Subsidies to Public Sector Units Hurt Education in Pakistan

[Riaz Haq]

"...under 1.5% of GDP [is] going to public schools that are on the front line of Pakistan's education emergency, or less than the subsidy for PIA, Pakistan Steel, and Pepco." Pakistan Education Task Force Report 2011

Pakistan has ordered 5 Boeing 777s and 75 train engines for its state-owned companies in a bid to catch up with rising passenger and cargo service demands, according to media reports.

Boeing, the American aerospace giant, has announced the $1.5 billion deal with Pakistan International Airline (PIA) which includes a firm order of five 777-300ER (extended range) jets as well as the purchase rights for an additional five, according to Fox News.

Separately, The News is reporting that Pakistan Railway is purchasing 75 Chinese-made train engines for $105 million.

Highways have now become the most important segment of transport sector in the country, according to the Economic Survey of Pakistan. At the time of Pakistan's independence in 1947, transportation by roads accounted for only 8% of all traffic. Today, it accounts for 92% of national passenger traffic and 96% of freight.

The last decade has seen major competition coming from first-class private bus services now operated on modern motorways in all parts of Pakistan. The best known of these is Daewoo bus service with its comfortable luxury coaches and stewardesses offering meal services. With the construction and expansion of national highways and motorways, the trucking industry has also grown by leaps and bounds in the last few decades.

In mid-90s, Pakistan Railway had 10.45% share of passenger traffic and 5.17% of freight traffic, which has declined to 9.95% and 4.72% respectively by the year 2006-07, according to Economic Survey of Pakistan.

Pakistan Railway has been weighed down by heavy expenses of payroll and rising corruption and incompetence. As a result, a large number of engines are no longer operational and there have been big cuts in service.

After gaining domestic and international traffic market share for several decades after independence, Pakistan International airline has been losing it in recent decades because of serious problems of corruption and mismanagement by the cronies of the ruling politicians. PIA is now losing hundreds of millions of dollars a year while being hit by lean and mean domestic private airlines and international competition from rising Gulf giants like Emirates, Etihad and Qatar Airways.

Today, PIA's employee to aircraft ratio of 450 is more than twice as much as some of its competitors. "Politically motivated inductions have been the major cause of the significant increase in human resource burden in this organization," the State Bank of Pakistan said recently.

Pakistani taxpayers are heavily subsidizing the national airline at the expense of much more crucial public sectors like education. Last year, a Pakistani government commission on education found that public funding for education has been cut from 2.5% of GDP in 2007 to just 1.5% - less than the annual subsidy given to the various PSUs including PIA, the national airline that continues to sustain huge losses.

The latest example of the use of public funds to buy support for the government is Rs 366 million given in "discretionary development funds" as reward to senators for passing the 20th Constitutional Amendment with more than two-third majority, according to Pakistani media reports.

The crux of the issue for the bloated public sector units like PIA, Pakistan Steel Mills and Pakistan Railways is the reprehensible system of political patronage which puts the wrong people in charge of them. The sooner PIA, PR and other PSUs become privatized, the easier it will be to revive them for better service and improved profitability. It will turn them into a source of much needed revenue for the public treasury, just as the denationalization of banks did in the last decade.

From an after-tax loss of Rs. 9.77 billion in 2001 (when MCB, Habib, UBL and Allied were government owned) the earnings of these privatized banks rose to a profit after-tax of Rs. 73.115 billion in 2007. Higher earnings meant increased tax contribution by these banks to the government from Rs 10.8 billion in 2001 to Rs. 33.8 billion in 2007, according to data provided by former State Bank governor Mr. Shahid Kardar.

Even if privatization of the heavily subsidized public sector units does not yield higher tax revenue from them, it will at least free up public funds for more pressing needs like education, health care, energy, water and public infrastructure development.

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[Riaz Haq]

Here's a Nation report on PIA's acquisition of new aircraft:

PIA management is going to purchase nine new planes to resume its certain routes like Houston, Chicago, Los Angeles in the US to put PIA on the path of progress while unlike past the procurement process will be monitored by Transparency International (TI) a Germany based watchdog , said well informed sources in the national flag carrier on Friday.

Sources disclosed that newly appointed Chairman PIA, Rao Qamar Suleman has himself decided to take TI on board to maintain maximum transparency in the procurement process.

