Uncertainty in the Economic Appraisal of Water Quality Improvement Investments: The Case for Project Risk Analysis

This technical paper argues that Monte Carlo risk analysis offers a more comprehensive and informative way to look at project risk ex-ante than the traditional (and often arbitrary), one-influence-at-atime sensitivity analysis approach customarily used in IDB analyses of economic feasibility. The case for probabilistic risk analysis is made using data from a project for cleaning up the Tietê river in São Paulo, Brazil. A number of ways to handle uncertainty about benefits are proposed, and their implications for the project acceptance decision and the consequent degree of presumed project risk are explained and illustrated.