Explanatory Memorandum to COM(2000)7 - Action by Member States concerning public service requirements and the award of public service contracts in passenger transport by rail, road and inland waterway

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dossier COM(2000)7 - Action by Member States concerning public service requirements and the award of public service contracts in passenger ...
source COM(2000)7 EN
date 26-07-2000
1. Introduction

The current Community regulatory framework was designed for a public transport industry in which suppliers were exclusively national, regional or local. Now, the sector is facing the emergence of a single European market in the provision of public transport.

At the same time, there is an ever more apparent need to modernise public transport so that it can make its full contribution to tackling problems of environmental damage and congestion.

The Commission has decided to make a new regulatory proposal, which will replace Regulation (EEC) No 1191/69 i as amended by Regulation (EEC) No 1893/91 i. The starting point for the proposal is the development of competition for the provision of public transport. This aim is in line with the conclusions of the European Council of Lisbon of 28 March 2000 where the Commission, Council and the Member States, each in accordance with their respective powers, were asked to speed up liberalisation in areas such as transport.

During the past decade, the economic conditions of the public transport sector in the European Union have changed a great deal. Eleven of the fifteen Member States have now introduced an element of competition in their legislation or administrative practices, relating to at least part of their public transport market. In nearly all cases this is controlled competition - based on the regular renewal of exclusive rights, rather than on free access to the market. Properly conducted, this market opening has proved a success, improving cost-effectiveness and the attractiveness of services. Public and private sector transport operators have taken advantage of the new opportunities, establishing themselves in other Member States and entering the market there.

It is now time, in the interests of operators, authorities and consumers, to establish clear rules putting competition in public transport on a Community basis. This will avoid the need for the Commission or the courts to resolve legal questions case by case, promoting legal certainty and harmonising key aspects of the procedures used in the different Member States. At the same time we can remove obstacles which the present Regulation places in the way of modern approaches to public transport.

Because market opening should go hand in hand with protection of the general interest, the Regulation also establishes for the first time an explicit obligation for authorities to pursue adequate transport services.

Contents

1.

2. The need to update Community law


2.

2.1 The existing legal framework


Article 73 of the EC Treaty refers to the importance of public services in rail, road and inland waterway transport. It states that Aids shall be compatible with this Treaty if they represent reimbursement for the discharge of certain obligations inherent in the concept of a public service. Regulation (EEC) No 1191/69 enumerates forms of compensation that are compatible with this reference to reimbursement for the discharge of certain obligations. It provides for competent authorities to impose public service obligations on operators, where these are necessary to ensure the provision of adequate transport services, and to reimburse operators for the cost of this. It lays down detailed rules for calculating the financial burden resulting from the imposition of public service obligations. Finally, it exempts compensation granted under the rules it lays down from the State aid notification procedures in Article 88 i of the Treaty.

Regulation (EEC) No 1893/91 amends this basic framework. It establishes a second mechanism - the conclusion of public service contracts - as the normal method of securing the fulfilment of public service objectives. But it still leaves room for the imposition of obligations, particularly in urban, suburban and regional transport.

Regulation (EEC) No 1191/69 as amended does not address the question of how public service contracts should be awarded. The award of certain public service contracts is subject to EC Directives on public procurement i. However, many contracts - notably those embodying concessions - are not subject to these procedures i. In addition, Regulation (EEC) No 1191/69 as amended does not address the question of the opening of the market for the provision of public transport services. Community legislation means that operators have the right to cross borders to provide certain international services and non-regular services i. But there is no right pursuant to Community legislation to provide national regular services, with the limited exception of special road transport services for students, military personnel and workers i. Operators wishing to provide regular services abroad must establish themselves in the Member State concerned, then participate in open procedures put in place under national law - where such procedures exist.
& Telekom Austria AG, 18 May 2000. The Commission's assessment of the status of concessions in Community law is presented in Commission interpretative communication on concessions under Community law, OJ C 121, 29.4.2000, p. 2.

3.

