Jason Nissé: Mum, it's Stephen Byers on the phone. He wants to talk about risk transfer

When I was a boy, our family would have a flutter on the Grand National. I'd put 50p each way on whatever horse I fancied. As it was usually Red Rum I did rather well. One year my brother told me that real gamblers don't place each-way bets; they back the horse to win. So I put all my money on the nose of some nag that came in third. I cried and cried and cried and cried until my parents gave me the £1 to make up for what I lost.

I can't help feeling that this is rather similar to what has happened at Railtrack. By giving a government grant of £300m to this new body, Network Rail, Stephen Byers is underwriting a 250p-a-share compensation offer to the investors in Railtrack who faced losing their shirts when the business was put into administration in October. The City institutions have cried and cried and the Government, tired of the bad publicity and fearing problems with other deals, has given in. This is a fundamental mistake that undermines the future of private sector finance for government projects.

Railtrack was a badly managed business. It asked McKinsey & Co to improve its efficiency, and the management consultants proposed changing the inspection and replacement schedule for railway tracks. As a result of this, the track at Hatfield became dangerous and an express train crashed, fatally. Railtrack had to close most of the network while it ensured the safety of passengers. It consequently ran out of money. Faced with demands for more and more cash to bail it out, the Government pulled the plug.

You can complain about the way the administration was executed – and with good reason. But had Tesco decided to cut back on hygiene inspections in its meat preparation, leading to the deaths by food poisoning of a couple of its customers, then the supermarket would have been sued, its stores closed down and, in all likelihood, it would have gone bust. No one, not even Stephen Byers, would have bailed out Tesco shareholders. Like Tesco, Railtrack was a private company. If private companies do not do their job, they go bust.

I've been to more meetings on the private finance initiative or public-private partnership than is entirely healthy. And the one thing the proponents of PFI/PPP always witter on about is risk transfer. This means that the downside of not completing a project – or series of projects – on time and to budget, rests with the private sector contractors, not the Government. When the Jubilee Line Extension ran into trouble, London Underground carried the can (£1.5bn worth of can). When the British Library project spiralled out of control, the Department for Culture, Media and Sport was left with the headache. But, in a properly thought-out project like the Millennium Stadium in Cardiff, the cost overruns became the responsibility of the contractor, John Laing. That's risk transfer.

The Tories, for all their supposed love of the private sector, understood this. Privatisation of the likes of British Steel, the water industry, the electricity industry, even BT, have proved to be poor investments in the long term. This may be because they were bad businesses, or because the people who ran them did not manage them well. The shareholders had the power to bring in better managers, and for the most part sat on their hands.

The shareholders in Railtrack had the power to sort out the company. But they chose to back managers who make poorly conceived, short-term decisions. Maybe Railtrack never had a chance, but it did precious little to help itself. The risk was transferred to the shareholders, they failed to mitigate it, and when it blew up, the Government bailed them out. A precedent was set when Mr Byers put £30m of extra money into the air traffic control privatisation. He has now written a "letter of comfort" to the bidders for the Tube PPP, saying that the Government will bail them out if Ken Livingstone, as Mayor of London, cuts up rough. There may be a good reason for this, but what next? Letters of comfort for every PFI or PPP deal, every privatisation?

The fact is that you can't have risk transfer if you don't transfer risk. When my parents bailed out my bad bet on the Grand National, they made it clear it was a one-off. But the private sector is not an eight-year-old boy, and Stephen Byers does not have the steadfastness under pressure that my mother had. Maybe she should be Transport Secretary.

j.nisse@independent.co.uk