New planes scheduled to be purchased included five B-737-800, two B-777-LR and two Jumbo planes. Sources claimed that Jumbo planes would be used for Haj purpose while B-777 for long haul flights like Huston, Chicago and Los Angeles while B-737-800 for other routes.

A well informed officer of PIA seeking anonymity said that MD PIA was also keen in revamping of routes like Nairobi, Johannesburg, Glasgow and Bangkok etc.

He said that Rao Qamar was in negotiations with American Transport Security Administration (TSA) to get permission for direct flight from Pakistan to US destinations. He said Rao has also successfully exempted from another security check imposed by the United States on PIA flights operating between the two countries at Manchester.

TSA had given deadline to PIA for detailed checking to be started at Manchester which could force the passengers to opt for an airline other than PIA, as the security check could increase the travel time from 16 to 25 hours, sources in PIA said. As per details, the US Transportation Security Administration (TSA) had warned PIA that after April 22nd, 2012 all passengers and luggage on board PIA aircrafts would be subjected to another security check at the Manchester airport prior to arriving in US destinations.

When contacted TI Pakistan head Adil Gillani said that though PIA management has tried to get TI on board regarding procurement of two Jumbo planes which were supposed to be used for Haj purpose but TIP has objected on procurement process and said why management was not going to purchase planes from Airbus rather than Boeing Company.

He said that as per Public Procurement Regulatory Authority (PPRA) every procurement should be made through tender.

Whereas sources in PIA were of the view that MD PIA was trying to purchase two Jumbo from Saudi Airlines against throw away price and secondly the airline has all sort of infrastructure of jumbo planes including, trained crew members, wide body hanger, spare parts and engines etc.

“It is matter of national interest and TIP should support such steps of PIA MD to pull the airlines out of losses” a senior PIA officer said.

A head of Association of PIA and also office-bearer of Joint Action Committee of Pakistan International Airlines (JACPIA) said on condition of not to be named that Rao was moving in the right direction. He said MD takes officer-bearers of different associations in PIA into confidence while taking any important decision. He also appreciated other steps taken by MD in the near past.

http://www.nation.com.pk/pakistan-news-newspaper-daily-english-onli...

[Riaz Haq]

Here's an excerpt of ET story on privatization in Pakistan:

“The way to economic growth is to let markets, and not the government, dictate prices and allocate economic resources,” said (Ishrat) Husain, who currently serves as the dean and director of the Institute of Business Administration (IBA), a leading business school based in Karachi.

Husain touched briefly on the theoretical arguments in favour of privatisation before laying out in detail how – in the few cases where it had been tried in Pakistan – it had produced a roaring success.

He gave three examples: banking, the telecommunications sector, and the power sector. In each, he laid out the reasons why it had been a success.

In the banking sector, for instance, before privatisation, the largest banks in the country were all government owned. In the early 2000s, the three big banks that the government decided to sell cost the national exchequer about Rs41 billion in bailouts in order to ensure that they were adequately capitalised. By 2011, far from needing banks, those same three banks were paying in Rs25 billion in corporate income taxes.

Indeed, Husain argued that, had the banking sector remained in government hands, the 2008 financial crisis would have been much worse than it was, and would have crippled the financial sector. The privately run banks, however, were able to weather the storm reasonably well and now nearly all of the major banks, and certainly all of the Big Five, are profitable.

To contrast with this success, Husain brought up the example of the Pakistan Steel Mills, the privatisation transaction of which was stopped by the Supreme Court on allegations of corruption in 2006. Since the transaction was halted, Pakistan Steel Mills has cost the government about Rs100 billion in bailouts. “And this does not even include the amount of foreign exchange we had to spend on importing steel because PSM is so badly run that it cannot operate on more than 25% capacity,” said Husain.
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He also addressed the concern that privatisation leads these companies to shed jobs, pointing out that many of them are too bloated in the first place, and that it is not the government’s role to employ everyone. “Of the more than 57 million people in the Pakistani workforce, only 2.5 million [less than 4.4%] work in the government and state-owned enterprises. Most of the jobs in this country come from the private sector, which is where the growth lies,” he said. So comprehensive was Husain’s arguments, that apart from two brief questions, nobody had anything left to ask him.

http://tribune.com.pk/story/436231/economic-liberalism-iba-dean-del...

