Is Branson Stealing from U.K. Taxpayers?

In recent weeks, readers of The Guardian who weren’t distracted by the Snowden story have been entertained by a debate between lefty economist Aditya Chakrabortty and entrepreneur Richard Branson, the CEO of Virgin Airlines, Virgin Rail, and various other companies. The debate actually started a couple of years ago, when Chakrabortty called Branson a “carpetbagger” because, among other things, he bought a failed bank from the British government for less than the government had spent rescuing the bank.

Virgin Pendolino tilting train in London. Wikipedia commons photo by Andrew Butcher.

Branson replied a few days later saying that “99% of our businesses have nothing to do with government at all and have been built in the face of ferocious competition.” Where his companies do work with the government, he added, their goal–as in the case of the bank–has been to turn loss-making enterprises into profitable ones.

Chakrabortty’s latest salvo, issued on June 10, focused on Virgin Rail, which operates some of Britain’s “privatized” trains. The Antiplanner uses quotation marks because BritRail’s privatization was only half-hearted. The government split the railways into a government-owned infrastructure company, called Network Rail, and operating franchises on various routes, which were “sold” or leased to various companies such as Virgin Rail. Chakrabortty calls Branson a “subsidy junkie” for what he claims were 2.79 billion pounds ($4.3 billion) in subsidies supposedly collected by Virgin Rail.

Chakrabortty bases his numbers on a report issued by the Trades Union Congress, which is no doubt unhappy about the loss of union jobs that resulted from privatization. What the unions don’t want to emphasize is that BritRail privatization has resulted in a huge increase in ridership during a period when rail ridership in most European countries has been flat or declining.

Branson, of course, was quick to point this out in his June 20 response. Most of the “subsidies” consisted of track rehabilitation work done by Network Rail, which was necessary due to BritRail’s lack of maintenance since the 1960s. Virgin Rail itself purchased or leased, without subsidies, all of the passenger equipment used on the line and was paying Network Rail more than $2.3 billion a year to use the tracks, as well as paying the government $165 million a year for the franchise.

As the report calculates subsidies, seven other operating companies receive far more subsidies than Virgin, but none of the other companies have as flamboyant a CEO as Virgin, so Chakrabortty singles out Branson for criticism. Since 1997, Virgin Group has owned only 51 percent of Virgin Rail, having sold the other 49 percent to Stagecoach, which also owns Megabus.

Chakrabortty’s most recent response doesn’t really reply to Branson’s points, but argues that the $2.3 billion that Virgin pays to Network Rail is a subsidy because the payment used to be twice that. (Branson had said that this “reflect[s] a reduction in costs after the renewal and upgrade work and other efficiencies it has made.”) Chakrabortty doesn’t mention the $165 million in franchise payments.

Chakrabortty’s claim that the government is “piling up debts” that profit Virgin Rail ignores the fact that the debts were incurred for track rehabilitation more than a decade ago, and since then Virgin has been paying both the government and Network Rail quite handsomely. While the Antiplanner tends to believe Branson more than Chakrabortty, the real problem is Britain’s half-hearted privatization.

The U.K. privatized to save taxpayers’ money, but it didn’t want to alienate rail passengers who liked to believe they were entitled to passenger trains even when other means of travel are more efficient. The government hoped that private operators would save money over public bureaucracies, but the incentives facing franchisees are less than perfect.

The biggest problem they had was that the split between operators and infrastructure created the wrong incentives for the infrastructure owners. When the rails were privatized in 1997, the infrastructure company, called Railtrack, had a dual incentive not to maintain the tracks, because maintenance both cost money and (when tracks were closed for maintenance) reduced revenues. Two serious train accidents persuaded the government this wasn’t going to work, so it took over Railtrack, renaming it Network Rail. True privatization, in which the same company that owned the tracks operated the trains, was never seriously considered, probably because the government feared that many passenger trains would not be able to compete with buses, planes, and cars.

Railtrack’s record was not much worse than the government’s own maintenance history when it owned the tracks and trains under the name British Rail. Rail infrastructure must be renewed about every 30 years, and considering that most British rail lines had been reconstructed shortly after the war, much the system was at least a decade overdue for renewal when Railtracks took over.

The current system is not perfect, but if subsidies exist, the government has itself to blame for separating infrastructure from operations, not the operating companies like Virgin Rail. The huge increase in rail ridership since privatization means that subsidies per passenger mile are the lowest in Europe. Those subsidies could end overnight if the government would sell the tracks to the companies operating the trains. If Chakrabortty were an objective journalist, rather than a shill for the unions, he might see this.

The moral of the story is that people designing institutions need to get the subsidies right. If they want to end subsidies, they might see a decline in service. If they want to move lots of passengers, they might see an increase in total subsidies though a decline in subsidies per passenger. In this case, any subsidies are to the passengers, not to the operating companies.

Using the standards by which American’s judge transit systems–trips and passenger miles–British rail privatization is an unparalleled success. Neither Amtrak nor any U.S. urban transit system has seen the 138-percent increase in ridership in 15 years experienced by Virgin Rail operations. To complain about the subsidies is only to argue that the Brits got the incentives wrong, not that the system is a failure.


One thought on “Is Branson Stealing from U.K. Taxpayers?

  1. paul

    My understanding is that the Conservative British government put in large amounts of taxpayers money in the 1990’s to get private firms to bid on taking over the rail system. Then they were not willing to let companies like railtrack go bankrupt as in a normal business system, a striking failure of privatization. The cost to the taxpayer in the 1990’s should be added in to any cost accounting of today’s British rail system. What is needed is a system that would operate in the same manner as the FDIC insures bank deposits but not shareholders of banks. Such a system would move in a continue the operation of a bankrupt rail company while sorting out bankrupcy and punishing the managers and staff who allowed it to go bankrupt.

    Some rail enthusiasts have considered the Netherlands and Swedish rail privatization has been better than the British example. I would be interested in the Antiplanners opinion on these rail systems.

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