City's investment fears played down

Railtrack was forced into receivership by Mr Byers

Claims that the private sector has cold feet about investing in public services after Railtrack was put into receivership have been played down by the government.

Cabinet Office Minister Lord MacDonald also sought to diminish the extent of the role played by private finance in the public sector.

The private sector money is going to cost more because of the breach of trust which occurred

Michael Howard

Ahead of a speech by Prime Minister Tony Blair aimed at winning the backing of public sector workers for the government's reforms, Lord MacDonald said private cash totalled £4bn of the £30bn invested in capital expenditure.

He said: "The important thing is that the reforms we are interested in today are those that affect the five million people across the public sector.

"They are about national standards, they are about devolving to the frontline, they are about more flexibility and incentives for the people working in the public services.

"And yes, they are about more choice but that choice doesn't necessarily have to be about public versus private sector."

On Wednesday Transport Secretary Stephen Byers insisted there was no indication that the private sector was shying away from the public private partnership approach to projects.

But shadow chancellor Michael Howard told the BBC on Thursday that the "breach of trust" that occurred when Mr Byers put Railtrack into administration meant that City money would now prove more costly to woo.

"The private sector money is going to cost more because of the breach of trust which occurred as a result of what [the government] did over Railtrack.

"Before then the risk premium was low. Since then the risk premium is much higher because of the way the government behaved."

In a letter to Chancellor Gordon Brown earlier this week, more than 20 investment fund managers said Mr Byers's Railtrack decision "caused considerable damage to the relationship between government and the whole of the business sector".

SRA backing

The government is relying on £35bn in private finance to be ploughed into the railways over the next 10 years.

Private investor interest in major infrastructure upgrades is growing

Richard Bowker, chairman of the Strategic Rail Authority

Mr Byers told MPs he "understood the motives behind" the fund managers' letter.

But he added: "There is no indication that the private sector is shying away from the public private partnership approach to projects."

The renewal of the Chiltern and GNER rail franchises had brought £470m of new investment into the railways in the last eight weeks, he said.

'Dramatic effect'

However, one of the fund managers behind Wednesday's letter to Gordon Brown said the Railtrack decision had badly shaken investor confidence and had led to a virtual "stand-off" between the government and the City.

Mr Byers claims SRA support

John Hall, chief executive of Brewin Dolphin Holdings, said the net result would be an increase in the cost of future PPP projects.

"The government had made great efforts when it first came to power to develop connections with the City and now we feel that this move has had a very dramatic effect on confidence and that it is going to take a long time to heal," Mr Hall told BBC Radio 4's The World at One.

Byers 'ignored Tube warning'

Meanwhile, Mr Byers has come under fresh fire over his plans for the part-privatisation of London's underground.

It has emerged that the transport secretary may have ignored a warning from the chairman of London Transport and given the go-ahead to the controversial scheme before key contract terms with bidders had been finalised.

The revelation could trigger a fresh legal challenge from London mayor Ken Livingstone, who remains bitterly opposed to Mr Byers' plans.

Earlier, Mr Byers rejected calls for a Commons debate on the Tube PPP.