FINANCE: BROWN REVIEW
POTENTIAL FINANCIAL CONSEQUENCES OF THE BROWN REVIEW
Words: Taylor Ferguson Director in the Government & Infrastructure Advisory team at Grant Thornton UK LLP, with a particular expertise in transport.
proposed are being considered by the Department for Transport (DfT) or HM Treasury and could be accepted in full or in part with Brown setting the DfT a deadline of April 2013 to confirm its franchising programme in full. One of the primary findings of
T
the review was that the franchising system is not fundamentally flawed, however, there are a number of recommendations that will have a direct impact on the financial propositions put forward by the Train Operating Companies (TOCs) and the level of subsidy or premium payable under the franchises if the recommendations are accepted. A number of these are highlighted below.
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Documentation It is proposed that there should be a simplified pre-qualification questionnaire (PQQ), which is backward looking only and would not require a bidder to articulate its vision for the franchise. This should be a straightforward change and should reduce the initial bidding costs. More problematic will be ensuring that the other key bidding documents including the Invitation to Tender (ITT) and the Franchise Agreement are fully developed to take account of Brown’s proposals. The changes will take time to be fully and consistently incorporated into the relevant documents, indeed Brown suggests that the changes will occur iteratively over a number of franchises. However, it will be important that the first franchise that comes to market, is
he Brown Review of the Rail Franchising Programme was issued on 10th January, the recommendations
clear in terms of evaluation, revenue risk, capital requirements, specification options and timetable to ensure unsuccessful bidders are not able to challenge inconsistencies within the documents as this may lead to higher priced bids and further delays. An additional proposal within the
Brown review is that each franchise should be assessed individually and is expected to have a 24-month procurement cycle, which will involve more time from both the DfT, and bidders to develop their proposals. Bidders will appreciate the enhanced clarity of the documents and this should improve the bids received by the DfT although it may not in itself have any direct cost impact on proposals put forward.
Evaluation Previously the evaluation of the winning franchise bids was focused on the net present value (NPV) of the franchise payment or subsidy line of the bidders’ financial proposals. The review states that the evaluation criteria should take account of bidders proposals for improving service quality for passengers, their approach to management, proposals for non- commercial investment (i.e. station facilities) and deliverability of the proposals. The weighting of this quality and deliverability score will be dependent on the nature of the franchise and is recommended to account for between 20-40% in the final evaluation. It is proposed that the quality and deliverability score is translated into a NPV amount on a pound per point basis and then combined with the NPV from the financial assessment.
While the financial evaluation may be more transparent it would take a brave bidder, at least in the initial franchises, to trade quality against price.
While the financial evaluation may
be more transparent it would take a brave bidder, at least in the initial franchises, to trade quality against price. The ability to create benefit from a quality score will depend on how the NPV of the financial payments are evaluated. In certain public private partnership (PPP) projects bidders are able to calculate their financial score prior to submission based on their NPV and the guidance within the evaluation methodology. In this case when the maximum score for finance is achieved (within a certain band of premium or subsidy payments), any surplus funds are then invested into the project to increase the quality. It will be interesting to see the level of quality bidders are prepared to put forward as a trade off against a lower subsidy / higher premium. This has the potential to increase the price of bids from the TOCs in return for a higher quality service relative to the current baseline.
Revenue risk
The risk associated with exogenous factors within franchises has always been difficult to deal with. The cap and collar mechanism had the potential to create perverse incentives for bidders
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