Scenario analysis is an important tool that can shed light on the implications of strategic risks and uncertainties on the case for introducing infrastructure-related reforms or investing in an initiative. Scenario analysis is more than just a simple set of sensitivity tests applied to an economic appraisal. It is a structured assessment of linkages between various drivers of change (and potential interactions between the drivers) and potential impacts on our infrastructure networks. Usually, the drivers of change are considered in establishing three or four alternate views (scenarios) of the future.
The level of certainty or uncertainty around individual drivers of change can also be considered and then translated into demands onto systems. The drivers of the future can be clustered and ranked to identify those that are most important for the goals defined during Stage 1, along with the reasons why. Then a range of 'shocks' against these drivers (scenario attributes) are set on which the scenarios can be tested through quantitative and qualitative approaches to explore for 'tipping points', and then compared with the defined goals and objectives.
Scenarios should be plausible and varied. Importantly, they should not be restricted to minor variations to a central 'business as usual' scenario. As well as setting out what the proponent believes to be a 'most likely' or 'business as usual' scenario, it is important to articulate futures where the drivers of change operate in a materially different way to that used for the 'most likely' scenario. For example, price shocks and technological step changes are valid considerations to build into scenarios. Box 1 provides a description of some of the drivers of change commonly used in scenario analysis.
| Box 1: Potential Drivers of the Future The future is shaped by a range of 'drivers of change' that, to varying degrees, are beyond the control of individual governments or initiative proponents. The drivers interact to create alternate scenarios or futures. Scenario analysis commonly uses some or all of the six drivers of change set out below. Other change drivers have been used in scenario analysis; however, the following factors are likely to have the greatest significance for Australia's infrastructure systems: • Socio-demographic change - total population, population mix (especially age profile), population distribution, values; • Economic change - size and mix of the economy, growth, globalisation, labour markets; • Energy prices - particularly the potential mix and cost of energy sources for various sectors of the economy; • Climate change - the impact of change in climate patterns such as temperature, run-off projections, sea level rise and storm surge probabilities on the demand for infrastructure and the maintenance of our existing infrastructure networks; • Technological change - whether change in technology will reduce or increase the demand for certain infrastructure systems, create entirely new demands; and/or change the way infrastructure systems are built, managed and operated; and • Governance change - changes in the wider system of government (not individual initiative governance) that may shape the demand for services and/or the way in which government respond to those demands. |
In developing scenarios, it is important that the time horizon for analysis reflects the nature of the problems and challenges to which infrastructure reform and investment should be directed. Some of the challenges, for example those associated with climate change and the availability and cost of various energy sources, have long-term implications. Infrastructure networks also tend to have long lives. For these reasons, scenario analysis frequently involves an assessment of the future over 20, 30 or more years.