4. The expediency of accepting the Peninsular and Oriental Company’s
proposal for a modification of the terms of the contract.
Upon these important points the most careful and mature consideration
has been bestowed; all the documents have been closely examined and
compared with the books of the company, and the following are the
results which are submitted for their Lordships’ information:--
First. That the amount paid to the Peninsular and Oriental Company for
the duties it has performed has not hitherto been more than it was
justly entitled to receive, on the principle that the shareholders are
entitled to a fair commercial profit on the capital invested in the
undertaking, and admitting that the affairs of the company have been
managed, as they appear to have been, with economy and efficiency. The
dividend hitherto made has never reached the amount of 10 per cent.
per annum, and the additions made to their shipping and other capital
are from reserves to meet contingencies. The principles on which these
reserves have been laid aside, instead of being divided as profits,
will be hereafter explained in this report.
Second. That the present inadequate means of ascertaining the expense
of her Majesty’s steam vessels, especially in the Indian and China
seas, renders it difficult to determine the comparative pecuniary
results which would follow the transfer of the duties. Considering,
however, the difficulty of adapting her Majesty’s vessels to commercial
purposes, accommodation of passengers and freight of merchandise,
and the superior convenience and advantages of mercantile companies
in these respects, the success or expediency of such a change is
exceedingly doubtful, except on a necessity, arising from exorbitant
demands for carrying the mails by contract.
Third. Considering that the postal duties have been well and
satisfactorily performed; that the company has never been fined for
any breach of contract; that it has never asked for any increase of
remuneration, or decrease of the duties to be performed, as has been
the case in other instances of contract with companies; considering,
also, the energetic manner in which this company has persevered in
extending steam communication through new and untried channels, and
that it has formed extensive establishments on the faith of the
continued support of the Government, and that it still contemplates an
extension of its communications with the farthest southern and eastern
point of the British possessions; establishing for these proposes a
steam navy of considerable magnitude, at the command of the public, on
any emergency,--it appears to be entitled to as much consideration as
is compatible with an economical administration of the duties of the
Post-office.
Fourth. That for reasons hereafter suggested, the contract may now with
great propriety be brought under conditions more favourable to the
Government; and that this may be done either by a fixed reduction for a
permanent term, or on a scale varying with the profits of the company.
In either case it will appear essential that any new arrangement to be
made should rather be of a permanent than of a temporary character,
both to ensure confidence to the company in the conduct and extension
of their concerns, and efficiency in the discharge of the service
entrusted to them.
The reasons for adopting these results, which are submitted with great
deference to their Lordships’ consideration, are founded upon facts
contained in the following statement:--
First: As regards the duties performed, and payments made.
The annexed table, No. 1, shows the routes, distances, and amounts of
the existing contracts. Of these, the third route has been recently
transferred to Government vessels. From this return it appears that
hitherto the company has been paid the sum of £224,525, which, however,
has been reduced by this transfer to £209,000.
For the performance of these duties, and the other business of the
company, the establishment of vessels detailed in the annexed table,
No. 2, is in efficient operation, with the exception of the “Ariel,”
recently stranded in the vicinity of Leghorn.
The original project fixed the capital at £1,000,000, but the amount
paid up was, and remains, at the sum of £973,378 16s. 8d. In addition
to this capital, reserved amounts have been credited, arising from
undivided profits, under the heads of “Repair,” “Insurance,” and
“Depreciation” funds, amounting to £306,424 19s. 2d., as will be seen
by the annexed statement, No. 3.
The balance-sheet of the company, No. 4, shows the last half-yearly
expenditure to amount to £238,404 19s.; and the receipts, including the
amount paid by the Government for the conveyance of mails, £301,034
10s. 2d.
Some idea of the extent of this establishment may be formed from the
following items of expenditure:--
For the half-year ending the 31st March last, the company disbursed for
the shipping department alone--
£ _s._ _d._
Coal 93,568 2 4
Oil and tallow 2,687 14 0
Victualling seamen 16,501 14 6
Wages to seamen 29,383 6 0
Incidental expenses 8,114 1 11
Chartering hired vessels 6,326 12 0
----------------
£158,581 10 9
----------------
The receipts under the following heads, for the same periods, amounted
to--
Passage-money, after deducting the charge for £ _s._ _d._
maintenance 110,508 4 6
Stewards’ fees 1,677 16 8
Freight and parcels 72,894 9 9
Conveyance of mails 112,262 10 0
-----------------
£297,343 0 11
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The company has not thought it prudent to pay a larger dividend than 8
per cent. per annum to the shareholders.
In addition to the dividend, the before-mentioned reserved funds have
accrued from the annual profits, viz.:--
Depreciation £175,183
Insurance 137,162
Repairing 74,079
--------
£386,424
--------
Beyond 2½ per cent. on the freight and passage-money, paid to the
directors under the head of management; and 5 per cent. on the profit
balance on closing the account, paid on the same account.
