Railway Freight Charges (Increase)

HC Deb 10 February 1954 vol 523 cc1167-78

13. Mr. Hector Hughes

asked the Minister of Transport and Civil Aviation if he has yet considered the memorandum recently sent to him by the Association of British Chambers of Commerce objecting to the application by the British Transport Commission for an increase of 10 per cent. in railway freight charges; if in considering it, he will bear in mind the special need of Scottish industry, particularly the fishing industry, in North-East Scotland; and if he will make a statement on the subject.

22. Lord Malcolm Douglas-Hamilton

asked the Minister of Transport and Civil Aviation whether he will now make a statement concerning the proposed increase in freight charges: and whether he will withhold his approval to any increase affecting the North of Scotland.

Mr. Lennox-Boyd

I have decided to accept the advice of the Permanent Members of the Transport Tribunal, acting as a Consultative Committee, and to authorise the British Transport Commission as from 1st March to increase by 10 per cent.the railway freight, dock and canal charges now in operation, subject in the case of merchandise by freight train and perishable traffic by passenger train to a maximum of 10s. a ton. I am circulating with the Official Report a copy of the Committee's Memorandum, which sets out fully the considerations justifying the increase.

I have considered carefully the representations made to me by the Association of British Chambers of Commerce. The issues raised by the Association cannot, however, be dealt with as part of a purely interim settlement of the Commission's pressing need for further revenue. I have also considered, most sympathetically, the representations made to me by Scottish interests. Some relief from the extra burden imposed will be afforded to them by the limitation of the increase in railway freight rates generally by a maximum of 10s. a ton.

Mr. Hughes

Does the right hon. Gentleman realise that I cannot thank him for that answer—for that outrageous increase in freight charges? Does he realise that, on the memorandum of the Chamber of Commerce, he is acting against the evidence before him and that both capital and labour are in favour of, not an increase, but a reduction in the discrimination against the North of Scotland?

Mr. Lennox-Boyd

I would say to the hon. and learned Gentleman that if he reads the Memorandum submitted to me by the Transport Tribunal, dealing as it does with the consequences of increased costs, including charges, then perhaps on reflection he would ask his question in a slightly different way, though I do not expect that he would be any more pleased with my answer.

Lord Malcolm Douglas-Hamilton

Does my right hon. Friend realise that the law of diminishing returns is already beginning to operate in the North of Scotland, and that for a very long period we have had a case for special consideration on freight rates? This applies to all areas remote from production centres. Cannot he ask the chairman of the Transport Commission to go more fully into the question of tapering charges for freight rates?

Mr. Lennox-Boyd

I should like to answer the question of my noble Friend straight away. I have the greatest sympathy with those who have to pay freight in Scotland and other parts of the United Kingdom where long hauls are involved. Under the 1953 Act I specially provided that there should be a new procedure, the detailed rules of which have been made by the Transport Tribunal, enabling the Commission to submit the heads of proposals for a merchandise scheme in a different way from that which would otherwise have been possible. The question of Scotland must be settled between the operator—the Commission—the Transport Tribunal and the transport interests in Scotland. I have reason to believe that the Commission hope to be able to formulate and submit to the Transport Tribunal heads of proposals, though not a complete merchandise charges scheme, at an early date. That will be the opportunity for Scottish interests to argue with vigour the question of tapering.

Mr. Callaghan

On the general question of the increase of 10 per cent. in freight charges throughout the whole industry, could the Minister tell us how much less than 10 per cent. would have been needed if the Commission had been able to rely upon £7 million profit from British Road Services this year?

Mr. Lennox-Boyd

All those who talk in that fashion lose sight altogether of the fact that the Commission will be reimbursed both by the sale of the lorries and by the transport levy designed to fill the gap. [Hon. Members: "No."] In addition, they will have a substantial annual saving of net interest costs. This should be borne in mind when hon. Gentlemen make charges of that kind. I would also remind the hon. Gentleman that the Commission will have very substantial road haulage services, in some ways easier units to maintain in the next few years, and if they do well with them, as I hope they will, they may improve on the record of the last six years which is not at all a happy financial one.

Mr. Callaghan

Does that long and rather irrelevant answer mean than, if the Commission were able to rely upon the profits of £7 million again this year, the increase would not have had to be more than 6 per cent.? Why does the right hon. Gentleman continue to blame it wholly on increased wages?

Mr. H. Nicholls

Will my right hon. Friend bear in mind that, while he can safely ignore the narrow party points which are made by the Opposition, the extra burden put on industry will be a grievous one, and will he do everything he can to bring about some reduction at an early date?

