Wednesday, July 22, 2015

On the British "gift" of railways to India

Reginald Reynolds in The White Sahibs in India (1937) writes:

The history of British railway policy in India is that of probably the largest item in the existing public debt of the country.  By 1931 the total capital expenditure by the State on railways stood at nearly £ 600,000,000. According to Sir John Strachey's Finance and Public Works of India the railways built by State enterprise between 1869 and 1881 involved a total outlay of £26,689,000.  The rest of the railways were, in the great majority of cases, built by Guaranteed Companies, most of them having since been purchased by the Government."

The nature of the contracts by which these Guaranteed Companies built Indian railways is probably unique in the history of financial operations.   The Company would be guaranteed an interest on its capital by the Indian Government at a rate which was itself excessive when compared with the prevailing market rates.  Free land would be granted by the Government, thus obviating the principal difficulty with which the railway speculator usually has to contend. If and when the railway showed a profit, that profit was the property of the Company; but when there was a loss the Company's dividends would be paid from the Indian taxes. 

Thus with a minimum of cost to themselves, a group of financiers could, without any of the normal risks of speculation, invest their capital with the certainty of a minimum dividend and the hope of a surplus.  The people of India, who were their sleeping partners in this astonishing arrangement, were compelled to balance the shareholder's losses and to produce, in addition, substantial dividends for them out of their taxes.

After pointing out that such a financial arrangement combines the disadvantages of private enterprise and public ownership with the benefits of neither, Reynolds continues:

An additional evil arose from the clause, inserted in these railway contracts, that the State might purchase the railway after a certain period of years.   Inevitably this caused an artificial inflation of stock prices as the purchase date drew near.   According to one authority the wastefulness of the system was officially perceived in the early years of the Crown Government, following the Mutiny.
Sir J.P. Grant, President of the Viceroy's Council, objected to the procedure as uneconomic, and the Finance Member of the Council (Mr. Laing) pointed out that the Companies looked exclusively to the Guarantee for their dividends.

In 1884, a Select Committee of Parliament examined a number of witnesses who gave evidence on this subject.   Among these witnesses was General Sir Richard Strachey, who said with regard to the Guarantee system:
Not only has it been productive of wasted money, but it has also created a very valuable property at the expense of the taxpayers of India, which has passed into the hands of third parties without their having incurred, in any sort of way, any risk.
 As regards the disproportionate rate of interest paid under the Guarantee, both Sir Richard Strachey and Mr. Westland (afterwards Finance Minister of India) stated that if the Government had built the railways itself it could have borrowed at a cheaper rate. "The probability is", said Sir Richard, "in fact it is almost a certainty, that they could have borrowed the money on better terms than the Company."
At an earlier enquiry, a witness stated that "the contracts are a perfect disgrace to whoever drew them up."
"This", said William Thornton, speaking as an expert, "is the necessary result in which the way they are drawn up...the undertakers of the railway, the Company, are deprived on one of the great inducements to economy; they know that whatever blunders they make, those blunders will not prevent their getting full current interest on their expenditure."
 Similar evidence was offered by Lt.-Colonel Chesney, who for six years had been auditor of the railway accounts.
"Railways began in India in 1848, when the first staff of engineers were sent out...These gentlemen were sent out to make railways and there was a kind of understanding that they were not to be controlled very closely....Nothing was known of the money expended till the accounts were rendered...It was quite understood that whatever was spent must be eventually passed.

The Right Honourable William Massey, who had been Finance Minister of India under two Governors-General, stated the matter even more bluntly.   According to him, "enormous sums were lavished, and the contractors had no motive whatever for economy." 
"All the money came from the English capitalist, and so long as he was guaranteed 5 per cent on the revenues of India it was immaterial to him whether the funds that he lent were thrown into the Hooghly or converted into bricks and mortar."
Massey estimated the cost of the East Indian railway at  £30,000 per mile and said of it, "It seems to me that they are the most extravagant works that were ever undertaken."  Lord Lawrence himself, who as Governor-General had condemned the system, reinforced this expert evidence with the authority of his high office, and told the Parliamentary Committee:

"I think it is notorious in India amongst almost every class that I ever heard talk on the subject, that the railways have been extravagantly made; that they have cost a great deal more than they are worth or ought to have cost.

"With a guarantee of 5 percent, capitalists will agree to anything; they do not care really very much whether it succeeds or fails; 5 per cent is such a good rate of interest that they are content to get that, and not really look after what is done."
 The figures of expenditure prove convincingly the justice of such strictures.  The Congress Report gives a table showing the cost per mile of twenty-five different railways, compiled from figures supplied to the Select Committee of 1884.   This table shows that, as between the same types of railways (that is to say, railways of the same gauge and traversing the same type of country) those constructed by the State cost half the amount that was spent under the Guarantee system.

Even Sir Juland Danvers, who for several years had held the post of Government Director of Railways in India, and was not himself hostile to the Guarantee System, admitted that
"the cost of lines now constructed" (that is to say, by the State) "has been much less than the average cost of these railways, which form the original main system.  Instead of £18,000 and £20,000 per mile we now see lines constructed on the five feet six inches gauge for £4,000, £5,000 and £9,000."
Reginald Reynolds tells us:
The loss on the Indian railways is incalculable.  Payments of deficit in guaranteed interest alone account for about £40,000,000, and this figure does not take into account the value of free land given to the Guaranteed Companies or the loss incurred by wasteful methods of construction.