5.1  Uncertainty

Uncertainty is distinct from Systematic Risk.  Despite the fact that both risk and uncertainty describe events in which the actual future outcome is not predictable with certainty, uncertainty cannot reasonably be assigned a probability, or allowance within a rate of return because the circumstances of the events are so unique.  For example, the list of Force Majeure events in a standard Project Agreement includes risks such as earthquakes, natural disasters, rebellions and revolutions.

When evaluating a project, moderate deviations from estimated cash flows, in either direction, are bound to occur, and these can be and should be, handled by adjusting cash flows and/or Discount Rates.  However, uncertainty is not incorporated into the procedures for deriving NPC cash flows and is not included in the estimate of Systematic Risk.  As a result, uncertainty should be addressed through a sensitivity analysis.

Under PPP contracts the private sector will normally face uncertainty (this includes and goes beyond Force Majeure).  This risk transfer is largely implicit within the Project Agreements for PPP projects.  Most Project Agreements include specific circumstances in which the risks of certain 'uncertain' events are shared, normally described with the Force Majeure clause of the contract. Any uncertainty not covered by Force Majeure is likely to be a project company risk.

The extremely pervasive nature of the events subject to uncertainty mean its impact on project returns is likely to be high, though the chances of an event happening are low.  Because of the difficulty in measuring uncertainty, it is recommended that a sensitivity analysis be conducted on the PPP Evaluation Discount Rate specifically in recognition of the transfer to the private sector of the uncertainty.  This sensitivity will result in a range of values with respect to each Proponent's bid for evaluation against the PSC.  It is recommended that an appropriate sensitivity analysis on the PPP Discount Rate would likely be in the range of an additional 0.5 per cent to 1 per cent.