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Port capacity investment size and timing under uncertainty and congestion

Author

Listed:
  • Matteo Balliauw
  • Peter M. Kort
  • Hilde Meersman
  • Christophe Smet
  • Eddy Van De Voorde
  • Thierry Vanelslander

Abstract

Well-planned port capacity investments are required to accommodate growing maritime trade, especially in developing countries. Such investments prove to be expensive, irreversible and subject to uncertainty. Under these conditions, the application of real options is better suited than the traditionally used NPV approach, given that specific port and market characteristics are taken into account. In this paper, we consider the investment in a new container port. The port is operated by one single actor who also owns the port and absence of competing ports in the neighbourhood is assumed. Two decisions have to be made: the size of the port and when to build it. Our real options model evaluating the option of flexible size and timing of the investment is based on a geometric Brownian motion. This approach has the advantage of analysing the impact of economic growth and uncertainty independently. Additionally, port users differ in aversion to congestion. Our model allows examining this impact on the optimal port investment. This paper shows that ports with more waiting-time averse customers are better off when investment is delayed to install a larger port. This result holds in both privately owned, profit-maximising ports and government-owned, social welfare-maximising ports.

Suggested Citation

  • Matteo Balliauw & Peter M. Kort & Hilde Meersman & Christophe Smet & Eddy Van De Voorde & Thierry Vanelslander, 2020. "Port capacity investment size and timing under uncertainty and congestion," Maritime Policy & Management, Taylor & Francis Journals, vol. 47(2), pages 221-239, February.
  • Handle: RePEc:taf:marpmg:v:47:y:2020:i:2:p:221-239
    DOI: 10.1080/03088839.2019.1689306
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    Cited by:

    1. Balliauw, Matteo & Onghena, Evy, 2020. "Expanding airport capacity of cities under uncertainty: Strategies to mitigate congestion," Journal of Air Transport Management, Elsevier, vol. 84(C).
    2. Balliauw, Matteo, 2021. "Time to build: A real options analysis of port capacity expansion investments under uncertainty," Research in Transportation Economics, Elsevier, vol. 90(C).

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