Member States may impose public service obligations [PSO] on undertakings and compensate them for the extra costs they incur. The public service compensation [PSC] may also include reasonable profit. Naturally, the PSC may not cover costs that are not related to the PSO or the service of general economic interest [SGEI]. So, for multi-service providers, account separation is absolutely necessary.
A less tractable problem is how to take into account changes in eligible costs that will be compensated in the future. Because costs evolve, the question that inevitably arises is what proportion of future cost increases should be covered by the PSC and what proportion should be borne and, therefore, absorbed by the service providers. Since the amount of permissible profit must be proportional to the degree of risk assumed by an undertaking, it follows that a compensation mechanism that covers most cost increases, minimises commercial risk and therefore should allow only for a smaller than otherwise profit.
On 21 December 2023, the Court of Justice, in case C-421/22, Dobeles Autobusu Parks and Others, provided an answer to whether Member States may exclude completely from the PSC any indexation of future costs.1 The judgment was a preliminary ruling on the interpretation of several articles of Regulation 1370/2007 on public passenger transport services by rail and by road.
Dobeles Autobusu Parks [Dobeles] and other transport undertakings operating in Latvia disputed the method of calculation of the amount of PSC for the provision of public passenger services by bus. In calculating the PSC, Member States have to conform with the requirements of Regulation 1370/2007.
A Latvian authority had launched an open tender procedure for the award of the right to provide bus services in rural areas for a period of ten years. Dobeles and the other undertakings challenged the calculation methodology used by the tender. Tenderers were in effect requested to predict the price of the service proposed for the next ten years. The PSC of operators during the term of the contract was then to be determined according to that expected price. However, the contract did not provide for a procedure for adjusting the price of the service in the event of a change in the underlying costs. Dobeles and the other undertakings claimed that, as a consequence, they were forced to assume excessive risk.
In light of these arguments, the referring Latvian court wanted to know whether Regulation 1370/2007 permitted a compensation mechanism that in essence shifted all or most risk to the service operators, by not providing for indexation of costs or adjustment of costs which were external to the operators, such as the price of fuel.
Need for a public service contract
As is well known, Regulation 1370/2007 interprets and implements Article 93 TFEU. Therefore, first, the Court of Justice recalled the main objectives of Regulation 1370/2007.
According to the Court, the Regulation defines how the competent national authorities may intervene in the field of public passenger transport in order to ensure that the provision of services of general interest can be more extensive, safer, of higher quality or cheaper than those which the market alone without state intervention would be able to provide. [paragraph 33 of the judgment]
Regulation 1370/2007 defines the conditions under which the competent national authorities, when imposing PSOs or entrusting the performance of those obligations to an undertaking, may grant compensation to service operators for the costs incurred and/or grant them exclusive rights in return for the performance of PSOs. [para 34]
Article 3(1) of that Regulation provides that, where a competent authority decides to grant to the operator of its choice an exclusive right and/or PSC, whatever its nature, in return for the fulfilment of PSOs, it has to do so in the context of a public service contract. Therefore, public service obligations and the related compensation must be established in the context of the same contract. [para 36]
By way of derogation from Article 3(1), Article 2(3) authorises the definition, by means of general rules, of PSOs which are intended to establish maximum fares for all passengers or for certain categories of passengers. In this case, the competent authority is required to grant compensation to the public service operator concerned. [para 37]
Tendering of contracts and the discretion of national authorities
Then the Court of Justice noted that the fact that in the present case the contract was awarded after an open tender procedure was in itself irrelevant to answering the question asked by the Latvian court. This is because it followed from the express wording of Article 6(1) of Regulation 1370/2007 that the compensation linked to a public service contract awarded
following an open, transparent and non-discriminatory tendering procedure had to comply with the requirements laid down in Article 4(1) of that Regulation, specifying the detailed rules for such compensation. That was the provision that had to be taken into account in order to answer the question referred. [paras 38-39]
In this connection, the Court recalled that in interpreting a provision of EU law, it was necessary to take into account not only its wording but also the objectives pursued by the rules of which it was part and the context in which it occurred. [para 40]
Article 4(1) of Regulation 1370/2007 states that public service contracts must establish in advance, in an objective and transparent manner, the parameters on the basis of which compensation must be calculated and define the detailed rules for the allocation of the costs associated with the provision of the services. The costs may include, inter alia, the costs of personnel, energy, infrastructure, maintenance and repair of transport vehicles, rolling stock and facilities necessary for the operation of transport services, fixed costs as well as an appropriate return on capital. [para 43]
The Court of Justice inferred that the competent national authorities enjoy a margin of discretion in devising the mechanism for such compensation. [para 42]
In particular, the possibility of allocating costs necessarily implies that the national authorities are not required to compensate for all the costs, but may transfer to the provider of that public service the risks associated with the development of some of those costs, whatever their nature. Therefore, it is irrelevant whether or not that service provider can fully control their development, even if they are the result of circumstances beyond the control of that service provider such as energy prices or social insurance costs. [para 43]
The Court considered that it followed from the wording of Article 4(1) of Regulation 1370/2007 that the national authorities could, in the exercise of their discretion, provide for a compensation scheme which, by reason of the parameters for calculating the PSC and the arrangements for allocating costs defined by those authorities, did not guarantee automatically to the provider of the public transport service the full coverage of those services. [para 44]
Avoidance of over-compensation and promotion of efficiency
In the field of SGEI in general, over-compensation of public service providers is never compatible with the internal market.
