Abstract
The process of European Union(EU) rail market liberalisation is now at a tipping point, with the fourth railway package approved by the European Parliament and Commission and the Member States that have to embed its mandates and provisions into their national legislation. To a large extent, this has already been achieved. The railway package is structured in two main pillars – market pillar and technical pillar – with specific objectives. My paper will focus on the market pillar, particularly on the new challenges that the liberalisation of the EU passenger rail market will generate on public service contracts in effect as of 2023. The establishment of the single European railway area requires common rules on the award of public service contracts in this sector, while taking into account the specific circumstances of each Member State. Public service contracts for public passenger transport services by rail should be awarded on the basis of a competitive tendering procedure. Procedures for competitive tendering of public service contracts should be open to all operators, should be fair and should respect the principles of transparency and non-discrimination. This paper will analyse the new legal challenges that public service contracts in railway transport will encounter and what their impact will be on the process of liberalisation or the EU passenger rail market.
Liberalisation of the EU passenger rail market: The EU context
The liberalisation of the railway system has proceeded progressively in recent years as a result of the implementation of the so-called railway packages approved by the European Union (EU). Rail freight and international passenger transport have been opened to competition and, finally, as a result of the fourth railway package adopted in 2016, 14 December 2020 was set as the date on which to liberalise passenger rail transport 1 . As such, the exclusive rights of current operators were eliminated and an unlimited number of railway companies have been given the chance to enter this market under a free competition model. The main milestones of the liberalisation process of the railway sector are summarised below.
The first railway package was approved in 2001, consisting of four Directives that kick-started the liberalisation of the freight transport market, as well as regulating the granting of railway licences to those companies and economic operators that wanted to enter this market 2 .
In 2004, the second railway package was approved, creating the European Railway Agency and defining the safety and interoperability rules necessary to open up the international rail transport market. 3
The third package was approved in 2007, which introduced the liberalisation of international passenger traffic, as well as regulating public passenger transport services by rail and road and defining the rights and obligations of passengers. 4
On 30 January 2013, the European Commission approved the Communication entitled ‘Fourth railway package: completing the single European railway area to promote European competitiveness and growth’. As a result of this document in 2016, the EU approved a set of Directives and Regulations that constitute the regulatory body of the fourth railway package, which will involve for Spain, for example, a major amendment of its railway legislation, especially aimed at the liberalisation of railway passenger transport that started on 14 December2020 5 .
However, the liberalisation of railway services does not prevent the competent authorities of the Member States from intervening in this sector, primarily to guarantee services that are of general interest but that operate at a loss. In this regard, the Member States have been defining the framework of so-called public service obligations (PSOs) with the aim of channelling public intervention in the general interest of European citizens. Thus, it has been common in several Member States to directly award rail service contracts that are accompanied by the competent authorities imposing certain public service obligations. 6
It should be noted that, as of 25 December 2023, the possibility of direct award of contracts involving the provision of public service obligations is eliminated, although certain exceptions and the possibility of extending this date until 2033 have been established. It is precisely on this issue – that is, the various challenges that the competent authorities will have to face when awarding new rail service contracts subject to PSO – that this paper will revolve. 7
Public Service Obligations in railway transport: the legal framework
The EU has defined the figure of the PSO to establish the channel of public intervention that is necessary to efficiently and effectively develop the so-called services of general economic interest, as well as defining the legal framework to which this intervention must be adapted.
In fact, it is absolutely necessary to have instruments of public intervention to ensure adequate levels of service provision in a sector as important for the economy and for society as railway transport. Thus, as I will examine below, Regulation 1370/2007, as amended by Regulation (EU) 2016/2338, defines certain conditions of a procedural legal nature for the imposition of PSOs and for the granting of compensation for them.
Firstly, Member States must define the content of PSOs clearly and precisely (Montero Pascual, 2013:128). It will no longer be sufficient for Member States to merely declare that a railway service is a public service; it will be necessary to identify the content of the PSOs that may be imposed on railway undertakings in terms of prices, frequencies, rolling stock, maintenance, etc.