[Riaz Haq]

Pakistan steel production to get a boost by two new players...Al Twariqi and Santex.

Here's Daily Times on Al-Twariqi:

Al-Tuwairqi Holding Company is establishing Tuwairqi Steel Mills Limited at Port Qasim, Karachi, having capacity of 1.28 million tonnes based on the latest technology and the total cost of the project is $260 million out of which US $ 225 million has so far been invested. The mill is going into production soon.

Tuwairqi also said that AL-Tuwairqi and POSCO of South Korea would sign a joint venture agreement in a ceremony to be held in Karachi today, September 2011. Tuwairqi said that he wanted to dispel the impression by setting the example that Pakistan was an ideal country for investment. He said that his venture would send a strong message to mega companies of the world that the country offered them competitive edge of doing business. “I am investing in my country to create jobs for the young people who otherwise may be misled by the enemy of my country,” he said.

http://www.dailytimes.com.pk/default.asp?page=2011\09\10\story_10-9-2011_pg5_13

Here's Daily Times on Czech Santex plans:

A Czech Group prepares to launch Euro 600 million steel venture in Pakistan.

An announcement here on Sunday said that a delegation of Santex Pakistan Limited (SPL) apprised Murad Ali Shah, Sindh Finance Minister, and Muhammad Zubair Motiwala, Chairman Sindh Board of Investment (SBI), about the establishment of steel billets making plant of 1.2 million tonnes capacity per annum and 300 MW coal-fired power plant during a meeting at the Sindh Board of Investment.

It said that the project would be launched at Bin Qasim close to Pakistan Steel Mills.

Santex Pakistan Limited is a subsidiary of Santex Group based in Czech Republic. The meeting was chaired by Sindh Finance Minister along with Chairman SBI and was attended by Secretary Finance, Secretary Coal and Energy Department, Secretary Energy, DG SBI and other government officials.

http://www.dailytimes.com.pk/default.asp?page=2012\09\24\story_24-9-2012_pg7_12

[Riaz Haq]

Here's a story about Air Arabia increasing flights to Pakistan:

UAE budget carrier Air Arabia on Wednesday announced the expansion of services to Karachi in Pakistan.

The four weekly flights from Sharjah to Karachi have been increased to daily flights, the airline said in a statement.

"We are extremely pleased to announce the expansion of services to Karachi in Pakistan," said Adel Ali, Group CEO, Air Arabia.

"Since launching operations to Pakistan, it has always been a market of focus for us, and the launch of additional services is a result of increasing customer demand from the market.

"The ever growing appeal for Air Arabia flights, underpinned by the value for money services, signals that Air Arabia continues to be the airline of choice for millions of passengers who travels between Pakistan and the UAE," he added.

Air Arabia started operations to Pakistan in 2007 with a launch of direct service to Karachi. Today, the carrier offers services Karachi and Peshawar.

Earlier this month, Air Arabia saw its net profit more than double to AED226m ($61.5m) in the third quarter of 2012 compared to the year ago quarter.

The airline, which operates out of Sharjah International Airport, posted revenues of AED836m for the three-month period ending September 30, up 19 percent from the corresponding quarter in 2011.

Passenger traffic rose 14 percent to 1.37m, while average seat load factor stood at 82 percent.

http://m.arabianbusiness.com/uae-s-air-arabia-ups-flights-pakistan-...

[Riaz Haq]

Here's an excerpt of a BR story on Zardari's visit to South Korea:

A major breakthrough came in the area of modernization of Railways. Pakistan, under the agreement, will seek high speed railways, communication systems, signaling, rail stock, modernization of operation and management, development of logistics parks and freight terminals, exchange of construction and maintenance technologies for infrastructure including tracks, bridges, overhead electrification and power supply systems.

The agreement was signed by Muhammad Arif Azim Secretary Railways and Minister of Railways of South Korea Kwon Do-youp. President Zardari in his meeting with President KORAIL Chung Chang-Young said Pakistan desired modern and efficient railways to help meet its growing industrial, agricultural and freight needs.

He said the current fleet of Pakistan Railways was unable to meet the needs of a growing nation and there was an urgent need to upgrade it.

The President who had a number of meetings with the heads of top Korean business houses said Pakistan was a heaven for foreign investors as the country's large consumer population promised good profits and lucrative business.

