51. Mr. Wilsonasked the Minister of Transport and Civil Aviation, in view of recent trends in goods traffic receipts of 52W British Railways, what the amount of the advances to be made, in accordance with the provisions of Section 2 of the Transport (Railway Finances) Act, 1957, against the British Transport Commission's deficit, is likely to be.
§ 63. Mr. Ernest Daviesasked the Minister of Transport and Civil Aviation what action is to be taken following the consultations he has had with the British Transport Commission concerning its financial position, under the Transport (Railway Finances) Act, 1957.
§ Mr. WatkinsonPassenger receipts are good but freight receipts have been badly hit in recent months by an unexpected fall in bulk traffics due to conditions in the coal and steel industries. I have been in close consultation with the Chairman of the Commission about these developments. Although the exact amount cannot be known until after the end of the year, I understand that as a result of the fall in bulk traffics the deficit which must now be expected is of the order of £85 million or about £20 million over that for 1957. He has given me a full report on the subject which includes an undertaking to secure further large reductions in working costs to meet the position. I have informed him that in these circumstances the Government would be prepared to advance the necessary funds to the Commission under the Transport (Railway Finances) Act, 1957.
I am circulating in the OFFICIAL REPORT the Chairman's full report to me, which also contains his views on future prospects, and also a copy of my letter to him, which sets out the Government's attitude in the matter. They are as follows:
29th September, 1958.
1. You are aware, from the discussions which we have had, of the grave fall in bulk and heavy traffics which has occurred, particularly during the third quarter of the year, and of the consequent effect on the Commission's revenue. From the results of the present year, so far as they are known to us, it now becomes apparent that the deficit of the Commission for 1958 will be considerably more than the amount of the 1957 deficit. This is a situation which we should face now although its final scope cannot be known for some months. I know that you agree with this. I am, therefore, writing to bring together the whole story and to present it to you comprehensively and, indeed, to summarise our own discussions
53WBACKGROUND
2. The forecasts given in the White Paper of October, 1956, were expressly based upon certain assumptions which are set out in paragraph 3 of the Commission's memorandum to you of September, 1956, and reproduced on page 11 of the White Paper. This stated that "throughout the review and in estimating the future margin between revenue and expenditure the Commission have, of necessity, framed their forecasts on the basis of the present value of money and a continuance of current economic conditions." The Commission have done their utmost to meet increases in costs and foreseeable declines in revenues, and thus beep within the limits of their financial plan. The serious drop in activity, particularly in heavy industry, in recent months has, however, caused a precipitous fall in the revenues of British Railways quite beyond anything envisaged when the Commission submitted their memorandum embodied in the White Paper of 1956. This is exemplified in Appendices "B" and "C" to this letter.*
THE TRAFFIC POSITION
3. The fall in British Railways traffic receipts for the first 36 weeks of 1958, by comparison with the Commission's budget estimates, is tabulated in Appendix "A" to this letter. The sum total of all railway traffic receipts for the first 36 weeks shows a decline of over £18m. (5½ per cent.) Considering the state of trade, passenger traffic is remarkably buoyant, total passenger receipts having receded by no more £1.3m. (1½ per cent.) and, wherever modernised passenger services have been introduced, there has been an improvement in the net revenue position. Total freight receipts have, however, shrunk by no less than £16.7m. (7 per cent.), The preponderance of loss is, therefore, in the freight field, especially in the case of coal and minerals.
4. The position is revealed even more strikingly in Appendices "B" and "C" to this letter, which illustrate the sudden steepening of the decline in bulk traffics during the present year. In the case of these traffics (coal, minerals, etc.) in particular, the fall in receipts is not due to diversion to other forms of transport. It would be wrong to suppose that the Commission have been the only sufferers. It is the Commission's belief that all public transport by rail, road and water, whether nationalised or in private hands, finds the present situation difficult and regards the future as a matter for serious concern.
5. In fact, the level of industrial activity in industries vital to the railways is now running below the level of 1956. There has been virtually no increase in coal production, a fall in coal imports and a large increase in un-distributed coal stocks. Consequently the tonnage available for transport has fallen when it was expected that it would rise. The railway receipts from coal class traffic provide over 40 per cent. of their total freight train traffic receipts and, in consequence, the fall in demand for coal has had a serious effect on revenue.
