The impacts of real options analysis on EU co-financing policy: the case of Ponta Delgada Port in the Azores

Abstract

Under the EU's cohesion policy, even if investments have negative net present values, they can be co-funded if they are critical for a region's development and economic and social cohesion. Ponta Delgada Port, the most important maritime infrastructure in the Azores, is struggling to keep pace with its growing activity due to its limited capacity. Investment plans to expand its capacity were drawn, but the traditional discounted cash flow method showed that the investment should not be deployed. However, the project will generate positive effects in the economy. The framework used by the EU to figure co-funding rates does not incorporate the flexibility factor. This study uses real options analysis to assess the investment and its potential impact on the EU's co-financing policy. The hypothesis is that real options analysis can result in lower co-funding rates compared to the method currently used by the EU. The results support this hypothesis.