The government has given its backing to a climbdown over City demands for shareholder compensation following the collapse of Railtrack.

Sailing into a fresh storm of controversy and hostility from MPs of all parties, Stephen Byers confirmed support for a publicly-funded £300 million bail out - but he is warning that the cash will only be paid if Railtrack came out of administration early.

The government money will be supplemented by £200 million in City financing as part of a new package to take over Railtrack by Network Rail, the newly-named not-for-profit company limited by guarantee.

Combined with company assets the £500 million deal will give Railtrack's shareholders around £2.50 a share. Shares were suspended at £2.80 when Byers took his controversial decision to place the company in administration.

U-turn

The latest twist to the rail privatisation saga sees the troubled transport secretary taking a sharp U-turn on his repeated pledge that no public money would go to support Railtrack's private shareholders, who have previously benefited from share prices as high as £17.

And the climbdown may test the loyalty of many Labour backbenchers who have backed the transport secretary through recent turbulence, happy, at least, with his tough action against the failed rail operator.

Announcing the newly-named successor to Railtrack, Byers attempted to draw a line under a 1996 privatisation now widely regarded as a disaster.

"I welcome the bid for Railtrack tabled today by Network Rail, a company limited by guarantee will be able to put the interests of the travelling public first," he said.

"There will be no shareholders, so any operating surplus will be used for the benefit of the railway system. Network Rail is committed to engineering excellence. Their bid has the potential to bring the rail industry together and overcome the confrontation that has all too often characterised it in the past."

Political trouble

But while the deal may get City financiers off the government's back and improve prospects for long awaited investment and improvements, the cash pay out is set for a bumpy political ride.

Commons transport select committee member and Cunninghame South Labour MP Brian Donohoe is opposed to shareholder compensation and said that that Byers would have some explaining to do to backbenchers who stood loyally by him.

"It will have to be explained as to why there has been this U-turn. I can only presume that it has been given to improve the relationship in the money markets with this government. I have to say if the company had not been taken into administration about two weeks down the line, the company would have gone belly-up in any event and there would not have been a penny of compensation."

Veteran Labour MP and chair of the select committee, Gwyneth Dunwoody, told the BBC of her concern that any public money was being used to underwrite arrangements to take Railtrack out of administration.

"If we are saying that the administration is going on too long and is costing too much, and it is cheaper to do a deal of this sort, we also have to explain why we are using the taxpayers money to underwrite the arrangements," she said.

"I am not at all clear why the government now feels that they have to take this rather precipative action. If it is because they believe it will undermine the status of the new company that is going to make a bid then that should be spelt out in considerable detail."

Shadow transport secretary Theresa May has accused Byers of a "humiliating U-turn" and demanded the government consider a rival bid for the failed rail company.

"It is clear the government has been panicked into doing this because they are worried about the threat of being taken to court and having to reveal the truth of their decision on Railtrack, which was a political decision and not a financial one," she told the BBC.

"And, of course, they are worried about the damage that Stephen Byers has done to the relationship between the government and the private sector. But the real question for Stephen Byers this morning is that it is now clear there is an offer on the table which would compensate the shareholders, put the company on an even keel, bring it out of administration early and not use taxpayers money. Why is he not looking at the offer? Why has he been panicked?"

The Lib Dems are set to oppose the pay out and the party's transport spokesman Don Foster believes Byers' handling of the affair still raises doubts over the rail network's future.

"We want a decent replacement for Railtrack but taxpayers' money should not be used to buy out shareholders of a private company, " he said.

"The secretary of state needs to answer numerous questions about the remit and terms of conditions of the new company. So badly did Stephen Byers handle putting part of Railtrack into administration that it is difficult to have confidence in these further plans. While the administrators have the task of getting the best deal for the shareholders, Stephen Byers should be putting taxpayers and rail users first.''

On track?

Network Rail is not the only potential buyer of Railtrack. Other bidders include Swiftrail, a consortium of City banks that includes German group WestLP Panmure.

And the new bail out bid follows threats of legal action against the government and growing fears that progress on the rail network could be placed on hold until November.

The new not-for-profit company's chairman Ian McAllister is now to seek a "challenging" July deadline to end the administration period. The company limited by guarantee will seek up to £9 billion from the City, with the Strategic Rail Authority providing standby loans, enabling Network Rail to both acquire Railtrack and to refinance £6.5 billion of debt.

"It is time for a fresh start for the rail industry. Network Rail's proposal marks a watershed for Britain's railway. It is an opportunity to endorse a better way of working, bringing the industry together for the benefit of all rail users," he said.

"We will end the confrontation that has all too often characterised this fragmented industry and establish new management structures and incentives to deliver system-wide performance and safety improvements. We will build on the pride and passion in Railtrack's people, elevating engineering excellence to where it belongs, at the heart of the rail network."

The new company will have no shareholders and will have two categories of members. Industry members such as the Strategic Rail Authority and the operating train companies will total 40 people. The second group will be made up of public interest members such as passenger groups, trade unions and representatives of people with disabilities.

The Rail Passengers Council, the statutory watchdog safeguarding the interests of rail users, has welcomed the new bid. RPC chairman Stewart Francis said the move was good news for long suffering rail passengers.

"This bid is good news for passengers. The sooner that Network Rail is up and running the better - the rail network will finally be in the hands of an accountable, not-for- dividend organisation. Profits will be ploughed back into the railways, not the pockets of shareholders. This is the beginning of the end of perhaps the most disruptive, divisive and damaging period for Britain's railways."