1 Capital-intensive and long-term
investments
1.1 Historical examples of long- term and capital- intensive investments
The starting point for defining the research problem was the observation
that there are many examples of investments in history that took many years
to implement and consumed significant amounts of capital and that had a
similar (project) nature and faced similar challenges. In order to better under-
stand their specificity, we present several selected capital- intensive and long-
term investments, as well as selected information relevant to the purpose
of the work (for example, construction cost, construction time, method of
financing).
Examples of attempts to finance a long- term and capital- intensive invest-
ment exclusively from private funds were the construction of the Suez Canal
(1859– 1869) and the construction of the Panama Canal (1879– 1889 – the
first approach, and 1904– 1914 – the main construction period). In both
cases, companies were founded (the Suez Canal Company founded in 1859
and Compagnie Universelle du Canal Interocéanique de Panama in 1880,
respectively) that issued shares (and in the case of Compagnie Universelle
du Canal Interocéanique de Panama, also bonds, including those linked to a
lottery). The construction of the Suez Canal was financed by the share cap-
ital of private investors in approximately 55%, of which 52% was owned
by French investors and approximately 45% by the Egyptian Government,
later supplemented by bonds, mainly by the Egyptian Government (eventu-
ally >60% was government financing) (Hansen and Tourk, 1978, pp. 938–
958). The funds obtained in this way were invested in the construction of
canals. The cost of building the Suez Canal was approximately USD 10
billion at today’s prices (approximately USD 470 million according to the
1870 estimate) (Alfred, 2012), and the Panama Canal was approximately
USD 11.5 billion at today’s prices (USD 375 million according to the 1913
estimate) (Onion et al., 2009). The Suez Canal Company brought large
profits to investors (the rate of return for French shareholders and the British
Government was approximately 8– 9% at an opportunity cost of 3– 4%, and
for the Egyptian government 2– 5% at an opportunity cost of 11%), while
Compagnie Universelle du Canal Interocéanique de Panama went bankrupt
in 1889. Eventually, both canals were nationalized. In the case of the Suez
Canal, this was in 1956, and in the case of the Panama Canal, the project
started by Compagnie Universelle du Canal Interocéanique de Panama after
its bankruptcy was bought by the US Government and completed in 1914.
In 1977, the United States and Panama signed new agreements to replace the
original 1903 agreement and agreed to transfer control of the canal in 1999,
which became a fact. The Suez Canal is currently managed by the Egyptian
state- owned Suez Canal Authority (SCA). It can, therefore, be said that in the
case of the Panama Canal, the project was financed both by private investors
(hundreds of thousands of French citizens who lost the invested funds) and by
the government (the United States), which completed the investment project.
The Suez Canal was expanded between 2014 and 2016 at a cost estimated
at USD 9– 15 billion in order to nearly double the capacity of the canal. The
investment was financed through the issue of investment certificates issued to
Egyptian and individual entities.
Another example of a long- term and capital- intensive investment financed
from private funds is the construction of the First Transcontinental Railroad
in the United States in the 19th century (1863– 1869). This project received
support from the federal government. For the American bankers of that time,
financing such construction was risky, raising the necessary capital (liquidity)
to cover the investment costs was difficult, and the expected return was diffi-
cult to estimate. Also, politicians and the US federal government, especially in
the face of Civil War expenses, did not want to incur such an outlay – the final
cost of the transcontinental railroad was USD 100 million (approximately
USD 2– 3 billion at today’s prices), which was one- third of the federal budget
in mid- 19th century in times of peace. Therefore, a financing mechanism
was created in which it was entrepreneurs who bore most of the expenses,
but with the support of the federal government. The mechanism was that
for every mile of railroad track financed by private investors (enriched by
gold mining and trading), the federal government was to transfer owner-
ship of 10 miles of public land on either side of the line. The value of these
lands, thanks to the railway line, was to increase in the future, which would
increase investors’ profits and reduce their risk. This opportunity was used by
the founders of two companies – the Central Pacific Railroad Company and
Union Pacific – which the government authorized to build sections of track in
the central west and west of the country, respectively. Central Pacific issued
USD 100 million of shares, of which it managed to sell USD 60 million (how-
ever, all of these shares were held by a small group of approximately seven
investors). In addition, under the Pacific Railroad Act passed by Congress
in 1862, the federal government could support the Central Pacific Railroad
with funds obtained from the sale of 30- year government bonds. Thus, the
company would receive USD 16,000 (approximately USD 480,000 at today’s
prices) for each mile of railroad built on flat land, USD 32,000 (approximately
USD 960,000 at today’s prices) in hilly country and USD 48,000 (approxi-
mately USD 1.5 million at today’s prices) in mountainous miles. However,
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