Alternative approach to credit scoring by DEA: Evaluating borrowers with respect to PFI projects

Wai Lun Eddie CHENG, Yat Hung CHIANG, Bo Sin TANG

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48 Citations (Scopus)

Abstract

Private finance initiative (PFI), as a form of public/private partnership (PPP), helps to contract the private sector to governmental projects. In contrast to traditional public financed projects, PFI projects are procured by allowing a private sector entity to take the responsibility to design, build, finance, and operate (DBFO) an asset for a contract period of up to several decades. Moreover, banks are perceived to take the leading role in financing PFI projects. Since project financing involves credit assessment of loan applicants, banks have employed popular credit scoring models to assess their creditworthiness. Although the existing models are useful for credit scoring, new models have to emerge in response to ever-changing business practices. This paper therefore aims at introducing the application of data envelopment analysis (DEA) as an alternative credit-scoring model. Unlike traditional credit-scoring building on a formula where weights to a set of criteria are assigned subjectively, DEA will automatically generate the relative weights for analysis. However, incorporating DEA demands additional considerations, which are discussed in this paper. Finally, examples are demonstrated for illustrating this alterative approach to credit scoring by DEA. Copyright © 2006 Elsevier Ltd. All rights reserved.
Original languageEnglish
Pages (from-to)1752-1760
JournalBuilding and Environment
Volume42
Issue number4
DOIs
Publication statusPublished - Apr 2007

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data envelopment analysis
Data envelopment analysis
Finance
finance
credit
data analysis
private sector
bank
public-private partnership
public private partnership
applicant
loan
project
assets
Industry
responsibility

Citation

Cheng, E. W. L., Chiang, Y. H., & Tang, B. S. (2007). Alternative approach to credit scoring by DEA: Evaluating borrowers with respect to PFI projects. Building and Environment, 42(4), 1752-1760. doi: 10.1016/j.buildenv.2006.02.012

Keywords

  • Private finance initiative
  • Public/private partnership
  • Data envelopment analysis
  • Credit scoring
  • Construction