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The New Zealand Railways Magazine, Volume 1, Issue 1 (May 1st, 1926)

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Until 1925 the financial organisation of the Railways followed closely the system evolved by the “Mother of Parliaments” for the control of the finances of Departments of State in Great Britain. Railway revenue receipts and payments formed part of the Consolidated Fund, the current account of the State, through which are passed the cash transactions of all Government Departments, except certain Departments for which special accounts have been provided, such as the Public Trust Department, Government Insurance Department and State Fire Office.

Under this system the railway finances, though separately recorded, had no separate identity. The Department paid all cash receipts to the Treasury, as the custodian of the Government funds, and forwarded all claims for disbursement of railway expenses to the Treasury for payment. It was the duty of the Treasury to find the cash to meet all railway expenditure, within the limits of the annual appropriation made by Parliament for that purpose, irrespective of the sufficiency or otherwise of the railway receipts to meet the railway disbursements at any given time.

Interest on loan moneys invested in railways was paid by the Treasury but was not charged against the Railway vote. It was, indeed, not possible to ascertain how much interest-bearing capital had been expended on railways, which were built originally by many different authorities, including Provincial Governments, local bodies, private companies, and the General Government, cut of the proceeds of loans, sales of land, ordinary revenue and share capital.

The books of the Public Works Department record the actual or estimated capital investment in the different sections of railway, but neither assets nor liabilities were entered in the accounts of the Railway Department. In actual practice the Railways were expected to earn sufficient revenue to maintain the assets at their original standard, pay working expenses, and return an arbitrary rate of interest (fixed in later years at 3¾ per cent.) on the estimated capital investment in lines open for traffic. This object the Department had been fairly successful in achieving, the surplus revenue over and above working expenses and the “policy” rate of interest amounting to £1,327,649 at 31st March, 1925.

Sufficient has been said to indicate that, financially, the powers and responsibilities of the Department were limited. It had no power to hold cash to provide for arrears of maintenance or depreciation not made good as and when it arose, to create reserves to meet deficits in bad years, or generally to adopt any of the precautions that sound accounting and finance dictate. However suitable such a system might be for the ordinary Department of State it was not calculated to achieve the best results in a gigantic trading concern such as the railways.

In 1924 the Government decided that one of the first and most important steps in the work of reorganisation was to place the finances and accounts on a different footing and as far as possible to bring them into line with commercial practice.

With this object the Government Railways Amendment Act of 1925 was passed. Of this Act it may be said that no more important amendment has ever been made in the constitution of the railways. It created, as from 1st April, 1925, a separate “Working Railways Account” into which all revenue receipts, including interest on investments of moneys belonging to the account, are now paid, and out of which all working expenses are met, as well as superannuation subsidies, interest on fixed capital and temporary loans.

All services rendered by the Railways to other Departments, or to the State in operating non-paying lines as a matter of Government policy, are to be charged for and credited to the Working Railways Account.

Power is given to borrow money from the Consolidated Fund when such a course may be necessary, and, on the other hand, to invest surplus cash not required in the Working Railways Account.

One section of the Act of special interest is that which provided for payment from the Consolidated Fund to the Working Railways Account of £1,327,649, less £854,256, the sum owing by the Railways to the Treasury as at 31st March, 1925.

It has already been explained that the Railways had no power to hold cash and that all surplus moneys arising out of railway operation automatically belonged to the Consolidated Fund. At the commencement of page 37 business on 1st April, 1925, there was therefore no cash in the Working Railways Account at the Treasury. On the other hand the Railways owed the Consolidated Fund £854,256 for advances made for the purchase of stores and materials in stock and not yet charged out against working expenses, for cash in hand and in transit, and for uncollected revenue at stations. Further, in the first few months of the Railway year, during the winter and spring, the revenue is at its lowest ebb, and insufficient for current requirements. The Department was faced with the immediate necessity for raising a very large amount of floating capital to enable it to carry on.

Under the circumstances it was claimed that the Working Railways Account was equitably entitled to be credited with the sum of £1,327,649, surplus earnings of past years, previously referred to. This claim was allowed, with the result that a reserve fund invested partly in stores stocks, and partly at call in the Consolidated Fund, became available for immediate necessities. Though by no means adequate for a business of such great magnitude the reserve considerably relieved the situation.

The reserves and depreciation funds of the railways of the United Kingdom amount to approximately 10 per cent. of the total capital as against a modest 3 per cent. represented by the initial sum available in New Zealand.

The Act empowers the Governor-General by Order-in-Council to frame regulations governing the operation of the Working Railways Account and fixing, inter alia, the rates of interest payable on capital and on temporary loans, the method to be followed in determining the capital investment in railways open for traffic,—the portions of the line that are to be regarded as non-paying lines, in respect of which the account is entitled to be subsidised, and the method of assessing the losses on such lines. These regulations are of considerable interest, but it is not possible to deal with them fully in the present article.

The Act does not make any alteration in the system of Parliamentary control of railway working expenditure. Estimates will still be submitted to, and appropriations made by, the Legislature annually, defining and authorising the expenditure out of the Working Railways Account for the purpose of Working Railways services.

The setting up of a separate Working Railways Account gives the railways a much greater measure of financial independence, with a corresponding increase in responsibility.

The railways will be paid for all services rendered and will be subsidised for lines operated for developmental purposes or for other reasons of State policy. In return they will be called on to pay interest charges at the average rate on Public Works Fund loans or at the actual rate on loans raised specifically for railway purposes. Superannuation Fund subsidies amounting to £170,000 per annum have to be met, and adequate provision made for renewals and betterments, and for the reserves without which no concern can successfully meet the ups and downs of business. Without adequate and stable finance no public utility can hope to render the best service to its customers, combat by higher standards of efficiency the ever increasing competition, or give and maintain reasonable pay and conditions of employment to its staff.

The financial success of the railways is not solely, or indeed mainly, a problem for the management. It vitally concerns every railwayman who takes a pride in his job and in return expects his job to render fair treatment to him. It can be solved only by the co-operation of all branches of the service.