GUIDELINES FOR RISK ANALYSIS IN THE COST-BENEFIT ANALYSIS OFWATER AND WASTEWATER PROJECTSDRAFT FOR DISCUSSION Rationale fo t!e"e #$i%eline"The Standard Application for Major Project Requet for Confir!ation of Aitance under Article "#$e% of Re&ulation $'C% No (#)*+ ,##- 'uropean Re&ional De.elop!ent Fund + Coheion FundInfratructure In.et!ent require a /Ri0 Ae!ent1 to 2e underta0en3E.3.1 Short description of methodology and summary results;E.3.2 Sensitivity analysis that presents the estimated effects on financial and economicperformance indicators ofchanges in variables tested includingidentificationofcritical variables1 and the switching values of the critical variables;E.3.3 Ris analysis involving a description of the probability distribution estimate of thepro!ect"s financial and economic performance indicators#O&'e(ti)e" fo t!e"e #$i%eline"The !ain o2jecti.e of thee &uideline i to pro.ide the 2aic tructure and !ethodolo&ical toolfor underta0in& the ri0 and eniti.it4 anal4i 5ithin the o.erall cot 2enefit anal4i in 5ater and5ate5ater ector ta0in& into account6 the conte7t in 5hich thee project are 2ein& prepared8 the difficultie of the cot 2enefit anal4i proce in the en.iron!ent ector8 the require!ent of the 'U re&ulationandrelated docu!ent forthe procein&andappro.al of 'U funded project3Nee%" fo Sen"iti)it* an% Ri"+ Anal*"i"The eniti.it4 and ri0 anal4i proce i intended to6 identif4 thoe factor that are 0e4 deter!inant of project outco!e8 deter!ine the li0elihood of indi.idual project return 2ein& unaccepta2le o5in& to ri08 dei&n!eaure5ithintheproject en.iron!ent anditector conte7t to!iti&atetheidentified ri0 ariin& fro! the identified 0e4 factor3Fortheepurpoe9 thefirt part of theanal4i$eniti.it4anal4i% ai!toidentif4the0e4.aria2leandtheir potential i!pact onprofita2ilit4indicator3 Theecondpart $ri0anal4i%atte!pt to eti!ate the pro2a2ilit4 of thee chan&e ta0in& place 5ith the reult e7preed a aneti!ated !ean and tandard de.iation of the indicator3The rele.ant indicator calculated afterthe 'U &rant that hould 2e conidered in underta0in& the ri0 and eniti.it4 anal4i are6 FRR+C and correpondin& FNP:+C8 'RR and correpondin& 'NP:3;here the reult of the ri0 and eniti.it4 anal4i ho5 0e4 cot or 2enefit para!eter to ha.e a!aterial i!pact on project .ia2ilit49 it i then necear4 to conider 5hat chan&e are required tothe project tructure to !iti&ate the potential ri031 Accordin& to the 'U turn cot E(F Decreae of 7? in project out>turn cot E(F Decreae of 7? in re.enue E,F Increae of 7? in re.enue E,F Decreae of 7? in OGM cot E*F Increae of 7? in OGM cot E*F Increae of 7? in econo!ic 2enefit Decreae of 7? in econo!ic 2enefit E(F Financial cot in the cae of FRR+C and FNP: and econo!ic cot in the cae of 'RR and 'NP:3E,F Total re.enue in the cae of hitorical re!ainin& cot !ethod and incre!ental re.enue other5ie3E*F For FRR+CandFNP:9total financial OGMcot inthecaeof hitorical re!ainin&cot !ethodandincre!entalfinancial OGM cot other5ie3 For 'RR and 'NP:9 incre!ental econo!ic OGM cot3T5o point hould 2e clearl4 tated6 A project re.enue are not an econo!ic 2enefit the eniti.it4 anal4i hould not 2eunderta0en to e7a!ine the i!pact of chan&e in project re.enue on the econo!ic rate ofreturn and econo!ic net preent .alue3 Si!ilarl49 econo!ic 2enefit are not a financial re.enue and hence the eniti.it4 anal4ihould not 2e underta0en to e7a!ine the i!pact of chan&e in econo!ic 2enefit on thefinancial net preent .alue31.1.2 Determining Switching Values of the Critical VariablesThe 5itchin& .alue i the percenta&e chan&e in a .aria2le for the NP: 2eco!e Hero or the IRRequal the opportunit4 cot of capital and hence the project deciion to chan&e3 The 5itchin&.alue therefore deter!ine the chan&e in the identified critical .aria2le at 5hich point a deciionconcernin& the .ia2ilit4 of the project9 under it initial confi&uration9 hould 2e i!ple!ented3The5itchin& .alue anal4i pro.ide the 2ac0&round for underta0in& the ri0 anal4i3The 5itchin& .alue hould 2e calculated a part of the projectA econo!ic and financial anal4i3It requireaniterati.eanal4itodeter!inetherequiredpercenta&echan&eina.aria2letochan&e the projectA net preent .alue to Hero3 The chan&e need to 2e applied on an annual2ai to the identified critical .aria2le9 5ith each critical .aria2le 2ein& eparatel4 identified3The.aria2le that need to 2e conidered hould include all identified /critical1 .aria2le and an4 u2co!ponent 5here the critical .aria2le i !ade up of e.eral part31.2 is! AnalysisRi0 anal4i e7a!ine the pro2a2ilit4 5ith 5hich the required chan&e in a .aria2le ha a !ateriali!pact on project .ia2ilit43In the coure of ri0 anal4i9 the follo5in& ri0 are e7a!ined6 Intheli&ht of their influenceonthefinancial andperfor!anceindicator9 ri0ariin&o5in& to .aria2le that are dee!ed a critical8 Other ri03The a2o.e ri0 hould 2e anal4ed in detail uin& a quantified approach3The 'U