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Sir,
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Inclosure 3 in No. 1.
British and Chinese Corporation, Shanghae, to Tang Shao-yi.
Peking, December 31, 1906. IN confirmation of my recent conversation with your Excelleney on the subject of the Shanghae-Nanking Railway, and with particular reference to the desire which, as Director-General, you have expressed, that the present system of administration and control of this railway should be modified, I have the honour to inform you that the matter has received the careful consideration of the Corporation and its joint managers, and that I am now authorized to discuss with your Excellency this proposed modifica- tion and to arrange for carrying the same into effect under conditions which, while calculated to meet the views of the Chinese Government, shall involve no breach of the Loan Agreement or anything prejudicial to the bondholders,
Before proceeding to the discussion of this important question, I am, however, instructed to state that the Corporation expects that certain outstanding questions arising out of the construction of the line may now be settled. These are:-
1. Provision of the land required for double track, which is a specific undertaking recorded in the Loan Agreement and prospectus, and which the Corporation is therefore unable to modify. I have explained to your Excellency that, in the opinion of Mr. Barry, the fulfilment of this condition will not entail any large expenditure.
2. Recognition of the fact that the amount realizable by the issue of bonds recently authorized (620,7501.) will be insufficient to complete the construction of the railway, and that further funds will be required in due course. Mr. Barry estimates that with the utmost economy the probable deficit will be 204,0001., and I have therefore to request that, in the first instance it be understood and agreed that the sum of 100,0001, included in the Engineer-in-chief's estimates as an appropriation for land purchases over and above the maximum named in Article 7 of the Loan Agreement shall hereafter be provided by the railway administration from other sources and placed to the credit of the construction account. As regards the balance of the estimated deficit, its amount will greatly depend on the goods-traffic receipts of the line; the question is therefore not of immediate urgency, and I would merely draw attention to the facts and request that your Excellency may inform me in what manner it is proposed to provide whatever funds may be required. The concluding clauses of Article 7 of the Loan Agreement provide for an additional issue of special 6 per cent. bonds to an amount not exceeding 250,0001., "in order to repay the sums spent in the purchase of land," and as these purchases have at present been met out of the general loan funds, the railway administration's simplest course would appear to be to arrange for the issue of such bends for the amount required to meet the final deficit (after payment of the unauthorized 100,0001. above referred to).
In explanation of the estimated deficit, it should be observed that, influenced no doubt by your Excellency's expressed wish that the estimates should be reduced to the lowest possible figure, the Engineer-in-chief has placed the net earnings of the line during construction at a figure which Mr. Barry considers at least 50,000l. too high. Futhermore, exchange was taken at 11. (10 dollars), involving at the present rate a further difference of 60,1007, and no allowance has been made for interest between March and June 1908, which will require, say, 37,500. Finally, although the estimates as passed called for a sum of 676,7121., the amount realized by the present bond issue is only 620,2601, a shortage of 56,600. These four items bring the total deficit to 203,0001. Article 1 of the Loan Agreement provides that "each series of the loan is to be in such amounts as the Engineer-in-chief may determine under direction of the Director-General and the Corporation, &e." The Corporation therefore, while bound to limit the bonds issued to the amount authorized by the Chinese Government in this case, does not accept the amount as sufficient for the completion of the line in terms of the Agreement.
3. Settlement of the Corporation's outstanding claims for commission on material. I have had the honour on several occasions of referring to this matter, and I have informed your Excellency that the Corporation had agreed to waive its right to com- mission on such local purchases as office furniture, stationery, &c. I have, moreover, drawn your Excellency's attention to the fact that the Corporation's commission is not an agent's commission of the usual kind, but represents, in the readiest and most equitable form, payment for superintendence and general services in the construction of the line. Under these circumstances, the instructions given to the Chinese members of
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the Board of Commissioners to withhold payment of commission involve a serious breach of the procedure laid down in the Loan Agreement, and I would therefore urge upon your Excellency that these instructions may now be rescinded, and the amount outstanding paid. The amount involved is not a grave matter, but the question of principle at stake is one which seriously affects those harmonious relations which it is the Corporation's object to maintain.
I have requested the joint managers in Shanghae to furnish me with a statement of the commission account outstanding, detailing the amounts and items, and I trust that this vexed question may, with your Excellency's good will, be speedily adjusted. As for the future interpretation of this clause of the Loan Agreement, the Corporation is prepared to limit its commission, after completion of the line, to purchases of materials of foreign origin, whether imported from abroad or bought locally, an arrangement which, taken together with the proposed modification of the system of control, will, I trust, be regarded as an indication of the liberal spirit in which the Corporation has met the views of the Chinese Government.
As regards the proposed change in the system of control, it is the desire of the Corporation, so soon as the questions above have been settled, to give effect to the wishes of the Chinese Government, and I have already suggested to your Excellency the lines of an amended procedure of administration which, if proposed, the Corporation would be prepared to accept.
It is obvious that no change can be made in the Loan Agreement, nor any limita- tion of the rights and interests of the bondholders as laid down in that document, but the object which the Chinese Government has in view should be attainable by the course suggested. This would consist in the appointment from Peking to the Board of Com. missioners of a Chinese official of suitable rank and qualifications, who, being acceptable Το to the Corporation, would thereafter be elected by the Board to be their Chairman. him, without violation of the Loan Agreement, might be delegated, as Chairman and Managing Director, the Board's powers, responsibility, and duties in connection with the general working of the railway, it being understood that in the event of any serious emergency, or results prejudicial to the interests of the bondholders and [or] Corpora- tion the Board would resume its corporate functions. The railway would, in fact, be worked under conditions approximating to those in force on the Northern Railways, the Board of Commissioners being in abeyance as long as the system proved satisfactory. It would be understood that, under the powers delegated to him by the Board, the Chairman would administer the railway, consulting the Engineer-in-chief on matters connected with the construction and maintenance of works, the Traffic Manager in regard to operation of the line, and the Chief Accountant on financial questions. The duties and respective responsibilities of these employés would require to be clearly defined.
Finally, for the protection of the Corporation vis-à-vis the holders of bonds and profit certificates, the proposed change in system and the appointment of the official intended to act as Managing Director and Chairman of the Board would require to be communicated to His Majesty's Minister by the Wai-wu Pu.
Trusting that this important matter may receive your Excellency's early and favourable consideration, I bave, &c.
(Signed) J. O. P. BLAND,
Representative in China.
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