2.2 The economic context


When Regulation (EEC) No 1191/69 was adopted, and even when it was amended in 1991, little of the public transport market was open to competition, and operators were exclusively national. In most Member States a significant proportion of public transport was provided by public administrations or publicly owned companies holding a monopoly position. Today, conditions are different. Markets are being opened on the basis of national legislation, and operators originating in other Member States are making increasing use of the opportunities this creates.

4.

2.2.1 Market opening


Eleven of the fifteen Member States i have introduced legislation or administrative arrangements providing for competition in at least part of the bus, coach or urban rail market. Five States have done the same in heavy rail i. The Annex summarises these arrangements.

5.

2.2.2 Emergence of multinational operators


Where the market has been opened, international operators have stepped in alongside national ones. By early 2000 at least nine companies, from the public and private sectors, were acting as public transport operators in more than one Member State. In only four Member States (compared to six, two years earlier) was the provision of public transport services still restricted to home-country operators i.

6.

2.2.3 Impacts on efficiency and attractiveness of services


This market opening has generally had positive impacts. This can be seen by comparing the effects of the three basic strategies that are now used to regulate public transport:

(i) Closed markets, in which operators are protected by exclusive rights and never face competition from other operators;

(ii) Controlled competition, in which exclusive rights last for fixed periods and are awarded following competition between operators;

(iii) Deregulation, in which there are no exclusive rights.

Experience in the Member States, supported by studies carried out at the Commission's request, shows that controlled competition can lead, with appropriate safeguards, to more attractive services at lower costs. It is not liable to obstruct the fulfilment of the particular missions assigned to transport operators, including the attainment of high standards of public service. In terms of efficiency, the Isotope research study i found that the cost of producing services was highest in closed markets, averaging EUR 3.02 per bus-km in 1996. For controlled competition the figure was EUR 2.26 i, while under deregulation it was lower still at EUR 1.44 i. According to the study, pay rates were not significantly different between controlled competition and closed markets. Lower pay in the UK bus industry accounted for some of the lower costs under deregulation compared with controlled competition, but not for all. Changes in the attractiveness of services are best measured by trends in ridership. Figures have to be treated with caution, because it is difficult to disentangle the effects of different factors. In particular, data on changes in expenditure on services are not available. Nevertheless, in the six Member States where controlled competition has been for some years the regulatory arrangement for a significant part of the bus and/or coach market i, the use of these modes, measured in passenger-kilometres, increased by 14% between 1990 and 1997. By contrast, the increase was 5% in the eight Member States where closed markets were predominant during this period i, while bus and coach use fell by 6% in the Member State where deregulation is the commonest approach i. The main reason for the poor attractiveness of deregulated services seems to be that without exclusive rights, service patterns are unstable and levels of integration are low. Studies of the UK bus market immediately before and after deregulation i show that the change of regime was followed by a sharp decline in ridership (reaching more than 20% over five years in the metropolitan areas). They conclude that this cannot be fully explained by changes in fares, service levels, car ownership or unemployment. Instability and loss of integration also seemed to be key factors. In conclusion, these data suggest that, in comparison with controlled competition,

* deregulated services are cheaper, but tend to be substantially worse from the point of view of attractive public transport;

* closed markets sometimes achieve similar standards of attractiveness for passengers, but at a higher price.

7.

2.3 The need for change


The Community legal framework described in Section 2.1 is not appropriate for these new and changing economic conditions.

8.

2.3.1 Enhancing controlled competition as a means to achieve a high standard of public service


The experience and studies summarised in Section 2.2.3 show that the different strategies pursued by Member States in regulating public transport have led to different results, and to disparities in terms of market opening and of the scope to achieve high quality standards, notably in situations where public budgets are under pressure. These disparities will inevitably present obstacles to the smooth functioning of the Community public transport market that has already begun to emerge. They may also give rise to a breach of the principle of equal treatment in respect of the new multinational transport operators. It is therefore important to update the existing Community legal framework in order to secure the efficient fulfilment of general interest objectives (in particular, the attainment of adequate public services in public transport) by introducing controlled competition.

