The document discusses sources of project risk and measurement techniques in Ethiopia. It defines project risk and risk management. It then outlines various sources of project risk for public enterprises, private companies, and non-governmental organizations in Ethiopia. The document also defines different techniques for measuring project risk, including the risk adjusted discount rate method, decision trees, basic probability theory, standard deviation, and others. It provides an example of how to calculate net present value using the risk adjusted discount rate method to evaluate a project.

1. Source of Project Risk and measurement Technique in Ethiopia
By Guta Mengesha
MA in Project Management and Finance
Email.gutamdg@yahoo.com
skype: guta.dinagde
Ethiopia, 2020
Guta Mengesha

2. Source of Project Risk and measurement Technique
Content of subject
1. Project risk defined
2. Project risk management
3. Source of project risk
• Source of project risk in general
• Public Enterprise Ethiopian context
• Private enterprise Ethiopian context
• Non-Governmental organizations
4.Risk measurement
Defined
5.Risk measurement tools
6.Reference
Guta Mengesha

3. Source of Project Risk and measurement Technique
Concept and definition
1.Project risk: the chance of loss in its cash flow and earning
or deliverables.
Risk is uncertain event or condition that could have
Negative or positive effect on one or more project
Objectives. source:Alper BENDER-University of Technology Sydney, 2016
Issue: is an event that has already occurred, should be solved or escalated
Source: Panjak sharma 2018
2.What is the project risk management?
ISO 31000 defines risk management as ‘Coordinated
activities to direct and control an organization with
regard to risk.
Guta Mengesha

4. Source of Project Risk and measurement Technique
3.Source of Project Risks in general context
1) Project-specific: the earning and cash flow of the project may be lower than expected
because of estimation error or due to some other specific factors like quality of
management.
2) Competitive risk: the earning and cash flow of the project may be affected by
unanticipated actions of competitors.
3) Industry-specific risk: unexpected technological advancement and regulatory changes, that
are specific to the industry which the project belongs, may have an impact on earning and
cash flow of the project
4) Market risk: unanticipated changes in macroeconomics factors like the GDP growth rate,
interest rate, and inflation have an impact on all projects, albeit in varying degree.
5) International risk: in case of foreign project, the earning and cash flow may be different
than expected due to the exchange rate risk or political risk.
Source: Prasanna Chandra(2010);- Projects: planning, analysis, selection, Financing,
implementation, and review. 7th edition Guta Mengesha

5. Source of Project Risk and measurement Technique
Source of project risk in public Enterprise of Ethiopia
 Overestimating benefits & Underestimating cost
 Political decision without proper feasibility study
 Lack of clear accountability and responsibility
 Lack of coordination among organizations
 Corruption and Rent seeking behavior
 Excessive excitement with immediate output
 Not taking public opinion in to account
 Lack of appropriate project governance
 Rushing to complete the project before time
 Jumping from idea stage to action stage
 Not doing appropriate feasibility study and design
 Not giving compensation to beneficiaries on time
Source: Asmamaw Tadege
 Absence sound inventory management.(Renaissance dam)
 Lack of project management effort
 Considering jobs of project as normal operation.
Guta Mengesha

6. Source of Project Risk and measurement Technique
Source of project risk in private companies in Ethiopia
1. Construction Phase Risks
Sponsor risk
Contractor risk/Sub-contractor
Pre-completion risk
Off-loaded jobs
Site and permitting
Availability of Facility
Cost overruns
Completion delays
Scope definition(Change)
Error(Omissions)
2. Operational Risk
Raw material/supply risk-downward stream?
Off-take and sales risk
Counterparty risk
Technology logs stack
Obsolescence risk
Inexperienced(Skill) PM
Logistics
Communication(misunderstanding)
Acceptance criteria undefined
Change(Late) requirement
Unrealistic deadlines
Guta Mengesha

7. Source of Project Risk and measurement Technique
Source of project risk in private companies in Ethiopia
3. Financial Risks
Foreign exchange risk
Interest rate risk
Inflation risk
Currency devaluations
Liquidity risk
Product pricing
Credit risk
Market risk(swing)
Customer
4. Political/Legal Risk
Nationalization
Taxes and tariffs
Peace and security
Enforceability of contract
Cultural difference(Foreign project)
5. Environmental Risk
Land slides
Heavy rains (Weather)
Other act of God
source: PMI Guta Mengesha

