Buying real options – Valuing uncertainty in infrastructure planning

For the last two decades real options thinking has been heralded as a new approach for handling uncertainty in investment decisions. However, application of the approach in infrastructure investment decision-making is negligible thus far. In this contribution we address the question: what are the barriers for the implementation of the real option approach (ROA) in practice? We focus on the experiences in several infrastructure-bound sectors: spatial planning and transport, ports, and energy.We conclude that the ROA maturity levels of these different sectors are quite different, and we ascribe these differences to the political setting, the institutional setting and the organisational flexibility of the sectors and their stakeholders. We suggest that the same issues apply to other advanced, quantitative methods.

► We investigate the slow uptake of real options analysis in infrastructure planning.
► Problems of political, institutional and organisational lock-in are most prominent.
► Principal-agent problem: costs, decisions and benefits lie with different actors.
► In competitive environments the uptake of innovative methods like ROA is higher.