Front Page Titles (by Subject) CHAPTER VII: RAILWAYS OF NEW ZEALAND - Where and Why Public Ownership has Failed
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CHAPTER VII: RAILWAYS OF NEW ZEALAND - Yves Guyot, Where and Why Public Ownership has Failed 
Where and Why Public Ownership has Failed, trans. H.F. Baker (London: Macmillan, 1914).
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RAILWAYS OF NEW ZEALAND
Capital Charges.—Receipts and Expenditures.—Net Operating Profits.—Deficits.—Interest on the Debt.—Pre-dominance of Political over Economic Considerations. Causes of the Deficit.—Advancement According to Seniority.—“The Government Strike.”—Theory of Operation at a Loss.—Profits from State Mines Attained Only at the Expense of the Railroads.
In 1860 the first railway of New Zealand was constructed by the provincial government of Canterbury, to connect the town of Christchurch with the port of Lyttelton, separated from it by a chain of high hills. In 1863 the provincial council of Auckland and Drury conceived the idea of extending the line to Wellington.
The capital then and subsequently sunk in the railways of New Zealand, amounting, according to the accounts, to £27,762,592 ($135,203,823), on the first of March, 1909, is far from representing the whole expense of the project. £1,289,840 ($6,281,520), the cost of lines not yet opened on the 31st of March, 1909, should have been added to this sum. The total amount would thus reach £29,052,432 ($141,485,343). Moreover, no account was taken of the interest paid on the capital sunk in lines not operated during the thirty-nine previous years.
Before 1882 the amount of the deficits can only be surmised; since that date they have aggregated £4,500,000 ($21,915,000). The total capital invested from 1870 to 1909 has been about £40,000,000 ($194,800,000), of which £23,305,009 ($113,495,000) was paid out of borrowed money. The rest has been raised by the sale of public land, and, above all, by the aid of taxes—direct or indirect.
Since 1895 the capital cost per mile of open line has risen from £7,703 to £10,351. This increase is due in part to improvements upon the roadbeds. In order to explain further such an increase in cost it is said that the country of New Zealand presents unusual difficulties—that it is situated far from the industrial centers of the world, and that construction is on a small scale. We might add that railway construction is considered as a species of national workshop, designed to give employment to laborers out of work; that none of the modern mechanical methods are employed; and, finally, that “the work is done by the government and not by private contractors.”1
The gross earnings of the railways increased from £1,150,851 in 1895 to £2,929,526 in 1908–1909. But the expenses rose in even greater proportion. They increased from £732,160 in 1894–1895 to £2,114,815 in 1908–1909. And, if there had not been a reduction of the rate of interest on government loans, the deficit of 1909, based on the “capital cost” of the open lines, would have been £323,555, instead of £212,468.
The railway statement, presented annually to Parliament by the Minister of Railways, always shows a “net working profit,” without any indication that this profit is always insufficient to pay the interest upon the cost of construction at the average rate of interest paid by the government upon the public debt.
During the year ending March 31, 1909, the railways earned a “net profit” of 2.93 per cent. on a capital of £27,762,592 ($135,203,823), the cost of construction of the open lines. But, since the average rate of interest paid on the public debt was 3.7 per cent., the “net profit” is absorbed in interest payments, and a deficit amounting to £212,468 ($1,034,719) emerges, if interest is reckoned on the cost of the open lines only. But real cost of construction includes the cost of the unopened lines, making a total of £29,052,432 ($141,485,343), reducing the “net profit” to 2.80 per cent., and increasing the deficit by £262,760 ($1,279,641). If the interest upon the open lines only is considered the total deficit from 1882 to 1909, in round numbers, is £4,500,000 ($21,915,000).
But as a matter of fact, according to the conditions of its investment, interest at the rate of 4 per cent. should have been paid on the railway debt. In such case the deficit in 1908–1909 would have been for both classes of lines £347,386 ($1,691,769); while the total deficit since 1881–1882 would probably amount to at least £8,000,000 ($35,160,000), and perhaps £10,000,000 ($48,700,000).
