The truth about Richard Branson's Virgin Rail profits

I once called Richard Branson a carpetbagger. A new report reveals that I was correct to say he built his business empire with millions from the taxpayers – only it's worse than I thought

• 
• • Aditya Chakrabortty
  • The Guardian, Monday 10 June 2013 20.00 BST

Richard Branson: 'subsidy junkie'. Photograph: Sipa USA/Rex Features

Just over 18 months ago on this page, I called Richard Branson a carpetbagger. Surveying his greatest business hits, from trains to planes to cable, my piece noted a common method: the Virgin boss liked to move into industries sheltered from too much competition, pull subsidies out of taxpayers and then cash out.

That was the story of Virgin Rail (now 49% owned by Stagecoach); of Virgin Atlantic (where the same role is played by Singapore Airlines) and it certainly fits Virgin's takeover last year of Northern Rock, where Branson was really the frontman for the serious money from America and Abu Dhabi.

Sir Richard was not best pleased. Faster than you could say "stroppy tycoon on the phone", a response in his name appeared in the Guardian, accusing me of a "vicious" attack full of "vitriol". But admirable hand-waving aside, he did not rebut my argument: that for all of his talk of enterprise and getting employees "really motivated and steamed up", Branson has built his business empire with millions from you, me and other taxpayers.

Well, last Friday a report was published that, I'm sorry to say, proves me wrong. He's an even bigger subsidy junkie than I thought.

Produced by academics at Manchester University's Centre for Research on Socio-Cultural Change (Cresc), and published by the TUC, the study looks at how Britain's railways have fared over two decades of privatisation. It's a hefty publication – more than eight months in the making, running to 166 pages and with more detail on the rail network than any commuter will ever need.

But it boils down to one key finding: the only way Branson and the vast majority of train barons make their profits is through handouts from the taxpayer. And while you may know about the direct payments taken by Virgin and others, the Cresc team has also analysed another, indirect transfer from the public purse to private hands. By now, it's worth £30bn – yet it is barely acknowledged either by Network Rail or Westminster.

Let's deal with the open-air subsidies first. If you tot up all the direct subsidies Branson's west coast mainline service received between 1997 and 2012, and convert them to today's prices, you get a sum of £2.79bn handed over by us – before a single ticket has been sold. And it is certainly before you factor in the service's upgrade (worth around £9bn, and paid for by the public), and the fleet of Pendolino trains (again, largely subsidised by the government).

By 2012, Virgin Trains enjoyed spanking new rolling stock, a more frequent service and a superfast line that whisked passengers from London to Manchester in just two hours. With all that going for it, plus a booming economy up till 2007 and rising fuel prices, the company couldn't help but pull in the customers.

Most of the improvements were subbed by taxpayers, with Virgin paying the state an agreed amount in the last two years of the franchise. Yet Branson and his shareholders could declare a cumulative net profit of £538m and trouser £499m in total dividends. No wonder some canny infants like to play with train sets.

These sums are what got Virgin interested in rail in the first place. In his biography of Branson, Tom Bower records a phrase used by the billionaire's lieutenants while weighing up the west coast deal: "It's a licence to print money. Can't go wrong."

But there is another undisclosed source of cash enjoyed by Virgin and the rest of the industry. Network Rail has been cutting the track access charges levied on the train companies. Under its predecessor Railtrack, the fees were worth around £3bn a year; they're now nearly half that, at just over £1.5bn a year. This is an indirect subsidy given by the public to the train operators, and Virgin is the third-biggest recipient. So important is the handout that, were it taken away, Cresc estimates the company would have made a loss of up to £257m last year alone.

Just so there's no doubt on the numbers, the Cresc report was shown to the Association of Train Operating Companies weeks before it was published. The trade body had time to dismantle the maths; but while it evidently doesn't like the conclusions, it hasn't repudiated the figures. Years of indirect subsidies have left Network Rail £30bn in the red. This is debt guaranteed by the public, although very few people know about it.

What all this resembles is a looking-glass version of capitalism. The public are handing money to private businesses for them to take a clip and pay us back the rest. Just in case that wasn't ludicrous enough, remember that Virgin's parent company is listed in British Virgin Islands, a sunny tax haven that is a stop pretty far from Wigan. And as we've seen repeatedly with the east coast line, the ones who don't make a profit can simply walk away, dumping their service back in public hands. Heads they win, tails you lose.

Branson is not the sole offender here; he's simply the most flamboyant representative of a completely rotten system for siphoning money from the public into private hands. The entire industry, as Treasury adviser Shriti Vadera put it in 2001, is peopled by "thinly capitalised … profiteers of the worst kind". And as a former investment banker, she'd know what those looked like.

