Forecasting, uncertainty, and public project appraisal

Abstract

Uncertainty in project planning and appraisal is still topical in the World Bank and other lending and development agencies although it is certainly not a new issue. It is appropriate to reconsider the issue now because more than a decade of active research on risk analysis has transpired without, however, the seeming emergence of agreed procedures and practice. In particular, the implications for what information price forecasters should provide for risky project appraisers have yet to be clarified. In Section 2, theoretical arguments about the proper role of uncertainty in appraisal are reviewed, and this section is closed by discussion of the various'practical'methods that have been proposed, in and outside the World Bank. Further procedures for quantifying uncertainty in both forecasting and appraisal are considered in Section 3. Section 4 presents a set of procedures that seem workable and retain some theoretical defensibility. These are illustrated through an example. Finally, conclusions and implications are drawn out in Section 5.Economic Theory&Research,Environmental Economics&Policies,Health Economics&Finance,Statistical&Mathematical Sciences,Insurance&Risk Mitigation