He said a large number of Korean companies were already operating in Pakistan and doing good business.

He said other companies can invest in many new areas while the existing ones can expand and diversify their operations. President KORAIL assured President Zardari that his company was willing to share its experiences and expertise with Pakistan Railways and help it develop on modern lines.

The President later witnessed the inking of a MoU under which Pakistan will be able to acquire used diesel locomotives and work for modernization, maintenance, operation and training of existing ones.

President Zardari during his meeting with the President and Chief Executive Officer of Samsung C&T said Pakistan needs to augment its energy resources to meet the growing demand of its industrial and domestic requirements...

http://www.brecorder.com/top-news/108-pakistan-top-news/93897-pakis...

[Riaz Haq]

Here's a Dawn report on PIA scrutiny by Pak Supreme Court:

Another notorious entity landed into court this week, probably because of Chief Justice Iftikhar Muhammad Chaudhry himself. According to a report, “Already in the headlines for all wrong reasons, PIA again came under the flak on Monday when counsel Khalid Anwar requested the court to take a suo motu notice of the pathetic state of affairs in the airline. The request was made against the backdrop of Sunday’s incident when an Islamabad-bound PIA aircraft developed fault in one of its engines and was stuck at the Karachi airport for hours. The chief justice and some federal ministers were among the passengers.”

The report says, “The Pakistan International Airlines bemoaned in the Supreme Court on Monday that the unilateral grant of liberal traffic rights to foreign airlines was one of the reasons for the national flag carrier’s decline. It said Pakistan had become a lifeline for foreign carriers, mainly from the Gulf region, which were sucking away the resources of Pakistan (Pakistani passengers). The report regretted that foreign airlines had been increasing their capacity on Pakistan routes because of the facility of liberal traffic rights. Successive governments have allowed foreign airlines to fly to and out of the country without offering any reciprocal rights to PIA to fly to their countries.” Is PIA justified in blaming its substandard performance on foreign competition which it can’t seem to come to terms with? What about the unrelenting decline of customer services, which is a major part of the business that is being questioned by the court?

Another recent analysis states, “Pakistan recently allowed five international airlines to begin direct passenger and cargo flights from Sialkot International Airport. Qatar Airways, Fly Dubai, Air Arabia, Etihad Airways and Emirates would start their operations from Sialkot soon. The number of international flights to various foreign destinations from the industrial city will reportedly rise to 45 from the existing 21 in a month.

The business community was thrilled. “The transport costs and the ability to respond to demand swiftly in a fast changing, competitive international market makes or breaks a business. Better connectivity will save local businesses time and money. Siakot will return favour by investing in modernisation of the airport and jacking up efforts to outperform their competitors in the international trade”, Mohammad Azam, a businessman from Sialkot commented.

“Sialkot is a big commercial centre with a motivated business community. The decision is a step in the right direction”, Zubair Motiwala, a known business leader said when reached over telephone.

The ministry that authenticated the government’s decision, however, did not share the euphoria. The ministry of defence, responsible for the aviation industry, detested the move that, it said, was forced on it. It believed the decision compromised national interests.

“People will still be happier if you allow them to travel free but would you do that?” a senior officer in the ministry asked when contacted in Islamabad for comments. “The sound economic decisions are not necessarily popular”, he answered without waiting for a reply. Why is the ministry not inclined to favour ‘sound economic decisions’? Why is fair and productive competition being regarded as detrimental? Could the fact that a self-absorbed ministry (that has too much on its plate in the first place) been given control of the aviation industry is proving out to be a disastrous decision?

With only three Pakistani airlines in the market, that seem are ever ready to be in the headlines for all the wrong reasons, what possible options are left for improvements in Pakistan’s aviation industry

http://dawn.com/2012/12/04/pakistans-aviation-industry-failing-to-fly/

[Riaz Haq]

Here's ET with a bit of good news about Pak Railway:

ISLAMABAD: Despite suffering yet another year plagued with debt and acute lack of fuel, the Pakistan Railways (PR) said on Wednesday that it managed to restore various closed trains on main and branch lines after receiving engines from various divisions.

An official of Pakistan Railways while talking to APP here on Wednesday said that key among the lines restored include the freight system which has been put back on the track due to fortuitous availability of engines.