These charges of 2½ per cent. on the freight and passage-money, and
5 per cent. on the balance, include, beyond all other expenses of
management, allowance to the managing directors, for conducting the
affairs of the company, to the net amount of from £15,000 to 16,000 per
annum.
This remuneration is paid to them under the deed of settlement, and has
probably secured to the shareholders an efficiency and economy in the
general arrangements which have contributed greatly to the success of
the concern; at the same time it may be doubted whether, in estimating
the profits of the company, the amount paid to the directors may not be
considered (beyond the usual compensation for such services) as part of
the general profits, rather than as a charge of management.
The principles on which the reserved funds have been laid aside appear
fair and reasonable.
The insurance is at a rate of 5 per cent. on the first cost of the
vessels employed, after deducting the amount already carried to
depreciation account; out of which amount the premiums for insurance at
Lloyd’s are paid on such assurances as are effected there, the balance
being added to the insurance fund. The portion of the insurance
actually effected is at rather a higher rate than the 5 per cent. It
would not be fair, therefore, to include any portion of this reserved
fund in an estimate of the company’s profits as shipowners or mail
contractors. It belongs fairly to them in their character of insurers,
as, if they had insured the full value of their property, it would have
been paid to underwriters.
The depreciation fund is calculated at a rate of 5 per cent. per annum
on the first cost of the vessels, after deducting the amount previously
carried to the same account.
The repair fund is at the rate of 10 per cent. per annum, calculated
on the same amount as the preceding; and it will be seen that the sum
thus reserved for the last six months was £37,633 13_s._ 3_d._, which
did not provide for the actual expenditure of £39,630 6_s._ 3_d._
So far, therefore, as the affairs of the company have hitherto
proceeded, the amount paid to them under the contract would not appear
to have exceeded a reasonable remuneration for the services performed,
on the principles before stated.
Second: The comparative advantages which might result from the
employment of her Majesty’s vessels, instead of contract vessels, for
the performance of those duties, appears to be a question of somewhat
difficult solution.
The present mode of keeping the accounts of the navy, and the
commixture of expenditure for the steam and other departments in the
dockyards and public offices, must render it exceedingly difficult to
ascertain the cost of any separate branch of service.
Supposing, however, that the financial comparison could be made, yet
there are many other important elements in the consideration of the
subject.
For the rapid and secure performance of the public mail duty, no
branch of the mercantile marine is so well prepared as her Majesty’s
naval department. But by the employment of her Majesty’s vessels,
light merchandise could not be conveyed; the habits and comforts of
the passengers could never be so well provided for as by persons paid
for such duties; and as regards the troublesome details of carrying
passengers, freight, and merchandise, the war steamer must be less
adapted than the merchant vessel.
It must be recollected, also, that a sufficient number of vessels
must be fitted up, equipped, provisioned, stored, and specially and
exclusively adapted to and employed upon this service; and that fresh
arrangements, depôts, and agencies along the lines of route would
be required; the preparation for such services would therefore be
necessarily attended with an expense which years of any probable saving
could scarcely defray.
Third: The question then arises whether, in the continued employment of
the Peninsular and Oriental Steam Company’s vessels, considering the
actual condition and the established profits and credit of the company,
owing in some measure to the existing contract, some modification of
the terms, for the advantage of the public, may not be fairly expected.
With a view to the consideration of this question, the following facts
are submitted.
The general transactions of the last half-year, the best period for
judging clearly the present operation of the company, furnish the
following points:
The gross profits, after deducting 2½ per cent. for £ _s._ _d._
management, and 5 per cent. for repairs, and 2½ per
cent. for insurance, amount to 62,629 11 2
From which is deducted 2½ per cent, for depreciation 16,915 0 0
--------------
Leaving, beyond the amount deducted for directors £45,714 11 2
--------------
The dividend to the shareholders, at the rate of 4 per cent. for six
months, or 8 per cent. per annum, on the original capital of £973,378,
amounted to £38,933, leaving a surplus balance of about £6,781, to be
carried to the next account.
If even the amount paid to the directors from the 2½ per cent.
(deducted for charges of management, being for a half year, £8,248 10s.
9d.), were added to the surplus balance of £6,781, and a dividend paid
to the proprietors at the rate of 10 per cent., the scale suggested by
their lordships, a residue would only be left of about £5,296; from
which residue the expenses of management, and ordinary salaries for
managing directors, would have to be defrayed.
Their lordships will thus have before them the means of considering
what modification of the terms of the contract the present and
prospective state of the profits of the company would appear to
justify; or whether it would be expedient to adopt such modification
to the varying profits of the company in the terms proposed by it;
viz., that when the financial position of the company, with respect
to such mail services, shall be such as, after making the customary
allowances for the repairs, &c., a maximum dividend of 10 per cent.
can be realised to the shareholders, any surplus over and above such
maximum dividend shall be placed to the credit of the Government.
(Signed) A. ELLICE,
WM. H. BOND.