Providing A Framework for Debt Management in Tehran Municipality

Shahrabi Farahani, Amir; Ghanbarian, Reza; Daneshfar, Salar

doi:10.22034/uep.2023.394759.1358

Providing A Framework for Debt Management in Tehran Municipality

Document Type : Original Article

Authors

Amir Shahrabi Farahani ¹

Reza Ghanbarian ²

Salar Daneshfar ³

¹ Ph.D. in Public Administration, Islamic Azad University, Central Tehran Branch, Tehran, Iran

² Ph.D. in Accounting, Allameh Tabatabai University, Tehran, Iran

³ Master of Business Administration, Tarbiat Modares University, Tehran, Iran

10.22034/uep.2023.394759.1358

Abstract

Introduction
In recent times, the mounting debt of municipalities in various countries, including the United States, China, Japan, Spain, and Mexico, has become a pressing concern for policymakers and researchers. The unrestricted expansion of debt in these countries has imposed significant repayment pressure on municipalities, raising the specter of a potential debt crisis. While local borrowing plays a central role in decentralized financial systems, the imprudent use of local debt can disrupt the provision of essential public services at the local level and, more critically, exert adverse effects on macroeconomic stability. Evidence from public and social media indicates that the escalating scale of municipal debt in Tehran has garnered the attention and concern of policymakers, researchers, and various segments of society due to the potential consequences associated with this issue. At present, the total accumulated debt of Tehran municipality stands at 85 thousand billion tomans, and there are apprehensions that if the current trend of debt accumulation persists, Tehran municipality may face default, leading not only to a downgrade in its credit rating but also to difficulties in obtaining financing from the capital or money markets. The substantial level of debt held by Tehran municipality, coupled with its annual profits, and the lack of clarity regarding the precise amount of debt and a high number of unrecorded debts, have led to different figures being reported by the media and other institutions while estimating the overall debt amount. In this context, the implementation of an effective debt management system within Tehran municipality can play a vital role in enhancing financial management and improving the debt situation. The key challenge lies in devising a legal and practical framework that allows Tehran municipality to maintain the necessary flexibility in delivering optimal services while ensuring financial discipline during both economic stability and times of crisis. To address these concerns, this study aims to answer the following questions:
What is the current status of debt management in Tehran municipality?
What constitutes an appropriate model for debt management in Tehran municipality?
What are the dimensions, components, and indicators involved in debt management within Tehran municipality?
To achieve this, we examine debt management mechanisms within the framework of public financial management systems adopted by municipalities worldwide and, based on that, propose a comprehensive framework for debt management specifically tailored to Tehran municipality.
Materials and Methods
The present study adopts a descriptive and survey research design, focusing on applied research objectives. The initial research framework was developed through an extensive literature review, encompassing municipal experiences, relevant institutions, books, articles, and scientific publications. Subsequently, the researchers adapted the initial model, considering Iranian municipalities’ activities and specific environmental and control characteristics. The final model was established following consultation with experts, and a research questionnaire was then prepared. The quantitative stage targeted a statistical population comprising managers with extensive experience in finance, accounting, and budget departments at Tehran Municipality. Priority was given to experts with educational backgrounds in finance, accounting, or related fields, and participants were predominantly managers and deputies ranked between 5 to 15 or higher, with over a decade of experience in their respective positions, particularly in finance, accounting, and treasury roles. The questionnaire was distributed online through the snowball method, employing a five-point Likert scale, and respondents were also invited to complete the questionnaire via telephone calls. A total of 103 valid questionnaires were collected. The face and content validity of the questionnaire were assessed through input from professors and subject matter experts. Additionally, the researchers utilized the PLS software to assess construct validity, determining factor loadings. The questionnaire’s reliability was assessed using Cronbach’s alpha coefficient, confirming the reliability values, combined reliability, and extracted variance of the research constructs. Furthermore, divergent validity was evaluated following Fornell and Larcker’s approach, supporting the confirmation of the research model.
Findings
The data analysis in this study encompasses two primary phases: descriptive and inferential. In the descriptive phase, mean and standard deviation were computed for interval variables. In the inferential analysis, the distribution of variables was first examined using the Kolmogorov-Smirnov test. Due to the non-normality of the data, the Wilcoxon test was employed to compare the current and desired situations. Furthermore, structural equation modeling using smartPLS software was utilized to test the research hypotheses. The results of these tests indicated that the investigated variables had a significant value (sig) below 0.05, confirming the non-normality of the data. The Wilcoxon test was also employed to compare the existing state of debt management in Tehran Municipality with the desired state. The findings revealed a significant difference between the current and desirable situations of debt management, highlighting a gap between the two. Subsequently, the model derived from the qualitative phase was examined to fit. In this regard, the standard beta values (factor loadings) of each extracted category were individually assessed using PLS software. Weak factor loadings (below 0.7) were eliminated to finalize the model. In this study, all factor loadings exceeded 0.9, indicating strong relationships between the variables. Moreover, the coefficients representing the main paths demonstrated the high intensity of the relationship between each component and the endogenous variable (debt management), with values above 0.9 for all paths. The developed model underscores that debt management is a multifaceted issue intertwined with various departments and operations within the organization, like planning and budgeting, auditing, finance, treasury, and legal affairs. Its effectiveness relies on the integration and coordination of organizational policies and strategies.
Conclusion
The aim of this study was to propose a debt management framework for Tehran Municipality. To achieve this, the debt governance systems and frameworks employed by municipalities worldwide were examined, leading to the development of an initial framework. A questionnaire was subsequently administered to financial managers within Tehran Municipality to assess the current and desired state of debt management. The analysis of the results revealed a significant gap between the existing debt management system in Tehran municipality and the desired ideal state. In order to bridge this gap, a comprehensive framework for debt management was proposed. This model encompasses five key dimensions, namely the formulation of laws and regulations, financial and budgetary policy formulation, strategic planning formulation and implementation, accounting and financial reporting, and financial and budgetary supervision. Each dimension includes various components that play a vital role in effective debt management. In terms of legislation, incorporating global experiences, the necessary legal provisions were identified to restrict and systematize urban debts. These provisions encompass requirements related to debt creation, utilization, settlement, and financing structure. Another crucial dimension is financial and budgetary policy, which involves policies to prevent budget deficits through debt, defining financial crisis situations, credit risk management, transparency in financial operations, and coordination of financial and budgetary policies. Furthermore, the formulation and implementation of a strategic debt management plan are essential aspects affecting municipal debt management. This requires the development of long-term financial plans and investment plans, along with the implementation of debt management strategies. In terms of accounting, establishing a debt management database utilizing information technology, cash flow forecasting, cash management, reporting, debt record-keeping, and debt forecasting are crucial considerations. Lastly, functional monitoring of municipal debts, including financial and budgetary monitoring, forms another important aspect of debt management requirements. Drawing on the successful experiences of the World Bank (2013) in municipal debt management, it is evident that effective debt governance goes beyond restrictive laws and regulations and entails a well-balanced decentralized financial design that encompasses various aspects, including long-term planning, administrative and organizational structures, accounting and reporting mechanisms, and monitoring mechanisms. In conclusion, the approach adopted in this study aligns with the comprehensive approach advocated by the World Bank, emphasizing the need for a holistic and integrated framework for debt management in municipalities.

Keywords

Debt Management

Structural Equation Modeling

Tehran Municipality Debts

20.1001.1.28212118.1402.4.2.5.2

Subjects

Urban Economy

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