Public service obligation

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Two DHC Dash-8-100 aircraft of Widerøe of Norway at Trondheim Airport, Værnes. Widerøe makes a large portion of its revenue from PSO routes like these in Northern and Western Norway

In transportation law of the European Union, public service obligation or PSO is an arrangement in which a governing body or other authority offers an auction for subsidies, thereby permitting the winning company a monopoly to operate a specified service of public transport for a specified period of time for the given subsidy. This is done in cases where there is not enough revenue for routes to be profitable in a free market, but where there is a socially desirable advantage in this transport being available. The use of PSO can be applied to many mode of transport, including air, sea, road or rail. In many cases the introduction of PSO has been a way to privatize former government owned transport. The infrastructure is often separated from the operation, and may be owned by the governing body or by a third party. The authority may also maintain the ownership of the vehicles, such as ferries or rolling stock.

Traditionally, public transport has been operated through a company wholly owned by the state with monopoly, like a national railway company. Alternatively, private companies were granted privileges (with or without subsidies) granting them a monopoly. In later years many markets have been deregulated, especially in Europe, paying the lowest bidding operator to carry out the traffic at regular auctions.

Specification

The authority issuing the auction may be a ministry of transport, county, province, state, municipality or other regional or local authority, or it can be a transit authority or other ad hoc organization responsible for some state of transport in an area. To be the auctioning part the authority must have some vested interest in subsidizing the transport in addition to the authority to ban other interests from operating competing services on parts or all of the system.

The auctioneer will specify a number of terms of the service, such as frequency, size of vehicle, timing of service, the maximum permitted fare paid by some or all the available seats and/or other specifications related to service and quality. The auctioneer can specify either a net or gross contract. In the latter the operator bids for the full operating costs, and all revenue goes to the authority; with net contracts the operator will be granted all revenue, and will bid only for the necessary difference between fare revenue and that needed to make the desired profit. The use of gross contracts reduces the risk of the operator since they do not need to estimate the ridership and will normally give lower bids since there is a lower risk premium in each bid. This option also makes it easier to create free transfer between operators and modes.

Net contracts commonly used to give the operators an incentive to increase ridership, where there would be a high administrative costs with the authority administrating the fares, or where the auctioneer wants to reduce its own risk. Urban public transport with transit authorities is most commonly operated with gross contracts, while airlines and ferry routes are typically operated on net contracts.

Typical uses of PSO include regional airline services in districts of for instance in Northern Norway or Ireland, where the airlines serve marginally populated areas not profitable for the carriers without subsidies. Rail services can be unprofitable even on major routes, and government subsidies are sometimes offered through PSO on unprofitable routes, for instance this has been very popular in Germany. Most cities subsidize their public transport, and in places where the transport is provided by private companies, that may be awarded through PSO. Other common PSO services are ferries, such as the routes to Gotland in Sweden, or car ferries on the road network of Norway. Ferry routes serving outlying islands in Hong Kong are also subsidised since recently, as a result of rising oil price and therefore the costs of operations.

European Union

A Veolia train in the Netherlands. Veolia has expanded rapidly based on winning many PSO contracts for bus and rail services in Europe

In the European Union, route PSOs are governed by Regulation (EC) No 1008/2008. They must be offered for tender in the Official Journal of the European Union and be open to any transport operator registered in an EU member state. There are limitations in the number of passengers which can be carried where the route can remain eligible for PSO. The winning tenderer usually receives a monopoly on the route, but may have to conform to one or more conditions of service, such as the type and size of vehicle, the timing of services, the maximum fare paid for a portion or all of the seats offered, membership of a common reservation system, quality of service measured by a maximum percentage of cancelled services, etc.

Examples of air transport PSOs currently in operation in Europe are routes from Dublin to Kerry and Donegal, routes between the Greek Mainland and the Greek Islands, routes between the Italian mainland and Sardinia, routes between the French mainland and Corsica, certain domestic routes within Norway, Sweden and Finland, and routes to the Scottish Highlands and Islands.

International routes are usually not supported by PSO. This is because of a political principle that people should pay for international travel themselves, not through tax money. This is especially evident in Scandinavia where there is very little international air traffic between cities other than through the capitals, where connections are commercially profitable.

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