Risk analysis in procurement

All forms of procurement involve the estimation and assessment of risks, and three main questions arise: Risk identification. What are the risks that a specific project entails? Can they be appropriately priced, managed and mitigated? Risk allocation. Who bears the final consequences if the risk happens, or can they be transferred to a third party such as an insurer? Risk management. How is the risk integrated into the working of the entity? What measures are taken to avoid or reduce the risk or its financial consequences? These three issues provide the basic framework for the chapter. However, some special issues arise which are more intractable. One is the Knightian distinction between risk and uncertainty. The presence of uncertainty muddies the waters considerably, as explored further in Chapter 9. The other problem area is the distinction between ‘project’ or ‘idiosyncratic’ risk vis-à -vis systemic risk as reflected in the discount rate. Choosing an appropriate discount rate has bedevilled the methodologies employed by various jurisdictions. Our own research analysis on this matter, reported in the chapter, suggests that – at least in the Australian context – systemic risk is misstated, jeopardizing the ability of public_private partnerships to demonstrate value for money.