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The New Zealand Railways Magazine, Volume 1, Issue 3 (July 24, 1926)


The scheme for the financial reorganisation of the railways, or more particularly that portion of the scheme providing for the payment to the working railways for services rendered, of an amount to compensate for the losses sustained in working cortain portions of the line, has been subjected to somewhat severe criticism, most of it obviously based on an incomplete knowledge and appreciation of the difficulties that had to be surmounted in order to place the railways on a sound footing.

First let it be said that the problem cannot be clearly understood without a general survey of the position of the railways at the close of the financial year ending on March 31st, 1925, a survey which necessitates a cortain amount of what one critic has unkindly dubbed “antiquarian research” into the early history of railway construction and policy.

For fifty years the railway policy of New Zealand was directed mainly to one end—the development of the country. Lines were built, tariff charges fixed, train services and other facilities granted in furtherance of that policy, to which the success of the railways as a selfsupporting business was almost completely subordinated. Apart from the Consolidated Fund the railway finances had no separate identity, no continuity, and no reserves. The true results of operation were consequently obscured, and the management was unable to build up the reserves which are so essential to sound and prudent administration.

The burden thrown on the State finances as a result of the war, and the rapid development of a rival means of transportation in the form of the road motor, finally forced a modification of the “development” policy and the substitution therefore (vide the annual statement of the Minister of Railways for 1924) of a new policy. This provided for a separate railway fiscal organisation, payment for all services rendered (including services rendered to the State in operating certain specified lines which could not be worked as a business proposition), a review of tariff charges, provision of adequate reserves, the introduction of sound accounting methods, and the setting up of a commercial organisation for the purpose of regaining, holding and developing business.

The Fay-Raven Commission in December, 1924, reported that having regard to the increase in population, the opening up of new producing areas, the revenue advantage brought about by the linking up of detached sections of the railway system and including also proper payments for the conveyance of lime and road metal as well as branch line losses to be made good out of consolidated funds, the railways would in 10 years time be in a position to pay working expenses, interest at £4 12s. per cent., and renewals fund contributions, provided the sum of £8,000,000 was spent during that period on improvements required to put the railways into a fair and economical working condition.

The position at 1st April, 1925, may be summed up as follows:—The net revenue available to meet interest charges amounting to £1,655,000 for the year 1924–25, was £1,567,000. It was estimated that the interest charges for 1925–26 (allowing for the increased rates payable and new lines to be opened for traffic), would be at least £1,900,000, including the interest burden on capital sunk on railway improvement works which, though necessary to put the service on an economic basis, would not become reproductive for several years. This burden was cestimated for the year 1925–26, at £50,000. gradually increasing to not less than £150,000 in 1928–29, after which the reduction in working costs effected by the improvements would tend to set off the higher interest charge.

The improvements programme also involves writing off retired facilities, including stations, yards, works, workshops and machinery, aggregating in value several hundred thousand pounds, which, though still serviceable, are obsolete or inadequate, and are only partially covered by reserves.

To provide for such retirements, for minor works, and for necessary but unproductive betterments which prudent finance does not allow as a charge against loan capital, at least £100,000 had to be provided annually for several years.

The additional charge against revenue to provide for renewals and insurance funds was estimated at £275,000 in excess of the actual annual expenditure. The increased superannuation subsidy for 1925–26 was £65,000, rising the following year to £90,000.

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Additional revenue was therefore required during 1925–26 as follows:—

Additional Interest 245,000
Deficit 1924–25 88,000
Betterments 100,000
Renewals and Insurance 275,000
Additional Superannuation Subsidy 65,000
Total £773,000

The excess of revenue over ordinary working expenses, amounting in 1924–25 to £1,567,000, had to be increased to £2,340,000, or by practically 50 per cent, before the finances could be said to be on a sound footing.

The steps taken to increase the revenue are too well known to require repetition. One of the most important was the setting up of a Commercial Branch and the fostering of a commercial spirit in the staff generally, which has resulted in a much higher standard of service rendered by the Department to its customers and a constant widening of the scope of the Department's activities. There are very few traders in New Zealand to-day who do not fully appreciate the fact that the railways are determined to secure all the transportation business offering and. prepared to consider and make a trial of any reasonable proposition put before them.

The revision of the tariff was put in hand promptly. Rates were adjusted, and are being adjusted almost daily, to meet the requirements of business, instead of business having to adjust itself to the tariff. Where the rates were too high to secure traffic they were reduced, and where they could be raised without unduly burdening essential industries they were increased.

