Railways, structures, fundraising and democracy...

So why is anyone a PLC? It comes with high standards of audit and compliance, and no gift aid. We seem to be establishing that the only profits are mythical, so there is no corporation tax issue - or at least it goes away if you admit your real liabilities and expenditure. No-one outside the commercial hard core four pays or ever will pay a dividend - we at least know that much about our emerging cost base.

In reality, supporters of any flavour - donors, "investors", the unwashed, armchair members, the bloke who chucks a fiver in a collecting box, are in it for the reward of keeping something going that would otherwise die out. And free or "priv" travel is the perfect reward. The supporter feels engaged and special - as he should. The railway actually gains financially because he brings MORE money, not less, on his discounted visit.

So the W & L model starts to look very good indeed; a charity to play trains, and a commercial arm to do the Lemon Drizzle cake. I have in the past had the cake - they should sell it by mail order!

Aye

GF-G

 

Your points about complexity, too many chiefs, etc are all well taken. However, as Tom has discussed, the different entities are not simply relicas of each other, but different types of entities (in legal terms), and have different legal attributes, and one simply cannot do all of the things they do with only one entity.

E.g. the ability for the volunteers to retain ownership of the main assets, if the operating company goes bust on poorly controlled day-to-day spending, is something one cannot have without a separate operating company. Etc, etc.

You are quite right that one should only introduce the complexity if it is "necessary and does .. bring actual benefit{s}". In some of the examples we are discussing, I think the benefits have been evaluated carefully, and the extra mechanism does make sense. Of course, when evaluating costs and benefits, not everyone may agree on the weight to be given to each side, but I don't know how to avoid that.

Noel

 

Perhaps I should rephrase: Whilst technically and in a legal sense shares, most people buy shares of the sort we are discussing in the same way that they would donate; they do not buy them for a return by selling on, although the dividend - which in these circumstances is a perk rather than financial return - might be a factor to them.

 

I welcome all initiatives (and have contributed to a few of them) that bring in the dough. And the Comedy Shares have the advantage over Bonds or Loans that they don't appear as debt in the accounts. A very good reason to smile at them. However straightforward donations are better still and it should be noted that many of the most successful railways have managed to attract rich and generous benefactors.

Please note I do not propose the K&ESR or W&L trust company structure as ideal, just answering the question someone asked whether a more unitary organisational setup was possible.

 

There is another bit of the tax equation, which is VAT on travel. We are quite careful to operate a "service", i.e. travel from A to B. We make sure that any passenger can turn up on the day and if they want buy a single ticket between any two stations. Even on Santa days it is possible to do that - there is one unbooked coach on one train. By doing that, we qualify as zero rated for VAT on the travel ticket.

Whereas a line likes the KESR, as I understand, is a charitable trust effectively offering an attraction, of which a train ride is an integral, but by no means the only, part. That gives them certain advantages because they can do the common charitable attraction swiz of soliciting a nominal donation on top of the entry price (what you and I might call the ticket price), but then reclaim GA on the whole amount. The downside is that because they have essentially offered an attraction, you have to pay VAT on the ticket price, whereas at the Bluebell you don't. The financial arguments are quite closely balanced, witness the fact that an all line non-member 3rd on the Bluebell is currently £13.50 (will probably go up slightly after March 22nd), and an equivalent ticket on the KESR is £15 for a ride of almost equal length.

The VAT thing has made joint tickets with Sheffield Park Gardens (National Trust) hard to organise, though I believe we have cracked it now, in that they want to offer the chance to collect Gift Aid on their ticket sales but have to charge VAT; whereas we want to be zero-rated for VAT but can't collect GA on our ticket sales. That's slightly complicated to unentangle for a joint ticket, though I see now that we are offering them, so we must have found a way.

As for privilege tickets: I'm a firm believer that the best route to health for any railway is high member numbers: they are the people who will fund you over and above gate income (whether through shares or donations); and they are the source of your volunteers who contribute millions in free labour. Fundraising is just a numbers game: the more people you can put your message in front of, the more you will raise and the more likely one of your members just happens to be a HNWI with a small fortune burning a hole in his pocket that he just desperately wants to spend on tins of malachite paint (or copper polish, for you SVR types) ... So lesson one: don't **** off your members. If that means very generous member benefits, so be it - you'll get the money back in cafe sales anyway. So for example, my wife and I get free 1st class travel for life on the Bluebell (because we are life members of the BRPS) but also get one pair of free tickets per year as a PLC shareholder. So I just give the tickets to my parents for a day out and thereby the railway gets four extra visits to the cafe even though they haven't had any fare income. Without the free tickets, probably none of us would have made the visit. For ordinary members, tickets are effectively half price (£7 third class for adults instead of £13.50; £3.50 for children instead of £6.80 etc). That seems a good deal and probably helps explain why our membership numbers are currently rising (the last number I saw was somewhere over 10,500).