But the Virgin boss also loves to shout about the virtues of private ownership of public good. At the moment, he's lobbying hard to take control of the east coast mainline. If successful, he'll doubtless try to replicate his previous sweet deal, state-subsidised Pendolinos and all. And just like now, it will be us paying for it.

The billionaire Virgin boss Richard Branson is no radical, he's no entrepreneur, he's just a plain old-fashioned carpetbagger

Last week, you, me and every other taxpayer in Britain each handed £13 to the billionaire Richard Branson. Not that we were told about this national whip-round. Instead, George Osborne claimed the heavily discounted sale of Northern Rock to the Virgin boss and a few of his chums represented "value for money". That's a funny way to describe a deal where taxpayers come out at least £400m poorer, but at least we now have an answer to that perennial pre-Christmas question of what to give the man who has everything.




And what do Team Branson plan to do with the Rock? Listen to Virgin Money chairman David Clementi's talk of creating "a significant banking competitor" and you'd have come away with wholesome impressions of commitment and investment. If you'd leafed through the FT this weekend, though, you'd have read about how the Virgin consortium will raid the business of its own cash to pay for the purchase – and then, as the chief investor, American financier Wilbur Ross, puts it: "We would hope to sell out a few years down the road." In other words, the business plan is to buy it cheap, strip it of assets – then flog it dear.



Hang on, you're probably thinking. Is this the same Branson who had those record shops? Who always pops up in the papers dressed as a woman or riding in a hot air balloon? Sir Richard of the Beard and the Overbite?



And the answer is: yes. Sure, Branson would like you to believe that he's the greatest iconoclast since John Calvin, leading a Reformation of established business. And if you won't buy that, he'll settle for being cast as a public-school Don Quixote for ever tilting at insiders and interest groups. Yes, the entrepreneur screws up – as with cars, cola, cosmetics and all those other discarded Virgins – but he takes risks.



The more prosaic truth is that the Virgin boss keeps himself in homes in Holland Park and Necker Island by taking taxpayer subsidies and operating heavily protected businesses. After all, you don't get much safer than a small mortgage lender that's had all its rubbish assets taken off it by the Treasury, in a market where the big banks are keeping their eyes down and their fingers crossed.



Think about the great Branson triumphs and you'll see what I mean. Virgin Rail? A monopoly on the West Coast main line, complete with initial subsidies worth hundreds of millions. Virgin Radio and Virgin Mobile? Both granted government licences to operate in a heavily restricted market. Virgin Airlines? The beneficiary of regulators' decision to strip British Airways of landing slots between London and New York and award them to the number two player. Again, a closed market where Branson has tried to keep the door shut tight against further competition.



Despite all the awards and the cosy relationships with whoever's in Downing Street, the Virgin boss neither makes anything, nor changes anything. He's no radical. The Northern Rock purchase is typical of his style: he fronts up a deal where the real money tends to come from someone else (in this case, an American and an Abu Dhabi investment firm), slaps the Virgin name everywhere and then cashes out as soon as possible. Branson isn't an entrepreneur; he's a carpetbagger.



Early in Tom Bower's splendid biography of Branson, there is a scene in which he is giving a Millennium Lecture at Oxford University in November 1999. The "lighthouse for enterprise" is asked what his great hope is for the new century, and a hush falls over the audience. What might he say? Were this Bill Gates, a picture would be painted of a software revolution. The head of Nissan might summon up a vision of Africans and Asians gaily pootling about in cheap new hatchbacks. What does the bearded visionary have in mind? "To run the national lottery."



Of course he does: a government-gifted licence to get his brand name plastered everywhere – the sort of thing Branson is always after.



But here's the thing: in his desire for sheltered money-makers, the Virgin boss differs from the rest of British business only in his desire for publicity. Look at our household names: take out retail, banks and commodities and the things you're left with bear names such as Wessex Water or Centrica or Arriva. In other words, they do things the public sector used to do – pump water or pipe gas or lay on public transport. Alternatively, they're outfits such as Serco, or Capita and they're bidding for contracts from the government; or they're engineers bidding for PFI projects. Now look at the big names in America or Germany: there are firms such as Google or Siemens.



Over here much of the private sector isn't adding anything or innovating – indeed, it's tricky to do that when you're running an administrative office or supplying water. They're simply taking contracts and cutting staffing costs.



This is a picture of lazy British business, either seeking business from the state or the protection of sheltered industries. And yet if you listen to the Conservatives, the problem with the economy is that the labour markets are too heavily regulated. No 10 lets it be known that it's taking seriously ideas to scrap laws around unfair dismissal, so that employees can be sacked without explanation.



The implication of all this is that Cameron and Osborne think the workers are to blame for the malaise of the British economy. Look at the Northern Rock deal, however, or flick through the business pages, and the opposite appears to be the case: it's business that needs to be prodded into working harder.