ARGENTINE RAILWAYS AND THE MITRE LAW.

Buenos Ayres, July 3.--A Presidential Decree, fixing the capital of each of the railway companies which would be officially recognised in the event of their being purchased by the State, deducts in the case of each company the portion of the capital which the Government considers not to be effective capital. These reductions in the case of the French Santa Fe Companies amount to more than 7,000,000 pesos gold; for the Rosario-Puerto-Belgrano, 8,000,000; and for the Province of Buenos Ayres Company, 10,000,000. In the case of the other companies the reductions to be made are less important. The object of the measure is to ensure that only capital actually paid out for the construction of railways shall be recognised as such, and that all sums added to capital on account of deficits in working or on the outcome of other financial operations shall be eliminated. The decree gives the companies ten years in which to liquidate the non-recognised capital.--Reuter.

Buenos Ayres, July 4.--A decree is published fixing the capital of the Buenos Ayres Pacific Railway at 108,742,000 pesos (gold). A sum of 5,688,000 pesos (gold) is to be deducted as being "non-effective" capital, and this sum will have to be liquidated by the company within ten years. The "recognised capital" remaining will thus be 103,000,000 pesos. The measure will, it is stated, permit the strict application of the law for the regularisation of tariffs, and will be to the advantage of the shareholders.--Reuter.
(The South American Journal, 12 July 1919, page 24.)

We reproduce the following from the South American Journal:- --

Some months ago brief telegrams reached this country to the effect that the Argentine Government had agreed to the recognised capitals of certain of the Argentine railways, and since then small items of information on this subject have come to hand, and at the recent informal meeting of the Buenos Aires and Pacific Railway the chairman made a reference to this subject, when he explained that the whole position as to the recognition of the capital of the railway companies was settled by the Argentine Mitre Law, which it may be recalled was passed on September 30th, 1907. Under this Law the companies are allowed to earn up to 17 per cent. gross on the share and debenture capitals recognised by the National Government, the idea being that working expenses would be in the neighbourhood of 60 per cent., which would mean that the companies are allowed to earn a net 6.8 per cent. on their total capital recognised by the Government before the authorities could intervene in the tariffs, while it was also arranged that should the actual working expenses exceed 60 per cent. of the receipts for three consecutive years, the Government would raise the limit. The fact that some part of the capital of the various companies was issued in the form of debenture and preference stocks carrying a low rate of interest, and that the 6.8 per cent. net was over the whole capitals, means that the amount which could be earned on the ordinary capitals would be a good deal more than this 6.8 per cent., but the adverse factor from the companies' point of view is the question of recognised capital, the Government standpoint being that they only recognised the money actually raised and spent on the property, as Lord St. Davids illustrated it: "Supposing you had issued 10,000,000 of capital in an Argentine railway; suppose you had issued it at par and got 10,000,000 sterling under the Mitre Law, it would be recognised as at 10,000,000; but if you had issued you stock at 90 and got 9,000,000, it would be recognised as 9,000,000, and not as 10,000,000. On the other hand, if you issued it at a premium and got 110, it would be recognised not as 10,000,000, but as 11,000,000"; and he proceeded to give the further illustration that when the Buenos Aires and Pacific Company was re-organised many years ago, and there were great arrears of preference dividend, which had to be capitalised, and it was funded into about 400,000 or ordinary stock, it was this capital which the Argentine Government under the Mitre Law regarded as "water", and therefore do not recognise it; and, while in the case of some companies like the Buenos Aires and Pacific Railway, where the amount unrecognised is not large relative to the total capital, the matter is only of moderate importance, but in the case of some other companies, where the amount unrecognised is large and the company is not doing exceedingly well, the position is far from satisfactory. While at the moment the question of Government expropriation does not need to be taken into account, sooner or later, especially now that Argentina is rolling in wealth, this may become an important matter, and on any deal of this kind the price to be paid would, generally speaking, be based upon the recognised capital plus a 20 per cent. bonus. Details have recently come to hand of the decision of the Government as regards recognised capital in the case of all the railways up to the end of June, 1912, with 1913 in one instance and 1914 in two other cases. It appears that of the total capital of 181,414,494 declared by the companies, the Government rejects no less than 23,013,637, or 12.70 per cent., of which 17,526,083, or 9.67 per cent. is rejected absolutely, and 5,517,554, or 3.03 per cent., subject to elimination in 10 years, which appears to mean that these amounts can be wiped out by appropriation from revenue during the period in question. Glancing briefly through the list, the Cordoba Central seems to be the worst hit under this ruling, with the Central Argentine also badly affected. At the end of June, 1913, the Cordoba Central showed in its accounts its capital at 18,543,268; of this 3,484,249, is absolutely rejected, and the company is allowed 10 years in which to amortise 2,526,293. In other words, one-third of its capital is rejected, and, as the difficulties of the past four or five years have necessitated the capitalising of further arrears of interest, it is to be feared that the outlook for this company, should the Government ever decide on expropriation, is not promising. The Central Argentine has nearly 9,000,000 of its capital, or something like 20 per cent., rejected, but the Buenos Aires and Pacific only suffers to the extent of about 10 per cent., which probably accounts for the chairman of that company not attaching so much importance to the matter. The following table, which we take from the British Board of Trade Journal, shows the position as regards the recognised capital of the various railways up to June, 1912, and beyond that date where indicated :---
Recognised Capital.
Railways. Capital as
per
Company's
Accounts
Net capital recognised
by Government.
%
Buenos Aires and Pacific 21,842,407 19,345,782 88.57
Villa Maria to Rufino 1,135,209 1,135,209 100.00
Bahia Blanca and North-Western 9,479,555 8,676,358 91.53
Argentine Great Western 12,081,890 11,200,819 92.71
Argentine Transandine 2,241,073 1,481,097 66.09
Cordoba Central (30-6-1913) 18,543,268 12,532,726 67.59
Central Argentine 47,812,686 38,823,070 81.20
Buenos Aires Western 21,842,064 20,573,163 94.19
Great Southern 45,426,079 43,611,638 96.01
Gt. Southern--Ensenada and South Coast 363,710 363,710 100.00
Gt. Southern--La Plata Port 318,968 318,968 100.00
Entre Rios--Villa Elisa to San Salvador 258,212 238,944 92.54
Entre Rios--Section in Province of Buenos Aires 69,373 69,373 100.00
TOTAL 181,414,494 158,370,857 87.30


