Edouard Empain and the Paris Métro

Railways received substantial investment in the middle of the 19th century and financing railway construction was one of the largest undertakings of financial institutions like banks and stock exchanges up to that point. Laying down track between cities required substantial investment and this need is well recorded and widely known. The financial history of urban rail systems, by contrast, receives significantly less attention. Initially, urban rail meant trams but towards the end of the century, underground metro systems began to be built in the world’s largest cities, including Paris. A Belgian financier, Edouard Empain, was crucial to the development of the Paris Métro.

Vision for a Paris Métro

In the 1890s, the central government of France and the city government of Paris were vying for control of the task of building the Paris Métro. The battle was another part of the historical struggle between centralization and Parisian interests. Still, there would have been some practical differences in the system depending on who was given control. The national government favored a system design that would facilitate easy transfers between the railway termini in the city, like the Gare du Nord and Gare Saint-Lazare; this was also the desire of the railway companies. Meanwhile, the city government favored routes that prioritized local connectivity rather than through-traffic.

The impasse was resolved as Paris prepared to host the Universal Exhibition in 1900. The city government was given control of the project. It would farm the development of the Paris Métro out to a private company though as only a private railway company possessed the requisite technical knowledge.

Paris decided to entice a developer for the metro by granting a concession. The city would borrow money for the project, since it could do so at low interest rates, but private entrepreneurs would bid to operate the line built for a certain amount of time, allowing the city to defray some of the cost. Under the terms of a concession, the city would end up owning the core fixed infrastructure, like tunnels, bridges, and stations. Conversely, in addition to the right to operate the system for some period, the concessionaire would also own the moveable pieces of the operation like the track, electrical equipment, rolling stock, and station entrances.

Six bids for this concession were received when it was put out to tender in 1897. Only two were judged to be credible with respect to the terms they were willing to accept and the financial strength of the sponsors submitting the bids. The winning plan came from what was largely a foreign group, the Compagnie Générale de Traction, which was backed by Belgian entrepreneur and investor, Baron Edouard Empain.

Belgian Capital

It is not actually surprising that there would be a Belgian connection to the Paris Métro. At the time the Paris Métro was being conceived, Belgian capital was being invested into urban transport, such as trams, on a large scale. Belgium may have been a relatively small country by size and population, but Brussels was the fourth largest financial center in Europe after London, Paris, and Berlin. Different centers specialized in different areas of industrial finance, like electrical engineering in the case of Germany and urban gas lighting in France. Belgian capital was invested in rail, and especially in trams and light rail. Of the fifty largest companies listed on the Brussels Bourse in 1892, twenty-seven were transport companies.

There was a brisk pace of new company formation in urban transport. In the five years between and including 1894 and 1898, twenty-eight tram and light rail companies were formed in Belgium and these raised capital of 223.6 million Belgian francs. In the next five years, between 1899 and 1903, eleven more companies raised 305.8 million Belgian francs.

There are a few reasons why Brussels was a worthwhile place to raise capital for new projects. Firms raising money in Belgium could draw on local savings. The country also had liberal laws concerning incorporation and low taxes; the requirements for listing companies were not very restrictive either. A lot of the money raised in these conducive markets went abroad because local investment opportunities were limited by a saturated market.

Why did Belgian capital find its way into urban rail projects? Well, a lot of Belgian foreign investment in tramways was thought to stimulate demand for coal and metals, which Belgium produced. So, a bank with many clients, and perhaps investments, in these sectors would be more eager to support tram companies. As an example of the sort of benefits to local industry that might accrue from this sort of investment, consider that the Société générale de tramways électriques d’Espagne, a Belgian company which owned the trams of Madrid, placed an order for 105 Belgian electric motors between 1900 and 1908.

In the 1890s, most of Belgium’s foreign investment in trams would be in Europe, albeit pretty well dispersed on the continent with large exposure to Western, Southern, and Eastern Europe. In the coming decades, Belgian investment in these industries would take root even in the Middle East and Latin America.

Baron Edouard Empain

The sponsor behind the winning bid for the Paris Métro was Edouard Empain, a Belgian entrepreneur born in Beloeil in 1852. Empain built a railroad just over the border in France, his first railroad investment, and built a business active in several industries but most notably in railways. Edouard Empain liberally deployed capital in France where half of his investments lied. By the time the opportunity to build the Paris Métro was secured, he had built or acquired several tram lines. Besides those in Belgium, his empire extended to France, from the department of Nord near the Belgian border all the way to the opposite corner of the country where Empain owned a tram line running between Bayonne and Biarritz.

