Towards improved port capacity investment decisions under uncertainty: a real options approach

ABSTRACT

Port activity plays an important role in facilitating international trade. Sufficient capacity is indispensable for a port to attract flows to a region and retain them. The capacity decision is the result of a trade-off between investment and waiting costs. Traditional methods to value expansion projects do not deal adequately with managerial flexibility in the face of uncertainty from different sources in the complex port environment. In this paper, real options (RO) models are identified as an alternative method to making project valuations and investment decisions, as they attribute the correct value to managerial flexibility under uncertainty. In order to be able to build and use such RO models for port capacity investment decisions, the sources and implications of uncertainty in the port and the different RO model specifications need to be understood. To this end, both the literature about uncertainty in the port context and the literature about real options models are reviewed in order to provide researchers who want to build their own decision-making models, with the necessary knowledge of both fields. The review makes clear that the complex interactions in and competition between the logistics chains and their actors coming together in ports have significant impacts on port capacity. Uncertainty is also caused by uncertain international trade flows and changes in legislation following new technologies and environmental impacts. An analysis of the components of some general RO models shows how the options of flexible output, investment size and timing are valued by RO models in a setting with demand uncertainty. Moreover, the review presents researchers with insights in how to deal with cooperative and competitive interactions in the chain, time to build, cyclical markets and legislation changes. It also shows how to value the expansion and the phased investment options. The new insights resulting from this review are subsequently combined in a framework that serves as a guideline to build RO models for port capacity investments. Finally, an exemplifying application of the framework is used to build an actual port capacity investment decision model.     

When are subsidies to trans-European network projects justified?

The trans-European transport network (TEN-T) encompasses the major planned transport infrastructure in Europe, ranging from high speed rail to port infrastructure. Projects in this category are considered priority projects and receive European subsidies; but these have been insufficient to get these projects off the ground. This paper addresses two research questions. First, it sketches the basic economics of cross-boundary infrastructure projects: what pricing and investment policies can we expect, what is the role of through traffic and high fixed costs of infrastructure? Second, it examines briefly what lessons the EU could draw from the experience of other existing federal funding institutions like the US and Germany. These ideas are used to propose a new subsidy scheme for the TEN-T projects.     

Mapping minibuses in Maputo and Nairobi: engaging paratransit in transportation planning in African cities

ABSTRACT

Often called paratransit because of their flexible stops, schedules and routes, minibuses make up the bulk of public transport in African cities. Despite their ubiquity and importance, these systems are poorly understood by transportation planners who tend to focus on large-scale urban infrastructure projects such as highways, commuter rail or bus rapid transit systems. The assumption within much of this planning is that these minibus systems are barriers to change and will become at most secondary “feeder” buses within large-scale projects, but structured plans detailing this vision are lacking. This paper argues that frequent failure to collect data and value important paratransit systems as a critical part of transportation in their own right is deeply problematic from the point of view of equity, access and inclusive and effective planning. We ask whether the growing number of bottom up mapping projects of minibus systems can disrupt this status quo. By comparing two mapping projects, Digital Matatus in Nairobi and the Mapa Dos Chapas in Maputo, we find that inclusive, collaborative mapping can help render these minibuses more visible in planning and provoke more grounded and inclusive “planning conversations” on multi-modal integration, passenger information and minibus upgrading, all key but relatively marginalised aspects of creating accessible, low emission, high quality and safe public transport in African cities.     

Real options and flexibility analysis in design and management of one-way mobility on-demand systems using decision rules

