Uncertainty about the scale of future demand presents a challenge for infrastructure design. The attraction of flexible strategies, incorporating upgrade options that can be exercised when and if required, has been recognized for a long time. The techniques of real options allowed the benefits of flexible strategies to be quantified for the first time. A new and simplified methodology for real options analysis has been developed and implemented in software. It performs evaluation in both cost and environmental impact terms. A case study of a real highway in Spain was evaluated using the new methodology and software. Seven alternative strategies for the roadway (subgrade, base course, and surface course) were evaluated, six with upgrade options that are exercised if the traffic demand crosses specified thresholds. The rate of traffic growth, and also the discount rate for financial evaluation, were treated as uncertain variables. The highway was designed when the Spanish economy was growing strongly and a high roadway specification performed best. Before the highway was built the economy crashed and construction was canceled. Recalculation for the posteconomic shock conditions with lower traffic growth and a higher interest rate favored a lower highway specification with upgrade options. Sensitivity analysis shows how the specification choice varies with the values taken by the uncertain variables. A novel specification was proposed to maximize flexibility when there is high uncertainty about traffic growth, and evaluation showed that it performed better in many conditions. The methodology of evaluating flexible strategies could be used in many applications, including infrastructure for climate change adaptation.
Fawcett, W; Urquijo, IR; Krieg, H; Hughes, M; Mikalsen, L; Gutiérrez, ORR
Cost and Environmental Evaluation of Flexible Strategies for a Highway Construction Project under Traffic Growth Uncertainty
Journal Of Infrastructure Systems