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The Pamphlet Collection of Sir Robert Stout: Volume 77

The True Position of Our New Zealand Railway Investment. — Loss Last Year, £1,007,095

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The True Position of Our New Zealand Railway Investment.

Loss Last Year, £1,007,095.

Introductory Notes.—The following paper is intended to be a continuation and amplification of the one I read on the 4th of February, 1902, before the Congress of New Zealand Chambers of Commerce, held in Wellington.*

In that paper I endeavoured to tell only so much of the ugly truth as I thought was sufficient to arouse Parliament and the public to a sense of the danger hanging over us. The efforts made to suppress my paper may be accepted as a proof that the Department is unable to reply to it.

The terrible loss made last year, and the dreary prospect for the future, has determined me, in this paper, to go more into [unclear: letail] and to fully expose the ghastly failure of our railway ad[unclear: trators] More than twenty years ago I pointed out that this [unclear: ust] come to pass, and nothing but the vast natural richness of the country, and the general state of prosperity throughout the world has prevented it from coming Jong ago. The smaller the country the sooner the present vicious system makes itself felt. Thus in Australia, Victoria suffers more keenly than New South [unclear: ales] Another condemnation of the present "no-system" is the

* Note.—The Chairman of the Congress was the Acting-President of the Wellington Chamber of Commerce, Mr. D. J. Nathan. This gentleman [unclear: manded] of me that I should alter the paper, so as to make it more acceptable to the Government. This, of course, I refused to do, but at the request of friends I [unclear: ed] down the strong language used, retaining all the facts. At the banquet, The Premier (Mr. Seddon) offered to print the report of the Congress [unclear: proceedings] of charge to the Chambers. This offer was accepted; and thus my paper [unclear: ll] into the hands of the Government and their friends, who cut not only my [unclear: aper] but my other work out of the report. They printed it as a separate [unclear: aper] at the "New Zealand Times" Office, and slipped it into such copies of the report as they thought fit. The paper, as I read it, was accepted by the [unclear: gress], which thanked me for it, and it was the duty of the President to see that it formed part of the proceedings.

page 2 fact that the more closely it is worked, and the more capital that is invested in it, the worse are the results, as witness the [unclear: Hurun] Bluff Section, as compared with Auckland, remembering that the Hurunui-Bluff revenue has been assisted out of "Additions to [unclear: Oper] Lines" to the extent of 45 per cent, of loan moneys, while Auckland has only had 6 per cent. I may also call attention to the increasing difficulty the English companies find in paying a dividend Some of them are now accused of doing what our Government is doing, paying dividends out of capital instead of out of earnings.

More than a year has passed since the paper referred to was read. It has been made considerable use of by the London financial papers; and a debate on my work took place in Parliament last session, but so far no one, either in Parliament or out of it has been found able to dispute the accuracy of my statements.

When the real position of our railways comes to be understood there is little doubt some will be found, indeed some have already been found, to advocate a return to what is called "non-politics control" under Commissioners, but I ask my fellow citizens to [unclear: pau] and think what would have been our position now, if, during the last six years, our railways had been managed by Commissioner Whom could we call to account? We could not touch the Government. We could not touch the Commissioners. We should have no remedy. Now we can and ought to call the Government to account. What could not be done under Commissioners appointed by a corrupt Government determined to keep in place and power.

All the figures given and deductions drawn are taken solely from the official "Railways Statements."

I complain of the continual misrepresentation as to the; postion of our railway investment, and its earning power. We [unclear: are] told, year by year, our railways earn an increased rate of inters when the Department must have known that year by year [unclear: they] were making a rapidly increasing loss. If the intention has [unclear: been] to give honest information, why was the attempt made to [unclear: suppress] my paper, and why did Sir Joseph Ward (Minister for [unclear: Railways] at the Choral Hall, on the 20th of October last, tell us that [unclear: duri] the first six months of that financial year, as compared with [unclear: the] corresponding period of the previous year, the railway revenue [unclear: have] increased £47,129, when his own official returns state that the [unclear: gr] increase was only £17,978, or considerably less than half his [unclear: statement?]

