Whether and When to Invest in Transportation Projects: Combining Scenarios and Real Options to Manage the Uncertainty of Costs and Benefits

Abstract

Transportation infrastructure projects are a cornerstone of economic growth. However, the issue of whether new transportation infrastructure projects deliver the expected benefits has come under considerable scrutiny. The growing economic uncertainty and the tightening of budget constraints have made the design, evaluation, and selection of such high-cost projects particularly critical. There are disagreements as to how project decision-makers can evaluate the long-term costs and benefits of infrastructure projects. The objective of this article is to address such disagreements. We develop and apply an innovative methodological approach that combines real options with scenarios to help policymakers assess the costs and benefits of transportation projects. While these techniques have been widely adopted in corporations, there is little empirical evidence regarding their combined use by project decision-makers dealing with complex infrastructure projects. In this article, we fill this gap in the planning and project studies literature. We show that scenarios and real options can be very helpful in developing a more comprehensive understanding of long-term impacts of major infrastructure projects and thus in selecting the most relevant projects. Overall, our article assists the debate on the management of the uncertainty of long-term costs and benefits of infrastructure projects and helps cope with such uncertainty.