Britain's millennium celebrations testified to a peculiar vision of nationhood. The national beacon, lit by the Queen to kindle a chain of flame from London to Aberdeen, was a gigantic crucible on which British Gas was scored in words 11 metres long beneath a crown of 18 BG logos. The Millennium Dome exhibits the work of some of our most cherished national institutions: the American companies Manpower and Ford. Its Body Zone was sponsored by Boots, its Mind Zone by the weapons manufacturer British Aerospace, and its Learning Zone by Tesco. 

Its Our Town stage, where "the diversity of local culture is celebrated", was financed by that guardian of diversity, McDonald's. British Airways and the British Airports Authority used the Journey Zone to explain to visitors the advantages of Heathrow Airport's proposed Terminal 5, in which they both have a certain interest. 

At the 1999 Labour party conference, Tony Blair told delegates he would "set the people free" by creating "a model 21st-century nation, based... on the equal worth of all". But some attendees at the conference were worth rather more than others. To reach the speeches, delegates had to fight their way past 62 corporate stalls: it looked more like a trade fair than a political gathering. 

The conference's fringe meeting on social justice in a global economy was sponsored by the Swiss company ABB, the builders of the turbines for the Three Gorges Dam in China, which displaced over a million people from the land. The meeting on holding government and companies to account was sponsored by the lottery company Camelot. The meeting on renewing democracy and rebuilding communities was financed by Tesco, widely blamed for shattering communities with their out-of-town superstores. When Lord Whitty, a minister at the department of the environment, was asked by the BBC whether the exhibitors at the conference were buying access to ministers, he replied: "You don't buy access to ministers. You buy access to the whole party." I think he was trying to reassure us. 

These are the outward signs of the corporate takeover of Britain, crude and trivial manifestations of a deeper problem. Corporations, the contraptions we invented to serve us, are overthrowing us. They are seizing powers previously invested in government, and using them to distort public life to suit their own ends. 

The government shows few signs of concern about this coup d'etat. New Labour, its leaders often remind us, is the party of business, aiming to establish the most business-friendly environment in the world. There is, Blair told the Confederation of British Industry, "great commitment and enthusiasm, right across the government, for forging links with the business community". "We want a society," the cabinet minister Peter Mandelson announced, "that celebrates and values its business heroes as much as its pop stars and footballers." 

The struggle between people and corporations will be the defining battle of the 21st century. If the corporations win, liberal democracy will come to an end. The great social democratic institutions which have defended the weak against the strong - equality before the law, representative government, democratic accountability and the sovereignty of parliament - will be toppled. If the corporate attempt on public life is beaten back, then democracy may re-emerge the stronger for its conquest. But this victory cannot be brokered by our representatives. Democracy will survive only if the people in whose name they govern rescue the state from captivity. 

My story begins on the Isle of Skye, which became, under the Conservatives, the laboratory for a novel experiment. As the terms under which it is being conducted have come to light, it has developed into a scandal of the kind associated with Brazil, rather than Britain: the Labour government is now caught in this scandal. 

Skye lies over the sea. This topographical distinction delights the tourists following the flight of Bonnie Prince Charlie. But by the end of the 1980s, it was a nuisance to the residents. Car ferries connecting the island to the mainland kept breaking down, so that people often had to queue for two or three hours. Some residents called for a bridge. The strait, or kyle, that separated Skye from the mainland, they argued, was scarcely a mile wide at its narrowest point. English islands close to the mainland coast were served by roads; was it not time for Skye to be connected to the national network? 

The Scottish Office, a department of the Conservative government, agreed. Road building was, at the time, a central component of the government's economic programme. There was, it told the people of Skye, just one problem: it had no money. Public funds spent on building a bridge would be funds not spent on the island's health and education. Rather than be defeated by this, it had devised a new and remarkable solution. 

The people of Skye would get their bridge, but it would be financed by a private company. The company would build the structure at its own expense, then recoup the money by charging a toll. The Skye Bridge would be the first project built under something called the private finance initiative (PFI). This, started by the Conservatives and developed by Labour, has become the means by which many new roads, bridges, rail links, schools, hospitals and prisons in Britain are now built. 

In the week the bridge opened, in October 1995, the government-run ferry service stopped: the only efficient means of getting to Skye was the bridge. This might have been uncontroversial had the toll the private companies levied not been the highest, per metre of road, in the world. The one-mile crossing now costs £5.70 each way. 