In addition, it is necessary to formally set out the PSOs in a legal document, which European legislation calls a contract but which may take various forms, such as a legal rule, an administrative act or a programme contract. The definition of the railway operator subject to the PSOs may arise out of either a public competitive tendering process or a procedure for the direct award of the service to a public body or to an undertaking controlled or not by the Public Authorities.
Finally, the key element in the field of PSOs is their compensation, as well as the amount thereof, as it may in no event exceed the net financial cost borne by the operator as a result of the PSOs (Montero Pascual et al., 2019:246). In this sense, the tendering procedures should guarantee that the compensation is set in line with the production cost of the service. However, in the event of direct allocation to a railway operator, it is necessary for the State to conduct cost analyses that adequately justify the amount of compensation established. 8
Defining PSOs in the railway transport system
The purpose of Regulation 1370/2007 is, as stated in Article 1 of the Regulation, to “…define how, in accordance with the rules of Community law, competent authorities may act in the field of public passenger transport to guarantee the provision of services of general interest which are among other things more numerous, safer, of a higher quality or provided at lower cost than those that market forces alone would have allowed”.
Regulation 1370/2007 thus defines the conditions under which the competent authorities of the EU Member States must compensate railway operators providing passenger transport services subject to PSOs for the costs arising from the provision of such services, in such a way that the contribution does not constitute state aid prohibited by European law.
In this regard, the Regulation is largely in line with the doctrine laid down by the Court of Justice of the EU (CJEU) in its leading case Altmark, 9 as well as the general regime defined in the Commission Decision of 20 December 2011 on the application of the provisions of Article 106 (2) of the Treaty on the Functioning of the European Union (TFEU) to state aid in the form of compensation for public services granted to certain undertakings entrusted with the operation of services of general economic interest. 10
The definition of PSOs is the responsibility of the Member States, which have broad discretion to provide and organise services of general economic interest. Thus, Regulation 1370/2007 is based on the recognition of the power of Member States to intervene to ensure the provision of inland passenger transport services that do not have commercial exploitation possibilities, that is, those that do not generate sufficient margins to be provided, in principle, by private operators.
We can distinguish three different categories for the organisation of PSOs (Community of European Railway and Infrastructure Companies CER, 2017:19): - Public service operations organised at national level; - Public service operations organised at the regional or local level; and - Public service operations organised by both national and local in cooperation with each other
Regulation 1370/2007 as it was amended by the Fourth Railway Package does not examine the level at which PSOs are dealt with. It simply indicates that the competent authority is ‘any public authority or group of public authorities of a Member State or Member States which has the power to intervene in public Passenger transport in a given geographical area or anybody invested with such authority. Therefore, in application of the subsidiarity principle, Member States have complete discretion over the organisation of the PSO’. 11
This intervention in the rail transport sector is channelled through the delimitation of the PSOs understood as ‘a requirement defined or determined by a competent authority in order to ensure public passenger transport services in the general interest that an operator, if it were considering its own commercial interests, would not assume or would not assume to the same extent or under the same conditions without reward’ (art. 2.e) Regulation 1370/2007).
One aspect that is important to highlight is that the definition of PSOs is not only delimited from the perspective of the attribution of powers to the Member States but is also configured as a duty or obligation. Thus, article 4.1.a) of Regulation 1370/2007 establishes that Member States are obliged to ‘clearly define the public service obligations with which the public service operator is to comply, and the geographical areas concerned’.
The Fourth Railway Package has, however, reduced the scope of Member States’ discretion in the delimitation of the scope of PSOs. Thus, on the one hand, the PSO must be justified in the light of a public passenger transport plan to be drawn up by the competent authorities. On the other hand, PSOs must be limited to what is strictly necessary to achieve nationwide network benefits. This would limit the imposition of PSOs to the whole of transport in a Member State.
Finally, the delimitation of PSOs, as indicated above, is the responsibility of the competent authorities of the Member States and not of the EU institutions. This is expressly stated in recital 12 of Regulation 1370/2007, which clearly establishes that “This Regulation is based on the principles of neutrality as regards the system of property ownership referred to in Article 295 of the Treaty, of the freedom of Member States to define services of general economic interest, referred to in Article 16 of the Treaty, and of subsidiarity and proportionality referred to in Article 5 of the Treaty”.
