The financial impact of the Great Central Railway’s London extension By Tony Sheward © Tony Sheward 2020 1 THE FINANCIAL IMPACT OF THE GREAT CENTRAL RAILWAY’S LONDON EXTENSION 1. Introduction The general opinion of authorities, who have written about the Great Central Railway’s (GCR) London Extension, seems to be that the project was not a financial success and acted as a drag on the company’s performance in the years following its opening. This article attempts to examine the financial results of the GCR in the years immediately leading up to the decision to commit to the project, the construction period, and operations from its opening up to 1913. It seeks to discover whether there were other factors, which influenced its financial performance either positively or negatively. For convenience, the title Great Central Railway is used throughout even though this name was not adopted by the Manchester, Sheffield & Lincolnshire Railway until 1897. A glossary of the abbreviations for the various lines is included at the end. The detailed financial figures are presented in four time periods as follows: a. The Immediate Years Prior to Work on the London Extension 1887-93 b. Construction of the London Extension Phase I 1894-99 c. Construction of the London Extension Phase II 1900-06 d. The Years after Completion of the London Extension Work 1907-13 The article takes as its main source the annual reports of GCR1 and the Railway Returns2. The historical background for the article is mainly taken from published sources, in particular the three-part history of the GCR by George Dow3 and the short history of the GCR by Robert Hartley.4 Although up to 1912, the annual reports were prepared in two half yearly tranches, the information in this article is presented by calendar year for ease of understanding and comparison. Also, 1913 was the first year in which the Railway Companies (Accounts and Returns) Act 1911 (the 1911 Act) took effect and yearly annual reports began. The figures for 1913 have been reconfigured to fit the reporting formats used up to 1912. 2. An Overview Before looking in detail at the figures for the years covered, it is useful to take a bird’s eye view of what happened to the GCR during that period. The following graphs are set out in Figures A-E: A. Gross Traffic Receipts from Passenger & Freight Trains B. Total Capital Receipts C. Net Revenue before Interest on Debentures and Loans, and Dividends D. Percentage Dividend on Ordinary Shares 2 E. Percentage Return on Capital versus Return on Long Term Debt and Consumer Prices Index The monetary figures are as reported in the accounts, but of course there was inflation over the period covered and this distorts the figures to some extent. The Bank of England’s inflation calculator gives some idea of the impact that it has had. The figures below show the purchasing power of £1 in 2018 pounds at five-year intervals over the period covered and for 1913: Year Equivalent in 2018 Pounds £ 1887 129.16 1892 124.81 1897 127.68 1902 120.74 1907 118.17 1912 112.20 1913 113.35 Between 1887 and 1913 the overall effect of inflation was relatively modest with the pound in 1887 having a purchasing power of £129.16 in 2018 pounds and £1 in 1913 £113.35. As can be seen above, there was not a smooth progression due to the cyclical nature of economic growth. The movement of the total gross traffic receipts over the four time periods in Figure A was as follows comparing the closing year of the previous period with the last year of the current period: Year Gross Year Gross Percentage Traffic Traffic Increase Receipts Receipts £m £m % 1886 1.709 1893 1.845 8.0 1893 1.845 1899 2.699 46.2 1899 2.699 1906 3.752 39.0 1906 3.752 1913 4.897 30.5 The above figures are distorted by the coal strike in 1893. If the year 1892 (£2.071m) is substituted, then the growth from 1886 to 1892 was 21.2 per cent and that from 1892 to 1899 was 30.3 per cent. On the basis of these figures, it can be seen that there was an increase in the rate of growth following Phase I of the London Extension, although this was not maintained in the years after Phase II was completed. The industrial relations problems that affected the rail, coal, cotton textiles and shipbuilding industries in 1908 and 1911-12 were partly responsible. In 1887, the GCR was predominantly a freight railway with gross receipts from freight trains making up 72.5 per cent of the total. The completion of the two Phases of the London 3 Extension did move the balance somewhat towards passenger trains, with 71.9 per cent of the total gross receipts coming from freight trains in 1899 and 70.1 per cent in 1906. However, in the years 1907-13 the percentage from freight trains began to edge up again reaching 73.3 per cent in 1913, slightly higher than it had been in 1887. In the graph, the plot for the total gross receipts is not unnaturally similar to that for the gross receipts from freight trains. The plot for the gross receipts from passenger trains is much smoother and less affected by the incidents of industrial unrest. The amount of capital received by the GCR from the issue of securities in Figure B during the four time periods were as follows: Period Capital Percentage Cumulative Received Increase Capital On 1887-1893 End of Period £m % £m To 1886 26.691 1887-1893 4.939 31.630 1894-1899 9.931 101.1 41.561 1900-1906 6.476 31.1 48.037 1907-1913 5.677 14.9 53.714 The first Phase of the London Extension required a more than doubling in the amount of capital received and, although Phase II needed less, it was still nearly a third more than during the pre-Extension period. After the two Phases were completed, capital received in the last period was nearer to the pre-Extension level, allowing for inflation. As will be seen in the detailed review of the years concerned below, this put a considerable burden on the GCR’s overall financial position. One instance of this was the use of various forms of working capital such as short-term loans and Lloyds Bonds. Hire purchase agreements for the supply of wagons had been used before 1887, but a special company, the Railway Rolling Stock Trust Ltd was formed to handle the hire purchase of the working stock for the Extension. Of course, not all of the capital required for the two Phases of the London Extension was raised directly by the GCR. In Phase I, the GCR formed a joint committee to use the Metropolitan Railway’s (MR) lines from Harrow to Quainton Road and rented a pair of tracks from Harrow to Canfield Place near Marylebone from the MR. In Phase II, it formed a joint committee with the Great Western Railway (GWR) to build a line from Northolt Junction to Ashendon Junction. The construction of the new Nottingham Victoria station was covered by a joint committee with the Great Northern Railway (GNR) and the GNR made advances to the GCR for its share of the cost. Similarly, the GWR made advances to the GCR for both the construction of the Banbury Branch and its share of the joint line. Although such arrangements reduced the upfront capital costs, they did mean that there were higher fixed costs for rents, interest etc. once operations began. The figures in Figure C shows the money that was left after the net revenue from operations, other receipts and other expenditures to be able to pay the interest on debentures and loans and dividends to shareholders. The figures can be summarised as follows: 4 Year Net Year Net Percentage Revenue Revenue Increase/ (Decrease) £m £m % 1886 1.090 1893 0.961 (11.8) 1893 0.961 1899 1.110 15.5 1899 1.110 1906 1.448 30.5 1906 1.448 1913 1.778 22.8 As with Graph A, the figure for 1893 was distorted by the coal strike in that year. If the year 1892 (£1.243m) is substituted, then the growth from 1886 to 1892 was 14.0 per cent and that from 1892 to 1899 was a reduction of 10.7 per cent. On the basis of these figures, it can be seen that there was pressure on net revenue during the construction work for Phase I, but that once it was operational the percentage rate of growth grew significantly. After completion of Phase II, growth continued at a slightly lower rate. The extent to which the above growth was sufficient to cover the higher interest and dividend charges resulting from the capital raised to finance the London Extension and indeed produce better results than before is a very important consideration. This is examined further in the consideration of Figures D and E below. Figure D shows that even before work on the London Extension started the GCR was not able to match the dividend payments on ordinary shares paid by some of its rivals. It should be explained that the GCR did in fact have three types of ordinary share; preferred ordinary shares that had some prior rights to a dividend, the normal ordinary shares and deferred ordinary shares which only had a right to a dividend after a payment to the other two.