Assessing Uncertainty and Risk in Public Sector Investment Projects

Abstract

The feasibility and profitability of large investment projects are frequently subject to a partially or even fully undeterminable future, encompassing uncertainty and various types of risk. We investigate significant issues in the field of project appraisal techniques, including risks and uncertainties, appropriate risk analysis, project duration as well as the dependencies between (sub-) projects. The most common project appraisal techniques are examined addressing benefits and weaknesses of each technique. Furthermore, the practical use of the different techniques for the public sector is examined, exemplifying this with a small-scale analysis of the risk analysis procedures of the World Bank. Our findings suggest that in particular for the public sector, practical implementation of quantitative techniques like Monte Carlo simulation in the appraisal procedure of investment projects has not fully occurred to date. We strongly recommend further application of these approaches to the evaluation of processes and financial or economic risk factors in project appraisal of public sector institutions.

Moderating Effect of Social Uncertainty between Capital Budgeting Practices and Performance

“…One of the most intractable issues confronted by researchers is how to identify, capture, and evaluate uncertainties associated with long term investment projects (Haka, 2006). Considering the importance of investment decisions nowadays, complex methods are used for making capital budgeting decisions rather than purely depending on theories of capital budgeting to mitigate International Journal of Accounting and Financial Reporting ISSN 2162-3082 2017 the effect of uncertainty and other contingency factors (Arnold and Hatzopoulos, 2000;Cooper et al, 2002;Byrne and Davis, 2005;Verbeeten, 2006;Zhang, Huang and Tang, 2011;Kersyte, 2011;Bock and Truck, 2011;Singh, Jain and Yadav, 2012). Therefore aim of the study is to evaluate the interacting effect of uncertainty between capital budgeting practices and performance.…”

“…These decisions are critical to managing strategic change and sustaining long term corporate performance. Nonetheless, current investment markets are evolving within an increasingly volatile and intertwined global network and investments are strongly exposed to uncertainties (Bock and Truck, 2011). Uncertainties could lead to failure of a good investment decision and thus integration of uncertainty with capital budgeting techniques is overarching, on the other hand, often complex (Ghahremani, Aghare and Abedzadeh, 2012).…”

Modelo de evaluación de proyectos de inversión en condiciones de riesgo para apertura de programas de pregrado en instituciones de educación superior de Colombia: caso de estudio

“…En la literatura de gestión de proyectos, la simulación Montecarlo se asocia generalmente con la gestión de riesgos, aunque en la práctica también se puede aplicar en la evaluación de la gestión del tiempo (programación) y la gestión de costos (presupuesto). Este método especifi ca ciertas condiciones y simulaciones de variables del entorno con variables de decisión, ambas claves para los resultados del proyecto, como el VPN o la TIR, con base en los perfi les de riesgo para todas las variables de riesgo relevantes (Bock y Trück, 2011).…”

Incorporating Risk and Uncertainty in Cost-Benefit Analysis

“…3 These costs and benefits might involve large changes in the welfare of particular groups of individuals and/or the environment (Lemp and Kochelman, 2009;Zwikael and Ahn, 2011). 4 An analysis of risk and uncertainty must therefore form an integral part of any CBA, on a par with financial and economic analysis (Jenkins et al, 2011;Bock and Truck, 2011;Flyvberg, 2009). …”