§ * EARL BEAUCHAMP
, in rising to call attention to the Return presented to the House last September, relating to the Payment of Interest out of Capital* said: My Lords, this Return, although small in size, is, I think, very instructive, and I should be very sorry indeed, if it were consigned to that insatiable gulf of oblivion to which so many Parliamentary papers find their way. My Lords, the question of the payment of interest out of capital is not a new one. In the year 1847, after the panic which followed the great extension of our Rail way system and the Railway Legislation which took place just before that time, a Standing Order was passed by your Lordships, which remained in force for a great number of years, providing that* RETURN (ordered 2nd August, 1888) of the cases in which Payment of Interest out of Capital has been sanctioned under Standing Order 128, as altered 27th May, 1886, with the amounts of Capital authorized by the several Acts, and stating the result as far as known (No. 247).1619 in every Bill dealing with Railways a clause should be inserted prohibiting the payment of interest out of capital. I will not now argue that question, because I think it will be generally admitted, even by those who a few years ago persuaded your Lordships to alter the practice and to accommodate it to the altered Standing Orders of the House of Commons, that the Standing Order in question was wise and sound, and that it had a beneficial effect upon Railway legislation. What was contended was that the acceptance of the Standing Order which prohibited the payment of interest out of capital hampered and crippled Railway enterprize and prevented the carrying out of many useful undertakings, undertakings which were useful in a public sense, and also useful as a means of affording employment, and that in consequence it was in some way a restraint upon labour. Various Railway Companies endeavoured in the September of 1882 to obtain from Parliament a relaxation of that Standing Order, but in that year the attempt was unsuccessful. The question was allowed to slumber for some time, but after various phases of agitation, your Lordships, in the year 1886, sanctioned the alteration, and brought your practice into conformity with what had been adopted by the House of Commons and recommended by a small Committee of your Lordships' House. That variation did not go to the extent of sweeping away the restriction upon payment of interest out of capital, but it gave power to the Committees, under certain stringent conditions, to allow such payment. My Lords, it has proved to have been a mistake to suppose that this alteration would enable Railway Companies who had been struggling with financial difficulties to triumph over them, and to embark on a successful career, which would be profitable to themselves, and also afford occupation to deserving men who were unemployed. I wish to draw your Lordships' attention to this fact—that it was contended that the alteration of the Standing Order would stimulate enterprize, and provide employment for labour; and, therefore, I will ask your Lordships to consider what has been the result. Have the results been commensurate with the expectations prophesied by those who came to 1620 your Lordships? Have the results been large or small? Now, the Return submitted to your Lordships is aReturn of cases in which Payment of Interest out of Capital has been sanctioned under Standing Order 128, as altered 27 May, 1886, with the amounts of capital authorized by the several Acts, and stating the result as far as known.I invite your Lordships to consider what have been the consequences of this alteration as tested by experience. Has it produced financial ease in the case of Railway Companies who found it difficult to raise their capital? Has it afforded employment to the unemployed, or has there been no such effect? The first railway I find mentioned here is the Regent's Canal, City, and Docks Railway. The Bill for that undertaking was passed in 1882, when the old Standing Order was in force, and the power to pay interest out of capital was not granted to this Company till 1885. Their authorized capital was £8,100,000, and after deducting £1,500,000 for the capital applicable to the Canal part of the undertaking, there was left for the Railway £6,600,000. The amount of capital which they were authorized under the Standing Order to apply to payment and interest was £660,000. The Return is "nothing done as yet"; so that in that case the alteration has had no result at all. The next is the Bridgewater Railway, which obtained this power in 1886. The capital authorized was £135,000; and the amount of interest capital sanctioned was £10,000 at 4 per cent. The note is, "No capital raised as yet." A similar remark is appended to the next two instances, the Brighton, Rottingdean, and Newhaven Direct Railway (share capital £180,000, interest capital £20,000), and the Burnley, Clitheroe, and Sabden Railway (share capital £168,000, interest capital £15,000). The next case is the Dore and Chinley Railway, in which £70,000 was authorized to be paid as interest out of capital, and the note is: "Company unable to raise capital. Powers for construction transferred to Midland Railway Company by Midland Railway Act of this Session." Then, with regard to the Halifax, High Level, and North and South Junction Railway, with a share capital of £320,000, and £16,000 al- 1621 lowed for interest capital, the vote is: "All capital required for construction of line has been raised as ordinary capital on payment of interest during construction, at 3½ per cent on the amount from time to time paid up on the shares. As regards this Railway there is an agreement with a larger Company to work the line, and under this agreement a certain income is secured, and there is no doubt that the fact of the existence of the agreement in the case of this Railway had considerable influence in causing the capital to be raised." In the next two cases (the Harrow and Stanmore Railway, share capital £60,000, interest capital £6,000; and the Lynton Railway, share capital £83,000, interest capital £5,000) the note is "No capital raised as yet." The Return as to the Manchester Ship Canal, with the large share capital of £8,000,000, of which £752,000 was allowed to be treated as interest capital, is, "Capital in course of being raised." As your Lordships know, that is a very large and important undertaking. It went through a very severe sifting both in your Lordships' House and in the House of Commons, and it only passed at the end of the third investigation, when Parliament had thoroughly satisfied itself of the soundness of the undertaking. There was, no doubt, some difficulty at first in raising the capital; but I am bold enough to say that, whether the Standing Order had been altered or not, the money would have been forthcoming. With regard to almost all the other cases, we find that the alteration has been unavailing. The Return as to the Nottingham Suburban Railway is—"The promoters state that, in consequence of the power to pay interest out of capital, the directors were able to place the whole of the amount on favourable terms, and it is probable that, without power to pay interest out of capital, greater expense than the outlay for interest would have had to be incurred in issuing the capital, and there would still have remained room for doubt as to the success of the efforts to place it." In the case of the Portsmouth and Hayling Railway, "No capital yet raised." In that of the Rotherham and Bawtry Railway, "Company unable to raise capital; applying this Session for power to abandon;" the South Hampshire Railway and Pier, 1622 "No capital has been raided, and the powers have lapsed;" the Uxbridge and Rickmansworth Railway, "No capital has been raised under the Act of 1887. What little capital has been raised has been raised under the Act of 1881, which did not contain power to pay interest out of capital during construction;" the Barry Dock and Railways, "Capital raised. Half had been raised without the power to pay interest. The promoters state that the power has enabled them to raise the further capital at a less cost for interest than the probable loss on discount without it." Then, as to the Brighton, Rottingdean, and Newhaven Direct Railway, and the Clyde, Ardrishaig, and Crinan Railway, "No capital raised as yet." I need not go into the other cases; but I think it is abundantly clear that the alteration of the Standing Order has not produced that beneficent effect which was expected, and, so far from having tended to induce investors to put their money in these undertakings, it has not had that effect. If this experiment had fulfilled the predictions with which it was ushered into existence, my criticism would have taken a very different form, but I think your Lordships will see that we have abandoned a very strong and very sound position with regard to paying interest out of capital, without having derived any corresponding advantage. We have not stimulated railway enterprize; we have not afforded employment to the unemployed, and the visions which were dangled before the eyes of the Legislature have in no sense been fulfilled.
§ * THE DUKE OF BUCKINGHAM AND CHANDOS
My Lords, the question to which the noble Lord has drawn attention is one, undoubtedly, of very considerable importance. Carrying the Return to which the noble Lord has referred up to the present time, I am afraid it would not disclose any circumstances which would go to confirm the idea that the modification of the Standing Order would have any large influence upon the construction and development of railway and similar work. The noble Lord rightly pointed out that the three prominent Bills which were before the House when the Standing Order was modified were the Regent's Canal Bill, the Dore and Chinley Railway Bill, and the Manchester Ship Canal Bill. So 1623 far as I can ascertain, the Regent's Canal scheme remains exactly where it was, and nothing whatever has been done to pay interest out of capital. In the case of the Dore and Chinley Railway, the power to pay interest has been abandoned, and the line has been transferred to one of the large existing companies to make with their own money. In the case of the Manchester Ship Canal Bill the capital has been raised. How far that may be due to the prevalence of an opinion that this large undertaking would pay in itself, or how far it may have been influenced by a concession of the payment of interest out of capital, it is impossible for me to give any opinion; but, looking through all the cases mentioned in the Return and to others which have since occurred, it does not appear to me that the public are more inclined to invest in companies which have the power to pay interest out of capital than they are to invest in similar companies which do not possess that power. In fact, unless the public are satisfied that the line or the scheme has a good prospect in itself, they will not be tempted to make an investment by the circumstance that interest may be paid to them out of capital. During last Session a considerable number of applications were made before Committees for power to pay interest. That power was conceded in the case of seven companies, and yet I believe I am right in saying that the power has not been exercised in a single instance. In the present Session applications for similar powers is made in the case of 18 companies, most of them minor concerns. In two or three cases these companies have been before Parliament more than once for variations of their lines, extension of time, or similar applications. In one or two cases the parties are again before Parliament for further changes of their lines or extension of time, having in the meantime raised no capital whatever. Whether or not the alteration of your Lordships' Standing Orders will tend to the good of the country by further development of undertakings giving large employment in their construction, I think no opinion can yet be formed. In the working of the Standing Order two questions have arisen—one, whether the concession of the power to pay interest out of capital 1624 should be granted at all; and, secondly, the rate at which it should be granted. As regards the first, it will be seen from the number of cases granted that the matter has been carefully watched by Committees of both Houses, and as regards the rate of interest, the principle adopted has generally been this:—the Committees have allowed the maximum of 4 per cent, practically 1 per cent above the interest on Government Stock, but they have only conceded that rate where the Company seeking the power have in its Acts agreements or arrangements with other existing companies which give a reasonable prospect of a somewhat similar rate being a permanent rate, so that when the construction is finished investors shall not be subjected to any great fall of their rate of interest. In cases where there have been no such agreements the interest has been fixed at 3½ or 3 per cent. One curious feature in the Returns is that the rate of interest does not appear to have materially acted on the question of raising or not raising the capital. One question, no doubt, will present itself to the Committees this Session with regard to the rate of interest. The rate of interest of the Government funds has been reduced, and the question may arise whether the maximum rate of interest should still be given—whether, in fact, 4 per cent is not too high a rate to continue? Having regard, however, to the care that has been shown by the Committees in investigating the cases and limiting the cases in which the power should be given, I think your Lordships may safely leave the matter where it is until the completion of the works and the expiry of the powers of the Acts which were sanctioned in 1886 and in 1887. When that time has expired, then, and not before, a fair opinion may be formed as to the effect which this power of payment of interest out of capital has had. Judging from the cases which have come before me, there is no doubt that very great care will have to be exercised in selecting and sifting out cases this Session, to avoid giving that power to mere speculative schemes which have no real basis except the possible hopes of speculators of some financial gain from the operation, irrespective of the real earnings of the particular scheme, and on the other hand not to avoid giving, where the im- 1625 portance of the scheme, not merely to particular localities, but to a large district of the country, was undoubted, every facility consistent with the Standing Orders of their Lordships' House to encourage the development and construction of such undertakings.
§ House adjourned at Fire o'clock, till To-morrow, a quarter past Four o'clock.