Again, on the 17th of February last, at a smoke concert, [unclear: the] Right Hon. the Premier, Mr. Seddon, told us that the [unclear: increas] "railway revenue for the first ten months of the current [unclear: year] £124,587. The official returns prove that for the period [unclear: mention] the gross increase was only £49,041, not much more than [unclear: one-third] of what the Premier stated it to be, while the net revenue for [unclear: the] period, according to their own showing, had actually [unclear: decrea] page 3 £21,591.* If our railways are being honestly dealt with, what need can there be for this very gross mis-statement of facts by the two leading members of the Ministry? I presume these mis-statements were duly telegraphed to the Old Country as Ministerial utterances.

I have purposely left out of my tables the live stock tonnage, as that is only an estimated amount. During the six years the number of parcels, live stock, etc., increased by 931,639, and their tonnage, including the weight of passengers, increased only 49,718 tons, showing that the increase was mainly in parcels and sheep. Had I included this tonnage, passengers would have been accounted for twice.

I have endeavoured to show fearlessly and faithfully what has happened on our railways during the last six years, and I have done so without any leaning towards either political party. But as a citizen of New Zealand, I think I am entitled to say this:—That a Government that could so mismanage, and so misrepresent a business concern, having £20,000,000 of capital invested in it, is hardly fit to be entrusted with the management of such business concerns as State Coal Mines, State Fire Insurance, a State Bank, etc. If they made a similar failure of these, in addition, where would they land us?

When generally speaking of the Government, I wish it to be distinctly understood that it is not the present Government only that I blame; that must be shared by previous Governments. While there is no doubt that the results for the last five or six years have been by far the worst on record, it must be remembered that this is largely due to the mistakes of previous administrations. I believe that Sir Joseph Ward really thought that the changes he has made would have a beneficial effect, but I also think that in the light of events he should have seen that a radical change of policy was absolutely necessary, and that his officials were incompetent to give him sound advice; and there is no doubt that the present Government is more to blame than any previous one, but whatever Government had been in power my action would have been precisely the same.

The facts revealed in this paper prove the danger in having a Ministry composed almost wholly of men from one portion of the colony. It should be remembered that the Premier somes from Westland, the Minister of Public Works and the Minister of Edu-

* The returns for the full year are now published. They show the gross earnings for the year to have been £99,452 more than during the previous year, or £25,135 less than the I'remier said it was for the ten calendar months only' while the net increase for the whole year was but £8,274, which is all that can go towards his surplus. It surely is a bad thing for a country when its Premier can so seriously misinform it, as to its financial position. The apparent large increase in net revenue during its last twelve weeks of the year is no doubt, due to manipulation of the account. We shall find that a large sum has been carried to revenue account for services said to be rendered to other Departments, and probably amounts due for current expenses have been held over for future payment.

page 4 cation from Canterbury, and the Minister for Railways and [unclear: also] the Minister for Lands from Otago. Whatever the intention may have been, the fact is certain that West-land, Canterbury, and Otago have been, and are being, largely favoured at the [unclear: expense] of the rest of the colony, not only in capital expended, but also in the matter of rating, and the fact also remains that five out of the eight Ministers forming the Cabinet represent the favoured districts—five Ministers from the South end of the South Island.

Have we not lost enough by letting the officials persevere in continuing their no-system? Why not try the new system, [unclear: which] has succeeded so well financially in other countries?

