Revenue risk allocation

In a regulated environment, one critical factor in determining the fares that need to be charged relates to which party in the system carries the risk that the revenues generated fall short of the level required to cover all relevant costs of the service offer provided, and is responsible for sustaining the system in the event that this is the case.

In the case of gross-cost contracts, clearly that is the contracting authority itself. It will seek to mitigate this risk through contracting only such services that it is confident that it can pay for, and by maximizing the revenue collection and its integrity. In some cases, however, it may be required to provide balancing funding between revenues that can be collected with convenient fares (determined by currency values in circulation) and the fares that would balance revenues and costs (the ‘technical fare’). In this case it will need substantial resources or reserves and / or some form of public guarantee.

In the case of net-cost contracts, this risk is transferred to the operators of the services. As a result, they will incorporate a risk margin in their tenders for the contracts and this will tend to result in higher fares than would otherwise be necessary. The commercial response, should this risk not have been correctly calculated, would then be to lower the quality of service and avoid any route duties where revenues are insufficient to cover the direct costs of operation.