A Hybrid Real Options Model to Assess the Impact of an Innovation on Existing Infrastructure Assets

A Hybrid Real Options Model to Assess the Impact of an Innovation on Existing Infrastructure Assets

Pratt, Angus (TU Delft Civil Engineering and Geosciences)

Chan, P.W.C. (mentor)
Schraven, D.F.J. (mentor)
Leijten, M. (mentor)

Delft University of Technology

Civil Engineering | Construction Management and Engineering

2021-07-29

Infrastructure finds itself at a convoluted juncture. A vast network of problems and choices are to be made, where the right course of action can solve the issues that has befuddled the infrastructure domain. These problems can be briefly described as; ageing assets that are no longer fit for purpose, use of infrastructure as a political tool with questionable goals and unclear benefits and value reporting.

Due to ageing assets, owners are faced with the unenviable task of total motorway replacement, but solutions to this have been found in the sanctum of innovations. But there are issues with the methods of assessment used in decision making. A solution to all these woes could be found in a wholly more appropriate decision-making method; to both improve implementation and give clarity to the values of infrastructure.

Hybrid real options (HRO) is a new economic method, relative to currently adopted methods, that combines decision and financial analyses to deal with uncertainty in systems. However, this method is still in its infancy and requires considerable work to complete a full method.

This study built an HRO method. This method consists of 5 key stages: options identification, formation of mechanisms, creation of decision trees, financial analyses, and simulation. Which forms a holistic systems-orientated framework. Importantly this research aimed to create a method that can be used to create frameworks to form an assessment, not to create a framework via another method. This was tested against a hypothetical case study of a smart motorway (NL: Dynamic Traffic Management). This case proved several key points, that the HRO method:
• Can effectively represent systems (shown in the mechanism stage)
• Intake wide stakeholder values (proved by the entire cases completion)
• Represent options financially using time as a variable (ranging from simple nominal sum to complex European call options and graphical piecewise solution)
• Has Dynamic abilities (shown in mechanism 3 by the self-feedback assessment mechanism)

This also demonstrates that the HRO can build on the cons of the current decision-making tools without compromising the pros - a step towards applicability. This method was also validated by an external expert. However, limitations were found with regards to the exponential growth and ability of the method to represent qualitative options. It is discussed that these are possible to address but a real case study is required to prove this.

Hybrid
Real options analysis
management tools
Innovation
Infrastructural assets

http://resolver.tudelft.nl/uuid:7aee96b2-be7c-405f-8fe8-8acf21a50bcb

Student theses

master thesis

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