* Note: Appendix "B" containing graphs not reproduced in OFFICIAL REPORT.
54W6. The iron and steel industry is second in importance only to the coal industry in its contribution to railway freight for, in addition to the coal class traffic carried on its behalf, this industry provides about one-fifth of freight train traffic receipts. It was expected that the steady growth of the iron and steel industry would provide additional traffic receipts in the first five years of the Modernisation Plan. However, towards the middle of 1957 the output of the iron and steel industry ceased to rise. By the end of the year 1957 the decline had already begun, and in the second quarter of 1958, when consumers of steel began to reduce their stocks, there were immediate repercussions throughout the industry.
7. At the beginning of 1958, carryings of iron ore were only slightly below the 1957 level, but by the second quarter, when home ore production was nearly 20 per cent. down, and imported ore consumption in pig iron manufacture about 15 per cent. down, railway carryings showed a similar fall.
8. Scrap consumption in steel-making had fallen to some 10 to 15 per cent. below the 1957 level by the second quarter. Railway carryings have fallen by a bigger percentage because scrap accumulated at works is being used up first. Similarly, pig iron carryings were much reduced, because the fall in the tonnage requiring transport was greater than the 10 to 15 per cent, fall in production. Deliveries of semi-finished steel fell by 15 to 20 per cent. and the decline in railway carryings was broadly similar. Carryings of finished steel have declined in proportion to the deliveries to steel users.
9. The Commission also draw attention, as a matter of record, to the decline in Government traffic passing by British Railways. The total receipts from this source were £25½m. in 1956, £25m. in 1957 and at current levels the figure for 1958 is not likely to exceed £20m. Passenger and freight train traffic each account for about half of the total.
10. The severe and unpredicted fall in the level of production by the heavy industries is thus the crux of the Commission's revenue problem at this time. The fall in receipts from coal and mineral traffics alone is now at the rate of over £600,000 a week compared with last year, or at the rate of over £30m. a year.
11. Future rail carryings depend very much on the prospects of a revival of industrial activity, and especially upon the future course of events in the heavy industries. There is no indication from the industries concerned that they regard their present trading position as involving any change in their long-term planning for a steady rise in production. In these circumstances, the Commission must work upon the assumption that the present decline in these traffics is a temporary condition. calling for short-term measures.
REVENUE AND EXPENDITURE IN 1958
12. Early in 1958 the revenue budget proposals for that year, which in accordance with normal practice had been submitted towards the end of 1957, were carefully reviewed. As a result, the Area Boards' budgets for the Railway Regions as finally approved by the 55W Commission were substantially revised to ensure that the Commission's net deficit for 1958 was reduced to £55m., a figure broadly in line with the forecast given in the White Paper. Since there was little scope for increases in rates and fares, this involved a reduction of some £14m. in the expenditure proposed by the Area Boards. An intensive drive was, therefore, launched through the Area Boards to effect further savings in working expenses. Action was taken to effect staff reductions, to curtail overtime and Sunday working, to reduce the wagon stock, to defer a certain amount of repair and maintenance of structures, track and vehicles without incurring an accumulation of deferred maintenance, and to curtail uneconomic train mileage.
13. Following joint discussions in May on the question of railway wages and salaries, the Commission and the trade unions reached agreement for increases costing about £10m. in a full year, on the understanding that both sides would mutually play their part in the reduction of railway working expenses. The Commission gave assurances to the Government that they would reduce their working expenses and the Government for their part undertook to increase the capital investment in British Railways in 1958 and 1959 above the restricted limits imposed in October, 1957, and to grant the Commission relief towards the maintenance of road bridges over railways. and of level crossings.
14. After allowing for the help from the Government and for selective limited increases in fares and charges, further reductions in expenditure at the rate of some £6m. a year were needed to meet the remainder of the cost of the wages agreement and were put in hand.
STEPS TAKEN TO IMPROVE THE FINANCIAL POSITION
Savings on British Railways
15. The principal steps taken to reduce expenditure on British Railways, and their results to date, are:
(a) Reduction in Staff.
