SIMPLE VERSUS MULTIVARIABLE ANALYSIS

There are many methods available for quantifying risk, however, for the purposes of developing the PSC only two are recommended. The most 'simple' method is the subjective assessment of the probability for each risk. Although a user-friendly method, a limitation of the simple probability technique is that it provides a single estimate for risk that is based on analysing risks independently of each other. The weighted effects of each risk are accumulated to provide the most likely outcome risk adjusted PSC.

The second method is based on multivariable analysis, and typically involves the use of computer-based simulation packages. Though more complex and still subjective, greater realism and confidence in risk quantification can be achieved by applying probabilities to the risks and considering the interdependencies between the risks. Probability analysis overcomes the limitations of the simple approach by specifying a probability distribution for each risk, and then considering the effects of the risks in combination. The result of the analysis is a range of values in which the final outcome may lie.

The expression of risk as a range of final outcomes is far more useful in terms of understanding Government's exposure to risk volatility, and in demonstrating the robustness of options with regard to risk transfer and management. This information forms the foundations upon which appropriate risk management strategies can be developed to mitigate and reduce Government's risk exposure. Adopting this technique for the Project may also assist in the process of bid evaluation, where bids are close to the PSC.

The risk quantification technique adopted for a particular projector risk depends on the significance of the project and the complexity of the risks within it. When selecting a risk quantification technique, factors that need to be considered include:

•  relative impact of the risk on the project;

•  size of the project; and

•  complexity of the project.

For example, a relatively simple project such as a car park is unlikely to warrant sophisticated probability valuation techniques, while a more complex project, such as a hospital, may warrant such analysis. However, this example may be overly simplistic, as a car park project may be structured to transfer significant usage risk to the Private Sector, in which case it may be advisable to carry out an advanced analysis on the volume projections.

No matter the risk quantification technique used, particular care must -betaken to ensure that the quantification of risk is robust and defensible. Outputs from the risk quantification are only as good as the assumptions on which it is based, and it is therefore vital that a robust  methodology is carried out.