PURCHASE OF THE MANILA RAILROAD COMPANY PART I

From: Report of the Governor General of the Philippine Islands [1916] pages 49-57

MESSAGE OF THE GOVERNOR GENERAL TO THE THIRD PHILIPPINE LEGISLATURE RELATIVE TO THE PROPOSED PURCHASE OF OUTSTANDING STOCK OF THE MANILA RAILROAD CO. BY THE PHILIPPINE GOVERNMENT.

MANILA, January 10, 1916.

GENTLEMEN OF THE LEGISLATURE: I have the honor to submit herewith for your consideration an agreement entered into on the 18th day of December, 1915, by and between the duly authorized representative of the Manila Railroad Co. and of the Manila Railway Co. (1906) (Ltd.) and myself. This agreement was made by me subject to the approval of the Philippine Legislature, and is of no force and effect unless ratified by you. On behalf of the Manila Railroad Co. and the Manila Railway Co. (1906) (Ltd.) this agreement was signed subject to the assent of the trustees of certain A and B debenture bonds of the Manila Railway Co., which is the owner of the stock of the Manila Railroad Co. I advocate the adoption by you of the terms of the agreement primarily because I believe that the people of the Philippine Islands should own their greatest public utility, the Manila Railroad Co.; this railroad is a public highway, and should be operated for the benefit of those served thereby rather than for the financial benefit of private stockholders. A railroad is, in the very nature of things, a monopoly, and experience throughout the world affords convincing arguments in favor of the ownership and control of such monopoly by the people themselves. Even if it be suggested that the management of a railroad company may perhaps be more profitably conducted by private enterprise, which is by no means certain, considerations of the highest public policy offset this. This railroad discharges a public function, namely, the transportation of persons and of freight from place to place within the Philippine Islands, and the exercise of this function should be subject to the control of the public itself. The conduct and operation of the Manila Railroad Co. enters, in one way or another, into almost every detail of your economic growth, and thus, directly or indirectly, affects and will continue indefinitely to affect the daily lives of the people of these islands. Without entering into a discussion of the general subject of the benefits of government ownership of railroads as opposed to private ownership, I submit this matter to your attention as of especial importance in the economic future and development of the Philippine Islands. The gift to a private company of a perpetual franchise for the operation of a transportation system was imprudent and unwise, and I earnestly advise that the people of the Philippines should take this, the first reasonable opportunity of securing the return of this franchise. It is true that in the United States the railroads generally have been built and maintained by private enterprise, although even there public assistance has been given by way of land grants, and guarantee of interest in many of the States, and the courts have been frequently called upon through reorganization to sustain the operation of many of these systems. However, the United States Government has recently authorized Government construction and ownership of a railroad line for the development of the Territory of Alaska. Moreover, the Government of the United States, through the ownership of the capital stock, operates the Panama Railroad as an incident to the building and operation of the Panama Canal. Outside of the United States the greater portion of the railroad mileage of the world is owned by the several States and Governments. The figures for the year 1913 show that of the railroad mileage outside the United States 197,491 miles were State owned, as compared with 136,327 miles privately owned. Here in the Orient it is especially noticeable that within recent years the Japanese Government has taken over and is maintaining in successful operation more than two-thirds of the railways of the Japanese Empire, and in the Dutch East Indies almost the entire railway mileage is owned by the Government. It is in British India, however, that we have the most striking precedent. There, as in the Philippines, it was found to be almost impossible to induce private capital to engage in the construction of the railways without government guaranty of some sort; that guaranty was finally and somewhat reluctantly given and carried with it such supervision as was necessary for the proper protection of the government under its guaranties. The exercise of this supervision finally resulted in the acquisition by the government of the greater portion of the railroad mileage of the numerous railroad companies of India, where they are now successfully operated by the States or by their lessees. A similar situation has developed in respect to the Manila Railroad Co. In order to induce the development and further construction of mileage, the government in 1910 guaranteed interest on bonds issued for the construction of the so-called Southern Lines in the amounts and under the conditions set forth in Act 1905 of the Philippine Legislature. The annual contingent liability of the government under this guaranty to-day amounts to approximately P863,000, and will increase as new sections of the railroad are completed and new bonds are issued under the provisions