The total British Railways staff in August, 1958, was 563,000, a reduction of 17,000 or 3 per cent, on the corresponding period last year; and reduction is
Average Weekly Passenger Train Miles Steam Electric Diesel Total Winter, 1957–58 … … 2,660,000 970,000 358,000 3,988,000 Winter, 1958–59 … … 2,375,000 950,000 575,000 3,900,000 (+) or (-) … … -285,000 -20,000 +217,000 -88,000 (2%) There is thus a substantial saving (11 per cent.) in the steam mileage, a smaller saving in electric mileage, and an increase of 61 per cent. in diesel-worked mileage. The last-named represents mainly the continuing introduction of multiple-unit diesel trains, the greater availability and quicker turnround of which are being exploited for traffic-building purposes. Further reductions in passenger train mileage are planned.
(ii) The reduction in freight train mileage amounts to about 5 per cent. 56W continuing. Some 60 per cent. of the annual expenditure on British Railways is on salaries and wages, and savings in expenditure are bound to be felt by the staff. The Commission, therefore, are careful to keep the trade unions informed on their financial position and on the measures in hand to correct it.
(b) Reduction in Wagon Fleet.
The total number of British Railways wagons in September, 1958, was slightly over one million, a reduction of 57,000 or 5 per cent. compared with the corresponding period last year. This process continues.
(c) Rationalisation of the System.
(i) A recent survey of current proposals for the withdrawal of passenger or freight services, or both, from particular sections of railway showed that 52 such proposals had been or were likely to be submitted during 1958, involving estimated net annual savings approaching £1½ million. This includes over £600,000 anticipated saving from the proposal to withdraw services from nearly the whole of the former Midland & Great Northern Joint Lines in East Anglia, which largely represent duplicate facilities.
(ii) During the second half of 1958 the drive for economy measures of this nature has been intensified, and there probably will have been submitted to the Consultative Committees by the end of the year the majority of the "easier" cases. New submissions will include proposals of greater size and importance, which though taking longer to examine may result in substantial financial benefits. About 35 cases of all kinds are likely to be submitted to the Consultative Committees between now and June. 1959.
(d) Curtailment in Train Mileage.
(i) To reduce passenger train mileage in cases where complete withdrawal of services from a section of line or stations was not desirable, substantial cuts in services were effected during the 1958 Summer Service. Further economies have been made in the 1958 Winter Train Service, the effect of which is:—
below last year's level. Some of this is due to falling traffics, and some of it to more economical methods of working. Every effort is being made to press home the reduction of expenditure without lowering the standard of service to traders.
16. For the first 32 weeks of the year, the Working Expenses of British Railways are estimated to be within £2m., or £½ per cent., of the revised target for that period. The effect of measures taken to reduce them is being increasingly felt, and it is expected that the 57W working expenses for the full year will be very near to budget. This indicates that the economy measures referred to in para. 12 above are being fully applied and will be reflected in the results for the year. There is also good reason to expect that the additional steps taken under para. 14 will be reflected in the rate of expenditure at the year's end.
Other Activities
17. The Commission have also reviewed the revenue budgets for their other activities, and wherever possible savings are being made in order to improve the overall revenue position.
Increased Charges
18. A 10 per cent. increase in certain charges for merchandise traffic carried by passenger train was introduced on 1st August, 1958, giving an estimated yield of £750,000 in a full year.
19. The process of adjusting sub-standard local passenger fares throughout the country has been continuing. Beyond selective adjustments of this nature, any question of a general increase in passenger fares must necessarily await the decision of the Transport Tribunal on the Passenger Charges Scheme which the Commission lodged on 1st September.
ESTIMATED FINANCIAL POSITION
20. In the light of present traffic trends, the Commission cannot assume that there will be any material improvement in the gross receipts of British Railways during the remainder of the year. On this basis, the broad financial picture for the year 1958 may be as set out in the next paragraph, but a firm estimate of the position cannot he made for some months.
21. The target for the year 1958 for British Railways was a reduction of the deficit (after including Central Charges, mainly interest) to £55m. The shortfall in gross receipts as compared with the target of £505m. is likely to be not lees than £30m. The net receipts from the Commission's other activities are not expected to do more than cover their share of central charges. The deficit of the Commission for the year 1958 may accordingly be of the order of £85m.
