B.—4a.

141. It is understood that the Board is carrying on certain capital works at the present time, and that funds are available for this purpose. We are of opinion that, if the Board cannot complete its programme without this special subsidy, these capital works should be held over for the present, and that the funds held by the Board should be utilized to meet interest and sinking fund chargeiS on its loans, even if this involves an application for special legislative authority. We therefore recommend that the subsidy be withheld for a period of two years, and that before further payments are made the necessity for continued assistance to the extent of £12,000 per annum should be critically reviewed. Saving 1932-33, £12,000. DEPRECIATION FUNDS. Railways and Post and Telegkaph Departments. 142. We have considered the position in regard to the annual provision for depreciation made by the Railways Department and the Post and Telegraph Department. In order that the position may be clearly understood, a short statement of the procedure in each Department is submitted hereunder. Railways Department. 143. It has been the practice in this Department for some years past to charge depreciation against the earnings from the railways, but from the Ist April, 1925, to the 31st March, 1930, although depreciation had been set aside, the effect of this was nullified by the fact that the Department paid over to the Consolidated Fund the full amount of interest on its capital, irrespective of whether sufficient profits had been made to permit of the full charge for interest being levied. 144. The result of this was that on the 31st March, 1930, the Department showed an accumulated loss of £2,042,016, and there were nominal reserves for depreciation and general purposes. The law was later amended to avoid the continuance of this policy of paying the full interest on capital to the Consolidated Fund, and the accumulated loss was written off against the depreciation and general reserves. The position now is that an annual charge is levied against railway earnings for depreciation and the amount is paid to the credit of the Public Works Fund : Vote, Additions to Open Lines. 145. The recoupment of interest to the Consolidated Fund is now dependent upon the amount of the net earnings of the Department after making suitable provision for depreciation. As a result of the policy adopted in the past, the Department has, however, no liquid reserves upon which it can draw for any exceptionally heavy replacements of structures and equipment. 146. The charge at present made for depreciation exceeds £400,000 per annum. This is apparently a reasonable provision. The proportionate amount is paid into the Public Works Fund by instalments at the end of each four-weekly period. The funds are used partly for replacing worn-out assets and partly for general capital purposes. In so far as the utilization of depreciation reserves for the replacement of worn-out assets is concerned, we have no comments to make. We consider, however, that the depreciation reserves should not be used for new capital purposes. In any case, we think that, as capital works in other directions have had to be stopped, the Railways Department should be no exception to the rule. Incidentally, the continuance of a policy of utilizing depreciation reserves for capital purposes must result in the raising of fresh loan capital at some future date if heavy renewals of worn-out assets are required. We are of opinion that it would be preferable for the Department to build up a specific reserve for depreciation, invested in Government securities, in order that the money should be available when required for replacement purposes. We accordingly recommend that any surplus arising from the annual provision for depreciation by the Railways Department be invested in Government stock or Treasury bills, which should be specifically earmarked for the purpose for which they were provided, and should, under no circumstances whatever, be appropriated to purposes other than Railway purposes. Post and Telegraph Department. 147. The position is slightly diSerent in this Department. In the first place, the Department has liquid investments (in Government stock) to the extent of £1,400,000 for depreciation purposes, while the depreciation reserve shown in the balance-sheet amounts in all to £3,452,172 13s. Ild. The difference between the specific investment of £f,400,000 and the total depreciation reserve is inyested in the Department's business. .148, The annual charge for depreciation in the past has been approximately £600,000 per annum, but as a result of recent investigation it has been definitely established that the depreciation rates have been in excess of normal requirements, and the rates have been reviewed. The charge for the current year will be reduced to approximately £250,000, and the Department will thereby be able to afford considerable relief to the Consolidated Fund on this account for 1931-32. Rates of depreciation for future years should be carefully reviewed in the light of actual experience. 149. We find in this Department, also, that, while an endeavour is made to build up a specific depreciation fund invested in Government stock, it is nevertheless the policy of the Department to finance new capital works in part from such reserves. We are of opinion that this practice should cease, and that the portion of the annual charge for depreciation which is not required for replacement and renewal purposes should be invested in Government stock or Treasury bills, and we recommend accordingly.

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