# C_2023222EN.01000101.xml

| 26.6.2023 | EN | Official Journal of the European Union | C 222/1 |
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26.6.2023

EN

Official Journal of the European Union

C 222/1

---

COMMISSION NOTICE

on interpretative guidelines concerning Regulation (EC) No 1370/2007 on public passenger transport services by rail and by road

(2023/C 222/01)

1.   INTRODUCTION

As expressed in its Communication on a Sustainable and Smart Mobility Strategy (1), decisive action is needed to shift more activity towards more sustainable transport modes. Public transport services are crucial to deliver the European Green Deal goals of sustainable, smart and inclusive mobility. To this end, the availability of resource-efficient and environmentally friendly public transport services is key. In the land sector, these services are regulated by Regulation (EC) No 1370/2007 of the European Parliament and of the Council of 23 October 2007 on public passenger transport services by rail and by road and repealing Council Regulations (EEC) Nos 1191/69 and 1107/70 (2) (‘Regulation (EC) No 1370/2007’ or (the ‘Regulation’).

In accordance with Protocol No 26 on services of general interest, national, regional and local authorities play an essential role and enjoy a wide discretion in providing, commissioning and organising services of general economic interest. Public passenger transport services in the general economic interest cannot always be operated on a commercial basis but may require public financial support. It is for Member States to identify the mobility needs of their citizens and what support may be required, if needed.

At the same time, financial support should be subject to conditions that ensure an undistorted functioning of the internal market. These conditions are spelled out in Regulation (EC) No 1370/2007.

Regulation (EC) No 1370/2007 entered into force on 3 December 2009. It was amended by Regulation (EU) 2016/2338 of the European Parliament and of the Council of 14 December 2016 (3), in the framework of the Fourth Railway Package (4).

Regulation (EC) No 1370/2007 lays down the conditions under which public transport services by rail and other track-based modes of transport and by road can be organised and financed: it applies, in particular, to bus, tram, metro and rail. It can also apply to inland waterways and national seawaters if Member States so decide.

The conditions concern, inter alia, the definition of public service obligations, the scope of public service contracts, the modalities for awarding such contracts and the determination of the compensation paid to public transport operators. If the provisions of Regulation (EC) No 1370/2007 are complied with, the compensation is deemed compatible with the internal market and exempt from the requirement of prior notification to the Commission under Article 108(3) of the Treaty on the Functioning of the European Union (‘TFEU’ or the ‘Treaty’).

In 2014, the Commission adopted a Communication on Interpretative Guidelines concerning Regulation (EC) No 1370/2007 (5) (the ‘2014 Interpretative Guidelines’), designed to communicate to stakeholders its understanding of a number of provisions of the Regulation, also inspired by best practices in Member States.

In the meantime, there has been an evolution of the legislative framework: in 2016, Regulation (EC) No 1370/2007 was substantively amended, notably to extend the principle of competitive tendering of public services to the railway sector. The amendment included the introduction of a transition period during which the unconditional direct award of public service contracts for rail passenger transport remains possible until 24 December 2023 to allow the sector to prepare for market opening.

The Court of Justice of the European Union (the ‘Union Courts’) also interpreted certain provisions of Regulation (EC) No 1370/2007 and rules applicable to the services of general economic interest. The application of these rules is notably affected by the fact that, since 1 January 2019, in application of the Fourth Railway Package, railway undertakings are granted the right of access to railway infrastructure, which enables them under Union law to develop commercial services.

It is necessary to revise the 2014 Interpretative Guidelines in the light of these developments, and in particular to assist competent authorities to prepare for the end of the abovementioned transition period on 24 December 2023. These revised guidelines should also cater for the orderly launch of new initiatives, such as the possibility of organising and supporting international public services such as, cross-border rail passenger transport as an attractive travel option on long distances.

Before adopting this Commission Notice, the Commission has consulted Member States and stakeholders representing interested parties, such as European associations of the public transport sector, including transport staff and passenger organisations.

This Commission Notice, which only covers selected provisions of Regulation (EC) No 1370/2007, does not create any new rules. It provides clarifications and guidance to Member States as to how the Commission interprets the provisions of the Regulation, having regard in particular to the relevant case-law of the Union Courts. The interpretation of the Union law is ultimately the prerogative of the Union Courts.

2.   THE COMMISSION’S UNDERSTANDING OF REGULATION (EC) No 1370/2007

2.1.   Scope of Regulation (EC) No 1370/2007

This Section provides interpretative guidance on the relationship between Regulation (EC) No 1370/2007 and the following directives: Directive 2014/24/EU of the European Parliament and of the Council of 26 February 2014 on public procurement and repealing Directive 2004/18/EC (6) (‘Directive 2014/24/EU’); Directive 2014/25/EU of the European Parliament and of the Council of 26 February 2014 on procurement by entities operating in the water, energy, transport and postal services sectors and repealing Directive 2004/17/EC (7) (‘Directive 2014/25/EU’); and Directive 2014/23/EU of the European Parliament and of the Council of 26 February 2014 on the award of concession contracts (8) (‘Directive 2014/23/EU’). This Section also explains how to apply Regulation (EC) No 1370/2007 to inland waterways and national seawaters. Furthermore, it also provides guidance with respect to international public transport services, public service obligations for freight and multi-modal transport services as well as special public transport modes.

2.1.1.   
  Article 5(1) and Article 1(3). Relationship between Regulation (EC) No 1370/2007 and the public procurement and concession directives

Regulation (EC) No 1370/2007 governs public service contracts as defined in Article 2 point (i) thereof, in the field of public passenger transport by rail and other track-based modes of transport and by road. However, depending on their characteristics, public service contracts may also fall within the scope of the public procurement directives (Directive 2014/24/EU and Directive 2014/25/EU) (9). Concessions for public passenger transport services within the meaning of Regulation (EC) No 1370/2007 are excluded from the scope of Directive 2014/23/EU (10).

The distinction between service contracts and service concessions is important to determine which legal instrument applies to the award.

Article 2(1), points (1), (2) and (5) of Directive 2014/25/EU defines ‘service contracts’ as contracts for pecuniary interest concluded in writing between one or more contracting entities, pursuing the activities referred to in Articles 8 to 14 of the Directive, and one or more economic operators and having as their object the provision of services. When these contracts involve ‘contracting authorities’, within the meaning of Article 2(1) point (1) of Directive 2014/24/EU, not exercising the activities referred to in Articles 8 to 14 of Directive 2014/25/EU, they are considered as ‘public service contracts’ in accordance with Article 2(1) points (6) and (9) of Directive 2014/24/EU.

Article 5(1)(b) of Directive 2014/23/EU on the award of concession contracts defines ‘service concessions’ as contracts ‘for pecuniary interest concluded in writing by means of which one or more contracting authorities or contracting entities entrust the provision and the management of services other than the execution of works referred to in point (a) to one or more economic operators, the consideration of which consists either solely in the right to exploit the services that are the subject of the contract or in that right together with payment’.

Article 5(1) specifies further that ‘the award of a works or services concession shall involve the transfer to the concessionaire of an operating risk in exploiting those works or services encompassing demand or supply risk or both. The concessionaire shall be deemed to assume operating risk where, under normal operating conditions, it is not guaranteed to recoup the investments made or the costs incurred in operating the works or the services, which are the subject matter of the concession. The part of the risk transferred to the concessionaire shall involve real exposure to the vagaries of the market, such that any potential estimated loss incurred by the concessionaire shall not be merely nominal or negligible’.

This distinction between public service contracts and service concessions is important because, according to Article 10(3) of Directive 2014/23/EU, this Directive shall not apply to concessions for public passenger transport services within the meaning of Regulation (EC) No 1370/2007. Therefore, the award of service concessions for these public passenger transport services is solely governed by Regulation (EC) No 1370/2007, regardless of the transport mode.

For service contracts, however, the transport mode matters. Article 5(1) of Regulation (EC) No 1370/2007 specifies that the award of public service contracts for transport services by bus or tram is governed by Directive 2004/17/EC (repealed and replaced by Directive 2014/25/EU) and 2004/18/EC (repealed and replaced by Directive 2014/24/EU), except where such contracts take the form of service concessions. The award of public service contracts for bus or tram services is thus solely governed by the procurement directives (Directives 2014/24/EU and 2014/25/EU).

Conversely, the award of public service contracts for public passenger transport services by railway and metro (including those that take the form of concessions) is governed solely by Regulation (EC) No 1370/2007 (and excluded from the scope of Directive 2014/24/EU, according to its recital 27 and Article 10(i), from the scope of Directive 2014/25/EU, according to its recital 35 and Article 21(g) and from the scope of Directive 2014/23/EU according to its Article 10(3)). The rules applicable to the award of multimodal contracts are discussed in Section 2.1.5.

For works concessions, Article 1(3) of Regulation (EC) No 1370/2007 states that ‘this Regulation shall not apply to public works concessions within the meaning of Article 1(3)(a) of Directive 2004/17/EC or Article 1(3) of Directive 2004/18/EC’. After the entry into force of Directive 2014/23/EU on the award of concession contracts, works concessions for public passenger transport services by rail and other track-based modes and by road are governed solely by this Directive. The term ‘works concession’ is now defined in Article 5(1)(a) of Directive 2014/23/EU.

Table

Summary of the applicable legal basis for contract awards by type of contractual arrangement and by transport mode

| Transport mode | Public service contracts as defined in Directives 2014/24/EU and 2014/25/EU | Service concessions as defined in Directive 2014/23/EU |
| --- | --- | --- |
| Bus and tram | Directives 2014/24/EU and 2014/25/EU | Regulation (EC) No 1370/2007 |
| Railway and metro | Regulation (EC) No 1370/2007 | Regulation (EC) No 1370/2007 |

Transport mode

Public service contracts as defined in Directives 2014/24/EU and 2014/25/EU

Service concessions as defined in Directive 2014/23/EU

Bus and tram

Directives 2014/24/EU and 2014/25/EU

Regulation (EC) No 1370/2007

Railway and metro

Regulation (EC) No 1370/2007

Regulation (EC) No 1370/2007

It should be clarified that all the provisions (and not solely those relating to the award procedures) of the public procurement directives remain applicable to public services contracts for transport by bus and tram. This applies, for example, to their provisions on the modification of contracts during their terms (see Section 2.5.5).

2.1.2.   
  Article 1(2). National decisions to apply Regulation (EC) No 1370/2007 to inland waterways and national seawaters

Article 1(2) states that Member States may apply Regulation (EC) No 1370/2007 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) (11), national sea waters.

To ensure legal certainty, a Member State’s decision to apply Regulation (EC) No 1370/2007 to public passenger transport by inland waterways or by national seawaters should be adopted in a transparent manner, through a legally binding act. Applying Regulation (EC) No 1370/2007 to inland waterway or national seawater passenger transport services may be especially useful where those services are integrated into a wider public passenger transport network.

In the absence of a decision to apply Regulation (EC) No 1370/2007 to inland waterway passenger transport services, the public financing of these services is governed directly by Article 93 TFEU. In its Communication on the interpretation of Council Regulation (EEC) No 3577/92 (12), the Commission provides guidance on the application of Regulation (EC) No 1370/2007 to maritime cabotage services.

2.1.3.   
  Article 1(2). Application of Regulation (EC) No 1370/2007 to international public transport services

Article 1(2) specifies that Regulation (EC) No 1370/2007 applies also to the international operation of public passenger transport services, and that subject to agreement of the competent authorities of the Member States on whose territory the services are provided, public service obligations may concern services at cross-border level, including those covering local and regional transport needs.

