Keeping Orange Line alive

Lahore Orange Line (train) rapid transit system is in the process of test run with commercial operations to commence by June 2020. This is second of four planned mass transit systems of Lahore. Green Line metro bus system is in operation for seven years, and there is no plan to execute third in priority (purple line) anytime soon. Punjab government's immediate worries are of financing operational subsidy due to limited fiscal space. The model is not optimal as Punjab government budget is financing project for inhabitants of Lahore. A better way is to finance (at least operations) from people of Lahore. The direct and indirect benefits are much wider.

The project is primarily financed by China. The loan drawn so far is $1.33 billion and is expected to close at $1.45 billion. The debt servicing is to start after 2023. Apart from that, Punjab government spend is around Rs 30 billion. The feasibility study conducted in 2015 estimated 245,000 passengers to travel daily on the train with fare of Rs 30 per trip. This is enough to only recover fraction of operational expense. There is no way to recover capital expenditure or Chinese debt servicing spanned over 20-25 years.

On the face of it, the project is not feasible. But that is how mass transit systems in the world work. The capital expenditure is spent to buy in other benefits. The city saves on vehicle operation cost by having less cars and bikes on roads. Lahore's estimated fuel consumption is around 1 billion liters per year. Other saving is on travel time. Expected time of travel from end to end of 27Km line reduces from 105 minutes to 45 minutes. According to a study by LUMS and Lahore Safe City, annual economic cost of congestion in Lahore is estimated at Rs 100 billion. The much-needed benefit is reduction in carbon emissions. Lahore's air quality is amongst the worst in the world, where one-fourth of city's air pollution is contributed by road vehicle carbon emissions.

In the world, the usual model is to recover 40 percent of operational expense from the fare revenues while 60 percent is subsidized. Capital expenditure is normally not recovered from revenues. The operational expenses of orange line are estimated at Rs 8 billion-8.2 billion. It is to operate on electricity with 110 million annual units consumption. At a cost of Rs 18 per unit, it comes at Rs 2 billion. O&M contractor will charge Rs 5.2 billion while around Rs 1 billion will be spent on security, janitorial services and automated fare collection system.

At a fare of Rs 30 with 245,000 daily passengers, the annual recovery would be Rs 2.7 billion with subsidy amount at Rs 5.4 billion. If the fare increases to Rs 50, the subsidy requirement would be reduced to Rs 4.4 billion. Breakeven is arriving at Rs 90 per passenger. If capital expenditure is to be recovered, the fare has to go up to around Rs 200.

That is too high a number and marginal consumer will sway away. For instance, in case of green line metro bus, when the fare was Rs 20 there were around 150,000 daily passengers on a weekday. Now with increased fare at Rs 30, the number of daily passengers has reduced to 127,000. Consumer is price sensitive. The operational revenues are increased by 30 percent, but at the cost of 15 percent reduction in passengers. Marginal consumer is adding other costs such as carbon emission, fuel consumption and increasing traffic congestion.

The need is to look at 245,000 daily commuters' assumption on orange line. At the time of feasibility study of Green Line, estimates were of having 340,000 daily commuters. It was done in 2005-06. At that time, there were plans of building high rises in Lahore and annual economic growth rate of Lahore was assumed at 7 percent. But that never happened. One reason for lower numbers is having bus system instead of train for Green Line. Train is a preferred choice of commuters in mega cities because of ease of travel and higher time savings. Orange Line train is 100 meters long versus bus of 10-meter-long. Therefore, more commuters are expected on Orange Line.

In order to attract more commuters, Lahore authorities have to discourage vehicles in central business district (lower Mall road) known as red zone. This can be done by increasing parking and congestion charges in the 'red zone'. The government has to play it right to encourage people to use mass transit system. That is why keeping prices low is imperative. Subsidies are to be recovered from indirect benefits.

Having said that, subsidies should not be spent solely from Punjab budget for the benefit of 11 percent of province population. There should be a way to partially recover from Lahore inhabitants. One common way is to apply additional tax on fuel. For instance, if fuel price increases by Rs 5 per liter in Lahore, Rs 5 billion can be collected at current consumption rate. This can be done in a phased manner by increasing Re 1 per litre every year.

The operational subsidy of Green Line was Rs 2.3 billion last year. Orange Line subsidy could be in the range of Rs 3.7 billion to Rs 5.4 billion. The model should be to slowly and gradually pass on the burden of subsidy from Punjab to Lahore by having higher tax on fuel, congestion and parking charges and by having higher vehicle registration fee. The other low hanging fruit is property taxes. But for any such thing to happen, the local government is ought to be active in Lahore.