De-Risking Infrastructure Finance through Flexibility in Engineering Design
Publication: International Conference on Transportation and Development 2021
ABSTRACT
This paper proposes a new, highly collaborative approach to reduce the financial risks that infrastructure development faces and thus to expand the pipeline of feasible projects. The approach innovatively combines advanced engineering methods with financial analysis to de-risk project outcomes. It relies on the concept of flexibility in engineering to navigate uncertainty and improve the risk profile of projects to sustainably bridge the gap between supply and demand for infrastructure services. The approach has four main elements: (1) explicit recognition of relevant design uncertainties; (2) proactive analysis of attendant financial risks; (3) development of real options that confer protection against these risks; and (4) definition of a strategic plan for a de-risked design that improves financial results across different futures and priorities. This paper illustrates the process with an example dealing with LNG infrastructure, but conceptually generalizable to a broad range of infrastructure projects and types.
Get full access to this article
View all available purchase options and get full access to this chapter.
REFERENCES
Almisnad, A., de Neufville, R., and Garcia, M. (2017) “Risk Distribution and the Adoption of Flexibility: Desalination Expansion in Qatar,” Chapter 12 in Water Diplomacy in Action: Contingent Approaches to Managing Complex Water Problems, S. Islam and K. Madani, eds., Anthem Water Diplomacy Series, Anthem Press, London, U.K., pp. 229-252.
Bain, R. (2009) “Error and optimism bias in toll road traffic forecasts,”Transportation, 36(5), pp. 469–482. doi: https://doi.org/10.1007/s11116-009-9199-7.
Basupi, I., and Kapelan, Z. (2015) Evaluating Flexibility in Water Distribution System Design under Future Demand Uncertainty,” ASCE J. of Infrastructure Systems, 21(2).
Biesek, G., and Gil, N. (2012) “Design for evolvability at project front-end strategizing: theory and methods,” Paper presented at PMI® Research and Education Conference, Limerick, Munster, Ireland. Newtown Square, PA: Project Management Institute.
Blunt, K. (2016) “The end of the road — San Antonio Express,” Available at: http://projects.expressnews.com/the-end-of-the-road-texas-130-toll-road (Accessed: 12 May 2019).
Cardin, M.-A., Bourani, M., and de Neufville, R. (2015) “Improving the Lifecycle Performance of Engineering Projects with Flexible Strategies: Example of On-Shore LNG Production Design,”, Systems Engineering, Vol. 18, Number 3, pp. 253-268.
de Neufville, R., and Odoni, A. (2013) Airport Systems Planning, Design, and Management, 2nd ed., McGraw-Hill, New York.
de Neufville, R., Scholtes, S., and Wang, T. (2006) “Valuing Options by Spreadsheet: Parking Garage Case Example,” ASCE J. Infrastructure Systems, 12(2), pp. 107-111, 2006.
de Neufville, R., and Scholtes, S. (2011) Flexibility in Engineering Design, MIT Press, Cambridge, MA.
de Neufville, R., Smet, K., Cardin, M.-A., and Ranjbar-Bourani, M. (2019) “Engineering Options Analysis - Applications,” Chapter 11 in Decision Making under Deep Uncertainty: from Theory to Practice, V.A.W.J. Marchau, W.E. Walker, P. Bloemen, and S. Popper, eds., Springer, pp. 321-351.
Deloitte. (2008) Building Flexibility. New delivery models for public infrastructure projects, London, U.K.
Fitch, G., Odeh, I., Kautz, F., and Ibbs, C. W. (2018) “System Dynamics Models for the Valuation of Real Options in P3 Concession Project Agreements,” ASCE J. of Infrastructure Systems, 24(1).
Flyvbjerg, B., Holm, M. S., and Buhl, S. (2005) “How (In)accurate Are Demands Forecasts in Public Works Projects?: The Case of Transportation,” J. American Planning Association, 71(2), pp. 131–146.
Ford, D., Lander, D., and Voyer, J. (2002) “A Real Options Approach to Valuing Strategic Flexibility in Uncertain Construction Projects,” Construction Management and Economics, 20(4), pp. 343-351.
Garvin, M., and Ford, D. (2012) “Real Options in Infrastructure Projects: Theory, Practice, and Prospects,” Engineering Project Organization Journal, 2(1-2), pp. 97-108.
