Introduction
The list of troubled government projects in Guyana is long and getting longer by the day. The root causes of this reside in a complex set of circumstances, including lack of systematic planning; poor project selection and design; even poorer execution and implementation; as well as weak monitoring and lack of transparency. Based on past experiences, this contributes immensely to the waste, corruption, and mismanagement, which beset these projects. This track-record highlights the risks and uncertainties facing government decision-making and spending.
It is for this reason, at the end of last week’s column, I promised to discuss, in coming weeks, two topics which are crucial for the intelligent appraisal of government projects. These are, the roles of 1) uncertainty and risk, and 2) the time value of money. Both are required in even the most rudimentary application of social benefit-cost analysis to public projects. I had sought to evoke readers’ interest in these topics, by attaching two popular sayings to them, namely 1) “a bird in hand is worth two (or more) in the bush” and 2) “time is money”, respectively.
Uncertainty and Risk
Understanding the notions of uncertainty and risk in government decision-making and projects is not easy. However, I believe the saying “a bird in hand is worth two (or more) in the bush” promotes an understanding of their essentials. For starters, one can recognize intuitively from this saying that, a bird in hand represents a definite and certain possession. But, having two (or more) in the bush, while doubling (or more) the potential for possessions, remains uncertain. This is so, if for no other reason than that, in real life, there is no guarantee that potential can be translated into actual possession.
As readers might well imagine, in this particular circumstance one’s ability to convert potential into certainty can be negatively affected by a host of factors. These include (but are not limited to) 1) lack of effective means for capturing the birds in the bush 2) the likelihood that the estimate of two (or more) birds in the bush is in error 3) the likelihood that an exogenous natural event prevents the birds’ from remaining in the bush (for example, an unexpected thunderstorm) and 4) the likelihood that other unexpected events (which are not natural) could drive the birds away (for example, the appearance of wildlife traders hunting birds). This list of unexpected occurrences can of course, go on and on.
For sure though, the likelihood (or probability) of some of those unexpected events occurring could be estimated fairly confidently. But, in practice, all of them cannot be similarly estimated. We can conclude therefore, there will always remain some uncertainty regarding one’s ability to bring the two (or more) birds in the bush into one’s actual possession. And, it is this remaining uncertainty, which makes the saying, in my view, excellent general advice for dealing with life’s uncertainties.
Economics and Uncertainty
In truth, the word uncertainty not only has different meanings in different scientific disciplines, but also differs from those found in popular usage. Uncertainty is especially developed in physics, where readers might recall from their early years of secondary schooling, the uncertainty principle. In the particular case of economics (and technology), uncertainty basically arises in decision-making because the certain valuation today of future flows of costs and benefits from any investment project (whether private or government) is impossible. No one person, nor indeed no available economic or business model can predict future values with certainty. However, estimated outcomes would have different probabilities or chances of occurring, with the measurement of some being more accurate than others.
To be precise (as no doubt readers would demand) uncertainty in economics refers to outcomes (or future results) flowing from given activities (or events), which are too unsure for us to be able to assign definite or measurable likelihoods, probabilities, or chances of their occurring. Indeed to be able to develop a likelihood of occurrence, (or probability or chance) there needs to be a historical record of similar events (or activities) and their outcomes from which to derive a statistical basis for estimation. This consideration provides the theoretical foundation from which economists distinguish between uncertainty and risk. This is considered next.
Economics and Risk
In cases of risk, economists presume the existence of historical data on similar previous activities (or events) and their outcomes. Armed with that information they are able to fairly confidently measure the risk attached to the various outcomes of a particular activity (or event). The availability of relevant historical data, however, does not obtain in cases of uncertainty. For risk therefore, investment projects would be able to have assigned probabilities, (or chances) of negative outcomes occurring. Thus in the example that I used earlier of a storm erupting and chasing the birds out of the bushes, the frequencies of such storms in the past might be obtained from available meteorological data, allowing probabilities or chances of its occurrence to be estimated.
We might say therefore, risk exists whenever an expected outcome from an activity (or event) is likely to be accompanied by undesirable consequences plus the seriousness of these undesirable consequences. To repeat, this is statistically measurable when there is available historical data.
Conclusion
In conclusion, consider the following circumstances in regard to Guyana’s several disputed projects. First, there is a likelihood that drought could affect the water flow at the Amaila Hydro Project site. The chances of this happening can be estimated from available meteorological data and the seriousness of its impact on the delivery of electricity estimated as a routine part of the feasibility (social cost-benefit) evaluation of the project. Second, government project planners should be aware of the track-record of public projects: falling behind schedule, incurring significant cost overruns, corruption, and so on. On the basis of this information, the risk of any public project running into difficulties can be confidently estimated.
Next week I shall wrap up this discussion of uncertainty and risk and afterwards proceed to discuss the other crucial notion I had indicated I would cover, that is, time is money.
