Real Options Approach to Valuation of High-Speed Railway Moscow-Kazan Investment Project

Infrastructure investment projects appear to be very risky due to their scale and uncertainty, which can arise in key variables of the project. However, this uncertainty can be significantly lowered over time. It implies that optimal timing of investment becomes an issue of high importance. In this paper we consider a strategic interaction between public and private sectors in a framework of real options approach, using as an illustrative example the High – Speed Railway Moscow – Kazan investment project. By incorporating uncertainty in the level of interest rate to our model, we calculate value of option to wait and show how players (government and private investors) choose optimal time to invest and how their choice depends on social cost of the project. Furthermore, we view the same interaction from perspective of the 2018 FIFA World Cup. We use an extended form of the game – “money burning game” – and demonstrate that hosting this particular championship fails to be an effective signal, given by the government to private sector for the purpose of attracting private funds to the HSRMK investment project. In addition to that we show that value of option to wait is lost, when investment decision is externally forced by the presence of a mega – event.