DEPRECIATION.

Evening Post, Volume LXX, Issue 36, 11 August 1905, Page 4

DEPRECIATION.

Depreciation is defined by Stonnontk as "the act of lessening the value of anything,'- 1 but in its technical sense it represents "the loss of value" rather than " the operation of losing it. The question of making due provision to cover this loss of value in connection with the plant and equipment of the electrical tramways of tho city is one of moment, and should engage the attention not only of the members of the City Council, -who have the responsibility of dealing with it, but aiso of the genenil body of otizens, and the ratepayers in particular. We shall confane our present consideration of this subject mainly to its relation to the physical deterioration of the assets, and as far as possible exclude the factor of obsolescence, which is of sufficient importance to be treated separately. That there is constant waste or consumption going on in connection with any operation entailing friction, use, or exposure to weather conditions, may be considered as axiomatic, and that such deterioration or decay is considerable in connection with electrical tramway appurtenahces is equally self-evident. it may, then, be postulated that the process of losing value is gradual, and that its continuation, is progressive, eventually resulting in the attenuation of tho subject to the point of inutility, necessitating its replacement. We therefore affirm tho proposition that, the deterioration being gradual and cumulative, the contributions for restoration should cor« respond, and consequently it- is wrong to postpone tho needful provision for this purpose till the expiration of tho subject. It has further to bo noted that tho waste is greater in tho later years than in the earlier period of "life," consequently it is necessary that the lose flkould be bpread by averago, so that each financinl period may bear ils fair proportion of the expense. Tho actual cost of maintenance is not sufficient to make good the loss by depreciation. In the early period of tho service the equivalent of the loss of value could riot bo profitably expended, as, in muny cases, the "life" of the subject, extending over a number of years, will have run its course before the effects of its deterioration aro felt in tho working of the service. Repairs are chargeable directly to revenue, tho "depreciation" allocation being purely to cover the reduction of worth by consumption or deterioration, so that tho subject may bo renewdd or replaced when its life of usefulness has expired. The amount of depreciation is the difference between the original and the residual or "scrap" value. Failure to average this loss must result in excessive expense for renewals in some years ~ and tho reverse in others, giving instability to the finances, and consequent derangement in tho management. Extreme fluctuations in fares to alternately meet largo deficiencies , or absorb fictitious surpluses would be demanded, passengers in the early stages of , the system travelling partly at the expend

of those of later years, or at the cost of the ratepayers. The effects of depreciation are possibly not evident, and may not be felt, during the earlier operation of the service, but the veriest novice" will not deny that its insidious agency is always at work. How, then, can tho doctrine of procrastination, in regard to its compensation be justified ? We are not at all pessimistic with regard to the financial potentialities of the tramways; but the enterprise must exist on its own revenue, which should be sufficient io cover the expenses of •working, including the consumption of material by deterioration, as much a.s the consumption of coal in its power-r ause furnace. Wfe quote from an authority on this point: — "Depreciation at axed, percentages should undoubtedly be written oK every year. . . The plea of insufficient surplus should never be allowed to excuse failure to- meet this necessary charge against revenue. A deficit should rather be shown and carried forward to the following year. In no other way can the accounts exhibit, as they should, the true results and position of the undertaking." From the beginning of traffic on the Wellington electrio tramways to the 31st March last, 6,457,759 passengers were carried, yielding a revenue of £36,704, or an average fare per passenger o.f 1.36 d, as compared with l.lld, the average given by Mr. Herbert Jekyll in connection with the Board of Trade returns for the 1903-4 period" of electric traction, embracing 162 ! concerns with 1148 miles of lino owned by local authorities, and 150 by companies and others, with 692 miles. Contrasted wiht 0.91 d, the average fare per passenger by the Glasgow electric 'tramways, it -will be noticed that the Wellington average faro per capita is just Jialf as much again as the Glasgow average. Mr Jekvli's summary shows the percentage of working expenditure to gross receipts to be 66.15, the corresponding Glasgow percentagef being 49.23. These figures demonstrate very clearly that electrical traction commonly yields a very liberal margin from which to furnish means to cover depreciation and sinking funds for redemption of loan moneys. It is not practicable for us to determine from the Wellington figures available the relative cost of the clusses of assets falling in different categories, and consequently we cannot approximately estimate the amount which it is necessary should be annually devoted towards building up .a fund to cover depreciation ; but it is safe to assert that it will require over £10,000, and perhaps £15,000, for this purpose, from which the importance of the Council grappling with the matter at the earliest possible moment may be judged. The source of the figures on which our rough estimate is based is, perhaps, the leading authority on this question at the present time — Mr. James Dalryinple, who is manager of the most successful municipal electrical tramway system in the world, that of Glasgow, and is, in addition a chartered accountant, so that his figures may be considered above suspicion. He has stated that from his experience of electric traction equipment he considers that jt is not doing more than is necessary to provide annually out of revenue to meet renewals and depreciation (in addition to general repairs and maintenance, including upkeep of track and roadway) at the following rates, viz.,: £450 per mile of single track of permanent way ; 3.09 per cent of the original capital value of electrical equipment of line; 2£ per cent, of buildings and fixtures; 5 per cent, of power-station, etc., plant; 74 per cent, j of cars and other electrical equipment, and i workshop tools and miscellaneous equip- j ment 5.81 per cent. The very serious ' importance attached to providing against the loss by depreciation is evidenced by I the fact that in Glasgow 19.24 of the gross receipts' (2d per car mile out of 10^d) are annually set aside to cover ', general depreciation and permanent way ', renewal, apart from repairs and maintenance. For the year ended 31st May, 1904, a special apportionment (additional to the annual appropriation) for dej)recia- , tion and renewal made the total percentage of gross receipts applied to the fund ' for this purpose 27.81, or £201,446, out I of a gross revenue of £723,190. A percentage of 6.28 of the gross revenue was applied to the sinking fund for ihe,redemption of loan moneys. The Wellington City Council for the financial year ended 31st March apparently completely ignored depreciation, and it is admittedly not provided for in the estimates for the current financial year, though a tramway surplus is "estimated" of £5565 — seemingly for appropriation to other purposes. Before Mr. Wright, the engineer under whose supervision the tramways were installed, left the colony, he was reported as having stnted (when discussing the system, and comparing it with other installations, and, inter alia, allocations for sinking funds for loan moneys redemption and depreciation), th.it £1350 was set aside every four weeks in connection with the Wellington undertaking; but this "substantial" allocation was apparently as evanescent as the £1516 13s 4d of sinking fund recently referred to by us, as no trace of it can be found in the tramway accounts. When a depreciation fund is established, ns it must bo if tho tramways are to be prudently managed, it should be so securely "ear-marked" as to render misapplication impossible, as the City Council or its responsible officers havo apparently little regard for principles in accounting or orthodox finance, if they are to be judged by past metliods in connection with tramways. Neglect to provide for po obvious and certain a loss as depreciation is culpable.