In developing and transition economies, the combined effect of decentralization and urbanization has increased demand on local governments to provide and

finance public services. Against this background, tight fiscal policies have constrained budgetary transfers from central to local governments. Competing claims for scarce budgetary resources have resulted in large funding gaps for local infrastructure investments. Private capital will be required if local services are to be brought to minimum standards that support growing urban demand. Local capability to shoulder the expanded responsibilities and, in particular, mobilize the required resources is contingent upon the existence of an adequate regulatory and fiscal framework for decentralization which requires, most importantly, that: (i) responsibilities for service delivery be clearly assigned among government tiers; (ii) capacity for own-source revenue generation (local taxes and user charges) be enhanced; and (iii) net flows (tax sharing and transfers) from central to local governments be rationalized and made predictable.

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