8. Source of Project Risk and measurement Technique
Source of project risk Non-Governmental organizations in Ethiopia
Organizational/management/human factors
 Poor leadership
 Inadequate authority of key personnel to fulfill roles
 Poor staff selection procedures
 Lack of clarity over roles and responsibilities
 Personality clashes
 Lack of operational support
Political
 Change of government or government policies
 War and disorder
 Adverse public opinion/media intervention
 Interference by politicians in development decisions
Environmental
 Natural disasters
 Sudden changes in weather patterns Guta Mengesha

9. Source of Project Risk and measurement Technique
Source of project risk Non-Governmental organizations
Technical/ operational/ infrastructure
 Inadequate design
 Scope creep
 Unclear expectations
Project Management Risk
 Lack of planning, risk analysis, contingencies
 Inadequate tracking and control response
 Unrealistic schedules
 Poorly managed logistics
 Delays in the approval of project documents
Guta Mengesha

10. Source of Project Risk and measurement Technique
Source of project risk Non-Governmental organizations
Strategic/commercial
• Failure of suppliers to meet contractual commitments
• Fraud/ theft
• Implementing Partners failing to deliver the desired outcome
Economic/financial/market
• Exchange rate fluctuation
• Interest rate instability
• Inflation
• Market developments adversely affect plans.
Legal and regulatory
• New or changed legislation invalidates project assumptions
• Failure to obtain appropriate approval (e.g. planning, consent)
• Unsatisfactory contractual arrangements
Source: A guid for PM 4 NGO’s Guta Mengesha

11. Source of Project Risk and measurement Technique
4. Measurement of project risk
Evaluation of likelihood and extent(Magnitude) of risks
A number of techniques have been suggested by Economists to
deal with risk in investment appraisal.
There are a number of methods, naming
Risk Adjusted discount rate(NPV),
Decision tree,
Basic probability theorem,
Standard deviation,
coefficient of variation and
Brake even,
Sensitivity analysis,
Scenario,
Hiller model and
Simulation methods Guta Mengesha

12. Measurement Technique project risk
Some of the popular techniques selected for this purpose are as follows:
1. Risk Adjusted Discount Rate Method(Net Present Value Method)
In this method all net cash inflows are discounted to present value using the required rate of return and is then
compared with the initial outlay
Is based on the presumption that investors expect a higher rate of return on risky projects as
compared to less risky projects.
The rate requires determination of (i) risk free rates and (ii) risk premium rate.
Risk free rate is the rate at which the future cash inflows should be discounted.
It takes into account both time and risk factors.
Decision Criteria
 If NPV is greater than zero accept the project
 If NPV is less than zero reject the project
Guta Mengesha

13. Source of Project Risk and measurement Technique
Risk Adjusted Discount Rate Method cont….
Illustration:
To illustrate the calculation of the NPV consider a project which has the following cash flow streams
The cost of capital, r, for the firm is 10%. The NPV of proposal is?
NPV= 200,000+200,000+300,000+300,000+350,000 – ICO =181,818+165289+225394+204,904+217322=994,727-1,000,000.00
(1.10)1 (1.10)2 (1.10)3 (1.10)4 (1.10)5
= Br. -5,273
Decision: Reject the project as NPV<0 Guta Mengesha

14. Source of Project Risk and measurement Technique
2.Decision Tree and Expected Monetory Value
A decision tree is a diagramming method used to help you select the best course of action in
situations in which future outcomes are uncertain
EMV is a type of decision tree where you calculate the expected monetary value of a decision
based on its risk event probability and monetary value
:Project 2; has higher EMV, hence less risky Guta Mengesha

15. Source of Project Risk and measurement Technique
3. Basic Probability Theorem:
We must see certain basic theorems relating to a probability theory.
These are as follows:
(i) The probability of an event is always a number between 0 and 1 inclusive. If an event is sure to occur, its
probability is by definition equal to 1. If it is certain that it will not occur its probability is 0.
(ii) If ‘n’ events are equally likely and only one of them may happen, then the probability of that event is 1/n.
(iii) If two events are mutually independent and the probabilities of one is PI while that of other P2, the probability
of the events occurring together is the product of P1, P2.
(iv) If the events are mutually exclusive and the probability of the one is PI while that of the other is P2, the
probability of either one or the other occurring is the sum P1+P2.
Illustration:
Pioneer Company Ltd. has given the following possible cash inflows for two of their projects A and B. Both the
projects will require an equal investment of USD. 5,000. Let us compute expected monetary values for the projects A
and B.
Guta Mengesha

