ECONOMIC REVIEW

The GCA shall draw conclusions on economic costs and benefits based on the calculations of the economic net present value (ENPV) of the stream of costs and benefits during the lifetime of the project. The GCA shall convert future costs and benefits into their present value using the social discount rate i.e., a calculation comparing the quantified socio-economic benefits received by the public and the GCA against the economic costs of the project, based on economic or social discount rate. The GCA shall determine the economically preferred project option based on the highest ENPV. If there are important costs and benefits that have not been quantified because the required data and calculation methods are not available, then the GCA should consider these in addition to the ENPV while determining the preferred alternative.

For purposes of presentation, the internal rate of return (IRR) of the stream of net benefits i.e., benefits less costs can be calculated (comparison of the socio-economic benefits and economic costs of the project) – this is the economic internal rate of return or EIRR. The EIRR of the preferred option should exceed the social discount rate.

The GCA shall conduct a sensitivity analysis to assess how uncertainties in KPBU/PPP implementation may impact the economic feasibility level of the project. This analysis helps understand how sensitive economic and financial outcomes are to key assumptions in the evaluation. This analysis also helps anticipate variations in costs and benefits that may occur. The uncertainties may include:

(a) Uncertainty about important assumptions in the calculation of costs and benefits and
(b) Project risks on the economic feasibility of the project.

The GCA shall carry out the sensitivity analysis through: (a) Identifying variables that may have a significant impact on project outcome
(b) Identifying the likelihood of risks occurring
(c) Calculating the impact by considering combinations of best and worst-case scenarios for the variables and
(d) Identifying changes in key assumptions that could reduce net financial or economic benefits and assess the likelihood of their occurrence.

For the above, the GCA shall include the usual sensitivity tests such as increase of costs (usually by about 20 percent) and low demand scenario.

The GCA shall consider that the significance of the project risk indication activity. The return on investment to the Implementing Business Entity (IBE) i.e., its form (closing of capital cost, operational cost and reasonable profit) and method (payment by users in the form of tariffs, Availability Payment (AP) and/or other forms as long as they do not conflict with the provisions of laws and regulations) can be combined, taking into account the clarity on the allocation of project risks in the PPP.

A risk review may also be carried out simultaneously with the quantitative assessment of VFM.

The Pre-FS should provide a risk matrix, which identifies all key risks relevant to the project and contains information about each risk. The matrix also contains each risk’s assessment, its allocation and mitigation measures deployed to planned to be deployed.

The information for the risk matrix is collected from the other components/sections/reviews of the Pre-FS (in particular the technical analysis, the analysis of user demand, and the project due diligence). The GCA may consider holding a risk workshop to complete the information. A risk workshop may be held with key experts of the GCA and the TA/consultants preparing the Pre-FS. The risk workshop brings together parties with different skill sets and expertise to debate the risks and their management.

Each section of the risk matrix is described below.

Risk identification – The GCA shall carry out project risk identification to determine and understand factors that may prevent, reduce, delay, or enhance the project's outcomes. A general review of potential risks can be useful to identify possible emerging risks potency. Some main and common categories of risks to the project should have been covered previously in the PS in a ‘risk matrix’ and would have included project physical risks, project operational risks, financial/market risks, and process risks. During the preparation of the Pre-FS, the GCA shall ensure the risks identified in the PS can be confirmed, decreased or increased and change the risk matrix, accordingly. The GCA shall ensure that identification of these common risks and other more project-specific risks is done by personnel who possess adequate technical and operational experience. These personnel can be from within the GCA or external to it. During the preparation of the Pre-FS, the GCA has a freehand to add as many rows required to include risks not included previously in PS risk matrix. The Pre-FS risk matrix should include the following information about each risk:
(i) Name of risk
(ii) Description of risk
(iii) Consequence in case the risk occurs (qualitative description)
(iv) Indication of the probability of occurrence (low/moderate/high)
(v) Indication of the likely impact on costs or revenues (low/moderate/high)
(vi) Grade of risk (scored 1–10) i.e., a product of probability and consequence
(vii) Proposed allocation. This explains how the risk will be allocated among public, private, entities or shared
(viii) Proposed management and mitigation measures (at least for the high-grade risks). This describes what mitigation might be available, for example, additional investment, technology, methodologies, and insurance
(ix) Additional remarks, if any.

For instance, demand risk would mean the risk that the projected numbers of users do not use the service, for example, the actual users are 10% lower than the projected numbers. The risk matrix would identify the probability of this risk occurring, and also if such an event actually takes place, what would be the impact of that risk on the KPBU project and finally who/which party would bear the adverse impact of this event.

Risk assessment - Here the GCA conducts an evaluation of the identified project risks that consider factors such as the level of risk, as well as the likelihood and consequences of these risks. This assessment is beyond the initial evaluation of risks conducted in the PS. Risk assessment techniques can range from subjective assessment methods based on experiences in similar projects to computer-based simulations. The choice of risk assessment approach depends on the significance and complexity of the risks and their impacts on the KPBU project. The GCA shall consider that the emphasis at the PS stage was on using subjective methods for assessment. However, during the preparation of the Pre-FS, detailed assessments may be conducted, especially if a more complex assessment with multi-variable simulations is required.

Risk allocation - If the project implementation can be carried out by parties other than the identified GCA, efficient risk management requires allocating risks to parties with the best capabilities to handle them. While at the PS stage, considerations were given to identify which party has the best capability to manage the identified risks, during the Pre-FS the GCA shall change or confirm the same, as may be required.

Risk mitigation - The GCA may identify mitigation strategies to reduce the likelihood of risks occurring or to lessen the consequences if those risks are materialised. The GCA may use mitigation strategies to prevent occurrences through project structuring or contingency planning. The GCA’s mitigation strategies should strive for a balance between potential costs and the risks involved, as well as the costs incurred to prevent or mitigate the risks.

Data permitting, the high-grade risks should be quantified. A minimal quantification includes:
(a) Probability of occurrence of risk and
(b) Damage, costs, or revenue loss if a risk occurs.

This helps the GCA to quantify the expected loss and the maximum loss due to the risk.