Private trains bring windfall for PR

The Railways official revealed that the move to allow private operators has been a boon for PR through which they earned Rs1 billion profit during2012.

The Shalimar and Business Expresses lines operating under a public private partnership arrangement afforded the cash-strapped national carrier an unexpected windfall. This small offering, though may not be enough to wipe out the department’s enormous debt or bring it back in contention for travel or freight, but it has certainly made Pakistan Railways hungry for more of the same.

“We are also planning to run more trains with the help of private sector to bring out organisation from the financial crisis” the official said.

Govt handout still needed for PR

Meanwhile, the department has had its pleas answered by the monied corridors of the federal government with Rs6 billion released for the department to purchase engine spare parts.

“This would help bring around 100 engines back on track within next few months,” says the report.

All out efforts are being made to improve performance and efficiency of Pakistan Railways and to make it a profit-earning organisation.

The out-of-order locomotives are being locally repaired and overhauled at Central Diesel Locomotive (CDL) workshop.

http://tribune.com.pk/story/487997/route-reinstatement-pakistan-rai...

[Riaz Haq]

Here's an APP report on proposed revival of Karachi Circular Railway:

The ECC which met here under the chairmanship of Minister for Finance and Economic Affairs Dr. Abdul Hafeez Shaikh was informed that Japan International Cooperation Agency (JICA) has already agreed to provide 93.5pc ($2.4 billion) of the estimated cost through soft loan at a markup of 0.2pc payable in 40 years including 10 years grace period. The remaining 6.5pc ($169.6 million) will be borne by the Ministry of Railway (60pc equity), Government of Sindh (25pc equity) and the City District Government Karachi (15pc equity); the stakeholders of KUTC as per their share.

The track of the KCR will be 86 km long with 27 stations to be built around the city.

This important project will be a milestone in improving the quality of life of the citizens.

The ECC also approved the summary with special appreciation for the Ministry of Railways, the Government of Sindh and Karachi City Government for their efforts to get approved the most economic and viable project of Circular Railway for Karachi.

The ECC also discussed various agenda items of national importance. The following decisions were taken in the meeting;

At the outset of the meeting the ECC members offered special prayers for departed soul of Senior Minister of the KPK Government Mr. Bashir Bilour who lost his life in a terrorist attack in Peshawar recently.

The ECC prayed to Almighty God for resting the departed soul in eternal peace and for granting courage to the bereaved family to bear this precious loss.

Ministry of Railways moved a summary seeking the approval of the ECC for waiver of on-lending charges to Karachi Urban Transport Corporation for the Project "Revival of Karachi Circular Railways as Modern Commuter System".

Japan International Cooperation Agency (JICA) has already agreed to provide 93.5pc (US$2.4 billion) of the estimated cost through soft loan at a markup of 0.2pc payable in 40 years including 10 years grace period.

The remaining 6.5pc (US$169.6 million) will be borne by the Ministry of Railway (60pc equity), Government of Sindh (25pc equity) and the City District Government Karachi (15pc equity); the stakeholders of KUTC as per their share.

The track of the KCR will be 86 km long and 27 stations will be built around the city.

This important project will be a milestone in improving the quality of life of the citizens.

The ECC approved the summary with special appreciation for the Ministry of Railways, the Government of Sindh and Karachi City Government for their efforts to get approved the most economic and viable project of Circular Railway for Karachi.

The ECC also approved a summary by Ministry of Railways for changes in the composition of Business Express.

Ministry of Railways submitted a summary for ECC approval back in July 2012.

http://www.brecorder.com/top-news/1-front-top-news/98665-ecc-approv...

[Riaz Haq]

Here's Bloomberg on PIA seeking Pak govt subsidy yet again:

Pakistan International Airlines Corp. (PIAA), the flag carrier reeling from seven straight years of losses, sought financial assistance from the government for at least a third time since 2007 to pare debt.

The carrier, also known as PIA, has asked for 25 billion rupees ($257 million) from the government, Managing Director Muhammad Junaid Yunus said in a Jan. 1 interview at his office in Karachi, Pakistan. The management is in talks with the finance ministry to raise the capital before March, he said.

“I’m praying that we get this,” Yunus said. “This is a government airline, it’s a national asset.”

