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West Somerset Railway General Discussion

Discussion in 'Heritage Railways & Centres in the UK' started by gwr4090, Nov 15, 2007.

  1. Jamessquared

    Jamessquared Nat Pres stalwart

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    I'm not sure I'd agree that that is a sound way to operate. The issue is that money set aside in year 1 is worth considerably less by year 10 when you might spend it; if the loco doesn't go straight into the works, it might get even further degraded by inflation.

    A different way to achieve the same result would be to consider how much loco work you need to do each year, then budget for that annually. In the case of the WSR, that might mean budgeting, say, 2/3 of a loco overhaul every year. That would mean you wouldn't carry any "dead" money in a fund gradually eroding by inflation, but when the time came, the primary job of the workshop would be to restore the loco over the course of 18 months or so. Two years later they would have moved on to spending their budget on the next one in the queue.

    Of course, there is the risk that budgets can be cut, but you have to assume that railways are operating on the basis of being an ongoing concern.

    Just to labour the point - suppose you accounted for track in the same way as people suggest accounting for locos, with a fund built up each year, assigned to each length of track. You relay a mile of track at, say, £500k and give it a fifty year life, so determine that for that particular mile, there is a ring-fenced fund that accrues by £10,000 every year. Fifty years later you have £500,000 in the bank plus a bit of interest - and a track renewal that now probably costs £1.5million to do the same work as before, due to inflation...

    Tom
     
  2. johnofwessex

    johnofwessex Resident of Nat Pres

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    I think that the general point is fine, BUT given the particular situation around the PLC then ring fencing the money for 53808 seems like a good idea.

    I d=suggest that the PLC's 'credibility' is not what it could or should be at the moment.
     
  3. Jamessquared

    Jamessquared Nat Pres stalwart

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    But that is a justification after the fact. The loco had been in traffic since 2016, and presumably the plc had considered at that time - before the current board were in place - how they felt they would honour the overhaul contract. So at the very least, a criticism of not setting money aside straight away needs to apply to the previous board as well, if that is the way you wish to go. My view is that it isn't necessarily the best way for a railway, which has a basically static loco requirement, to fund loco overhauls. Of course, an individual loco owning group may have a different view, but the general mileage-based method often asserted as "ideal" just seems to create money sitting uselessly in a bank account, gradually depleting with inflation.

    Tom
     
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  4. jnc

    jnc Well-Known Member

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    Well, from memory (not worth expending the energy to confirm), they re-did their formal publicly-filed accounting statement to remove the accumulating 'charge' to pay for the overhaul. If an accurate memory, that seems to me to be a fairly definitive public statement of intent. To put it another way, why would they formally do that, if they still had an actual 'internal' commitment to do the overhaul? (I know what a likely answer is, the previous is a semi-rhetorical question; I'm trying to see if anyone can offer a different, and viable, explanation. The above-mentioned likely answer is of course another large can of foul-smelling worms.)

    I'm so tired of the ongoing WSR saga. Can we just put the whole thing in a box for a year or two? We can re-open it in a year or two and see if the line is still there.

    Noel
     
  5. jnc

    jnc Well-Known Member

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    Well, before the current board's deletion of the accumulated fund, the prior board seemed to have adopted that method of dealing with it.
    That's a good point, but if a large organization is going to change its basic strategy in such a major area, I'd like to see it formally announced. (Whether such a major change should be openly discussed before its adoption I leave aside for the moment.)

    I don't recall a statement on this topic from the 'family' or the PLC, but perhaps I just missed it?

    Noel

    PS: It's important, I think, in discussing this suggestion, to distinguish between actual cash, sitting in a bank account (to which your statement about inflation applies), and an accounting provision, which is just a note on the accounts, which shows the magnitude of the accumulating future charge (which will have to be paid out of future income). If that note is 'off', it doesn't have a major impact; the cost of the actual restoration isn't changed at all by it, it's going to cost whatever it's going to cost; which of course it always was. It just means that one has inaccurate data for future plans. And of course if one discovers, before the work starts, that it's off, one can correct it without having any real-world impact on the actual cost; one will then just have better data.

    It's my impression that this is what the PLC was previously actually doing; accumulating a charge in the accounts, there wasn't actually a pot of money in a bank somewhere. Which gets us back to my previous question: what did they hope to gain by changing that?
     
