State aid in rail passenger transport: what can we learn from the Italian experience?

This opinion piece by Germano Guglielmi, Head of Legislative Affairs, Public Funding and State Aid at Ferrovie dello Stato Italiane, originally appeared in the European Transport Regulation Observer ‘European Green Deal: What Implications for State Aid in the Rail Sector?‘ (January 2021).

The European Union (EU) and national regulations should seize the opportunities offered by the recovery plans to exit the COVID-19 crisis and, even more, to promote the twin green and digital transformations that are at the heart of the European Green Deal. However, the possibilities offered by these new recovery instruments – that are actually still under discussion at the EU level and then will need some time for their implementation at the national level – should not put away those already existing tools that could serve the purpose. Looking at the wider context that goes beyond the contingency, the evaluation and revision of State aid guidelines could effectively contribute and support the Green Deal, for example by providing the Member States with the necessary flexibility to support actions whose contribution to the transition to climate neutrality by 2050 is more evident. At the same time, State aid guidelines should not allow the alteration of the level playing field and jeopardise the stability of the internal market.

Focusing on the transport sector, evaluations are currently underway of the relevant State aid guidelines including those about railways. The challenge of allowing flexibility while maintaining objective criteria applicable all over Europe is not an easy one. When it comes to rail passenger transport, key questions revolve around the possibility for public authorities to award public service contracts and the demonstration of their necessity.

In Europe, Regulation 1370/2007 lays down the conditions under which competent authorities compensate public service obligations (PSO) or grant exclusive rights in return for the discharge of PSO. The Regulation states that all compensation connected with a public service contract shall establish in advance, in an objective and transparent manner, both the parameters based on which the compensation payment – if any – is to be calculated, and the nature and extent of any exclusive rights granted, in a way that prevents overcompensation. According to Commission interpretative guidelines and Commission Communication on services of general economic interest, the determination of the reasonable profit margin should be in line with normal market conditions (or with the profit margin required by a typical well-run undertaking active in the same sector) and not exceed what is necessary to reflect the level of risk of the service provided.

Against this background, in Italy, the Transport Regulation Authority hugely redefined the regulatory framework on local public passenger transport services by rail and by road, and it went much further into depth than the Regulation to enhance transparency and to improve the efficiency and cost-effectiveness of the services. In particular, the Authority set forth rules and criteria governing the award procedures and the calculation of PSO compensation. Both in the case of contracts awarded by public procurement and in the case of contracts awarded on a concession basis, the Authority stated that the Awarding Entity should draw up a simulated Economic-Financial Plan (EFP), broken down for all the years of the contract period. What is interesting about the EFP is that it is not only a scheme to determining the tender price or the public service contract compensation, but it is also a tool to monitor the management of the award. The Authority also calculates and makes available to the Awarding Entities the procedures concerning the calculation of the reasonable profit margin for both directly awarded public service contracts and contracts awarded by tendering procedure. This procedure makes Italy quite a unique case study.

Indeed, aiming at the achievement of the Green Deal, of which the completion of a Single European Railway Area can be considered one of the building blocks, we should get rid of greatly different and diverging national regulatory frameworks. Yet in Italy, the Transport Regulation Authority defined a very detailed framework, much more articulated than any other EU country. Did Italy go towards an over-regulated system or is it the right way that should be followed at the EU level, for instance including similar schemes in new Guidelines or new Regulation?

If the Italian model is correct, there could be some lessons to learn when designing the new EU regulatory framework, bearing in mind it should both aim at providing flexibility and preserving the level playing field. On the one hand, a reporting scheme could be defined at EU level to determine further the criteria provided for by Annex of Regulation 1370/2007, and these criteria should apply to contracts awarded both directly and via a tender procedure. In particular, an equal and uniform legal and regulatory framework concerning the calculation of the return on capital defined at European level would eliminate the differences existing among the Member States and thereby ensure a level playing field. On the other hand, one may concede that some aspects of the Italian experience are unsatisfactory. For instance, the Authority requires the public service operator to perform a gradual improvement in the effectiveness and efficiency of the services. Nevertheless, especially in railway transport, it should be borne in mind that some costs cannot be reduced and unforeseeable circumstances cannot be easily addressed. Therefore, additional mechanisms at the EU level could be established from the outset in order to flexibly guarantee the economic and financial equilibrium of public service contracts over the years.