This study explores the concepts of real options and flexibility analysis as an approach to address uncertain demand growth in mobility on-demand (MoD) vehicle-sharing systems, with the goal of improving expected lifecycle performance. As MoD systems are gaining popularity worldwide, they inevitably face significant uncertainty in terms of needs and customer demands. Designing, planning capacity deployment, and operating such system can be challenging, and require significant capital investments for companies and cities. Two distinct real options analysis (ROA) models are developed to evaluate and optimize flexible strategies for these systems, relying on a novel methodological approach to value flexibility based on decision rules. The decision-rule-based approach differs from standard ROA approaches used to quantify the value of flexibility in irreversible investment projects, typically based on dynamic programming. It emulates the decision-making process by capturing mathematically a triggering mechanism that determines when it is best to exercise the flexibilities embedded in the system design. Two prevalent types of MoD systems are studied in this paper as demonstration of the methodological framework: a station-based system where customers must pick up and return the vehicle at specific locations, and a free-floating system, where customers may pick up and drop the car anywhere within a certain area. A simulation-based approach is used to analyze the station-based system, which models the rebalancing operations from a micro-level perspective. The approach consists of a discrete event simulator for performance estimation, and an optimization algorithm for design space exploration that integrates a population-based search algorithm with Optimal Computing Budget Allocation (OCBA). For the free-floating system, an analytical model is developed where the decision rule is formulated into and solved using stochastic mixed integer programming (MIP). The study provides guidance to system operators on potential strategies for deploying MoD systems, considering explicitly uncertainty and flexibility as a value enhancing mechanism.     

Hydrogen refueling station networks for heavy-duty vehicles in future power systems

A potential solution to reduce greenhouse gas (GHG) emissions in the transport sector is to use alternatively fueled vehicles (AFV). Heavy-duty vehicles (HDV) emit a large share of GHG emissions in the transport sector and are therefore the subject of growing attention from global regulators. Fuel cell and green hydrogen technologies are a promising option to decarbonize HDVs, as their fast refueling and long vehicle ranges are consistent with current logistic operational requirements. Moreover, the application of green hydrogen in transport could enable more effective integration of renewable energies (RE) across different energy sectors. This paper explores the interplay between HDV Hydrogen Refueling Stations (HRS) that produce hydrogen locally and the power system by combining an infrastructure location planning model and an electricity system optimization model that takes grid expansion options into account. Two scenarios – one sizing refueling stations to support the power system and one sizing them independently of it – are assessed regarding their impacts on the total annual electricity system costs, regional RE integration and the levelized cost of hydrogen (LCOH). The impacts are calculated based on locational marginal pricing for 2050. Depending on the integration scenario, we find average LCOH of between 4.83 euro/kg and 5.36 euro/kg, for which nodal electricity prices are the main determining factor as well as a strong difference in LCOH between north and south Germany. Adding HDV-HRS incurs power transmission expansion as well as higher power supply costs as the total power demand increases. From a system perspective, investing in HDV-HRS in symbiosis with the power system rather than independently promises cost savings of around seven billion euros per annum. We therefore conclude that the co-optimization of multiple energy sectors is important for investment planning and has the potential to exploit synergies.     

Patchwork in an interconnected world: the challenges of transport networks in Sub-Saharan Africa*

Sub-Saharan Africa has recently undergone, or still do in many countries, a period of transport infrastructure expansion. Current policies are centred on the development of international links, which require large capital-intensive projects and are sometimes economically dubious. This paper reviews the past policies and transport functions since colonial times by placing them in their economic and political context. We find that present strategies have similarities to the ones prevailing in previous periods, where expansion phases dominated by transport-led economic growth theories were followed by a stagnation of Africa’s infrastructure development. In view of the challenges in translating findings from empirical research into right policies, we identify the potential of more balanced and sustainable strategic investments, notably by reinforcing the existing secondary transport networks converging into urban centres.     

Uncertainty in the context of highway appraisal

Transport planning is based on traffic forecasts which are subject to great uncertainties. These uncertainties have generally been ignored or, at least, not explicitly included in the planning process. This paper describes the principles behind the estimation of the uncertainty (or range of error) of the forecasts of a traffic model and discusses the means by which this information can be absorbed into the decision-making in transport planning projects. These principles have been applied to the appraisal of a British highway project and throughout the paper reference is made to this project in order to illustrate the results of the practical application of an explicit treatment of uncertainty. It is believed that this approach can and should be developed for application in most areas of transport planning, leading inevitably to an improvement in the quality of the decisions taken.     

