Arguments over the government's decision to place Railtrack in administration continued on Tuesday, with a warning that the handling of the move could hit plans for private investment in the network.

The chairman of the Strategic Rail Authority, Sir Alastair Morton, warned that the government was now facing an uphill task in rebuilding the confidence the private sector needs to invest in the rail industry.

Morton warned the government that it "needs to recreate the confidence of the private sector".

He said the key questions facing the government were how did the current situation arise, can the government still attract private capital into the industry, whether this is a good starting place for the restructuring of the industry, and what should a restructured rail industry look like.

Turning to the issue of new finance, Morton said transport minister Stephen Byers had made several "heroic assumptions" in his statement to MPs on Monday. "They are going to be difficult to deliver," he warned.

On the capital issue, Sir Alastair questioned whether the government would be in a position to raise the money needed from the private sector.

"The government, the Treasury and the Department of Transport working closely together, have done a lot to put doubts in every investor's mind. And to say that a not-for-profit company without reserves is going to be able to raise lots of money, as Mr Byers did last night, is an interesting question...I look forward to examining it," Morton told BBC Radio Four's Today programme.

The rail chief warned that the government's plans for investing in the rail industry might not bring about the hoped-for improvements. He said the £30 billion of anticipated investment was already insufficient to bring about significant improvements in services and added: "If you then do not get that other 50 per cent which is supposed to come from the private sector, you really aren't very far forward."

The rail supremo also said that restructuring of the industry was necessary, but that "a lot of work" was needed to ensure the replacement for Railtrack was successful.

Byers defended his plans, however, saying he was confident the government could attract funding from the private sector.

"We are confident that we will be able to lever in money from the private sector, it will be attractive as far as the private sector is concerned," he told Today.

"What we found in the City last week as we have taken people through the proposals that we have got for a railway network that is delivering for the travelling public is that there is an enormous amount of interest in the City," Byers said.

In a separate move, a passengers' watchdog called on ministers and the industry to ensure the needs of travellers are put first.

The Rail Passengers Council chairman, Stewart Francis, said: "The hue and cry from shareholders should not drown the passenger's voice. Shareholders were happy to take the profits in good times, but they will not be compensating passengers by paying this money back now."

"Let's put the last spasms of this discredited, bankrupt rail industry structure behind us and get on with building what everyone wants - a safe, reliable, affordable railway," Francis added.