In the face of intense sea and road competition the possibilities of increasing the revenue by adding to the tariff charges were greatly restricted, and it was estimated that less than half of the total additional net revenue required could be raised by increased charges and commercial activities, leaving approximately £400,000 to be obtained by other means.

Attention was next directed to the reduction of working expenses. The report of the Fay-Raven Commission indicated that reductions in expenditure were dependent very largely on the carrying out of the programme of new works already referred to, the results of which would not make themselves felt for several years. On the other hand a vigorous poliey demanded the provision of more trains, or faster trains with reduced loads, improved rolling stock, experiments with cheaper forms of transport such as rail motors, and generally an extension of all the activities and services of the Department, an extension which, though undoubtedly fully warranted by present or prospective results, could not be carried out without increases in expenditure, more than offsetting any immediate reductions made possible by improved methods or more economical administration. It was evident therefore that the deficiency could not be made good by reductions in working expenses.

Coming finally to consideration of the nonpaying branch lines and isolated seetions, which more than any other factor are responsible for the difficult financial position of the railways to-day:—

A brief analysis of the figures now available with respect to branch lines under the revised system of accounting will throw a good deal of light on the subject. It should be explained that the detailed figures are for the twelve four-weekly accounting periods ending on 27th February, 1926, and not for a full year, Under the terms of the Order in Council the losses are determined six-monthly in August and February so that the necessary adjustments may be made between the consolidated fund and the working railways account before the close of the six months ending 30th September, and the financial year ending 31st March, respectively.

The figures in respect of non-paying branches are as follows:—

28 Branches—774 Miles.

Total Expenditure £324,058
Interest Charges 217,652
Total Revenue £258,243
Value as Feeders 36,568
Loss 246,899

The results on two branch lines (Waitara and Foxton) formerly regarded as non-paying and not included above, are as follows:–

2 Branches—25 Miles.

Total Expenditure £19,269
Interest Charges 3,775
Profit 5,494
Total £28,538
Total Revenue £14,265
Value as Feeders 14,273
Total £28,538

Of the non-paying lines nine branches aggregating 330 miles yielded a revenue of £17,544 in excess of expenditure, to meet interest page 10 charges amounting to £96,957; and 19 branches aggregating 444 miles showed an operating loss of £46,791 and interest charges amounting to £120,695.

A brief explanation of the method of arriving at the branch line earnings will be of interest. Each branch is credited with the carnings from all local traffic between stations on the branch; with a proportion of the earnings from traffic carried to or from the branch from or to the main line, based on the mileage travelled on each line; and also with the whole of the net profits (before charging interest) derived by the main line from traffic received from or conveyed to the branch line.

Let us assume that the cost of conveying traffic on the main line (exclusive of interest) is 75 per cent. of the revenue. A passenger travels 60 miles, 20 miles on the branch and 40 miles on the main line at a fare of, say, fifteen shillings. The branch is credited not only with five shillings or twenty sixtieths of the total fare, but with 2s. 6d., or twenty-five per cent. of the main line earnings. The branch line therefore gets credit for one half of the total receipts, though the passenger travelled only one third of the journey on the branch. Traffic from the main line to the branch is apportioned in the same way.

The effect of this method of assessing the “feeder value” of the branch lines is that every improvement made in the operating efficiency of the main lines automatically reduces the amount of subsidy payable to the railway account.

The position of the isolated sections of railway for the year ended 31st March last was as follows:—

Miles Revenue £ Working Expenses £ Operating Loss £ Interest £ Ttl Loss £
Kaihu 24 8,411 11,354 2,943 7,927 10,870
Gisborne 60 39,565 41,110 1,545 35,674 37,219
Nelson 61 28,281 36,655 8,374 18,366 26,740
Picton 56 42,352 44,900 2,548 28,390 30,938
201 118,609 134,019 15,410 90,357 105,767

The capital cost of these lines was £2,200,000. The position of Development Lines may be summarised as follows:—

Total Revenue including feeder value £ Working Expenses £ Amount per cent of Revenue £ Interest Charges £ Amount per cent £ Loss £
Subsidised Branches (11 months) 294,811 324,058 110 217,652 74 246,889
Subsidised isolated sections 118,609 134,019 113 90,357 76 105,767
Total 413,420 458,077 308,009 352,666

Applying the drastic methods advocated by some crties, it would be necessary to write down capital by about 7½ millions, close 19 branch lines 444 miles in length, and 201 miles of isolated lines, to effect a saving of about £65,000 per annum. It must be remembered that the capital sunk in such railways would be practically a dead loss in the event of the lines being closed. Since the railways were constructed out of loan capital and the liability to the lender cannot be repudiated, the taxpayer would not be relieved of the interest burden, amounting to £300,000 per annum.

