The focus on risk underpins the financial analysis of a project or opportunity because each risk should be allocated a theoretical cost. In reality, however, this cost is likely to be a range of estimates rather than a point estimate. The simple calculation is shown in the following equation:
Expected cost of risk = probability of risk occurring × cost if risk occurs
It is this calculation of the expected cost of risk that makes the discrimination between risk and uncertainty important: it is easier to put a price on risks but can be very difficult, if not impossible, to put a price on uncertainty.
Table 1: Impact of various risks and uncertainties
| Risk | Uncertainty | ||
Factor | Variable impact: Impact can be positive or negative and can change over time. | Binary impact: | Variable impact: Impact can be positive or negative and can change over time. | Binary impact: |
Technical | • Capital costs differ from those forecast • Operational costs, including maintenance, differ from those • Price of inputs- e.g., feedstock | • Contract effectiveness (the private-sector party is not left with any it thought had been passed on to another party) • Construction completion is late | • Technology performs differently from the way it was forecast | • Technology does not work as expected |
Markets | • Revenue risk if linked to performance |
| • Revenue risk if linked to demand | • Force majeure |
Performance of obligations under the contract |
| • Failure to achieve required operational performance |
|
|
Financial / Economic | • Cost of debt • Exchange rate • Interest rate • Debt margin (either bank or capital markets) • Inflation/deflation • Cost of insurance |
| • Availability of debt | • Market failure • Unavailability of insurance |
Political consequences |
|
| • Political interference | • Change of law, either general or specific to sector • Legal and regulatory enforcement • Expropriation • Political interference • Currency convertibility |
Other |
|
| • Procurement process: -duration and -competition | • Counterparty failure • Land acquisition • Climate change- e.g., flooding |