Real Options applied to infrastructure projects: A new approach to value and manage risk and flexibility

Infrastructure projects are subject to internal and external uncertainties. Being able to anticipate to uncertainties within a project and manage them adds value to the business case. Although it is commonly used to evaluate projects, the Net Present Value (NPV) method is unable to determine the added value of managing risk and flexibility. Real Options (RO), a method originating from financial markets, gives management a tool to value flexibility and risk in infrastructure projects. Literature provides several examples on how to value options or execute a Real Options analysis. However, the majority of these examples fails to incorporate all opportunities offered by RO to include options and/or ways to reduce uncertainty. This paper presents twelve opportunities that should be considered to minimise the risk of a project and increase the flexibility of the project during its lifetime. This checklist is based on practical experience with project evaluations and could be used as a starting point to list alternatives that should be evaluated. Including a wider set of alternatives in an evaluation has substantial benefits and may lead to different decisions.