Struggling,settling, solutions: A qualitative study of landscape protection in motorway planning

Landscape is an important public interest with social, cultural, ecological, and environmental dimensions. It is central to the formation of local cultures and contributes to human well-being. Some areas are protected by supranational agreements that have significant international value. The European Landscape Convention (ELC) calls for integrating landscape considerations into other policy areas such as motorway planning that may directly or indirectly impact the landscape. The key challenge is the integration of existing institutional backgrounds and governing traditions. This paper compares how two qualitative case studies managed landscape protection while planning motorways. Specifically, we examine two internationally protected areas – one in Hungary that focuses on nature and one in Sweden the focuses on culture – to consider how these areas were assessed during the planning of the new motorways. Analysing the cases through the theoretical lens of institutional interplay, we found that the main differences between the two cases can be attributed to the different governing traditions and interpretations of landscape.     

To kill a real option – Incomplete contracts,real options and PPP

This paper is concerned with the implications of public–private partnership agreements for the execution of expansion options in road infrastructure. More specifically, it analyzes the expansion of an existing two-lane road in Sweden, and examines the real options created by an intermediate type of road with three lanes. Interpreting the results from real option analysis in the light of incomplete contract theory, this paper finds that external congestion costs might necessitate public ownership to ensure a social optimal outcome in public–private partnerships.     

Cost overruns in transportation infrastructure projects: Sowing the seeds for a probabilistic theory of causation

Understanding the cause of cost overruns in transportation infrastructure projects has been a topic that has received considerable attention from academics and the popular press. Despite studies providing the essential building blocks and frameworks for cost overrun mitigation and containment, the problem still remains a pervasive issue for Governments worldwide. The interdependency that exists between ‘causes’ that lead to cost overruns materialising have largely been ignored when considering the likelihood and impact of their occurrence. The vast majority of the cost overrun literature has tended to adopt a deterministic approach in examining the occurrence of the phenomenon; in this paper a shift towards the adoption of pluralistic probabilistic approach to cost overrun causation is proposed. The establishment of probabilistic theory incorporates the ability to consider the interdependencies of causes so to provide Governments with a holistic understanding of the uncertainties and risks that may derail the delivery and increase the cost of transportation infrastructure projects. This will further assist in the design of effective mitigation and containment strategies that will ensure future transportation infrastructure projects meet their expected costs as well as the need of taxpayers.     

Flexible strategic planning of transport systems

Abstract

This paper presents a decision support methodology for long-range planning of transport systems that exhibits strategic flexibility and stochastic system parameters. Unlike one-off strategic decisions, flexible decisions should be dynamically reformulated with time. The proposed methodology is based on the construction of a tree structure of multiple interlinked tactical planning problems, each associated with a scenario in the tree, where problems under scenarios at intermediate dates incorporate in their formulation the solution of the corresponding problems associated with past (future) connected scenarios. The resulting tree structure of interconnected planning decisions becomes a strategic-tactical decision support system that allows managers to formulate suitable flexible strategic decisions that mitigate the consequences associated with downside scenarios while taking advantage of the upside opportunities. The methodology is applied to the planning of a fleet deployment through charter contracts where contract prices depend on both market behavior and the duration of the contract itself.     

Renegotiating PPP Contracts: Reinforcing the ‘P' in Partnership

Abstract

The issue of renegotiation is becoming increasingly important as a tool to address uncertainty of public private partnership (PPP) projects and as a mechanism to restore its economic and financial equilibrium. This paper aims to understand how and why renegotiations occur in long-lasting PPP projects and what are the pros and cons of the renegotiation. We depart from a literature review on contract incompleteness and on the determinant factors for the renegotiation of infrastructure concessions. To illustrate the discussion, the case studies of nine European PPP projects are analysed by examining the specific exogenous and endogenous determinant factors that conduce to renegotiating contracts. The implications of contractual renegotiations are explained and summarized through a comparison of our case studies with literature. Although renegotiation, per se, is not a solution for the successful implementation of PPP projects, our findings reinforce the idea of contractual flexibility as a tool that allows adapting to uncertainty. Moreover, effective communication mechanisms allow a better response to unforeseen events, reinforcing the partners’ commitment to deliver a win–win project.     

