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Kassab, M., Hegazy, T., and Hipel, K.W.

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Multiple Criteria Decision Support for Infrastructure Privatization
M. Kassab1, T. Hegazy 2, and K.W. Hipel 1 1. Systems Design Engineering Dept., University of Waterloo, Waterloo, ON, N2L 3G1, Canada; PH: (519) 888-4567 ext.: 33283; FAX: (519) 888-6197. 2. Civil Engineering Dept., University of Waterloo, Waterloo, ON, N2L 3G1, Canada; PH (519) 888-4567 ext.: 32174; FAX (519) 888-4349; e-mail: tarek@uwaterloo.ca Abstract In this paper, a multi-criteria decision making (MCDM) framework is introduced for evaluating and comparing a wide range of privatization schemes for infrastructure facilities. The proposed framework helps the decision maker identify all stakeholders, their options, and their preferences. Two MCDM techniques are applied consecutively to arrive at the most suitable privatization decision: (1) the Elimination method which uses user-defined thresholds to eliminate unfeasible alternatives; and (2) the Scoring method that uses user-defined criteria to score the short-listed solutions and arrive at the best one. Based on the framework, a computerized decision support system has been developed and tested on a case study involving the privatization of a water treatment plant. Introduction In recent years, there has been a growing trend towards involving the private sector in the management and operation of infrastructure systems, particularly in areas such as transportation, water and wastewater, and power. Among the factors that have triggered the privatization trend are: aging infrastructure, escalating demands on infrastructure services due to population growth, the scarcity of governmental resources, the increase in globalization, and the realization by governments that they are unable to provide efficient services. All of these factors are operating around the world and have opened the door for private investors in more than one hundred countries (National Science Foundation 2004) to finance, manage and own infrastructure projects that were once considered the sole responsibility of the government.

short listing of feasible ones. K. For example. T. environmental. To compare among various privatization scenarios. privatization has resulted in some disasters. considering the preferences of all stakeholders. These examples illustrate a common experience: most private infrastructure concession contracts are renegotiated. technological. Hegazy. and Hipel. .Kassab. within three years. M. however.000 different private concession contracts covering the sectors of transport. UNIDO 1996).W.. the privatization of Hamilton waste water sewage project in 1995 failed due to the failure of the private partner to meet its contract obligations. France awarded four road concessions.. various combinations of these functions produce different Public-Private Partnership (PPP) alternatives. Privatization: A challenge In general. Guasch (2003) examined more than 1. This module integrates several methods as discussed in the following subsections. operational and administrative efficiency. water. Three highways went bankrupt and the remaining contracts required renegotiation. existing methods lack a comprehensive decision support for all the steps involved. and the single-criterion evaluation technique (Smith 1999). many of the 12 highway franchises in Spain had higher costs than anticipated. in the early 1970s. In the literature. many methods have been used in evaluating PPP options. the core of the DSS is a multiple criteria decision analysis (MCDA) module. criteria and preferences related to a given privatization situation. three of which went bankrupt after the oil shock and were bailed out by the French government (Guasch 2003). and maintenance. such as net present value (NPV). Common categories include public/social. as shown at the right side of Figure 1. Decision support system for privatization The proposed decision support system for infrastructure privatization is structured as shown in Figure 1. including identifying PPP alternatives. Park 1999. investment. In general. 2 Despite its successes in many countries. while traffic was much lower than expected. About the same time. and telecommunications awarded during the 1990s in Latin America and found that. the Kepno-Trego technique (Tiong and Alum 1997). Loxely 1999. terms had been changed substantially in over 60 percent of the contracts. the commonly used selection process for selecting the privatization proposals involves identifying the alternatives. various categories of criteria have been used in the literature (Gleick 2002. Many of the problems associated with infrastructure privatization decisions resulted from the lack of a systematic methodology to choose the proper privatization option. In Canada. In the literature. economical. billing. Also. It includes a literature compilation of the typical options and evaluation criteria used by various stakeholders in various privatization situations. operation. Each of these alternatives suits specific circumstances and stakeholders’ preferences to different degree. and political criteria. stakeholders. With the main functions that can be privatized being ownership. and making a final decision. The criteria also include both numeric and non-numeric aspects. power.