A legal discovery by veteran campaigner and folk singer Robbie the Pict convinced the people of Skye that the tolls were worth fighting. The toll regime, Robbie believed, breached Article 18 of the Act of Union, which forbids the Crown to levy a tax in Scotland in circumstances not encountered in England. As there was no sole road crossing to an inshore island which was tolled in England, and as the Scottish Office told the European Union that the tolls should be classified as a tax, the charges looked to Robbie like a violation of the act. 

Convinced that they had a constitutional as well as a moral case, the islanders began one of the biggest and most sustained campaigns of civil disobedience in Scotland since the Lewis Risings of 1919. It started with a petition, circulated by the West Highland Free Press. Though Skye has only 10,000 inhabitants, within a few weeks 7,000 people had signed up, demanding a free crossing rather than a toll bridge. They were ignored. So, when the bridge opened, many of the islanders refused to pay: 600 people - crofters, shopkeepers, doctors, factory workers and engineers, most of whom had never been in trouble before - were arrested. Some collected dozens of charges: Robbie was arraigned on 129. The Highlands police and judicial systems nearly collapsed beneath the load. The islanders launched legal counter-suits. 

The toll company changed its tactics. It stopped calling the police and refused to let the non-payers pass. So the islanders devised new means of frustrating their captors. Some days they would pay the toll penny by penny, blocking the bridge for hours. They would bring cardboard cheques so large that they wouldn't fit through the toll-booth window. They discovered that the collecting company banked its money on Friday, so 30 people agreed to arrive at intervals on a Saturday morning with £100 notes and no change. 

I met Robbie the Pict playing football around the toll booth on the bridge in the summer of 1998. He had discovered that Hamilton Park, the land on which the toll booth and the approach road were built, had been established with a deed that only a compulsory purchase order could repeal. In its hurry to get the bridge built, the Scottish Office had initiated compulsory purchase proceedings but forgot to complete them. Legally, the land remained a designated recreation area, and Robbie and friends were lawfully entitled to play football there, and use the barrier as a goal: "They don't want to arrest us for this one as they don't want the issue raised in court. We could mount a legal challenge to the existence of the toll booths." 

The islanders discovered that the company empowered by the government to collect the tolls had changed its name, while the deed which appeared to allow it to charge the money remained the same. So Robbie bought the discarded company name - Skye Bridge Tolls Ltd - and insisted that he, and not the consortium, now had the legal right to collect the money. When the company protested, he offered to sell them the original name for £1m, and demanded that they "remove our good name" from the documents they were using "for the purpose of exacting money from road users". "I've got a right," he told me, "to collect the tolls. One of these days I'm going to set up in a garden shed and if the police come I'll tell them, 'I've got the paperwork: it's them you should be arresting.'" 

The protesters put in a bid to buy the bridge, and another to acquire the ferries that used to run across the kyle. Both were, unsurprisingly, rejected by the Scottish Office, which says that the bridge is owned by a consortium of three firms: two construction companies and the Bank of America. But the islanders later discovered that, by the time the bridge opened, the ownership had changed dramatically. One thousand shares had been issued. The Bank of America had 997 , while the remaining three were in the hands of Bank of America nominees. The bank was sole controller of the bridge. The other companies were employed merely to collect the tolls on its behalf and transfer the money to America. The Scottish Office had twice issued misleading statements about this. 

The Bank of America, previously known as the Bank of Italy, has a blemished record. In November 1998, it settled with 250 American government agencies which had sued it, after admitting that it had improperly shifted unclaimed payments into its own accounts instead of returning them to the public bodies to which they belonged. Most islanders' tolls are transferred to the bank headquarters in California. Skye had become, according to the protesters, part of a US banking gulag, a colonial penitentiary in which they were held to ransom. 

They chose Independence Day to demand release from their imperial masters. On July 4 1998, the Crofter's Kitchen cafe, on the Skye side of the bridge, was in uproar; 100 people crammed into it, singing, laughing and shouting. At the time advertised, the residents quietly filed into the car park. Robbie Cormack, a big man with a ginger moustache, brought out a clipboard. As he announced the names of the American states, protesters in fancy dress took placards: Florida went to a gigantic orange carton, with its ingredients listed as "pure Florida orange, diluted with Scottish Office mandarins". Mississippi went to a ghoul in a white hood and cape. 