While Article 1(2) specifically refers to local and regional transport needs, the notion of international public service covers also long-distance public passenger services. The pre-requisite for the establishment of an international public service is the agreement of the competent authorities of the Member States on whose territory the services are provided. Such competent authorities remain free to decide whether to recognise the public service status of the proposed service on the territory under their jurisdiction. The agreement under Article 1(2) may take different forms. The agreement required for the establishment of the international public service cannot be limited to a general provision ensuring access to the transport infrastructure, as the latter is already guaranteed by Directive 2012/34/EU of the European Parliament and of the Council of 21 November 2012 establishing a single European railway area (13). If an international service crosses a Member State exclusively in transit (i.e. without picking up or letting down passengers) the agreement of the transit Member State is not required, as it can be considered that no services are provided on its territory.

However, competent authorities enjoy large discretion as regards the content of the agreement. Cross-border cooperation can be implemented in different manners such as, for instance, by constituting a consortium of involved authorities based on contractual arrangements between them (e.g. European Grouping of Territorial Cooperation or European economic interest grouping).

Provided that all the competent authorities on whose territories the international public transport service is provided so agree, nothing prevents the public service obligations on the entire service to be specified, nor the related compensation to be granted, by only one or some of the competent authorities concerned.

If a competent authority does not give its agreement to the proposed international public service, the latter cannot be provided as a public service on the territory under that Member State’s jurisdiction. In such cases, Regulation No (EC) 1370/2007 does not prohibit the establishment of hybrid services, where part of a cross-border service is provided on a commercial basis, and part as a public service. However, it is for Member States to ensure that such services do not distort competition and, in particular, that there is no cross-subsidization between the compensated and commercial legs of the journey. For example, they may request, subject to the protection of sensitive commercial data, full and transparent information from operators about the costs and revenues of each leg, demonstrating the absence of cross-subsidies between the commercial leg and the compensated leg of the journey. They may also require that the operator receiving compensation chooses its commercial partner on the basis of a fair and transparent selection procedure, rather than on the basis of historic relations.

2.1.4.   
  Public service obligations on freight transport services

Regulation (EC) No 1370/2007 does not apply to freight transport services. Freight transport services can only be qualified as services of general economic interest when the Member State concerned establishes that there is a genuine need for such services that is not, or not sufficiently, met by the market (see Section 2.2.3). If Member States wish to establish support measures for rail freight transport services which do not fulfil the conditions defined in the Altmark judgement (14) and constitute State aid, they must notify those measures to the Commission pursuant to Article 108(3) TFEU.

2.1.5.   
  Article 1(2). Multimodal public service obligations

According to its Article 1(2), the Regulation applies to public passenger transport services by rail and other track-based modes as well as by road. If so decided by Member States, it can also apply to public passenger transport by inland waterways and national sea waters (see Section 2.1.2). Hence competent authorities may decide to grant public service contracts with public service obligations covering one or more of the transport modes under the Regulation. As regards the duration of multimodal contracts, Article 4(3) provides that it shall be limited to 15 years if transport by rail or other track-based contract represents more than 50 % of the value of the services in question. The award of service contracts that cover both, public transport services by bus or tram as well as by metro or rail remains subject to both the requirements of the public procurement directives (Directive 2014/24/EU or 2014/25/EU) and of Regulation (EC) No 1370/2007.

According to recital 17, competent authorities are free to establish social and qualitative criteria for public service obligations, including for environmental protection. Competent authorities can specify public service obligations for several modes with a view to promoting environmental sustainability of multimodal public transport.

2.1.6.   
  Article 1(2). Special public transport modes

To improve the offer of public passenger transport services, in particular at the level of the first/last mile of passengers’ travel activities, competent authorities may complement the offer of scheduled, fixed route based public transport services by on-demand public transport services. Such on-demand services, typically by road vehicles, enable passengers to book trips using electronic or other communication for the collection and drop off of passengers, between stops designated by the on-demand operator or scheduled public transport stops. If on-demand public transport services are the object of an exclusive right and/or compensation in return for the discharge of public service obligations, in particular as concerns the compulsory availability of the service, and fulfil the requirements of Art 2(a) of the Regulation, i.e. they are of general economic interest and provided to the public on a non-discriminatory and continuous basis, the Commission considers that they also fall within the remit of Article 1(2) of the Regulation.

Some competent authorities include in their public transport offer services provided using cable-propelled vehicles (e.g. cable cars, funiculars). The Commission considers that such services fall within the remit of Article 1(2) of the Regulation as long as they are provided by vehicles that have constant contact with either the road or tracks.

2.2.   Definition of public service obligations and general rules/contents of public service contracts

This chapter provides interpretative guidance on key characteristics of general rules and on how competent authorities define the nature and extent of public service obligations and of exclusive rights in the context of Regulation (EC) No 1370/2007. Furthermore, it addresses the conditions under which extensions of the duration of public service contracts can be granted, as well as the conditions for subcontracting, including in the case of internal operators.

2.2.1.   
  Article 2 point (i). Constitutive features of a public service contract

To take account of the different legal regimes and traditions in the Member States, the definition of a public service contract provided by Regulation (EC) No 1370/2007 is very broad and includes various types of legally binding acts, which do not always take the form of a contract under national law.

According to Article 2 point (i), a public service contract consists of ‘one or more legally binding acts confirming the agreement between a competent authority and a public service operator to entrust to that public service operator the management and operation of public passenger transport services subject to public service obligations’. The contract may also consist of a decision adopted by a competent authority taking the form of an individual legislative or regulatory act or containing conditions under which the competent authority itself provides the services or entrusts them to an internal operator. A combination of a legal act assigning the operation of services to an operator with an administrative act setting out detailed service requirements and a method for calculating the compensation can also constitute a public service contract. The notion of ‘public service contract’ as defined by Regulation (EC) No 1370/2007 also covers public service concessions.

2.2.2.   
  Article 2 point (l) and Article 3(2) and (3). General rules

General rules are defined in Article 2 point (l) as measures that apply ‘without discrimination to all public passenger transport services of the same type in a given geographical area for which a competent authority is responsible’. General rules are therefore measures that apply to all operators of one or several types of public transport services in a non-discriminatory manner. The measure may be restricted to the geographical area for which a competent authority is responsible but does not necessarily need to cover the entire geographical area.

A competent authority may decide to use general rules to establish social or qualitative standards in accordance with recital 17 of Regulation (EC) No 1370/2007.

Member States and/or competent authorities may organise public transport through general rules such as laws, decrees or regulatory measures. Article 3(2) of Regulation (EC) No 1370/2007 covers only general rules which take the form of compensated maximum tariffs for all passengers or for certain categories of passengers. For these general rules, there is no obligation to conclude a public service contract.

Article 3(3) allows the Member States to exclude from the scope of Regulation (EC) No 1370/2007 general rules on financial compensation for public service obligations which establish maximum tariffs for the transport of pupils, students, apprentices and persons with reduced mobility. If a Member State decides to do so, the national authorities must assess whether compensation granted under these general rules constitutes State aid. In the affirmative, the rules must be notified to the Commission in accordance with Article 108 TFEU.

Member States are not precluded from establishing other general rules that include public service obligations. Where they involve compensation, there is an obligation to conclude a public service contract, pursuant to Article 3(1) of Regulation (EC) No 1370/2007. Such contracts should be available to all operators, including new entrants.

2.2.3.   
  Article 2 point (e) and Article 2a. Definition of the nature and extent of public service obligations and of the scope of public service contracts

—   General principles and definition of public service obligations

Article 14 TFEU and Protocol No 26 on services of general interest annexed to the TFEU lay out the general principles of how Member States define and provide services of general economic interest (SGEI). As already mentioned, according to Protocol No 26, national, regional and local authorities play an essential role and have wide discretion in providing, commissioning and organising SGEIs tailored as closely as possible to the needs of the users. The specification of a public service obligation may only be called into question by the Commission in the event of a manifest error (15). However, the Member State’s power to define a SGEI is not unlimited and may not be exercised arbitrarily for the sole purpose of allowing a particular sector to circumvent the application of the competition rules (16).

Regulation (EC) No 1370/2007 lays down the legal framework within which Member States can provide, commission and organise SGEIs in the field of public passenger transport by rail and by road. Article 1 of Regulation (EC) No 1370/2007 states that its purpose ‘is to define how, in accordance with the rules of Union 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’.

As mentioned in Article 2 point (e) of Regulation (EC) No 1370/2007, a public service obligation is a requirement 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 (17).

Public service obligations usually set requirements on the operator as regards, for instance, the frequency of services, service quality, tariff obligations and service provision in particular at smaller intermediate stations or at destinations that may not be commercially attractive, and the provision of early morning and late evening services. Other requirements are possible.

As stated in Article 2a of Regulation (EC) No 1370/2007, it is for the competent authorities to lay down specifications for public service obligations in accordance with Article 2(e).

—   Consistency with the objectives of Member States’ public transport policy

When applying Article 2a(1) of Regulation (EC) No 1370/2007, the competent authority must ensure that the public service specifications are consistent with the policy objectives stated in public transport policy documents in the Member States. Member States have a wide margin of manoeuvre in determining the content and format of such documents and the procedures for consulting relevant stakeholders. Such documents should define the objectives of public transport policy, such as for instance territorial connectivity, including cross-border connections, and the development of sustainable transport and identify the means to attain them across the different transport modes. As stated in recital 10 of Regulation (EU) 2016/2338, stakeholders to be consulted may include transport operators actually or potentially present in the geographical area concerned, infrastructure managers and representative passenger organisations, employee organisations and environmental organisations.

—   Existence of a real need for public service obligations

Article 2 point (e) of Regulation (EC) No 1370/2007 quoted above should be read in accordance with the jurisprudence of the Union Courts (18).

It derives from this jurisprudence, that before laying down specifications for public service obligations, the competent authority should assess whether there is a genuine need for the planned public transport services.

In accordance with this case-law, in order to assess whether this genuine need exists, the competent authorities should:

| 1. | assess whether there is a demand from users; |
| --- | --- |

1.

assess whether there is a demand from users;

| 2. | assess whether this demand cannot be addressed, even partly, by market operators in the absence of public service obligations; and |
| --- | --- |

2.

assess whether this demand cannot be addressed, even partly, by market operators in the absence of public service obligations; and

| 3. | give priority to the approach that is least restrictive for the fundamental freedoms and least harmful for the proper functioning of the internal market to meet the need thus identified. |
| --- | --- |

3.

give priority to the approach that is least restrictive for the fundamental freedoms and least harmful for the proper functioning of the internal market to meet the need thus identified.

According to the Union Courts, ‘the absence of evidence, provided by the Member State, that [the scope of the public service obligation is necessary and proportionate to a real public service need] may constitute a manifest error of assessment which the Commission must take into consideration’ (19).

—   Ex ante assessment of the demand for public transport services

In line with Article 1 of Protocol No 26, Member States have a wide discretion in providing, commissioning and organising public services as closely as possible to the needs of the users. Public transport services should be organised in the interest of the users.

When assessing the demand for transport, competent authorities may consider not only existing and prospective demand from users, but also expected demand which can reasonably arise from pursuing policy objectives such as the promotion of sustainable transport, regional connectivity, public health or social cohesion. For example, in view of the objectives of the European Green Deal, the requirement to assess demand ex-ante is not incompatible with the possibility for competent authorities to expand the offer for public passenger transport for rail or road and to trigger modal shift, in particular from individual cars, to greener services, including at international level in cooperation with other Member States. This objective can for example be reflected in the public transport policy documents referred to in Article 2a(1) of the Regulation.

The ex-ante assessment of the demand for a public transport service can be carried out through different methods, such as for example the use of historical data, representative polls or public consultation of the users to identify their expectations from the public services.

