The Daily News THURSDAY, JUNE 18, 1925. FINANCIAL ADJUSTMENTS.

Taranaki Daily News, 18 June 1925, Page 6

The Daily News THURSDAY, JUNE 18, 1925. FINANCIAL ADJUSTMENTS.

The action of the New Plymouth Borough Council in relation to the adjustment of the balancesheets of the tramways and electrical departments under the .control of the council will doubtless arouse interest oil the part of those ratepayers who watch matters of this kind. To the generality of the citizens the process of making provision for depreciation, renewals and sinking funds fails to arouse more than passing attention, except probably to evoke the remark that figures can be made to show a profit or a loss at the will of the manipulator, and it is likely they will construe the recent action of the council as an illustration of that view of the case. There are not a few who fail to comprehend why gross profits on a trading enterprise should in the nett results prove to be a loss of a greater or lesser extent according to circumstances. In reality the explanation is very simple, for in trading concerns that are carried on by borrowed capital, unless provision is made for wasting assets by depreciation and the inevitable renewals, the true position of the venture is not made plain, and to make no provision for the automatic extinction of the borrowed money, is unsound. Not long ago there matured several loans raised by the borough and a fresh loan had to be raised at considerable expense wherewith to pay off the former borrowings, whereas had the sound principle of creating sinking funds been adopted from the outset the loans would have paid themselves off at a very small additional annual contribution by the ratepayers. It is now proposed to reorganise the

methods hitherto adopted by the borough in relation to depreciation, renewals, reserve and sinking funds. In the first place the amount written off for depreciation is to be calculated on the capital value after allowing for sums already written off, instead of the whole value shown on the books. The change is one that should have been the rule from the outset, and why that course was not taken is difficult to account for, but no great harm has been done,’ except to show a smaller nett profit on the year’s working and to make revenue responsible for reducing the capital liability than is usually done in private businesses. It is also proposed to reduce the writingoff on account of renewals from one per cent, to half per cent. While it is quite right and proper to build up a reserve for replacing any of the existing plant, in view of the fact that the responsible officers of the council consider there is an ample sum now in hand to meet reasonable calls on such a fund, the reduction appears to be perfectly justified, and one-half per cent, each year may be expected to keep the fund suffieienty strong to satisfy replacement requirements, it not being intended that extensions shall be financed therefrom. Wisely, no doubt, it will be thought, the savings from the renewal funds are to be devoted to increasing the sinking funds, that is, to reduce the capital liability. The larger this latter fund becomes, the more interest it will earn, so that not only will the loan more speedily pay itself off, but the credit of the borough will be enhanced when future borrowing has to be undertaken. It is important for the ratepayers to understand this phase of both the electrical and tramway ventures. Obviously the weight of writing-off from the gross revenue considerable sums in respect of four funds might be expected to prove, at times, too big a hurdle to permit of a profit being shown. Largely it is a ■ matter of book-keeping on ultra cautious lines, but in reality the ratepayers obtain relief from responsibility as the result of every pound sterling set aside in the sinking. . funds.. Naturally the feeling of satisfaction would be enhanced by the balance-sheets disclosing profits on both undertakings, and possibly by a system of strict economy this may be accomplished in the future. The trouble is that in most undertakings by the Government and by municipalities the same strictly business methods as those adopted by private firms are not often in evidence, the result being the tendency for the cost of operations to mount upwards, and the public have to pay and hope -for the best. There is no doubt that the New Plymouth borough officials do their best to promote eeonomy, though it would be claiming too much to assert that they always get full value foi’ the money expended. In this they are not alone. The tramways and the electrical department ought to return satisfactory nett profits considering

the great expansion of the town and its population, as well as the advantages of water power. Possibly there have been handicaps operating adversely, but the ratepayers would certainly be better pleased if serious efforts were made to ensure those enterprises paying—and paying well.