Finance TAYLOR FERGUSON
EXPLORING THE NEW GDP FRANCHISE MECHANISM
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Taylor Ferguson, Director, Government & Infrastructure Advisory from Grant Thornton UK LLP gives his thoughts on the new franchising letting process based on national gross domestic product (GDP).
Words: Taylor Ferguson I 42 RailCONNECT
n the build up to the start of the new franchising letting process, a number of papers were produced including ‘The Future of Rail Franchising’ consultation by the Department for Transport (DfT) and ‘Franchising Reform’ by the Association of Train Operating Companies (ATOC). The papers provided insight into some of the issues that would be addressed by the new process to ensure a value for money solution for the taxpayer in line with the recommendations of the McNulty Rail Value for Money Study. The main arguments for change related to longer franchises, the benefits of which would be to allow operators to take strategic, longer-term investment decisions, creating additional value from their operations and providing a higher level of cost savings for UK Rail. In addition to the franchise length the other key area for
the DfT – in response to criticism from the National Audit Office (NAO) and the Public Accounts Committee (PAC) – was to address the robustness of forecasts from operators, how they would be assessed and how any additional revenues or shortfalls would be shared with the taxpayer.
In developing a new risk-sharing mechanism, the DfT was keen to avoid just accepting bids that provided the best net present value (NPV) of franchise subsidy or premium payments. The first fifteen or so years following privatisation demonstrated that while the ‘cap and collar’ regime had some merits and was understood by the market, it was not without its failings. Several franchise operators had bid revenue forecasts which had turned out to be undeliverable, while others have benefited from the general upward trend in rail patronage to deliver profitability in excess of their original forecasts. The new mechanism would need to overcome these failings.
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