"(2) The interest during construction (3 per cent.) is less than a fair and reasonable return on the investment."
The amount actually paid out for interest on money used during the period of construction will vary, of course, depending on the time of construction and the way in which payments on construction materials are made. On the basis of a rate of 6% per annum and construction lasting one year, only a very small portion of the construction cost will pay 6%, while the great items of rails, buildings, motive power, and equipment will be put into the work from 90 days to 10 months after the commencement of work, and will actually bear but little interest. In the Michigan appraisal the assumption was made that all work must be replaced in one year, and that on long roads partial operation would commence as various sections of the line were completed; and 3% was agreed on as a fair average, perhaps having in mind Governor Pingree's "desire to increase railway taxation." Some assumption must be made. This one, that long roads, covering several years of construction work, are in Michigan put in partial operation as soon as built, is not unreasonable. Such an assumption clearly would not be proper in the case of long lines crossing mountains, or involving such a class of construction as to make it impossible to complete the property short of two or three years; and, in any such cases, the interest charge should be made sufficient to cover.
"(3) No allowance is made for working capital with which to carry on the business."
All the appraisals of physical property have been made on the basis of securing a figure representing the cost of reconstructing the property in the condition in which it existed on the date of the appraisal, including only items properly chargeable to capital, cost of road, and equipment. This is not such an item. The writer is of the opinion, however, that it is a proper one to determine and include in any report.
"(4) No allowance is made for wear and tear of material during the period of construction. Assuming eight years to be the life of a tie, and three years the period of construction, a substantial percentage of the period of usefulness is over before the road is in operation. The use of the rails before the track is put in proper line and surface hastens the time when they must be removed."
This deterioration is a necessary incident to any construction work. It has not been customary or usual to take account of it. To add to the amount capitalized on account of this item would be manifestly improper. The only way in which this could be cared for would be in an adjustment of the depreciation reserve when raised to cover that which takes place during the construction period. This reserve, later in the address, is objected to by Mr. Williams as improper accounting:
"(5) No allowance has been made for impact and adaptation. After the line is placed in operation, each fill will sink 1 ft. for every 10 ft. of height. The slope of cuts must be increased to prevent landslides and washouts. The ballast will pound into the roadbed, necessitating additional ballast to secure a standard cross-section."
Part of this objection is covered by the item, "Appreciation of Roadbed," discussed elsewhere. This, perhaps, is a proper item, but a comparatively small one. One of the examples cited is clearly maintenance. This objection is largely covered in the Michigan work by the contingency item.
"(6) A uniform price for earthwork was used, thus ignoring the varying character of soil and length of haul."
This is erroneous. On the Michigan appraisal prices were used for earth, loose rock, and solid rock. There is practically no classification in the Southern Peninsula of Michigan, or, in fact, on 90% of the mileage of the State. The price used was not much out of the way when considered as a fair average for the territory. The same was apparently true of other appraisals. It would not be a proper figure to use in an estimate based on 1909 prices, which are materially greater than those obtaining in 1890-1900.