West Somerset Railway General Discussion

Excuse the SVR diversion, but I know its history better.

I had this discussion with an SVR director in the noughties, about heritage railways' sometimes aversion to debt. The SVR purchased its line in 1967, paying BR by instalments. It has borrowed money in the short term (like buying Kidderminster freehold, before raising the money in a share issue) and longer term 'mortgages', such as phase 3 at Kidder was a £550,000 loan 2006-20. It still has outstanding £400k in long-term loans (to 2031), on the purchase of what is now the West car park at Bridgnorth and Kidderminster TMD. Had it not taken loans it might have lost the Kidder freehold or lost the opportunity at Bridgnorth. It could have continued with temporary buildings at Kidderminster Town, but I don't think many will argue that completing the station was a 'good thing'. So it's not quite 'debt is bad' or 'debt is a failure of management', IMO. It has a role

I think if you offered many heritage lines additional capital instead of debt they'd take your arm off (though it's a weakness of the 'PLC operator wholly owned by charity' model) but not (m)any have that option.

It becomes more problematic when you have both borrowings and reservations in your accounts whether you're a going concern, which brings one back to the WSR

Patrick

 

I think that buying land is one of the areas where taking out a loan is necessary, and I think this has always been recognised. Back in the day when being in debt was frowned upon, mortgages were an exception to that attitude. It is the wholesale hocking of everything that can be hocked and the subsequent apparent lack of acknowledgement that the loan is a large sum of money that will, at some point, have to be paid back that is the problem. Especially since the loan appears to have been to cover an operational loss, not to buy an asset or fund a repair to a locomotive so that it can start earning revenue again.

 

I'm not sure where you get that idea from. The whole origin of banking lies in lending a portion of the depositors' funds (originally gold !). I know I had a small overdraft to help buy my first car in the mid-sixties (a lot cheaper than H.P.) and most businesses in our area, being holiday resort territory, had overdraft facilities to help them through the off season.

 

I didn't say that nobody was in debt, just that it wasn't considered normal. Of course some businesses had cyclical debt, indeed farmers' need for credit to survive from harvest to harvest goes back thousands of years, but being permanently in debt, apart from paying off loans for particular expensive assets, like a house or a car, was, as I say, generally frowned upon and that included running a permanent overdraft.

 

Perhaps the question to ask is "Can you make the borrowed money earn more than your bank can?"

The biggest risk, which Covid 19 threw into stark relief, is inadequate cash reserves. I believe the Charity Commission recommendation is that about three months outgoings should be the minimum level but a prudent reserve should probably be considerably higher than that.

The usual tendency of most heritage railway members is to want available funds to be spent on some exciting or worthy project. Convincing them of the need to keep possibly seven figure sums unallocated can be a tall order and doesn't exactly encourage more donations!

The reality of the last torrid lockdown periods is that, without borrowing, such as the Government CBILS loans, and increased overdraft facilities more heritage railways would have gone under. With outgoings still there and inability to generate an operating surplus ( which of course is different from being able to generate revenue which is why, for some, staying shut was the right move) whether or not borrowing is desirable is academic. It was the only way they could survive.

As long as they are using the borrowed cash to earn more than its costing them, and are building prudent reserves, that seems to be a sensible strategy.

 

Isn't there a bit of an inconsistency in the two bits highlighted? The first seems to say it is prudent to spend money if it generates a return; the second that it is prudent to hold a large cash reserve.

Imagine a railway with £1m in reserve. Since the purpose of the reserve is a contingency fund, that presumably means ready-access cash, so what could you earn in the bank with that? £1,000 per year @ 0.1% interest? While also losing perhaps £30k per year in real terms erosion by inflation?

If instead you spent that £1million on, say, track replacement and in the process saved > £1k per year in labour and parts of, for example, broken spring replacement, then spending the money would show a positive RoI above the interest earned, let alone the erosion by inflation.

I absolutely agree on the need for prudence - but that has to be tempered with actually going out and spending money on things that will generate cashable savings.

