RAMP

1. RAMP Risk Analysis and Management for Projects

2. Background to RAMP • Joint Publication by the Faculty and Institute of Actuaries with the Institution of Civil Engineers. • Published in 1998, Revised 2002. • Recommended by HM Treasury as a tool for managing risk.

3. Definition of RAMP • RAMP is a comprehensive and systematic process for identifying, evaluating and managing risks in capital investment projects. • It covers the entire life of a project from inception to close-down, not just the construction phase.

4. Risk • Risk is a threat (or opportunity) which could affect adversely (or favourably) achievement of objectives of an investment. • A risk event is a specific happening which can have an affect on the project. • One is interested in identifying all possible risk events and the liklihood and impact of outcomes associated with these.

5. Investment Life-Cycle • Identify (Cost) • Appraise (Cost) • Plan (Cost) • Create (Cost) • Operate (Cost) +Revenues • Close down (Cost) +Revenue

6. RAMP Process • Launch • Appointments, terms of reference, budgets • Baselines, parameters, assumptions • Review • Management • Close down • Review of project output • Review of RAMP process

7. The Review Stage • Identify • Evaluate • Mitigate • Assess and plan to deal with residual risk • Communicate Strategy

8. Identification • Consider objectives, deliverables or activities associated with given stage. • Brainstorm to get a first list of risks. • Examine a risk matrix and identify further risks. • Use lists from other projects, reviews, studies or even a site visit. • Add all these to a ‘risk register.’

9. Identification (II) • Add an ‘impact’ to each risk – e.g. ‘possibly significant’ or ‘probably insignificant’ • Review in plenary and record • Cause or triggers to risk events • Consequences and activities affected • Ownership of risk • Possible responses to mitigate

10. Evaluation • Likelihood or probability of each risk. • The impact if the event occurs (financial). • The score (product of these) for the risk. • Where there is a risk which could have very serious consequences, special care is needed. • Overall, if a full value analysis is possible this should be done (e.g. MC of NPV.) • More general assessment is possible.

11. Evaluation. Assessment (I) • Description Prob Scale Val • Highly Likely >85% 16 • Likely >50% 12 • Fairly Likely >20% 8 • Unlikely >1% 4 • Very Unlikely <1% 2 • Extremely Unlikely <0.01% 1

12. Evaluation. Assessment (II) • DescriptionScale Value • Disastrous 1000 • Severe 100 • Substantial 20 • Marginal 3 • Negligible 1

13. Evaluation (IV) • Score Action • >=1000 Must Eliminate or Transfer • <1000 Avoid or transfer • <100 Retain and Manage • <20 Can be ignored

14. Mitigation • Risk mitigation is the taking of actions in order to ensure that the effect of a risk event is lessened. • This may take the form of a reduction in the probability of a risk event. • Alternatively the impact of an event should it occur may be altered. (E.g. taking an umbrella.)

15. Impact on NPV • Risk mitigation may often cost money. • However, this is offset by the reduction in volatility associated with the project returns. • A reduction in expected returns may be perfectly acceptable to a risk averse investor (recall concave utility.) • Sometimes a higher ‘risk premium’ is demanded. This is not mitigation and is an incomplete strategy in project management.

16. Mitigation Strategies • Reduce the probability or impact of risk event • Transfer the risk (insure) • Avoid the risk entirely (>cost) • Absorb or pool risks • Further information may help understand a particular risk better and may be appropriate to help decide on a strategy.

17. Reducing Risk • Risk can be reduced by recognising that the possibility of an event exists and acting to reduce the probability of its occurrence. • For example, training staff or putting up warning signs can reduce the chance of an industrial accident. • The mandatory wearing of protective clothing can reduce the impact of some accidents. • Getting key project individuals to fly on different flights is an extreme method but a valid risk reduction strategy.

18. Transferring Risk • Insurance is an obvious way to do this. • A tightly worded contract might serve to transfer risk. For example, a fixed price contract for construction work passes the cost of delays to the contractor. • Hedging currency risk is a method of transferring risk to the market.

19. Avoiding Risk • Sometimes it is possible to avoid a risk entirely. • For example, the use of hydrogen in airships was dangerous because it is explosive. • Using helium eliminates the risk of explosion entirely (at an acceptable cost).

20. Absorbing Risk • If it is not possible (or economically worthwhile) to eliminate risk, then it has to be absorbed. • A risk is said to be pooled if there is an agreement to bear it jointly. • For example, a partnership to build and rent 12 houses with 12 other parties imlplicitly pools the risk of not being able to rent one.

21. Further Information • Sometimes it may be evident that a risk event will be critical to the viability a project. • For example, the existence of underground channels in the construction of a metro. • If a substantial channel is on the route it may make the project too costly. • Taking soil samples at the planning stage could give accurate probability estimates or eliminate the possibility.

22. Strategic Analysis • Each mitigation strategy should be evaluated. • The effect on risks and consequences should be clearly identified. • Secondary risks caused by the strategy need to be highlighted. • The cost of each mitigation strategy should be summarised. • A decision on whether to implement then needs to be made.

23. Residual Risk • Residual risk is that which is left after the mitigating strategies are implemented. • These need to be summarised to inform decision about the project. • The impact of these on the bottom line, or NPV of ins and outs should be investigated (perhaps using MC techniques.) • Associated with each residual risk should be a risk response plan.

24. Management • The management involves the communication of the residual risk analysis, mitigation strategy and risk response plan. • “The risk mitigation strategy and the risk response plan must be fully integrated with the management systems and processes which determine the principal activities of the client.”

25. Management (II) • From the analyst point of view it is important to ensure that the strategies are being implemented. • Updating of the plans takes place at regular review meetings. • Monitoring of risks should be more regular, and should include all risks (even those some time in the future.)

26. Example 1.I • Company with project requiring 1000 investment in computer system in year 1. • Saving will be 300 the following year and 400 in each of 3 years after that. • What is the NPV for this project (with discount rate of 6%)? • Of course this is the plan!

27. Example 1.II • Having gone through the identification of risks phase, the following were highlighted; • System know-how could be resold (10%, 200 in year 2) • Technological delay (15%, one year delay and cost of 300 in year 2) • System doesn’t work well (10%, savings reduced by 100 p.a.) • Both delay and not work well (10%)

28. Example 1.III Exercise • Write down a schedule showing the NPV for each of the 5 possibilities. • This gives a probability distribution of NPVs. • The expected value of the project can be calculated.

29. Example 1.IV • The contractor offers to cover the cost of the delay that may be experienced for an upfront additional cost. • This is for 80 in year 1. • What are the possibilities now? • Calculate expected NPV.

30. Example 2 • Appendix 8 of the RAMP manual gives another example. • This is of a major construction project (to build a bridge/tunnel.) • It contains some interesting examples of mitigation strategies and methods of reducing risks for important events.

31. Summary • RAMP is a tool for risk analysis in the context of the management of projects. • It contains 4 main steps. • This brings the process from start up through review and management to close down. • It is a widely accepted methodology and provides a good mixture of quantitative as well as ‘practical’ strategies.