Rejected Capital.
Railways. Absolutely To be
amortised in
ten years.
Total.
Buenos Aires and Pacific 1,368,036 1,128,589 2,496,625
Bahia Blanca and North-Western 200,726 602,471 803,197
Argentine Gt. Western 14,607 866,464 881,071
Argentine Transandine 366,239 393,737 759,976
Cordoba Central 3,484,249 2,526,293 6,010,542
Central Argentine 8,989,616 --- 8,989,616
Buenos Aires Western 1,268,901 --- 1,268,901
Great Southern 1,814,441 --- 1,814,441
Entre Rios--Villa Elisa to San Salvador 19,268 --- 19,268
TOTAL 17,526,083 5,517,554 23,043,637
(The Review of the River Plate, 27 February 1920, page 595.)

Further on the Southern Railway capital, see Rögind.



[Two things that seem never to have been mentioned up to this date, in spite of the experience with inflation: (1) The recognised capital was defined by its historical value without any adjustment for increased replacement cost. (2) The Mitre Law did not state by what formula the allowed ratio of gross receipts to recognised capital would be increased when operating expenses exceed 60 per cent of revenues for three consecutive years. Moreover, Government refusal to recognise contributions made by bondholders in the form of interest first lost but then capitalised in new securities was never debated.

To illustrate the effect of the first omission, consider the effect of inflation during World War I. On 1 October 1915 the Government allowed a 10% general tariff increase, and on 20 November 1917 another 22%, together 34.2%. That led directly into the following tariff dispute as illustrated by the following figures, providing an example that assumes (a) an increase in operating expenses in equal proportion as the increase in revenue, (b) no net investment during the period in question --- something very close to actual fact:

Recognised capital (historical, no adjustment for inflation) Initial situation
before
1 October 1915
Final result
after
20 Nov. 1917
100.0 100.00
Gross revenue (as raised by decreed tariff increases) 17.0 22.81
Operating expenses (rising from 60 to 70% of revenue) 10.2 16.01
Net Revenue 6.8 6.8

Gross revenue having been increased with Government authorisation to 22.8 per cent. of recognised capital, the Government gained the right to intervene in tariffs and order tariff reductions. An alternative to this absurdity was to increase tariffs by a lesser percentage than operating costs, progressively diminishing the return to capital. Either way the Mitre Law, sponsored by the railways themselves, carried the seeds of their destruction. S.D.]

* * *

Further recognitions of capital were much delayed:

18 de julio de 1924. Decreto confirmando el capital del Ferrocarril de Buenos Aires al Pacífico al 30 de junio de 1912 y dejando sin efecto el Decreto de fecha 1 de julio de 1919 en la parte que manda eliminar de ese capital 5.688.089,23 $ oro.

