Government plans risk transfer changes to franchises
A new risk transfer mechanism will be introduced by the Government on some passenger franchises, in a bid to ensure franchising remains attractive to bidders.
Details of the new Forecast Revenue Mechanism (FRM) are contained in the Government’s response to the Transport Select Committee (TSC) report on rail franchising, released on April 24.
The FRM would offer protection against shortfalls in revenue relative to the winning bidder’s bid revenue line, and ensure that operators share revenue with the Government should the franchise outperform forecasts. The Government says this can help ensure ‘healthy competition’ in the franchising process. It also says it agrees with the TSC’s recommendation that bidding costs in franchises should be streamlined where possible.
Reforms to track access charges are also in prospect, with the TSC recommending that a proposal for a Public Service Obligation on open access operators should be consulted on within the next 12 months. The TSC also recommends that timetable slots for open access services should be determined before publication of the Invitation to Tender for franchises. On the possibility of a greater role for open access operators, the Government says that putting in place reforms to track access charges must take place before any other developments.
On calls to make clearer the basis on which franchises are awarded, the Government says: “This may potentially assist with the public and industry gaining a better understanding of the basis… on which a franchise has been awarded. Our commitment to transparency must be balanced with the need to respect the commercial confidentiality of bidders.”
The Government says it will investigate ways in which the final scores could be presented, and that it will consult with the Rail Delivery Group before presenting proposals to the TSC.
An outcome-based approach to specifying franchises is agreed to by the Government, which says it is testing a wider use of the policy, including service quality specifications on the East Anglia franchise. It says it will develop its approach on a case-by-case basis, but “should, where possible, strive to focus specifications on outcomes”.
But it disagrees with the TSC’s recommendation that what qualifies as force majeure should be more clearly defined, arguing that existing definitions are “sufficiently clear”.
The Government accepts a recommendation that it should no longer contract for a breach level cap on performance penalties, although it says: “It should be borne in mind that some kind of cap will remain appropriate,
primarily because if performance were to deteriorate below the floor level for the regime the operator would then be reaching the point at which it would become exposed to contractual enforcement action from the Department.”
It added: “In the Department’s view, imposing unlimited additional financial risk on the franchise would not be in the public interest and could impact adversely on the number, value and quality of franchise bids.”
Should any major changes be made in the rail franchising schedule, the Government says it agrees with the TSC’s recommendation that Direct Awards should be considered for the highest-performing franchises. The Government says it will “continue to consider” Direct Awards where major infrastructure decisions “remain unclear”, but claims that it is “sufficiently resourced” to meet the required franchise timescales.
The Department for Transport rejects the TSC’s recommendation that an independent review of its franchising functions should be commissioned. It says that it already commissions and receives regular independent reviews of the franchising programme, adding that the Cabinet Office’s Infrastructure and Projects Authority concluded that there “is full confidence in the franchise team and its leadership”.
A new risk transfer is to be introduced by Government on some franchises, to ensure they remain attractive to bidders. Recently some competitions have involved just two bidders. One of the next franchises to be let will be South Eastern. On April 25, a Southeastern Class 395 races along High Speed 1 at Detling.