9.

2.3.2 Making a reality of the right of establishment


In public transport public financing is widespread, because society needs a higher level of service than the market will provide. A significant part of the public transport market is viable only as a result of aid for the provision of public services. If aid for the provision of public services is, in practice, reserved to operators that are not only established in, but also originate in the same Member State as the aiding authority, then there is room to question whether the right of establishment has been frustrated by a distortion of the kind referred to in Article 44(2)(h) of the EC Treaty. Exclusive rights are also widespread in the public transport sector. They have a valuable role to play in ensuring integration between services. Where properly applied by competent authorities, they can enable the finances of loss-making and of commercially viable services to be pooled in ways that benefit the general interest i. It follows that access to the public transport market depends, in reality, on access to public financing and to exclusive rights.

The existing legal framework does not address the question of how fair access to the public transport market can be guaranteed. Where markets have been opened on the basis of national legislation, there are disparities in the procedures used. To achieve the full implementation of the right of establishment, there is a need to harmonise basic aspects of these procedures.

10.

2.3.3 Promoting legal certainty


The emergence of international operators means that the organisation of markets for the supply of public transport - and in particular, how this may affect trade between Member States - is now of direct Community interest i. Effects on trade between Member States can include effects on financial relationships between branches of the same enterprise established in different countries. In a market where exclusive rights play such an important part, it is particularly important for authorities and operators to be confident that these rights are compatible with the Treaty. Article 43 of the Treaty requires Member States to ensure freedom of establishment, including the unrestricted right to take up and pursue activities or manage undertakings. Under Article 86 i of the Treaty, Member States may, under certain conditions, restrict the application of other Treaty principles if this is necessary for the operation of services of general interest. Granting exclusive rights which affect trade between Member States limits market access and thus infringes - albeit indirectly - the principle of freedom of establishment. Interventions by Member States restricting market access must, in accordance with Article 86 i, be proportionate and therefore should limit or harm competition only to the degree necessary to obtain the public benefits aimed at. At present, the Community's secondary legislation provides no guidance permitting authorities and operators to assess, with a degree of legal certainty, whether an exclusive right is or is not proportionate. The Commission considers that the question of proportionality applies to the length of time for which exclusive rights are granted before being renewed. It also applies to the geographical area covered by these rights; to the types of competing service, which are excluded; and to the precision with which the public service requirements to be fulfilled by the operator are defined i. The Commission also considers that the instrument by which Member States award contracts embodying exclusive rights as an important indicator. In principle, open, fair and non-discriminatory procedures restrict competition the least.
[1996] ECR 3547: paragraph 178) and Corbeau (Case 320/91 Criminal proceedings against Paul Corbeau [1993] ECR 2533) make it clear that these particular tasks are public service obligations. If public service obligations are defined loosely or not at all, the claim that Community competition law obstructs their performance can have no validity. This view is supported by the Court's judgment in Ahmed Saeed (Case 66/86 Ahmed Saeed Flugreisen and Silver Line Reisebüro GmbH v Zentrale zur Bekämpfung Unlauteren Wettbewerbs eV [1989] ECR 803), which states (paragraph 56) that 'For it to be possible for the effect of the competition rules to be restricted pursuant to Article 90 i [now Article 86(2)] by needs arising from the performance of a task of general interest, the national authorities responsible for the approval of tariffs and the courts to which disputes relating thereto are submitted must be able to determine the exact nature of the needs in question and their impact on the structure of the tariffs applied by the airlines in question.'.

11.

2.3.4 Updating State aid rules relating to the provision of public passenger transport


Regulation (EEC) No 1191/69, as amended, contains an exemption stating that compensation awarded in accordance with the provisions of the Regulation is not subject to the obligatory State aid notification procedure laid down in Article 88 i of the Treaty.