22. In a situation such as this, the financial structure of the Commission has the disadvantage compared with other businesses and indeed most other transport undertakings, that the fixed interest on Transport Stock which the Commission have to pay is an expense which has to be met in full each year whatever the earnings may be; there is no equity capital which can go insufficiently rewarded or unrewarded in a bad year. It has not been possible to build up a general reserve which could be used to meet an emergency.
23. Of the £250m. of "deficit" borrowings authorised by the Transport (Railway Finances) Act 1957, £118m. has been borrowed in respect of the years 1956 and 1957. Assuming the deficit for the year 1958 to be of the order of £85m., the total borrowings in respect of the three years 1956 to 1958 (if the Commission borrow the full deficit of 1958) would amount to about £200m.
58WThe Commission's total borrowing powers in respect of deficits may, therefore, be exhausted during 1959.
EMERGENCY CORRECTIVE ACTION
24. In these circumstances, the Commission have considered the emergency measures to be taken under two main heads, namely:—
(a) further reductions in expenditure; and
(b) increases in revenue.
Field for further reductions in expenditure
25. The Commission have directed the Area Boards to intensify their drive during the remainder of the year to reduce expenditure to meet the present emergency. The Commission intend to work towards still greater reductions in their installations, including workshops and goods terminals, and under the former heading have in hand a further review of all their facilities for maintenance and for rolling stock construction, with a view to greater concentration and co-ordination of their engineering resources. It was an integral part of the Modernisation Plan that the British Railways system should be adapted so as to provide a more compact network, capable of being fully utilised, and of doing efficiently and cheaply the things railways are best fitted to do. While it follows that some services now provided by rail will have to he performed by other means of transport, the continuation of modernisation will ensure that the economic value of the railway system as a whole will continue to improve.
Possible increases in revenue
(a) Passenger Traffic.
26. As already stated, the Commission have lodged a new Passenger Charges Scheme with the Transport Tribunal. If the Tribunal approve this Scheme, powers are not likely to be available to the Commission until early in 1959. Any general increase in British Railways passenger fares would have to be very carefully considered in the light of current market conditions: selective increases will be made where possible.
(b) Freight Traffic.
The Commission have considered the question of obtaining increased revenue from freight traffic, assessing every possibility from overall to selective increases. They consider that an overall emergency increase might yield temporary advantages only to be succeeded by permanent disadvantages. Discussions are in progress with the heavy industries to improve the revenue from certain important flows of bulk and heavy traffics. As far as possible, it is the Commission's policy to hold down their freight charges in order to encourage traffic.
MODERNISATION
27. Modernisation is itself the best way of achieving reductions in expenditure and increases in traffics. Its continuation at the present rate is an essential contribution towards making the railways pay their way.
59WThe faster it goes, the sooner it will pay off. The stage in modernisation has now been reached when, although much planning has yet to be done, the new equipment in use is making a real impact on the pattern of service which is reflected in the revenue results. The most striking evidence is in the field of diesel traction, where over 1,000 main line and shunting locomotives are now in service; over 150 diesel main line locomotives will he in service by the end of the year. There are also over 2,000 multiple unit diesel vehicles now in traffic showing such increases in receipts over 1957 as 55 per cent. in Hampshire and 112 per cent. on Tees-side.
28. Electrification schemes are well in hand hut progress is less spectacular because of the large amount of associated engineering work on bridges, stations, signalling and communications. It is significant, however, that the electrification of the Shenfield-Southend line has virtually doubled the traffic and this, together with the experience in the Southern Region, has fully justified the suburban electrification projects.
29. Modernisation is also having an increasing effect on the standard of freight services. About 35 per cent. of the total freight train mileage is now run by trains fitted with continuous brakes, compared with 28 per cent. a year ago. Since the inception of the Export Express Service nearly two years ago, over 28,000 wagon loads of export traffic have been carried to ports without a single shipment being missed through the fault of British Railways. Freight transits generally have been substantially improved.
30. The foregoing examples are evidence that the economics of the Modernisation Plan have been soundly conceived.
CONCLUSION
31. The finances of British Railways have been struck a violent, unexpected blow, by the sharp setback in the output and traffics of coal, steel and other basic industries.