—   Analysis of the market offer

In line with Articles 1(1) and Article 2 point (e) of Regulation (EC) No 1370/2007, there cannot be a genuine public service need if the user demand is already capable of being met by operators in the absence of an obligation laid down by the public authorities to that end (20).

The analysis of market offer is only required where open access rights for the type of services covered by the public service contract have been introduced by Union or national law.

The assessment of the market offer should, as a matter of principle, include the consultation of operators on their interest to offer the relevant services through open access services and assess its results. Market operators may, for example, be consulted on the nature, volume and frequency of services they already provide or plan to provide in the geographical area concerned or on the level of tariffs they apply or intend to apply.

When commercial services are provided or expected or announced by a market operator to be launched within a reasonably short deadline (for example in rail, where the operator has informed the regulatory body and the infrastructure manager of its intention to launch the service pursuant to Article 38(4) of Directive 2012/34/EU), competent authorities should take them into account when specifying the scope of public service obligations unless there are objective justifications for not doing so.

The assessment of the market offer may, but does not have to, take into consideration the existence of comparable transport services provided by other modes of transport. In this assessment of the comparability of transport modes, the competent authorities may take into account the specificities of each mode of transport. In the case of rail transport, these specificities include the issues of investment burden and infrastructure costs (21). They may also include its environmental benefits compared to other modes.

—   Selection of the least harmful approach to the functioning of the internal market

When considering whether the public service obligations laid down in a public service contract are the least restrictive for the fundamental freedoms and least harmful to the proper functioning of the internal market, the competent authority may consider alternative measures in line with Union law. For example, if its objective is to guarantee affordable transport services, the competent authority may consider imposing general rules on maximum tariffs instead of awarding a public service contract to a single operator. This analysis is only required where open access rights for the type of services covered by the public service contract have been introduced by Union or national law.

—   Possibility to group cost-covering and non-cost-covering services in the public service contract

Article 2a(1) of Regulation (EC) No 1370/2007 provides that competent authorities may group cost-covering and non-covering services. This text must be read jointly with the general definition of public service obligation set out in point (e) of Article 2 of Regulation (EC) No 1370/2007, according to which services under public service obligation are services that an operator, if it were considering its own commercial interests, would not assume or would not assume to the same extent. Accordingly, competent authorities can group cost covering and non-cost covering services only in duly justified cases.

Recital 8 of Regulation (EU) 2016/2338 which motivates this provision, provides that ‘specifications of public service obligations in public passenger transport should, where possible, generate positive network effects’. Accordingly, the Commission considers that the decision to include cost-covering services in the scope of the public service obligations should also reflect the objective of ensuring a coherent transport system, notably at a geographical level, and of reaping the benefits of positive network effects, rather than only limiting the amount of the compensation.

When specifying public service obligations and defining their geographical scope, the competent authorities are bound by the principle of proportionality, in accordance with Union law, as recalled in Article 2a(1) of Regulation (EC) No 1370/2007. The grouping of cost-covering and non-covering services must be necessary and proportionate.

In conclusion to Section 2.2.3, competent authorities should pay particular attention to adhere to the conditions set out in this Section so as not to expose themselves to the risk of a manifest error in the definition of the scope of the public service obligation and possible recovery of the compensation under State aid rules.

2.2.4.   
  Article 2 point (f), Article 3(1) and Article 4(1). Definition of the nature and extent of exclusive rights to ensure compliance with Union law

Under Article 3(1), subject to the limited exceptions of Article 3(2), a public service contract must be concluded if a competent authority decides to grant an operator an exclusive right and/or compensation in return for the discharge of public service obligations. An exclusive right is defined in Article 2 point (f) as ‘a right entitling a public service operator to operate certain public passenger transport services on a particular route or network or in a particular area, to the exclusion of any other such operator’. Under Article 4(1), the public service contract must specify the conditions for exercising the exclusive right, in particular the type of transport service it refers to, its geographical scope and the duration of the exclusive right. The wording of the definition set out in Article 2 point (f) limits the scope of the exclusive rights to particular public transport services and to particular routes, networks or particular areas.

The evolution of the single market, and in particular the right for railway undertakings to access infrastructure to provide open-access services on the Member States’ domestic markets, introduced by Article 10 of Directive 2012/34/EU, has implications for the notion of exclusive rights granted as a form of compensation for the discharge of public service obligations.

The interplay between exclusive rights and access rights is explained in Article 6 of Commission Implementing Regulation (EU) 2018/1795 (22) on the economic equilibrium test: while Member States may grant exclusive rights, they may not limit the right of access of other operators to the railway infrastructure concerned for the provision of rail passenger services, unless such services would compromise the economic equilibrium of the public service contract, as laid down in Articles 11 and 11a of Directive 2012/34/EU.

With the exception of public service contracts falling within the scope of Article 11(5) of Directive 2012/34/EU, for which access can be limited unconditionally, in all other cases the necessary protection of public service contracts granting exclusive rights from revenue abstraction resulting from open-access services is ensured exclusively via the economic equilibrium test, pursuant to Articles 11 and 11a of Directive 2012/34/EU. As specified in Article 6 of Commission Implementing Regulation (EU) 2018/1795 on the economic equilibrium test, in carrying out the test, the regulatory body must give due consideration to the monetary value of such exclusive rights.

Member States may grant certain rights that may appear non-exclusive but de facto prevent other undertakings from participating in the market through legal rules or administrative practices. For example, administrative arrangements granting authorisation to operate public transport services subject to criteria, such as a desirable volume and quality of services, could have the practical effect of limiting the number of operators on the market. Such de facto exclusive rights must also comply with Regulation (EC) No 1370/2007.

2.2.5.   
  Article 4 and Article 8. Duration of public service contracts and conditions under which a 50 % extension up to 50 % of the duration of the public service contract can be granted

Article 4 and Article 8 lay down provisions on the maximum duration of public service contracts and time limits for their award and expiry.

The ‘duration of the contract’ must be determined by reference to the start of transport operations. This interpretation is also corroborated by the fact that key provisions of Regulation (EC) No 1370/2007 start to apply from that date such as, for instance, those on the obligation of competent authorities to compensate public service obligations. It is the Commission’s understanding that in several Member States the ‘duration of the contract’ is contractually established by reference to the start of transport operations.

The performance of a public service contract may be preceded by a ‘mobilisation phase’, during which the public service operator prepares for the start of operations. The time required to mobilise resources can vary widely depending on the differences in the public service obligations under the old and new contract, ranging from a few weeks for direct awards not requiring significant preparation, to three or even four years for public transport operators that must invest heavily, e.g. by procuring new rolling stock, to provide the required services.

However, the mobilisation period between the moment when the contractual obligations come into being (which typically coincides with the signature of the contract) and the start of transport operations is not included in the duration of the contract and should always be commensurate to the operator’s demonstrable needs to prepare for operations and consistent with past practice in the Member State concerned. The timing of the award in relation to the start of operations should not result in circumvention of the provisions of Regulation (EC) No 1370/2007 on the phasing-out of unconditional direct awards, enshrined in Article 8(2)(iii). This may be the case where a public service contract is directly re-awarded to an incumbent operator in close proximity of the cut-off date of 25 December 2023 concerning direct awards and publicity requirements, while operations under the new contract are scheduled to start significantly after that date in the absence of an objective justification for the duration of the mobilisation period.

Advanced payments on the compensation are possible during a mobilisation period, provided that State aid rules are also respected.

Article 4(4) allows for an extension of the duration of a public service contract by a maximum of 50 %, if necessary and having regard to the conditions of asset depreciation. Such an extension can be granted if the public service operator provides assets, such as rolling stock, maintenance facilities or infrastructure for which the depreciation period is exceptionally long, that are significant in relation to the value of the overall assets needed to carry out the passenger transport services covered by the public service contract and are predominantly linked to the passenger transport services covered by the contract.

Recital 15 further explains that ‘it is necessary to make provision for extending public service contracts by a maximum of half their initial duration where the public service operator must invest in assets for which the depreciation period is exceptional and, because of their special characteristics and constraints, in the case of the outermost regions’ specified in Article 349 TFEU.

Since it is an exception to the general rule on the duration of public service contacts, the possibility of extending their duration by up to 50 % should be applied restrictively. On a case-by-case basis, the competent authority must assess whether an extension is necessary to enable the operator to amortise its assets at a typical or legally prescribed depreciation rate and whether the additional duration is proportionate to this objective. When carrying out this assessment, the competent authority takes into account only the share of assets financed by the operator itself, and not the share financed by public funds.

In principle, the competent authority will decide to extend the contract’s duration before the award of a new contract so that the duration of the contract is clear from the date of its award. An extension of the duration while the contract is running is only possible subject to certain conditions. The intended investments in new rolling stock must be objectively justified, for instance, due to technical reasons that arose at a later stage. It should be demonstrated that without the extension, the residual duration of the contract should not allow for a meaningful amortisation of the investment. The possibility and conditions of such an extension should be clearly indicated in the tender documents and in the contract. In addition, such an extension may affect the level of compensation, which should be adjusted as a result.

In application of Article 8(2), the duration of contracts awarded in accordance with Article 5(6) between 3 December 2019 and 24 December 2023 cannot exceed ten years. This is a specific and absolute limit, aimed at preserving the effects of the cut-off date of 24 December 2023 and prevent that contracts awarded in accordance with Articles 5(6) and 7(3) continue to apply for a long time. Therefore, the duration of such contracts cannot be extended in application of Article 4(4).

2.2.6.   
  Article 4(7) and Article 5(2)(e). Conditions of subcontracting

Under Article 4(7) of Regulation (EC) No 1370/2007, a public service contract must stipulate whether, and if so to what extent, subcontracting is possible. If subcontracting takes place, the public transport operator is always required to perform ‘a major part’ of the public passenger transport services itself.

Public service contracts directly awarded to an internal operator may also be subcontracted, albeit under stricter conditions. Pursuant to Article 5(2)(e), the internal operator must provide ‘the major part’ of the public passenger transport services itself. With this provision, the legislator intended to preclude the internal operator from subcontracting to another entity more than a modest share of the transport services, as in such a situation the concept of ‘internal operator’ under the control of the competent authority would be devoid of meaning.

Without prejudice to a case-by-case analysis, it would seem reasonable to consider that subcontracting more than one third of the public transport services would require a strong justification, in particular in view of the objectives of Article 5(2)(e), such as the attempt to avoid the establishment of false internal operators. Typically, the fraction of transport services to be subcontracted is measured in value terms or in timetable kilometres (23).

As regards public service contracts awarded under the second sentence of Article 5(1) of Regulation (EC) No 1370/2007, i.e. in accordance with the procedures provided for under the public procurement directives, the rules on subcontracting laid down in Article 4(7) of Regulation (EC) No 1370/2007 take precedence over those laid down in those directives (24).

In any case, subcontracting must be carried out respecting the relevant public procurement legislation.

Finally, Regulation (EC) No 1370/2007 does not prevent the public service contract from stipulating a minimum percentage of transport services in value terms to be subcontracted by the operator under a public service contract. The contract can stipulate this, provided the provisions of the Regulation are respected, especially those on the maximum share of a public service contract that may be subcontracted.

2.3.   Article 4(4a), (4b), (5) and (6). Staff protection in the case of a change of operator

Recital 12 of Regulation (EU) 2016/2338 lays out that in establishing the single European railway area Member States should ensure an adequate level of social protection for the staff of public service operators. Article 4(4a) and (4b) recalls the relevant rules and obligations applicable to public transport operations.