This is reiterated further on in recital 17 when it states that ‘In keeping with the principle of subsidiarity, competent authorities are free to establish social and qualitative criteria in order to maintain and raise quality standards for public service obligations, for instance with regard to minimal working conditions, passenger rights, the needs of persons with reduced mobility, environmental protection, the security of passengers and employees as well as collective agreement obligations and other rules and agreements concerning workplaces and social protection at the place where the service is provided. In order to ensure transparent and comparable terms of competition between operators and to avert the risk of social dumping, competent authorities should be free to impose specific social and service quality standards’.
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Public service contracts: legal framework
Legal framework established by Regulation 1379/2007
Regulation 1370/2007 establishes the rules applicable to contracts subject to PSOs, as well as the elements that define their compensation. Specifically, in accordance with Article 3.1 thereof “Where a competent authority decides to grant the operator of its choice an exclusive right and/or compensation, of whatever nature, in return for the discharge of public service obligations, it shall do so within the framework of a public service contract.”
As mentioned above, on 14 December 2016, the so-called Fourth Railway Package was approved in the EU, which amended, through three Directives and three Regulations, different issues in relation to railway transport in the EU.
Thus, as far as our field of study is concerned, Regulation 1370/2007 has been amended by Regulation (EU) 2016/2338 of the European Parliament and of the Council of 14 December 2016 in the aspects concerning the opening of the market for domestic rail passenger services. Thus, art. 5.3 provides that “Any competent authority which has recourse to a third party other than an internal operator, shall award public service contracts on the basis of a competitive tendering procedure”.
However, the use of a competitive tendering procedure is excluded when, in accordance with Article 5 (4a) and (4b) of Regulation 1370/2007, one of the following situations is present that enable the competent authority to award contracts directly: a) When its value, if rail services are included, is less than 7.5 million euros or 500,000 km per year. b) Where the competent authority considers it justified: (i) by the structural and geographic characteristics of the market and network concerned (size, demand characteristics, network complexity or technical and geographic isolation) or (ii) where it results in higher quality or cost-efficiency of service compared to the previous awarded PSOs contract.
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Therefore, the competent authority must provide sufficient reasons for choosing a direct award contract, including, in accordance with Art. 5.7 of Regulation 1370/2007, ‘the possibility to request an assessment of the substantiated decision taken by the competent authority by an independent body designated by the Member State concerned. The outcome of such assessment shall be made publicly available in accordance with national law’.
Finally, it should be noted that the amendment of Regulation 1370/2007 came into force on 24 December 2017, with the rules for the award of public service contracts being applicable from 3 December 2019. However, Article 8 of the aforementioned Regulation provides for a transitional legal regime that allows the direct award of these contracts until 24 December 2023, limiting them from 3 December 2019 to a maximum duration of 10 years.
The Spanish model of public service contract
In Spain, passenger rail transport services subject to PSOs owned by the General State Administration are governed by a public service contract, signed on December 18, 2018 between the Ministry of Public Works and Renfe Viajeros S.M.E, S.A, which regulates the provision of public passenger rail transport services of Cercanías, Media Distancia Convencional, Alta Velocidad Media Distancia (AVANT) and Ancho Métrico (CSP 2018–2027), with a duration of 10 years, extendable for 5 additional years. 14
The CSP 2018–2027 was signed in accordance with the provisions of art.8.bis of Regulation 1370/2007 which establishes that the “Public service contracts for public passenger transport services by rail directly awarded on the basis of a procedure other than a fair competitive procedure as of 24 December 2017 until 2 December 2019 may continue until their expiry date. In derogation from Article 4(3), the duration of such contracts shall not exceed 10 years”.
