It also applies where the probability attaching to a possible outcome involving significant harm is uncertain. systematic: that is where variability is correlated with income for example, where better outcomes from a project or policy are likely to accrue in good times and worse in bad timesĢ.6.10 If a set of circumstances or course of action or inaction could lead to a very adverse outcome, even if with a very small probability, action to avoid that outcome may be appropriate.concentrated: that is where risks are large relative to the income of the section of the population that must bear them.For instance, this may apply where risk is: be inclined to reject certain risky investments despite positive expected outcomes. In other words, decisions should be based on expected outcomes, not their variability.Ģ.6.9 However, there may be some situations where it is appropriate to take account of variability as well as expected outcomes and be risk averse i.e. For instance, the range may be wider for cases involving new technology.Ģ.6.8 In general, for proposals where the benefits and costs accrue to the community as a whole, the cost of variability is so small relative to the margin of error in appraisal or evaluation as to be negligible, and government may be regarded as risk neutral. All projects have a range of possible outcomes, although the range will be wider, and variability more important, for some cases than for others. In practice, this distinction is not always clear cut however NIGEAE uses the term risk in step six and uncertainty in step eight.Ģ.6.7 Variability, or variance, is the spread of possible outcomes around an expected outcome. there are uncertainties about future wage or fuel costs, or changes in consumers' tastes, or competition from other suppliersĢ.6.5 No matter how robust the assumptions about these and other factors, there will still generally be risks to consider, and there will be uncertainty over the range of possible outcomes.Ģ.6.6 A distinction may be drawn between a risk, which is measurable and has a known or estimable probability, and an uncertainty, which is more vague and of unknown probability.the demand for an outcome or output depends on future incomes.
operating costs depend on the success of a new technology.construction costs depend on ground conditions, or the weather.This possibility may exist because, for example: Identify and analyse risksĢ.6.4 Risk arises because of the possibility of more than one outcome occurring. Item 4 is chiefly about sensitivity analysis, which is dealt with under step eight. See section five of NIGEAE for more details. There is extensive separate guidance on PPP issues, including the treatment of risks. Item 3 above is chiefly relevant to public private partnership (PPP) proposals. risk management and risk reduction strategies.It covers the following elements of risk analysis: to inform the option selection decision, by examining how risks and uncertainties affect net present values (NPVs) and the balance of advantage between optionsĢ.6.3 This section of NIGEAE concentrates on basic principles relating to items 1 and 2 above.to decide how best to allocate risks between the public and private sectors.to inform decisions on how best to manage risks, by drawing attention to risk factors which require particularly careful monitoring and management, and enabling suitable risk management measures to be built into the project plan.to adjust assumptions about costs, benefits and timing to allow for optimism bias.(Grants Paid to Irish Sport Horse Genetic Testing Unit Ltd, NIAO report HC 396, para 52). The Northern Ireland Audit Office (NIAO) has stated that appraisals must be based on sound and realistic assumptions, and costings that address risks and uncertainties. 2.6.1 In appraisals, there is always likely to be some difference between what is expected and what eventually happens, because of biases unwittingly inherent in the appraisal and material risks and uncertainties.Ģ.6.2 The analysis of risks and uncertainties is a key element in appraisal.
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