This article looks at the limitations on London & North Eastern Railway investment and why it struggled with financial stringency throughout its existence. The railways in the inter-war years found it difficult to finance capital expenditure in the conventional way. As a result of the deficit on capital account and poor trend of earnings, the LNER could not raise significant fresh capital on the stock market.
As a consequence, railway companies resorted to sources other than the capital market to finance investment. These included loans from Government bodies such as the Railway Finance Corporation Ltd., land sales, the realisation of non-railway investments and the use of liquid surpluses in superannuation funds.
The LNER chiefly used return on investment to assess proposals for capital projects based on anticipated savings in working expenses as a percentage return on net outlay. Neither they, nor British industry more widely at the time, considered other criteria, such as the life of the scheme or accurate timing of expected savings.
Much of the LNER investment was with Government assistance, but the only source of significant new money was the New Works Programme (NWP) 1935-40.
The ‘Big Four’ between the wars
After 1918 the Government neither maintained the status quo nor nationalised the railways. Instead it pursued a middle way of regionalisation under private ownership. From 1st January 1923, under the Railways Act of 1921, the undertakings of about 120 separate railway companies were either amalgamated or absorbed intact into one of four new regional monopolies, the’ Big Four’. The Act set down provisions for the winding up of constituent and subsidiary companies.
The Act provided for “the reorganisation and more efficient and economical working of the railway system”. From the point of view of management control this was the most important aspect of the 1921 Act and formed the criteria by which the performance of the railways was to be judged.1
The Government paid £60 million including interest, but before taxes, in settlement of claims made by railway companies for compensation resulting from its control of the railways during the hostilities. The part allocated to the LNER was £15.8 million.
The 1921 Act catered for rates and fares to be fixed at a level which gave the ‘Big Four’ companies a ‘standard’ revenue approximately the free net revenues of constituent and subsidiary companies of each amalgamated company in 1913 with certain allowances for unproductive capital and capital expended since 1913. ‘Standard’ revenue was supposed, under the Act, to be provided by manipulating charges. There were fundamental weaknesses in the capital structure and financial performance of the railway companies, particularly the LNER. Railway profitability was weak and never reached the ‘standard’ revenue’. The growth in road competition and the inability of railway companies to compete effectively, particularly with road haulage during the 1920s and 1930s, greatly reduced the revenue
