3.13 In line with the recommendations of the Brown review, the Department seeks to allocate risks to the party best placed to manage them. If the Department tried to transfer risks to operators that they could not reasonably control, bidders would likely respond by increasing contingency in their franchise bids, leading to reduced premia or increased subsidies.
3.14 The Department has replaced its previous 'cap and collar' approach - which created perverse incentives if revenue fell below expectations - with contractual measures that are in line with recommendations from the Brown Review. For example:
• For most franchises, operators bear the risk if revenues do not meet forecasts for reasons that are within their control, such as the reliability of the train service or marketing. The main exception is the current Thameslink, Southern and Great Northern franchise.11
• The Department has developed approaches to share the impact of risks to revenue that are outside operators' control. These are based on factors that drive passenger demand on different franchises.
• On the InterCity East Coast franchise, where there is a lot of discretionary travel, the Department is using a formula linked to GDP. If GDP falls below an agreed baseline, the operator is protected from lower revenues due to reductions in passenger numbers attributable to lower GDP. If GDP exceeds the baseline, the Department stands to gain most of the increased revenues.
• For commuter franchises in and out of London the Department has been considering using forecasts of London job growth as the main indicator. In the invitation to tender for the East Anglia franchise, the Department has used both GDP and London job growth.
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11 For the Thameslink franchise, the Department opted for a management contract with fixed premium regardless of revenues because of the level of uncertainty related to Network Rail's infrastructure work on the route - particularly the rebuilding of London Bridge Station. We discussed this in our 2013 Thameslink report.