Capturing the Value of Flexibility in Public Sector Capital Investment Projects: Evidence from New Zealand Local Government Organisations

Zahir Ahmed, The Auckland University of Technology
Ali Elharidy, The Auckland University of Technology
Kristine Fu, The Auckland University of Technology
Deryl Northcott, The Auckland University of Technology

Abstract: Capital investment projects with inherent flexibility provide valuable options for responding to changes in the business environment. While conventional investment appraisal methods fail to capture the value of this flexibility, real options analysis (ROA) has been proposed as a useful alternative, despite being challenging to implement. This study examines how project flexibility is considered in practice. It focuses on local government organisations (LGOs), which typically have significant capital investment programmes that need to be responsive to changing operating conditions.  A questionnaire (mailed to the financial directors of New Zealand LGOs) was combined with follow-up interviews to facilitate data triangulation. The findings reveal that LGO managers recognize the value of project flexibility and take it into account to some extent. However, there was no evidence that formal ROA procedures are used in practice. These findings are of relevance to financial decision makers concerned with assessing capital investment projects in the public sector.