The PM wished to be neutral between bosses and unions. The dream has come true: now they both feel alienated

It is so piquant, so delicious. Stephen "Hammer of the Unions" Byers has caved in to industrial action. A few sharp kicks from the Gucci-sheathed feet of the City's bootboys and he has handed over the readies to Railtrack shareholders.

The fund managers and bankers were threatening strike action. Government hopes of obtaining cheap funding for public-private partnerships, private finance initiatives and other clever-clogs ways of reducing direct public spending were a dead duck, they warned - unless Byers saw reason and abandoned his insistence that not a penny of taxpayers' money would be used to recompense Railtrack shareholders.

This was a hollow threat. The government is still the best credit in town. The notion that the bankers and fund managers would provide a united front and boycott public sector business was absurd. As their business models are predicated on the notion of kill or be killed, the spirit of anti-government solidarity was unlikely to last long. But Byers looked into their eyes and came over all wobbly.

His backbone was also tested by a pending appearance at the High Court in a case initiated by Railtrack's leading shareholders. It would not have enhanced his dignity to be cross-questioned by m'learned friends about why his memory of events leading up to the collapse of Railtrack differs significantly from that of the company's former chairman.

Byers's line has always been that his decision to put Railtrack into administration under UK insolvency procedures was a mercy killing, that the company had warned him that it was facing collapse and should not have counted on him to rescue it. But if Railtrack directors had good reason to believe the game was up, they should, under stock exchange disclosure rules, have told the shareholders of the looming disaster. They failed to do this, and the Financial Services Authority launched an investigation.

Last month, the authority quietly announced that there was no evidence that Railtrack directors had failed to keep shareholders properly informed of material information. In effect, this means that Railtrack's market price of 280p, just before Byers declared the company insolvent, was the correct price. I doubt that Byers would have wanted to explain in court how he reconciles that with his decision not to pay the shareholders any compensation. Even for someone with his legal training, that would have taken some deft footwork.

I trust he does not expect bankers and fund managers to be grateful that shareholders will now receive around 250p per share. Like teachers or postal workers, they will take the settlement with ill grace, muttering that it is too little too late. And they have a point, in the sense that this most business-friendly of Labour governments flouted convention.

The best way of looking at the whole sorry saga is that Byers has engineered a takeover of Railtrack by a "not for dividend" company called Network Rail. A bidder normally pays more than the prevailing share price of the target company. But Byers has bought the whole lot at a discount.

You could call it a smart bit of corporate finance by the Department for Transport wideboys. But bankers and businessmen do not like being made to look like chumps. The Prime Minister always wanted to be equidistant from labour and capital. His dream has come true: the brothers and the bosses now feel equally alienated from him.

One example of the hidden cost of the Railtrack debacle is the difficulty the Department of Trade and Industry has had in finding a serious business person to lead an inquiry into the role of non-executive directors on company boards. This inquiry is hugely important and timely, given that the current crop of non-execs proved utterly incapable of reining in the overweening ambition of executives at Enron, Marconi and other financially challenged companies. The DTI and the Treasury felt they had found a businessman with sufficient bottom for the job in Sir Peter Davis, chief executive of Sainsbury.

Davis said he was interested, but made it clear he needed to consult his own non-executives. But, whether by accident or design, his possible appointment was leaked before it was signed and sealed. About a third of Sainsbury's shareholders then told him they would prefer that he did no favours for the government, and that he should concentrate on stocking supermarket shelves rather than restocking UK boardrooms. And although Davis is a tough cookie, the prevailing anti-government climate made it impossible for him to do the pro bono thing.

The ideal of joined-up government remains somewhat elusive when it comes to industrial policy. Take attempts to improve the productivity of the Post Office. This will involve shifting much of the Royal Mail's transport requirements to road from rail. This would make sense if the Post Office were privatised, assuming the cost savings are as big as claimed. But the government remains the sole shareholder and Tony Blair has consistently shied away from giving the posties proper autonomy. In other words, when the roads are congested with mail lorries, when your children are having a roadside asthma attack because of the increased emissions and when Gordon Brown is pumping yet more money into the loss-making railways, send your complaints to T Blair.

Robert Peston is editorial director of QUEST(TM);; e-mail

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