Tom

 

The problems should not be ignored though. Accumulation of working capital and thus initial progress, is painfully slow; nothing like the "adrenalin rush" of a successful share issue. A great big slug of good fortune is needed as well. A purchase price for the freehold of £8,000 in 1971 seemed a bargain even then but it took a great deal of raising. Such things are never going to happen again, especially when they include the cost of the rail!

Still this model avoids the residual fear of the share driven schemes namely that some smart alec will find a means round the various safeguards put in place to stop the railway being torn up and the land sold for development.

Paul H.

 

So have I got this right?;

1. “Comedy Shares” good for balance sheet reasons (sorry Tom)– donations better. And we are starting to see funding gaps that mean operating revenue support may be (er, will be) needed as well as capital funds.

2. Non-unitary arrangements to separate assets from debt good – but mostly as a precaution against bankruptcy. (Isn’t it probably true that in practical terms, if the operating company goes belly-up it is game over for the whole operation anyway? How do you salvage anything when the trains have stopped and the administrators are coming through the gate?)

3. Multiple layers bring legal powers to do multiple things. Unitary won’t achieve that. There has to be two layers at least (i.e W & L), but one can be a wholly owned subsidiary of the other. Does anyone know how many layers GWS have?

Finally, did we get anywhere with zigzags point about democracy?

Aye

GF-G

 

I think (and we really need Bean Counter here...) that the tax implications make fund raising via Trust or fund raising via a share issue more finely balanced than they look on paper.

As I understand it, if I donate £100 to the Trust, they can reclaim Gift Aid and turn it into £125, minus any administrative costs. But when they spend it, they have to pay VAT on their purchases if those items have VAT chargeable on them.

Whereas when you invest £100 in the PLC in shares, they only have £100 in the bank, but they can reclaim VAT on purchases that have VAT on them. Effectively that means they can buy £125 worth of stuff and reclaim £25 back in VAT. So financially, they are closer than they look.

Of course some things don't attract VAT (and therefore it can't be reclaimed); in that instance, with no VAT to reclaim, buying that product through the Trust, with Gift Aid reclaim, is more attractive. So again, the extra complexity of having a PLC and a Trust comes with certain advantages. Though a significant disadvantage is that it does obfuscate the accounts to a certain degree, to the extent that while I am certain that our accounts are fully legitimate and understood by both the board and our auditors, as a normal member, it is not a simple matter to work out just how much something like "restore an engine" costs, by time the cost may have been split across several budget lines in at least two different organisations.

Where I think raising money via shares is expensive is that, even if you give no dividend, you have an ongoing liability to keep a register of shareholders and hold an AGM, circulate accounts etc. Whereas if you give to the Trust, that's it - letter of thanks, but no ongoing, long term admin cost. I wrote in the SVR thread, and still believe it, that in my view the minimum investment of £100 is too low: fairly soon a significant proportion of that money could be eaten up simply by administering the register of shareholders over the course of a few years. If you reckon the cost of producing and printing a booklet of accounts and posting it to every shareholder once per year costs, say, £2, then (allowing for inflation), your £100 investment will have been entirely used up in admin costs within no more than about 25 years. Which I think is why the minimum Bluebell shareholding was set at £250, even though that caused howls of outrage back in 2007 as being too high.

Tom

 

And, by the same token, can anyone offer an impartial, non-partisan view of how the SVR is structured?

Tom

 

Right, lets see if this makes us any common ground;

If you are a railway with more than one station and thus zero-rated for VAT, a PLC is a good plan because it retains all the income stream from ticket sales, but gets a big chunk of turnover, apart from wages, back from the VAT. Corporation tax is not an issue because profits are illusory. You can offer free tickets to shareholders.

If you are an attraction railway, with an admission fee,, you can add up to 25% to your revenue side, if you are a charity, through Gift Aid, but add 20% to the real cost base, except wages, versus a PLC because you pay VAT on almost everything and can’t claim it back. You can be a charity because profits are illusory. You can offer free admission to donors(?).

This at first blush seems straightforward. If you have one or no stations, your lead organisation should be a charity. If you have two or more, your lead organisation should be a PLC.

I assume I am talking complete rot and have got it wrong. But it all looks horribly marginal. And in either case, a significant payroll is actually not just unhelpful, but very unhelpful, because of the importance of VAT or Gift Aid. Once again, we seem to be looking at the unwashed for salvation.

Aye

GF-G

 

#

I will be very interested to see who pops their head above the parapet to provide one for you!