Other protesters took banners reading "Welcome to Skye, the £5.60 state" and "Bank of America: The bank that likes to say gimme". An accordionist struck up The Yellow Rose of Texas, and the Independence from America March set off past the sign the protesters had legally and perma nently installed on the roundabout ("Beware: bogus toll collectors ahead") and over the bridge to the mainland. 

The postmaster, Drew Millar, claiming to be Bill Clinton's special representative, apologised that the president couldn't be with them: he had, regrettably "gotten held up in the bathroom, helping one of his interns to grasp the essentials of the body politic". But, he went on, "I would like to welcome you to the 51st state of America, and thank you sincerely for all the contributions you've made to our federal tax-take." 

There is a sheriff's court on the island, but the Crown insisted on trying protesters (378 islanders were prosecuted) in Dingwall, 120 miles away. Because of the caseload, and the etiolated nature of sheriff's court procedures, some defendants had to turn up in court as many as 15 times to defend a single case of the non-payment of £5. "They are trying to wear us down," Robbie the Pict told me, "but they won't succeed." 

Another islander, John Campbell, who trained as an engineer, looked into the financing of the project. The bridge, according to the Miller Group, which built it, cost £25m. The Scottish Office initially contributed £13m. The European Investment Bank added £13m. Private investors paid in £7.5m, the contractors £0.5m, and a commercial bank £6m: a total of £40m. The bridge was 60% overfinanced. 

The only explanation the islanders could suggest is that the investors believed the bridge would make a great deal of money, and they wanted to buy into a stake. The £25m project will extract, for its private backers and the Bank of America, £88m from one of the poorest places in the British Isles. 

So the people of Skye must pay a fee to an American bank every time they want to go to or from their island, although the costs of the bridge have already been met by the taxpayer and the European Investment Bank. The government had no need to use the PFI to build the bridge. As Skye lies within a regional development area, it could have asked the EU to provide nearly all the money for a toll-free crossing. The means of finance have nothing to do with saving public money. Far from Westminster and national newspapers, out of sight, out of mind, Skye was the ideal location for launching a corrupt, unpopular initiative, in which private companies were granted monopolistic control over public works. 

The people of Skye had every reason to believe that a Labour government would overturn the tolls. In 1995, Brian Wilson MP, who was to become the minister for industry in the Scottish Office and, later, a minister at the department for trade and industry, described the bridge as "a shocking story of ideologues using a remote place for an experiment that they could not have got away with anywhere else". The toll regime, he announced, was "immoral, unacceptable and unjust"; while the people of Skye were the "near-monopoly prisoners of... ruthless commercial interests". In 1996, he joined the demonstrators, marching over the bridge with a pipe band, and announced that the Tartan Toll Tax was "an injustice which will not be meekly acquiesced in". In the same year, Calum MacDonald MP, now a minister in the Scottish Office, asked his opposite number: "Isn't it about time that he listened to the weight of public opinion... and scrap[ped] this toll regime?" 

The local Labour candidate for the 1997 general election, Donnie Munro (formerly the lead singer of Runrig), told voters: "The Labour party is committed to work in partnership to abolish the tolls within the shortest practicable timescale." The Scottish Labour party published a full-page ad to this effect in the West Highland Free Press a week before the election. 

Soon after the election was won, ministers announced that scrap ping the tolls would be impossible. It would, they maintained, cost £30m to buy out the contract, which is more than the bridge cost to design and build. Brian Wilson told Scotland on Sunday: "It's just a lie to say that either I or the Labour party promised to abolish the tolls." When the islanders requested that they be allowed to reopen the kyle ferry service and run it in competition with the bridge, Wilson told them it was a silly stunt. 

"What hurts us most," John Campbell told me, "is the sense of betrayal. These ministers were campaigners before they got into power. Now they're just suits." 

The Bank of America has continued to thrive in Britain. Before the election, the consortium to which it belonged won the contract to build the privately financed A30 dual carriageway in Devon. Since the election, it has become the lending bank for the £1bn PFI contract to update and operate London Transport's ticketing services. 

In Skye, the court cases grind on. The islanders have now taken their appeals to the European Court of Human Rights and the European Court of Justice. But their demonstrations have diminished. Exhausted and impoverished, the people of Skye no longer have either the energy or the resources to sustain the pressure of the last few years. But they have not given up, and some say they never will. Because their battle is just the opening chapter of the corporate takeover of Britain. 

* This piece is an edited extract from The Captive State: The Corporate Takeover of Britain (Macmillan, £12.99)