    Last edited: Dec 29, 2020
  6. Steve

    Steve Resident of Nat Pres Friend

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    Tom's post adequately answers your first question. People with a vested interest might like to see ring-fenced funds but those with a sense of reality realise that this is not the best way to manage money.
    With regard to you becoming tired of the saga, you are one of those perpetuating it, even if not as frequently as others.
     
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  7. D1039

    D1039 Guest

    With the emphasis on 'ever', it's history now but have a look back to the PLC's statement of 1st May and the S&D's PR of 15th May ("The mention of the Agreements concerning the engine 53808 is even more audacious and the declaration by the WSR plc, in public, of their intention to breach the locomotive operating agreement with us is breath-taking").

    Patrick
     
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  8. Steve

    Steve Resident of Nat Pres Friend

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    You could always look at the published accounts, in particular, Note 16.
     
  9. jnc

    jnc Well-Known Member

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    Putting a major change of strategy in a footnote in the accounts is not what I think of as, or meant by, a 'formal announcement' (although that channel is technically formal, and a public announcement).

    But I think that's not worth debating. I'm more wondering what the actual change, if any, really is, if my analysis in the PS above is correct. It seems like there's no real change in how the funding is going to work (which was Tom's suggestion); all they've done is delete the 'note' that shows how expensive it's going to be.

    Noel
     
  10. Steve

    Steve Resident of Nat Pres Friend

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    Having dug out these statements, I accept that the last paragraph of the statement by Martin Brown says that. However, as you say, it is history and the latest statement needs to be taken as the more up-to-date position. It may again change in the future but that would be speculating.
     
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  11. Bayard

    Bayard Well-Known Member

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    The problem with that approach is exactly the problem that has occurred at the WSR, if the company gets into financial difficulties, all you have left is an intention to overhaul the loco and a provision in the accounts, but no actual money with which to do it. The only difference between that position and the position of the Plc earlier this year lay in the intention and the provision, neither of which were there. There was no difference in the actual financial position of the company, so it seems that the entire sh*tstorm was generated by a need for someone to be seen as "The Saviour of the Railway", by turning an apparent £800K loss into an apparent £300K profit and a bit of bloody-mindedness by the same party a bit later on.

    However, the up-to-date position is still unsatisfactory and simply renders the previous position and all the bad PR it generated, pointless. The Plc could have left the provision in the accounts and been honest about its financial difficulties vis-a-vis the overhaul, but expressed the same desire to try and raise the necessary funds in time as it is doing now and it would be in exactly the same financial position without having attracted all the opprobrium and damaged its ability to raise further funds.
     
  12. ross

    ross Well-Known Member

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    It is probably a safe bet that neither is actually the truth
     
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  13. Jamessquared

    Jamessquared Nat Pres stalwart

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    Unfortunately that's the risk of being a private loco owner in that situation.

    Suppose the company did put actual cash aside into its reserves against a future overhaul, but then nonetheless got into significant financial trouble that led to bankruptcy. At that point, the loco owner is just one amongst many creditors, and would likely only get some - possibly very little - of that money back, and then be faced with insufficient money for the overhaul and nowhere in which to carry it out. (Unlike a charity, a company can hold money in reserve and can note in its accounts what it is in reserve for, but it is a lesser protection than a restricted fund in a charity - and even a charity can go bust).

    Alternatively the company is financially healthy, and can budget to overhaul the locomotive within its normal budget process - at which point how and where they find the money is neither here nor there.

    The third alternative of course is a different agreement in which the company pays an agreed daily or mileage rate to the owner, who accrues money over the ten years, for which they will pay directly for the subsequent overhaul. But (1) the money loses value through inflation (2) there is no guarantee that the amount paid is sufficient for the overhaul - frequently it is insufficient; and most importantly (3) that's not the agreement in place, so it is a bit of a moot point.

    So my point remains - setting money aside into reserves comes with problems, and doesn't seem to offer any real protection to the owner in the event of company failure. There is a separate question for how the liability for a future overhaul is represented in the accounts, which I am not qualified to comment, except to say that presumably the auditors were happy with how it was represented; and the directors signed off in the knowledge of their responsibilities. Ultimately as I understand it, the agreement runs until 2030, so provided significant overhaul work has started on the loco by about 2027/8 or thereabouts, the company should still be on track to meet its commitment. The more immediate question is about ensuring sufficient motive power to operate the planned level of service between now and then without the loco.