fails with respect to Technology Transfer (its score. M. Then. In this process.Stakeholders . At the end of the process. the percentage of foreign shareholders should not exceed 50%. Hegazy. The elimination method involves: Listing the acceptance thresholds rules. first the important criteria and their weights are defined. In addition. the strength of this technique is its simplicity in identifying and eliminating less desirable alternatives. 3 MCDSS Components User Interface . is less than the 10% threshold). alternatives 1 and n are unacceptable (shaded) because they were scored higher that 50%. all the failures to meet the acceptance rules were highlighted. the expected consequences of each alternative are assigned numerical values by each group.Evaluation Criteria Optimum Decision Figure 1: Component of the DSS for Infrastructure Privatization The Elimination method The elimination method (MacCrimmon 1973. a short list of the more preferred alternatives is ready for group decision analysis. In this process. In the fist stage. K. then. For example. based on brain-storming. Group Decision Making: The Scoring Method After prescreening using the elimination method.Preferences Elimination Method . As shown in the example of Figure 2. Following this process.W. the short listed alternatives are evaluated against detailed criteria that reflect the preferences of various stockholder groups. . 8%. this method allows the user to use richer rules that have combined and/or conditional thresholds.Options . acceptance rules are ranked from most important at the top to least important at the bottom. eliminating infeasible solutions.. each alternative is scored with respect to each acceptance rule (numeric and non-numeric scores are possible). as shown in the left side of Figure 2. The overall preference score or value for each alternative is simply the weighted summation of its scores for all the criteria.Solution Acceptance Rules . Radford 1989) provides the ability to eliminate some of the decision alternatives that do not meet certain acceptance thresholds set by the stakeholders involved.Kassab.. the last rule specifies that for an alternative to be accepted. and finally ranking the short listed solutions. All others are then eliminated. The leasing alternative. and Hipel.Arrive at best the solution .Screening alternatives Scoring Method . As shown in Figure 2. short listed solution are identified as the ones that pass the upper rules (highest priority) and also have less rules being violated. for example. T.

.. T..Scoring and selection of solution with top score Figure 3: Main Menu Screen . The interface automates all of the computations involved and allows the user or decision maker to interact with the system to obtain decision support. as shown in Figure 3.1 29 B 15% O&M B+ 13 20 1. for alternative i is given weighted sum represented as: q i i i v i = w1 v1i + w2 v2 + w3 v3 + . 4 Failed on Rules 6..75 25 B70 Asset Sale B+ 15 40 1. including a main screen with a simple interface and buttons to activate the step-by-step process. Basic Data: . 7 Failed on Rules 2. 6 Failed on Rules 1.9 25 A 20% Services B12.. M..2 25 C+ 9% BOT B+ 7 30 0..Short listing of solutions 1 2 3 . then the overall score. a prototype Decision Support System (DSS) was developed. 4 a) Scoring of Alternatives 1 Ranked Acceptance Rules Public and Social Impact Technology Transfer (%) Operational Efficiency Economic Cost Reduction (millions) Degree of Risk Transfer to Government Environmental Protection Political (Foreign Shareholders) Threshold ≥ B+ > 10 % ≥ 10% ≥ 1m < 35% >B ≤ 50% Score for Privatization Alternatives 2 3 4 n Leasing B8 15 1. 7 Failed on Rule 6 Figure 2: Elimination Method Example Giving a score vij for alternative i with respect to each criterion j with weight wj. 2. + wq vq = ∑w v j j =1 i q Prototype Decision Support System Using the macro language of Microsoft Excel. 6.W...5 12 1.. Hegazy..Stakeholders and options Elimination Method .Kassab. Basically. the decision support system was developed as a workbook that contains several worksheets. and Hipel. K...6 10 C 60% b) Ranking of Alternatives Failed on Rules 1. vi.

$180 million contract with a private company. When the deal was signed. The third stakeholder represents Public users. Five stakeholders were specified in this case study. their combinations (4x2x2x2x2=64) represent the number of privatization alternatives or decision states. a Regional Municipality in the province of Ontario. which has four decision options: rebuild and operate (R&O). It is assumed that they have two decision conditions for approving any proposal: a guarantee that no employee be fired. having two decision conditions: No share for non-Canadian private sector. and finally Purchase the whole facility (purchase). as shown in Figure 4. or regular quality control and tests by an independent party. 5 Privatization case study In December 1994. it was the largest private-public partnership (PPP) agreement of this type in North America. and Alternative Decisions . a comparison is made between the system’s suggested solution and what historically happened. represented by their union.Kassab. Using the proposed DSS. M. or at least 51% of the private sector should be Canadian owned. This group is assumed to have two decision options for approving proposals: fee increases must be less than 2% annually or open bid competition must be allowed to prevent a monopoly. Finally.. The contract transferred the region’s water and sewage system operation. which has two decision conditions: installation of a filtration system to screen out any hazardous materials. Hegazy. Details on the decision-making process that resulted in the selection of (Operation & Maintenance O&M) are not available. The first stakeholder is the Private sector. management and maintenance responsibilities to the private sector. The Second stakeholder is the Employees. or a guarantee that the facility will remain unionized. a detailed report (Loxely 1999) highlighted the flaws in this PPP agreement and its failure. T. Options. The step-by-step analysis is described as follows: Step 1: Identify stakeholders and their mutually exclusive options. the fifth stakeholder group is the Government. K. However. The fourth stakeholder is the Environmental group.W. operate and manage (O&M). Based on these options.. renovate-operate-manage (R&O&M). 5 Stakeholders and their options Total solutions: 64 Figure 4: Stakeholders. It is noted that the specified options represent the stakeholders’ mutually exclusive choices. Canada signed a ten-year. and Hipel.

