Cost overrun risk assessment in the public investment projects: an empirically-grounded research

Abstract

The article deals with an issue of how to accurately assess the Risk (risk of cost overrun)in the PIPs (public investment projects). Problematic and as a result rare application of quantitative risk assessment tools in the public sector determines the relevance of systemization and facilitation of techniques which would allow increasing accuracy of Risk assessment as well as efficiency and transparency of public finance management. The purpose of this article was to analyze the peculiarities of Risk in the PIPs and to find the PDs (probability distributions) the best enable to assess the Risk in the PIPs more specifically. Summarizing the scientific literature it was revealed that, due to a complex of problems, risk assessment based on historical data gives place to the qualitative tools such as personal expertise which is prevailing in practice. However, under circumstances analyzed in the article, the application of historical data allows getting more accurate result, and a public sector, despite a lack of experience in comparison with private one, has more advantages in this case. Performed case study enabled to present a methodology of how to systemize data for assessment of the Risk in the PIPs. The peculiarities of Risk were analyzed in the groups (PIP groups)) their classification was based on PIP accounting plan of long-term asset in Lithuania. The findings of the article showed the difficulties of the public sector to ensure sufficient financing as well as the problems to manage the Risk in the PIPs. The case study disclosed the inability of so called “traditional” PDs to accurately describe this tendency of success of the public sector to implement the PIP within the estimated budget, while the Loglogistics and its parameters was tested as the most suitable PD to assess the Risk not in a general case, but also in the different the PIP groups. DOI: http://dx.doi.org/10.5755/j01.ee.26.3.8631