File 2764/1904 Pt 2 'Baghdad Railway: General negotiations 1908-10.' [‎100v] (209/799)

1907 stated that, owing to the size of the kilometric guarantees, a profit of 5,000,0001.
was expected to be realized by the promoters on the construction alone of the Bagdad^
Railway. Such a Concession would be utterly inconsistent with the interests of
I^enclose a short statement showing how the Committee arrived at this estimate
of profit, and from it you will see that, while recognizing the substantial nature of
the permanent wav, they estimated the cost of construction, including lolling-stock,
at 4,375L per kilometre on the first section as against Dr. Gwmners figure of
5,0001., which you quote. We draw our own conclusions as to the disposal of the
diftef enemas ^ ^ Gu]f sect i ons . You say, “The cash product of the bonds provided
to meet the construction cost is about 8,500L per kilometre.^ If 2,0001 per kilometre
is surrendered to Dr. Gwinner in respect of the western portion of the line there will
remain 6,500L, and this sum, you urge, will not leave an excessive margin, taking
into consideration the gauge and the substantial nature of the line, the provision of
rollincr-stock, the cost of terminal arrangements at Bagdad, Bussorah, and Koweit,
and of one or more bridges over the Euphrates, and, finally, the payment of interest
during construction. , -< j u*
I do not think it correct to include m the cost of constructing the Bagdad-built
sections of the railway the expense of “ terminal arrangements ” other than stations. It
is expressly stipulated in Article 23 of the Concession of 1903 that “ le concessionnaire
aura la faculte da construire, d ses frais, des ports k Bagdad, &c. ; and it is provided
that there shall be special port dues, which would of course be regulated on such a
scale as to cover not only the current expenditure of the port authorities, but also the
interest and sinking fund on the original outlay in construction.
W ith regard to bridges, so far as I can see, over the Euphrates there need only
be one. # .... . , ,
As to payment of interest during construction, this item need not be very
considerable on the Gulf sections, where the engineering obstacles are few. If, as
in any case would be necessary, Article 29 were modified, it might be possible to
undertake work on all the Gulf sections simultaneously, thus lessening the period of
construction during which interest would have to be paid.
You do not think that 6,500/. per kilometre would leave an excessive margin
after construction; it is impossible to estimate cost with precision in the absence
of detailed surveys, but such information as we have does not point to so high a
figure. The Committee of 1907, after an examination of all available data, put the
cost of the Konia-Eregli section at 4,375/. per kilometre, including rolling-stock; and
they fully recognized that the first section was relatively easy and that the line is
substantially built. As a fair estimate of the cost on the Bagdad-Gulf^ sections Sir
James Mackay, who has some Indian experience, suggested 8 ,000/. a mile (5,000/. a
kilometre) ; i.e., 625/. per kilometre in excess of what the first section is believed to
have cost. ...... . . „,,
So much for the cost of construction. I now take the liability of the Ottoman
Government under the Concession of 1903, in so far as concerns the sections from
Bagdad to Koweit—a distance of approximately 450 miles, or say 716 kilom.
° The construction annuity yields, to take your figure, 8,500/. per kilometre ; and
as the loans, after allowing for discounting-and bankers’ charges, produce only slightly
over 80 per cent, of their nominal amount, interest must be reckoned at 5 per cent.
The capital sum on which interest would be payable would be 8,500/. X 716, or
6,086,000/. ; and interest at 5 per cent, would be 304,300/., and this amount of
interest would be subject to reduction only by_ the operation of the sinking fund,
which is spread over the whole period till the expiration of the Concession.
The working expenses guarantee is not a fixed charge, but it might at its
maximum amount reach 4,500 fr. per annum per kilometre, which works out at
128,8801. a-year.
The liability of the Turkish tax-payer in respect of the Bagdad-Gulf sections
would thus be interest to the amount of 304,300/., reducible only by the gradual
operation of the sinking fund, and, with the working guarantee, it might reach
433,1.80/. .
An alternative plan would be the adoption of what, for the sake of convenience,
I may term the “ Indian ” system. This could be introduced on the most advantageous
basis if His Majesty’s Government were to offer a guarantee of 3 per cent, on the
actual cost of construction, which we put up at, say, 3,600,000/. including rolling-stock.