Geltner, D., and de Neufville, R. (2018) Flexibility and Real Estate Valuation under Uncertainty: A Practical Guide for Developers, Wiley-Blackwell, U.K. and U.S.
Gupta, A. (2011) Governance Mechanisms for Infrastructure Public-Private Partnerships: Focus on India, Master of Science Thesis, MIT Technology and Policy Program, Cambridge MA USA. Available at https://dspace.mit.edu/handle/1721.1/68448.
International Organization for Standardization. (2020) ISO Standard 31000 -Enterprise Risk Management for the Professional, Geneva, Switzerland.
Irwin, C. (2007) Government Guarantees: Allocating and Valuing Risk in Privately Financed Infrastructure Projects, The World Bank, Washington, DC.
Lasi, D., and de Neufville, R. (2019) “Project Phasing and Flexibility can reduce risk and increase value of the new Space Launch Complex in the Azores,” MIT-Portugal Research Conference, San Miguel, Açores.
Lin, J., de Weck, O., de Neufville, R., and Yue, H. (2013) “Enhancing the Value of Oilfield Developments with Flexible Subsea Tiebacks,” J. Petroleum Science and Engineering, 102(February), pp. 73-83. https://doi.org/10.1016/j.petrol.2013.01.003.
Mak, J. (2018) The Design of Resilient Engineering Infrastructure Systems, PhD dissertation, Department of Engineering, Cambridge University, Cambridge, U.K.
Martins, J., Marques, R., and Cruz, C. (2015) “Real Options in Infrastructure: Revisiting the Literature,” ASCE J. of Infrastructure Systems, 21(1).
Nguyen, D., Garvin, M., and Gonzalez, E. (2018) “Risk Allocation in US public-private Partnership Highway project contracts,” ASCE J. of Construction Engineering and Management.
O’Dea, L. (2016) Contracts, Not Concrete: De-Risking Private Finance of Sustainable Infrastructure in Emerging Markets, Ph.D. dissertation, MIT Sloan School of Management, Cambridge, MA. http://hdl.handle.net/1721.1/104514.
Peters, L. (2016) “Impact of Probability Distributions on Real Options Valuation,” ASCE J. of Infrastructure Systems, 22(3).
PPIAF. (2017). Toll-Road PPPs: Identifying, Mitigating and Managing Traffic Risk. Washington D.C.
Schmitt, A. (2016) “Private Toll Road Backed By $430 Million in Federal Funds Goes Bust,” Available at: https://usa.streetsblog.org/2016/10/18/private-toll-road-backed-by-430-million-in-federal-funds-goes-bust/ (Accessed: 12 May 2019).
Soltani, M., and Firouzi, A. (2020) “Real Option Valuation of Flexibility in Operation and Maintenance Contracts of Water Pipelines Based on Reliability Analysis,” ASCE J. of Infrastructure Systems, 26(1).
Swanson, R., Sakhrani, V., and Preston, M. (2019) “Flexible design at Batoka Dam: How real options analysis compares to other decision-making tools,” Renewable Energy Focus, 31(4).
U.K., Her Majesty’s Treasury. (2008) “Infrastructure procurement: delivering long-term value,” London, U.K. https://webarchive.nationalarchives.gov.uk/20100407174452/http://www.hm-treasury.gov.uk/d/bud08_procurement_533.pdf#page=27&zoom=auto,-119,604.
Vasudevan, V., Prakash, P., and Sahu, B. (2018) “Options Framework and Valuation of Highway Infrastructure under Real and Financial Uncertainties,” ASCE J. of Infrastructure Systems, 24(3).
Wear, B. (2018) “Texas 130 builders concealed road’s flaws, new owners say in lawsuit,” Available at: https://www.statesman.com/news/20180303/texas-130-builders-concealed-roads-flaws-new-owners-say-in-lawsuit (Accessed: 12 May 2019).
Information & Authors
Information
Published In
International Conference on Transportation and Development 2021
Pages: 247 - 258
Copyright
© 2021 American Society of Civil Engineers.
History
Published online: Jun 4, 2021
Authors
Metrics & Citations
Metrics
Citations
Download citation
If you have the appropriate software installed, you can download article citation data to the citation manager of your choice. Simply select your manager software from the list below and click Download.