By contrast to all other forms of compensation for the provision of public services, in the land transport sector the Commission plays no role in assessing the proportionality of compensation. Regulation (EEC) No 1191/69 does not provide mechanisms that would permit this. This liberal approach seemed appropriate when markets were closed - factually as well as by law - to cross-border competition. However, the gradual emergence of a single market for the provision of public transport means that there is now a Community interest, as well as a national interest, in any abuse of state financing. In markets where public financing can affect trade between Member States, any public financing that distorts competition is prohibited by Article 87 i of the Treaty. Under Article 44(2)(h) of the Treaty, moreover, the European Parliament, the Council and the Commission must satisfy themselves that the conditions of establishment are not being distorted by aids granted by Member States.

To avoid over-compensation, it is therefore now necessary for stricter conditions to be introduced for the procedures by which public financing is granted. In particular, the use of procedures that are fair, open and non-discriminatory is considered as a guarantee that the level of aid has been kept to an absolute minimum, making it compatible with the Treaty. Where such procedures are not employed, it is essential for any compensation to be paid in line with accurate calculations of their financial effect.

12.

2.3.5 Removing unnecessary limits on Member State action


The existing regulatory framework is out of date and, in places, unclear. It inadvertently rules out approaches that ought to be permitted. It needs amending to:

*enable authorities to insist on the inclusion of long distance bus and rail services in integration measures such as integrated ticketing schemes or information services;

*simplify and modernise the complex rules on the calculation of compensation;

*simplify the rules on separate accounting;

*make it clear how authorities can lay down general rules of the game applying to all operators, without having to conclude public service contracts with each one;

*clarify how authorities can protect existing employees in situations where public service contracts change hands.

13.

3. The Commission's proposal


Recent years have seen the opening of national public transport markets on the basis of national legislation, and the emergence of multinational operators. It is now necessary to update Community law to take account of these developments.

14.

3.1 Principles of the reform


The framework proposed in this Regulation will:

*ensure better value for money and better quality services in the public transport sector;

*ensure that operators making use of their right of establishment have a real opportunity to gain access to the market, through fair, open and non-discriminatory procedures for the award of financial compensations and exclusive rights;

*harmonise key aspects of the competitive procedures developed in the different Member States;

*promote legal certainty about the rights and duties of operators and authorities in relation to Community law on State aids and exclusive rights as they affect public transport.

The Regulation will not determine the goals that public services should achieve; the way they should be pursued; or the balance between authorities' role in specifying services and operators' scope to experiment. It does not lay down institutional structures for managing public transport, and does not prevent Member States from deciding which bodies should act as competent authorities. It will not impose a single European mechanism to be used in all Member States. Instead, it extends the range of tools that authorities can use, within the framework of European law, to implement their choices. The Regulation will not oblige authorities and operators to follow procedures that are disproportionate in relation to the scale of their activity. Small contracts can be awarded directly without competition. The Regulation is based on the principle of controlled competition. This approach draws on experience in Member States. It also reflects the recommendations of the expert study the Commission commissioned from a consortium led by NEA Transport research and training i, which supported the view that controlled competition is an effective method of achieving the general objectives pursued by Article 16 of the EC Treaty and the Common Transport Policy. The approach is also in line with views expressed by the European Parliament i, the Committee of the Regions i and the Economic and Social Committee i, and has support (although not unanimously) among representatives of the sector i.

15.

3.2 Outline of the proposed Regulation


CHAPTER I: Scope and definitions

Article 1 sets the Regulation's scope and objectives.

Article 2 explains that the Regulation does not replace any of the obligations to which authorities are already subject as a result of the public procurement Directives 92/50 and 93/38. In addition, where one of those Directives already requires a contract to be tendered, it will be those Directives rather than the new Regulation that determine the manner in which this should be done.

Article 3 defines key terms. The definition of an operator and of a public service contract are framed to include the whole range of legal relationships between authorities and operators.

16.

