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Flexibility in planning and development of a container terminal: an application of an American-style call option

ABSTRACT The prosperity and social progress of developed and developing economies is highly dependent on the existence of efficient transport infrastructure. Nevertheless, current budgetary constraints are jeopardizing the necessary investments in new or existing infrastructure. New models for planning and managing infrastructure are now necessary to overcome the lack of public economic resources available. Port infrastructure is no exception and, due to the vast number of uncertainties involving these projects, it is relevant to maximize the capture of the latent value of flexible options. Incorporating flexibility in these projects, prior to the implementation phase, can be a solution that allows port managers to address future uncertainties and mitigate risk exposure. This paper analyzes the incorporation of flexibility in port planning through the use of an American call option to the physical capacity expansion problem. The rationale is to implement a flexible expansion plan, through options that can be exercised at any given time, that are able to deal with uncertainty in demand. The paper uses a case study – Terminal Container of Ferrol, in Spain – and the results support the hypothesis that imbedded flexibility will robustly increase the net present value of the project.