Not surprisingly, the Court of Justice held that any compensation scheme had to aim not only to avoid over-compensation of costs, but also to promote greater efficiency on the part of the provider of a public transport service. A compensation scheme which guarantees, in all circumstances, the automatic coverage of all costs associated with the performance of a public service contract does not provide such an incentive for greater efficiency, since the service provider in question is not required to limit its costs. [para 46]
On the other hand, a compensation scheme which, in the absence of regular indexation, does not automatically cover all of those costs, but has the effect of transferring certain risks to the public service provider, is capable of contributing to the attainment of such an objective. Even with regard to costs which are beyond the control of the public service provider concerned, the efficiency gains which it has acquired will enable it to strengthen its financial viability in order to meet those costs, which will help to ensure the proper performance of the obligations laid down in the public service contract. [para 47]
Tendering obviates the need for detailed compensation rules
Next, the Court of Justice made an important observation. Article 4 of Regulation 1370/2007 does not contain specific rules applicable to the method of calculating the PSC whenever a public service contract is awarded following a competitive tendering procedure. In such a case, the compensation, unlike that which is linked to a public service contract awarded directly or pursuant to a general rule and, therefore, without a call for competition, does not have to comply with the more detailed rules contained in the Annex which is intended to ensure the appropriateness of the amount of compensation. [para 48]
That difference is based on the premise that, in the case of a competitive tendering procedure, it is not necessary to adopt more precise rules concerning the calculation of compensation in order to ensure the appropriateness of its amount, since such a procedure reduces to a minimum the amount of compensation of the provider of the public transport service. Consequently, it avoids, by means of an automatic adjustment, not only excessive compensation but also insufficient compensation. [para 49]
Any service provider who decides to participate in a tendering procedure for the performance of a public service contract must itself determine the terms of its offer, in the light of all the relevant parameters, and, in particular, the likely evolution of costs, regardless of whether they are within its control, that are likely to affect the provision of the service. This in turn defines the level of risk that the bidder is prepared to assume. It may, therefore, be presumed, without prejudice to provisions of EU law allowing national authorities to reject abnormally low tenders, that an offer is such as to ensure that, if a bidder wins the contract, it will receive a rate of return on the capital employed corresponding to the level of risk incurred. [para 50]
It follows that a compensation scheme linked to a public service contract awarded following an open, transparent and non-discriminatory tendering procedure is, in itself, capable of ensuring that the provider of that public service is covered for its costs and that it is also compensated appropriately, the amount of which will vary according to the level of risk which it is prepared to assume. [para 51]
Therefore, the competent national authorities are not required, in the context of a competitive tendering procedure, to automatically compensate, by means of regular indexation, all the costs incurred by the provider of a transport service linked to the performance of a public service contract, whether or not they are under its control, so that this contract provides it with appropriate remuneration. [para 52]
Absence of automatic indexation does not necessarily create excessive risk
Then the Court of Justice noted that Dobeles and Others claimed that the failure to properly index the costs associated with the discharge of a PSO which are beyond their control could result in the provider of that public service not receiving appropriate compensation, in the sense that the amount of the contribution could become insufficient, which would risk undermining its financial viability and/or the quality of the service provided. [para 53].
The Court responded that, in accordance with the principle of proportionality, which is a general principle of EU law, enshrined, as regards the specifications of PSOs, in Article 2(a)(1) of Regulation 1370/2007, the competent national authorities may not impose excessive or unreasonable conditions on transport service providers entrusted with the performance of those obligations. [para 54]
In accordance with the principle of proportionality, the amount of compensation must vary according to the risk which the public service provider is prepared to assume. [para 55]
However, the absence of a mechanism for the regular indexation of costs cannot, in itself, be regarded as constituting a breach of the principle of proportionality. Where a transport service provider decides to participate in such a procedure, it itself determines the terms of its offer. In particular, it is for the bidder to assess the level of risk which it is prepared to assume in the light of the compensation arrangements set out in the public service contract, and in particular the absence of such a mechanism. Therefore, if a national authority were to include, in the context of a competitive tendering procedure, conditions that are unreasonable or excessive in the light of the risks which will have to be assumed by the public service provider, it would be unlikely that offers would be submitted to it, with the result that that authority would have to amend those conditions in order to make them compatible with the principle of proportionality. [para 56]
In the present case, however, it does not appear that the tender specifications at issue contained such unreasonable or excessive conditions, since the national authorities received around a hundred offers by transport undertakings established in several Member States. [para 57]
As regards the risks mentioned earlier, they arise in the event that a transport service provider, in the hope of winning the contract, proposes a contract price which does not take sufficient account of a future increase in costs. The possibility that a provider of those services may offer a price which entails a risk that it will be unable to perform the contract appropriately is inherent in each tendering procedure and may, depending on the circumstances of the individual case, lead to the application, where appropriate, of provisions of EU law allowing the national authorities to reject abnormally low tenders. On the other hand, that possibility does not justify the requirement that public service contracts concluded by national authorities, in the context of a public service contract and following an open, transparent and non-discriminatory tendering procedure, always include a regular indexation mechanism which makes it possible, automatically, to ensure full compensation for any increase in the costs associated with their performance, whether or not they are under the control of the provider. [para 58]
In the light of all the foregoing considerations, the Court of Justice concluded that Regulation 1370/2007 did not preclude PSC which, following an open, transparent and non-discriminatory tendering procedure, excluded regular indexation of any increase in the costs related to the management and operation of a public transport service.
Three conclusions may be drawn from this case. First, the compensation of public service providers selected through a competitive procedure need not included indexation of future cost increases. Second, the non-indexation of costs in the context of a competitive selection procedure does not necessarily force service providers to assume excessive risk. Third, a competitive selection should ensure the cost efficiency of the service concerned and the reasonableness (proportionality) of the profit of the provider.
In other words, tendering is the solution to many problems.