Q9. When should the simple and advanced risk valuation techniques be used?

The National PPP Guidelines: Volume 4 Public Sector Comparator Guidance provides detailed guidance on determining the most appropriate risk valuation technique. It explains and provides examples of the use of both the simple and the advanced technique. It also states that the technique adopted for a particular project or a particular risk depends on the significance of the project and the complexity of the risks within it.

When selecting a risk valuation technique, factors to be considered include:

∙ the relative impact of the risk on the project;

∙ the size of the project; and

∙ the complexity of the project.

For example, a relatively simple project, such as a hospital car park is unlikely to warrant sophisticated advanced probability valuation techniques, whereas a more complex project, such as a hospital, may warrant such analysis. But even this example may be oversimplistic as a hospital car park project may be structured to transfer significant usage risk to the private sector. For this risk it may be advisable to carry out a probability analysis on the volume projections. The method used should be discussed and agreed with DTF, the project team and your advisers.