Outline of risk(s)

Main arrangements that reduce or mitigate the risk

Planning stage - specifying the level of passenger services

Franchise planning assumes a level of demand that is too low11, and/or cost Benefit Analysis does not address all relevant economic and social issues, with the result that forecast demand cannot be met. If such risks crystallised they would result in setting the service level too low to meet growing demand.

The Department could plan additional capacity, using forecasting tools and research, as part of the High Level Output Specification (HLOS). The HLOS exercise precedes each five year regulatory period and can, subject to affordability constraints, update the Department's rolling stock strategy.

If events invalidate planning assumptions, the Department expects train operators to propose additional capacity, varying franchise contracts as appropriate, or at the time of the next franchise competition.

Investment of public funds towards making additions to the network during the life of a franchise, sponsored by the Department (from HLOS) and/or Network Rail, may provide windfall profits to train operators.

The Department is entitled to re-run the financial model to revise the level of target revenue and shares in any revenue increase more than two per cent above the target level.

The target revenue will be reset during the next franchise competition.

Stakeholder expectations are unrealistic or are not met, leading to stakeholder dissatisfaction and potential loss of reputation.

Specifications do not meet future planned network or local transport developments because of:

■ unreliable data at time of letting

■ changes in local priorities

■ unplanned changes in the network during the life of the franchise.

Consultation with all relevant parties.

Consultation may add services to the base specification, or seek a price for an optional service, although implementation will depend on value for money and/or affordability.

If the options priced during contract bidding are not acceptable - as in the case of settling the future use of the Eurostar platforms at Waterloo - a contract variation may be developed during the franchise term.

In some cases an alternative will be a postponement until a subsequent franchise competition.

Encouragement of electronic ticketing technology to increase rail travel and boost revenue can result in complicated price differentials. This may lead to unintended impacts on passengers and their travel decisions.

Making public any implications for the policy on fares regulated by the Department, with communication on fare proposals during the consultation stages. This provides bodies such as Passenger Focus with the opportunity to make representations on behalf of passengers.

Industry-wide fares simplification proposals that aim to improve transparency and passenger understanding of fare choices.

Purchasing stage - securing competitive tenders

Bidders make inaccurate cost forecasts, perhaps because the incumbent provides data late, or lacking in sufficient detail.

Bidders put in misleading revenue targets in the revenue risk sharing years towards the end of the franchise and/or confuse the attribution of revenue across delivery plans and operating criteria in order to win a bid.

Revenues and costs are risk adjusted and normalised, although this commercial risk is endemic and bidders will keep varying their approach.

The Department tests the level of parent company financial support and sets it at an appropriate level.

A winning bid is assessed as deliverable, and is accompanied by well thought through implementation plans. Nevertheless it potentially overloads a bidder's management capability to deliver the amount of change in the bid.

The Department considers the track record and management capability of each bidder during prequalification. Network Rail is included in making the assessment of deliverability of proposed changes and implementation plans.

If the train operator subsequently fails to deliver the promised level of service, the Department can impose a remedial plan (as set out in the next section).

Large multi-modal transport groups abuse a dominant position in a travel corridor. For example three such multi modal transport groups hold nine franchises with potential implications for fares.

Referral by ORR of the winning bidder to the competition commission.

If appropriate, sanctions under competition Law will be applied.

Managing stage - monitoring service delivery

Not having industry expertise in key posts, and/or sufficient skilled staff leading to weaker negotiation of contract changes.

Plans to maintain the current level of rail industry experience in key posts within the Department. If vacancies increase, the Department can step up interim staffing and revise plans to attract and retain suitably skilled staff.

Passenger and media dissatisfaction if a TOc fails to deliver the promised level of service, in particular during the period following a hand-over from the previous incumbent.

Monitor service levels and assess feedback from Passenger Focus. The Department can agree informal arrangements to remedy poor performance with a train operator (as in the case of First Great Western). This can be followed, if necessary, by a remedial plan to cure a breach of contract.

Train operator self-certifies compliance with standards but does not supply all the information the Department needs to support the certification.

The Department checks data quality (see para 4.5) and can seek supporting information to show that standards are enforced. This can be followed, if necessary, by a remedial plan to cure a breach of contract.

Poor cooperation with Network Rail on improving network reliability, resulting in failure to achieve satisfactory train service performance.

Joint performance improvement plans between the train operator and Network Rail.12

Lower than predicted revenues, for example when train operators face a national economic downturn or costs exceed forecasts.

Financial failure if parent company support is exhausted.13

The train operator can implement contingency plans (such as those evaluated when the franchise was let) with steps to reduce costs and/or discretionary service provision.

Department budget projections make allowance for possible revenue risk sharing. If the train operator fails, the plans for the Department to act as operator of last resort have worked in practice and, to date, re-letting has been on similar or improved economic terms.

Risks retained by the Secretary of State appear likely to crystallise. In each such case, risk retention had to pass a value for money test to show that it represents the least worst outcome.

The Department monitors and reports on such risks. It has influence to manage some such risks actively, for example to encourage Network Rail to perform, but at other times may lack contractual levers.

NOTE

This summary does not consider catastrophic risks that are classed as Force Majeure and likely to impact the Department's budget on a basis that is not franchise specific.