Capital Rationing in the Public Sector Using the Analytic Hierarchy Process

This paper describes an application of the Analytic Hierarchy Process (AHP) to a capital rationing decision problem. The Istanbul Water and Sewerage Administration (IWSA) was granted a loan of $650 million offered by the World Bank to allocate among several water provision and waste water treatment projects. A project selection process solely based upon the benefit-cost analysis would not be sufficient to reflect the IWSA's social and political goals. Thus the AHP methodology is employed to express all quantifiable and non-quantifiable factors as a single model. Such a model provides the weights of the projects based upon the preferences and judgements of the IWSA managers. Then it becomes necessary to determine the multi-project schedule within the stated credit conditions over a 15-year planning horizon. To serve this purpose, a mixed integer linear model is formulated to provide the best project start up portfolio with a feasible credit outlay. Several IWSA managers participated both in the AHP stage of forming the hierarchical structure, assessing the matrix weights and in the mathematical modelling stage of determining project durations, cost and revenue figures. The solution presented to the IWSA management is approved to be implemented in their strategic course of action.