Darling backs £30bn rail bond in financing U-turn

The Government will signal a major U-turn in its transport funding policy tomorrow when the Transport Secretary, Alistair Darling, proposes a £30bn bond issue by the Strategic Rail Authority (SRA).

The massive capital injection for the railways would be additional to the £60bn which was to come jointly from the Treasury and the business community over the next decade.

Until now Gordon Brown has argued against such borrowings on the grounds that they constitute an unacceptable addition to public debt. However, the Chancellor and Mr Darlingwill make clear that the new borrowings, to take place over 10 years, would not appear on the Government's balance sheet.

It is thought that Mr Darling's close political relationship with the Chancellor has made the compromise possible. The bonds will be backed by revenue from rail fares, but the state will be their ultimate guarantor.

Cash from the securities will be used to fund improvements to the creaking rail system which is constantly compared unfavourably with networks on the Continent. So-called special purpose vehicles will be created to finance upgrades which will also include direct investment by the private sector.

In the past ministers have rejected bond issues as a means of funding investment in public services – most controversially in the case of London Underground and National Air Traffic Services. The partly privatised air traffic system has come to the brink of financial collapse and is awaiting a ruling by the Civil Aviation Authority on its proposal to increase the fees charged to airlines.

There is a precedent for the kind of bond issue envisaged by the SRA. Four years ago the Government allowed such a device to be used when the Channel Tunnel Rail Link faced financial difficulties.

The new funding regime in the railway industry follows the bankruptcy of Railtrack, which was formerly responsible for the maintenance of the network and its improvements. Network Rail, the infrastructure company's not-for-profit and publicly backed successor, will be responsible for routine work on the system. The SRA has taken control of major enhancement projects such as the scheme being considered for the East London Tube line.

Speaking at a rail finance "summit" tomorrow, Mr Darling will reaffirm his commitment to working with the private sector, but sceptics will detect a substantial shift away from direct investment by the business community. A spokesman for the SRA said the £30bn bond issue was "not a done deal", but a proposal which would be floated at the meeting attended by representative of City financial institutions.

A spokeswoman for the Treasury said that an independent panel at the Office for National Statistics makes decisions on whether borrowings should be regarded as public sector debt using European accounting rules. "Such decisions are nothing to do with the Treasury," she said.