Influential factors in port infrastructure tariff formulation,implementation and revision

The process of formulation, revision and approval of port infrastructure tariffs is complex and involves different stakeholders. The extant literature focuses more on port pricing research but pays less attention to the practice of port infrastructure tariff setting. This paper aims to identify and analyses the influential factors in the port infrastructure tariff formulation process using survey data collected from 67 port authorities. Exploratory factor analysis (EFA) is first conducted before confirmatory factor analysis (CFA) is applied to analyse the latent factors underlying port infrastructure tariff setting. The analysis results suggested the four factors influential to infrastructure tariff practice, namely tariff policies, transparency, tariff regulation and stakeholder participation. The paper also presents the implications for port authorities, management and stakeholders.     

Toward criteria in the development of urban transportation systems

Improved criteria are necessary to aid in determining awards of federal funds for metropolitan transit projects. Commuting is the main use for public transit. Thus a primary objective of an urban transit system should be to provide a flexible and balanced set of options to the workers in the metropolitan area for their journey to work. This paper discusses various facets of an appropriate balance among the three modes: rapid rail, bus, and automobile. Three cities are selected for further analysis: Baltimore, Kansas City, and Phoenix. These cities represent different stages in economic-transportation development, and also present different spatial patterns of residence and employment. The applicability of rapid rail transit to each city is examined in view of central city worker concentration and recent trends.     

Evaluating the competitiveness of container ports in Korea and China

Changes in world trade and the shipping environment have created ever-increasing competition between ports in North-east Asia, especially Korea and China. Following intensive state investment in port developments through large-scale projects, Chinese ports now threaten to oust Busan in Korea as the regional hub. To identify and evaluate the competitiveness of major ports in the region, this paper identifies the components influencing their competitiveness and presents a structure for evaluating them. Based on the literature related to port selection and competition, a regional survey of shipping companies and owners employed factor analysis to reveal that port service, hinterland condition, availability, convenience, logistics cost, regional centre and connectivity are the determining factors in these regions.     

Guidance for transport planning and policymaking in the face of an uncertain future

Uncertainty of outcome is widely recognised as a concern facing decision-makers and their advisors. In a number of spheres of policy, it appears uncertainty has intensified in the face of globalisation, economic instability, climate change, technological innovation and changing consumer preferences. How can planners and policymakers plan for an uncertain future? There is growing interest in, and use of, techniques that can help decision-making processes where deep uncertainty is involved. This paper is based upon one of the most recent international examples of a foresight exercise employed to examine uncertainty – specifically that which concerns uncertainty over the nature and extent of future demand for car travel. The principal focus of the paper is on the insights and guidance this examination of uncertainty brings forth for transport planning and policymaking. To accommodate deep uncertainty requires a flexible and open approach in terms of how policy and investment possibilities are formulated and judged. The paper argues for a focus upon the Triple Access System of spatial proximity, physical mobility and digital connectivity as a framework for policy and investment decisions that can harness flexibility and resilience. Uncertainty becomes an opportunity for decision-makers with the realisation that they are shaping the future rather than (only) responding to a predicted future. The paper outlines two forms of policymaking pathway: regime-compliant (in which adherence to trends and the nature of the world we have known pushes policy) and regime-testing (in which the nature of the world as we have known it is brought into question and vision pulls policy decisions). Stronger orientation towards regime-testing to assist in managing an uncertain future is advocated.     