As I have already stated, the duration of these contracts may not exceed 10 years, except when art. 4.4 of Regulation 1370/2007 becomes applicable, which establishes that ‘If necessary, having regard to the conditions of asset depreciation, the duration of the public service contract may be extended by a maximum of 50 % if the public service operator provides assets which are both significant in relation to the overall assets needed to carry out the passenger transport services covered by the public service contract and linked predominantly to the passenger transport services covered by the contract’.
In this regard, the Eighth and Twenty-third clauses of the CSP 2018–2027 contemplate the possibility of RENFE Viajeros developing investments associated with the renewal of rolling stock. In fact, to date, RENFE Viajeros has awarded contracts for the renewal of rolling stock assigned to the provision of transport services subject to PSOs worth 2.703 billion euros. 15
However, despite this possibility of extension provided for in Regulation 1370/2007, as mentioned above, the Spanish CNMC has been against doing so, warning of the benefits of introducing competition in the provision of services subject to PSOs. In this regard, it pointed out that the risk borne by RENFE Viajeros resulting from the purchase of rolling stock that would justify the extension of the contract is limited; as a new awardee would step into the contract, according to the Twenty-First clause of the CSP 2018–2027, that awardee would receive a compensation equivalent to the market value of those assets.
As a result, the regulatory authorities in Spain seem to choose to prioritise the positive effects of competitive tendering of the services subject to PSOs when the contract signed by RENFE Viajeros comes to an end in 2027. 16
Challenges for the future in PSO contracts
With a view to liberalising the market for railway passenger transport subject to PSOs, particularly as regards the awarding of contracts by competitive tender, a number of aspects must be taken into account from the perspective of preparing the different contracts. This section looks at some of the challenges triggered by the process to liberalise PSO contracts.
One previous step: the possibility of liberalising some PSOs that are not operating at a loss
The definition of PSOs is the responsibility of the Member States, which have ample discretion to provide, organise and commission services of general economic interest. Thus, Regulation 1370/2007 is based on the recognition of the power of Member States to intervene to ensure the provision of inland passenger transport services that cannot feasibly be operated commercially, that is, those that do not generate sufficient margins to be provided, in principle, by private operators.
But what happens if some of these services can feasibly be operated commercially? If so, should the PSOs be maintained and, consequently, should the legal regime applying to the different railway operators remain in place?
This is a highly complex issue with a number of different aspects. For example, the possible despublicatio of certain railway lines subject to PSOs because they may be subject to commercial operation may generate problems in small EU Member States such as Luxembourg, as it could affect local companies with a strong presence in the PSOs sector, as new companies not necessarily from that Member State could then enter, which would in turn trigger significant social and employment ramifications.
Similarly, there would be a shift from competition for the market to competition in the market, as is the case for passenger rail transport not subject to PSOs. In this regard, States, such as Spain, could be against this possibility to maintain the incumbent operators in this market sector, posing a barrier to the possible entry of new railway undertakings.
Possible dysfunctionalities between the provision of a new railway passenger transport service in competition with railway services subject to PSOs
Another area where barriers to entry for new operators may emerge is in the overlapping of sections of the railway network between liberalised commercial services and railway services subject to PSOs, which would require the competent authorities of the Member States assessing the financial impact that a new railway service could have on pre-existing contracts subject to PSOs.
Directive 2012/34/EU of the European Parliament and of the Council of 21 November 2012 establishing a single European railway area (RECAST Directive) empowered Member States to limit the right of access to railway infrastructure for passenger services between a given origin and a given destination, where one or more public service contracts cover the same or an alternative route and the exercise of that right would jeopardise the economic equilibrium of that contract or contracts.
In this regard, recital 3 of Commission Implementing Regulation (EU) 2018/1975 laying down the procedure and criteria for the application of the economic equilibrium test, pursuant to Art. 11 of Directive 2012/34/EU, (hereinafter Regulation 2018/1975) states that: ‘It is therefore necessary to balance the legitimate interests of operators performing a public service contract and competent authorities, on the one hand, with the overarching objectives of completing the single European railway area and reaping its wider social benefits, on the other hand. The economic equilibrium test should achieve a balance between those competing interests’.