Crucially, Edouard Empain founded his own bank in 1881, the Maison de banque E.-L.-J. Empain. This captive source of capital for investment gave him independence from the big Belgian banks which often owned large stakes in the firms they lent to. The synergy between banking and industry in Belgium means it wasn’t uncommon for large industrialists to establish their own banks.

The Banque Empain operated as an investment bank, listing securities for Empain’s companies on the Brussels Bourse where the broader public could buy them. When Empain acquired or founded a new company, the Banque Empain was usually quick to list the shares, typically within two years, giving Edouard Empain a source of liquid funds. Prior to the late 1880s, the Empain group of companies largely needed to finance themselves by issuing shares which diluted his stake but by the mid-1890s, Empain’s businesses were funded primarily by issuing bonds since market conditions became favorable. To generate interest, Empain publicized his firms in French, Belgian, and Dutch newspapers.

Edouard Empain attempted to secure a tram concession in Paris in 1894 but lost out to competitors. This was at a time when electric trams were replacing steam-driven trams, and even some remaining horse-driven lines. Shortly thereafter, he received a concession to build a tram system for Cairo. In raising money for these ventures, Empain came to rely on capital raised in France as well as Belgium. Thankfully for his fortune, the 1890s proved very favorable for borrowing large amounts of money. Beyond borrowing there, and despite losing out on the earlier Paris tram concession, the Empain group was also investing more in France.

Compagnie du Métropolitain de Paris

The Empain-backed Compagnie Générale de Traction, which won the Paris underground metro bid, formed a new entity to operate the Paris Métro, the Compagnie du Métropolitain de Paris (CMP), formed in 1898. This company was capitalized with twenty-five million francs. Empain was about one-quarter owner of CMP initially but quickly thereafter became the largest shareholder and appointed much of its board. The company was eventually listed on the stock exchanges of Paris and Brussels.

Under the city’s supervision, the company quickly built the first line of the Paris Métro, Line 1. Besides the track and station infrastructure, a power station had to be built on the Quai de Bercy. Line 1 opened in July 1900, a few days into the Universal Exhibition. The trains proved popular. That year, the metro had 17.7 million passengers; in 1901, the first full year in operation, saw passenger count rise to 55.9 million. By 1903, this had risen to 118.2 million and 190 million by 1906.

CMP’s system grew to seventy-eight track kilometers by 1914. Up to that point, the metro system was also financially successful. In the immediate pre-war years 1911-1913, CMP earned returns on equity of 10.9% on a share capital with par value of sixty-eight million francs. This was a rather profitable business when compared to Empain’s other companies, though this came with some challenges.

First, there was a competitor. A new company, the Société du chemin de fer électrique souterrain du Nord-Sud de Paris (Nord-Sud), was given a concession to operate new lines and it built two that now correspond to Line 12 and Line 13 on the Paris Métro. The government pressured the companies to allow free transfers between the systems but compensated them for this. Nonetheless, CMP’s preference was to deny such transfers.

Then, wartime and post-war inflation damaged the CMP. For one, the cost of coal increased, making electricity to run the system more expensive. Inflation was a problem affecting urban rail companies across Europe. Costs increased but companies were pressured to keep fares low or were required to under the terms of their concessions. Further, the two underground metros competed not just with each other but also with trams. The Compagnie des tramways de Paris et du département de la Seine, which was partially owned by Empain as it happens, possessed 268 kilometers of track by 1914. The CMP had wanted to coordinate or consolidate these operations but was rebuffed by the city government on competition grounds.

Combined CMP and Nord-Sud System Map in 1914

The CMP concession was revised in 1921 to reflect the difficult new reality. The city increased its control over the company’s finances. In return, CMP had a reduced set of responsibilities, construction and maintenance alone, and could earn a lower but steadier rate of profit. The company regained some of its old role in 1930 though. Further, while the city had earlier rejected this possibility, that same year, the two metro operators merged, with CMP taking over the operations of Nord-Sud which was not as financially successful. Now, the Parisian metro system was unified. The company would later be nationalized after the Second World War.

Lesson

Financial markets compete with one another but investors in particular places often come to favor particular investments with which they are most familiar. As a result, different markets specialize in particular areas of investment. Edouard Empain’s urban rail portfolio is evidence of how this specialization evolves over time. It often focuses domestically initially, until local investment opportunities in that sector have dried up and then local investors remain invested in the same assets but abroad rather than at home.

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