{ "docId": "019dd923-5de0-76bd-a165-578b9862173f", "docSlug": "091122f6e046fa86", "documentTitle": "Rail industry cost and revenue sharing (2011)", "authorId": "misc", "authorName": "L.E.K.", "documentKindSlug": "consulting-deck", "documentKindLabel": "Consulting deck", "sourceTypeSlug": "strategy_consulting", "sourceTypeLabel": "Strategy consulting", "presentationDate": null, "orientation": "landscape", "aspectRatio": 1.414, "pageNumber": 64, "pageCount": 170, "prevPage": 63, "nextPage": 65, "slideType": "recommendation", "function": "recommend", "density": "overcrowded", "nDataPoints": 6, "notes": "The slide uses a bulleted list to build a logical argument from problem (uncertainty/risk) to solution (soft caps).", "elementsJson": [ "headline_text", "bullet_list", "numbered_list" ], "metadataConfidence": 1, "imagePath": null, "slideHref": "/slides/019dd923-5de0-76bd-a165-578b9862173f/64", "deckHref": "/decks/019dd923-5de0-76bd-a165-578b9862173f", "deckJsonHref": "/decks/019dd923-5de0-76bd-a165-578b9862173f.json", "deckAnchorHref": "/decks/019dd923-5de0-76bd-a165-578b9862173f#slide-64", "components": [ { "bbox": null, "kind": "callout", "text": "We would recommend that caps are used but that they are applied through a tapering down of the sharing percentage to create a soft cap.", "attrs": null, "subkind": null, "toolName": "Visual emphasis", "toolSlug": "visual-emphasis", "confidence": null, "componentId": "019dd951-edab-7238-a550-d426f0bfb11d", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.25, "w": 0.8, "x": 0.1, "y": 0.66 }, "kind": "list", "text": "Consequently, we would recommend that caps are used but that they are applied through a tapering down of the sharing percentage to create a soft cap. The tapering would need to occur much more gradually than the DfT's revenue share / support mechanism. If the starting sharing percentage is 25% then this could tapered down in 5 percentage point intervals. For example: Sharing percentage of 25% for variances of up to 5%; Then 20% sharing for variances of 5-10%, 15% for variances of 10-15%, 10% for 20-25%; This would cap TOCs' total potential downside at 2.4% of NR's baseline costs, or c.£100m p.a. or 37% of TOCs' normalised profit", "attrs": null, "subkind": "bullet", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "0dc2a7fe-6997-42aa-be99-83f1cc9b34de", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.12, "w": 0.8, "x": 0.1, "y": 0.38 }, "kind": "list", "text": "As a result, it is difficult to accurately assess the degree of risk transfer. This is particularly an issue for TOCs because: Franchise bidders have to price this risk / opportunity into their bids; The investor community will price the risk / opportunity into the share price of transport operator groups", "attrs": null, "subkind": "bullet", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "be08ce32-27da-4018-8d9b-200cbb4c609d", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.08, "w": 0.8, "x": 0.1, "y": 0.5 }, "kind": "list", "text": "As such, even if the actual level of risk transfer from the cost and revenue sharing mechanism is set at a manageable level (through the percentages and causes items), there would still be value in using caps to give all parties confidence that there is a limit to the downside exposure", "attrs": null, "subkind": "bullet", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "c76ab6c8-58ca-4279-987c-7103179660b9", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.1, "w": 0.8, "x": 0.1, "y": 0.28 }, "kind": "list", "text": "The introduction of a cost and revenue sharing mechanism would create uncertainty for all organisations. Nobody knows exactly how each party would behave under the new arrangements or how easy it would be to achieve efficiency savings over and above those assumed in the baselines", "attrs": null, "subkind": "bullet", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "ccee9780-0800-4907-b0d2-ff095cba72ac", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.08, "w": 0.8, "x": 0.1, "y": 0.58 }, "kind": "list", "text": "The major disadvantage of caps is that incentives change when caps are reached. A current example of this is the lack of incentive on many train operators to grow revenue because they are in 80% revenue support with little prospect of escaping from that arrangement", "attrs": null, "subkind": "bullet", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "eac93c75-45dc-4f51-8eae-b99438d58328", "frameworkName": null, "frameworkSlug": null }, { "bbox": null, "kind": "metric", "text": "sharing percentage: 25%", "attrs": null, "subkind": "primary", "toolName": "Quantification", "toolSlug": "quantification", "confidence": null, "componentId": "019dd951-edab-7238-a550-d90e674b239f", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.08, "w": 0.8, "x": 0.1, "y": 0.15 }, "kind": "title", "text": "6 – Caps: We would recommend that caps are used but that they are applied through a tapering down of the sharing percentage to create a soft cap", "attrs": null, "subkind": "headline", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "364d19a3-8045-40f7-bce7-23031370fe77", "frameworkName": null, "frameworkSlug": null } ], "metrics": [], "tools": [], "frameworks": [], "arcBeats": [ { "to": 80, "from": 61, "beatId": "f6c8096e-5bf3-4157-90b0-fd229f7d9bcd", "arcName": "The Consultant's Gambit", "arcSlug": "consultants-gambit", "beatName": "Impact & Next Steps", "beatSlug": "consultants-gambit-impact-next-steps", "evidence": "The document outlines the implementation plan and next steps for the recommended solution.", "position": 4, "confidence": 0.8, "parentBeatName": "Resolution", "parentBeatSlug": "resolution" } ], "loops": [], "imagePathAlt": null, "thumbSrc": null, "thumbSrcAlt": null, "locked": true }