    That might all sound as if the benefits of the agreement are loaded in favour of the operating railway against the locomotive owner. And in financial terms that is probably true - but bear in mind there is a symbiotic relationship between loco owners and railway operators. In essence, the locomotive owners subsidise the provision of motive power to a railway, but the railway provides somewhere to run (physical infrastructure and operational expertise / procedures) which would not otherwise be open to the owner - and that is a considerable benefit for an owning group where one of the primary aims is to see their assets operating.

    Tom
     
    Last edited: Dec 29, 2020
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  14. jnc

    jnc Well-Known Member

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    True, but for a group which owns a loco, they don't really have the 'pay it out of future income' option. Yes, for a larger organization (like a vintage railway), that is probably a superior alternative, as you point out; but that requires having a large future income stream.

    There is an approach which safely avoids the inflation issue for loco-owning groups, which is to have the user be responsible for the overhaul (using the 'pay for the overhaul out of future income' approach), but to also have an 'overhaul default' insurance policy, payable to the loco owner, the premiums for which are paid by the user, which will pay out if the user is unable to pay for the overhaul. Since it doesn't belong to the user, it's not an asset which can be seized if the user goes into bankruptcy. I have actually seen a similar mechanism used with life insurance policies associated with business deals (beneficiary is party A, but party B pays the premiums). That does have the advantage of being an existing market, though; it might not be possible to find someone to write a 'overhaul default' policy.
    Yes, but 'the overhaul costing more than one projects' can bite any method of paying for an overhaul, including the 'pay out of future revenue' one. In that scheme, the organization may be able to find the money, but likely it will have an impact on other things (e.g. the planned new shed). So in the 'insurance' scheme, the payout is likely to be fixed (insurance companies don't like open-ended commitments), rather than 'we'll pay for the restoration, no matter what it costs' - but I suppose that might be an option the insurance would offer (if they can figure out how to price it).

    Noel

    PS: Now that I think about it, 'overhaul default' insurance might be difficult to write. If it pays out if the user is unable to pay for the overhaul, what's to stop an unscrupulous user from just saying 'sorry, I can't pay'? If the user goes into bankruptcy, that's pretty easy to write; but covering severe, but not fatal, business difficulties is probably a recipe for disagreements. So, living with the downsides of 'hire payments' might be unavoidable.
     
    Last edited: Dec 30, 2020
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  15. Monkey Magic

    Monkey Magic Part of the furniture

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    The key point is that these relationships are largely based on trust. However you set up the funding the assumption is that no one is going to try and screw over the other.

    Owner trusts railway that they will not abuse loco, renege on agreements and pay for what they should.
    Railway trusts that time/money/effort put into loco will not be followed by loco being moved to a different line.

    When trust breaks down you have problems, especially as the ability of one party to seek some means of enforcement against another is next to impossible because of the costs involved.

    This again goes back to the leitmotif in the Flying Scotsman report about the way in which the industry is run as an informal cottage industry (reflecting how it was set up) and that it hasn't moved with the times.
     
    Last edited: Dec 29, 2020
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  16. Steve

    Steve Resident of Nat Pres Friend

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    A very astute analysis of loco hire. About the only thing not considered is ‘overhaul and use’, which is the opposite of the 53808 agreement. None of the options are perfect.
     
    Last edited: Dec 29, 2020
  17. Wenlock

    Wenlock Well-Known Member Friend

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    Can come unstuck with 'overhaul and use' too. Look at L99/7715, an agreement for overhaul, to be followed by five years use by overhauler, then to be returned to owners for remaining five years of ticket. Except that the loco failed before being returned and was not fit for further five years. Spent time at Llangollen awaiting legal dispute resolving.
     
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  18. Steve

    Steve Resident of Nat Pres Friend

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    None of the options are perfect, even where the railway owns the loco. I know of several locos where they have been run to the end of their ticket and then put aside as too costly/difficult in favour of easier options, which can include hiring in in its various forms.
    At the end of the day it usually comes down to cash in the bank and the priorities for spending that cash.
     
  19. Fireline

    Fireline Well-Known Member

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    I can think of an example where a loco was overhauled "just to last a certain length of time", and came out of the works sounding like it was due an overhaul!
     
  20. Steve

    Steve Resident of Nat Pres Friend

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    Only one? Overhaul means different things to different people/groups. It can also be affected by the locos future and the owners plans. If that future lies elsewhere the overhaul is likely to be of a minimal nature, perhaps just enough to get the boiler certified. Forget about new tyres, axle boxes or new cylinders as they are to some extent subjective, especially if they’re just within acceptable limits.
     
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