The deficit is due, above all, to the principal line of the South Island, 1,299 miles long. The political influence of this part of New Zealand, formerly much greater than it is to-day, contributed to the unprofitable railway construction in that territory. Sir Joseph Ward, however, in explaining in Parliament the deficit on the lines of the southern province, announced that the lines of the northern province would presently need repairs, and that these lines would present in time to come the same deficiencies as the others.1
Such accounts as these show the necessity of reckoning on large sums for repairs. Moreover, as the Minister of Railways, Hon. J. A. Millar, said, in 1909:
“The enhanced price of materials, increased rates of wages, and expenditures incurred on the works enumerated (track renewals) have had a marked effect on the maintenance expenditure, which has steadily increased during the past 10 years.”
Further, the public is exacting, and the government must sacrifice economic considerations to those of a political nature. Since 1895, according to Sir Joseph Ward, rate reductions have reached £850,000, while the value of increased train service has risen to £883,000. This reckoning takes no account of the concessions in pay given to the railway staff, which amounted to another £375,000.
Although from 1895 to 1907 the salaries of railway employees were increased £375,000 ($1,826,250) the Amalgamated Society of Railway Servants complained that they were receiving lower salaries than those paid by private companies, while their hours were often much longer than would be tolerated in any private business subject to the jurisdiction of the Arbitration Court.
The causes of the deficit on the railways are:
One of the most serious causes of inefficiency is the system of promotion, which is based principally on seniority in point of service, in the hope of abolishing favoritism and other abuses.
Government employees have often been accused of making use of the so-called “government strike.” The general manager of railways wrote a letter in 1909 to the chief mechanical engineer at the Addington workshops, making serious charges of inefficiency. But, when the investigating committee assembled at Christchurch on March 11, 1909, that same general manager made a pitiful recantation. Yet the investigation had clearly demonstrated, among other things, the difficulty of discharging useless men; of finding capable men to replace them when discharged; the lack of encouragement of skilled labor because of the absence of all opportunity for advancement or increase in salary; the utter absence of initiative shown by the superintendent of the workshops and the lack of up-to-date appliances in certain lines of work. The board of inquiry, the chairman of which was a distinguished engineer, Professor R. J. Scott, of Canterbury College, arrived at the conclusion that the cost of production was greater at Addington than in private workshops, and that the amount of production was relatively much less in proportion to the number of hands employed.
The Evening Post, of Wellington, said on June 17, 1909:
“Here, in miniature, we have the evils depicted which are rampant more or less in every branch of the public service; and, if the result is that at Addington we are paying from 30 to 60 or 70 per cent. more for the work done than it would cost us elsewhere, it is natural to infer that the public service, as a whole, is also costing far beyond its value.”
For the reasons given above and a number of others the railways of New Zealand have never earned the full amount of interest on the capital cost.
However, the state has frequently declared that it does not wish to make the railways pay. That far and above such a consideration should be placed the service rendered to the country in providing cheap transportation of agricultural products to the markets.
This theory gives rise to two questions:
Moreover, arguments based on such a theory have the prime defect of lacking a just standard of measurement. They are marked by that vagueness which so often envelops political conceptions and fosters the worst abuses. They serve to enable makers of electoral platforms and members of the most influential groups to instigate expenditures which weigh heavily upon all their fellow-citizens, in order to increase the value of their own property. Thus they make their own political strength increase the “unearned increment” so violently denounced by the partisans of nationalization of the soil and of state operation of railways.
Messrs. J. S. Le Rossignol and W. D. Stewart have demonstrated very clearly the disadvantage of railway operation at a loss.
A railway line is opened in a country which cannot support it. It is therefore a parasitic line, which serves only to injure other lines, or to be a drain on the whole body of the taxpayers of the country. Because of its cost it stands in the way of rate reductions and improvement in the service of other lines. It operates at the expense of either passengers and shippers or of the taxpayers of other regions.
How about the development of the country? But railroads cannot be constructed everywhere. When the fundamental rule is lost sight of, that a region ought to pay and to pay enough to compensate for losses during the first years of operation, there can be no further limit to extravagant expenditures. Indeed, the financial failure of the railways has been one of the chief causes of the arrested development of the whole system. It took twenty-three years to construct a section 200 miles long on the principal line between Auckland and Wellington; and this line is self-supporting. Then apart from the fact that this dilatory method of construction has added enormously to the cost, it is appalling to think of the huge sum which the country has paid in interest during the construction, to say nothing of the returns which might have been gathered in and the settlement which would have been promoted had the work been completed with reasonable dispatch.
