Public Service Obligation
In transport
Transport or transportation is the movement of people, cattle, animals and goods from one location to another. Modes of transport include air, rail, road, water, cable, pipeline, and space. The field can be divided into infrastructure, vehicles, and operations...

, public service obligation or PSO is an arrangement in which a governing body or other authority offers an auction
An auction is a process of buying and selling goods or services by offering them up for bid, taking bids, and then selling the item to the highest bidder...

 for subsidies
A subsidy is an assistance paid to a business or economic sector. Most subsidies are made by the government to producers or distributors in an industry to prevent the decline of that industry or an increase in the prices of its products or simply to encourage it to hire more labor A subsidy (also...

, permit the winning company a monopoly
A monopoly exists when a specific person or enterprise is the only supplier of a particular commodity...

 to operate a specified service of public transport
Public transport
Public transport is a shared passenger transportation service which is available for use by the general public, as distinct from modes such as taxicab, car pooling or hired buses which are not shared by strangers without private arrangement.Public transport modes include buses, trolleybuses, trams...

 for a specified period of time for the given subsidy. This is done in cases where there is not enough revenue
In business, revenue is income that a company receives from its normal business activities, usually from the sale of goods and services to customers. In many countries, such as the United Kingdom, revenue is referred to as turnover....

 for routes to be profitable in a free market
Free market
A free market is a competitive market where prices are determined by supply and demand. However, the term is also commonly used for markets in which economic intervention and regulation by the state is limited to tax collection, and enforcement of private ownership and contracts...

, but where there is a socially desirable advantage in this transport being available. The use of PSO can be applied to many mode of transport
Mode of transport
Mode of transport is a term used to distinguish substantially different ways to perform transport. The most dominant modes of transport are aviation, land transport, which includes rail, road and off-road transport, and ship transport...

, including air, sea
Ship transport
Ship transport is watercraft carrying people or goods . Sea transport has been the largest carrier of freight throughout recorded history. Although the importance of sea travel for passengers has decreased due to aviation, it is effective for short trips and pleasure cruises...

, road
Road transport
Road transport or road transportation is transport on roads of passengers or goods. A hybrid of road transport and ship transport is the historic horse-drawn boat.-History:...

 or rail
Rail transport
Rail transport is a means of conveyance of passengers and goods by way of wheeled vehicles running on rail tracks. In contrast to road transport, where vehicles merely run on a prepared surface, rail vehicles are also directionally guided by the tracks they run on...

. In many cases the introduction of PSO has been a way to privatize
Privatization is the incidence or process of transferring ownership of a business, enterprise, agency or public service from the public sector to the private sector or to private non-profit organizations...

 former government owned transport. The infrastructure is often separated from the operation, and may be owned by the governing body or by a third party. The authority may also maintain the ownership of the vehicles, such as ferries or rolling stock
Rolling stock
Rolling stock comprises all the vehicles that move on a railway. It usually includes both powered and unpowered vehicles, for example locomotives, railroad cars, coaches and wagons...


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


The authority issuing the auction may be a ministry of transport, county
A county is a jurisdiction of local government in certain modern nations. Historically in mainland Europe, the original French term, comté, and its equivalents in other languages denoted a jurisdiction under the sovereignty of a count A county is a jurisdiction of local government in certain...

, province
A province is a territorial unit, almost always an administrative division, within a country or state.-Etymology:The English word "province" is attested since about 1330 and derives from the 13th-century Old French "province," which itself comes from the Latin word "provincia," which referred to...

, state, municipality
A municipality is essentially an urban administrative division having corporate status and usually powers of self-government. It can also be used to mean the governing body of a municipality. A municipality is a general-purpose administrative subdivision, as opposed to a special-purpose district...

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

The auctioneer will specify a number of terms of the service, such as frequency
Headway is a measurement of the distance/time between vehicles in a transit system. The precise definition varies depending on the application, but it is most commonly measured as the distance from the tip of one vehicle to the tip of the next one behind it, expressed as the time it will take for...