PIA plans to lease 12 fuel-efficient planes this year, Yunus said, as the company turns for funds to the government, which itself is trying to repair state finances after recording the highest budget deficit in two decades. South Asian carriers Air India Ltd. and SriLankan Airlines Ltd. have also won state funding amid competition from Emirates and Middle East carriers.

Pakistan’s national carrier got government loans of 25 billion rupees in 2007 and about 8 billion rupees in the year ended in June 2009, Yunus said.

“The cash injection won’t bring PIA out of trouble but it will still make things better for them,” said Khurram Schehzad, the Karachi-based head of research at brokerage Arif Habib Ltd. “The implementation of this should be gradual considering the looming elections and the coming budget.”

PIA fell 14 percent to 3.82 rupees at close of trading in Karachi yesterday. The benchmark KSE 100 index fell 1.8 percent. The stock more than doubled in 2012, ending eight straight years of annual declines.
Kingfisher Losses

Fuel costs and rising competition have also hurt other carriers in the region. The Indian government said it may provide as much as 300 billion rupees ($5.5 billion) to unprofitable Air India through 2020. Kingfisher Airlines Ltd. (KAIR), India’s second-biggest carrier by market share in 2011, has halted operations since October after five years of losses.

PIA plans to lease eight A320s and four turboprops, Yunus said. The Airbus planes would be used for services to cities including Dubai, Abu Dhabi, Kuwait and Mumbai. The company will raise bank loans to fund the fleet upgrade after government approval, he said.

The carrier has a debt of 150 billion rupees, Yunus said. PIA posted a loss of 26 billion rupees in 2011, according to data compiled by Bloomberg. It previously reported an annual profit in 2004.

http://www.bloomberg.com/news/2013-01-02/pakistan-airlines-seeks-go...

[Riaz Haq]

Here's ET on Pakistan Railway revenue increase from private partners:

LAHORE:

The cash-strapped Pakistan Railways (PR) appears to be benefiting from its joint ventures with private companies: officials at the state-owned company admitted that the partnerships accounted for 26% of total passenger revenues for the railways, despite accounting for less than 1% of passenger traffic, during the first six months of financial year 2013.

Revenues for the Railways were up by 19.9% to Rs7.7 billion during the period between July 1 and December 20, 2012, compared to the same period in the previous year. Nearly 89% of that increase came from rising revenues in the passenger segment of the Railways, and nearly all of that increase came from the two public-private partnerships, where companies have leased out routes from Pakistan Railways. Passenger services account for nearly three-quarters of all Railways revenue.

In February 2012, Pakistan Railways signed an agreement to allow the Four Brothers Group, a diversified conglomerate, to run the Business Express, a refurbished train to that travels between Karachi and Lahore. The Railways gets Rs3.1 million per day for the service as a flat fee for the use of its stations and tracks. In March, a similar agreement privatised the newly revitalised Shalimar Express, operated by Air Rail Services, which provides the Railways with Rs1.5 million in lease revenues per day.
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The Privatisation Commission lists Pakistan Railways as a state-owned entity that is up for sale. Yet the left-leaning government led by the Pakistan Peoples Party seems to loathe privatising an entity that – with over 82,000 employees – is one of the largest employers in the country. An outright privatisation would almost certainly mean massive job losses, since the Railways have massive redundancies in their workforce.

And so the government appears to be pursuing what can only be described as a backdoor privatisation, where certain routes are leased out to private companies to run in exchange for fixed revenues. In addition to the two that started last year, a third train – the Night Coach – has also started service from Karachi to Lahore. It is also operated by Air Rail Services and its lease payments are set at Rs1.7 million per day.

“In the coming days, we are hoping that passenger revenues will reflect the expected increase from the latest joint venture,” said Zubair Shafi Ghauri, the spokesperson for Pakistan Railways. “We are now looking for some short-distance joint ventures from remote junctions to facilitate the rural population, though nothing is final yet.”

Whether or not this business model is sustainable is an open question. The management of the Business Express claims that their operational breakeven occurs at 55% occupancy levels, which they are only marginally above, despite operating on the popular Lahore-Karachi route. The Shalimar Express is faring a little better, with a 71% occupancy rate on the same route, with a slightly smaller train.

http://tribune.com.pk/story/492719/pakistan-railways-private-trains...