32. Having no reserves to meet such an emergency, temporary though it may be, the Commission are facing a financial crisis of gravity and urgency. The question is—what should be done about it?
33. First, the Commission want to state that nothing has happened to stultify the appreciation of the future prospects of the railways, as set out in the White Paper of 1956. In so far as new equipment has already been put into service, it has justified the claims made for it, as paragraphs 27 to 30 show. Increased flexibility in charging methods has given results more slowly than was expected, but they are beginning to mature. In the White Paper it was specifically stated that the forecasts made in it were put forward on the assumption that the general level of the national economy would stay about where it was. A severe, even if temporary, setback in those industries on which the railways are most dependent inevitably affects those forecasts. It has not shaken the Commission's confidence in their plans, nor their determination to see their plans through to success.
60W34. The industries with which we are most concerned are, for their part, sticking to their former plans in spite of their present difficulties. The steel industry has said so publicly. The Coal Board know that they are faced with a steady and permanent decline in the market for locomotive and household coal, but this is the coal which is hardest to mine and easiest to sell abroad. They are confident that the market for industrial coal and coke will recover. although competition from oil will take some business from them.
35. Our recommendations as to what should be done take account of these facts. They are:—
(a) Further Reduction in Costs
As is set out in this paper, much has been done during the year and the effect of the action taken will be fully apparent next year. However, we are nowhere near the end of the process of the rationalisation of our railway system. This process was an essential element in the Modernisation Plan. The kind of steps we are taking now were described in the Plan, but the process is being accelerated. Having put in hand the programme for 1958, the Commission are now preparing a programme of rationalisation for 1959. The main features will be presented to you by the end of the year. At this time I can go no further than say that we shall take as our target a reduction of £20m. per annum in addition to economies already in operation, which will yield several millions of pounds more in 1959 than in 1958.
(b) Further Efforts to Increase Revenue
The situation as regards fares and charges has been outlined in this paper. Apart from this, the drive for more business will, it is believed, bring increased results as the decentralised organisation settles down, and the commercial officers become more adroit at utilising the greater freedom which they have recently been given.
(c) Modernisation to be pushed
We remain completely convinced that by modernisation and rationalisation our railways can be made to pay their way. It is the key. Although we have been trying to go as fast as possible, we must try to go faster. Above all else we ask for the continuation of the Government's support in the prosecution of the Modernisation Plan
(d) Government Assistance
Whatever the Commission may do to help themselves in this crisis, they cannot overcome it without assistance from the Government.
36. It is not for the Commission to propose what measures should be taken by the Government to see the Commission through what 61W they must assume, on the information available below, from the auditors whom you to them, will be only a temporary setback. The Commission clearly recognise, however, that before additional aid, even of a temporary nature, is given, the Government must be satisfied that the Commission are doing all in their power to help themselves. I have described above what we have done and what we intend to do.
37. The Commission are anxious that the Government shall be satisfied beyond doubt that the position is fairly reflected in this letter. They would have no objection to your seeking a verification of the critical points in cur presentation of the situation, as set out
62W
APPENDIX A BRITISH RAILWAYS TRAFFIC RECEIPTS Aggregate for 36 weeks ended 7th September 1958 1958 Increase or Decrease compared with Budget £000 £000 % PASSENGERS Ordinary … … … … 82,711 1,522 Early Morning … … … … 4,931 158 Season Tickets … … … … 11,965 369 Total Passengers … … … … 99,607 1,311 1.3 FREIGHT (including Parcels and Mails) Freight Train General Merchandise and Livestock … … … … 63,614 6,463 9.2 Minerals … … … … 31,334 4,790 13.3 Coal and Coke … … … … 85,133 4,561 5. Coaching Train Parcels and Other Merchandise … … … … 23,675 772 Postal Parcels … … … … 6,723 145 Letter Mails … … … … 5,164 4 35,562 913 2.5 Total Freight … … … … 215,643 16,727 7.2 TOTAL RAILWAY TRAFFIC RECEIPTS … … … … 315,250 18,038 5.4 25th September, 1958. below, from the auditors whom you appoint:—
(a) That the undertakings which the Commission gave earlier in the year about steps to reduce working costs of British Reailways will have been substantially fulfilled by the end of the year.
