The Real Options Approach For Uncertainty Management In Dutch Infrastructure Projects
A. Al Darwish (TU Delft - Civil Engineering & Geosciences)
D.F.J. Schraven – Graduation committee member (TU Delft - Architecture and the Built Environment)
M. Leijten – Mentor (TU Delft - Technology, Policy and Management)
Y. Kharoubi – Graduation committee member (TU Delft - Civil Engineering & Geosciences)
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Abstract
The Dutch infrastructure sector faces significant challenges in investment decisions under uncertainty, particularly in large-scale projects with long lifespans and high sunk costs. Traditional methods like Cost-Benefit Analysis (CBA) often fail to account for the value of flexibility and strategic options, such as deferring, expanding, or abandoning projects in response to changing conditions. This research examines the Real Options Approach (ROA) as a complementary method to enhance decision-making in this context. Originating from financial economics, ROA provides a framework for valuing and managing strategic investments by recognizing the intrinsic value of flexibility in uncertain environments. The study assesses the current use of ROA in the Dutch infrastructure sector, identifying barriers to its adoption and potential enablers. Through literature review and empirical research, including interviews with key stakeholders, the research highlights the practical challenges and opportunities associated with implementing ROA. Findings suggest that while ROA is theoretically appealing, its practical application in the Netherlands is limited due to entrenched standardized decision-making processes and the significant influence of political considerations that often prioritize short-term gains. Additionally, there is a widespread lack of familiarity with ROA, and it is perceived as complex, requiring substantial time and financial resources. To enhance ROA adoption, the research recommends effective communication to raise awareness of its benefits, targeted training to build stakeholder competence, and the simplification and standardization of ROA processes with clear documentation. Moreover, fostering a cultural and organizational shift towards flexibility and adaptability, along with the gradual integration of ROA into decision-making, is essential. These measures are crucial for bridging the gap between ROA's theoretical potential and its practical application, leading to more informed, flexible, and resilient investment decisions under uncertainty.