 

Interesting debate on this, very informative.

Regarding my point about a democratic structure (and to perhaps clarify somethings in my earlier posting) -

I would view the membership body as the controlling influence, here it would be one vote per member. I would like to see the 'comedy railway shares' have no voting rights (is that possible?), and the benefit of holding such to an individual is a travel concession. If it were possible to structure in this way the operating arm could raise funding via share issues, but it would mean that with the absecene of voting rights that a wealthy individual, or group, would be unable to exert undue influence by the size of thier wallets, the membership with its one member one vote would retain the democratic control.

Not sure how this fits in with the John Lewis model, but maybe its similar to the model used by some football clubs, Barcelona being a prime example - its essentially owned by the fans (ie the members)

 

To take the Bluebell example again, the different bodies have different voting rights.

So, as a member of the BRPS (the member body) I have a "one member one vote" say in that organisation. At least in our structure, voting is primarily to elect the Trustees who will conduct the business of the society, though we also get to vote on some policy issues and, crucially, the Long Term Plan (which is the bible for which projects get done and which don't) is a Society document so has to be endorsed by the BRPS. The next vote on that will be this year.

There are 10,500 members so theoretically I have about 0.01% share of the vote, though in practical terms, around 300 people turn up to AGMs (and we have no postal or remote votes), so by turning up in person I essentially have about 0.3% share of the vote.

With regard the PLC, I have my proportion of the share capital as a vote - I think that means about 0.005% sway over matters. However, in practice, the BRPS owns 72% of the PLC shares, so effectively whichever way the BRPS block vote goes, the remaining 28% of small shareholders cannot block. So as a small shareholder, I really have zero influence over the PLC through my shares (in that sense they are comedy railway shares with no vote), but do have an influence through my membership of the membership body.

As for the Bluebell Trust - that has no direct democracy as far as I can see, but the Trustees are elected by the BRPS and its terms of reference for its charitable activities are defined by the BRPS.

In practice, this means the BRPS is at least theoreticlly the seat of democratic power. In particular, the PLC should really act as an executive agency to carry out Society policy. As an example, extending the line to East Grinstead is a Society long term objective. The Society has then tasked the PLC with achieving that objective, which it has achieved (at least financially) by issuing shares, coupled with fundraising via the Trust. But without the Society setting it as a policy objective, it is probably unlikely that the PLC on its own would have chosen to pursue that objective.

So, there are frictions at the edges, but I think the model works well in that the Society sets policy (most crucially, the Long Term Plan), and the PLC delivers that policy (and has to report back at each AGM on how it is progressing against the major objectives laid out in the long term plan). GFG will probably query the actual democracy, in terms of co-opted directors, and also the fact that a nominal elctorate of 10,500 is actually in practice about 300, but I don't see how you get round that problem - even in UK general elections, many people don't bother to vote, and we are much less important than that. The other possible weakness is that essentially the BRPS doesn't have to pay for its plans, so theoretically could ask for plans to be delivered without regard to their cost (for example, our draft new LTP calls for a line of telegraph poles to be erected along the line, which is pure set dressing and will have no positive financial impact, but will cost money). But ultimately that is where the Trust comes in, because if that part of the LTP gets adopted, the PLC (who employ the infrastructure manager) will have to actually be closely involved in the work to erect them, but they will probably plead a lack of budget and therefore it will be down to the Trust to set up a reserved fund to pay for it and then see how quickly the membership chip in to pay for it.

I'm genuinely interested in the SVR set up. From what I can see reading the other thread, the SVR has the same set up of membership body and commercial body, but crucially as far as I can tell, the membership body doesn't have a majority shareholding in the commercial body, so it is much more hamstrung in requiring the commercial body to implement membership-mandated policy. Or have I got that wrong?

Tom

 

As Tom says, we really need Bean Counter to enter the affray but I think that you have got the vat thingy wrong. If you are vat registered (whether plc, charity or what) you have to charge vat on the goods and services you provide but can reclaim the vat on goods and services that you purchase.
If you are a transport provider, the service that you provide (travel) is zero rated so the tax you are collecting for HMG is effectively nothing. You still claim back the vat that you have paid on the goods and services that you purchase. Exactly the same applies if you are an attraction instead of a transport provider, but the vat element is now 20% and not zero, All else is equal in terms of vat. The difference is that you can claim Gift Aid by devious means, assuming the visitors pay UK income tax.

 

The Ffestiniog set up seems to work. Briefly you have the Railway Company which has always been there. The company is supported by the Society with both volunteers and money and has a representative on the company board. There is also the Heritage Group which concentrates on restoring, maintaining and, sometimes, reproducing original equipment and features. In over fifty years of my involvement, there have been very few 'upsets' so, maybe, it is worth looking at.

