would see to it that prices remain affordable, in particular for the poor and that the quality of the services remains at a certain level. A good regulator may be necessary, applying the principles of regulatory economics (for example Viscusi et al., 2000). Under these circumstance viable and sustainable infrastructure finance institutions should be possible, like in so many other countries.
India will have to choose between the dominant European and the dominant US system of issuing bonds for urban infrastructure, although the country is big enough to try both! Because of the 74th Constitutional amendment local government and higher levels of government have become equal partners. To make that real, local governments need to have the financial information to allow them to be an equal partner. We also suggest to use to the maximum different 'user charges', local taxes, inter-governmental income transfers and possible contributions of the private sector.
With the introduction of the City Challenge Fund a new approach is emerging, which is not replacing the capital market.xiii The Challenge Fund approach rather tries to bring about the necessary reforms at the municipal level and promote project preparation qualities to prepare local governments for eventually submitting real financially sound infrastructure proposals to financial institutions. The CCF is a novel approach, probably very much fit for the bigger cities, which may have access to the capital markets already (for example Ahmedabad through its bond issue). The question is to what extent the smaller cities would also benefit from it. They may have more problems to come up with competitive proposals. However, the preparation window of the CCF may allow them to make a start with the reform process and access more funds in a second round. Local governments in states that have already similar projects, like Andhra Pradesh Urban Services for the Poor (APUSP, 1999) will find it easier to prepare a proposal combining the reform and infrastructure plans. India has launched some interesting initiatives and may be able to try different models at the same time: the CCF, the full-fledged SLFI in Karnataka and the network based approach to preparing and financing infrastructure projects in Gujarat.
ADB (1996) Asian Development Bank, Annual report. Manila: ADB.
APUSP (1999): Project document. New Delhi: DFID.
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Dijk, M.P. van (2000b): Initiating municipal accounting reform: experience and issues. Report on a Workshop in New Delhi, in the framework of the ADB TA 3209.