We want a simple system that everyone can understand; [unclear: the] present complication is absolutely unnecessary. It is [unclear: designedly] made for the purpose of misleading the public. This is what Mr J. P. Maxwell said in his report of 1884, when asking for power to impose differential rates:—"While retaining publicity by [unclear: gazetting] each rate, were such a principle" (differential rating) "more [unclear: widely] introduced The Public Would not be able to do What It Now, to Some Extent. Essays to do—read and Interpret the Rates [unclear: Geneeally]; But the Practice followed Elsewhere would be, [unclear: necessary]; the customer would appeal to the station each time [unclear: he] Required a Rate Quoted, and, whether the railways were managed by a Minister or a Board, more power and freedom, in respect to rating, would have to be placed in the officers' hands." The small capitals are mine.

The Tables appended have been carefully prepared, and are intended to show clearly the downward course of our railway [unclear: investment] during the last six years. The more they are studied [unclear: the] more complete and disastrous the failure will be seen to be. [unclear: I] might have taken a longer period, but thought the last six [unclear: years] sufficient. I direct particular attention to the fact that year [unclear: by] year there has been a continuous and rapidly-increasing loss, [unclear: which] is more particularly manifest during the last three years (see Table A, column 11), notwithstanding the fact that during these years the business and gross revenue of our railways very largely increased There is not one single gleam of success in any part of our railway working. The striking feature of the whole is the fact that, the greater and more apparent is the loss made, the more loudly the Department asserts they have made an increased profit. Is [unclear: It] Possible They do not Know the truth?

Our Railways represent nearly one-half of our colonial [unclear: debt] and they are constantly being paraded before this country and the English bond-holder as our most valuable "[unclear: Reproductive]" asset. It is, therefore, very important that we should [unclear: understand] their true position, and the object of my present paper is to [unclear: place] page 5 this clearly before the public, in the hope that such action may be taken as will avert further disaster. It is very gratifying to me to find that at last some little attention, not only in this country, but also in Australia, England, and America, is being paid to the all-important question of railway administration. What is wanted is greater attention to the Policy that should govern the administration.

So far in this country our main attention has been concentrated on railway construction, and this has resolved itself into a miserable scramble among the provinces as to which shall grab the most of the expenditure. The tables which follow will prove that no attempt has been made to construct our railways in the positions where they were most required, or where they would pay the whole colony best, but the money for their construction was, I may say, invariably voted for expenditure where it would buy the most political support for the party in power. This statement applies, not only to the present Government, but to most, if not all, of the preceding Governments. It is impossible to imagine that it is in the interest of the whole colony that £53 9s. 2½d. out of every £100 spent in railway construction should have been expended at the south end of the South Island.

What is the Annual Cost of Keeping Our Railways Open is not difficult to ascertain. First, we must provide for interest payable on the loans out of which our railways have been constructed, and it we take this at 4 per cent. we shall be well within the mark. Then we must take all the expenditure necessary to keep the lines open and working. This now consists of the amounts expended under the headings of "Additions to open lines," and "Working Expenses." If these three items added together are less than the gross revenue, the balance will be our profit. If they are more than the gross revenue the balance will be our loss. Take the year 1902 as an example.

In this year the Department claims that they earned £3 8s. 6d. per cent. In order to show this return, this is what they did. They had £1,325,831 locked up in "Unopened Lines." Interest on this at 4 per cent, amounts to £53,033. This they paid out of capital, and thus reduced capital and raised revenue by that amount, but they brought it into the railway account as so much capital expended in railway construction. It is, however, clear that it was not so spent, but was money paid to the English bond-holder, Then they paid out of capital for renewals and repairs, £777,989, which ought to have been paid out of revenue. To this they added a fiction of £71,593 for services said to be rendered to other Departments of the Government, and which they treated as revenue actually earned and paid. Thus we have the sum of no less than £902,615 wrongly used to bolster up the revenue of that one particular year. The balance of interest on our railway loans was, at 4 per cent., £726,829, and "Working Expenses," £1,252,237. This page 6 makes the total outgoings for the year, £2,881,681, and if from [unclear: this] we deduct the gross revenue, £1,874,586, we find that the loss for the year 1902 was £1,007,095. Thus not only was every penny of interest lost, but our railways did not pay working expenses.

