2.6.1 In 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. SGHD requires that appraisals must be based on sound and realistic assumptions, and costings that address risks and uncertainties. The analysis has four broad purposes:
(a) To adjust assumptions about costs, benefits and timing to allow for optimism bias
(b) 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;
(c) To decide how best to allocate risks between the public and private sectors; and
(d) To inform the option selection decision, by examining how risks and uncertainties affect NPVs and the balance of advantage between options.
2.6.3 Paras 5.57 to 5.75 and Annex 4 of the Green Book deal with these in some detail. Item (c) above is chiefly relevant to PPP proposals. There is extensive separate guidance on PPP issues, including the treatment of risks. See section 5 of the Option Appraisal Guide for more details. Item (d) is dealt with under STEP 8 below. This section of the Option Appraisal Guide concentrates on basic principles relating to items (a) and (b) above. It covers the following elements of risk analysis: