Valuing Flexibility in Private Toll Road Development

Abstract

The emergence of alternative project delivery and finance methods in developing and sustaining infrastructure assets increases the significance of valuing such facilities. As private participants are introduced into the delivery of public facilities, the balance of possible future cash flows with initial capital inflows is an essential aspect of ensuring project viability. Traditional valuation techniques, which provide a tangible basis for the ultimate investment decision, often are employed in project financial analysis. The uncertainty of future cash flows, however, presents unique challenges for the use of these traditional methods. Moreover, the active management and planning of infrastructure projects creates flexibility that is largely ignored by traditional valuation methods. The Dulles Greenway, a recent private highway venture, provides a perspective to understand how “options” are used intuitively throughout a large-scale project and how the “option” to wait and resolve uncertainty can be valued with simple techniques that supplement traditional valuation methods. This article retrospectively analyzes project cash flows and the decision to invest in the Dulles Greenway.