Project Ranking Methodology for Public Infrastructure Project

Global estimates of infrastructure investments required to support economic growth and human development lie in the range of US$65-70 trillion by 2030 (Read more here), while the estimated pool of available funds is limited to approximately US$45 trillion (Read more here).

Conventional project finance ranking methodology using Net Present Value (NPV), Internal Rate of Return (IRR) and/ or Payback Period (PBP) are straight forward and common among corporate practitioners as these methodologies seek to maximize shareholder’s wealth.

Public infrastructure projects, on the other hand, require more than maximizing shareholder’s wealth.  Other factors such as social and economic impact are equally important for decision making.  Furthermore, they often show an opposite impact as compared to financial results.

The World Bank has proposed an Infrastructure Prioritization Framework (IPF) in 2016 (Read more here).  It has a multi-criteria decision support tool that considers project outcomes along two dimensions, social-environmental and financial-economic.  Illustration below shows the summary and outcome of the IPF.

The core idea of the IPF is the statistical process, which consists of data Z-score standardization, normalization, and then using Principal Component Analysis (PCA) method to assign weightage to each component to form the index.  PCA is an advanced statistical method recommended by Organisation for Economic Co-operation and Development (OECD) to assign weightage for Index construction (Read more here).

The above framework is useful to examine HSR, ECRL, MRT and other similar transport projects that will have an impact on the economy.

Example of Transport-Projects Ranked.

Based on the above, project 2 is a great project although its IRR is not high while projects 1 and 5 are to be rejected under this methodology.  Whilst projects 3 and 4 are deemed acceptable on the FEI and SEI indices.

For more information about project ranking methodology, please visit http://www.mpcap.com.my/ or contact info@mpcap.com.my.