Recommendation 16

Our previous reports have covered some of the commercial difficulties caused by the Department’s franchising model. In the worst-case scenarios, issues such as over- optimistic assumptions of passenger growth led to severe operator losses and early contract terminations.39 These contract terminations accelerated the Department’s exposure to the commercial issues in the franchising system as, after termination, the Department is legally obliged to ensure continuity of passenger service; doing so either through a replacement contract with the incumbent on amended terms or, as was the case for the East Coast and Northern Rail franchises, transferring operations to a government- owned operator of last resort. In both scenarios, the Department becomes exposed to the financial risk of reduced revenue from slowed passenger growth.40