 

Tom, it looks like the Bluebell is going along lines close to what I would view as ideal.

Although the numbers voting are small I woudl have thought that maybe postal or e-voting might be a next step, or maybe if votes arent urgent perhaps there is a way that a vote could be recorded when a member travels at member rates?

One other thing Id like to clear-up from my earlier postings is that with a membership body holding the railway assets then yes it does offer protection in the case of a fire sale (although as GFG pointed out then if there was a fire sale then would there by anything worth resurecting anyway) but it would also keep the assets out of the hands of wealthier investors who might block buy shares with the hidden aim of being able to control those assets.

 

The Middleton Railway is only a small outfit but has been in the railway preservation game for well over 50 years and has largely stayed loyal to its original constitutional roots, the only significant change being that from a Preservation Society into a Limited Liability Company in the very early days. It does not have a separate trading organisation and it does not employ paid staff. It is controlled by a board of directors essentially elected by the membership (which is not necessarily ensuring the best men for the job). It is very careful with its expenditure and generally matches this with income. It has money in the bank and could go out and buy a boiler for one of its locos when needed, which it has done in the past. It is very much volunteer orientated and largely engineering led (which some say is not the best approach but has stood the test of time). It is fortunate in not having any large infrastructure to maintain, other than buildings, so most of its cost base is on loco, rolling stock and track maintenance and renewal. It keeps costs down by using volunteer effort to do virtually everything that its skillset will allow and only rarely employs outside contractors to do work. A rare example of this is having two new valve buckles made but only because the loco is wanted back in traffic and we already have enough to do before Easter; otherwise we would have made them ourselves.
You may think that the bigger railways can't possibly carry on in this way but it was really exactly how the Talyllyn Railway started out and, indeed, the nascent Bluebell, SVR, NYMR, KWVR and a host of other heritage railways. Somewhere along the way, quite a few of these have lost their way and need to return to be much closer to their volunteer roots if they are to survive.

 

Democracy is complex and fragile, and Zigzag speaks for many, especially with his desire for one man, one vote, but Tom has highlighted the difficulties that it brings with it. It is possible to enshrine democracy into the fabric of your organisation, if that is what you want to do. I think the only one of the big railways where it is genuinely enshrined is the Worth Valley, which was set up as a Worker’s Co-Op and I believe still is. How many layers have they got?

Probably most of us would agree that there should be some Democracy, and how it works should be transparent. It would be interesting to know how KWVR reconciles the conflicting interest of being a small socialist republic (said with affection, BTW, before the Haworth Mafia tears me apart) and the interests and aspirations of HNWI supporters, who having paid the piper have a legitimate expectation to hear the tune they have paid for, not just the one the unwashed chose but played more loudly.

To take an example of the other extreme from KWVR, Nunney Castle has a volunteer support team. They seem happy enough, although it is a one man engine so they probably have a rather limited amount of constitutional democracy. But the owner knows the value of their contribution. Without them he has to pay people, or go and clean and prep it himself at Oh-Gawd-Hundred in the morning. So he probably listens to them.

But whether we run things as a co-op or a dictatorship, the unwashed have a definable cash value. Look at any HLF application to see your backbreaking weekend contribution reduced to a bald cash number – that is what you are worth in monetarised terms.

One of my old General Managers used to say it very simply – when money talks, b*ll**** walks. I suggest that in a world where money talks the voice of the unwashed should be the same as the value you attach to their labours in an HLF bid. If you can afford to pay people to do your bidding unquestioningly, you can easily ignore the unwashed, and let them walk away. If the multiple and growing demands on income mean you need them, you have to listen. A character trait of all good leaders is the ability to listen.

I do not see many heritage railways sitting on the sort of cash mountain that allows them to lose their unwashed. Yet the army of paid employees and managers swells relentlessly. Who is paying all these people, and out of what?

Aye

GF-G

 

True, but the one you did have, about the Welsh Highland, was a humdinger of a Hogsnorton, and probably makes up for not having a lot of little ones!

It is worth reading Gordon Rushton's epic and horribly well-informed tome about the machinations with FR and WHR, the massive toy throwing, the willy-waving shows of strength by FR board members, and the duplicity that virtually by accident got the WHR rebuilt without the people who really wanted it actually having to do it!

 

The FR also has the FR Trust, which owns the majority of shares in the FR Co (which also still has minority shareholdings dating from before the preservation era). And it has two supporting societies, one for the FR and one for the WHR. In addition to the fueding with the WHHR there were also many FRS members opposed to WH reconstruction due to the risk of it becoming a financial millstone.