(b) That the sudden drop in coal and mineral traffic is the main cause of the present position, and that this drop is due to a fall in the traffic offering rather than to any failure by the Commission to hold their share of these traffics.
(Sgd.) BRIAN H. ROBERTSON.
63W
APPENDIX C BRITISH RAILWAYS: TONNAGE OF MINERALS AND COAL AND COKE CARRIED Weeks ended 4th May to 7th September 1958 Week ended 1958 MINERALS COAL AND COKE Traffic Percentage fall on 1957 Traffic Percentage rise or fall on 1957 Tons Per cent. Tons Per cent. 000 000 4th May … … … … … 1,113 -20 3,105 -8 11th May … … … … … 1,024 -20 2,977 -8 18th May … … … … … 1,047 -21 3,144 -7 25th May … … … … … 1,034 -21 3,097 -10 1st June … … … … (a) 929 -29 2,459 -27 8th June … … … … … 973 -16 2,969 -7 15th June … … … … (b) 1,017 -12 2,965 +16 22nd June … … … … … 961 -25 2,895 -10 29th June … … … … … 1,043 -23 2,864 -14 6th July … … … … … 984 -13 2,804 -4 13th July … … … … … 996 -23 2,739 -3 20th July … … … … … 967 -18 2,702 -1 27th July … … … … … 960 -19 2,027 -23 3rd August … … … … … 724 -37 1,526 -29 10th August … … … … … 635 -34 1,702 -11 17th August … … … … … 913 -17 2,351 -14 24th August … … … … … 909 -26 2,632 -10 31st August … … … … … 957 -27 2,638 -16 7th September … … … … … 881 -30 2,710 -11 [...](a) Whit week 1958; (b) Whit week 1957. 25th September, 1958. 30th October, 1958.
Thank you for your letter of the 29th September, summing up the problems we have been discussing.
In the Government's view it would be reasonable to assume that the present phase in the economy is temporary and that a future expansion of economic activity is to be expected. The addition of a possible further £25 million to the accumulated deficit is, however, as I know you realise, an extremely serious matter, and the maximum effort will be required from all concerned with the future of the railways if it is to be put right.
The B.T.C. restates its view that a modern railway system is essential to our industrial future. I do not dissent, although as you recognise, it will have to be a more compact and efficient system than it is today. I shall look to you and your colleagues therefore to press forward with your plans for securing economies with the utmost determination. I appreciate that your 1958 financial picture is, to a large extent, due to external causes, but continued repetition would impair financial discipline and confidence in the financial future of the railways. Nor can the Government envisage an indefinite extension of the time when the Commission will break even.
The Commission have, however, made substantial economies this year, and I note that it is the Commission's intention to secure in addition further savings in working expenses of 64W at least £20m. per annum. The Government accept that the modernisation of the railways must continue and I am glad to see your expression of the Commission's continued confidence in its eventual success. The Government have considered how the immediate position should be met and have decided that the best course would be to advance the necessary funds under the Transport (Railway Finances) Act, 1957.
The question of how to meet your future position can be considered in connection with the general question of the limits on the borrowing powers of the Commission, which is bound to arise shortly in any case.
I told you in my letter of 5th May that the Government is prepared to consider how far it might he practicable to provide for a more rapid completion of at least parts of the modernisation plan. The scale and pace of the different parts of the Plan will now also need to be looked at in the light of your proposals for speeding up economies, as well of course as in relation to the scale of public investment as a whole.
I welcome your suggestion that the Auditors whom I appoint should be asked to verify that the undertakings which the Commission gave earlier in the year to reduce working costs of British Railways will have been substantially fulfilled by the end of the year and that the main cause of the present position is a fall in the coal and mineral traffics offering rather than any failure by the Commission to hold 65W their share of these traffics. I have, therefore, asked the Auditors to let me have their Report as soon as possible.
Harold Watkinson.
General Sir Brian Robertson, Bt., G.C.B., G.B.E., K.C.M.G., K.C.V.O., D.S.O., M.C.