Putting Railtrack into administration may prove to be a costly mistake for New Labour. The City is warning that investors will be demanding an extra £1 billion from PPP deals to cover the risk of future projects failing.
Has the City fallen out of love with New Labour? The letter sent by City institutions to Gordon Brown haranguing the government for its mishandling of the Railtrack crisis seems to suggest so.

The fund managers vented their anger over the way the government placed Railtrack in administration without consulting shareholders first. All the signatories to the letter, which include senior figures from Hermes, Merrill Lynch and UBS are Railtrack shareholders, and they are seeking compensation from the government for confiscation of Railtrack assets. Most are also members of the Railtrack Shareholders Action Group.

City firms feel betrayed by Stephen Byers and they say that the government will get a bumpier ride in the City as a result. They warn that investors in public-private initiatives will be looking to strike a harder bargain to cover the political risk of another Railtrack occurring. This will mean higher levels of interest payments on loans to PPP and other infrastructure projects, which will come out of the taxpayer's pocket claim the City names.

A wariness has descending over the City, says the letter, as firms think twice about doing deals with the government. They thought that with regulation they were playing safe with Railtrack, and were satisfied with regulated, medium-sized profits as a result. But now the regulation safety net has been removed investors will demand higher returns before engaging in any Government related projects. It has been estimated that the government will have to contribute an extra £1 billion of taxpayers' money towards PPP deals.

It's hard to see too many companies turning their backs on the government, though. Balfour Beatty this week announced that it had increased profits from its rail, construction and investments divisions over the year to take its pre-tax profits to £104 million. It is part of the Metronet consortium that has preferred bidder status to take control of two of the three Tube line concessions and is hoping for a return on its £70 million investment of between 13% and 17% over seven years.

The biggest threats to Balfour Beatty's rail growth are the hold ups in rail maintenance work, according to chief executive Mike Welton. He is keen for the government to sort out Railtrack, but fears the UK's poor record in meeting spending pledges will hamper Balfour's continuing growth.