Every man having the most ordinary knowledge of business will admit that Capital invested in any business ought not to be allowed to fritter away. The main, if not sole, object of business is to increase capital, consequently in all well conducted business interest is first charged on the capital; and every article used in carrying on that business, that is liable to destruction [unclear: by wear] and tear, and the effluction of time, is always paid for out of [unclear: the] income earned by the business. It may be all at once, or by [unclear: means] of a depreciation account, reducing the cost by so much [unclear: yearly] If this were not done the concern must, sooner or later, come to grief.

Apply this rule to our railways, and what do we find? [unclear: The] rolling stock, and the so-called permanent way, are constantly [unclear: wearing] out and requiring renewals, repairs, and replacements. [unclear: To] meet these demands last year cost us £1,311,557. Of this [unclear: £533,568] was charged against revenue, and £777,989 to capital account.

It seems to me incredible that business men should treat [unclear: such] perishable articles as tarpaulins, fences, repairs to [unclear: buildings] stockyards, respacing—not relaying—sleepers (does this mean [unclear: correcting] blunders?), cushioning cars, etc., etc., etc., as fixed [unclear: capital].

The fiction of having £20,000,000 invested in "reproductive": railways is only maintained by assuming that every rail and sleeper laid, every shed, fence, and platform erected, every [unclear: engine] car, and truck, every cushion, tarpaulin, and lamp bought or [unclear: constructed] since 1870 is still in existence, and in good-working [unclear: order] What an absurdity! Yet this is the assumption on which the [unclear: account] is kept.

My contention is that during the last six years a sum of £1,722,757 for "Additions to Open Lines," and also a sum of £232,859 for interest on money expended on lines under [unclear: construction], which total £1,955,616, was Wrongly Charged to [unclear: Capital] account, instead of against revenue account, and consequently [unclear: that] the capital invested in our railways has been decreased by that amount. In addition to this sum of nearly two millions, a further sum of at least £365,000 has been carried to revenue account [unclear: for] services supposed to be rendered to other Departments. [unclear: In] other words, a sum of not less than £2,320,616 has, during the [unclear: last] six years, been wrongfully used to bolster up the revenue account and thus it has been made to appear that our railways have [unclear: earned] something over 3 per cent. Let me repeat that prior to the [unclear: appointment] of the Railway Commissioners, all these items [unclear: were] charged against revenue earned.

page 7

When a new railway is constructed, it is quite right to charge its cost, with its full equipment of rolling stock, to capital, but after that it ought to keep itself going.

Table A, Column 3, will show how continuously and rapidly the charge for "Additions to Open Lines" has increased. It rose from £64,717 in 1897 to £777,989 in 1902. It appears to have been increased just as it was required to make it appear that a certain rate of interest had been earned.

It happens somewhat curiously that five months after read my paper in Wellington, a controversy on the same subject took place in the "London Times." This will be found in their September file of 1902. It commenced by an "American Railway Official" charging the English companies with doing what I accuse our Government of doing, that is, paying dividends out of capital, instead of out of revenue, by charging to capital, items that ought to be paid for out of revenue. He selected the North-Eastern as his example, which he compares with the Delaware, Lackawanna, and Western Railway Company, of the United States of America.

He shows that in 1901 the American Company paid out of revenue, £51,969 for new bridges, £24,341 for interlocking and signal apparatus, £65,867 for sidings, yards, and track, £22,150 for new depots, freight houses, etc., £19,048 for water and fuel stations, £16,934 for new turn-tables, round houses, pits, engine houses, etc., £45,481 for sundry changes and improvements to buildings, new buildings on the line, and yards and sidings in course of construction. (In New Zealand all these things are paid for out of capital.)

