RAILWAY FINANCE.

Lyttelton Times, Volume CXVIII, Issue 18435, 15 June 1920, Page 6

RAILWAY FINANCE.

A Wellington subscriber to the " Lyttelton Times " sends along a query in regard to railway finance. He points out that in a recent editorial we showed that the net earnings of the railways in the last, financial year were equal to a bare 4 per cent on the cost of construction of open lines, or £3 13s per cent on the cost of all lines, opened and unopened, and we observed that since the average rate of interest payable on money borrowed to build the lines is higher than 4 per cent, the railways were last year a burden on the taxpayers. Our correspondent says he has searched official records in vain for a statement of interest due on railway loans, and he asks where we got our figure of "higher than 4 per cent." The point raised here is both interesting and important. So far as we are aware, it is true that the blue-books do not give the interest required to pay for railwaj' loans. In the railway statements there is no ?ntry for interest. The interest bill is i charge on the Consolidated Fund and Sot upon the railways. As to the rate Itself, that is not easy to arrive at, because the public debt is an accumulation of loan s raised at rates ranging from 3 to 5 per cent and floated <©n various terms, some at par and some at a premium. In 1918-19 the interest paid to bondholders in respect of the total public debt gave-an average xate j of £4 2s lid per cent. That, however, j did not include payments into sinking funds. In answering our correspondent it probably will be fairer to take the position in the last financial year before the war, because the large war-time borrowings have raised the average rate of interest. In 1913-14 the public debt wis £94,753,000 and the interest charge £3,812,000, the average rate being £3 16s 3d per cent. But not all of this 94J millions had been actually received. Many of the loans were floated rwtow par, for instance. A table of allocations contains the item: "Deficiencies in revenue, charges and expenses of raising loans, increase by conversion, etc., provincial liabilities and miscellaneous, £8,456,000." Thus, while interest had to be paid upon £04,753,000, the actual amount available for expenditure was reduced to £86,297,000, bringing the virtual rate o? interest paid upon loan money received up to an average of £4 8s 4d per £IOO. In addition to this, there is the payment into the sinking fund. •Under the Debt Extinction Act, sufficient money has to bo paid from the

Consolidated Fund each year to extinguish the public debt in seventy-five years. War loans, we may mention, are treated difforontly, a sinking fund of 1 per cent being provided for, which at 4 per cent compound interest will extinguish tho indebtedness in some forty years. The rest of the public debt involves a sinking fund payment of about 4b 5d per cent, or correspondingly less if tho fund earns more than 4 per cent compound interest. So that in respect of the pre-war debt, including the great bulk of tho loans for railways, the charges in 1914 were £4 8s 4d for interest nnd 4 S Cd for sinking fund, a total of £4 12s 9d per cent upon the total amount of borrowed money received and expended, or £4 Os lOd per cent including the eight and a half millions .of deficiencies, charges and expenses. As railways could not very well bo constructed out of deficiencies and costs of loan flotations, it follows that to ascertain the interest charge the calculation must be on the net amounts received. With the sinking fund obligation, as we have shown, the charges in respect of the publio debt came to £4 12s 9d per cent. Tho only point that can be in doubt concerning railway cost is whether loans for the* construction were raised at the average rate. If anything, wo should say tho railway loan R cost rather more than the average over the whole indebtedness, because some of the cheapest money was borrowed, in large sums, for tho Advances Department. Not by any methods of calculation can the interest required to pay for borrowed money spent in building railways he brought below the figure we hove given, so long as candid methods are employed. If the railways last year had earned £300,000 more than they did earn, the bondholders and tho sinking fund commissioners would havo to go the lot. As it is, the taxpayers have to make up that deficiency. It certainly is timo the Department revised its style of management. If we were asked to undertake, the task wo should begin by stopping tho carriage of lime or grnsu seed or anything else for nothing, and wo should tune up tho scale of charges and effect economies in order to produce a clean balance-sheet.