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Introduction to Risk

2.6.1In 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.
2.6.2

The analysis of risks and uncertainties is a key element in appraisal. The NIAO has stated that appraisals must be based on sound and realistic assumptions, and costings that address risks and uncertainties. (Grants Paid to Irish Sport Horse Genetic Testing Unit Ltd, NIAO report HC 396, para 52).

The analysis has four broad purposes:

  1. To adjust assumptions about costs, benefits and timing to allow for optimism bias;
  2. 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;
  3. To decide how best to allocate risks between the public and private sectors; and
  4. To inform the option selection decision, by examining how risks and uncertainties affect NPVs and the balance of advantage between options.
2.6.3

This section of NIGEAE concentrates on basic principles relating to items 1. and 2. above. It covers the following elements of risk analysis:

  • Identify and Analyse Risks
  • Adjust for Optimism Bias
  • Risk Management and Risk Reduction Strategies

Item 3. above is chiefly relevant to PPP proposals. There is extensive separate guidance on PPP issues, including the treatment of risks. See section 5 of NIGEAE for more details. Item 4. is chiefly about sensitivity analysis, which is dealt with under STEP 8 below.

Read on to Identify and Analyse Risks

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