Real options in infrastructure projects: theory, practice and prospects

Abstract

Developed from financial options theory and pricing models, real options have evolved to become a mainstream area of academic inquiry. This account traces the field generally from its origins to present day. Research has demonstrated the potential for real options to enhance project value by managing uncertainty through investment, structuring and design decisions. Despite this, real options theory is not widely used as a whole or within the discipline of infrastructure development and construction project management. The creation of infrastructure occurs almost exclusively in a project-based environment. Not surprisingly, project managers play a pivotal role in the success of such projects and make frequent decisions that shape and reshape implementation strategies. Perhaps, the path towards disseminating real options into infrastructure project practice is to improve the understanding of the managerial environment and behaviour. Hence, the characteristics of infrastructure projects and project management underpin six propositions, which need further investigation to aid bridging the chasm between the notion of real options and its application in actual project settings. Each proposition is linked to the literature and project management practice.