as shown in the right side of Figure 5. to determine the best solution. The weights represent the relative importance and indicate the relative preference of all parties with respect to the final decision.W. Evaluating the solutions with respect to acceptance rules (Scores made by user) rule 1 rule 2 rule 3 rule 4 rule 5 rule 6 rule 7 rule 8 rule 9 Acceptance rules Figure 5: Applying the Elimination Method Thus. For example. and its foreign ownership exceeds the threshold limit of 50%. and Hipel. a short list of 10 feasible alternatives was generated. Hegazy. solution 36 is ranked 57 since it violates 6 rules..Kassab. based on the weights of the rules and the evaluation values. Weights specified by user Stakeholders Private sector Employees Public users Environmentals Government Solution 6 R&O&M Unionize <2% Increase Regular tests No share Figure 6: Simple Scoring Method . as shown in the left hand side of Figure 6. each of the possible solutions was evaluated with respect to the rules. the system ranked the solutions depending on how many rules were satisfied. After eliminating low ranked alternatives. the program highlighted the failures of each solution. Accordingly. solution 34 (soln 34) fails with respect to the 6th and the 7th rules since its level of environmental protection is B. the short listed solutions were exposed to a more detailed analysis using the simple scoring method. M. In the present case study. This process involved defining the important evaluation criteria and soliciting their relative weights from the stakeholders. T. For example. K. Given 64 decision states. 6 Step 2: Short listing feasible solutions.. Once the acceptance rules were specified. Step 3: in this step. it is important to identify and exclude any solutions with infeasible options. nine acceptance rules are used (left side of Figure 5).

scores were assigned on a scale of 1 to 100. Conclusions In this paper. as shown in Figure 6. In this process. As shown in Figure 6. the total score achieved by each solution is calculated by the system. and the Simple scoring method. the most important issue for the Government is the “efficiency and cost saving” criterion which corresponds to the private sector being able to perform the job and save the Government money.W. and thereby save time and money. the “Impact on workers and community” criterion also scored a low value of 20 due to the existing union. The developed framework makes the selection process clear and transparent and helps decision makers in the public and private sectors select the proper Public Private Partnership alternatives. the evaluation process proceeded. Two MCDA techniques were utilized in the MCDSS procedure: the Elimination method. The last criterion. Next. 7 Once the criteria and their relative weights (sum to a total of 1. “Economic development benefits” was assigned a high score of 90 as one of the main reasons for outsourcing these facilities is to help the local economy. and the absence of foreign ownership and the inclusions of environmental monitoring. M. and Hipel.. because of the addition of the task of renovating the old facility. and finally. the “Environmental risk & quality of service” criterion scored a value of 50. The framework is designed to consider the various viewpoints of stakeholders and accordingly determine the most appropriate privatization decision that satisfies all stakeholders’ preferences. The R&O&M solution is different from O&M.0) were determined.Kassab. K. Hegazy. The third criterion is “Operational efficiency”. with respect to each criterion. An example application of waste water treatment plant was then presented to demonstrate the practicality and usefulness of the developed prototype. Next. The DSS determined that solution 6 “Renovate-Operate-Manage (R&O&M)” is a better decision than the failed decision of “Operate and Manage (O&M)” actually used. The second criterion is “Financial risk transfer”. in addition to the unsatisfactory performance of the private sector. Next. a Multi-Criteria Decision-support System framework is introduced to evaluate and compare a wide range of privatization schemes for infrastructure facilities. T. the system highlighted solution 6 with the highest score. Hence. the Government assigned it a score of 90. the stakeholders’ scores were averaged for each short listed solution.. which scored 70 due to the importance of saving money and providing adequate service. Part of the failure of this real-life project was due to the high cost of renovation to the government. because it represents other serious problems facing the government. which are budget cuts and emergency financing. and the “Issues of accountability and transparency” scored a low value of 20 because the union and the environmental groups will be monitoring Private sector performance. As such. In solution 6. . the current condition of the privatized infrastructure must be an important aspect to consider in the decision making process. A score of 70 was assigned to reflect its importance.

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