, size of vehicle, timing of service, the maximum permitted fare
A fare is the fee paid by a passenger allowing him or her to make use of a public transport system: rail, bus, taxi, etc. In the case of air transport, the term airfare is often used.-Uses:...

by some or all the available seats and/or other specifications related to service and quality. The auctioneer can specify either a net or gross contract. In the latter the operator bids for the full operating costs, and all revenue goes to the authority; with net contracts the operator will be granted all revenue, and will bid only for the necessary difference between fare revenue and that needed to make the desired profit. The use of gross contracts reduces the risk of the operator since they do not need to estimate the ridership and will normally give lower bids since there is a lower risk premium
Risk premium
A risk premium is the minimum amount of money by which the expected return on a risky asset must exceed the known return on a risk-free asset, in order to induce an individual to hold the risky asset rather than the risk-free asset...

 in each bid. This option also makes it easier to create free transfer between operators and modes.

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

Typical uses of PSO include regional airline
Regional airline
Regional airlines are airlines that operate regional aircraft to provide passenger air service to communities without sufficient demand to attract mainline service...

 services in districts of for instance in Northern Norway or Ireland
Ireland is an island to the northwest of continental Europe. It is the third-largest island in Europe and the twentieth-largest island on Earth...

, where the airlines serve marginally populated areas not profitable for the carriers without subsidies. Rail services can be unprofitable even on major routes, and government subsidies are sometimes offered through PSO on unprofitable routes, for instance this has been very popular in Germany
Germany , officially the Federal Republic of Germany , is a federal parliamentary republic in Europe. The country consists of 16 states while the capital and largest city is Berlin. Germany covers an area of 357,021 km2 and has a largely temperate seasonal climate...

. Most cities subsidize their public transport
Public transport
Public transport is a shared passenger transportation service which is available for use by the general public, as distinct from modes such as taxicab, car pooling or hired buses which are not shared by strangers without private arrangement.Public transport modes include buses, trolleybuses, trams...

, and in places where the transport is provided by private companies, that may be awarded through PSO. Other common PSO services are ferries, such as the routes to Gotland
Gotland is a county, province, municipality and diocese of Sweden; it is Sweden's largest island and the largest island in the Baltic Sea. At 3,140 square kilometers in area, the region makes up less than one percent of Sweden's total land area...

 in Sweden, or car ferries on the road network of Norway. Ferry routes serving outlying islands in Hong Kong
Hong Kong
Hong Kong is one of two Special Administrative Regions of the People's Republic of China , the other being Macau. A city-state situated on China's south coast and enclosed by the Pearl River Delta and South China Sea, it is renowned for its expansive skyline and deep natural harbour...

 are also subsidised since recently, as a result of rising oil price and therefore the costs of operations.

European Union

In the European Union
European Union
The European Union is an economic and political union of 27 independent member states which are located primarily in Europe. The EU traces its origins from the European Coal and Steel Community and the European Economic Community , formed by six countries in 1958...

, route PSOs are governed by Regulation (EC) No 1008/2008. They must be offered for tender in the Official Journal of the European Union
Official Journal of the European Union
The Official Journal of the European Union is the official gazette of record for the European Union . It is published every working day in all of the official languages of the member states. Only legal acts published in the Official Journal are binding.It was first published on 30 December 1952 as...

 and be open to any transport operator registered in an EU member state. There are limitations in the number of passengers which can be carried where the route can remain eligible for PSO. The winning tenderer usually receives a monopoly on the route, but may have to conform to one or more conditions of service, such as the type and size of vehicle, the timing of services, the maximum fare paid for a portion or all of the seats offered, membership of a common reservation system, quality of service measured by a maximum percentage of cancelled services, etc.

