West Somerset Railway General Discussion

The point about run and repair deals is that cash isn't always set aside to meet the liability, because it may involve paying both for overhauls while the loco is running, and then having the cash for the overhaul when the loco is unavailable. Given how much of a shoestring heritage railways run on, that would be very constraining.

That is different from pay to run hire deals, where fairly immediate payment would be the norm.

 

Quite possibly, but the trouble is you can use the same argument about many companies in many industries. Until today for example did anyone really expect Thames Water to find some investment to allow them to keep operating, although I have yet to see the details what the investment really is.
Maybe they will pay it, maybe they will in the end default, but at this point an arrangement has been made (and I assume agreed) so all we can do is wait.

 

Dead right!

The way it's normally done from an accounting perspective is to record a provision in the accounts that recognises the accruing liability. Not unreasonably people tend to equate "provision" with "provided". That's not the case. It's just an accounting entry recording the liability but doesn't involve any money being set aside.

The problem is not just with "use then overhaul" contracts with third party owners. Exactly the same financial cliff face can arise where a railway treats its owned locomotives and stock in the same way. From an accounting perspective the assets are depreciated in the accounts to reflect their reducing value but what's really needed are dedicated funds for ther overhaul cost accumulating over the period of use.
Typically there are more than enough other ugent capital spend priorities during the use period so is not squirreled away meaning the assest may be doomed to sit unrepaired for years.

It may seem counter intuitive but could there be merit in a heritage railway finding ways to charge itself hire fees for the use of its own assets so as to build up funds for overhauls when they fall due?

 

So basically the accounting method doesn't work, since what you're suggesting is essentially what @Snifter has suggested should already have been in place.

 

The accounting method is fine. The problem is that the results are of limited relevance in an organisation that is never going to be sold as an asset. And the second problem is that so many people see "provision" in accounts, and assume that accounting entries equal cash in the bank, and don't adjust their thinking to accept the reality.

 

The accounting method works for what it is designed to do.

Cashflow and its management is a different topic.

 

Imagine for a moment a unified, purposeful WSR inside a charity wrapper that hadn’t alienated the Hinkley Fund, the local schools, the S&DRT enthusiasts; that could demonstrate a track record of well-delivered grant-funded projects like community engagement and ‘Dunster Goods’; that had a well-developed fundraising team combining professionals and volunteers; that was looking forward to the 60th anniversary of closure of the S&D and was working with the other S&D railways and active local authorities like Bath.

Would there be any doubt that 53808 would be in steam for S&D 60, as part of a spectacular event making national and regional headlines and enthusing a whole new generation about our steam heritage?

Imagine…

 

S&D 60 could take place, but not on the WSR, MHR, most likily because it is the heritage railway that has the stations and coaches that can portray what the S&D was like. Southern stations, green coaches, and gradients, and a freight train ,

 

If that's correct shouldn't you be doing the same for coaches, track, buildings and all other deteriorating assets? Sounds like an accounting nightmare with far too much of your precious cash reserves tied up in 'restricted funds' for each loco or other thing.

A simpler alternative might be to allocate an annual budget for planned overhauls of 'home fleet' engines, in addition to the budgeted amount for the routine maintenance of locos in service. Just like anything else (e.g. building repairs; track renewals) you'll have to predict and project-forward to estimate your budgeting requirements in future years, based on what is known of the condition of the locos intended to be overhauled - plus contingencies. Additional cash reserves (or loan facilities) are of course also required for unpredictable expenditure.

 

That just ties your money up uselessly in accounts where its value erodes away with inflation. Even in a relatively benign inflation environment that pertained until a few years ago, the money you put aside this year is worth perhaps 30% less by time you need to spend it 10 years from now.

If you are a railway that owns and operates with its own assets, surely the mechanism is to predict your requirement, and invest enough each year to maintain that requirement. So lets say you own a dozen or so locos, and need 5 in traffic at any time which you estimate will cost £500k each overhaul - then you need to overhaul loco every two years, so you need to be investing £250k in loco overhauls every year. But it isn't loco A accruing a pot of money to pay for its own overhaul a decade or more away; it is loco A earning money to pay for the overhaul of loco B that will replace it in the fleet.

