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The Profitability of the Suez Canal as a Private Enterprise, 1859–1956

Published online by Cambridge University Press:  11 May 2010

Bent Hansen  and
Khairy Tourk
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Abstract

On the basis of published accounts, internal rates of return and present values are computed for capital in general and for particular investors (French shareholders and the British and Egyptian governments) from construction to nationalization of the canal. Terminal values at the nationalization had to be imputed. Rates of return are compared with opportunity costs represented by the return on alternative investments. For capital generally, French shareholders, and the British government, rates of return were 8–9 percent against opportunity costs of 3–4 percent. For the Egyptian government, corresponding figures were 2–5 and 11 percent. American investment would not have been profitable.

Type
Articles
Information
The Journal of Economic History , Volume 38 , Issue 4 , December 1978 , pp. 938 - 958
Copyright
Copyright © The Economic History Association 1978

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References

1 R., and Nousbaum, J. and Hutchings, G., Compagnie Universelle du Canal de Suez (Paris, 1947)Google Scholar, which we lean heavily upon in such matters.

2 Wilson, Arnold T., The Suez Canal: Its Past, Present and Future (Oxford, 1933).Google Scholar

3 Landes, David, Bankers and Pashas: International Finance and Economic Imperialism in Egypt (New York, 1969 [1958])Google Scholar; Marlowe, John, Spoiling the Egyptians (London, 1974)Google Scholar.

4 Cameron, Rondo E., France and the Economic Development of Europe, 1800–1914 (Princeton, 1961), p. 476.Google Scholar

5 Without nationalization Egypt might have been able to squeeze more and more out of the company—for instance, subjecting it to the ordinary Egyptian corporate income tax. The company was and had always been an Egyptian company.

6 Marlowe, Spoiling the Egyptians, p. 262, describes this episode in some detail.

7 We considered as negligible the opportunity costs of the land granted to the company.

8 Suffice it to mention that after the agreement in 1958 about compensation payment from Egypt for the nationalization, the reorganized Compagnie Financiere de Suez became one of the leading financial institutions in France. The stock market quotations of the shares of the old company did not decline more than about 40 percent after the nationalization, indicating that the assets seized by Egypt may have been a minor part of the company's net worth at that time. In any case, it is a fascinating story how this rich but old, passive, sleepy, and overcautious company developed over a few years into an aggressive, dominating, financial group—a metamorphosis apparently triggered by the nationalization of the canal. See Morin, François, La structure financière du capitalisme francais (Paris, 1974), pp. 196ff.Google Scholar

9 Special problems arise in connection with inputs obtained by the company below market value—e.g., the land grants and the forced labor delivered by the khedive. Since we study profitability of the canal itself in a private sense, we do not here include such “costs.” Moreover, objections may be raised to including payments listed in our second section under (a), (b), (f), (g), (h), and (i) as returns to “capital” or “capitalists.” Items (a) and (g) might be considered returns to entrepreneurship; (b) and (f) returns to natural resources; (h) and (i) returns to labor. We conceive of “capital” and “capitalists,” however, in the widest possible sense, i.e., as a synonym for an activity.

10 The British government in fact continues to be a shareholder in the reorganized French company.

11 As pointed out above, Egypt's intérêt was surrendered to the company from 1869 to 1894 to cover compensations. We have chosen to treat Egypt's cash flows gross in the sense that the surrendered intérêt is included among the receipts and the amount of compensation among the payments. It could be argued that we should rather exclude both from the Egyptian cash flows. This would not, however, substantially change the computed internal rate of return for Egypt. Needless to say, this problem does not affect the computations for the canal per se or for French and British shareholders.

12 There is a slight ambiguity in our treatment of these payments. In the costs of the canal itself we have included the payments for “control,” but not the 7 percent; we have included both as revenue for the Egyptian government. Behind this treatment is the idea that while the 7 percent was a substitute for corporate income taxation, the payments for control were for a service (perhaps fictitious) from the Egyptian government to the company. This service being a “public good” without specific marginal costs that could be ascribed to the delivery to the company, the latter payments could be reckoned both as a cost for the company and a net revenue for the Egyptian government. Fortunately, the payments for “control” were very small.

13 Since the French franc as well as-the shares went down from 1955 to 1957, we converted the stock market prices to U.S. cents, took the difference between share prices in constant dollars between 1955 and 1957 as the fall in share value, and recalculated this difference in French francs.

14 Market wages in rural areas apparently were some 2–3 piasters per day and the differential between urban and rural areas, the marginal incentive for migration from the villages, may have been about 2 piasters. This would presumably be the minimum required for making village labor volunteer in the canal work.

15 Problems arose, not so much because solving a 102-degree polynomium was involved, but because multiple positive roots might exist. The net cash flow series for the canal activity per se has three, and that for the Egyptian government four sign changes. Three and four positive roots, respectively, might then exist. Graphical, computerized search for roots in the interval 0 to 80 percent led, however, in all cases to the discovery of one positive root only. Hence, we feel confident in disregarding the multiple root problem.

16 The weighted average rate of interest, ρ, is defined by

thus being the nominal internal rate of return over T years of the subsequent investment of one unit of currency on a one-year basis at current nominal rates of interest, it. This way of defining the opportunity costs gives relatively high weights to the interest rates of the early years. One-year interest rates have, of course, to be used because the cash flows are on an annual basis. The weighted average, as defined here, will coincide with long-term interest rates on the assumption that interest expectations are correct. This may seem a rather special assumption, but it does, in fact, underlie all our calculations of internal rates of return and present values: these are conditioned by hypothetically correct expectations.

17 See the discussion in Cairncross, Alexander K., Home and Foreign Investment, 1870–1913: Studies in Capital Accumulation (North Brighton, 1975 [1953]), ch. 9, pp. 230–31Google Scholar, where returns of up to 9 percent in alternative domestic British investments before World War I are mentioned. See also Jenks, Leland H., The Migration of British Capital to 1875 (rpt. New York, 1975; 1st ed., 1927), p. 415.Google Scholar

18 Rates on Egyptian long-term issues were generally somewhat lower than the short-term rate we have used for the years 1859 to 1882, yet very high. See, for instance, Jenks, Migration, Appendix C, pp. 421–24.

19 The United States federal and state governments did, however, borrow long-term in London at considerably lower interest rates than the commercial paper rate in the U.S., and with government backing the canal project might have been financed at lower rates than the American interest rates.

20 The authors have made an attempt to calculate optimal, monopolistic toll rates under present-day conditions. See Hansen, Bent and Tourk, Khairy, “The Suez Canal Project to Accommodate Super-Tankers,” Journal of Transport Economics and Policy, 8 (May 1974), 1–19.Google Scholar