40
provide funds for the completion of the railway and for the interest on the loan, but will provide a source of revenue to them, they having reserved to themselves in the Loan Agreement 80 per cent. of the net profits.
If the line were constructed departmentally and one section at a time it would take certainly four and probably five years to build, and, owing to unforeseen con- tingencies, the line might prove to be more expensive than estimated and the loan insufficient, whereas a first class railway contractor, with the facilities he possesses, and with the right and advantage of constructing the various sections simultaneously, will undertake to complete the line in three years and three months for a lump sum, taking all risks.
5. The British and Chinese Corporation have secured and submitted to the Railway Board of Commissioners a tender from Pauling and Co. (Limited), a fully responsible Company, with a world-wide business and experience. They undertake, for a lump sum and under a heavy penalty, to build, equip and complete, within three years and three months, a first class railway (double line to Soochow and single line from Soochow to Nanking), to the specification and satisfaction of Messrs. Sir John Wolfe Barry, Arthur John Barry, and G. J. Morrison, the Consulting Engineers of the Corporation. Having regard to the risks and obligations of the tender, the price is pronounced to be reasonable by the Consulting Engineers, who recommend the accep- tance of the tender. It is a condition of the tender that the whole loan shall be issued before the Contract becomes binding, so that payment for the work (which has been tendered for on the basis of payment in cash) may be assured. On no other basis could
a contract at the price be obtainable.
The price inserted in the tender is the net sum payable to the Contractors, and no part of it finds its way, directly or indirectly, to the Treasury of the British and Chinese Corporation, whose sole remuneration is that reserved to them in the Loan Agreement and mentioned in paragraph 1 of this Memorandum,
6. The British and Chinese Corporation estimate that, after adding to the construction contract price the discount, interest on and service of the loan during construction, and providing liberally for the necessary engineering supervision, the expenses of the Board of Commissioners, the Corporation's commission on materials and various contingencies, there will be a margin of 200,0001, plus earnings from sections opened during construction, so that it may not become necessary to issue the supplemental land loan of 250,0007, provided for in the Agreement, but that the entire cost of the enterprise, including laud, will be covered by the principal loan of 3,250,0001. nominal.
7. It is contended that to build the line departmentally and one section at a time and to issue the loan in corresponding instalments, as contemplated in the Loan Agree- ment, would result in a saving of cost and of interest. The answer is that any saving which the Railway Board of Commissioners might hope to make by constructing depart- mentally would be of small moment as compared with the risks:-
(1.) Of the loan proceeds proving insufficient;
(2.) Of delay in completing the line;
(3.) Of postponed profits; and
*
(4.) Of the damage to Chinese credit and railway enterprise in China which would attend
any miscarriage in the construction and development of this railway, which, of all others, will be watched with keen criticism.
N.B. When the railway is a going concern and has a properly organized staff and workshops it will be in a position to make extensions and improvements itself to the best advantage.
As regards interest on unemployed loan funds, the Hong Kong and Shanghae Bank, in order to assist the project, are prepared to allow the most favourable rate for the loan funds pending expenditure, added to which there will be the saving of interest effected by the railway being constructed and completed so much sooner than could be relied upon if built departmentally. Earlier completion also secures earlier profits.
8. Advantage should be taken of the first opportunity of issuing the whole loan and securing the proceeds, because of the uncertainty of financial and political conditions, and the record of the Northern Railway Loan, shows how a loan most successfully issued may lose its popularity. And as the Chinese insist on the same fixed price being paid for the bonds and the amount of the loan has been arrived at on that basis, it is folly for them on the ground of saving interest to rum the risk of the British and Chinese Corporation, being unable to float the remaining instalments of the loan.
The great concern of the British and Chinese Corporation, is that the project shall
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be a coromercial success, and it is to this end that the policy specified herein, is being advocated by them.
As frequent and favourable reference has been made to the fact, that construction, section by section, and the issue of the loan by instalments is being pursued by others, the matter is referred to in the following clause.
9. As regards the American and Belgian methods of railway construction in China, and which methods for the present, and for want of foresight and other reasons, have been accepted by the Chinese Railway Administration, it may be pointed out that the Chinese have no guarantee that the American and Belgian Syndicates will take up and pay for all the bonds included in their Loan Agreements, or that if the loans are completely subscribed and paid for, the proceeds will complete the railways, for the construction of which the loans have been issued. The bonds at present being placed
are, it is common knowledge, being financed by or on behalf of constructing Syndicates, who make their profit inter alia out of materials supplied at enormous prices, so that in the no distant future it may be anticipated the Chinese will find themselves with uncompleted railways (built at an extravagant cost), and with exhausted loans, but compelled nevertheless to meet the obligations of the bonds issued, and, if they desire the completion of the railways, to provide the deficient capital.
In any case the British and Chinese Corporation would observe the spirit of the obligation in their agreement to build at bond fide cost price, but they wish to avoid the contingencies anticipated above, and to make sure that whatever they undertake will be carried to a successful issue.
On behalf of the British and Chinese Corporation, Limited,
3, Lombard Street, London, November 24, 1903.
(Signed)
Inclosure in No. 49.
Extract from the “Times,"
THE SHANGHAE-NANKING RAILWAY CONTRACT,
Chairman.
IT will be remembered that on the 9th July the British and Chinese Corporation Syndicate, which enjoyed a large measure of British Government support, concluded the negotiations initiated in 1898 by the signature of the final contract for the construction of the Shanghae-Suchau-Nanking Railway. The contract stipulated that the first instalment of the loan must be remitted to China within eight months, and the work begun within a year; otherwise the agreement lapses. It was recently intimated by the Corporation that the present condition of the money market was unfavourable for the issue of bonds. They hoped that an improvement would occur in the spring, and meanwhile suggested that Sheng should authorize the prospectus of the loan to state that the work of construction would be entrusted to a prominent firm of contractors, with the object of increasing the confidence of the public. Sheng declines to accede to the condition, which has not been admitted in the case of other railway concessions. He points out that the interests of bondholders will be safeguarded by the British majority on the board of control, which, in accordance with the contract supervises the construction, and suggests that the best course for the Corporation to adopt, if the bond market is unfavourable, is to follow the example of the American and Belgian concessionnaires, who, being directly interested in their respective enterprises, advance funds for the construction of the first section of the line, issuing hands on the completion thereof, secured on such section as a going concern.
Sheng and other Chinese officials do not conceal their disappointment with the position of affairs. They contrast the action of the Corporation with that of Continental Syndicates, laving stress on the admittedly liberal terms of the British concession, and pointing out that funds are forthcoming under non-British railway agreements.
Whether the situation be due to political causes or to financial methods, it is undeniable that it must seriously prejudice existing and future British enterprises of a sunilar nature. If the Government realizes the commercial and political importance of railways in China, uo effort should be spared to prevent the possibility of doubt or delay as regards the carrying out of the contract as ratified for the construction of this most important line in the centre of the sphere of British influence.
Shunghae, November 18, 1903.
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