Mr. Lennox-Boyd

Indeed I will, but we must see this in perspective. Taking 100 as the pre-war figure, railway freights after this increase will represent 253 compared with the figure of 323 for the General Index of Wholesale Prices. Following is the Committee's Memorandum:

1. 1. By a letter dated the 31st December, 1953, you asked for our advice on a request made by the British Transport Commission that they should be authorised under Section 82 of the Transport Act, 1947, to increase by 10 per cent. the railway, dock and canal freight rates and charges now in operation subject, in the case of merchandise by freight train and perishable traffic by passenger train or other similar service, to a maximum increase of 10s. per ton.
2. 2. The Commission's request was supported by a memorandum with statistical appendices. Stated summarily the capital conclusions which these documents were directed to supporting were:
• (1) that at the present level of their various rates and charges the revenue of the Commission in a full future year would fall short of the expenditure chargeable against this revenue by about £25 million:
• (2) that of this total prospective deficiency about £23 million would be attributable to British Railways treated as a separate activity:
• (3) that the increases for which authority was sought would in a full year produce additional revenue in the case of British Railways of about £23 million and in the case of the Docks and Canals of about £1.5 million.
3. 3. We have obtained from the Commission such further statistical information as seemed to us necessary for a full understanding of the considerations put forward in their memorandum. This further information included provisional estimates of the results of the operations of the Commission in 1953. The more important of these 1953 estimates were based, however, on accounts which covered only a portion of the year and we have thought it safer to disregard these incomplete and provisional figures and in so far as the financial past of the Commission is relevant to rely on the audited accounts for 1952. We have of necessity assumed that the arithmetical computations of the Commission are substantially correct as, e.g., that the effect of the recent decision of the Railway Staff National Tribunal will be to increase the wages, costs of the Commission by £6.5 million per annum.
4. 4. The Commission's forecast purported to reflect only those changes which were "already known or fixed,"neglecting the many possibilities which might adversely affect them during the next twelve months. This deliberately limited purview was described by the Commission in the following passage in their memorandum: "The estimate assumes a continuation of the present high levels of traffics: it makes no allowance for further increases of wages in other industries, or for the extent to which the Commission may be unable to recoup, out of the increased economy and efficiency in operation which they are determined to secure, the further increases to be granted to their own workers; and no allowance is made for substantial trading 1171 losses which might be incurred by British Road Services during the disposal period, or for other consequences of the Transport Act, 1953. The forecast assumes, also, that Road Passenger Services (Provincial and Scottish) and "Other Activities"will be able to increase their earnings to cover in full the increased costs falling upon them. In effect, therefore, the forecast in Appendix A must be characterised as optimistic and provisional. As soon as the position is clearer, and at latest in a few months time, this provisional estimate will need amendment and the forecast as it then appears may well lead to a further application for increased charges. That is, the present application is designed merely to stop the greatest part of the gap which already exists and which is running, as the forecast shows, at almost £500,000 a week."
5. 5. The decline in the financial fortunes of the Commission prophesied in their "optimistic and provisional"forecast can we think best be appreciated from the comparison made in the following table between the principle figures in the forecast and corresponding figures taken from the 1952 Accounts.

	1952 actual	"Future Year" estimate
	£m.	£m.
Net Receipts:
British Railways	37.0	15.0
Docks and Canals	2.3	1.8
London Transport Road and Rail Services	1.0	2.0
British Road Services	1.6	Nil
Road Passenger Services	3.8	4.5
Other Activities	8.9	7.0
Total net receipts	54.6	30.3
Central Charges (after deduction of interest earnings)	50.1	55.5
Surplus/Deficit	4.5	25.2

1. 6. It will be seen from the foregoing table that it is estimated that the net receipts of British Railways will in the "future year" have worsened to the extent of £22 million. This worsening is analysed in the following table:

	£m.	£m.
Gross Receipts:
Passengers	+ 2
Freight	+ 12.9
Total increase in gross receipts		14.9
Working Expenses:
Wages	+ 16.2
Pension Scheme	+ 1.2
National Insurance	+ 0.7
Price Levels	+ 6.3
Depreciation	+ 2.0
Maintenance	+ 16.0
Improvements in efficiency and minor changes	- 5.5
Net increase in working expenses		36.9
Difference	22.0

