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This week I cover the Suez canal, looking at how much it costs, and a brief summary of its value for money.
The Suez Canal is a 120 mile man-made waterway. It stretches from Port Said on the Mediterranean Sea in Egypt, moving south to the city of Suez. Essentially the Suez connects the Mediterranean Sea to the Indian Ocean by way of the Red Sea, providing a sea route from the far east to Europe.
Who built it? Who runs it? Who owns it?
A tricky question, very political, so let me tow the line here. I’m completly ignoring the ancient Egyptian canals discovered by Napolean when he invaded Egypt.
In modern times, the canal was first proposed as early as 1839, based on the findings of French engineer, explorer and egyptologist Linant de Bellefonds. The International Commission for the Piercing of the Isthmus of Suez produced their final report in 1856; two years later, the Suez Canal Company was formally established. 2 years later, the Ottoman Governor of Egypt Khedive Said Pasha gave Ferdinand de Lesseps of France authorisation to create the company that would oversee construction of the canal. It took 10 years to build, and opened on the 17th November 1869.
Then in 1888, the Suez canal was declared a neutral zone, protected by Great Britain (which at that point controlled Egypt and Sudan). In 1936 the Anglo-Egyptian Treaty listed the canal under British control, so not neutral during world war 2. After the war, Egypt withdrew from the treaty, resulting in a series of events that led to the Suez crisis.
Under protection of the United Nations, the Suez Canal Company operated the waterway. It is now operated by the Suez Canal Authority, and is open to ships of all countries.
Why was it built?
Simply put, it is a more direct route for shipping between Europe and Asia, you don’t need to go all the way around Africa to reach India. Before the canal’s opening in 1869, goods were sometimes offloaded from ships and carried overland between the Mediterranean and the Red Sea. The European nations exporting heavy, bulky, low-cost raw materials and food from India, for example, would not have been at the levels experienced during the late 19th into the 20th century if the canal wasn’t there. Travelling through the Suez canal instead of circumnavigating Africa, aboard a steamship from Bombay to Liverpool or London shortened the journey by around 40 days. In modern days with faster and more powerful ships the time saving is around 9 days.
How much did it cost to build the Canal?
Fascinating detail into the costs, benefits and profitisation over the Suez is detailed by Hansen and Tourk, published in 1978, which also talks about the opportunity costs associated with building the Suez canal, particularly for French, British, Egyptian and American shareholders.
A fact of the construction process is that over the 10 years, an estimated 1.5 million workers were used during the project, an unknown number of these were slave labourers, and an unknown number of these believed to be tens of thousands died.
So here we go, some numbers for you:
The Suez canal company set up by Ferdinand de Lesseps started with a paid-up share capital of 200 million francs. 111 million were sold to private investors, of which 104 million francs were sold to French investors at an average of 5,238 francs per investor. Because he couldn’t get enough investors, the Egyptian government bought the remaining shares for 89 million francs.
During construction there were rebellions against colonial British and French rule in Egypt, and limits of construction technology caused delays. The total cost of construction more than doubled the original estimate.
The construction costs went up to 291 million francs, where quote obligations unquote were issued in 1867 for a total market value of 100 million francs. Further quote deligations unquote were sold in 1869 for 32.4 million francs, and bonds issued in 1871 with a market value of 20 million francs. This overspending really strained the company’s finances when the canal went into operation. Upt to 1918, the canal was expanded and deepened, with financing from sales during operation but also the further issuing of obligations of around 425 million francs.
The profits made during operation post 1918 provided enough finance for reinvestments as well starting to paydown the loans.
So, capital costs were predominantly covered by the Egyptian government (around 273 million Francs), when you include the debt finance, the donation of the land to the company and the core labour force (a subsidised workforce given that it was slave labour or payment was given at rural market rates) working for the construction period. Interestingly, the forced labour was stopped by the Egyptian Government in 1863, who were then made to pay 84 million francs to the company as an indemnity. From 1866 to 1869 Egypt paid a furthr 42 million francs in compensation for various services by the company and for return of sovereignty over the terminal ports of the canal. The Egyptian shares were sold to the British for the original 89 million francs.
The cost of constructing the Suez canal was around half a billion francs in 1870s money.
There are some interesting legacy payments for the canal company, such as 120,000 gold francs per annum paid to Lesseps family. Interesting.
How much does it cost to operate?
For the first couple of years there was less traffic than expected. But then, traffic stepped up, and it was a major turning point in global commerce, and geopolitics, especially in relation to the colonization of Africa by European powers. The politics is interesting, but I am going to steer clear of that.
We can look at this from the perspective of operating and maintaining the canal, and from the perspective of the shipping companies:
Maintenance of the canal includes the infrastructure such as ports, the dredging of silt, etc to keep the ships from going aground, security costs, potential ongoing capital projects to expand the canal.
Shipping costs consist of the capital cost, the suez canal fee (which for each ship is based on the Suez canal net tonnage, crew cost, maintenance costs, insurance costs, fuel and port dues (like container handling charges). As well as normal insurance, there is an Aden Emergency Charge (at 40USD/Twenty foot Equivalnt Unit), which is a premium for piracy off Somalia. Fuel cost accounts for approximately 50% of the total shipping unit cost for all the ship-sizes. Port dues approximately 20%, and depreciation cost and the NSR-SCR-combined fees including Aden emergency charge occupy approximately 10% respectively.
In 2014, the Egyptian government oversaw at $8 billion, 1-year expansion project that widened the Suez from 61 meters to 312 meters for a 21-mile distance. So, ships can go in both directions at the same time now… well, not at the moment, with that ship blocking it. Profitability for the canal owner/ operator means getting as many ships through and paying the fee as possible, whilst minimising maintenance costs. For the shipping company, they need to get to their destination in the shortest route minimising fuel costs, but they also need to make sure the port fees are low enough.
So Is it value for money?
I would find it difficult to calculate the payback or internal rate of return given such a long period of time, a bunch of different owners, a complicated political situation, the nationalised status of the Suez canal company, etc. From some publications it would suggest that the rates of return for the French shareholders and the British government were around 8-9%, with an opportunity cost of 3-4%. Great success. For the Egyptian Government the rate of return was 2-5%, with an opportunity cost of 11%. And for American investment .. not profitable.
The 20th century saw trade transformed globally, it also saw major shocks during thw two world wars, the Suez crisis, and the shifting of ports from the Mediterranean to norther Europe. Now we are talking about alternatives to the Suez, the major ones being the Northern Sea route and the Chinese Silk Road Initiative. As China has become more of an economical powerhouse, the Belt and road initiative and the Northern Sea Route have gained real momentum.
At the moment, the route around the Southern point of Africa (the Cape of Good Hope) is the main alternative. This is used for ships that are too bif for the Suez, and for those ships that are worried about piracy in Somalia. On cost benefit analysis, many ships going from Saudi Arabia to the US go this way.
Because of the melting Arctic sea ice the Northern Sea Route is becoming more feasible for cargo travelling between Europe and the far East during a six-to-eight-week window in the summer months. It’s a 40% shorter route, but this is offset somewhat by the need for icebreakers. For example a NSR fee is need to hire a Russian ice-breaker, escort by Government mandate with specifically designed and equipped ships i.e. ice-class ships.
There are talks of railways, nuclear powered ice-breakers, automated ships with no crew, amongst other ideas, which could all reduce the viability of the Suez canal. For now, it is still a vital route for goods between Europe and Asia.
What do you think about the cost of the Suez canal? Anything interesting that you found that I’ve missed? Or any comments? I’d love to hear your feedback. Also, let me know what you want to see on the show going forward.
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