In compliance with Article 4(5) of Regulation (EC) No 1370/2007, and as explained in its recitals 16 and 17, the following scenarios exist as regards staff protection in the case of a change of operator:

| (i) | Where the conditions for the application of the Council Directive 2001/23/EC of 12 March 2001 on the approximation of the laws of the Member States relating to the safeguarding of employees’ rights in the event of transfers of undertakings, businesses or parts of undertakings or businesses (25) are fulfilled, for instance, where there is a transfer of significant tangible assets such as rolling stock from the outgoing to the incoming operator (26), the protection of employees’ rights, which include notably the continuity of employment contracts, derives directly from this Directive. |
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(i)

Where the conditions for the application of the Council Directive 2001/23/EC of 12 March 2001 on the approximation of the laws of the Member States relating to the safeguarding of employees’ rights in the event of transfers of undertakings, businesses or parts of undertakings or businesses (25) are fulfilled, for instance, where there is a transfer of significant tangible assets such as rolling stock from the outgoing to the incoming operator (26), the protection of employees’ rights, which include notably the continuity of employment contracts, derives directly from this Directive.

| (ii) | Where there is no transfer within the meaning of Directive 2001/23/EC, competent authorities may nevertheless decide to require a transfer of staff previously taken on to provide services with the rights to which the staff would have been entitled if Directive 2001/23/EC had applied. |
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(ii)

Where there is no transfer within the meaning of Directive 2001/23/EC, competent authorities may nevertheless decide to require a transfer of staff previously taken on to provide services with the rights to which the staff would have been entitled if Directive 2001/23/EC had applied.

| (iii) | Competent authorities may decide to require the public transport operator to respect certain social standards for all staff involved in the provision of public transport services ‘in order to ensure transparent and comparable terms of competition between operators and to avert the risk of social dumping’ as stated in recital 17 of Regulation (EC) No 1370/2007. For instance, these standards could relate to a collective agreement at company level or a collective agreement concluded for the relevant market segment. |
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(iii)

Competent authorities may decide to require the public transport operator to respect certain social standards for all staff involved in the provision of public transport services ‘in order to ensure transparent and comparable terms of competition between operators and to avert the risk of social dumping’ as stated in recital 17 of Regulation (EC) No 1370/2007. For instance, these standards could relate to a collective agreement at company level or a collective agreement concluded for the relevant market segment.

| (iv) | Competent authorities may apply a combination of possibilities (ii) and (iii). |
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(iv)

Competent authorities may apply a combination of possibilities (ii) and (iii).

Article 4(6) provides that information about applicable rules and provisions in the field of staff protection such as quality and social standards, quality and social criteria, and rights and obligations relating to the transfer of staff in the case of a change of operator, have to be included in the tender documents and in the public service contracts. Such standards and criteria may for example relate to the availability of social and sanitary facilities, regular and continuous training of staff, promotion plans for women, older employees and people with disabilities, as well as compliance with workplace and safety obligations and with worker participation rules.

2.4.   Access to essential production factors and information

This Section provides interpretative guidance on access to rolling stock, as well as information essential for the award of public service contracts.

2.4.1.   
  Article 5a. Access to rail rolling stock

Access to rail rolling stock is essential for operators to be able to submit bids in procedures for the competitive award of public service contracts, in particular when they are new entrants without a large rolling stock fleet at their disposal.

Under Article 5a, competent authorities must assess whether measures are necessary to ensure effective and non-discriminatory access to suitable rolling stock. When assessing the extent to which operators have effective access to rolling stock, the competent authority should assess all relevant barriers such as, for instance, the financial, technical or regulatory barriers that may hinder such access. Supply from leasing companies, from other market actors providing rolling stock or from pools of rolling stock operated by competent authorities should be taken into account. This assessment should also take account of the mobilisation period, i.e. the time required for operators to be able to use the rolling stock for transport operations. When considering whether access to rolling stock is non-discriminatory, competent authorities must assess whether some operators have access to rolling stock on less favourable conditions than competitors. Finally, they should analyse whether the available rolling stock is suitable, i.e. whether it fulfils the requirements in terms of price, quality and technical standards prescribed in the tender documentation.

This assessment report must be made publicly available sufficiently in advance to allow all stakeholders to react. The accuracy of this report may also be contested in the context of an Article 5(7) review.

When the assessment report concludes that measures are necessary to ensure effective and non-discriminatory access to suitable rolling stock, competent authorities are not legally required under Article 5a(2) to take such measures. However, by not adopting appropriate measures, a competent authority runs the risk of having the award of the public service contract reviewed under Article 5(7), on the grounds that the award procedure was not fair and did not observe the principles of transparency and non-discrimination, in line with Article 5(3).

Article 5a(2) provides a list of measures that competent authorities may adopt to ensure effective and non-discriminatory access to rolling stock. This list is not exhaustive. Among other possible measures, the competent authority can also introduce in the public service contract an obligation to transfer the rolling stock at the end of the contract to the incoming operator. If such rolling stock was originally purchased through public funds, the price at which it is transferred should appropriately reflect the public funding received by the outgoing operator.

2.4.2.   
  Article 4(8). Access to information essential for the award of public service contract

Competent authorities must make available to all interested parties the information required to prepare offers for competitive tendering procedures. To that end, public service contracts must include an obligation for the operator to provide the competent authority with all the information required for the award of the next prospective contract. When existing contracts do not contain such a provision, they should be amended accordingly. The competent authority is required to ensure the legitimate protection of confidential business information.

Article 4(8) provides a list of information that is typically made available by the competent authorities. This list is not exhaustive. It is for the competent authority to assess, on a case-by-case basis, which information is necessary, taking into account relevant elements such as, for instance, the characteristics of the contract to be awarded (e.g. net cost or gross cost contracts) and the legitimate protection of confidential business information. Information items not listed in this provision, but which can be deemed essential for bidders include, for instance, the maintenance records of the rolling stock that may be transferred to the new public service operator.

2.5.   Award of public service contracts

This Section provides interpretative guidance on a number of provisions related to the award of public service contracts. The guidance covers the conditions under which public service contracts can be directly awarded as well as the procedural requirements for the competitive tendering of contracts.

2.5.1.   
  Article 5(2)(b). Conditions under which a public service contract may be directly awarded to an internal operator

Regulation (EC) No 1370/2007 allows competent local authorities to provide public passenger transport services by rail and by road themselves or to award a public service contract directly to an internal operator. However, if they choose the second option, they must respect a number of strict rules and conditions set out in Article 5(2). The Commission notes the following:

| (i) | Article 5(2) provides that a public service contract may be awarded directly to internal operators by a competent local authority or a group of such authorities providing integrated public passenger transport services. This means that the public passenger transport services under a contract directly awarded by a group of competent local authorities must be integrated from a geographical, transport or tariff point of view across the territory for which such a group of authorities is responsible. The geographical scope of such services provided under the responsibility of a competent local authority or a group of such authorities may only cover the needs of an urban agglomeration (27) or rural areas, or both. |
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(i)

Article 5(2) provides that a public service contract may be awarded directly to internal operators by a competent local authority or a group of such authorities providing integrated public passenger transport services. This means that the public passenger transport services under a contract directly awarded by a group of competent local authorities must be integrated from a geographical, transport or tariff point of view across the territory for which such a group of authorities is responsible. The geographical scope of such services provided under the responsibility of a competent local authority or a group of such authorities may only cover the needs of an urban agglomeration (27) or rural areas, or both.

| (ii) | The rules on control of the internal operator by the competent authority defined in Article 2 point (j) and specified in Article 5(2) must in any event be respected. An internal operator must be ‘a legally distinct entity over which a competent local authority or, in the case of a group of authorities, at least one competent local authority exercises control similar to that exercised over its own departments’. Point (a) of Article 5(2) lays down a set of criteria that shall be taken into consideration in assessing whether a competent authority effectively controls its internal operator. These criteria are ‘the degree of representation on administrative, management or supervisory bodies, specifications relating to this representation in the articles of association, ownership, effective influence and control over strategic decisions and individual management decisions’. The assessment of control must be based on all relevant criteria.
  With regard to the ownership criterion, Regulation (EC) No 1370/2007 does not require the competent authorities to hold 100 % of the internal operator’s capital. This could be relevant, for example, in cases of public-private partnerships. In this respect, the notion of internal operator under Regulation (EC) No 1370/2007 is broader that the notion of ‘in house’ operator under the case-law of the Union Courts (28). However, effective control by the competent authority has to be proven by other criteria as mentioned in Article 5(2)(a). |
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(ii)

The rules on control of the internal operator by the competent authority defined in Article 2 point (j) and specified in Article 5(2) must in any event be respected. An internal operator must be ‘a legally distinct entity over which a competent local authority or, in the case of a group of authorities, at least one competent local authority exercises control similar to that exercised over its own departments’. Point (a) of Article 5(2) lays down a set of criteria that shall be taken into consideration in assessing whether a competent authority effectively controls its internal operator. These criteria are ‘the degree of representation on administrative, management or supervisory bodies, specifications relating to this representation in the articles of association, ownership, effective influence and control over strategic decisions and individual management decisions’. The assessment of control must be based on all relevant criteria.

With regard to the ownership criterion, Regulation (EC) No 1370/2007 does not require the competent authorities to hold 100 % of the internal operator’s capital. This could be relevant, for example, in cases of public-private partnerships. In this respect, the notion of internal operator under Regulation (EC) No 1370/2007 is broader that the notion of ‘in house’ operator under the case-law of the Union Courts (28). However, effective control by the competent authority has to be proven by other criteria as mentioned in Article 5(2)(a).

| (iii) | To reduce distortions of competition, Article 5(2)(b) requires that the transport activities of internal operators and any entity over which this operator exercises even a minimal influence should be geographically confined within the territory of the competent authority or of the group of local competent authorities.
  The internal operator or the entity influenced by the internal operator must not operate public passenger transport services, including as a subcontractor, or participate in tender procedures outside the competent authority’s territory within the Union or, due to a possible indirect effect on the internal market, elsewhere in the world.
  Article 5(2)(b) is drafted in broad terms to prevent the creation of corporate structures that aim to circumvent this geographical confinement. Without prejudice to the provisions on outgoing lines or other ancillary elements entering the territory of neighbouring competent local authorities, as mentioned in point (v), this provision on geographical confinement must be applied strictly. |
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(iii)

To reduce distortions of competition, Article 5(2)(b) requires that the transport activities of internal operators and any entity over which this operator exercises even a minimal influence should be geographically confined within the territory of the competent authority or of the group of local competent authorities.

The internal operator or the entity influenced by the internal operator must not operate public passenger transport services, including as a subcontractor, or participate in tender procedures outside the competent authority’s territory within the Union or, due to a possible indirect effect on the internal market, elsewhere in the world.

