Taxpayers will have to pay £2 billion to rescue the failed privatisation of London Underground, the Government admitted yesterday.

Ruth Kelly, the Transport Secretary, had to raid the Government’s contingencies fund to settle the debts of Metronet, which ran nine of the twelve underground lines but went bust in July.

The scale of the public liability for Metronet’s failure will be a severe embarrassment to Gordon Brown, who forced through the controversial Public Private Partnership of the Tube when he was Chancellor.

The payment also exposed the fallacy of the Government’s claim that it was transferring risk to the private sector. The five companies that owned Metronet – Balfour Beatty, Thames Water, EDF Energy, Bombardier and Atkins – had to pay only £70 million each towards the debt because they had won guarantees from the Government that limited their liability.

Ms Kelly told Parliament that she had had to make the payment because Metronet’s lenders had exercised an option granted by the Government in a “letter of comfort”, sent when the contracts were being negotiated in 2003. The payment may result in the delay or abandonment of parts of the Tube upgrade and other urgent transport projects, such as relieving motorway and rail congestion.

Ms Kelly said that £1.7 billion would be taken from the contingencies fund to pay existing debts and a further £300 million would be paid to Transport for London (TfL) to cover its costs in taking on Metronet’s contracts up to 2010. She admitted that the final cost to the taxpayer of Metronet’s collapse was still not known.

A Department for Transport spokesman said: “It’s a riddle of contracts, to be honest. They don’t yet know what the total cost to the public will be.”

The £2 billion payment comes on top of the millions of public money used to set up the partnership.

Tony Travers, a public policy expert at the London School of Economics, said that between £6 billion and £8 billion had been spent on the Tube PPP in the past 5½ years, with little to show for it. “There are some new tiles on stations but there is no real sense for the passenger that the system is getting better despite a huge amount of money being spent. It is very difficult to judge what has happened to all that money. The Government is spending more but getting less.”

Mr Travers criticised the way the Government announced the £2 billion payment.

“They tried to disguise it as part of what they called ‘long-term funding for TfL’. They wanted to bury the bad news about a huge sum of public money going down the drain.”

Metronet’s two contracts are due to return to the public sector later this year, when TfL takes full control of the nine lines. Only the Jubilee, Northern and Piccadilly lines will remain under private management under a separate contract with Tube Lines.

Theresa Villiers, the Shadow Transport Secretary, said: “The taxpayer is picking up a £2 billion tab for Gordon Brown’s incompetence when he set up the Metronet PPP. But the total cost of this shambles is still unclear.”

Norman Baker, the Liberal Democrat transport spokesman, said: “Just like Northern Rock, the private sector takes the profit when they can, and the public sector bails them out when matters go pear-shaped. This is an appalling waste of public money.”

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