The Eiffel Tower, the first project finance project

The construction of the eiffel tower represented a technological feat. However, not many people are aware that it was also a feat of financing, one of the first examples of modern project finance.

The legal and financial arrangements created for the tower were quite similar to those used in project finance today. to celebrate the centenary of the French revolution, the French republic decided to hold a world’s fair in 1889 to showcase French engineering. engineer Gustav eiffel proposed building a 300-meter tower, which would be the world’s highest. the project cost 6.5 million francs (approximately €20 million today). The state provided 1.5 million francs, and the balance was to be paid by the monument’s operations during the fair and over the next 20 years. the majority of the financing was in fact repaid through ticket sales. at the end of the first two decades, the eiffel tower was to be turned over to the city of Paris2. Eeiffel created a limited liability company, or société anonyme, called the société de la tour eiffel (STE), and it issued two kinds of shares (including French “ordinary” shares, which are similar to convertible bonds). The shares began trading soon after the tower opened. repayment to the STE was made one year after the monument opened to the public and began collecting tickets. eiffel, the shareholders and the state profited substantially. this robust arrangement, including the concession contract at its core, lasted for more than a century.

Today, the basic public-private partnership technique used to finance the eiffel tower is known as a Build, operate and transfer (BOT) approach. In the building phase, the concession company erects the infrastructure and provides financing through equity capital. in the operating phase, the concession company runs the facility, and the operating revenues are used to pay lenders (repay the full debt) along with equity contributors. in the final, transfer phase, the concession company turns the facility over to the authority that granted the concession when it expires, generally at no cost.

The key actors in a BOT are :
• The “conceding” authority (i.e. a state or a regional or a local body), which grants the concession for the project.
• The building contractor, which generally is required to deliver the project at a set price on a given due date, based on a turnkey-operation contract.
• The operator, which is a significant participant, par- ticularly in projects where operation and mainte- nance are critical.
• Lenders (including banks, financial institutions and multilateral lenders).
• Capital investors (including equity investment funds and insurers).

Example taken from the JP Morgan Asset management Infrastructure investing white paper