of existing law. To protect itself under its guaranty, the Philippine government has maintained agencies of supervision and of audit, but constant controversies have arisen between the government and the management of the railroad company in the acquisition of the land for right of way, in the construction of these lines, regarding the proper distribution of the expense of operation as between the Northern and Southern Lines, and over other matters. During these years the control and management of the railroad company have been in the hands of a board of directors in New York City; the Manila Railroad Co., moreover, is controlled through stock ownership by an English holding company whose directors sit in London. I believe it desirable to transfer the control of the great public function which the Manila Railroad Co. has undertaken under its franchise to perform from these two boards of directors in New York and London to the representative of the people served; in other words; to the government of the Philippine Islands. The control thus located in the Philippine Islands can be more immediately responsive to the needs of traffic and may be exercised not solely for the financial benefits arising from the railroad for the benefit of the stockholders, but primarily to develop the country and to serve the people occupying the territory traversed by the road. The consolidation of the management of the road in the hands of directors in Manila and abolition of the dual supervision over the construction work by the government and the railroad company, as at present exists, will result in considerable net economics to the railroad company itself. In addition, however, to the general reasons in favor of government ownership of this railroad, a special reason exists of great and compelling interest to the Filipino people. For the purpose of expediting the construction of the Southern Lines of the Manila Railroad, the Philippine government has by legislative authority lent to the Manila Railroad Co. from time to time from the resources of the gold standard fund the sum of 15,675,000 and has authorized further loans so that the total will eventually reach the sum of P7,127,000. These sums of money have been re-loaned by the Manila Railroad Co. to the sole stockholder, the Manila Railway Co. (1906) (Ltd.), which is the English construction company, in order to enable the latter to comply with its contract to construct the Manila South Lines. This English company is now unable by reason of the financial condition brought about by the European war to obtain capital for further construction work in the Philippines except as this government may make to it further advances from time to time. The situation is one, therefore, in my opinion, which requires the Philippine government, for the protection of its own investments in the Manila Railroad Co., to assume the ownership of the road. Moreover, it may be stated that the government has practically financed the construction work for the Manila Railroad Co. since January 22, 1912, during which time the final control of that construction and the operation of the line so constructed has been in private hands. The contract which I submit for your consideration provides for the liquidation of all claims by the English construction company against the railroad company for work already performed and the complete withdrawal of the construction company from further responsibility. The present financial condition of the Manila Railroad Co. is as follows: The bonded indebtedness is P45,242,000, and consists of the following issues of bonds: P8,660,000 6 per cent first-mortgage gold bonds, maturing in 1956; P15,432,000 7 per cent second-mortgage gold bonds, maturing also in 1956; and P21,150,000 4 per cent first-mortgage gold bonds, Southern Lines, maturing in 1939. The capital stock amounts to 111,567,000 authorized and outstanding, all owned by the Manila Railway Co. (1906) (Ltd.), with the exception of a few qualifying shares in the hands of the directors of the road. The negotiations for the acquisition of the Manila Railroad Co. have been based upon the purchase by the government of the capital stock of that company. The price finally agreed upon is P8,000,000, or approximately 70 per cent of the face value, which is the full amount required for the acquisition of the Manila Railroad Co. by the Philippine government. For the immediate present the contract calls for the payment of 51 per cent of the P8,000,000, or P4,080,000, which sum may be temporarily provided out of existing capital resources of the government. The balance of 93,920,000 will be payable in 18 months from the date of the execution of the contract. In addition to this, the government, under the terms of the.contract, will undertake to lend to the Manila Railroad Co., if required, such amount as may be necessary to maintain a sinking fund to be established by the railroad company at a rate sufficient to pay off the principal on the outstanding government interest-guaranteed 4 per cent bonds, and the construction company, which is the owner of almost all of the outstanding 4s, has agreed to an extension of the date of maturity of said 4 per cent bonds, provided congressional authority for such extension can be secured. Such loans for the purpose of maintaining this sinking fund are to bear interest at 4 per cent and are secured by a lien on the property