Polly Toynbee rather hits the nail on the head here:

Tony Blair will now
reform the party voting system to stop union domination. He may also
break the unions’ last real hold on Labour, as its financier, by opting
for state financing of parties. This is a long necessary act to free
all parties from the gross corruption of grubbing and grovelling for
money from bizarre billionaires who want power and favours in return.
But it also puts at risk Labour’s umbilical link to a working class
that has not died, even if now it owns its own home and no longer
belongs to union or party. It risks cementing Labour’s future as the
party too much on display in conference hotel bars, brimming with
careerists wanting to take the special adviser route to parliament,
lobbyists, thinktankies, power groupies and eye-on-the-main-chance
hangers on.

Democracy
cannot survive on virtual parties, manufactured by professionals,
devoid of roots. Labour is in danger of becoming a phantom party – a
self-perpetuating oligarchy given absolute power by only 25% of the
electorate through a perverted voting system that will, with a swing of
the pendulum, deliver the same power to an equally unrepresentative
Tory clique.

State financing of parties will indeed lead to those virtual, self-perpetuating oligarchies. Billionaires buying Baronies would be better.

There is, actually, an  even easier route, a better one. Only individual citizens may contribute to a political party (no companies, no unions, no foreigners). Any amount they wish. And that amount and their name be posted on a website for all who are interested to see. Complete transparency.

Parties may indeed be necessary for the system as set up to function but why should they not be forced to come up with the money they need themselves? And if they can’t find a few hundred thousand people willing to pop them 50 quid now and again, why should anyone else be forced to subsidize them?