−
−
though a government asset may be used more efficiently in the
private sector, potential private-sector purchasers will
generally discount such an asset's earnings at a rate in
excess of the Treasury rate, in part, due to the cost of
bearing risk. When there is evidence that government assets
can be used more efficiently in the private sector, valuation
analyses for these assets should include sensitivity
comparisons that discount the returns from such assets with
the rate of interest earned by assets of similar riskiness in
the private sector.
9. Treatment of Uncertainty
. Estimates of benefits and costs are typically
uncertain because of imprecision in both underlying data and modeling
assumptions. Because such uncertainty is basic to many analyses, its effects
should be analyzed and reported. Useful information in such a report would
include the key sources of uncertainty; expected value estimates of outcomes; the
sensitivity of results to important sources of uncertainty; and where possible,
the probability distributions of benefits, costs, and net benefits.
a. Characterizing Uncertainty
. Analyses should attempt to characterize the
sources and nature of uncertainty. Ideally, probability distributions of
potential benefits, costs, and net benefits should be presented. It
should be recognized that many phenomena that are treated as deterministic
or certain are, in fact, uncertain. In analyzing uncertain data,
objective estimates of probabilities should be used whenever possible.
Market data, such as private insurance payments or interest rate
differentials, may be useful in identifying and estimating relevant risks.
Stochastic simulation methods can be useful for analyzing such phenomena
and developing insights into the relevant probability distributions. In
any case, the basis for the probability distribution assumptions should be
reported. Any limitations of the analysis because of uncertainty or
biases surrounding data or assumptions should be discussed.
b. Expected Values
. The expected values of the distributions of benefits,
costs and net benefits can be obtained by weighting each outcome by its
probability of occurrence, and then summing across all potential outcomes.
If estimated benefits, costs and net benefits are characterized by point
estimates rather than as probability distributions, the expected value (an
unbiased estimate) is the appropriate estimate for use.
Estimates that differ from expected values (such as worst-case estimates)
may be provided in addition to expected values, but the rationale for such
estimates must be clearly presented. For any such estimate, the analysis
should identify the nature and magnitude of any bias. For example,
studies of past activities have documented tendencies for cost growth
beyond initial expectations; analyses should consider whether past
experience suggests that initial estimates of benefits or costs are
optimistic.
c. Sensitivity Analysis. Major assumptions should be varied and net present
value and other outcomes recomputed to determine how sensitive outcomes
are to changes in the assumptions. The assumptions that deserve the most
attention will depend on the dominant benefit and cost elements and the