16. Source of Project Risk and measurement Technique
Basic Probability Theorem: con..
From the above table B has higher monetary value as compared to Project A.
Therefore, Project B is preferable.
Project A Project B
Posible
Event cash inflow Probability
Expected
value(USD) cash inflowa Probability
Expected
value(USD)
A 4,000.00 0.10 400.00 12,000.00 0.10 1,200.00
B 5,000.00 0.20 1,000.00 10,000.00 0.15 1,500.00
C 6,000.00 0.40 2,400.00 8,000.00 0.50 4,000.00
D 7,000.00 0.20 1,400.00 6,000.00 0.15 900.00
E 8,000.00 0.10 800.00 4,000.00 0.10 400.00
Total 6,000.00 8,000.00
Guta Mengesha

17. Source of Project Risk and measurement Technique
4. Standard Deviation:
The standard deviation is defined as the square root of the mean of the squared deviations of all the
items from the mean and it is usual to denote it by the small Greek “Sigma”, σ. In the case of capital
budgeting, this measure is used to compare the variability of possible cash flows of different projects from
their respective mean or expected values.
Steps to be followed for calculating the S.D. of the possible cash flows:
(i) Compute the mean value of the possible cash flows.
(ii) Find out the deviation between the mean value and the
possible cash flows.
(iii) Square the deviations.
(iv) Multiply the squared deviations by the assigned probabilities to get the weighted squared deviations.
(v) The sum of the weighted squared deviations and their square root are calculated. The result gives the
S.D.
Illustration:
On the basis of the data given in probability theory approach find out which project is more risky by
adopting S.D. approach.
Guta Mengesha

18. Source of Project Risk and measurement Technique
Standard Deviation:
Project-A
𝝈 =1,200,0002 = 1,095
Project B
𝝈 =4,400,0002 = 2,098
A project having a larger standard deviation will be more risky as compared to a project having smaller standard deviation.
Thus, project B is more risky.
Passabele
Event Cash inflow
Devition from the
mean (6000) Deviations squares Probability
Probability devation
squared
A 4,000.00 - 2,000.00 4,000,000.00 0.10 400,000.00
B 5,000.00 - 1,000.00 1,000,000.00 0.20 200,000.00
C 6,000.00 - - 0.40 -
D 7,000.00 1,000.00 1,000,000.00 0.20 200,000.00
E 8,000.00 2,000.00 4,000,000.00 0.10 400,000.00
Total 30,000.00 1,200,000.00
Possible
Event Cash inflow
Devition from the
mean(6000) Deviations squired Probability Probability devation squared
A 12,000.00 4,000.00 16,000,000.00 0.10 1,600,000.00
B 10,000.00 2,000.00 4,000,000.00 0.15 600,000.00
C 8,000.00 - - 0.50 -
D 6,000.00 - 2,000.00 4,000,000.00 0.15 600,000.00
E 4,000.00 - 4,000.00 16,000,000.00 0.10 1,600,000.00
Total 40,000.00 4,400,000.00
Guta Mengesha

19. Source of Project Risk and measurement Technique
5.Coefficient of Variation:
Standard deviation is expressed in the units of the original distribution and is called absolute measure of
dispersion. Therefore, absolute measure must be reduced to a form which is free from the original unit of
measurement. This can be done by expressing it in relation to the average from which variation is measured.
This measure of relative variation is obtained by dividing the absolute measure by that average and is called a
coefficient of variation.
1. The coefficient of variation can be calculated as follows:
= Standard Deviation/Expected (or Mean) Cash Flow = σ/Erf
Project A=1,095 =0.19 or 19%
6,000
Project B= 2,098=0.27 or27%
8000
Thus, The coefficient of variation of project B is more
as compareer to project A.
Hence, project B is more risky.
Summary
The coefficient of variation is a better risk measure than the standard deviation alone because the CV adjusts
for the size of the project. The CV measures the standard deviation divided by the mean and therefore puts
the standard deviation into context.
Guta Mengesha

20. Source of Project Risk and measurement Technique
5. Reference
Scholarly Article shared by Shivan V, Risk, meaning and measurement 2018
Project Management body of knowledge PMBOK- guide 2000
Project Management Institute. 2004. A Guide to the Project Management Body of Knowledge:
PMBOK® Guide – Third Edition
United Nations Environment Program, 2005, UNEP project manual: formulation, approval, monitoring and
evaluation.
World Vision Development Resource Team, 2009, LEAP Lexicon – Second Edition, Washington, DC:World
Vision International
Plan International, 2002, Project Management Methodology
Prasanna Chandra(2010);- Projects: planning, analysis, selection, Financing, implementation, and review.
7th edition
Article shared by Asmamaw Tadege Risk on projects in Ethiopian Public enterprise
www.projectcartoon.com
www.ProjectBailout.com
Guta Mengesha

21. Source of Project Risk and measurement Technique
THAT’S ALL!!!
GOD BLESS YOU!!!
Guta Mengesha