Financing the Eiffel Tower: Project Finance and Agency Theory
15 Pages Posted: 4 Dec 2015
Date Written: 2010
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 project’s 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.
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