of the railroad company subject only to the liens existing on such property at the time such loans are made. In consideration of the price of 98,000,000 agreed upon for the P11,567,000 par value of outstanding capital stock, the construction company, which is the owner of all of the outstanding 6 and 7 per cent first and second mortgage bonds of the Northern Lines, has agreed to a reduction in the rate of interest upon such bonds to 5 per cent, which will result in a net interest saving of P395,240 to the Manila Railroad Co. It is this saving which gives, in my opinion, value to the outstanding stock of the Manila Railroad Co. The railroad has now for the third time since the government entered into its contract of guaranty failed to meet the full interest obligations upon its present indebtedness. In 1910 the government was compelled to advance under its interest guaranty the sum of approximately P19,000 to enable the road to meet its full interest payments. In 1914 the deficit amounted to P51,631.26. In 1915 the estimated deficit October 31, on the Southern Lines, amounted to P82,900. In the years 1914 and 1915 there were partial failures of the rice crops in central Luzon, and these, coming at times when financial conditions throughout the world were already disturbed by reason of the European war, brought about the inability of the Manila Railroad Co. to meet its interest obligations for the current years. In addition to the deficit on the Southern Lines amounting to P982,900, which has been paid by the government under its guaranty as stated above, there is a further sum which may amount to P100,000 on the Northern Lines, which has been financed by a temporary release by this government of a portion of the bonds now held in the bureau of insular affairs to secure existing indebtedness of the railroad company to the government. Moreover, until the completion of the present construction plans of the railroad company, each year imposes greater interest obligations upon the railroad, inasmuch as the road is being built in isolated sections, and these sections c;ln not be expected to pay for themselves until they are connected one with another and through traffic is thus established. As has before been mentioned, the refunding of 6s and 7s under the terms of this agreement with 5 per cent bonds will result in an annual saving of interest to the Manila Railroad Co. of P395,240 per annum, or more than sufficient to provide for any ordinary contingencies such as those herein before detailed. It should not be understood, however, that the purchase of the Manila Railroad Co. will result in immediate financial benefit to the government by way of dividends upon the stock. While it is true that in the year 1912 the sum of P377,733 was paid in dividends upon this stock and in the year 1913 P465,683, it is also true that the company has under the terms of its existing construction contracts assumed liability for interest payments upon sections of the road which will in themselves be unprofitable until finally linked one to the other. For example, the Southern Lines are not finally connected between Laguimanoc and Hondagua on the Pacific coast of Luzon. It is expected that this connection will be made some time in the early part of this year, but there is as yet no connection between Hondagua and the beginning of another section of the line at Iriga, and it is estimated that this connection can not be effected for at least two years to come. Until this connecting link is built the existing line in Ambos Camarines and Albay does not and will not produce sufficient revenue to pay for its operation. An actual deficit in operation of this individual section of approximately P100,000 a year, which must be debited against the entire system, will be almost inevitable until this connection is made. It will only be upon completion of the line between Hondagua and Iriga that its operation through Ambos Camarines and Albay will pay fixed charges upon that section, I am confident, however, that upon the completion of that line the through traffic from the southern Provinces will produce revenue more than sufficient to pay the fixed charges, and that the completed system of railways will prove to be a profitable investment in the' way of dividends upon the stock acquired by this government. The question of profitable operation and stock dividends upon the stock of the Manila Railroad Co. when owned by the government is without doubt a matter of great importance, but of less importance to the people of the Philippine Islands than that the road should be operated in such a way as to develop as quickly as possible and to the utmost the country served and the expansion of commerce in the Philippines. Should the agreement entered into by me and herewith placed before you be ratified by the Philippine Legislature, I recommend that provision be made for a management of the railroad with a reasonably fixed tenure of office and freedom from minor political restrictions which should be accomplished by an extension of the civil-service rules to the personnel. In a larger sense the very acquisition of this railroad system by the government will remove the railroad from politics. Attached to this message are a copy of the agreement entered into. by me and of the balance sheet of the Manila Railroad Co. as of September 30, 1915.

FRANCIS BURTON HARRISON,
Governor General.