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The Pamphlet Collection of Sir Robert Stout: Volume 82

Dunedin, January 9, 1885

Dunedin,

Re proposed purchase of the Waimea Plains railway by Government.

Sir,—I have the honour to acknowledge the receipt of your letter of the 2nd inst. (No. 59/92), which has been considered by my Board.

With reference to your statement that you are assured by ample evidence that this Company desired to stop all through running of trains between Dunedin and Kingston by the Waimea Plains route, and that this was explained to be our reason for the change made in December 1883, my directors again deny that they are responsible for the cessation of the through service; for, as already explained to you, the Company's time-table has always admitted of the continuance of a through service, had the Government thought fit to arrange for trains to meet ours at Elbow, and they regret that you should persist in reiterating charges without supporting them with any evidence, which they now challenge you to produce. The correspondence that passed between the Railway Department and the Company in December 1883, relating to the termination of the agreement then subsisting, will certainly not justify the charges.

Regarding your statement that the changes made in December 1883 were not in the least degree necessitated by any of the features of tbs arrangement then subsisting, my directors are at a loss to discover how you arrived at that conclusion, In the first place the consideration the Company received for performing the service between Kingston and Elbow was ridiculously inadequate. The running speed which had to be maintained in order to overtake the local traffic and comply with the Government timetable, besides involving considerable outlay for maintenance and repairs, taxed the powers of the Company to the utmost. Having carefully considered the question, the Board came to be conclusion that by confining themselves to the local traffic, thus reducing the mileage run by about one third they would be able to work the line more easily, and to the greater convenience of the settlers, without adversely affecting the revenue account. An inquiry into the working of the line during the past 12 months will fully justify the course the Board has pursued, and disprove the unfounded and unsupported charge of mismanagement.

In your letter under reply you state that "the Railway Department would have been willing to make any reasonable modification in that arrangement to preserve the through character of the line, but the wish of the Com- page 8 pany was otherwise, and the Government was warned to discontinue the issue of tickets for through traffic." In reply to this, I am directed to say that the Railway Department never indicated such willingness by making any proposals in the direction mentioned, and emphatically to deny that "the Government was warned to discontinue the issue of tickets for through traffic."

Replying to the third paragraph of your letter, my directors fail to see by what method of reasoning you arrive at the conclusion that because a portion of the Company's liabilities (namely, the debentures), together with the paid-up capital, "apparently only exceeds by something under £2000, the cost of the railway, as formally certified to by the Minister of Public Works," therefore" the cost has been certified to at too high a figure." You appear to have overlooked the fact that the Company's liabilities amount to over £15,000, in addition to the debenture loan, With reference to the "admissions" made by me during our recent interview, if my replies to the questions put to me may be so termed, I think I showed no disinclination to furnish the items included in the cost of the railway and its equipment, which has been certified to by a competent auditor, and approved also by the auditor appointed by the Government. I may also state for your information that during the trial of a test case for the recovery of rates, the propriety of the items challenged by you being included in the cost of the railway was unsuccessfully contested in Court, so that the correctness of the construction account may be said to be established. In any case, my directors respectfully submit that, as section 22 of "The District Railways Act 1877 Amendment Act 1878" expressly declares that as regards the guaranteed interest the certificate of the Minister as to the coat of the railway shall be conclusive, the question may be regarded as settled.

My directors deem it scarcely necessary to controvert your opinion that it is opposed to the intention of the Legislature that the guarantors should pay the shareholders 8½ per cent., as the intention of the Legislature appears to them to be clearly expressed in the statute, The guaranteed interest is upon the cost of the railway and its equipment, as certified to by the Minister. Had the whole of the Company's nominal capital been paid up, the guaranteed interest would have yielded considerably less than 7 per cent, to the shareholders. In that event I presume the guarantors would have argued that it was not the intention of the Legislature to pay the shareholders 7 per cent. If the Company be fortunate enough to make a profit out of a financial operation, not affecting the working expenses of the line, it does not appear to my directors that the matter concerns the guarantors, who have not been asked to contribute anything to the very heavy burden in the shape of exorbitant interest that the shareholders have had to bear by reason of the faulty legislation previously complained of. I may further point out that although for the future there is a good prospect of the shareholders receiving 8½ per cent, upon their investment, seeing they have had no return whatever for a period exceeding six years, many years must elapse before the average dividend will equal 7 per cent.

I regret that I did not correctly understand the terms of the alternative offer referred to in my letter of the 29th ult. Both Mr Bell and Mr Wales understood the offer to be as quoted in my letter.

In my calculation, including the sum of £9000 for redemption of the debentures, I endeavoured to show the value of your first offer only, not considering the alternative offer, as I understood it to be more favourable to the Company. Upon the same method of working, and assuming the debentures for the purchase money to be saleable at par, which you will probably admit is extremely doubtful, the following figures exhibit approximately, the loss the Company would sustain by agreeing to the terms now proposed by the Government:—
Amount of purchase money £106,000, less debentures 75,000 £31,000
Moiety of two years rates, say 7,000
Government quota of interest for current year, say 2,000
£40,000
Due to sundry creditors, say 15,000
Amount payable to shareholders 25,000

The paid up capital being £35,610, the shareholders would lose £10,610, or equal to about 28 per cent, of their capital.

Considering the Company's improved position and prospects, my directors would not be justified in recommending the shareholders to part with what is now undoubtedly a good property, on anything like the terms proposed by you, at the same time they would be prepared to agree to any arrangement that would have the effect of lessening the guarantors' contribution without diminishing the amount of guaranteed interest secured to the Company by law. It is estimated that a saving in the working expenses of at least £2000 per annum can be effected, and the income increased by the line being worked as part of the Government system, so that it will be seen that were the Government to lease the line at a rental equivalent to the guaranteed interest, the guarantors would be considerably relieved. At the same time the directors recognise the fact that the guarantors would be relieved to a much greater extent by the Government purchasing the railway. Without committing the Company to the price assumed, the following will serve to illustrate my meaning.

Assuming the Government purchase the line at, say £125,000 in 4 per cent, debentures, the annual charge would be £5000. The profits under the existing system of working may be set down at £1000, which, added to the estimated saving of £2000 in working expenses (allowing nothing for increased traffic, which would undoubtedly result from the line being worked as part of the Government system), page 9 would leave about £2000 to be contributed by the guarantors instead of about £6600 as at present, thus:—
£ s. d.
Seven per cent, on £108,713 (certified coat) 7609 18 2
Deduct profit, say 1000 0 0
£6609 18 2

It will be seen that the difference between the interest on £125,000 at 4 per cent., and the profits would about equal the Government quota of guaranteed interest, so that by purchasing the line at the price assumed, the rate-payers would be entirely relieved without increasing the present annual charge upon the Consolidated Fund.—I have the honour to be, Sir, your obedient servant,

R. H. Leary, Secretary.

The Honourable the Minister of Public Works, Wellington.