Turkey, the Great Powers, and the Bagdad Railway: A study in imperialism

by Edward Mead Earle

The Sultan Loosens the Purse-Strings

There are special and peculiar problems connected with the construction of railways in the economically backward areas of the world. In well populated regions, such as western Europe, railways have been built to accommodate existing traffic; in sparsely populated regions, such as eastern Russia and western United States, they have been constructed chiefly to create new traffic. In the economically advanced countries of the world the railway has been the result of civilization; in the backward countries it has been the outpost of civilization. A new railway in an undeveloped region is obliged at the outset to concern itself mainly with the upbuilding of the territory through which it runs, in order to assure abundant traffic for the future; during this period its receipts are rarely, if ever, adequate to meet the costs of operation. Private capital cannot be expected to assume alone the risk and burden thus involved, but the public service which the railway renders during this critical time justifies the government in subsidizing the enterprise until it can become self-supporting. The granting of state subventions has been a common practice of the nineteenth and twentieth centuries. China time and time again has pledged national revenues in support of railway construction; the Latin-American countries have been conspicuous exemplars of the same practice; more than half of the railways of Russia were constructed with government funds.[44]

There was every reason to believe that the Bagdad Railway would be built with some system of state guarantees. Almost every railway in Asiatic Turkey at one time or another had been the recipient of a government subvention, and the proposed trans-Mesopotamian railway faced many more obstacles than had faced any then in operation. The provinces through which the Bagdad Railway was to pass were sparsely settled and were too backward, economically, to warrant the construction of a railway for the accommodation of existing traffic;[45] the German technical commission of 1899 had pointed out that the estimated gross operating revenue for some years would be entirely inadequate to pay the expenses of running trains even if there should be an unlooked for volume of passenger and mail service to India. In time, it was believed, improved transportation and greater political security would induce immigration and produce widespread economic prosperity in the provinces of Anatolia, Syria, and Mesopotamia, thus assuring financial independence to the railway.[46] During the interim, however, a state guarantee appeared to be necessary.

Under the terms of the convention of 1903, the Turkish Government undertook partially to finance the construction of the Bagdad Railway. For each kilometre of the line built the Government agreed to issue to the Company the sum of 275,000 francs, nominal value, in Imperial Ottoman bonds, to be secured by a first mortgage on the railway and its properties.[47] The payment of interest and sinking fund on these bonds was to be guaranteed by the assignment to the Public Debt Administration for this purpose of the revenues of certain of the districts through which the railway was to pass. For the purpose of financing the first section of two hundred kilometres beyond Konia, there was delivered to the Company on March 5, 1903, an issue of fifty-four million francs of “Imperial Ottoman Bagdad Railway Four Per Cent Bonds, First Series.”[48] Similar payment for the construction of subsequent sections was to be made the subject of further agreement between the Government and the concessionaires.

In addition to supplying in this manner the actual funds for the building of the railway, the Ottoman Government guaranteed gross operating receipts of forty-five hundred francs annually for each kilometre of the line open to traffic. If the receipts failed to reach that sum, the Government was to reimburse the Company for the deficiency. If the receipts amounted to more than forty-five hundred francs per kilometre in any given year, the excess over that amount to ten thousand francs was to belong to the Government; any excess over and above ten thousand francs was to be divided sixty per cent to the Government, forty per cent to the Railway. The Government also agreed to reimburse the Company, in thirty annual payments of three hundred fifty thousand francs, for such improvements as might be necessary to prepare the Anatolian Railways for the initiation of a through express service to the Persian Gulf and, furthermore, to subsidize that express service at the rate of three hundred fifty thousand francs annually from the date of the completion of the main line to Aleppo.[49]

Closely connected with these financial guarantees were grants of public lands. Lands owned by the Government and needed for right-of-way were transferred to the concessionaires free of any charge. Additional land required for construction purposes might be occupied without rental as well as worked by the Company for sand and gravel. Wood and timber necessary for the construction and operation of the railway might be cut from State-owned forests without compensation. The concessionaires were permitted to operate mines within a zone twenty kilometres each side of the line, subject to such regulations as might be laid down by the Ministry of Public Works. As a public utility, the railway was granted the right of expropriation of such privately owned land as might be essential for the right-of-way, as well as quarries, gravel-pits, or other properties necessary for purposes of construction. The Company was authorized, also, to conduct researches for objects of art and antiquity along the route of the railway![50]

