Financing the Eiffel Tower: Project Finance and Agency Theory
du Moutier, Michel Lyonnet, Journal of Applied Finance
The City of Paris's Eiffel Tower, the world's tallest structure at its completion in 1889, has come to symbolize Europe itself. It is an embodiment of what we now call project finance. Under this model, a public grantor awards a concession to a projects private sponsor. The sponsor builds the project, financing it with equity and (mostly) limited-recourse debt, and uses revenues from operation of the project to service the debt. At the end of the concession, the sponsor or builder returns the infrastructure of the project to the public authority. The success of project finance depends on an optimal allocation of risks among all parties, including principals and agents. Agency theory provides us a way to characterize the myriad problems arising from agent-principal conflicts in such large complex projects in the modern corporate world. A positive agency theory model is built here through a detailed analysis of property rights exchanged in the transactions needed to build the Eiffel Tower. Analysis of the original financial documents and contracts for the Tower reveals how specific provisions in the contracts combined to reduce agency costs all around. Thus a model derived from positive agency theory may help us better understand modern project finance.
In the mid- 1880s, wishing to celebrate the 100th anniversary of the French revolution, the French Republic planned an 1889 exposition intended to promote French knowledge and industry. The French engineer, Gustave Eiffel, suggested to Edouard Lockroy, then the Minister of Commerce and Industry and Fair Commissar, building what would become the world's highest tower as an entrance gate to the Fair. The tower was to be constructed of metal structural engineering members like the famous Garabit viaduct or New York City's Statue of Liberty. Eiffel succeeded in convincing Lockroy that such an edifice would be proof of France's industrial design ability.
ARequest for Proposals (RFP) was issued on May 1, 1886, requiring all responses to be filed within a mere two weeks. The press and various selection committee members noted at the time that this rather clearly gave the edge to Eiffel over other prospective bidders. And, unsurprisingly, Eiffel won the bid. Unable to afford complete financing of a 6.5 million French franc project (in 1 889 terms), the government decided to offer a 1.5 million franc subsidy for the project, with the balance to be funded by the private operator and reimbursed by operating revenues attributable to the tower during the World Fair and for twenty years after.1 Gustave Eiffel developed an innovative financial scheme to carry out his Eiffel Tower financing.
At the end of this twenty-year period, the tower was to be destroyed. Fortunately, it was not.
Nowadays, the monument is recognized as a showpiece of exceptional technological prowess, and it has high symbolic value in Europe.2
On January 8, 1887, the French government, the City of Paris, and Gustave Eiffel signed a three-party contract specifying details of the concession arrangements. This document and related contemporary notes give us a fascinating laboratory for analysis of the agency relationships between the conceding authority and the concessionaire in what is now called a Public-Private Partnership (PPP).
The Eiffel Tower financing over a century ago may also tell us that there is "nothing new under the sun". As a matter of fact, the monument financing is an early example of what we now call project finance. Before the financial crisis, over $200 billion of project finance loans was raised every year in the debt financial markets, yet there is little theoretical work on this topic.
We use the Eiffel Tower example to test the positive agency theory model, which draws on Jensen and Meckling (1976). Our study involves a detailed analysis of the property rights exchanged in transactions between the parties involved in the Eiffel Tower project.
In analysis of the various contracts, we look for clauses that 1) allocate project risks to the entities or managers that are the best able to manage them or 2) serve to prevent parties from behaving opportunistically. …