A Direct Interaction Approach to Identify Real Options “In” Large-Scale Infrastructure Systems

There is a universe of real options opportunities for infrastructure development that are not fully considered in real options analysis literature. These are known as real options “in” infrastructures systems. They are design components embedded early on “in” the system design process – i.e. prior to fielding and operations – to enable time-to-build, scale alteration, product switching, and many other real options difficult to classify through a discrete set of categories suggested by Trigeorgis (1996). Real options “in” system require technical and engineering knowledge. This differs from real options “on” system focusing on managerial flexibility (e.g. investment deferral, abandonment, growth). Several example case studies show real options “in” system offer significant economic value improvement compared to a baseline inflexible design, ranging between 20% and 80%. Because real options “in” systems are numerous and different from one infrastructure to another, there is a need for analytical tools to guide the engineering effort for valuable opportunities. This paper illustrates some of the research issues involved in developing this field productively. It suggests a potential approach based on direct interactions, discussions, and close work with designers to enable real option opportunities “in” infrastructure systems.