4.7 Conclusion
Decisions to undertake investment projects will often be incomplete in the sense that different aspects of the implementation, including the timing of the investment and the phasing of the investment, will be at the discretion of the party implementing the investment rather than the party making the original decision. The literature on real options represents a substantial advance on the earlier literature on cost-benefit analysis and the weighted average cost of capital. Perhaps more importantly, the growing literature on real options allows more sophisticated analysis of complex investment scenarios, including those where ownership interests or responsibilities for implementation are shared between the private sector and the public sector. We have shown that while the differences in the objectives and constraints between public-sector and private-sector investors may be material, these may be incorporated into real option analysis in a straightforward way.
Real-option analysis has provided formal methods for capturing the differences between investments that involve large fixed and sunk infrastructure projects, and those where the scale, location and use of the investment are more flexible. Further, real-option analysis may provide assistance in thinking about the circumstances in which private investment may be utilised to achieve public purposes, and the extent to which the terms of the contract will need to explicitly recognise characteristics of the investment (including the variability in demand and the extent to which it is sunk) if efficient outcomes are to be achieved.
