Strategic and Operational Real Options in Area Development Projects: Reflections on the Finnish Background

Area development projects are multi-million euro construction projects that aim for relatively large areas to be constructed in a concentrated time frame. Finnish municipalities have tended to favor area development projects due to the related normally positive indirect cash flow effects for municipalities, e.g., positive tax income effects, and the fact that they speed-up the municipal development. Area development projects, however, also cause risks to the municipalities in the form of possible changes in the population demographics in the developed areas, which in turn may cause negative cash flows. As most municipalities in Finland are facing tight financial times (AD 2008) they may be very risk averse. This may cause reluctancy to favor the start of new area development projects, which again delays municipal development, and may even delay growth in the aggregate level. This paper will describe the traditional (present) policy models for Finnish municipalities, vis-àvis area development projects, and the creation of new policies through an analysis of high level (strategic) real options available to municipalities to change their role in these projects. The extension of the municipalities’ involvement in the area development projects and active tracking of the available real options reduces municipalities’ risks and enhances returns.