Economics and financing

Cover of Economic Evaluation of Road Investment Proposals: Risk Analysis
Economic Evaluation of Road Investment Proposals: Risk Analysis
  • Publication no: AP-R203-02
  • ISBN: 0 85588 618 8
  • Published: 1 February 2002
Economic risk analysis is useful because it can develop an awareness of the impact of risk and uncertainty on decision making processes and help with the formulation of appropriate policies and strategies to minimise risk. This report describes a study that examined general quantitative methods of risk assessment in Road User Cost (RUC) models for application in road project evaluation. Appropriate techniques were applied to estimate the variance component of key uncertain factors that influence summary project evaluation measures such as Benefit Cost Ratio (BCR) and Net Present Value (NPV). A translation into practice of the risk analysis principles is demonstrated using a case study example. In the case study, a number of separate projects were considered for inclusion in an investment program, the budget for which was insufficient to fund them all. The example demonstrated the use of risk analysis principles to estimate the levels of risk and uncertainty within final economic decision measures such as BCR and NPV, from uncertainty in the key input variables feeding into the project evaluation process. By estimating the riskiness aspect of these summary measures, a more realistic comparison of project returns can be obtained. The case study described in this report indicates the additional value of including risk analysis as part of project evaluation. Work reported also indicated that risk analysis, even using the simplest of possible risk distributions, is not necessarily straightforward and care should be taken when applying readily available software, particularly where risk analysis results for several projects are compared. It follows that similar problems could be faced where alternative project solutions to a specified transport problem are being evaluated. Further work is suggested to develop standard methods for the application of risk analysis principles in Australia. Most of the value-adding in this report arises from the d
  • 1.0. INTRODUCTION
  • 1.1. OBJECTIVES
  • 1.2. PLANNING OF THE REPORT
  • 2.0. STATE OF PLAY
  • 2.1. DEFINITION OF CONCEPTS
  • 2.2. KEY STEPS IN THE PROCESS OF RISK MANAGEMENT
  • 2.3. GUIDELINES FOR RISK ANALYSIS OF MAJOR PROJECTS
  • 3.0. ASSESSING VARIABILITY
  • 3.1. UNCERTAINTY IN ROAD USER BENEFITS/COSTS
  • 3.2. UNCERTAINTY IN ROAD CONSTRUCTION COSTS
  • 3.3. INCORPORATING ESTIMATES OF VARIABILITY
    • 3.3.1. Techniques for assessing variability
    • 3.3.2. Probability Functions
    • 3.3.3. Viability of the risk analysis method
  • 4.0. RISK ANALYSIS TECHNIQUES
  • 4.1. TOOL AVAILABILITY (@RISK)
  • 4.2. SENSITIVITY ANALYSIS
  • 4.3. SIMULATION TECHNIQUES
  • 5.0. WORKED EXAMPLE
  • 5.1. BACKGROUND
    • 5.1.1. General Details
    • 5.1.2. Course of Action
    • 5.1.3. Problems Encountered
  • 5.2. METHODOLOGY
    • 5.2.1. Analysis Approach
    • 5.2.2. Alternative Methods for Estimating Impacts of Uncertainty
  • 5.3. RESULTS
    • 5.3.1. General Details
    • 5.3.2. Category Selection Method
    • 5.3.3. Regression Method
  • 6.0. SUMMARY AND CONCLUSIONS
  • 7.0. REFERENCES
  • APPENDIX A: SPECIFICATION AND APPLICATION OF PROBABILITYDENSITY FUNCTIONS FOR USE IN RISK ANALYSIS OFROAD PROJECTS
  • APPENDIX B: SAMPLING METHODS AVAILABLE TO END USERSOF @RISK