Assessment of Cross‐Border Spillover Effects of National Transport Infrastructure Plans: An Accessibility Approach

Abstract

Traditional transport infrastructure assessment methodologies rarely include the full range of strategic benefits for the transportation system. One of these benefits is the contribution to cross‐border integration, critical for the European integration process. However, this is a key issue in strategic planning and decision‐making processes, as its inclusion may increase the probability of large‐scale transport infrastructure projects being funded. This paper presents a methodology for the measurement of the contribution of transport infrastructure plans to European integration. The methodology is based on the measurement of the improvement in network efficiency in cross‐border regions of neighbouring countries, via accessibility calculations in a Geographical Information System support. The methodology was tested by applying it to the ambitious road and rail network extensions included in the Spanish Strategic Transport and Infrastructure Plan (PEIT) 2005–2020. The results show significant and important network efficiency improvements of the PEIT outside the Spanish border. For the road mode, while the Spanish average accessibility improvement accounts for 2.6%, average improvements in cross‐border regions of France and Portugal are of 1.8%. And for the rail mode, the corresponding Spanish value is 34.5%, whereas in neighbouring regions it accounts for 20.2%. These results stress the significant importance of this strategic benefit and the consequent need for its inclusion in strategic planning processes. Finally, the paper identifies the potential of the methodology when applied at different administrative levels, such as the local or state levels.     

Agent-based model for continuous activity planning with an open planning horizon

The paper proposes the microscopic travel demand model continuous target-based activity planning (C-TAP) that generates multi-week schedules by means of a continuous planning approach with an open planning horizon. C-TAP introduces behavioral targets to describe people’s motivation to perform activities, and it uses a planning heuristic to make on-the-fly decisions about upcoming activities. The planning heuristic bases its decisions on three aspects: a discomfort index derived from deviations from agents’ past performance with regard to their behavioral targets; the effectiveness of the immediate execution; and activity execution options available in the near future. The paper reports the results of a test scenario based on an existing 6-week continuous travel diary and validates C-TAP by comparing simulation results with observed behavioral patterns along several dimensions (weekday similarities, weekday execution probabilities of activities, transition probabilities between activities, duration distributions of activities, frequency distributions of activities, execution interval distributions of activities and weekly travel probability distributions). The results show that C-TAP has the capability to reproduce observed behavior and the flexibility to introduces new behavioral patterns.     

Statistical mechanics for analytic planning: an application to domestic air traffic in China

Abstract

Statistical mechanics has shown its usefulness when assessing the topology of many networks, including those of infrastructure. Its principles take into account the large-scale and network-wide effects of changes in its key parameters, which in turn may provide critical input when planning for infrastructure projects. One objective would be to modify the pattern of capacity expansions inside a system to make it less exposed to local shortfalls in demand. To illustrate our point, we shall use domestic air traffic in China; airports are spatially distributed and they also need to respond to the potential demand that they face locally. Airlines that control parts of the traffic system are identified as agents. A relationship between the agent's behavior and the system-wide level of variance in traffic flows can be established by regression analysis. It is shown how intervention on these agents would reduce negative traffic variance while enhancing a more balanced, less costly growth of the system itself.     

Field investigation and parametric study of greenhouse gas emissions from railway plain-line renewals

Railway transportation is becoming increasingly important in many parts of the world for mass transport of passengers and freight. This study was prompted by the industry’s need to systemically estimate greenhouse gas emissions from railway construction and maintenance activities. In this paper, the emphasis is placed on plain-line railway maintenance and renewal projects. The objective of this study was to reduce the uncertainties and assumptions of previous studies based on ballasted track maintenance and renewal projects. A field-based data collection was carried out on plain-line ballasted track renewals. The results reveal that the emissions from the materials contribute more than nine times the CO₂-e emissions than the machines used in the renewal projects. The results show that extending the lifespan of rail infrastructure assets through maintenance is beneficial in terms of reducing CO₂-e emissions. Analysis was then carried out using the field data. Then the results were compared to two ballastless track alternatives. The results show that CO₂-e emissions per metre from ballasted track were the least overall, however, the maintenance CO₂-e emissions are greater than those of ballastless tracks over the infrastructure lifespan, with ballasted track maintenance emitting more CO₂-e emissions at the 30 and 60 year intervals and the end of life when compared to the ballastless track types. The outcome of the study can provide decision makers, construction schedulers, environmental planners and project planners with reasonably accurate GHG emission estimates that can be used to plan, forecast and reduce emissions for plain-line renewal projects.