2020/21 were clearly very weird, more or less unprecedented, years in financial terms, and every railway had to find some way across entirely uncharted waters. But in normal times, the significant danger to me, and what seems to have occurred on the WSR, is a very gradual, but steady, year-on-year decline in revenue, rather than a sudden swing that could be plugged by holding a large reserve. To me it looks like revenues have gradually dropped and costs gradually risen, but that hasn't been recognised until too late - at which point, there also isn't much left in reserve for the kind of capital investments in product that might help reverse those trends.It might even be the case that the fact that the WSR did at one time hold significant reserves rather served to delay the moment that that drop in revenues was faced head on.

(I'd also note, just on a technicality, that the charity commission guidance on reserves would apply to the support charities, but not the operating company in the current discussion. Reading the accounts of, for example, the Bluebell Railway Trust shows they have a policy of holding quite a large reserve, but that is on the basis of an organisation that derives its entire revenue from donations, and therefore could be more susceptible to a sudden change in income.)

Tom

 

Yes, such decisions do depend on interest rates and rates of inflation. If you can borrow at an interest rate equal to the rate of inflation, that may look like, effectively, free money, however, apart from the fact that it is doubtful that the bank would let you get away with that, you have to consider that the loan will have to be paid back at some point. If you are borrowing to buy an appreciating asset, like land or land and buildings, then it probably makes sense. Even if you are borrowing to buy a depreciating asset, like a steam locomotive, it would make sense if the locomotive could earn more than enough money to cover the difference between the rate of inflation and the interest rate and cover its own depreciation, but if you are borrowing simply to fill a hole in your bank balance, you have neither appreciation, earnings nor an asset to sell to fund the repayment.

 

I think you might misunderstand me. I'm not suggesting that a company should borrow to fill a hole in the bank balance, but rather the opposite: that holding a large cash reserve, particularly at a real negative interest rate, is not necessarily prudent if at the same time there is a significant backlog of maintenance activity that needs attending to.

Tom

 

As one who has to consider the three month reserve window for a charity, I largely agree with you. However, I have one massive reservation - that reserve has to be liquid. Wages have to be paid, fuel bills met, and so on. That cash reserve has to be enough to manage in those situations - something that balance sheet views of accounts can underestimate where the values of the underlying asset are, day to day, irrelevant.


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Its not so much what the accounts say that's important, It's what the outcome is going to be by March 2022, when expenditure has to be met by what ever income the railway has managed to earn over the Christmas/ new year every where margins will be tough, have a poor festive period, etc and your really going to be in trouble, Having mixed messaging does not help, saying to supporters we are doing ok, whilst appealing for funds elsewhere , only confuses the issue, either you need to raise the money, or you don't, but we all know whats behind it, appealing to your base, to keep them from asking to many questions, preventing others from questioning your ability maybe? whilst passing out the begging bowl to everyone else. self preservation, first, railway preservation second.

 

Added to which, it is perfectly possible to have made a big profit in the year, which makes the accounts look nice and healthy, but still have no money in the bank, something I have learned the hard way.

 

The hardware seems to be complete as far as one can tell.

 

Wow. Looks up to NR standards (or is it GBR this week?), though I imagine it'll have to make the same Bobawful racket as every other modern crossing. Ho hum, that's progress for you!

 

Network Rail. We're not gone just yet. It still needs agreements from a large number of stakeholders and for the full bill to pass through parliament.

In any event, it's subject to ORR standards, NR standards, Level Crossing Order and a range of laws in relation to the provision of a crossing.

 

Oi remember when all that were fields. I must be getting old.

 

Me too

 

I can remember a trip to Minehead by DMU and yes from Blue Anchor, there was just fields even Minehead seemed very under developed that would have been in the early 80;s when the steam didn't work the whole line, and the bagnals were still there.

 

Does that include the CCTV?

 

Where have the new crossing barriers been sourced from?

 

Unipart I would of thought sane as Network Rail.