1. 7. The difference (£2 million) between the gross receipts from passengers in 1952 and the estimated receipts for the "future year"is attributable to the fact that whereas the increased fares authorised by the 1952 Passenger Charges Scheme were operative for only a portion of that year, both these increases and the further increases authorised by the 1953 Scheme will as matters now stand be operative throughout the "future year." The "improvement"assumes a decrease in traffic as com pared with 1952 quantified in terms of earnings at £1.9 million. The estimated improvement (£12.9 million) in the gross freight receipts is based in the main on two considerations, first that as compared with 1952 traffics will show an increase quantified in terms of earnings at £2.6 million, and secondly that whereas the 5 per cent. increase authorised in 1952 was operative during one month only of that year it will operate throughout the "future year."
2. 8. In the case of the first five of the heads under which the anticipated increase in working expenses is analysed the additional expenditure requires little explanation. Wages. Of the total increase (£16.2 million) £9.7 million is attributable to the wages award of 1952, which was operative during only a portion of that year, and the remainder (£6.5 million) to the "award"of the 3rd December, 1953, by the Railway Staff National Tribunal. Pension Scheme. The Commission is committed to the establishment of a pension scheme for adult railway male wages staff. The cost of such a scheme in a full year is likely to be of the order of £2.5 million. As it has not yet been brought into operation only a portion (£1.2 million) falls to be provided for in the "future year" estimate. National Insurance. Contributions were increased in October, 1952. The additional £0.7 million represents the difference between the extra expenditure incurred by reason of this increase during a portion of 1952 and that which will require to be defrayed during the full "future year." Price Levels. The figure of £6.3 million is made up as to £4.3 million by increases in the prices of coal and steel, as to the remainder (£2.0 million) by other minor increases and by a decrease in the prices obtainable on the sale of steel scrap. Depreciation. This increase (£2.0 million) is attributable mainly to the fact that, as depreciation is calculated by reference to the historical cost of the assets concerned, the replacement of an asset at a higher price than that at which the asset replaced was acquired involves an increase in the depreciation chargeable against revenue.
3. 9. The increase (£16 million) in the costs charged under the head "maintenance" calls for a fuller examination. The Commission's forecast is based on the view that the accounting practice whereunder the whole of the expenditure actually incurred in maintaining the British Railways undertaking has not in the past been charged against the undertaking in the Commission's accounts can no longer be justified. This accounting 1173 practice has been debated during each of the three public inquiries we have held into passenger charges schemes. Its origin and justification, the extent to which its application has in each of the five years 1948–52 reduced the amount treated in the Commission's accounts as a working expense chargeable against British Railways receipts, its modification and the ultimate decision wholly to discontinue it have been fully disclosed in the successive published Reports of the Commission. It may nevertheless be useful if we summarise here the history of the matter. The Commission's Report for 1952, repeating in substance what had appeared in each of the four previous Reports contained in the section described as "Notes on Accounts" the passage following: "The assets of the vested undertakings were not fully maintained during the war and assets were kept in service as long as possible without replacement. Since 1st January, 1948, substantial abnormal expenditure has been incurred on maintenance; this abnormal expenditure arises partly out of the overtaking of areas, partly out of the extra volume and cost of repairs due to the existence of the arrears and partly as a result of other adverse factors resulting from the war. It. is not feasible to identify and quantify precisely this abnormal maintenance expenditure, but the procedure followed during the period of Government control of the vested undertakings has, with appropriate modifications, been continued and a standard charge for maintenance is computed each year, based upon the expenditure in pre-war years adjusted for changes in the quantum of assets in service, and increased to allow for the rise in price levels. In 1948 a close review was made of the adequacy of the charge arrived at on this basis, and further additions were made to the standard for elements of under-maintenance in the base

—	1948	1949	1950	1951	1952	Total
				£m.	£m.	£m.	£m.	£m.	£m.
Rolling Stock	…	…	…	59.3	59.3	59.4	61.5	68.9	308.4
Way and Structures	…	…	51.2	53.7	50.7	54.3	65.6	275.5
Collection and Delivery	…	3.3	3.5	3.2	3.3	2.8	16.1
Total Expenditure	…	…	113.8	116.5	113.3	119.1	137.3	600.0
Less Off Charge to Abnormal Maintenance Account	…	18.0	14.0	10.1	10.6	21.1	73.8
Net charge against Revenue	…	95.8	102.5	103.2	108.5	116.2	526.2

The passage from the 1952 Report quoted above shows that it had then been decided that the accounting practice under discussion was to be abandoned by the end of 1953 and that thereafter the whole of the expenditure incurred on maintenance was to be charged against revenue "subject to equalisation arrangements for certain categories of expenditure."