Article 5(2)(b) is drafted in broad terms to prevent the creation of corporate structures that aim to circumvent this geographical confinement. Without prejudice to the provisions on outgoing lines or other ancillary elements entering the territory of neighbouring competent local authorities, as mentioned in point (v), this provision on geographical confinement must be applied strictly.

| (iv) | The Commission considers that the participation of an internal operator in a competitive tendering procedure for the award of a public transport service contract could call into question the validity of the direct award of a public service contract to that operator (29) unless the conditions of Article 5(2)(c) are complied with. |
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(iv)

The Commission considers that the participation of an internal operator in a competitive tendering procedure for the award of a public transport service contract could call into question the validity of the direct award of a public service contract to that operator (29) unless the conditions of Article 5(2)(c) are complied with.

| (v) | Article 5(2)(b) allows internal operators to operate ‘outgoing lines or other ancillary elements of that activity which enter the territory of neighbouring competent local authorities’. This provision provides some flexibility by catering for transport between neighbouring regions. Internal operators may therefore operate services beyond the territory of their competent local authority to a certain extent. To assess whether the services under public service contract are compliant with this provision, the following criteria should be applied: whether those services connect the territory of the competent authority in question to a neighbouring territory, and whether they are ancillary rather than the main purpose of the public transport activities under public service contract. The Commission will assess whether the public transport activities are of a secondary nature by comparing their volume in vehicle or train km with the total volume of the public transport activities covered by the internal operator’s contract(s). |
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(v)

Article 5(2)(b) allows internal operators to operate ‘outgoing lines or other ancillary elements of that activity which enter the territory of neighbouring competent local authorities’. This provision provides some flexibility by catering for transport between neighbouring regions. Internal operators may therefore operate services beyond the territory of their competent local authority to a certain extent. To assess whether the services under public service contract are compliant with this provision, the following criteria should be applied: whether those services connect the territory of the competent authority in question to a neighbouring territory, and whether they are ancillary rather than the main purpose of the public transport activities under public service contract. The Commission will assess whether the public transport activities are of a secondary nature by comparing their volume in vehicle or train km with the total volume of the public transport activities covered by the internal operator’s contract(s).

| (vi) | Article 5(2) of Regulation (EC) No 1370/2007 does not apply to the direct award of contracts for public passenger transport services by bus or tram, which do not take the form of service concessions, within the meaning of Article 5(1) of Directive 2014/23/EU. The direct award of such contracts to an in-house operator must be made in compliance with Article 12 of Directive 2014/24/EU or with Article 28 of Directive 2014/25/EU (30). |
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(vi)

Article 5(2) of Regulation (EC) No 1370/2007 does not apply to the direct award of contracts for public passenger transport services by bus or tram, which do not take the form of service concessions, within the meaning of Article 5(1) of Directive 2014/23/EU. The direct award of such contracts to an in-house operator must be made in compliance with Article 12 of Directive 2014/24/EU or with Article 28 of Directive 2014/25/EU (30).

2.5.2.   
  Article 5(3). The principle of the competitive tendering of public service contracts and its procedural requirements

Article 5(3) stipulates that, if a competent authority uses a third party other than an internal operator to provide public passenger transport services, it shall award public service contracts through a fair, open, transparent and non-discriminatory competitive tendering procedure.

Article 5(3) provides that competent authorities shall award public service contracts on the basis of a competitive tendering procedure, except in the cases specified in paragraphs 3a, 4, 4a, 4b, 5 and 6. This provision thus clearly establishes that the competitive tendering procedure under Article 5(3) is the principle, while paragraphs 3a, 4, 4a, 4b, 5 and 6 provide for exceptions to this rule. According to the case law, any derogation from or exception to a general rule should be interpreted narrowly (31).

Article 5(3) also provides a few other details on the conditions under which a competitive tendering procedure should be organised. As laid out under point 2.5.1, contract award procedures must be designed so as to create conditions for effective competition. The application of the general principles of the Treaty, such as the principles of transparency and non-discrimination, implies, for instance, that the assessment criteria for the selection of offers must be published with the tender documents. The more detailed procedural rules of Union public procurement legislation, such as the ones laid down in Directives 2014/24/EU and 2014/25/EU, or in Directive 2014/23/EU on concessions, although not required, may be applied if Member States so wish.

In order to comply Article 5(3) of Regulation (EC) No 1370/2007, public procurement procedures must be designed so as to create the best conditions for effective competition. An award procedure involving negotiation between the competent authority and the bidders may comply with the principle of non-discrimination, provided that the negotiations are impartial, fair, and transparent. For example, a purely negotiated procedure without prior publication would breach the principles of transparency and non-discrimination set out in Article 5(3). Similarly, a tender procedure that unduly restricts the number of potential bidders would also not comply with the requirements of Article 5(3).

According to Article 5(3) of Regulation (EC) No 1370/2007, the competent authority may also choose to negotiate with pre-selected parties, after a pre-selection of tenders, in case there are specific or complex requirements. An example of this is when bidding operators must come up with technologically innovative transport solutions to meet the requirements published in the tender documents. Even when using pre-selection and negotiation, the selection and award procedure must nevertheless comply with all the conditions set out in Article 5(3).

In order to provide potential tenderers with fair and equal opportunities, the period between the launch of the competitive tendering procedure and the submission of the offers, as well as the period between the launch of the competitive tendering procedure and the moment from which the operation of the transport services has to start, must be of appropriate and reasonable length.

2.5.3.   
  Exceptions to the principle of competitive tendering of public service contracts

2.5.3.1.   Article 5(3a). Conditions under which competent authorities may directly award a public service contract for rail under exceptional circumstances

As regards public service contracts for rail transport, competent authorities may decide to temporarily award new contracts directly when the authority considers that this is justified by exceptional circumstances, in particular where:

| — | there are a number of competitive tendering procedures that are already being run by the competent authority or other competent authorities which could affect the number and quality of bids likely to be received if the contract is the subject of a competitive tendering procedure; or |
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—

there are a number of competitive tendering procedures that are already being run by the competent authority or other competent authorities which could affect the number and quality of bids likely to be received if the contract is the subject of a competitive tendering procedure; or

| — | changes to the scope of one or more public service contracts are required in order to optimise the provision of public services. |
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—

changes to the scope of one or more public service contracts are required in order to optimise the provision of public services.

Such exceptional circumstances include situations where a competent authority wants to redesign the geographical coverage or size of contract lots. For example, in cases where a competent authority plans to provide public transport services under one single contract, while they are currently being provided under two existing contracts with different expiry dates, it may be necessary to temporarily directly award the contract with the earliest expiry date, so that both contracts can end at the same date.

Although the list of situations provided in Regulation (EC) No 1370/2007 that constitute exceptional circumstances is an open one, the term ‘exceptional circumstances’ has to be interpreted in a strict manner. For this reason, as mentioned in recital 21 of Regulation (EU) 2016/2338 this provision is meant to be used if it allows competent authorities to ensure that the services are delivered in the most cost-effective manner. The duration of contracts awarded according to this provision shall be limited to what would appear to be proportionate to the exceptional circumstance concerned, and in any case not exceed 5 years. The competent authority has to respect certain transparency requirements. It must swiftly inform the Commission of the decision to award a contract on that basis, which must be duly substantiated. The detailed publication references (e.g. link to the relevant website) shall be sent to the General Directorate for Mobility and Transport of the European Commission (32) for analysis and possible follow-up. This information requirement does not make the award conditional on the Commission’s agreement. The competent authority must also publish the public service contract. A competent authority cannot use this legal option for the award of two consecutive public service contracts covering the same public service obligations.

2.5.3.2.   Article 5(4). Conditions under which a competent authority may directly award a public service contract in case of a small contract volume or small and medium-sized operators

In the case of a direct award of a public service contract of small value (Article 5(4)), the competent authority may directly award the contract without a competitive tendering procedure. A public service contract is considered to be of small value if its average annual value is estimated at less than EUR 1 million or if it involves the annual provision of less than 300 000 kilometres of public passenger transport services. In case of contracts including public passenger transport services by rail, these two thresholds are respectively EUR 7.5 million average annual value and 500 000 kilometres of public passenger transport services. In the case of a contract awarded to a small or medium-sized enterprise (‘SME’) operating no more than 23 road vehicles, the thresholds may be increased to an average annual value estimated at less than EUR 2 million or the annual provision of less than 600 000 kilometres of public transport services.

The existence of a threshold specifically concerning SMEs defined in terms of ‘road vehicles’ indicates that this provision only applies to the transport by bus, and not to transport by tram, metro or train. The threshold of 23 road vehicles has to be interpreted in a restrictive manner in the light of the exceptional character of Article 5(4). Therefore, the terms ‘vehicles being operated’ must be interpreted as referring to the total number of vehicles being operated by the public transport operator and not to the number of vehicles operated for services covered by a particular public service contract. The criteria of the SME Recommendation (33) apply to the definition of small or medium-sized undertakings.

In application of Article 5(4), Member States may decide to require competitive tendering for all contracts, including those of small value and those awarded to small and medium-sized operators. By the same token, they may also choose to lower the thresholds below which direct award is admissible.

2.5.3.3.   Article 5(4a). Conditions under which competent authorities may directly award a public service contract for rail in case of certain structural and geographic characteristics of the market and network and of performance improvements

Article 5(4a) allows the competent authority to directly award public service contracts for public passenger transport services by rail when two conditions are met. As an exception to the principle of the competitive tendering procedure for the award of public service contracts, this provision should be interpreted restrictively.

The first condition is that the direct award is justified by the relevant structural and geographical characteristics of the market and network concerned, and in particular size, demand characteristics, network complexity, technical and geographical isolation and the services covered by the contract.

The list of the specific characteristics is not exhaustive. The competent authority can therefore consider the need for direct award also with reference to other characteristics than the ones listed in the text. The conclusion of a competent authority that the market and network characteristics justify the direct award should be based on objective grounds. It is settled case-law that the burden of proving the actual existence of circumstances justifying derogation lies on the person seeking to rely on those circumstances. For that reason, in its substantiated decision to award a contract under Article 5(4a), the competent authority must bring sufficient evidence proving that the conditions specified in that provision of Regulation (EC) No 1370/2007 are fulfilled.

Taking into account the rationale for Article 5(4a), i.e. that in certain cases, the objectives of the Regulation, i.e. the provision of high-quality and cost-efficient services cannot be achieved by competitive tendering, due to certain market and network characteristics, what is essential is not so much the number and nature of the characteristics invoked by the Member State but the demonstration that in the specific case at hand, these characteristics objectively justify the use of a direct award instead of competitive tendering.

Without prejudice to the assessment of each individual case, the Commission’s understanding of the meaning and measurement of the relevant characteristics is the following: market size should be measured in train-kilometres whereas network size in track-kilometres. Network complexity could be characterised, for instance, by the presence of many intermodal hubs, typically in local or suburban networks. Technical isolation could e.g. refer to a situation where major network constituents deviate from EU standards such as Technical Specifications of Interoperability. Geographical isolation could mean networks that have no physical links to neighbouring networks, when for instance they are situated on an island. The term ‘services covered by the contract’ could refer for instance to a ‘strategic value’ of the services.

The second condition to be satisfied to justify a direct award under Article 5(4a) is that the contract must result in an improvement in quality of services or cost-efficiency compared to the previously awarded public service contract. Regulation (EC) No 1370/2007 does not specify the margin of the improvement, so it is up to the competent authority to decide on this. However, in order to prevent the circumvention of the obligation of Regulation (EC) No 1370/2007 and to ensure its useful effect, the improvement of services should be meaningful.

Regulation (EC) No 1370/2007 also requires that the competent authority publishes its substantiated decision to use the direct award and inform the Commission thereof within one month of its publication. This is designed to enable market actors and the Commission to take note of the use of the direct award procedure and its justification. The detailed publication references (e.g. link to the relevant website) shall be sent to the General Directorate for Mobility and Transport of the European Commission (34) for analysis and possible follow-up. This information requirement does not make the award conditional on the Commission’s agreement.

Member States with an annual market volume of rail passenger transport of less than 23 million train- kilometres on 24 December 2017, only one competent authority at national level and one public service contract covering the entire rail network, are deemed to fulfil the first condition. However, also in those Member States, the second condition for a direct award still has to be fulfilled. Therefore, they also have to publish a substantiated decision and inform the Commission thereof. A list of Member States whose rail passenger market was below 23 million train-kilometres per year on 24 December 2017 is established in the appendix to these Guidelines.

