The Railtrack debacle has exposed Byers and Blair not as unreconstructed socialists, but as unadulterated incompetents

The Railtrack debacle is a once-in-a-parliament rite of passage for this government; and it might just help Tony Blair come to terms with his party's nationalising past.

First things first, which is that one of the arguments advanced against the government would be laughable, were it not being made by bankers and fund managers who, in most respects, are serious and sensible. This is that Stephen Byers, the Secretary of State for Transport, has broken an unwritten understanding that the government would never allow a privatised company - or at least one receiving as much public subsidy as Railtrack - to go bust.

In fact, precisely the opposite is true. On 2 April, the company and the government signed a four-page statement of principles governing their relationship, in which the first point ran: "The government stands behind the rail system but not behind individual rail companies and their shareholders, who need to be fully aware of the projected liabilities in which they invest and the performance risks they face."

I thought at the time that this was an intriguing piece of forward planning by a civil servant, since it carries only one possible interpretation: the government was prepared to let Railtrack go to the wall. Nor was it in any sense a secret document. It was published on the stock exchange's information system for all investors to see.

But one of the characteristics of the City that never fails to astound me is its blind spots. It is the most powerful data- processing machine: numbers, words, facts and figures zap into the stock exchange at an astonishing rate around the clock. And somehow all this data is ordered in milliseconds and out pops rational information in the form of share prices.

Yet every now and then, the market cannot grasp a simple truth - such as that Railtrack might go bust. I can write with some authority on this because, since January, I have been arguing that this was a strong possibility. But whether I was communicating in print or in person, I was aware that my message was not getting through. Nobody believed me. I could always tell, in spite of their polite expressions of interest, that people thought I was bonkers.

This helps to explain why a number of senior figures in the City have reacted in such an emotional way to Railtrack's demise. It never occurred to them that they would one day be called on to grieve for the snuffing out of up to £1.4bn of shareholders' wealth.

Having said all this, Railtrack is an exceptional company in that its life or death has always been a matter for the government to determine. The business has never been properly independent; its value has depended on how much money the government pumped in and on the regulatory framework for the industry. In other words, it is a matter of government fiat whether Railtrack shares are worth anything, even when it is in administration. So it is not surprising that shareholders have turned on Byers, even if he feels that his decision to withdraw support was justified by the incompetence of Railtrack's management.

Both the government and the company behaved abominably by conducting their negotiations in secret. Shareholders, staff and assorted creditors were treated with contempt, as if their long-standing commitment to the company gave them no right whatsoever to influence its future.

Even so, it has been amusing to see the way that some of the bankers and investors have since sought to rationalise their loss. All week, they have been telling me that Labour is now showing its true colours, that the socialist, nationalising plot has been revealed. Today the "property" of Railtrack shareholders has been appropriated, tomorrow the stock market will be closed down and, the day after that, Royal Ascot will be dug up for workers' allotments. In other words, this vicious left-wing regime is set to destroy the bastions of the free market.

The truth, however, is that Blair and Byers have contorted themselves to avoid nationalisation, to persuade themselves that they are whizzo investment bankers engaged in a sophisticated corporate finance transaction to rescue and reconstruct Railtrack within the private sector. Unfortunately, on this model, what they looked like was a couple of old-fashioned asset-strippers, attempting to take control of a failing company without paying for the privilege.

In the face of City fury, Byers is doing all kinds of financial juggling to find ways to recompense shareholders without it looking as though taxpayers' money is being used to buy them off. In spite of this, bankers are ganging up to punish the government by pushing up the cost of its access to private sector funds.

It would probably have been cheaper for the government and more satisfactory for shareholders if Railtrack had been explicitly nationalised, with Byers purchasing the shares at a price determined by an independent valuer.

He would not have had to keep the company in the public sector for more than a millisecond. It could have been reprivatised immediately by injecting it into Byers's revered non-profit- making company limited by guarantee. But he did not and could not do this, because rule one in the new Labour handbook is "nationalisation is a no-no".

What Byers and Blair are guilty of in this case is not unreconstructed socialism, but unadulterated incompetence. If tonight you see a man in a grey suit flashing across the night sky, you will know what it is: Byers hoist on the Third Way petard.

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

This article first appeared in the 22 October 2001 issue of the New Statesman, A plan for the world