It is estimated that the effect of this decision will be to add £21 million to the maintenance costs charged against revenue in the 1952 accounts. The Commission in preparing their forecast have acted on the assumption that,

period. The excess of the actual maintenance expenditure incurred during the year 1952 over the standard charge so arrived at is regarded as abnormal maintenance expenditure. The amounts in question have accordingly been deducted from the actual maintenance expenditure and charged against the provision set up for this purpose in the Commission's books at 1st January, 1948. The arrangements relating to the standard charge for maintenance have been discontinued at various dates for certain categories of expenditure, and in such cases maintenance expenditure is charged to Revenue Account as incurred. A standard charge based upon pre-war expenditure tends to become less appropriate as time goes on, even though careful adjustments are made for the factors mentioned. It is accordingly intended to discontinue the existing arrangements by the end of 1953 and to substitute a procedure under which maintenance expenditure is charged to Revenue Account as incurred, subject to equalisation arrangements for certain categories of expenditure."

The gradual reduction of the "Abnormal Maintenance Account"from the figure at which it stood on the 1st January, 1948 (£149.7 million), to £67.5 million by the end of 1952 is evidenced by the five successive Balance Sheets. According to the Commission's memorandum the accounts for 1953 will probably show that by the end of that year it had been reduced to less than £50 million. The amounts actually expended in the case of British Railways on maintenance and the portions thereof debited to the "Abnormal Maintenance Account" instead of being charged against revenue as part of the working expenses have been set out in detail in the Annual Accounts. The figures for the five years 1948–1952 were, summarily stated, as follows:—

to quote from their memorandum, "they might be justified in drawing a sum of up to £5 million if necessary, out of the remaining balance of the Abnormal Maintenance Account in order to mitigate the effect of the change in procedure upon the first year concerned."In the result the amount of the additional charge against revenue under this head as compared with the 1952 figures for which in their submission provision should now be made is £16 million. We are not of course, strictly, concerned with the question how the actual future expenditure on maintenance is dealt with in the Commission's accounts. This will, we

presume, be ultimately a matter for the Commission's auditors. The question we are seeking to answer is by how much as matters now stand will British Railways in the "future year" fail to pay their way. For the purposes of this inquiry, in our opinion, the mere fact that some unidentifiable and therefore unquantifiable part of the anticipated expenditure on maintenance may be attributable to past omissions is not a good reason for making any deduction from that expenditure.

Accepting then as we do the Commission's statements of fact we agree with their forecast in this particular. Such doubt as we have felt was not as to the principle involved but as to whether they would not be justified in debiting the depleted Abnormal Maintenance Account with rather more than the £5 million they propose, subject to the approval of their Auditors, to devote to mitigating the effect of the accounting change. Upon the whole, however, we think that the temporary relief of £5 million is as much as would be justifiable.

