Real option applications in megaproject planning: trends, relevance and research gaps. A literature review

Abstract

Megaprojects are complex and contain multiple risks and uncertainties. The dominant 'predict and control' planning method mainly ignores risks and uncertainties, making megaprojects inflexible and vulnerable to unforeseen changes. Insights and methods from real options theory (ROT) in economics and finance have the potential to improve planning of megaprojects in three ways: (a) better management and assessment of risks and uncertainties, (b) a more transparent and explicit identification and communication of risks and uncertainties, and (c) a monetary valuation of flexibility. An in-depth literature review of 42 papers of real options applications to megaprojects serves as a benchmark to analyse if current real options literature meets these three expectations. Through this review, we identify the main trends, relevance and research gaps. While its theoretical relevance is illustrated, three main gaps impede real options' practical relevance for megaprojects: the applications paint an incomplete picture of megaprojects; its mathematical complexity; and the lack of empirical evidence of real-life cases. Based on a plea for more interactive research between scholars and planning practitioners, we provide an agenda for further research as to how ROT can better meet its expectations and fulfill its potential for the planning of megaprojects.

Optimized Expansion Strategy for a Hydrogen Pipe Network in the Port of Rotterdam with Compound Real Options Analysis

“…ROA for decision making under uncertainty has attracted the attention of numerous scholars. The scientific literature offers a broad array of ROA applications among a broad array of domains such as flood defense [45,46], water supply [47,48], infrastructure maintenance and replacement [49,50], construction and public-private partnerships [24,[51][52][53][54][55], exploitation of toll roads [56] and the energy sector [14][15][16]26]. Over the last years, ROA has quickly emerged in the literature on energy transition, firstly because energy transition is subject to uncertainty and rapidly changing environments and secondly because valuing flexibility can make innovative but expensive investments attractive, whereas traditional discounted cash flow would not [14,20,27].…”

“…As an example, a Geometric Brownian Motion (GBM) is popular for predicting stock price developments, however, many authors argue whether this assumption holds for the prediction of prices in real projects [19,29,31,32]. Similar findings are presented by [24], whose authors challenge the practical relevance of many ROA applications given the absence of compound options, the assumptions on uncertainty quantification, the mathematical complexity and the lack of empirical evidence in real-life cases.…”

A Village Reconstruction Model Using Particle Swarm Optimization Algorithm

“…e three meso-levels of material, color, and decoration were compiled. After the study, the architectural style of the Hui village in Daming County will be transformed into a versatile Hui characteristic style under the premise of unity and harmony [14].…”

Construction Strategic Project Readiness Assessment

“…Large capital construction projects are fraught with significant planning issues, with cost and scheduling remaining key areas of scrutiny. Failure to exploit opportunities for improving project value and decreasing risks during the FEP phase could lead to the undervaluation of such projects (Machiels et al, 2021). As mentioned, acquiring an in-depth understanding of this type of risk is challenging because neither spending nor delivery has begun during this phase.…”