File 2764/1904 Pt 2 'Baghdad Railway: General negotiations 1908-10.' [‎130r] (268/799)

Memorandum by Sir Ediuard Grey {communicated privately to Mr. Winston Churchill).
I CANNOT help feeling that we should he careful not to he dragged into the
vortex of kilometric guarantees, as established by the convention of 1903, and that it is
necessary to put our foot down at once to prevent ourselves being placed in a hopelessly
false position in relation to our declared policy of the last few years. Were we to
accept any scheme of co-operation in the Bagdad Railway which included participation
by this country in the kilometric guarantees under the convention of 1903, it would he
almost impossible to defend our action in Parliament against the attacks which would
undoubtedly be made on it both there and in the press. There have already been
indications in this sense in the press.
To put the matter very briefly, there are, under the convention of 1903, two forms
of kilometric guarantees :—
1. A 99 years’ annuity to be capitalised and devoted] to the construction of the
line and the provision of rolling stock ; and
2. A guarantee for the working expenses.
The construction annuity is fixed at such a figure as to far exceed the cost of
building the line and the supply of rolling stock, and to leave large sums for allocation,
thus encouraging extravagance and fraudulent finance, as exemplified in the first
section.
The guarantee for the working expenses is not conducive to the encouragement
and development of traffic, since, owing to the terms in which the concession is drawn
up, the most favourable situation for the company, from a financial point of view, would
be that there should be the smallest possible amount of traffic, or, better still, none
at all.
This brief outline is sufficient to show that the extension of the system of
kilometric guarantees is very injurious to the interests of Turkey, since it involves
mulcting the Turkish tax-payer of sums largely in excess of the actual requirements,
while it tends to restrict the development of traffic on the line. These are very serious
objections, which have already been recognised as sufficient to justify His Majesty’s
Government in refusing to participate in the Bagdad Railway scheme on the basis of
kilometric guarantees for construction and working expenses.
It is desirable to find a solution of the situation created by Sir E. Cassel’s
negotiation with Gwinner, which at present involves the system of kilometric
guarantees with all its faults and objections.
There are three alternatives to kilometric guarantees :—
{a.) No guarantee at all.
{b.) A British guarantee.
(c.) A Turkish guarantee.
Now as regards the question of constructing the line without any guarantee at all,
it is not possible to express an opinion as to whether such a course is possible or not;
but I would draw attention to the case of the British Smyrna-Aidin Railway, which,
ever since it was constructed in 1856, has been worked without a kilometric guarantee.
Naturally all the shareholders of this line are British, and, although an incomparably
poorer country than the Mesopotamian delta is served by it, it has paid a regular and
continuous dividend of 6 per cent. If British investors were sufficiently enterprising
to find capital for the construction of the Smyrna-Aidin Railway, it should not be
impossible to find British capital for the construction of the Bagdad section, with all its
prospects of irrigation of the adjoining districts.
The second alternative is that of a British guarantee of 3 per cent, on the capital
spent on the Gulf section of the line, any earnings above this 3 per cent, being shared
equally between the guarantors and the shareholders. This was recommended by
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