1. 10. We conclude then from this review that as matters now stand it would be imprudent to put the net traffic receipts of British Rail ways during the "future year" at a higher figure than about £15 million. The Com mission's forecast assumes, we think rightly, that there should be added to these net traffic receipts so much of the Commission's estimated net revenue from commercial advertising and the letting of sites and shops as is attributable to British Railways properties. This allocation is put at £1.5 million. It assumes a decrease of £0.2 million in the total income received from these sources in 1952. We see no reason for thinking that the allocation is to any significant extent under estimated. For the purposes accordingly of a rough prospective profit and loss account it is estimated that at the present level of their charges British Railways will be able to contribute about £16.5 million to the common pool out of which if the Commission as a whole is to balance its accounts its common or central charges must come. The final question is how much more than £16.5 million ought British Railways to contribute to this common pool in order that they may be considered as a separate activity to be paying their way.
2. 11. The central charges for the "future year" will it is estimated be £58.5 million gross and, after deducting interest receivable by the Commission £55.5 million net. Of the £58.5 million gross £55.2 million is attributable to interest payable by the Commission and to the obligatory provision made for capital redemption. The question how such central charges should be apportioned between the separate activities of the Commission for the purpose of forming a judgment, in the case of any one of these activities, as to whether it can be considered to be paying its way, was the subject of prolonged debate at each of those public inquiries which have been held into passenger charges schemes. At the latest of these inquiries concluded in April last year the view advanced by the principal critics of the apportionment proposed by the Commission in the case of the London Transport Executive 1176 was that the share of the central charges to-be contributed by each activity should bear the same proportion to the total charges as the fixed assets and goodwill of that activity bore to the aggregate of the fixed assets and goodwill vested in the Commission. Although in our view the question what in the case of each activity is a fair apportionment can not be answered precisely by the application of this or any other single mathematical formula, we think that it affords a sufficiently useful criterion by which to judge the figure suggested by the Commission. According to the latest published figures, i.e., those in the 1952 Accounts, the fixed assets and goodwill of British Railways represented a little more than 72.2 per cent. of the whole of the fixed assets and goodwill of the Commission. By reason of the fact that when the 1954 Accounts are drawn up a large part of the fixed assets and goodwill of the Road Haulage organisation, in 1952 nearly £72 million, will no longer appear it is reasonably certain that the British Railways proportion will then be greater than £72.2 per cent. If for example the Road Haulage assets were reduced to £36 million all the other figures remaining the same, British Railways proportion would be over 73.8 per cent. The apportionable central charges for the "future year" being £55.5 million by applying the criterion under discussion the contribution to be expected of British Railways would (a) if 72.2 per cent. were adopted be rather over £40 million, and (b) if 73.8 per cent. were adopted rather over £40.9 million. The Commission's forecast assesses the contribution to be expected as £39.5 million, i.e., as about 71.17 per cent, of the apportionable charges. Treating the criterion discussed above as a guide, though no more than a guide, to a fair apportionment, we do not think in the light of our experience that this figure is excessive. In the result then we see no reason to dissent from the Commission's view that as matters now stand British Railways will in the "future year" be failing to pay their way by approximately £23 million.
3. 12. It remains to consider whether some part of the additional revenue required should be sought from passenger traffic. The Commission's views on this question are set out in the following passage in their memorandum: "A contribution from passengers will be required in the form of a reduction in the services provided to the public, where these are poorly patronised. It may also be commercially practicable to make selective increases in local fares, or to improve the net results of secondary lines by changing the form of operation and of motive power. But such measures cannot be expected, at least on the short term, to do more than balance the reductions which will doubtless be required in long distance main-line fares to meet the competition from express coaches. Any general increase in long distance railway fares would, in present circumstances, do serious damage to precisely those traffics which railways find profitable." We feel some difficulty in dealing with this matter because any proposal to increase fares 1177 which involved an alteration of the maxima fixed by the Charges Scheme which came into operation on the 16th August last would have to be considered by us sitting in our normal capacity as a Tribunal. We are, however, satisfied in the light of the evidence put before us during two inquiries into passenger charges schemes, the second of which was concluded at the end of April last, that no general increase could be justified and that such additional revenue as might possibly be obtained by selective increases in particular fare categories would not make any appreciable contribution to the immediate necessities of British Railways.
4. 13. The Commission estimate that the increases for which sanction is sought will yield additional revenue of the order of £23 million. This estimate is admittedly speculative. How speculative it must be appears when it is borne in mind that a decline of 1 per cent. in the total gross receipts would result in a decrease of over £4.25 million. There are at least two reasons why as it seems to us it would be unwise to act upon the view that the Commission have underestimated the yield from the increases. The first is that in estimating the net revenue to be expected from the charges as they stand at present the Commission have deliberately neglected many factors which may well in the event prove that their forecast was over-optimistic. The second is that any increase which is sanctioned can only operate for at the most eleven months of the present year, and it is obviously most desirable that British Railways' accounts should be brought into balance by the end of the year. We think therefore that the increases are no more than the situation makes necessary.
5. 14. The Commission estimate that the Docks and Canals taken together will at the present level of charges yield in the "future year" a net revenue of about £1.8 million. The material question is what contribution ought to be expected from them towards the net central charges (£55.5 million). The figures in the 1952 accounts show that the fixed assets and goodwill of the Docks and Canals represented rather more than 5.7 per cent. of the whole of the fixed assets and goodwill of the Commission. For the reason indicated in paragraph 10 it is to be supposed that when the 1954 figures are available this percentage will be found to be higher. Applying the method of allocation described in that paragraph the contribution to the central charges should be not less than £3.16 million. The net revenue expected being £1.8 million these activities will be failing to pay their way by rather more than £1.3 million. It is estimated that an increase of 10 per cent. in the present charges will yield £1.5 million in a full year. This is, according to our calculations, £0.2 million more than is necessary to enable it to be said of the Docks and Canals that in a full year they will be paying their way. It is arguable, therefore, that a 9 per cent. increase would suffice. We think, however, that for the reasons indicated in paragraph 13 it would be unwise to adopt so strictly mathematical a view.
1178
6. 15. As the result of our review of the matter we advise that regulations be made as soon as possible authorising the Commission to make the increased charges specified in their application.

Hubert Hull.

A. E. Sewell.

J. C. POOLE.

26th January, 1954.