CHAPTER II: Adequate public passenger transport


Article 4 confirms the general interest approach of the Regulation by establishing the concept of adequate public passenger transport and the requirement that authorities should secure it in applying the Regulation - without diminishing the effect of specific standards already laid down by individual Member States. Whatever methods Member States choose to use for regulating and financing public transport, this Article ensures that attention will be paid to the quality of the service provided. It also makes specific provision for integrated information about public transport.

17.

CHAPTER III: Public service contracts


Article 5 establishes as a general rule that authorities' interventions in public transport should take the form of public service contracts. The only exception is where authorities lay down minimum criteria for public transport operation in accordance with Article 10. Article 6 lays down that public service contracts should normally be awarded by competitive tendering. It defines some important aspects of the content of public service contracts and sets a limit on their duration - normally five years. Articles 7 and 8 define the cases where public service contracts will not have to be competitively tendered. Article 7 determines where competent authorities will be able to award public service contracts directly to a given operator. This affects certain rail services, where it is possible that safety standards or the efficiency of light rail or metro systems would be put at risk. It also affects bus services that are fully integrated with these rail services; small contracts; and cases where the authority wishes to facilitate the implementation of an idea for a completely new service and no new public money is involved. Article 8 sets out a simplified competitive procedure -'quality comparison'. This may be used where the contract will include an exclusive right but no new public money. Article 9 sets out mechanisms that competent authorities may use to control damaging market concentration and to protect employees in the case of a change of operator. It confirms that authorities may require operators to be established in the Member State concerned, making them subject to all the standards that the Member State requires of established operators.

18.

CHAPTER IV: Minimum criteria for public transport operation


Article 10 contains the conditions that apply when authorities specify minimum criteria that any operator must comply with, and in particular when authorities wish to compensate operators for the cost of this. It permits authorities to secure the fulfilment of public service requirements that are separate from, or additional to, those embodied in public service contracts. It serves as an addition, not an alternative, to the possibility of awarding public service contracts. Compensation for the cost of complying with such minimum criteria is limited to one fifth of the value of an operator's services, but the same operator may receive additional compensation under the terms of a public service contract, permitting the more detailed monitoring and enforcement arrangements that are appropriate where a higher level of public funding is involved.

19.

CHAPTER V: Procedural issues


Article 11 ensures that authorities will not be required to notify the Commission in advance of any compensation paid under the terms of the Regulation. This maintains the status quo established in Regulation (EEC) No 1191/69. Article 12 sets out basic procedural requirements for tendering and quality comparisons. Article 13 lays down transparency requirements, building on those established in Regulation (EEC) No 1191/69. Article 14 requires Member States to establish appeal procedures. Article 15 covers the separation of accounts. It maintains, in a simplified form, the approach established in Regulation (EEC) No 1191/69.

20.

CHAPTER VI: Final provisions


Article 16 maintains Community rules for ensuring that excessive compensation is not paid, covering compensation for the cost of complying with minimum criteria and also circumstances where a contract has not been competitively tendered. These rules were originally laid down in Regulation (EEC) No 1191/69; they are simplified and modernised in Annex I. Article 17 provides for a transitional period of three years, with the possibility of extending this up to six years where the payback period of rail infrastructure investment will not have run its course within three years. Article 18 ensures that the Regulation does not detract from the rights already granted, under the Europe Agreements, to operators from the countries listed in Annex II. Article 19 enables the Commission to be consulted on proposed national legislation giving effect to the Regulation. It also requires the Commission to report on its functioning within five years, with a view to future amendments. Article 20 provides for the repeal of the old Regulation and the deletion of the redundant paragraph of Regulation (EEC) No 1107/70 on transport aid. Article 21 provides for the entry into force of this Regulation.

21.

4. Justification for action at Community level


22.

