There is no indication that the private sector is shying away from the public private partnership approach to projects

Stephen Byers

Fears that the private sector has lost all confidence in the government following Mr Byers' decision to force Railtrack into administration were unfounded, he said.

Mr Byers was attempting to reassure MPs after a stark warning from the City on rail finance.

In a letter to Chancellor Gordon Brown, 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".

The Conservatives say the letter has wide implications for Labour's flagship public private partnership (PPP) policy.

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.

Giving evidence to the Commons transport select committee, Mr Byers also claimed the backing of the chairman of the Strategic Rail Authority Richard Bowker.

'Growing'

Mr Byers quoted a letter of support from Mr Bowker, scotching press reports that the SRA did not trust the transport department's financial projections.

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

John Hall, chief executive of fund managers Brewin Dolphin Holdings

"It is rubbish to say I found the secretary of state's funding statements to be wildly optimistic," Mr Bowker's letter said.

"Private investor interest in major infrastructure upgrades is growing.

"I know that because I am in daily discussions with them," he added.

'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 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's plans.

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