The Department's approach to sharing revenue risk

2.10  The franchises include a risk sharing mechanism on train operating company revenue receipts.ix Under the franchise agreements the Department has rights to a share of revenue above 102 per cent of the target revenue stated in the contract. On the downside the Department accepts the risk of force majeure events (for example, terrorist acts) and, after the first four years of each franchise, shares in the shortfall if actual revenue falls below 98 per cent of target revenue (Figure 9). The risk sharing mechanism does not expose the taxpayer to revenue shortfall in the first four years, but thereafter shortfalls in revenue are shared between public and private sectors.

2.11  Figure 11 (on page 20) shows that five out of the eight franchises can expect increased passenger carrying capacity under the Department's future investment plans (see paragraph 3.5). The standard clauses in rail franchise agreementsx give the Department contractual rights to seek value for money from any franchise amendments that have to be negotiated mid-term. These changes may involve agreeing a higher level of target revenue to reflect the higher capacity and help avoid windfall gains for train operators.