The resulting interest charges on the whole line may be readily conceived. Instead of concentrating the funds upon one line, and completing it, they have been frittered away in various parts of the country, in order to conciliate political groups. The government, unable to borrow more than a certain sum annually, was at a standstill. If, on the contrary, it had been given an opportunity to finish the profitable lines, it might have been able, with the resources that these latter would have yielded, to pay the interest on the capital already borrowed; its credit would have been improved, and, possibly, the resources thus at hand might have permitted it to provide for interest on sums to be borrowed for the further development of the system.
Such a wasteful policy, far from aiding in the development of the country, has actually retarded it. The districts deprived of a railway have paid for those in other places, while the slow rate at which these railroads have been constructed, together with the excessive amounts which have been paid out to build unproductive lines, have deprived other districts of any hope of a railroad of their own. New Zealand has at last begun to comprehend that the construction of lines which do not pay is “bad policy.”
The government has recently adopted a system of forcing the railroads to earn their own interest on the capital invested. Sir Joseph Ward, at Winton, on the 5th of May, 1910, even mentioned the necessity for amortization. “The time for continued borrowing is coming to an end, and that of repayment is approaching.”
Unfortunately the government finds itself between districts which are demanding railways, districts which have them, and which are demanding rate reduction, improvements of transportation and other favors, and employees demanding increase of salaries and shorter hours. The department of labor insists that railways be constructed in order to give work to the unemployed; while finance critics demand that the railways be compelled to provide for the interest on the capital invested in them, and that they earn enough to pay for the new lines.
Yet, despite all the disadvantages connected with government operation of railways, no one dares suggest that the lines may be leased to a private company, although a provision for such lease exists in the act of 1900 (section 34), and such a proceeding would undoubtedly be the best means of putting the finances of New Zealand on a sound basis. It has been suggested that the administration of the railways should be confided to a commission of experts who would be independent of the influences to which public officials are exposed. Even this system, however, would not completely insure freedom from political interference, were it only by reason of its origin and the necessity for its renewal. Such a commission is also practically certain to fall into all the errors of a bureaucracy. The system has been employed in the Australian states, notably Victoria, and in New South Wales.
The government of New Zealand is anxious to make use of the railways to carry out a certain policy relating to the distribution of population. The “stage system” of railway rates worked out by Samuel Vaile, and discussed with much approval in 1882, was especially designed to prevent the concentration of population in cities and to keep it distributed over a vast territory, by establishing very low rates in rural districts and high rates in the urban districts. The experiment, however, was never made.
New Zealand is developing. Little by little the profitable lines have been completed, and some abuses have been more or less checked. In fact, the government has gone so far as to ask, as a condition of completing the Lawrence-Roxburgh railway, that the people of the district guarantee at least 3 per cent. interest on the capital cost. But although the results of railway operation are improving, and will probably continue to improve, and although partisans of state operation have been untiring in their attempts to draw conclusions favorable to their argument, an unbiassed history of the railways in New Zealand only condemns it.
Government property in New Zealand is exempt from taxation. At each extension of its activity the amount of property subject to taxation diminishes, and, if these enterprises fail, the burden of the taxpayers is increased. The principles of sound private and public finance are the same everywhere, and profit from public enterprises is indispensable in order to establish the fact that they are an advantage as public investments.
It is not so many years since the state of New Zealand undertook the operation of two coal mines, known respectively as the Seddonville and Port Elizabeth mines. In 1905, 1906, and 1908 the first was losing money. In 1911 it lost £3,219. In 1910 it made a profit of £194, and in 1912, of £863. The mine of Port Elizabeth brought in profits as high as £21,313 in 1906. But its profits have greatly diminished during the last few years, and in 1912 were only £3,964.
The explanation of these profits is simple. Up to 1908 the government had bought 166,000 tons out of a total production of 237,300 tons for the railroads. But it apparently found its own coal too expensive. It began to buy coal from private dealers. In 1912 it bought only 58,000 tons, out of a total production of 244,500. Its mining profits, therefore, have been mainly derived from its own railroad.
State Socialism in New Zealand, page 72.
July 26, 1907. State Socialism in New Zealand, p. 74.