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—
The receipts under the following heads, for the same periods, amounted to—
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.:—
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 insurancefund. 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 13s.3d., which did not provide for the actual expenditure of £39,630 6s.3d.
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, andspecially 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 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.
No. 1.—Memorandum of Contracts with Government for the Conveyance of Her Majesty’s Mails by the Peninsular and Oriental Steam Navigation Company.
London, 8th June, 1848.
The vessels marked * are built of iron.
(True Copy.)(Signed)C. W. HOWELL,Secretary.
(Signed)John Pirie.Ar. Anderson.Fran. Carleton.B. M. Willcox.
(True Copy.)
(Signed)C. W. Howell, Secretary.
Copy of a Memorandum made byMr.Cowperon the Contract for the Calcutta Mails, after the receipt of the Report of Investigation byCaptainElliceandMr.Bond,and sent toLordAuckland.
“The contract for the Calcutta mails, from Southampton to Alexandria, expires on the 8th January, 1849. Two offers have been made for its renewal, one by the Peninsular and Oriental Company, for £27,500 the first year, and for sums diminishing by £500 a year for every subsequent year that the contract may remain in force. A new company, the India and Australia, offer to do the same service for £25,650; the sum now paid is £28,500.
“The Peninsular and Oriental Company accompanied their tender by an offer to pay over to the Government any earnings or profits they might receive beyond a maximum dividend of ten per cent. to the shareholders, after the customary allowances have been deducted for repairs, wear and tear, and sea risk of the vessels and property; and as a security, they offered to submit, from time to time, the accounts of all their transactions connected with the mail service, to the inspection of such competent persons as the Government may appoint.
“Captain Ellice and Mr. Bond were then requested to examine the accounts of this company before any decision was come to upon the tenders; and having had every facility afforded them, have made the accompanying report. From this it appears that the profits made upon the capital of the company, about equal ten per cent. as a total sum; but that after reserves for depreciation, repairs and insurance, and expenses of management, there has remained hitherto not more than eight per cent. for the shareholders. The question of how much of the earnings ought to be kept in reserve to meet depreciation, is so discretionary that I have no expectation that any company would ever admit that there was a surplus profit to be handed over to Government; and this report confirms my impression, that we ought not to make such an arrangement a part of the contract.
“But I think both the tenders too high, and that we ought to decline them both; and this we can do without irregularity, for they are not tenders called for absolutely, but only tenders ‘to treat.’
“If this be done, we should then make an offer on our part; and as the Peninsular and Oriental Company have performedtheir contract perfectly, and furnish every guarantee that can be desired for the regular execution of a future contract, I consider that we ought to make our offer to them only; and if they should refuse it, we might repeat it to the India and Australia Company.
“The mileage we pay them at present is estimated by the hydrographer at 8s. 01/4d. a mile and by the company at 7s. 91/2d. a mile (he measures the distance of the voyage out and back at 5,920 nautical miles, they at 6,084); but we pay the same company about 4s. 6d. a mile for the line to Lisbon and Gibraltar, and I think we are justified in offering the same payment for the Alexandria line. But in that case we must not tie them down as to size of vessels, for the lowness of the remuneration on the former line is explained by the contract not requiring the vessels to be more than 140-horse power.
“To this department the size of the vessels is a matter of indifference, we care only that it be sufficient to secure speed; and we should stipulate only for a certain rate of speed.
“If my proposition be adopted we should immediately signify to the parties that their tenders are not accepted, and make a communication to the Treasury.
“I omitted to mention, that by directions from the Treasury we fixed the duration of the contract for which we demanded tenders, at three years; and also, that a reason for offering 4s. 6d. a mile may be found in the agreement made in May, 1845, by this same company, to convey mails between Southampton and Alexandria, in vessels of 280-horse power, as far as Malta; and of 180-horse power between Malta and Alexandria, for £15,525, which gives a mileage of about 4s. 6d. This agreement was entered into for only one year, since the company complained of its lowness, and declined, on that account, to make a formal and permanent contract at that rate; but they have continued it ever since, and it has been terminated by ourselves in May last.
(Signed) “W. Cowper.”
“27th June, 1848.
