Integrating Risk into ADB’s Economic Analysis of Projects

Abstract

Current practice suggests that project economic analysis can be strengthened through the use of quantitative risk analysis to investigate the effect on project outcomes of the expected range and distribution of values for key project parameters. The heightened focus on poverty reduction, which raises the profile of the poor’s vulnerability and exposure to risk, also suggests that poverty analysis can be improved through the use of risk-oriented techniques. The opportunity to improve practice in this area of project economic analysis is offered by the existence of dedicated and easy-to-use software packages for risk analysis. The paper suggests that, as a general rule, the greater the extent to which risk can be identified and quantified within the scope of routine project economic analysis, the stronger will be overall project design and the lower likelihood of project failure. Also, the more comprehensively the objective circumstances and subjective attitudes of poor project participants can be taken into account in project planning, the greater chance of projects achieving their poverty reduction objectives. To assist in better integrating risk analysis in project economic analysis, the paper provides a summary of key principles, ways in which risk analysis can be employed specifically to address poverty reduction objectives, and a summary of typical risk circumstances on a sector-by-sector basis. Practical guidance for applying typical risk analysis software is also provided.