Capturing the value of flexibility in public sector capital projects

Real Option Analysis is recognized as being complex and challenging in practice, and questions have arisen as to how well project flexibility is assessed within organizations. Although some studies have examined the use of ROA-type approaches in the private sector, few have investigated their use in the public sector. This study seeks to examine how New Zealand local government organizations (LGOs) take account of project flexibility when assessing capital investment projects. To achieve the objectives¿a survey questionnaire and follow-up interviews were used to explore LGO financial decision-makers¿ experiences of, and attitudes towards, assessing project flexibility in investment appraisal. The findings reveal that LGO financial decision-makers do recognize that project flexibility has value and seem to take it into account to some extent. However, ROA-type thinking or procedures were not well known amongst the respondents and no evidence was found of their use in practice. This is the first empirical study to examine this issue in the NZ public sector context. In sum, the findings of this study fill a gap in the literature.