In the foregoing respects the Bagdad Railway Convention was by no means revolutionary in character. In issuing its bonds for the purpose of financing railway construction, in pledging public revenues as a guarantee of traffic receipts, in granting public lands for right-of-way, the Imperial Ottoman Government was following wellestablished precedents of the nineteenth century. The United States, for example, had adopted similar measures to encourage the building of transcontinental railways. To cite a single instance, Congress granted the promoters of the Union Pacific system a right-of-way through the public domain, twenty sections of land on each side of each mile of the railway, and a loan of bonds of the United States to an amount of fifty million dollars. Between 1850 and 1873 alone the Government transferred to the railways some thirty-five million acres of public lands, an area in excess of that of the State of New York.[51]

In certain other respects, however, the Bagdad Railway Convention was radical and far-reaching in its innovations. Worthy of first mention among its unusual provisions is the sweeping tax exemption granted the concessionaires by Article 8: “Manufactured material for the permanent way and materials, iron, wood, coal, engines, cars and coaches, and other stores necessary for the initial establishment as well as the enlargement and development of the railway and everything pertaining thereto which the concessionaires shall purchase in the empire or import from abroad shall be exempt from all domestic taxes and customs duties. The exemption from customs duties shall also be granted the coal necessary for the operation of the road, imported abroad by the concessionaires, until the gross receipts of the line and its branches reach 15,500 francs per kilometre. Likewise, during the entire period of the concession the land, capital, and revenue of the railway and everything appertaining thereto shall not be taxed; neither shall any stamp duty be charged on the present Convention or on the Specifications annexed thereto, the additional conventions, or any subsequent instruments; nor on the issue of Government bonds; nor on the amounts collected by the concessionaires on account of the guarantee for working expenses; nor shall any duty be levied on their stock, preferred stock and bonds, or on the bonds which the Imperial Ottoman Government shall issue to the concessionaires.” Thus the Bagdad Railway not only was assured of a subsidy constituting a preferred claim on certain taxes collected from the Turkish peasantry, but, in addition, was exempted from the payment of important contributions to the national revenue. The extent to which such an arrangement would confound confusion will be clear if one will recall that many other restrictions on the collection and disbursement of public funds were vested in the Ottoman Public Debt Administration.[52]

Incidental to the railway, the Bagdad Company was granted other valuable concessions. The corporation was given permission to establish and operate tile and brick works along the line of the railway. For the direct and indirect use of the railway and its subsidiary enterprises the Company was authorized to establish hydro-electric stations for the generation of light and power. The erection of necessary warehouses and depots was permitted as essential to the proper operation of the railway. The Anatolian Railway was empowered to provide for satisfactory ferry service between Constantinople and Haidar Pasha, in order to insure direct sleeping-car service from Europe to Asia and to provide other facilities for through traffic. All of these subsidiary projects were to enjoy the same exemption from taxation as the railway itself.[53]

The concessionaires were granted the right of constructing at Bagdad, Basra, and at the terminus on the Persian Gulf modern port facilities, including “all necessary arrangements for bringing ships alongside the quay and for the loading, unloading, and warehousing of goods.” During the period of the construction of the railway the Company was granted rights of navigation on the Tigris, the Euphrates, and the Shatt-el-Arab for the transportation of materials and supplies necessary to the building and operation of the main line and its branches.[54] These river and harbor concessions aroused the fear and the rage of the Lynch Brothers, who, as we shall see, were to be among the leaders of British opposition to the Bagdad Railway.[55]

These, then, were the outstanding economic provisions of the Bagdad Railway Convention of 1903. The Imperial Ottoman Government assumed the cost of the construction of the railway and, in addition, guaranteed a certain minimum annual return on each kilometre in operation. It pledged for these purposes the taxes of the districts through which the railway was to pass, and it deputed the Ottoman Public Debt Administration to collect these revenues and supervise payments to the concessionaires. As additional compensation to the Company it made large grants of public lands and conceded valuable privileges indirectly connected with the construction of the railway. In this manner the Sultan mortgaged his empire. But mortgages have their purposes, and Abdul Hamid hoped for big things from the Bagdad Railway.