The American writer says in reference to the North-Eastern of England:—

"It is evident from what has been stated, its current operating charges were relieved at the expense of capital; that this process has been going on for so many years that the corporation is suffering from over-capitalisation, and what was begun, perhaps as a temporary expedient to pay a large dividend, has become a chronic necessity."

How exactly this tallies with our case. He further says:—

"With a decreased income of £60,875 for the half-year, its managers charged to capital on account of lines and works open for traffic, £284,973, and for working stock (carriages), £96,117: total, £381,090, the equivalent of fully 2½ per cent. of its dividend."

So, according to this writer, the North-Eastern Railway of England, which in 1900 had a capital of £83,876,000, and an income 'of £9,276,000, required a sum of £381,000 to help up its half-yearly dividend, while our little concern required last year £902,615 of this wrongful application to deceive the public into the belief that our railways paid £3 8s. 6d. per cent. Yes, in this one year, no less than a misappropriation of nine hundred and two thousand page 8 six hundred and fifteen pounds. The thing seems so [unclear: incredible] that I do not wonder people think I am speaking without [unclear: knowledge], but I am only telling the sober truth.

Mr. Gibb, the General Manager of the North-Eastern, in [unclear: replying] to the American writer, says:—

"All well-managed English railways with which I am [unclear: acquainted] provide fully out of revenue for all necessary renewals.

Speaking of what was done on the American line, and on [unclear: hi] English line, he remarks that, "It includes" (on the American [unclear: line] "the cost of 79 new engines, at an average cost of £2,530 [unclear: per] engine, but they had to break up or sell 72 worn-out engines, [unclear: s] that the nett result of it all was that they added seven engines [unclear: t] their stock, debiting nothing to capital." But he adds: "The [unclear: North]-Eastern, in the same year, added 21 engines to their stock, at [unclear: as] average cost of £2,693 per engine, in addition to making [unclear: provision] for ordinary renewals, the old engines being replaced in all [unclear: case] by new and more powerful engines, And Also Without [unclear: Debiting] Capital With any part of the Cost."

"The Times" has a leading article on this controversy, in [unclear: which] it says:—

"The management of an ordinary business assumes that it [unclear: is] not sufficient to maintain the buildings and plant in condition [unclear: of] revenue. Sooner or later, plant, even if maintained in first-[unclear: rate] condition, must become useless, either because it is superseded [unclear: by] newer inventions, or because it is, by change in demand, [unclear: made] wholly superfluous. There must, therefore, be in some shape [unclear: or] form a substantial reserve, or the company is likely some day [unclear: to] get into the Bankruptcy Court."

"The Times" also contends that: "A policy of this [unclear: kind] (charging to capital), "if continued indefinitely. . . . must [unclear: ultimately] lead to the extinction of dividends on the ordinary [unclear: stock] Our dividend is already more than extinguished.

"The Times" goes even much further than this, and says:—

"It is not sufficient to maintain the buildings and plant in [unclear: working] order," but that the British Companies Ought to "[unclear: Supplement] or Improve" Their Property Out of Revenue, as Well as [unclear: Maintaining] it from that Source. It is well to bear in mind that [unclear: the] writer of this article is certain to have been one of the best [unclear: authorities] obtainable in the United Kingdom.

Mr. Rous-Martin, formerly of Wellington, but now of [unclear: London], and who is a recognised authority on railway matters, [unclear: has] a well-written article on this controversy in Page's Magazine of" [unclear: November] last. In it he says:—

"Probably no British railway will dream of disputing [unclear: the] general principle that all expenditure on what is strictly [unclear: the] renewal of permanent way or rolling-stock already constructed [unclear: or] page 9 of capital, should be defrayed out of revenue. If Ten Old Engines be Condemned, and Ten New Ones Built to Replace them, the Charge is, as a Matter of Course, on Revenue in the Case of Every Properly Managed Line. But Mr. Gibb tells us that not only is this done on the North-Eastern Railway, but also the old locomotives are replaced out of revenue by others of much greater power. Consequently the ten old engines are replaced by new ones with the equivalent power of twelve or perhaps fifteen old ones. So, too, in the case of the road. It is manifestly advisable that when an inferior old permanent way is replaced by a better new one, this expense should come out of revenue."

