Abstract
Decentralization of some governmental functions is taking place in many developing and transition countries. Decentralized entities are becoming responsible for undertaking various infrastructure investments required to meet basic needs at the local level, including utilities, water and sanitation, transportation, health and education, and environmental protection. Owing to fiscal constraints at the center, decentralized entities can rely only partly on capital grants from the center to fund these investments. To meet their funding needs, decentralized entities, therefore, need to broaden their own resource base, access subnational bond markets, and increase the efficiency of resource use. In emerging-market countries, these funding needs must be weighed against the prospect that multiple issuers of securities with varying claims to sovereign creditworthiness will fragment a nascent market and thereby reduce its liquidity and efficiency. On the other hand, properly managed subnational bond market can complement the national bond market.