Valuation of Interacting Real Options in a Tollroad Infrastructure Project

This paper provides an example of the valuation of a "real option" in a large-scale infrastructure project. The Transurban City Link project in Melbourne, Australia, is a major project involving the financing, construction, operation and maintenance of 22 kilometers of toll-roads. Two interacting embedded options are identified in the project. In the past it has often been considered too difficult to explicitly value interacting embedded options. This paper presents a straight-forward methodology for valuing the options and their "interaction effect". The procedure involves simulating the key underlying risk factors using Monte Carlo methods. The results indicate that at least one of the options, which allows Transurban to defer payment of the concession fee to the Government, has a very significant value. In fact the option value could account for more than half of the market value of Transurban securities. This significant value is attributed to the fact that the option preserves investor returns for (approximately) the first 15 years of the project's life