The aim of this provision is to regulate the procedure and criteria to be applied by the competent authorities of the Member States to assess the impact of a new passenger transport service on existing contracts subject to PSO.
Regulation 2018/1795 defines the economic equilibrium test as follows: ‘means the assessment process described in Article 11(1) to (4) and Article 11a of Directive 2012/34/EU and further described in Article 10 and carried out by a regulatory body at the request of one of the entities referred to in Article 11(2) of Directive 2012/34/EU in order to determine whether the economic equilibrium of a public service contract would be compromised by the proposed new rail passenger service’
In addition, Regulation 2018/1795 states in its recital 17 that the analysis of the impact of a new passenger transport service on the economic equilibrium of a public service contract should be based ‘on an objective methodology adopted by the regulatory body having regard to the specificities of rail transport in the Member State concerned’.
This provision has been further developed in article 14, which specifies that the ‘methodology used by the regulatory body to perform the test shall be clear, transparent and non-discriminatory and shall be published on its website’.
Thus, the economic equilibrium test to be developed by the competent authorities must be based on a series of principles that takes into account the following factors: a) The existence of a new passenger transport service which coincides with a service subject to PSOs b) Analysis of requests for proof of economic equilibrium by new entrant rail operators c) The economic equilibrium test shall be based on the public service contract signed between the competent authorities and the railway undertakings providing the service, the business plans of the new operator, as well as the impact on costs and optimisation of the railway network. d) It has to be examined whether the provision of a new rail service is in direct competition with the services subject to PSOs. If it is determined that the two services are not substitutable, it should be concluded that they are not in competition with each other and the new passenger service should be determined to have no impact on the public service contract. If not, the impact of the new passenger service on the public service contract must be assessed. e) The competent authority shall establish whether the proposed new passenger service is likely to have a substantial negative impact on the public service contract, in particular on: (i) the profitability obtained by the railway undertaking operating the public service contract, by establishing the net financial impact of the new service and (ii) the net cost to the awarding competent authority of the public service contract.
To sum up, the national competent authorities must be very careful when they design the methodology for the economic equilibrium test so as not to create an artificial barrier to entry for new rail transport undertakings that could potentially be awarded public service contracts in future.
Equally, the manner in which the incumbent operator provides its services can in some cases generate particularly close relations between the services subject to PSOs and commercial services. Thus, current contracts in some Member States include the possibility of railway undertakings providing services under a public service contract with overlapping commercial services on certain sections. It is therefore possible to reserve seats on commercial trains as necessary to guarantee that the service under the PSOs is provided properly. Under this model of combined-service trains (called trenes sinergiados), seats on services subject to PSOs must be offered, in fare-related terms, as if the train had been used for those services exclusively.
Although it is true that combined-service trains make it possible to increase the use and occupation of seats on trains in sections where commercial services overlap with services subject to PSOs – thus reducing the cost of the service and the financial compensation received by the incumbent operator – it is also true that once railway passenger transport has been liberalised, that model could generate a competitive advantage for the operator if an exclusive and strategic use is made of the seats reserved for PSOs. Thus, in the hypothetical event that commercial trains have a low occupation, the railway operator could have an interest in increasing the proportion of seats reserved for PSO services, which would increase the profitability of the commercial service as a substantial part of the cost of the train would be covered by the competent authority; this would therefore distort competition.
Barriers to tendering for public service railway contracts
There are several barriers to entry that may emerge for new economic operators interested in entering the market for railway transport services subject to PSOs. From the perspective of methodology, two kinds of barriers to entry exist: on the one hand, those that are economic and, on the other hand, barriers that are strictly legal.
Economic barriers to entry
The tendering of rail services subject to PSOs is a long and complex process: the perimeter of the tender must be properly defined, the services to be contracted must be described to the interested parties, as must the relevant operational and demand data and the duration of the contract, all in line with the provisions of Article 5.3.ter of Regulation 1370/2007. 17
Rolling stock is another key issue in tenders of this kind, as rolling stock needs will determine whether or not it is viable for undertakings that are not currently present in the market to take part in the process. Therefore, Article 5 bis of Regulation 1370/2007 specifies that for the purpose of launching a competitive tendering procedure, the competent authority must assess whether it is necessary to adopt measures ensuring effective and non-discriminatory access to suitable rolling stock. This assessment must take into account the existence of rolling stock rental companies and will result in the issuance of a valuation report, which will be made public.
