The importance of risk analysis

As mentioned in Chapter 1, in terms of risk, too many feasibility studies and appraisals of megaprojects assume projects to exist in a predictable Newtonian world of cause and effect where things go according to plan. In reality, the world of megaproject planning and implementation is a highly stochastic one where things happen only with a certain probability and rarely turn out as originally intended. The failure to reflect the probabilistic nature of project planning, implementation and operation is a central cause of the poor track record for megaproject performance documented above.

It is fairly common in feasibility studies and appraisals of major transport and other infrastructure projects to make a mechanical sensitivity analysis examining the effect on project viability of hypothetical changes in, for instance, construction costs, interest rates and revenues. The typical range for such sensitivity analysis is from ±10 per cent to ±20 per cent. It is, on the other hand, unfortunately rare that risk analysis is made by identifying alternative future states of costs, revenues and effects and a probability distribution estimated for the likelihood that these states would actually occur. This information is required in order to estimate the expected values of costs, revenues and effects, or, in other words, the most likely development, including the associated variances.