**-6-**

22. The general consensus in the education and health sectors is that, for fiscal and X-efficiency reasons, economic pricing is now thought to be more relevant than was expected at the time that OHS 2.25 was prepared. The basic research and thinking has been done; however, our review of SARs indicates that this new perception is not yet mirrored in Bank project work or in many of the developing countries. The same is true of rural water supply, where Bank thinking has shifted strongly in favor of cost recovery. Case studies or cross-country comparisons should **Se** developed and disseminated as examples of how disaggregated user charges can be designed and applied. The priority in these sectors is to apply the ideas that have been developed and to moritor and disseminate their results.

23. Urban water supply **is** at a different point and holds lessons of its own. Economic costing **has** become routine in SARs and is widely used for project design. Tariff studies based on LRHC **are** often financed through Bank projects. However, it **is** clear that properly designed tariffs **are** not a sufficient condition for an efficient utility. Much attention **has** been devoted to LRMC estimation, while the metering/billing/collection systems in many countries **have** continued to deteriorate. The result is often higher tariffs yielding little additional revenue. A better **balance** is needed, combining rougher **estimates** of LREC with more focus on the other links in the chain of user charge implementation.i/

# Sectors with External Economies in Production

24. We include seven sectors in this category: highways, irrigation, natural **gas,** ports, power, railways and telecomunications. These are the sectors where decreasing marginal production costs lead inherently to monopoly. The ownership of natural monopolies can be left in the private nector, as is the case in some industrial countries, but even then they are zabject to price regulation by the public sector.

25. The interpretation of efficiency prices presents difficulties in these sectors sintce investment lumpiness, problems in projecting demand and the importance of using a "system" rather t_an a project framework in estimating marginal costs are common to sectors with external economies in production. In the natural gas, power and telecommunication **s** ectors, these problems have received considerable attention and practical guidelines have been developed for implementing the recommended approaches. In general, LRMC is felt to be more appropriate as a representation of economic cost in these sectors, and the "average incremental cost" formula has been developed to approximate LRMC under certain conditions._/ For highways and ports, shortrun marginal cost (SRKC) is advocated; this has been widely applied in the former sector, but discussed only at a general level in the latter. The choice between LRMC and SRMC in railways depends on the circumstances of the country's rail system; however, this has not been elaborated in any detail. In the irrigation sector, little attention has been given to the best measure of economic costs because metering has generally been considered impractical.

26. The distincton between LRMC and SRMC is less relevant where a rationing or congestion price should be applied during those times of day or in those parts of the system where demand at enisting prices cannot be