The Public Service Obligation (PSO) model as part of Ukraine's European integration
hoto: Illiya Vjestica
The Association "Energy Efficient Cities of Ukraine" has published an analytical review "Public Service Obligations (PSO model) as part of Ukraine's European integration". It is the result of a study conducted by the partner NGO Vision Zero.
What is Public Service Obligation?
In the context of European Union law, a public service obligation is an obligation imposed on an organization by law or contract to provide services of general interest in the EU. Public service obligations (PSOs) can apply to any public service sector, but postal services, social services, energy, transportation, and banking are specific sectors where this model is relevant.
The purpose of a PSO is to protect the public interest. This may include protecting the population from rapidly rising electricity prices or supporting renewable energy producers to implement green generation projects, etc. The state's use of this mechanism aims to compensate for the negative effects of the introduction of new market rules in the industry.
In Ukraine, the term PSO is already used in the energy sector: the supply of electricity and gas to the population. In the electricity sector, it is known as the assignment of special obligations (PSO) and was introduced by the Law of Ukraine "On the Electricity Market". Its full name is "the imposition of special obligations to ensure the public interest in the functioning of the electricity market".
Urban and suburban passenger transportation in developed countries is not self-sustaining or profitable from direct revenues from the sale of single tickets and travel passes. This does not depend on the form of ownership of the carrier (private or municipal), although it may have an impact on the final cost of the service. Accordingly, public transportation in cities and suburban areas is considered a public service of general interest, which is guaranteed by the state, in particular by cities or their associations, to improve the quality of life and create opportunities for residents and visitors. The closest analogy is streets and roads, a public infrastructure financed from the budget that does not generate direct revenue and requires significant development and maintenance costs.
Public transportation, which is guaranteed by the state and financed from the budget as a social service (like roads, education, healthcare, etc.), allows for a focus on service quality and sustainability, as opposed to a self-sustaining approach that relies on either high fares or high ridership. In cities, where space is a valuable resource that is claimed by many stakeholders, high-quality and reliable public transportation is key to economic competitiveness and citizen satisfaction. A bus or tram that runs consistently on schedule regardless of the day of the week, time of day, or area of the city means more time for other activities, and thus creates opportunities for development and access to public goods.
Currently, passenger transportation in Ukraine is organized on the basis of self-sufficiency, especially bus transportation by private carriers. In most cities, municipal enterprises (if any) are usually left with transportation of privileged categories of citizens. This leads to the fact that MEs are in a constant crisis. Compensation for the transportation of certain privileged categories of passengers does not cover all the costs of the enterprise, even taking into account the share of revenues from paid passengers.
Despite the existing legal regulation in Ukraine, which is unclear and difficult to implement in some areas, Ukrainian city governments are coming up with their own schemes to finance services or compensate transport operators. In some cases, there is no compensation at all, most often for private bus operators. This principle of transportation organization leads to shadowing of carriers' income, tax optimization, and deterioration of the quality of service for passengers (failure to run buses, failure to comply with schedules, worn-out vehicles, etc.)
Ukraine's European integration commitments in transport legislation
One of the fundamental provisions of the EU-Ukraine Association Agreement is the reform of our country's transport sector through the introduction of the PSO model in public transport passenger transportation. Nevertheless, the harmonization of Ukrainian legislation with European directives in this area is progressing extremely slowly.
The study states that the implementation of Ukraine's European integration commitments in the transport sector by the Verkhovna Rada is at 19%, which is one of the worst sectoral indicators. Delaying the introduction of the PSO model in Ukraine hinders the development of public transport and may lead to the destruction of the sector.
"Ukraine's transition to the PSO model is not only desirable, it is mandatory and inevitable. The sooner the legal framework for this is created, the sooner local governments and local executive authorities (transportation customers) will be able to build transparent and fair contractual relations with carriers, which will ensure reliable transportation services and significant private capital investment in the transport sector," the analytical review says.
Public Service Obligation as a principle of passenger transportation organization
The PSO model in the public transport sector has been operating in the European Union on the basis of Regulation 1370/2007/EC since 2009. This document defines the principles of organizing passenger transportation by public transport in a certain geographical area. It defines the mechanism of interaction between the competent authorities and carriers acting as a customer and a contractor for the provision of public services.
According to the PSO model, the state or local authorities (represented by the competent authority) are the customer of passenger transportation by rail and urban public transport. The competent authority, as the customer of the service, guarantees and pays transport companies for the transportation services provided on the routes, and the revenues from passengers become budget revenues. In Ukraine, this model is also known as "payment for transportation work" and has several examples of its implementation. These include, among others, Ukrzaliznytsia's pilot projects to organize suburban transportation in four regions of the country and Chernihiv's experience in introducing a surcharge to carriers for transportation in the city.
The study states that the PSO model should be implemented not only in view of Ukraine's European integration commitments, but also to address a number of critical public transport issues:
- chronic unprofitability of municipal transport enterprises;
- insufficient investment by carriers in the renewal of rolling stock;
- significant corruption risks in the sector;
- insufficient development of automated fare accounting systems (e-ticket) and electronic monitoring;
- current limited service of routes by carriers (time, geographical, inclusive).
Legislative changes for PSO implementation
Currently, urban and suburban public passenger transport in Ukraine operates under three main laws: Law 1914-IV "On Urban Electric Transport", Law 2344-III "On Road Transport", and Law 273/96-VR "On Railway Transport". This hinders the synergy of different types of public transport and their further development.
To implement the provisions of Regulation 1370/2007/EC, which is the legal basis for the PSO model, the Verkhovna Rada must adopt a number of draft laws. "In urban public transport, the implementation of the Regulation is planned by draft law 5149 and several other draft laws that systematically complement it: 5150, 5151, 5152, and 5185," says the analytical study by the NGO Vision Zero. In particular, draft law 5149 provides for the introduction of the PSO model, i.e. a new mechanism for providing passenger transportation services, which is considered a service of general economic interest and for which it is necessary to attract funds from the relevant budgets.
"If Ukraine's politicians continue to delay the fulfillment of these obligations, this may lead to further destruction of the public transport sector, the termination of transport enterprises and the gradual cessation of public transport services in hundreds of villages, towns and cities of Ukraine. This, in turn, will have large-scale social, economic, demographic and political consequences," summarize the analysts of the NGO "Vision Zero".
To read the analytical review in more detail, please follow the link.