The contract shall include specific performance requirements covering aspects of quality of service and of cost-efficiency. The performance requirements must be measurable, transparent and verifiable. They shall be expressly based on indicators that enable the competent authority to carry out conclusive periodic assessments. These indicators must be able to unambiguously reflect the improvement of service quality and/or cost-efficiency of the directly awarded contract in comparison to the previous one. Otherwise, the requirement that the contract must bring improvements in comparison to the previous one could not be effectively fulfilled and monitored. Performance requirements should in particular cover punctuality of services, frequency of train operations, quality of rolling stock and transport capacity for passengers. This list is an open one, meaning that the enumerated quality requirements must be included in the public service contract as a minimum; competent authorities can use additional requirements.

The competent authority is obliged to assess periodically, at least every five years, the fulfilment of the contractual improvement requirements. To ensure a constant and meaningful monitoring of compliance and to be able to detect non-compliance at an early stage and, if applicable, to take measures to regain compliance, more frequent assessments may be warranted. The competent authority should ensure that it will be able to effectively monitor performance. Hence, it has to make sure – for instance, through contractual requirements – that it effectively obtains the data from relevant actors that enables it to assess compliance. The competent authority has to make the results of its periodic assessments public.

The contract must also include effective and deterrent measures to be imposed in case the railway undertaking fails to meet the performance requirements. This means that all requirements must be fulfilled at the periodical assessments to avoid applying such effective and deterrent measures. Therefore, the competent authority is not entitled to waive the application of these measures. Such measures can have various forms and may include fines.

Lastly, if the operator fails to meet the performance requirements, the competent authority may at any time wholly or partially suspend or terminate the contract awarded directly on the basis of Article 5(4a).

Contracts awarded on the basis of Article 5(4a) cannot be longer than 10 years, or than 15 years if they include significant investment in compliance with Art 4(4). These contracts must also be published.

2.5.3.4.   Article 5(5). Emergency awards

In the event of an actual or imminent disruption of services, whether operated under public service obligations or not, Article 5(5) empowers competent authorities to directly award, extend or impose a public service contract for a period not exceeding two years.

The scope of emergency awards covers also substantive modifications of contracts, for instance, in response to crisis situations like pandemics. Such modifications shall be temporary in nature and limited to the duration of a crisis, whose consequences the emergency award addresses, and in any event, cannot exceed two years. If the initial contract has been suspended rather than terminated and has not yet expired upon the end of the emergency measures, the initial terms of the contract apply again. The modified contracts shall specify the modalities of a return to the previous contract, where applicable.

Emergency public service contracts cannot be applied retroactively as the content of these contracts have to be defined in accordance with Article 4, before their application. In case the cause for the actual or imminent disruption of services persists when these emergency measures expire at the end of the two year period, the competent authority may adopt new emergency measures under Article 5(5) provided that they can demonstrate that an award of the public service contract on the basis of the other provisions of Regulation (EC) No 1370/2007 has not been materially possible given the exceptional circumstances.

Pursuant to Article 5(1) of Regulation (EC) No 1370/2007, public service contracts as defined in the Public Procurement Directives (Directive 2014/24/EU and Directive 2014/25/EU) for public passenger transport services by bus or tram are awarded in accordance with these directives where such contracts do not take the form of service concessions contracts as defined in them. Article 5(5) of Regulation No 1370/2007 is thus not applicable to the award of such contracts. However, the Public Procurement Directives provide for specific urgent award procedures, including the possibility of a negotiated procedure without publication in specific circumstances (35).

Regulation (EC) No 1370/2007 provides that the obligation to publish certain information at least one year before the direct award in application of Article 7(2) does not apply in the case of the emergency award of a public service contract under Article 5(5). The Commission considers that by analogy this obligation does not apply either in the case of the award of public service contracts for transport services by bus or by tram on the basis of the urgent award procedures laid down in the Public Procurement Directives, as it would preclude such urgent award.

2.5.3.5.   Article 5(6). Rail services that qualify for the direct award procedure

Article 5(6) allows competent authorities to award public service contracts directly for rail transport, ‘with the exception of other track-based modes such as metro and tramway’.

The award by an authority of contracts for the provision of services of general interest to a third party has to respect general Treaty principles, such as the principles of transparency and equal treatment (36). Contracts directly awarded under Article 5(6) are not exonerated from compliance with these Treaty principles. This is the reason why Regulation (EC) No 1370/2007 requires notably, in Article 7(2) and (3), that competent authorities publish certain information about directly awarded public service contracts in rail at least one year before and within one year of the award.

The exception to the general rule of a competitive award procedure must also be applied restrictively. Rail substitute services, such as transport services by bus and coach that may be contractually required from the public service operator in cases of disruption of the rail network, cannot be considered as rail transport services and thus do not fall under Article 5(6). The rail undertaking should subcontract such rail substitute services by bus and coach according to relevant public procurement legislation.

Whether certain types of urban or suburban rail transport systems, such as the S-Bahn (in Austria, Germany and Denmark) and the RER (in France), or modes of transport that are similar to ‘other track based modes’ (for instance, metro or tram services), such as tram-train services and certain automatic train services operated under optical guidance systems, are included in the rail exemption of Article 5(6), must be assessed on a case-by-case basis, applying suitable criteria. In particular, this will depend on factors such as whether the systems in question are normally interoperable and/or share infrastructure with the traditional heavy rail network. Although tram-train services do use heavy rail infrastructure, their special characteristics mean they should nonetheless be regarded as ‘other track-based modes’.

2.5.4.   
  Art. 5(7). Review of award decisions

This provision stipulates that Member States must take necessary measures to ensure that competent authorities' decisions taken in accordance with Article 5(2) to (6) may be reviewed effectively and rapidly, at the request of any person having or having had an interest in obtaining a particular contract and who has been or risks being harmed by an alleged infringement (‘interested parties’) on the grounds that such decisions have infringed Union law or national rules implementing that law. Such review bodies may be of a judicial character.

In its second subparagraph, Article 5(7) further specifies that for cases of direct award covered by its paragraphs 4a and 4b, such measures must include the possibility for interested parties to request an assessment of the substantiated decision taken by the competent authority by an independent body designated by the Member State concerned.

As explained in Recital 27 of Regulation (EU) 2016/2338, Member States may decide that the assessment is made as part of a judicial review. This assessment can thus be specifically provided by the designated independent body, to be used in the context of the review procedure referred to in Article 5(7), first subparagraph. The Commission considers that this independent body should have the appropriate knowledge of the market and access to the necessary information in order to provide an expert assessment. For these reasons, rail regulatory bodies within the meaning set out in Article 55 of Directive 2012/34/EU are well placed to provide this function. In cases where a Member State appoints an independent body other than its rail regulatory body, its level of independence should be sufficient to ensure legal and operational independence from the interests of competent authorities and railway undertakings and be, at least, equal to the level of independence of the rail regulatory body.

The outcome of such assessment must be made publicly available in accordance with national law. The Commission understands that at least the essential points of the assessment and the final result stating whether the justification of the award decision is compliant with the rules of Regulation (EC) No 1370/2007 must be published.

Where bodies responsible for review procedures are not judicial in character, written reasons for their decisions shall always be given. Furthermore, in such a case, their decisions must be subject to judicial review or review by another body, which is a court or tribunal within the meaning of Article 267 TFEU.

2.5.5.   
  Modifications of public service contracts

Where a running public service contract needs to be amended, for instance where the transport service volume and corresponding compensation amount need to be adapted due to an extension of a metro line, the question arises as to whether the competent authority should start a new award procedure or whether the contract can be amended without a new award.

The Union Courts held that in the case of minor, non-substantial modifications a new award it may not be necessary to ensure that general Treaty principles such as transparency and non-discrimination are complied with and a simple amendment of the contract may be sufficient. On the other hand, according to the Union Courts, in order to ensure transparency of procedures and equal treatment of tenderers, substantial amendments to essential provisions of a service concession contract or to contracts subject to the public procurement directives require the award of a new contract in certain cases. This is the case, in particular, if the new provisions are materially different in character from the original contract and are therefore such as to demonstrate the intention of the parties to renegotiate the essential terms of that contract (37).

According to the Union Courts, an amendment to a contract during its term may be regarded as substantial if it introduces conditions which, if they had been part of the original award procedure, would have allowed for the admission of tenderers other than those originally admitted or would have allowed for the acceptance of an offer other than that originally accepted (38).

In the absence of specific provisions in Regulation (EC) No 1370/2007, the principles of the abovementioned case-law are fully applicable to modifications of public service contracts covered by that Regulation. In order to determine what constitutes non-substantial modifications, a case-by-case assessment based on objective criteria is required (39).

These principles apply to contracts awarded on the basis of a competitive tendering procedure. Furthermore, when substantial amendments to essential provisions of contracts awarded under Article 5(6) are made after 24 December 2023, this should require the award of a new contract.

Moreover, the specific rules on the modification of contracts during their term set under Directive 2014/24/EU and Directive 2014/25/EU (40) apply to contracts that are awarded in accordance with those Directives, pursuant to Article 5(1) of Regulation (EC) No 1370/2007.

2.6.   Compensation for public services

The Union rules governing the conditions under which a compensation for services of general economic interest constitutes aid under Article 107 TFEU apply to land transport. Article 106(2) TFEU does not apply in cases where compensation constitutes State aid and is paid for public service obligations in land transport. Rather, such compensation is covered by Article 93 TFEU. Accordingly, the Union compatibility rules regarding compensation for services of general economic interest (41) based on Article 106(2) TFEU, do not apply to land transport (42).

The rules on compensation laid down in Regulation (EC) No 1370/2007 aim to ensure that operators are not overcompensated, taking into account a reasonable profit, that the compensation ensures the financial sustainability of the provision of public passenger transport in the long term (43) and that the system encourages overall efficiency. Regulation (EC) No 1370/2007 also spells out details of the Commission's ex ante and ex post controls into the level of compensation granted.

Provided that compensation for public passenger transport services by rail and by road is paid in accordance with Regulation (EC) No 1370/2007, such compensation shall be deemed compatible with the internal market and shall be exempt from the prior notification requirement laid down in Article 108(3) TFEU, in accordance with Article 9(1) of that Regulation.

This presumption of compatibility and the exemption from the notification requirement is only relevant if the compensation constitutes State aid within the meaning of Article 107(1) TFEU. Public service compensation fulfilling the conditions laid down by the Union Courts in the Altmark judgement (44) does not constitute State aid and is therefore not subject to a prior notification obligation in any case. Nevertheless, to be compliant with Union law, such public service compensation would still need to fulfil the other requirements of Regulation (EC) No 1370/2007 related to the organisation of the land transport services under internal market rules, for example the provisions on the duration of a public service contract, on staff protection, access to rolling stock, award procedures or subcontracting.

2.6.1.   
  Contracts awarded on the basis of a competitive tender

Article 4(1)(b) of Regulation (EC) No 1370/2007 provides that public service contracts and general rules shall establish in advance, in an objective and transparent manner, the parameters on the basis of which the compensation payment, if any, is to be calculated, and the nature and extent of any exclusive rights granted, in a way that prevents overcompensation.

However, Regulation (EC) No 1370/2007 does not impose specific conditions on how public service compensation must be designed when the related public service contract is awarded on the basis of a competitive tendering procedure in application of Article 5(3) of Regulation (EC) No 1370/2007. The Annex to Regulation (EC) No 1370/2007 (the ‘Annex’) is not applicable to those contracts.

A competitive tendering procedure that is open, transparent and non-discriminatory should in principle ensure that the price that the competent authority pays to obtain the public service described in the tender specifications involves the least cost to the community. However, competent authorities should be particularly attentive to signs suggesting a lack of effective competition for the tender.

