A financial approach for municipality investment: a case study of drinking water and sewerage investment in Turkey

Abstract

The main aim of this study is to determine the effect of municipality investment decisions on financial tables. For this purpose, we analyzed financial ratios which were used in investment decisions during 2006 to 2014 in Turkey. Financial relationships are between the municipality’s financial decisions on both drinking water investment and sewerage investment and their financial ratios that were calculated from financial statements. In Turkey, there are 81 municipalities in the local government status. We analyzed all municipalities’ consolidated financial statements, such as balance sheets and income statements during the aforementioned period. In this study, we used a two-step analysis. Firstly, we calculated traditional financial ratios of all municipalities and secondly, we used the Structural Equation Model (SEM). We calculated all ratios, and then we analyzed any structural relationships between the dependent variables and independent variables. We designated “Drinking Water Investments” and “Sewerage Investments” as dependent variables in the study. As for independent variables, we have chosen some financial ratios that are related to literature. In the study, we have some major findings for the variables. Drinking Water Investment results showed two important things. Firstly, signs of all variables are very important. However, when Financing Ratio and Taxes to Revenues’ signs are “-” negative, it means the municipality may reduce the total liabilities to increase drinking water investment. The total tax to total revenue ratio must decrease in order to invest in and establish the drinking water system. In testing for Sewerage Investment, Quick Ratio, Grants, Aids and Special Revenues (Special Rev to T-Rev) and Administrative Cost (Admin Cost) are negative “-” signs in the SEM result. It means that if the municipality wants to invest in sewerage investments, they should take into account that these variables have a negative effect on this investing in the sewerage system.