“I think with Captain Ellice and Mr. Bond, that we should desire to conclude an arrangement with the Oriental in preference to any other company, for the present contract hasbeen loyally kept, and the capital and means of that company give better promise of efficiency and exactness than could be looked for in any other quarter. The Indian and Australian Company is indeed supported by good names, but it has yet no paid-up capital, or body of shareholders, or organised establishment on which we could depend; and though it may be desirable to establish a rivalry and competition on the line of communication, It would not be wise to do so at the hazard of uncertainty and interruption. We have, however, advertised for tenders; and though we are not bound to take the lowest offer, we should scarcely be justified in rejecting it without a fair examination of its value. The first question, however, must be, which is the lowest offer? The Oriental Company propose to perform the service in the first instance, for £27,500; the other company for £25,650. But the Oriental are ready to lower their charge by sums of £500 in the second, £1,000 in the third, £1,500 in the fourth, and £2,000 in the fifth year, or £5,000 in the five years. This would reduce the difference between the two companies to only £850 annually, in the event of the contract winning for five years, or to £1,350 if it should be taken for three years. But the Oriental further offer to the Government a share in their profits on this line, whatever they may be beyond 10 per cent. paid to the shareholders. It is difficult to calculate to what this might amount, or to determine upon what principle it should be calculated. The dividend to the shareholders has not yet amounted to more than eight per cent., but large sums have been applied to new capital, to reserve funds, for insurance, and to other purposes. There may be profit on the Mediterranean line, and there may be loss on other lines, and an annual inquiry into all these matters might lead to endless discussions and disputes, and would be a source of frequent vexation to both parties. It is clear, however, that the company makes considerable profits, and I would prefer, to a share in them under the exercise of an inquisitorial power, a liberal compromise by a reduction of the terms which have been proposed; and I think that this reduction should be to a sum considerably lower than the £25,650 which has been tendered by the Indian and Australian Company. Mr. Cowper would reduce the sum demanded to about £15,000, taking the mileage at 4s.6d., the price of the Lisbon, instead of 8s.01/4d., the mileage of the Mediterranean packets. I doubt whether these terms would not be too hard. The Lisbon packets are less efficientand less expensive than those of the Mediterranean, and though the profits of the latter are large at some seasons of the year, there are months when passengers to India are rare, and the receipt small.
“I am inclined to propose a middle term between the £16,000 and the £27,500, and to offer £22,000 for five years, as a fixed sum, without condition for periodical reductions, or for a share in the company’s profits; but before this is determined on, I should like to have further opinions upon the result which may be drawn from the company’s accounts.
“I have carefully looked into them, and I find it difficult to decide upon what portion of the receipts is to be regarded as net profit, and what portion of disbursement is to be referred to necessary expenditure. Looking to the accumulation of capital which has taken place in twelve years, the profit must have been large.
(Signed) “Auckland.
“Note.—I find that from May, 1845, up to this month, the Oriental Company has been running their Mediterranean packets at 4s.6d.the mile; and I am reconciled, therefore, to the offer which it is proposed by Mr. Cowper should be made to them.”9
“That the managing directors shall provide and furnish, free of all costs to the company, suitable offices for the business of the said company at the house No. 51, St. Mary Axe, in the city of London, or elsewhere10in the said city, including asuitable board-room for the meetings of the Board of Directors, and the general meetings of the company; and shall provide all necessary superintendents, clerks, agents, and servants, for conducting and performing the business and matters to be done by the said managing directors; and also will provide and pay such printing and stationery, and office expenses, as shall be connected with, or necessary for the performance of such business; but all superintendents, clerks, or other persons employed in any repairing or building establishment of the said company, and the salaries of the secretary, and of any clerks employed at outports, at foreign places, and all other expenses relating to the conduct of the affairs of the company, except such as are agreed to be transacted by the managing directors, are to be paid by the said company.
“That in consideration of the duties to be performed by the said managing directors, and the expense to be incurred by them, and of the services rendered by them11in the formation of the said company, and of the negotiating and procuring the contracts with her Majesty’s Government for the mail service, and of applying for and procuring the aforesaid charter of incorporation for the said company,—the said managing directors shall be allowed and paid by the said company a commission of two and a half per cent. on the gross receipts or earnings of the said company; and also a further commission of £5 per cent. upon the net profits of the business of the said company, after deducting from such net profits the amount which shall be considered necessary to set apart as a reserve fund, as after mentioned, for the purpose of repairing machinery and vessels and other of the stock of the said company; the aforesaid commission of £5 per cent. to be paid on the making up the half-yearly accounts of the company for the ascertaining and declaring the dividends to be paid to the proprietors; and that such compensation shall be paid to the managing directors in equal shares so long as there shall be more than one.12
“B. M. W.”
“11 August, 1848.”