A group of senior City financiers dealt a blow to proposals to use private money to pay for investment in public services last night, warning that the Railtrack affair had dented confidence in deals with the Government.
More than 20 senior fund managers have written to the Chancellor, Gordon Brown, warning that the way Railtrack was taken into administration by Stephen Byers, the embattled Transport Secretary, has undermined confidence in future deals with the private sector.
They warned that the affair had inflicted "considerable damage to the relationship between the Government and the whole of the business sector, in particular the City".
The letter, by senior figures from some of the City's largest institutional investors, represents a major blow to Labour's attempts to use private finance to fund improvements in transport, health and education.
The letter said the crisis would mean the interest rates on future schemes would rise to cover "political risk" and "will increase the cost to the taxpayer".
It said: "We believe that many of our colleagues in the private sector will now be wary of entering into such relationships and that damage has been caused to the trust that had previously existed between the Government and the City."
Projects reliant on private finance include the controversial public-private partnership for the London Underground and the project to upgrade the east coast main line.
The letter echoes repeated Conservative claims, all denied by Mr Byers, that the Railtrack affair will damage the chances of securing future private investment for the rail network. Railtrack shareholders have been pressing for compensation after losing their entire investments when the company was put into administration on 7 October.