Examples of air transport PSOs currently in operation in Europe are routes from Dublin to Knock
Ireland West Airport Knock
-Ground transport:BusBus Éireann currently provide services from the Airport on the Derry-Sligo-Galway and Galway-Sligo-Derry Route 64, Ireland West Airport Knock - Castlebar - Westport - Achill Island route 440, Dublin - Athlone - Ireland West Airport Knock - Westport route 21, and connects with...

, Galway
Galway Airport
Galway Airport is located at Carnmore, north of Galway City, County Galway, Ireland and is managed by Corrib Airport Limited.On 31 October 2011 the airport's sole remaining operator Aer Arann ceased commercial operations at the airport...

, Kerry
Kerry Airport
-Ground transportation:Kerry Airport is approximately from both Cork and Limerick. Iarnród Éireann's Farranfore railway station is located to the south with services to Killarney, Tralee, Cork and Dublin....

, Sligo
Sligo Airport
Sligo Airport is located in Strandhill, County Sligo, west of Sligo in Ireland. The airport is a small regional airport and has no scheduled routes.-Introduction:...

, Donegal
Donegal Airport
Donegal Airport is located south-west of An Bun Beag , being located at Carrickfinn, a townland in The Rosses, a district in north-west County Donegal, Ireland. The small airport is located right on the county's north-west coast. It is about a 15 minute drive from Dungloe and Gweedore and 45...

 and City of Derry
City of Derry Airport
City of Derry Airport is an airport located northeast of Derry, Northern Ireland. It is located on the south bank of Lough Foyle, a short distance from the village of Eglinton and from the city centre...

, routes between the Italian mainland
Italy , officially the Italian Republic languages]] under the European Charter for Regional or Minority Languages. In each of these, Italy's official name is as follows:;;;;;;;;), is a unitary parliamentary republic in South-Central Europe. To the north it borders France, Switzerland, Austria and...

 and Sardinia
Sardinia is the second-largest island in the Mediterranean Sea . It is an autonomous region of Italy, and the nearest land masses are the French island of Corsica, the Italian Peninsula, Sicily, Tunisia and the Spanish Balearic Islands.The name Sardinia is from the pre-Roman noun *sard[],...

, routes between the French mainland
The French Republic , The French Republic , The French Republic , (commonly known as France , is a unitary semi-presidential republic in Western Europe with several overseas territories and islands located on other continents and in the Indian, Pacific, and Atlantic oceans. Metropolitan France...

 and Corsica
Corsica is an island in the Mediterranean Sea. It is located west of Italy, southeast of the French mainland, and north of the island of Sardinia....

, certain domestic routes within Norway
Norway , officially the Kingdom of Norway, is a Nordic unitary constitutional monarchy whose territory comprises the western portion of the Scandinavian Peninsula, Jan Mayen, and the Arctic archipelago of Svalbard and Bouvet Island. Norway has a total area of and a population of about 4.9 million...

, Sweden
Sweden , officially the Kingdom of Sweden , is a Nordic country on the Scandinavian Peninsula in Northern Europe. Sweden borders with Norway and Finland and is connected to Denmark by a bridge-tunnel across the Öresund....

 and Finland
Finland , officially the Republic of Finland, is a Nordic country situated in the Fennoscandian region of Northern Europe. It is bordered by Sweden in the west, Norway in the north and Russia in the east, while Estonia lies to its south across the Gulf of Finland.Around 5.4 million people reside...

, and routes to the Scottish
Scotland is a country that is part of the United Kingdom. Occupying the northern third of the island of Great Britain, it shares a border with England to the south and is bounded by the North Sea to the east, the Atlantic Ocean to the north and west, and the North Channel and Irish Sea to the...

 Highlands and Islands
Highlands and Islands
The Highlands and Islands of Scotland are broadly the Scottish Highlands plus Orkney, Shetland and the Hebrides.The Highlands and Islands are sometimes defined as the area to which the Crofters' Act of 1886 applied...


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

External links

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