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Division 2.4 Risk assessment

United Kingdom

Original text. Later amendments are not shown.

As set out in Article 101(1)(e) of Regulation (EU) No 1303/2013, a risk assessment must be included in the CBA. This is required to deal with the uncertainty that always permeates investment projects. Risk assessment enables the project promoter to better understand the way the estimated impacts are likely to change should some key project variables turn out to be different from those expected. A thorough risk analysis constitutes the basis for a sound risk-management strategy, which in turn feeds back into the project design. Particular attention should be paid to climate change and environmental aspects.

The risk assessment shall comprise two steps:

  1. (1)

    Sensitivity analysis, which determines the ‘critical’ variables or parameters of the model i.e. those whose variations, positive or negative, have the greatest impact on the project's performance indicators, shall take the following aspects into consideration:

    • the critical variables are the ones whose 1 % variation results in more than 1 % variation of the NPV;

    • the analysis is carried out by varying one element at a time and determining the effect of that change on the NPV;

    • the switching values are defined as the percentage change the critical variable should assume to make the NPV equal to zero;

    • scenario analysis allowing the study of the combined impact of determined sets of critical values and in particular, the combination of optimistic and pessimistic values of a group of variables to build different scenarios, which may hold under certain hypotheses.

  2. (2)

    Qualitative risk analysis including risk prevention and mitigation, which shall include the following elements:

    • a list of risks to which the project is exposed;

    • a risk matrix showing for each identified risk:

      • the possible causes of failure,

      • the link with the sensitivity analysis, where applicable,

      • the negative effects generated on the project,

      • the ranked (e.g. very unlikely, unlikely, about as likely as not, likely, very likely) levels of probability of occurrence and of the severity of impact,

      • the risk level (i.e. combination of probability and impact).

    • identification of prevention and mitigation measures, including the entity in charge of preventing and mitigating the main risks, standard procedures, where appropriate and taking into account best practices, where possible, to be applied to reduce risk exposure, where considered necessary.

    • interpretation of risk matrix including an assessment of the residual risks after the application of prevention and mitigation measures;

    • In addition the risk assessment may, where appropriate (depending on project size, data availability), and should, where the residual risk exposure is still significant, include the probabilistic risk analysis, which involves the following steps:

      1. (1)

        Probability distributions for critical variables informing about the likelihood of occurring a given percentage change in the critical variables. Computing the probability distribution of critical variables is necessary to carry out a quantitative risk analysis.

      2. (2)

        Quantitative risk analysis based on Montecarlo simulation, providing probability distributions and statistical indicators for expected result, STD, etc. of project financial and economic performance indicators.

    The main risks per sector to be taken into account in the risk assessment are set out in Table 2.

    In order to assist the project promoters in preparation of qualitative risk analysis in line with this Regulation, Member States are encouraged (if they consider this appropriate and/or feasible) to develop national guidelines on valuation of certain standard project risks, and list of mitigation and prevention measures across sectors.

    Table 2
    Sector/SubsectorSpecific risks
    Water supply and sanitation

    Demand risks:

    1. (i)

      Water consumption lower than predicted

    2. (ii)

      Connection rate to public sewage system slower than predicted

    Design risks:

    1. (iii)

      Inadequate surveys and investigation e.g. inaccurate hydrological predictions

    2. (iv)

      Inadequate design cost estimates

    Land acquisition risks:

    1. (v)

      Procedural delays

    2. (vi)

      Land cost higher than predicted

    Administrative and procurement risks:

    1. (vii)

      Procedural delays

    2. (viii)

      building or other permits

    3. (ix)

      utility approval

    4. (x)

      Legal proceedings

    Construction risks:

    1. (xi)

      Project cost overruns and delays in construction

    2. (xii)

      Contractor related (bankruptcy, lack of resources)

    Operational risks:

    1. (xiii)

      Reliability of identified water sources (quantity/quality)

    2. (xiv)

      Maintenance and repair costs higher than predicted, accumulation of technical breakdowns

    Financial risks:

    1. (xv)

      Tariff increases slower than predicted

    2. (xvi)

      Tariff collection lower than predicted

    Regulatory risks

    1. (xvii)

      unexpected political or regulatory factors affecting the water price

    Other risks:

    1. (xviii)

      Public opposition

    Waste management

    Demand risks:

    1. (i)

      Waste generation lower than predicted

    2. (ii)

      Waste flow control/delivery insufficient

    Design risks:

    1. (iii)

      Inadequate surveys and investigation

    2. (iv)

      Choice of unsuitable technology

    3. (v)

      Inadequate design cost estimates

    Land acquisition risks:

    1. (vi)

      Procedural delays

    2. (vii)

      Land cost higher than predicted

    Administrative and procurement risks:

    1. (viii)

      Procedural delays

    2. (ix)

      Building or other permits

    3. (x)

      Utility approvals

    Construction risks:

    1. (xi)

      Project cost overruns and delays in construction

    2. (xii)

      Contractor related (bankruptcy, lack of resources)

    Operational risks:

    1. (xiii)

      Waste composition other than predicted or having unexpectedly large variations

    2. (xiv)

      Maintenance and repair costs higher than predicted, accumulation of technical breakdowns

    3. (xv)

      Process outputs fail to meet quality targets

    4. (xvi)

      Failure to meet limits of emissions produced by the facility (to air and/or water)

    Financial risks:

    1. (xvii)

      Tariff increases slower than predicted

    2. (xviii)

      Tariff collection lower than predicted

    Regulatory risks:

    1. (xix)

      Changes of environmental requirements, economic and regulatory instruments (i.e. introduction of landfill taxes, bans on landfilling)

    Other risks:

    1. (xx)

      Public opposition

    Energy

    Demand risks:

    1. (i)

      Demand shortfalls

    2. (ii)

      Evolution of prices of different competing fuels

    3. (iii)

      Inadequate analysis of climatic conditions affecting the energy demand for heating and/or cooling

    Design risks:

    1. (iv)

      Inadequate design cost estimates

    2. (v)

      Inadequate site surveys and investigation

    3. (vi)

      Innovation in energy production/transmission or energy storage technology making the one in the project obsolete

    Land acquisition risks

    1. (vii)

      Land costs higher than predicted

    2. (viii)

      Higher costs for the acquisition of rights of way

    3. (ix)

      Procedural delays

    Administrative and procurement risks:

    1. (x)

      Procedural delays

    Construction risks:

    1. (xi)

      Project cost overruns and delays in construction

    2. (xii)

      Flooding, landslides, etc.

    3. (xiii)

      Accidents

    Operational risks:

    1. (xiv)

      Maintenance and repair costs higher than predicted, accumulation of technical breakdowns, for example those caused by climate change impacts

    2. (xv)

      Long out-of-service time for accident or external causes

    Financial risks:

    1. (xvi)

      Changes in the tariff system and/or in the system of incentives

    2. (xvii)

      Inadequate estimate of energy price trends

    Regulatory risks:

    1. (xviii)

      Changes of environmental requirements, economic instruments (i.e. RES support schemes, EU ETS design)

    Other risks:

    1. (xix)

      Public opposition

    Roads, Railways, Public Transport, Airports, Seaports, Intermodal

    Demand risks:

    1. (i)

      Traffic forecasts different than predicted

    Design risks:

    1. (ii)

      Inadequate site surveys and investigation

    2. (iii)

      Inadequate design cost estimates

    Administrative and procurement risks:

    1. (iv)

      Procedural delays

    2. (v)

      Building permits

    3. (vi)

      Utility approvals

    Land acquisition risks:

    1. (vii)

      Land costs higher than predicted

    2. (viii)

      Procedural delays

    Construction risks:

    1. (ix)

      Project cost overruns

    2. (x)

      Flooding, landslides, etc.

    3. (xi)

      Archaeological findings

    4. (xii)

      Contractor related (bankruptcy, lack of resources)

    Operational risks:

    1. (xiii)

      Operation and maintenance costs higher than expected

    Financial risks:

    1. (xiv)

      Tolls collection lower than expected

    Regulatory risks:

    1. (xv)

      Changes in environmental requirements

    Other risks:

    1. (xvi)

      Public opposition

    RDI

    Demand risks:

    1. (i)

      Development of relevant industry (demand for research results and demand for private contracted research)

    2. (ii)

      Evolutions on labour market (demand for university graduates and impact on demand for education services in the area)

    3. (iii)

      Interest of the general public different than predicted

    Design risks:

    1. (iv)

      Inadequate design cost estimates

    2. (v)

      Inadequate site selection or delays in completing the project design

    3. (vi)

      Invention of a new RDI technology making the infrastructure's technology obsolete

    4. (vii)

      Lack of well-established technical engineering expertise

    Administrative and Procurement risks:

    1. (viii)

      Delays in obtaining building permits

    2. (ix)

      Unresolved property ownership rights

    3. (x)

      Delays in the acquisition of intellectual property rights or higher-than-expected costs for their acquisition

    4. (xi)

      Procedural delays to select the supplier and sign the procurement contract

    5. (xii)

      Supply bottlenecks

    Construction risks:

    1. (xiii)

      Project delays and cost overruns during installation of scientific equipment

    2. (xiv)

      Lack of ready-made solutions to meet the needs arisen during the construction or operation of the infrastructure

    3. (xv)

      Delays in complementary works outside the project promoter's control

    Operational risks:

    1. (xvi)

      Lack of academic staff/researchers

    2. (xvii)

      Unexpected complication connected with the installation of specialised equipment

    3. (xviii)

      Delays in making the equipment fully and reliably running

    4. (xix)

      Insufficient production of research results

    5. (xx)

      Unexpected environmental impacts/accidents

    Financial risks:

    1. (xxi)

      Insufficient committed funding on a national/regional level during the operational phase

    2. (xxii)

      Inadequate estimate of financial revenues

    3. (xxiii)

      Failure to meet the demand from users

    4. (xxiv)

      Inadequate system for protection and exploitation of intellectual property

    5. (xxv)

      Loss of existing clients/users due to competition from other R+D centres

    Broadband

    Context and regulatory risks:

    1. (i)

      Change of orientation of the strategic policy

    2. (ii)

      Change in excepted behaviour of future private investors

    3. (iii)

      Change in regulations in the retail market

    4. (iv)

      Unsuccessful State-aid application

    Demand risks:

    1. (v)

      Lower than estimated service take-up from retail- and/or wholesale providers

    2. (vi)

      Low investments in ‘last mile’ network by service providers

    Design risks:

    1. (vii)

      Inadequate design cost estimates

    Administrative and procurement risks:

    1. (viii)

      Delays in project procurement

    2. (ix)

      Risk of not obtaining required property rights

    Operational and financial risks:

    1. (x)

      Increase in operational cost

    2. (xi)

      Insufficient committed funding on a national/regional level during the operational phase

    3. (xii)

      Loss of key personnel during project operation