The "Evening Post," of Wellington, has pust published a series if articles on our railways by "Fishplate." This writer is evidently i trained railway man, and knows what he is writing about. He says:-"The financial side of our railways attracts singularly little public attention."... "A recent Parliamentary paper is eulogistic of the results achieved last year, but it discloses that, although the lines contributed revenue to the amount of £1,874,586, they absorbed (Exclusive of interest on cost) £2,030,226, or £155,640" (the exact figure I gave on the 17th February last), "more than they gave." If to this £155,640 we add interest at 4 per cent.. £779,862, and the fiction of £71,593. which seems to have escaped "Fish-plate's" notice, we have the sum of £1,007,095 as bis estimate of last year's loss. This also is the exact sum I placed before the public some months ago.

"Fishplate" says:—"The practice that has been indulged in of debiting to capital account cost of renewals, and that of other works, properly chargeable to revenue, is to be deprecated as unsound and highly improper."

He further says that as regards rates "certain individuals and corporations pay less than standard rates—a circumstance suggestive of undue preference."

From what appears above, it will be seen that the manager of the Delaware. Lackawanna, and Western Railway Company of the United States of America, the manager of the North-Western of England, the "Times" newspaper of London. Mr. Rous-Martin, of London, and "Fishplate," of Wellington, all support me in my statement that the items now paid for out of capital, under the heading "Additions to Open Lines," ought to be paid for out of revenue. I may also mention that the Manawatu Railway Company have recently built a new steel bridge, which they paid for J of revenue. To me it seems incredible that anyone with an ordinary knowledge of business can take any other view.

We may very safely estimate the amount credited to revenue for services to other Departments, as so much money earned by the railways during the six years, at £285,000, I object to this being so treated.. It was simply an entry made in various books page 10 for services said to be rendered to other Departments. Thus if a Minister took a special train from Christchurch to the Bluff this would be charged for at the rate of 5s. per mile for one [unclear: vehicle] and for each additional car 2s. 6d. per mile, and railway [unclear: passenger] revenue would be credited with £96 10s. for one carriage only But who paid this money? Where did it come from? It is [unclear: quite] clear that nobody paid it, and that it was merely, as Sir [unclear: Julius] Vogel would have said, an "adjustment of accounts." and that the cost of this service, whatever it was, was paid by the [unclear: community] out of taxation or loan.

From the first the Department fought hard to have this [unclear: item] included in the revenue account, but this was never done till 1896, or six years ago, when the difficulty in paying a small rate of [unclear: interest] began to be more seriously felt.

Here is another way of proving the downward course of [unclear: our] railway investment. In 1897 the Department says they [unclear: earned] £1,286,158—as a matter of fact, they did not earn this amount by the sum they have taken credit for as services rendered to [unclear: other] Departments—but they say they actually earned this [unclear: £1,286,158], If, therefore, we deduct from this sum the amounts for "[unclear: Additions] to Open Lines" and "Working Expenses," we still have [unclear: left] £432,387 towards payment of interest in that year. If we take the account in precisely the same manner in 1901, we had only [unclear: £274,358] towards payment of interest, and in 1902 not only had we not [unclear: one] penny towards interest, but we were £155,640 to the bad. "[unclear: Fish-plate]," of Wellington, has taken the account in this manner, [unclear: and] has arrived at exactly the same result.

The tables which follow illustrate the history of the whole our of railways during the last six years, and also of the [unclear: Auckland] Hurunui-Bluff sections, and the Wellington-Taranaki and Hawke's Bay section for five years only. This, because these [unclear: last] lines were not joined together till 1898.