It should be noted that even a competitive tender in itself does not ensure that there will be no overcompensation, i.e. that the compensation actually paid over the lifetime of the contract does not exceed what is necessary to cover all or part of the costs incurred in the discharge of public service obligations, taking into account the relevant receipts and a reasonable profit within the meaning of Article 4(1)(b) of Regulation 1370/2007.

2.6.2.   
  Compensation for directly awarded contracts

When a public service contract is directly awarded in accordance with Article 5(2), 5(3a), 5(4), 5(4a), 5(4b) 5(5) or 5(6), or a competent authority imposes general rules within the meaning of Article 3(2), the level of compensation is not the result of competitive market forces, but of direct negotiation or directly imposed by the competent authority. In these circumstances, in accordance with Articles 4 and 6(1), the methodology to calculate the maximum compensation amount laid out in the Annex has to be applied to avoid overcompensation.

If the Annex is complied with (in addition to all other relevant provisions of Regulation (EC) No 1370/2007), such compensation is deemed as compatible with the internal market, and, thus, benefits from the block exemption under Article 9(1) of Regulation (EC) No 1370/2007.

2.6.3.   
  Overcompensation

The contract agreed between the public service operator and the competent authority can take different forms, in particular as regards risk-sharing arrangements and the maximum level of reasonable profit that the operator is entitled to retain.

Typically, competent authorities will need to carry out regular ex post checks to detect any overcompensation and foresee in the public service contracts claw back mechanisms providing for the recovery of any overcompensated amounts.

This principle applies to competitively tendered and directly awarded contracts, as the prohibition of overcompensation laid down in Article 4(1) applies to all contracts.

The Commission recommends that such overcompensation checks are carried out by reference to the costs and revenues and the maximal level of profit that will normally be established in the contract. The method used for the overcompensation checks should also take into account network effects, where these are quantifiable.

In case of competitively awarded concession contracts, there is a presumption that the successful bidder has already factored into the offer any efficiency gains it expects to make over the duration of the contract. Therefore, the Commission considers that the requirement of ex post overcompensation check can be adapted for such contracts to take into account the specific features of those contracts.

In all cases, competent authorities are free to define the frequency and extent of overcompensation checks depending on the duration and complexity of the contract.

2.6.4.   
  The notion of ‘reasonable profit’

Article 4(1)(c) provides that the costs to be taken into account in a public service contract may include ‘a suitable return on capital’, i.e. a reasonable profit. This provision applies, whether the contracts are directly awarded or competitively tendered.

There is no precise guidance how to define a reasonable profit within the Regulation for either competitively tendered, nor directly awarded contracts.

In line with general principles applicable in State aid, the Annex defines ‘reasonable profit’ as ‘a rate of return on capital that is normal for the sector in a given Member State and that takes account of the risk, or absence of risk, incurred by the public service operator by virtue of public authority intervention’. The Annex does not provide further guidance on how to establish that level of profit and is in any case applicable only for directly awarded contracts.

However, useful indications on how to determine an appropriate level of reasonable profit can be drawn from the SGEI Communication.

The SGEI Communication explains that ‘where a generally accepted market remuneration exists for a given service, that market remuneration provides the best benchmark for the compensation in the absence of a tender’ (45). An example are market contracts in the same sector of activity, with similar characteristics and in the same Member State.

In that case, the level of reasonable profit can be determined by comparing the profit margin required by a typical, well-run undertaking active in the same sector to provide the service in question (46). However, market benchmarks do not always exist (47) and when they exist, they may need to be adjusted, if their features are not comparable to the transaction at stake (48).

The standard measurement of the return on capital of a public service contract is the internal rate of return (IRR) that the company makes on its invested capital over the lifetime of the project, that is, the IRR on the contract’s cash flows. However, accounting measures such as the return on equity (ROE), the return on capital employed (ROCE) or other generally accepted economic indicators for the return on capital may also be used.

It should be borne in mind that indicators may be influenced by the accounting methods used by the operator and may reflect its situation only in a given year. Where this is the case, care should be taken to use indicators which reflect long-term economic realities linked to the execution of the public service contract. Whenever feasible, the level of reasonable profit should be assessed over the lifetime of the contract. Account should be taken of the differences in economic models of railways, tramways, metro and bus transport. For example, railway transport is very capital-intensive, whereas for bus transport personnel tends to be the main cost factor.

The adequate level of reasonable profit must be established by the competent authority on the basis of a case-by-case assessment which should essentially consist in comparing the profit level of the contract with comparable contracts on the market. That remuneration must take into account the normal market remuneration for similar services and the level of risk involved in the contract. For example, a public service contract under which the compensation can be adjusted to take into account unforeseen costs will be less risky than a contract where compensation is fixed. All other things being equal, the reasonable profit should be lower for the less risky contract. The contract should explicitly indicate whether, and under which circumstances, the compensation amount can be adjusted to reflect relevant external developments, as an increase in the compensation which departs from the ex-ante contractual terms will normally be considered not compliant with Regulation (EC) No 1370/2007.

The compensation mechanism should generally encourage management efficiency (49). Compensation schemes which mechanically cover actually incurred costs do not encourage the transport operator to become more cost-efficient over time. Such mechanisms are only acceptable where costs are highly uncertain and the transport operator needs a high degree of protection against uncertainty.

2.6.5.   
  Article 4(1) and (2) and the Annex. Preventing the cross-subsidisation of commercial activities

When a public service provider also carries out commercial activities, it should be ensured that it cannot use the public compensation to strengthen its competitive position in other markets where it operates commercially. To this effect, the Annex prescribes accounting separation between public service and commercial activities, as well as a sound cost allocation method reflecting the real costs of providing the public service.

Article 4(1) and (2), read in connection with the Annex, requires that the costs and revenues of the operator must be correctly allocated between the public services (on a contract-by-contract basis) and the commercial services (see Section 2.5.2).

If, for example, the costs of services rendered in stations to the public service and commercial activities were allocated only to the public service, this would constitute a cross-subsidy incompatible with Regulation (EC) No 1370/2007. Specific obligations on the separation of accounts of railway undertakings are also enshrined in Directive 2012/34/EC (50).

Each public service contract should contain specific rules on compensation and should give rise to specific accounting entries. If an undertaking has entered into several public service contracts, its accounts should allow the identification of compensation received for the discharge of public service obligations in the various public service contracts separated from revenues from commercial market operations. At the written request of the Commission, these accounts must be made available in accordance with Article 6(2) of Regulation (EC) No 1370/2007.

2.6.6.   
  Article 4(1). Efficiency incentives

Recital 27 of Regulation (EC) No 1370/2007 states that in the case of a direct award or general rules, the parameters for compensation should be set in such a way that compensation is appropriate and reflects a ‘desire for efficiency and quality of service’. Point 7 of the Annex specifies that the method of compensation should ‘promote the maintenance or development of effective management by the public service operator, which can be the subject of an objective assessment’.

This means that incentives for an economically efficient provision of the service should be built into the compensation mechanism. Efficiency should improve over time and improvements should be objectively measurable.

Efficiency should be understood as the relation between the quality (or level) of the public services and the resources employed. Incentives can thus be designed to reduce costs and/or increase the quality/level of service. However, cost reductions that are achieved at the expense of service quality/level do not count as efficiency improvements.

Efficiency incentives should be realistic, proportionate and precisely defined in the contract. Efficiency gains should be appropriately shared between the operator, the public authorities and, where appropriate, the users. The operator should not be allowed to keep a disproportionate part of such benefits. Any such mechanism for incentivising efficiency improvements must be based on objective and measurable criteria set out in the entrustment act and subject to transparent ex post assessment carried out by the competent authority.

2.6.7.   
  Article 6(1). Checking compliance with Regulation (EC) No 1370/2007

Competent authorities are required to carry out regular checks during the lifetime of the public service contract, in particular if directly awarded, not only to verify compliance with its terms, but also to detect (and claw back) at an early stage any overcompensation. This is important in particular for long-term contracts.

2.6.8.   
  Article 1(1). and Article 6(1). Requirement to pay operators ‘appropriate’ compensation for public service obligations

According to point 7 of the Annex to Regulation, ‘the method of compensation must promote the maintenance or development of [...] the provision of passenger transport services of a sufficiently high standard’. This principle is also enshrined in Article 2a(2)(b), which states that the compensation of the net financial effort for public service obligations must financially sustain the provision of public passenger transport in the long term.

This means that the compensation made available by competent authorities should make it possible for operators to provide high-quality services on a financially sustainable basis. Underfunding would result in a degradation of the quality of service. In addition, for competitively awarded contracts, an excessively low compensation would discourage prospective bidders from participating in tender procedures.

2.7.   Article 7(2), (3) and (4). Publication and transparency

The interpretative guidance provided in this Section covers the obligation of competent authorities to ensure transparency about the award of public service contracts before and after the award procedure.

Article 7(2) states that at least one year before the publication of an invitation to tender or the direct award of a public service contract, competent authorities shall publish certain information on the contract envisaged in the Official Journal of the European Union. The obligation to publish this information also applies when the public service contracts are awarded under the second sentence of Article 5(1) of Regulation (EC) No 1370/2007 in accordance with the procedure provided for by the public procurement directives, even though these directives do not provide for such a publication (51).

The objective of Article 7(2) is, first, to enable economic operators to react to the intentions of the competent authority, in particular to the type of award that it intends to resort to (invitation to tender or direct award), and second, to give economic operators time to better prepare for an invitation to tender. As a result, failure to publish the information pursuant to Article 7(2) can result in the annulment of the call for tender if the lack of prior information caused a significant disadvantage to operators compared to the operator that currently performs the contract, and therefore has exact knowledge of all its characteristics (52). Such failure will also deprive Member States from the exemption of notification pursuant to Article 108(3) TFEU (53).

Article 7(3) states that within one year of the direct award of a public service contract for rail services, competent authorities shall publish certain information on the awarded contract.

The Commission services have developed model forms and procedures that allow competent authorities to comply with these publication requirements. In view of the publication of the information in the Official Journal of the European Union, the competent authorities should use the specific tool ‘eNotices’ (54) for filling-in and submitting notices for publication on the ‘Tenders Electronic Daily’ (TED).

Article 7(4) provides that a competent authority, when so requested by an interested party, shall forward to it the reasons for directly awarding a public service contract. A competent authority must determine its intention to award a contract directly at least one year in advance, since this information must be published in the Official Journal of the European Union (Article 7(2), in particular subparagraph (b)). Thus, interested parties are placed in a position to formulate questions a long time before the contract is awarded, which must be one year later at the earliest. In order to grant effective legal protection, the information requested in accordance with Article 7(4) should be provided without undue delay.

Article 7(2) and (4) of Regulation (EC) No 1370/2007 do not require a competent authority to publish or communicate to any interested economic operators all the information necessary in order to enable them to submit a sufficiently detailed offer which could be subject to a comparative assessment, nor to carry out such a comparative assessment of all bids that may have been received following publication of that information (55).

2.8.   Transitional arrangements

This Section provides interpretative guidance on some aspects of the provisions on transitional arrangements concerning contracts awarded before the entry into force of Regulation (EC) No 1370/2007 and those awarded during the transitional periods as defined in Article 8.

2.8.1.   
  Article 8(3) (b) and (c). Maximum duration of 30 years

Article 8(3)(b) and (c) states that public service contracts awarded ‘before 26 July 2000 on the basis of a procedure other than a fair competitive tendering procedure’ or awarded ‘as from 26 July 2000 and before 3 December 2009 on the basis of a fair competitive tendering procedure [...] may continue until they expire, but for no longer than 30 years’.