Rolling stock maintenance is also essential for the operation of these services. Workshops therefore become an essential asset and the terms and conditions for access thereto will determine which candidates will be able to participate in these processes. 18
Access to network capacity may also limit the entry of new operators. This aspect has been highlighted in Spain by the CNMC in its Resolution of 6 May 2020, which indicated that ‘the divergence in the periods of validity of the framework agreement and the contract for the provision of PSO services may restrict the opening of these services to competition’.
Finally, as the European experience has shown
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, contractual design is critical for the liberalisation of services subject to PSOs to yield the expected benefits, in particular in the following aspects: i) contract or lot size; ii) duration of the contract; iii) risk sharing, deciding between contracts that establish the gross or net cost; iv) quality commitments in the provision of services, their control by the competent authority and possible penalties; or v) the possibility for modification might increase parties' interest in participating in the process.
Legal barriers
As well as the economic barriers analysed above, there are other barriers to entry for future operators interested in providing railway passenger services subject to PSOs. These are a result of the legal framework established by the different Member States not only when they design the legal structure of future contracts, but also by how they interpret European legislation.
For example, a number of issues have emerged in some Member States – Spain included – when interpreting some legal concepts established by European railway legislation, such as the ‘operator of service facilities’. Commission Implementing Regulation (EU) 2017/2177 of 22 November 2017 on access to service facilities and rail-related services – the aim of which is to foster competition in the railway passenger transport sector, for which non-discriminatory access must be guaranteed to service facilities and the rail-related services provided at those facilities, which should in turn result in the ability to offer better services to users – provides an unclear definition of ‘operator of service facilities’, while establishing a series of burdens and obligations that an undertaking must observe. Given the potentially differing interpretations emerging due to the lack of clarity in the Regulation, some operators that provide maintenance service to rail undertakings are unable to know with the necessary certainty whether or not if they fit within the concept of ‘operator of service facilities’ and, thus, if they are subject to certain obligations; therefore, decisions have in some cases been adopted without knowing whether or not they are compliant with European laws.
That complex legal backdrop can generate discrimination among different rail undertakings that want access to maintenance facilities (which are normally owned by the rail undertaking that holds the contracts subject to PSOs), which could amount to a barrier to entry to new economic operators for public service contracts of this kind.
It is therefore necessary for European institutions to adopt mechanisms of soft law to offer an adequate interpretation of the different applicable European regulations that have a fundamental impact on the structure and award of future railway service contracts subject to PSOs.
The duration of contracts subject to PSOs
A key element for the future tendering of contracts subject to PSOs will be their duration. Contract duration is determined primarily by the necessity for the train operating undertaking to invest or not. The Member States might consider including investment in the rail contract, that is to say, it may ask the train operating undertaking that could be awarded with the public service contract to buy new rolling stock or to build maintenance facilities.
It should be pointed out that contracts with an excessively long duration – 15 or more years – fossilise the market and reduce the positive impact of the tender in the form of price reduction and technological innovation (Montero Pascual et al., 2019:249). However, such long periods may be necessary if railway undertakings are to bear the cost of rolling stock and if the risk generated by the termination of the contract before the depreciation of the rolling stock is not reduced in any way.
On the other hand, if excessively short duration periods are set (e.g. around 3 years), the reduced risk related to rolling stock must be taken into account for that period to be viable. In this regard, some of the proposals tabled to mitigate this negative effect could be: the creation of ROSCOs that assume ownership of the rolling stock, which is leased to the railway undertakings for the duration of the contract; ownership of the rolling stock by the Public Authorities; commitment by the Public Authorities to purchase the rolling stock at the end of the contract, etc.
Therefore, although these short-term contracts can stimulate the market, they can also have a detrimental impact on the provision of the service by not allowing the development of innovative and sustainable projects, since undertakings will not have time to develop them.
