Sunday, May 06, 2007

Suez and the Canal

Suez and the Canal

Andre Willers
28 April 2007
See “Suez and the Boers”

Discussion :

Have you ever wondered why the Suez Canal has not been built before ?
In the past 6 000 years there have been a number of civilizations that had the technical expertise and manpower to build it .

The Egyptian civilization could have done it at any time . (All they actually did was the tiny little canal dug from the Red Sea to the Nile . Note that this was abandoned after a short usage.)

The various middle east civilizations like the Babylonians , Hittites , Assyrians , Greeks , Romans , pre-Mongol Muslims , British Empire all could have built it .

But they did not .

The answer was that it was not profitable .

The argument:
Competing land routes between the big markets in India , Iran , Spice Islands , Indo-China and China could and did adjust their costs downward to very low levels . They were fairly immune against political instability (These routes are still in operation as we speak , using huge trucks .)

But :

1 . The initial capital costs of the canal has to be amortized ( ie a charge from tariffs in the future )
2 . The operating costs are fixed as well . There is a certain minimum , below which the canal will silt up .
3. Canal profits are extremely sensitive to political instability . A whiff of war , and , understandably , the canal workers and captains of cargo ships disappear or raise their rates to very high levels .

So , the land-route operators simply threaten a combined price and unrest war to render any canal unprofitable in the term needed to recoup capital expenses .

Any vizier , priest , finance person in the last 6 000 years would immediately nix such a scheme .

What must be very clearly understood here , is that the cost of building a canal is very , very high . Maintaining it is cheaper by at least a factor of about 10 .

So how did De Lesseps do it ?

The keys were the limited liability company , stock exchanges and human greed .

Huge projects of this nature at the time was only possible by divorcing the initial capital elements from the maintenance elements .

In plain speak , the construction costs were financed by shares on the Paris Bourse , hyped up by a bullish press and French government guarantees .
The French Government of the time (Napoleon III ) saw this as a part of the French expansion into North Africa ( Guarantees cost nothing as long as he was in power . If he loses power , what does he care . One of the perils of autocracy)

The company went bankrupt after Napoleon III quit in 1870 .It was bought out cheaply by the British . The capital losses were borne by the French investors.

There was enormous amounts of capital floating around at the time , generated by the industrial revolution . France especially , went from a near zero-base to very high growth rates (similar to those seen in the initial industrialization of Russia , Japan ,China) . Britain had even bigger rates of capital formation , but these were soaked up by the US and India .

The Suez Canal company was floated and the share prices bubbled , mostly on the last fool hypothesis and Government guarantees .

The Suez canal was finished by 1869 .

In 1870 the Franco-Prussian war ended with the abdication of Napoleon III . French government guarantees were waste paper . Shares in the Suez Canal Company were about worthless and the company was bankrupt . Egypt went bankrupt .

See “Suez and the Boers”

In 1871 placer gold , with the promise of the Mother Lode was discovered in South Africa . There was the possibility of other large gold deposits , possibly under the control of Muslims .

This was a threat that the British empire could not ignore .

The standard method was used . An international finance house (Rothschild in this case ) was approached to lend 4 Million pounds to the British Government with guarantees of repayment at fixed interest rates , with sweeteners all round . The sweeteners ensured the use of British Troops if things went tricky .

This money was used to buy the controlling interest in the Suez Canal , with various small print proviso’s that meant that small , greedy investers in the Paris Bourse ended up paying for the debts (ie the capital costs) .

Even so , the running costs could only be maintained by a generous subsidy from the British Government . True viability only became possible with high-energy , petroleum powered equipment reducing the costs of maintaining the canal by a factor of ten . This margin has now been eaten up by oil-price increases and tariffs .

Do not be surprised if the Suez Canal is allowed to silt up .

The Strategic value of the Suez Canal .

Surprisingly , this strategic value is zero .

It has a commercial value , namely the interest on the capital value of ships and cargo on the time saved by going through Suez instead of the Cape of Good Hope .Even this is offset by the pipeline effect and the monetary stability in the Empire .

The British Empire did not need to rush troops to India , or vice versa . Any Empire reinforcements could be sent quicker from Britain or India itself .

It was more convenient , but not worth the cost of canal construction.

That was why the British did not build the canal .

But when the French were so obliging as to undertake the work and the initial capital expenditure , even then the British hesitated . Only when the strategic importance of the Suez as a base for force projection into Africa to prevent a possible gold supply not under British control became clear , did they act .

Be very clear on the difference between strategic and economic .
The British had prospered handily without the Canal and could block it any time they liked . The monetary loss would have inconvenienced some traders , but nothing serious .

But for projecting power into Africa , it was essential . At least until it was explored sufficiently so that there was a high degree of certainty that no new Witwatersrands lurked .

The rest is obvious .


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