A public service obligation (PSO) is a requirement set by a public authority to secure passenger transport services in the general interest that an operator would not provide, or not to the same extent or on the same terms, on commercial grounds alone. In rail, PSOs are imposed through public service contracts that define the services and the compensation the operator receives.
Regulation (EC) No 1370/2007 sets the EU rules for public service obligations in rail and road passenger transport. It lays down how competent authorities award public service contracts and when compensation payments are compatible with the internal market without prior state aid notification.
Compensation may not exceed the net cost of discharging the obligation, taking account of revenues and a reasonable profit. Rail contracts are generally limited to 15 years, with longer terms possible where the operator provides significant assets.
Many rail services that society needs cannot be run commercially. The PSO framework lets authorities pay for them and grant exclusive rights while keeping the payments within EU competition and state aid rules.
Tendering after the 4th Railway Package
Regulation (EU) 2016/2338, part of the 4th Railway Package, made competitive tendering the default for rail public service contracts. The general option to award rail contracts directly ceased to apply on 25 December 2023, and contracts awarded directly under it from 3 December 2019 were limited to 10 years.
Direct award remains possible in defined cases. These include small contracts, emergency measures, operators that also manage all or most of the infrastructure, and markets where the authority can justify it by structural and geographical characteristics, provided the contract sets performance requirements.
PSO contracts also set limits on open access. Through the economic equilibrium test in the Recast Directive, a member state may restrict new commercial services on a route the contract covers.