Tom

 

I'm slightly more in the restricted fund camp, albeit that my ring fencing would be at fleet rather than loco level.

Such ring fencing relies on there being sufficient free cash flow to be able to squirrel those reserves away. I'm not aware of any railway that has the luxury of that cash in hand on top of it's existing commitments

 

What some people seem to be suggesting is that a railway puts away money in an account to pay for the overhaul, a bit like I and others might do when putting monthly amounts away to pay for the next car to replace the worn out existing one. That works in simplistic terms but falls down when you need a new washing machine and have £5000 in your car savings account but nothing in your current account to pay for the washing machine so can't buy the washing machine and have to take out a loan to buy the washing machine, which isn't best use of liquid assets. For car, substitute loco and for washing machine substitute infrastructure/whatever. Whilst you've got money in the bank, use it and leave the loan until you really need it.

 

You didn't say 'Designated funds' - now it starts to make more sense.

If you think it through I reckon both @35B 's 'ring fencing at fleet level' and @Lineisclear 's 'Dedicated Funds' is not so different to what I and @Jamessquared 've described in simpler terms. It's a matter of predicting your long-term costs and spreading out both the raising & spending of the necessary money over that long-term period.

 

At which point, I wouldn't bother with a Designated Fund. They're useful, but the moment you've made a trustee decision to reallocate, you've set a precedent.

Restricted Funds, defined carefully, might be a way to handle this - hence my suggestion of a general restricted fund (e.g. an "Overhauls Fund"), vaguely akin to the Fabric Fund that most CofE churches have. I am still dubious about where the cash will come from, as the initial set-up phase will require both expenditure on existing overhauls and the deposit of cash into the Restricted Fund. Try as I might, I can never get away with spending the same cash twice.

 

It is, but the ring-fencing (which is legally onerous to break) may be a useful additional discipline - my comparison with church fabric funds was deliberate.

 

Just reflecting on this, and assuming that the reserves can be squirreled away in the first place, I think there are two additional points to consider.

First, the reserves do not have to be held in cash. Other forms of investment exist, and allow returns to be gained that will far exceed bank interest. The second, which relates to the need to squirrel away funds for more than just locomotive overhauls, is that investments may not have to be held separately by fund. Accounting techniques exist to allow single assets to be shared between funds, meaning that returns can be maximised.

 

Whether you call it ring fenced or restricted, or designated, all these just seem to be ways to tie up money for long periods of time and see its value erode by inflation. Now, if you are in the happy position of having sufficient reserves to do that after you have fixed everything that needs fixing - then be my guest.

There is a more general problem with restricted funds in charities, which is what happens if you have insufficient for the desired objective that the fund relates to. If you have £100k in the Loco A fund, but the next overhaul is estimated at £500k, then you simultaneously have both a lot of money and nothing.

Assuming we are still talking about a charity, then the trustees have a duty to consider any investment policy in terms of the balance of risk and reward. I suspect the vast majority of railway charity trustees are probably quite cautious in that regard, so are unlikely to go much beyond the "high interest fixed term savings account or similar". Which as we have seen in recent years don't keep up with inflation ... The kind of investment strategy you are proposing is I'd suggest the preserve more of grant awarding charities (i.e. those that have a significant endowment and pay out grants on a regular basis) rather than the kind of cash-consuming charities that most railway organisations are.

If you are talking more about the operating company - well, of course you have to maintain a prudent level of reserves. But if you have got a nice healthy 12 months of operating expenditure in the bank but face a bridge failure that will close the line if not remediated and which will cost 6 months of reserves to remedy - well, you're not going to say "sorry, that is our loco repair fund for 2034" are you?

Tom

 

Any heritage railway worth its salt should be charging depreciation of its locos through the p&l account. It should also be projecting forward it's anticipated cash in and outflows and determining where it hopes to spend its money in the future. This is not the same as actually putting cash to one side.

Edit for typo

 

My concern is when any default by WSR PLC on the payments towards the costs for the overhaul of SDRT loco 53808 crystallise and are actionable as a civil debt, and whether a default of say the first instalment crystallises the whole debt being due.