2 de octubre de 1930. Decreto declarando que la empresa del Ferrocarril Nordeste Argentino debe presentar a la Dirección General de Ferrocarriles a los efectos establecidos en la Ley 5315 el estado detallado de las inversiones efectuadas desde su iniciación hasta la fecha, con cargo a la Cuenta Capital.---B.O. 10923.

21 de julio de 1936. Decreto fijando el monto del capital invertido por el Ferrocarril Rosario a Puerto Belgrano en los ejercicios comprendidos entre el 1 de julio de 1912 y el 30 de junio de 1920.---B.O. 12.657.

21 de julio de 1936. Decreto fijando el monto de la Cuenta Capital del Ferrocarril del Sud en los años 1912/1920.---B.O. 12.657.

21 de julio de 1936. Decreto fijando el monto de la Cuenta Capital del Ferrocarril del Sud en los años 1920/1928.---B.O. 12.657.

24 de julio de 1936, Decreto fijando las cantidades de capital invertido por la Compañía General de Ferrocarriles en la Provincia de Buenos Aires en el período 1912/1920.---B.O. 12.664.

24 de julio de 1936, Decreto fijando las cantidades de capital invertido por la Compañía General de Ferrocarriles en la Provincia de Buenos Aires en el período 1920/1928.---B.O. 12.664.

8 de agosto de 1936. Decreto fijando el monto del capital invertido por el Ferrocarril Rosario a Puerto Belgrano en los ejercicios comprendidos entre el 1 de julio de 1920 y el 30 de junio de 1928.---B.O. 12.674.

5 de agosto de 1936. Decreto fijando el monto del capital invertido por el Ferrocarril de Buenos Aires al Pacífico en entre el 1 de julio de 1913 y el 30 de junio de 1920.---B.O. 12.670.

13 de agosto de 1936, Decreto fijando el monto en la Cuenta Capital del Ferrocarril Provincia de Santa Fe en los años 1912/1920.---B.O. 12.675.

3 de setiembre de 1936, Decreto fijando el monto en la Cuenta Capital del Ferrocarril Provincia de Santa Fe en los años 1910/1928.---B.O. 12.688.

16 de octubre de 1936. Decreto fijando el monto del capital invertido por el Ferrocarril de Buenos Aires al Pacífico en los ejercicios comprendidos entre los años 1914/1920.---B.O. 12.713.

16 de octubre de 1936. Decreto fijando el monto del capital invertido por el Ferrocarril de Buenos Aires al Pacífico en los ejercicios comprendidos entre los años 1920/1928.---B.O. 12.713.

23 de noviembre de 1936. Decreto fijando el monto del capital invertido por el Ferrocarril Trasandino Argentino en los ejercicios comprendidos entre el 1 de julio de 1913 y el 30 de junio de 1920.---B.O. 12.747.

23 de diciembre de 1936. Decreto fijando en 149.677.143,46 $ o/s. el capital del Ferrocarril Oeste al 30 de junio de 1928.---B.O. 12.775.

29 de diciembre de 1936. Decreto fijando el monto del capital invertido por el Ferrocarril Oeste en los ejercicios comprendidos entre el 30 de junio de 1912 y el 30 de junio de 1922.---B.O. 12.776.

24 de julio de 1936. Decreto fijando el monto del capital invertido por el Ferrocarril Central Argentino durante los ejercicios comprendidos entre el 1 de julio de 1912 y el 30 de junio de 1920.---B.O. 12.664.

2 de abril de 1937, Decreto fijando el monto del capital invertido en los años 1913/1920.---B.O. 12.881.

3 de abril de 1937, Decreto fijando el monto del capital invertido en los años 1920/1928.---B.O. 12.881.

17 de mayo de 1937. Decreto fijando el monto del capital invertido por el Ferrocarril Central Argentino en los períodos comprendidos entre el 1 de julio de 1920 y el 30 de junio de 1928.---B.O. 12.664.

4 de junio de 1937. Decreto fijando el monto del capital invertido por el Ferrocarril Trasandino Argentino en los ejercicios comprendidos en los años 1920/1928.---B.O. 12.968.

4 de junio de 1937. Decreto fijando el monto del capital invertido por el Ferrocarril de Entre Ríos en los años 1919/1928.---B.O. 12.968.

16 de junio de 1937. Decreto fijando el monto del capital invertido en los años 1912/1928 por el Ferrocarril Central de Buenos aires.---B.O. 12.993.

17 de julio de 1937. Decreto determinando el monto del capital de la Empresa del Tranvía a Vapor de Rafaela en los ejercicios comprendidos en el 1 de julio de 1911 y el 30 de junio de 1927.---B.O. 12.656.

(Source: Estadística de los ferrocarriles en explotación, Table 2.)