Although this provision does not expressly specify the starting point from which the maximum period of 30 years must be calculated, the Union Courts held that this period runs from the date of entry into force of Regulation (EC) No 1370/2007 (56). Consequently, given the fact that the Regulation entered into force on 3 December 2009, all public service contracts that fall under the provisions of Article 8(3)(b) and (c) may continue until 3 December 2039, at the latest.

2.8.2.   
  Article 8(3)(d). Meaning of ‘limited duration comparable to the durations specified in Article 4’

Article 8(3)(d) states that public service contracts awarded ‘as from 26 July 2000 and before 24 December 2017 on the basis of a procedure other than a fair competitive tendering procedure [...] may continue until they expire, provided they are of limited duration comparable to the durations specified in Article 4’.

The Commission considers that the term ‘comparable to the durations specified in Article 4’ should be interpreted restrictively, so as to ensure that Member States work towards achieving the objectives of Regulation (EC) No 1370/2007 from the date of its entry into force on 3 December 2009. The Commission therefore takes the view that it would be sensible to consider that the duration of public service contracts should be very similar to those indicated in Article 4.

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(1)  Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions: Sustainable and Smart Mobility Strategy – putting European transport on track for the future (COM/2020/789 final), 9.12.2020.

(2)  OJ L 315, 3.12.2007, p. 1.

(3)  Regulation (EU) 2016/2338 of the European Parliament and of the Council of 14 December 2016 amending Regulation (EC) No 1370/2007 concerning the opening of the market for domestic passenger transport services by rail (OJ L 354, 23.12.2016, p. 22).

(4)  The Fourth Railway Package is a set of six legislative texts designed to complete the single market for rail services; see https://transport.ec.europa.eu/transport-modes/rail/railway-packages/fourth-railway-package-2016_en.

(5)  Communication from the Commission on interpretative guidelines concerning Regulation (EC) No 1370/2007 on public passenger transport services by rail and by road of 29 March 2014 (OJ C 92, 29.3.2014, p. 1).

(6)  OJ L 94, 28.3.2014, p. 65.

(7)  OJ L 94, 28.3.2014, p. 243.

(8)  OJ L 94, 28.3.2014, p. 1.

(9)  It should be noted that Regulation (EC) No 1370/2007 still refers to Directives 2004/17/EC and 2004/18/EC, which in the meantime have been repealed and replaced by Directives 2014/24/EU and 2014/25/EU. All these references should be understood as relating to the new directives.

(10)  Article 10(3) of Directive 2014/23/EU.

(11)  OJ L 364, 12.12.1992, p. 7.

(12)  Communication from the Commission on the interpretation of Council Regulation (EEC) No 3577/92 applying the principle of freedom to provide services to maritime transport within Member States (maritime cabotage) (COM/2014/0232 final), 22.4.2014.

(13)  OJ L 343, 14.12.2012, p. 32.

(14)  Judgement of 24 July 2003, Altmark Trans, C-280/00, EU:C:2003:415 (the ‘Altmark judgement’).

(15)  Judgement of 29 November 2018, ARFEA v European Commission, T-720/16, EU:T:2018:853, para 88; judgement of 24 November 2020, Viasat Broadcasting UK Ltd, C-445/19, EU:C:2020:952, para 33.

(16)  Judgement of 12 February 2008, BUPA and Others v European Commission, T-289/03, EU:T:2008:29, para 168.

(17)  This approach is consistent with the Commission's general approach to Services of General Economic Interest in other sectors. See, in particular, point 48 of the Communication from the Commission on the application of the European Union State aid rules to compensation granted for the provision of services of general economic interest (the ‘SGEI Communication’) (OJ C 8, 11.1.2012, p. 4).

(18)  See, in particular, Judgement of 1 March 2017, Société nationale maritime Corse Méditerranée (SNCM) v European Commission, T-454/13, EU:T:2017:134, para 134 (the ‘SNCM judgement’).

(19)  Judgement of 1 March 2017, French Republic v European Commission, T-366/13, ECLI:EU:T:2017:135, para 105.

(20)  SNCM judgement, para 134.

(21)  Judgement of 18 January 2017, Andersen v European Commission, T-92/11 RENV, EU:T:2017:14, para 70. The General Court refers to the particularities of rail transport mentioned in recital 25 of Regulation (EC) No 1370/2007. That recital refers to the specific issues of investment burden and investment costs.

(22)  Commission Implementing Regulation (EU) 2018/1795 of 20 November 2018 laying down procedure and criteria for the application of the economic equilibrium test pursuant to Article 11 of Directive 2012/34/EU (OJ L 294, 21.11.2018, p. 5).

(23)  For a case of measurement in timetable kilometres, see Judgement of 27 October 2016, Hörmann Reisen, C-292/15, EU:C:2016:817 (the ‘Hörmann Reisen judgement’).

(24)  See, to that effect, the Hörmann Reisen judgement, para 34 to 48.

(25)  OJ L 82, 22.3.2001, p. 16.

(26)  In accordance with the case-law of the Union Courts, Directive 2001/23/EC is applicable to a transfer of undertaking which takes place following a tendering procedure for the award of a public service contract. In sectors of activity based on tangible assets, such as bus or rail transport, Directive 2001/23/EC applies if significant tangible assets are transferred. The existence of a transfer within the meaning of Directive 2001/23/EC is not precluded by the fact that ownership of the tangible assets previously used by a transferor and taken over by a transferee is not transferred, for example in case the tangible assets taken over by the new contractor did not belong to its predecessor but were provided by the contracting authority; see , to that effect, Judgement of 20 November 2003, Abler, C-340/01, EU:C:2003:629; see also Judgement of 26 November 2015, ADIF, C-509/14, EU:C:2015:781.

(27)  This may include functional urban areas, which consist of a city and its commuting zone.

(28)  Judgement of 13 November 2008, Coditel Brabant, C-324/07, EU:C:2008:621, para 30.

(29)  Opinion of the Advocate General delivered on 25 October 2018 in Joined Cases C-350/17 and C-351/17, Mobit, EU:C:2018:869, para 104.

(30)  Judgement of 21 March 2019, Rhein-Sieg-Kreis, Joined Cases C-266/17 and C-267/17, EU:C:2019:241.

(31)  See, ex multis, Judgement of 18 January 2001, Commission of the European Communities v Kingdom of Spain, C-83/99, EU:C:2001:31, para 19; and Judgement of 7 July 2022, Pricoforest SRL v Inspectoratul de Stat pentru Controlul în Transportul Rutier (ISCTR), C-13/21, EU:C:2022:531, para 30.

(32)  MOVE-PSO-REGULATION@ec.europa.eu

(33)  Commission Recommendation of 6 May 2003 concerning the definition of micro, small and medium-sized enterprises (OJ L 124, 20.5.2003, p. 36).

(34)  MOVE-PSO-REGULATION@ec.europa.eu

(35)  See Articles 32 and 72 of Directive 2014/24/EU and Articles 50 and 89 of Directive 2014/25/EU.

(36)  See for instance recital 20 of Regulation (EC) No 1370/2007: ‘Where a public authority chooses to entrust a general interest service to a third party, it must select the public service operator in accordance with Community law on public contracts and concessions, as established by Articles 43 to 49 of the Treaty, and the principles of transparency and equal treatment’.

(37)  Judgement of 5 October 2000, Commission of the European Communities v French Republic, C-337/98, EU:C:2000:543, para 44 and 46; Judgement of 19 June 2008, pressetext Nachrichtenagentur, C-454/06, EU:C:2008:351, para 34; and Judgement of 13 April 2010, Wall, C-91/08, EU:C:2010:182, para 37 and 38 (the ‘Wall judgement’); Judgement of 14 May 2020, T-Systems Magyarország Zrt., C-263/19, EU:C:2020:373, para 61. The case-law of the Union Courts was also taken into account in setting the conditions under which modifications to a contract during its performance require a new procurement procedure under Article 72 of Directive 2014/24/EU and Article 89 of Directive 2014/25/EU. Similar provisions are also set under Article 43 of Directive 2014/23/EU.

(38)  Judgement of 19 June 2008, pressetext Nachrichtenagentur, C-454/06, EU:C:2008:351, para 35 to 37; Wall judgement, para 38; Judgement of 7 September 2016Finn Frogne, C-549/14, EU:C:2016:634, para 28; Judgement of 3 October 2019, Delta Antrepriză de Construcţii şi Montaj 93, C-267/18, EU:C:2019:826, para 33.

(39)  The Union Courts pointed out in the Wall judgement case that a change of subcontractor, even if the possibility of a change is provided for in the contract, may in exceptional cases constitute a substantial amendment to one of the essential provisions of a concession contract where the use of one subcontractor rather than another was, in view of the particular characteristics of the services concerned, a decisive factor in concluding the contract, which is in any event for the referring court to ascertain.

(40)  Article 72 of Directive 2014/24/EU and Article 89 of Directive 2014/25/EU.

(41)  Notably Commission Decision on the application of Article 106(2) TFEU to State aid in the form of public service compensation granted to certain undertakings entrusted with the operation of services of general economic interest (OJ L 7, 11.1.2012, p. 3) and EU framework for State aid in the form of public service compensation (OJ C 8, 11.1.2012, p. 15).

(42)  However, Commission Regulation (EU) No 360/2012 on the application of Articles 107 and 108 to de minimis aid granted to undertakings providing services of general economic interest (OJ L 114, 26.4.2012, p. 8) applies to aid granted to undertakings providing land transport services, with the exception of aid granted to undertakings performing road freight transport for hire and reward (see recital 7 and Article 1(2)(g) of Regulation (EU) No 360/2012).

(43)  Article 2a (2).

(44)  See the Altmark judgement, and also, in particular, Section 3 of the SGEI Communication.

(45)  Point 69 of the SGEI Communication.

(46)  Further guidance is given in the SGEI Communication on what is to be considered a ‘typical undertaking, well run and adequately provided with material means so as to be able to meet the necessary public service requirement’. See in particular points 70-76.

(47)  There are persisting strong differences between national rail markets (as highlighted by the 7th Report on monitoring development of the rail market published by the Commission in January 2021) as well as very significant State interventions distorting prices on this market. See https://ec.europa.eu/transport/modes/rail/market/market_monitoring_en .

(48)  This means that it is not always possible to use as a benchmark the average profit margin in the sector. The specificities of the contract and notably the risk involved by the contract may require an adjustment of the profit margin in a particular case, to ensure that this profit margin remains reasonable.

(49)  In particular point 7 of the Annex to Regulation (EC) No 1370/2007.

(50)  Article 6 on the separation of accounts of railway undertakings and railway infrastructure managers.

(51)  Judgement of 20 September 2018, Stefan Rudigier, C-518/17, EU:C:2018:757 (the ‘Rudigier judgement’).

(52)  As set out in the Rudigier judgement.

(53)  See, to that effect, Judgement of 12 October 1978, Commission and Belgium, C-156/77, para 10 and Judgement of 21 July 2016, Dilly’s Wellnesshotel GmbH, C-493/14, ECLI:EU:C:2016:577, para 38.

(54)  This tool is available in all EU languages at the address https://enotices.ted.europa.eu.

(55)  Judgement of 24 October 2019, Autorità Garante della Concorrenza e del Mercato, C-515/18, EU:C:2019:893.

(56)  Judgement of 19 March 2020, Compañía de Tranvías de La Coruña, C-45/19, EU:C:2020:224.

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ANNEX

Member States with a market volume of rail passenger transport of less than 23 million train- kilometres in December 2017

Bulgaria

Estonia

Greece

Croatia

Ireland

Lithuania

Luxembourg

Latvia

Slovenia

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