The winner of the new Essex Thameside franchise must shoulder the entire risk of failure to meet revenue growth targets. James Dark reports

The winner of the new Essex Thameside franchise will face stiffer requirements to guarantee delivery of the full premium payment offered to the Department for Transport.

In addition to new provisions for the franchise’s parent company to stand behind Essex Thameside financially, the new operator will bear the entire risk of any failure to meet revenue growth targets due to over-optimistic bidding or a further deterioration in economic conditions, throughout the 15-year contract term. In previous franchises let by the DfT, operators have been able to claim a significant proportion of any shortfall in forecast revenue from the government after a franchise has been running for four years.

The new regime, set out in the Essex Thameside ITT published last week, is designed to ensure the franchise can continue operating without any DfT support if large losses are sustained due to lower revenue growth or higher costs than forecast. The guarantee will come in the form of a loan facility provided by the new franchise’s parent company, which will be available to support the finances of the Essex Thameside business on demand from the DfT. It will be set at a level which means it will only be financially

beneficial for the parent company to default on the franchise in extreme circumstances.

The size of the loan facility will be determined by a new DfT process to ‘health check’ bidders’ growth and cost forecasts and adjust them in accordance with the DfT’s assessment of their deliverability and rival bidders’ views of the market. The DfT will use this information to calculate the extent of the financial backing the winning bidder will need to provide to ensure Essex Thameside can continue operating under 95% of 500 different economic scenarios.

Industry sources said that the circumstances of the Essex Thameside franchise meant it was unclear whether the new requirements would feature in future commuter franchise tenders. The current franchise is the only contract still operating to have been let by OPRAF (the erstwhile Office of Passenger Rail Franchising) at privatisation, and as such has no risk sharing measures in place. It has remained profitable during the recession, whereas a number of London commuter operators have fallen heavily into the red, despite claiming revenue support from the DfT.

“In part that reflects the terms the [current Essex Thameside] contract was let on… but what we have also seen is that the Essex rail market has been very resilient,” Passenger Transport was told. “The current franchise would not have needed revenue support had it been available, and that could have informed the DfT’s thinking.”

The new InterCity West Coast franchise, which was the first contract to be tendered under the DfT’s new franchising policies, will feature a revised risk sharing mechanism to support operators based on variations in GDP rather than being solely based on companies’ revenue forecasts.

 

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