The Public Service Obligations in Transport Regulations 2023

The Public Service Obligations in Transport Regulations 2023 (the “PSO Regulations”), which came into force on Christmas Day 2023, set out procurement and subsidy control obligations in the public transport sector for public bodies awarding PSO contracts. Clarice Harper-Smith highlights the key considerations.

The Regulations revoke and replace the Regulation (EU) 1370/2007. Whilst a lot of the EU law has been retained, there are some changes that this article will highlight.

The PSO Regulations apply to the award of contracts for public passenger transport services, including bus concession services, that contain public service obligations (“PSOs”). PSOs are obligations to provide services that would not be performed on a purely commercial basis.

The objectives of the PSO Regulations are consistent with the principles in the Procurement Act 2023 however, the PSO Regulations are a separate procurement and subsidy regime from the Subsidy Control Act 2022 (“SCR 2022”) and the Procurement Act and will need to be considered separately to these regimes.

Local authority procurement teams may overlook the PSO Regulations and default to using the Public Contracts Regulations 2015 (“PCR 2015”) and SCR 2022; however, these regimes are not appliable to all contracts. This article will emphasise the correct approach and how local authority procurement teams should apply the PSO Regulations.

The obligations under the PSO Regulations are now in force, before the wider obligations under the new Procurement Act, so it is important local authorities letting bus services understand and comply with these requirements.

The Regulations apply to rail, tram and bus contracts, this article will focus on local authority bus services.

Obligations for PSOs

PSOs are obligations on ‘competent authorities’ to provide public passenger transport services to the public that would not be viable on a purely commercial basis.

A competent authority is a public authority with the power to secure the provision of public passenger transport services in a particular area, this includes local transport authorities.

The requirements:

• When developing specifications for PSOs and the scope of the application, public authorities must take into account the possibility of grouping cost-covering services with non-cost-covering services and the appropriateness of the specifications to the services concerned.
• The specifications must be consistent with any objectives set out in relevant public transport policies.
• The specifications and the related compensation of the net financial effect on the operator of the public service obligations must be designed to achieve any such objectives in a cost-effective manner.
• Specifications and related compensation of the net financial effect on the operator must also financially sustain the provision of public passenger transport services in the long term, in accordance with the requirements laid down in the relevant public transport policies.
• Arrangements to set pricing by way of establishing maximum fares for all or certain categories of person and rules that compensate public service operators must cover no more than the net financial effect on the operator of complying with fare obligations. Public authorities should consider Regulation 7 of the PSO Regulations in detail.
• Clearly define the PSO including geographical areas and any exclusive rights.
• Establish the parameters of how the compensation payment is to be calculated and the nature and extent of any exclusive rights granted in a way that precents overcompensation.
• Public authorities should be clear as to the permissibility of sub-contracting.
• Public service contracts have a maximum duration of 10 years.

Procurement Obligations under the PSO Regulations

There are additional rules under the PSO Regulations that only apply when the contract being procured is a form of concessions contract.

A services concession contract is:

“a contract in writing for the supply, for pecuniary interest, of public passenger transport services to a competent authority where—

• at least part of the consideration for that supply is a right for the supplier to exploit the services, and
• under the contract the public service operator is exposed to a real operating risk.”

If the contract is a services concessions contract the following rules apply:

• Authorities must issue a competitive tender for a service concession contract.
• A direct award can be made only where an exception applies. The exceptions are:
  • the contract is let to an internal operator,
  • where the average annual value is estimated at less than £875,000,
  • if the contract is awarded to a small or medium-sized enterprise operating not more than 23 road vehicles, the thresholds may be increased to either an average annual value estimated at less than £1,750,000, or
  • the contract concerns the annual provision of less than 300,000 kilometres of public passenger transport services.
• When required to tender, the tender must comply with the following:
  • The procedure adopted for competitive tendering must be open to all suppliers, fair and transparent.
  • The process must make relevant information available to all interested parties to enable them to prepare an offer under a competitive tendering procedure. This includes:
    • information on passenger demand, fares, costs and revenues related to the public passenger transport services covered by the competitive tendering procedure, and
    • details of the infrastructure specifications relevant for the operation of the required vehicles or rolling stock.
  • There is a general rule to publish information about the award 1 year before the ITT is launched. However, this requirement can be waived where there would be no significant disadvantage to a supplier.
  • Authorities have to publish relevant information post award.
  • Authorities should also consider the provisions under the PSO Regulations for modifying existing arrangements with service providers.

How the PSO Regulations interact with other regulations (PCR 2015 and SCA 2022)

If the PSO Regulations apply and the contract being let is a service concessions contract, the PCR 2015 (soon to be the Procurement Act 2023) will not apply.

The procurement obligations under the PSO Regulations will not apply to contracts being procured that are related to public passenger transport services that are not services concessions contract. The contract may instead by caught by the PCR 2015.

If the PSO Regulations apply and the contract is a service concession contract, the SCA 2022 will not apply. PSOs that are service concession contracts will be exempt from the SCA 2022.

If the PSO Regulations apply, authorities should also consider the application of the subsidy rules under the Transport Act 1985 and the Subsidy Control Regulations.

Some key changes from EU Regulations

New Limitation Period: The period in which a challenge can be brought in the courts in relation to the award of a PSO contract is now one month for judicial review claims and six years for private law claims regarding breach of statutory duty.

Standing Requirements: There are now standing requirements clarifying who may bring a claim if they believe an authority has failed to comply with the PSO Regulations when entering into a PSO contract. A person whose interests may be effected by a subsidy decision can bring a claim.

New remedy: New remedy of recovery of unlawful subsidy to align with the Subsidy Control Act 2022.

Direct Award Power: It is for the authority to determine if a direct award is appropriate.

Overcompensation: The definition of ‘reasonable profit’ now includes a range of factors that can be used to assess what is reasonable, i.e. level of cost and revenue risk taken. The new definition also considers what would be deemed reasonable profit in a scenario where a normal market position cannot be determined, in which case, the level of profit required by a typical well run undertaken will be taken into account.

New Contracts Award Notice: There is a new contract awards notice within two months of entering into a contract to provide transparency. And the requirement for authorities to publish annual aggregated reports on PSOs they are responsible for has now been removed.

Procurement Objectives: The PSO Regulations now adopt the procurement objectives and rules on modifying public services contracts.

Sharpe Pritchard will be presenting a Coffee Club on the topic of bus services and the application of the PSO Regulations on Friday 31 May 2023 at 8:30am.

Clarice Harper-Smith is a Trainee Solicitor at Sharpe Pritchard LLP.

This article is for general awareness only and does not constitute legal or professional advice. The law may have changed since this page was first published. If you would like further advice and assistance in relation to any issue raised in this article, please contact us by telephone or email This email address is being protected from spambots. You need JavaScript enabled to view it.