Thus, public service contracts with durations of 5 to 7 years may be the most suitable option, provided that the risk related to the investment in rolling stock can be reduced. 20
The need for multimodal coherence of railway services subject to PSOs
Mobility needs in the different Member States must be ensured by railway connections with other existing modes of transport, especially in the sectors affected by PSOs. In Spain, for example, transport services on certain bus lines sometimes overlap with routes on which rail transport services subject to PSOs are provided. Under Spanish law, regular bus transport is managed by means of concessions, whereby an operator provides the service with an exclusive right and sometimes receives compensation.
In Spain, there are currently around 80 concessions for regular bus lines – managed through the Ministry of Transport. In addition other lines are managed by the Autonomous Regions which, for the most part, have developed and/or implemented their own concession model.
According to the Ministry of Transport, by adding both networks – state and regional – ‘there is no population centre with more than fifty inhabitants that is not served by at least one intercity bus line’. 21 As pointed out above, bus connectivity entails that certain lines overlap with routes covered by the railway, including routes subject to PSOs. As such, there is multimodal competition on low-demand routes that require public funding to be provided.
This is why a multimodal approach should be taken when tendering for rail services subject to PSOs. In this respect, it will be necessary for the competent authorities of the Member States to examine in detail the various modes of transport that may overlap to match them to the demand of citizens and to ensure, on the one hand, the greatest possible connectivity and, on the other hand, the greatest possible efficiency in the public expenditure associated with transport, while ensuring adequate profitability for the economic operators providing those services.
It must be also be taken into account that it is quite common in some countries to include other transportation modes, as we have just seen (bus transportation) along rail transportation in single public service contracts. In this sense, as some authors have highlighted (P. Perennes 2020: 279) multimodal contracts can be easier to monitor for public transport authorities and can help them to optimise the offer for both types of transportation. However, the potential impact on competition is quite strong, as only the big players can offer both rail transport and road transport. Therefore, multimodal contracts have to be used very carefully.
Therefore, this raises two different – albeit connected – issues. One is that intermodality must be taken into account from the standpoint of guaranteeing the efficiency and effectiveness of the overall transport system in the Member States; another very different matter is that elements of intermodality are included in future public service contracts, which can lead to significant barriers to entry for new operators, with a resulting negative impact on free competition.
PSOs in international cross-border passenger transport
Directive 2012/34/EU, as amended by Directive 2016/2370, defines the concept of international passenger service": ‘international passenger service’ means a passenger service where the train crosses at least one border of a Member State and whose principal purpose is to carry passengers between stations located in different Member States; the train may be supplemented and/or split, and the different parts of the train may have different origins and destinations, provided that all wagons cross at least one border;
International rail transport between two or more Member States of the European Union is liberalised. Any railway undertaking that obtains the relevant licences (railway undertaking licence and safety certificates) may provide cross-border services between Member States, whether for the international transport of passengers or freight.
On the other hand, Article 1.2 of Regulation 1370/2007 states that this rule shall apply to the operation of public passenger transport services by rail not only nationally, but also internationally, as follows: ‘This Regulation shall apply to the national and international operation of public passenger transport services by rail and other track-based modes and by road, except for services which are operated mainly for their historical interest or their tourist value. Member States may apply this Regulation to public passenger transport by inland waterways and, without prejudice to Council Regulation (EEC) No 3577/92 of 7 December 1992 applying the principle of freedom to provide services to maritime transport within Member States (maritime cabotage) (14), national sea waters’.
In fact, following the amendment of Regulation 1370/2007 by EU Regulation 2016/2338, EU rules clarify that public service obligations may relate to services on a cross-border level, including those covering local and regional transport needs (art. 1.2): “Subject to agreement of the competent authorities of the Member States on whose territory the services are provided, public service obligations may concern public transport services at cross-border level, including those covering local and regional transport needs”.
The provision goes further and clarifies that public service obligations on cross-border services shall be imposed “subject to the approval of the competent authorities of the Member States in whose territory the services are provided”.