The position can be improved only by increasing the operating revenue or decreasing the working expenses in order to produce a greater net revenue.

It may be laid down as a general rule that capital charges should not exceed 25 per cent. of the gross revenue if lines are to be successfully operated, thus allowing for a working expense ratio of 75 per cent. Last year the percentage of capital charges to revenue on the North Island Main Line and Branches was 20 per cent. and on the South Island Main Line and Branches 30 per cent. of the operating revenue.

In order to put the subsidised lines on a self-supporting basis a revenue of £1,250,000, or three times the present income, would be required. The prospects of realising any such increase are so remote as to be negligible. Under competitive conditions the cnforcement of higher charges on branch line traffic in order to give a return more in keeping with the actual cost of the service could not produce more than a very small proportion of the amount required. On the contrary it has been found necessary in many cases to reduce charges in order to retain even the small volume of traffic offering.

The possibilities of reducing the cost of maintaining and operating lines carrying light traffic are engaging the attention of railway operators throughout the world. New Zealand is experimenting with light rail motors of various types. Officers have been sent abroad with special instructions to study the methods adopted in other countries. A number of different schemes suited to the conditions ruling in various localities have been formulated and will be given an extended trial. It is hoped by such means to eliminate the operating loss and make some contribution towards capital charges.

It is, however, obvious that the cost of constructing and maintaining railways through sparsely settled agricultural and nastoral coun- page 11 try is so high that such lines cannot be regarded as financially self-supporting, though the benefits accruing to the State may be very considerable. It is, therefore, not surprising that the Government of New Zealand was compelled by force of circumstances to follow the example of practically every country of the civilised world, even where no capital liability attaches to the Government, and subsidies lines which, though they do not pay their way as a commercial proposition, are essential to the national welfare.

Government subsidies in many different forms such as land endowments, share-capital subscriptions, loans, or guaranteed minimum carnings have been granted to railways in Australia, Africa, United States, Canada, Japan, China, India, and practically all European countries except perhaps Great Britain. In New Zealand itself there is precedent for the subsidy in the case of the Midland Railway Company, which received a land subsidy of equivalent to 13/6 for every pound of capital expenditure, and the Wellington Manawatu Company, which was endowed with 215,000 acres of Crown lands and £30,000 worth of Government works.

If the system of railway construction by private enterprise assisted by State subsidy had been generally adopted in New Zealand, it may safely be assumed that the present cost of State aid to the railways would have been greatly in excess of £360,000 per annum.

In planning the new system the administration was faced with two alternatives. The first was to write down the capital to a figure at which the railways could, with efficient management, pay their way without assistance. The effect would have been to relieve the railway accounts of the interest burden and obscure the position by an unidentified charge in the Consolidated Fund. The second alternative was to let the capital stand at the original figure and show clearly in the railway accounts every year the cost to the taxpayer of providing transportation services on the subsidised lines.

Under both systems the loss must necessarily be borne by the taxpayer, just as in an unsuccessful company it must be borne by the shareholder. The plan adopted has the virtue of correctly recording the results, and affords a valuable guide in determining the railway construction policy of the future.

In conclusion it may be stated that the railway management is still faced with a difficult task.

In the South Island a large proportion of the main lines in respect of which no subsidy is payable, does not carry sufficient traffic to support fully the maintenance and interest burden.

The same position exists with respect to practically the whole of the lines recently opened, or lines now under construction and shortly to be opened for traffic in the North Island. The capital cost of such lines is in many cases almost double the average cost of opened lines, while the country served is still sparsely settled and the anticipated traffic return low.

Intense competition calls for a bold progressive policy. The need for adequate facilities to permit of economical operation is urgent. Under favourable conditions the result of the first year's operations was satisfactory, but the outlook for the current year is by no means bright.

Transportation is the life blood of commerce. Violent or revolutionary interference with the channels of circulation established during 50 years of operation might very easily do incalculable damage and would certainly not be tolerated by the country. The position has been carefully and systematically surveyed and it is believed that the foundations of a sound and lasting financial system have been laid. The completion of the plans is a matter of years rather than of months. The Railway administration and staff are fully alive to the absolute necessity of cheap and efficient transportation to ensure the continued prosperity of the Dominion and they will do their utmost to carry the scheme to a successful conclusion. They must, however, work in the light, not grope in the dark. This is what the new systm achieves.