4.1 What are the objectives of the proposed action in relation to the Community's obligations-


The proposal aims to enhance legal certainty concerning the application of Community rules on exclusive rights and State aids in the context of the emerging single market in public passenger transport. It will achieve this through clear rules guaranteeing the proportionality of exclusive rights (notably relating to their duration and the methods of awarding them) and the proportionality of the provision of financial compensation to operators for their compliance with authorities' public service requirements (public service obligations, under the terms of Article 73 of the Treaty). At the same time, the proposal will encourage efficiency and effectiveness in public transport. This has an important role to play in fulfilling the Community's objectives in relation to global warming, reduction of carbon dioxide emissions, reduction of pollution, underpinning Community economic growth and supporting social inclusion. If the present trend of increasing use of cars and falling use of public transport is not halted, these objectives will not be achieved. Public transport use will continue to decline unless a substantial increase in its efficiency and the attractiveness of the services it offers is achieved.

23.

4.2 Does competence for the planned activity lie solely with the Community or is it shared with the Member States-


The action falls under a shared competence (Article 71(1)(d) of the Treaty) and also under an exclusive competence (Article 89 of the Treaty).

24.

4.3 What is the Community dimension of the problem (for example, how many Member States are involved and what solution has been used up to now)-


The Regulation concerns all Member States. In order to avoid distortion of competition, it is necessary to improve and harmonise the treatment of authorities' action to secure public service requirements where this has an impact on competition, notably by generalising in all Member States the award of public service contracts and exclusive rights following consistent non-discriminatory competitive procedures. There is presently a wide divergence of practice in the Member States, and - with regard to exclusive rights in particular - the Community dimension has not previously been addressed.

25.

4.4 What is the most effective solution taking into account the means available to the Community and those of the Member States-


Given the need to establish legal certainty in situations in which operators originating in one Member State establish themselves in a second Member State and attempt to enter the public transport market there, the most effective solution is action at Community level. To achieve this, this proposal establishes common rules

- for the use of contracts between authorities and operators;

- for compensating operators for the fulfilment of public service requirements;

- for the award of exclusive rights;

- for introducing and managing competition;

- on transparency.

26.

4.5 What real added value will the activity proposed by the Commission provide and what would be the cost of inaction-


Given that the purpose of the action is to establish common rules applicable in all the Member States, the action can only be achieved through Community legislation and could not be achieved by action at the level of the individual Member States. The Regulation will promote the provision of efficient and attractive public transport and will enable Member States to develop specific national regulatory systems with confidence within the common standards for transparency and non-discrimination established by a clear Community framework. The Regulation will also remove restrictions on Member State action that are imposed by Regulation (EEC) No 1191/69 and are now out of date. The present situation is characterised by the absence of a common framework of Community rules; this could lead to the disruption of the system for regulating public transport in one or more Member States as the result of adverse court judgments.

27.

4.6 What forms of action are available to the Community (recommendation, financial support, regulation, mutual recognition, etc.)-


The proposal is based, inter alia, on Article 89 of the Treaty, which leaves the Community no choice but to proceed by means of a regulation. Neither financial support nor mutual recognition would be an appropriate way of achieving a minimum standard applicable across the Community.

28.

4.7 Is it necessary to have a uniform regulation or is a directive setting out the general objectives sufficient, leaving the implementation at the level of the Member States-


To achieve the objectives of the proposal, the principles of transparency and non-discrimination which it aims to promote need to be simultaneously embodied in each of the different national regulatory frameworks in a clear, precise and compatible way. The Community has no choice but to proceed by means of a regulation (see 4.6) and a regulation is the appropriate way to achieve this. In any case the proposal establishes how the principles referred to should be applied to different regulatory mechanisms, without predetermining which of those mechanisms Member State authorities will deploy in each particular case.


29.

Annex


Summary of current market organisation and regulatory arrangements for the operation of public passenger transport in the Community


>TABLE POSITION>


Main sources for the table:


'Examination of Community law relating to the public service obligations and contracts in the field of inland passenger transport', NEA transport training and research, 1998.


'The regulation of bus and coach services within the European Union', Colin Buchanan and Partners, Transport Research Institute, Napier University, Edinburgh, UK and Centro Studi Traffico, Milano, Italy, 1997.


'A study into the organisation and operation of urban public transport in the 12 Member States', Halcrow Fox Consultancy, London, UK, 1994.