However, European Union legislation contains no further reference to the regime of cross-border public service obligations.
It thus seems that there is no possibility for European Union institutions to define their own public service obligations in the railway sector and to put them out to tender in order to contract their provision to a railway undertaking. Regulation 1370/2008 clearly states that this competence lies with the competent authorities of the Member States.
As a result, cooperation between the competent authorities in each of the Member States involved in an international public service obligation is indispensable. In a theoretical approach, it is possible to distinguish between two models of cooperation.
A first model, such as the one followed in France for the management of international PSOs, is characterised by the fact that it is based on a partnership agreement between the Member States, which defines the division of responsibilities, with each Member State then imposing PSO obligations on a national railway undertaking in parallel. 22 There are therefore two public service obligation contracts, one on each side of the border. The model is concluded by a private partnership agreement between the railway undertakings, in accordance with the conditions imposed by the Member States on each of the railway undertakings in the public service obligation contracts.
This model of inter-administrative cooperation between States may pose a number of issues, especially from the perspective of the possible breach of EU competition law, as the joint provision of a rail service by undertakings that are potentially competitors could be considered as a collusive agreement contrary to art. 101.1 TFEU. However, these agreements could be considered lawful under art. 101.3 TFEU if they seek to improve the production or marketing and distribution of services, although it must be possible to justify them on objective grounds.
Groups of economic operators between railway undertakings from different Member States for the provision of cross-border services have become common and have been accepted by the competition authorities. It should also be noted that, although agreements of that kind potentially reduce competition, they are nevertheless necessary for the provision of cross-border services and therefore lead to an improvement in production. This has been the case, for example, in the provision of cross-border services between France and Luxembourg.
A second model, which could be referred to as the ‘EU model’, would be characterised by the contracting of a single railway undertaking for the provision of the services covered by public service obligations. The Member States agree on the conditions of service provision (including compensation for the railway undertaking) and the procedure for awarding the contract by means of an agreement to that effect. There would thus be a single contract subject to PSOs.
Thus, no specific and definitive model for the provision of cross-border public passenger rail transport services is derived from the European regulation, with the Member States enjoying broad discretion when it comes to organising them. It would be advisable for the EU to consider the possibility of offering some regulatory or soft law guidelines that would provide more legal certainty to economic operators who, in the fast approaching near future, may show an interest in accessing the provision of such services.
Conclusions
In this article I have looked at several issues and challenges that will be encountered during the process of liberalising railway passenger transport subject to PSOs. Removing the possibility of directly awarding railway passenger transport contracts subject to PSOs from 25 December 2023 onwards will, without any shadow of a doubt, open up a new and highly complex scenario in a sector of huge social and economic significance for the EU.
A look at the legal framework applicable to railway passenger transport, particularly from the perspective of services subject to PSOs, primarily Regulation 1370/2007 and national regulations that define the PSOs, offers a complex and incomplete panorama with a view towards future competitive tendering in the Member States for public sector rail contracts; what is more, many are the legal gaps that new regulatory measures will have to fill.
As such, throughout this article I have tried to analyse the legal foundations for opening railway passenger transport subject to PSOs to new economic operators, which the competent authorities of the Member States will have to take into account when both defining those PSOs and designing the process for tendering those public service contracts. Furthermore, while I have looked at the current legal framework; I have also offered a number of lege ferenda solutions throughout the article.
Many are the issues that have therefore been analysed and raised connected to the future of contracts subject to PSOs, which will require considerable effort by the European institutions and national authorities of the Member States when designing and adopting actions aimed at furthering the process of liberalising railway passenger transport. In my opinion, it will be necessary to approve regulatory measures, potentially by means of instruments of soft law, to assist in the design of future public service contracts, and thus making it easier for new operators to enter the market. Equally, it will be necessary to approve instruments of collaboration among the Member States in order to structure international cross-border passenger transport by rail where contracts subject to PSOs may be affected.
Footnotes
Declaration of conflicting interests
The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.
Funding
The author(s) received no financial support for the research, authorship, and/or publication of this article.
