Specification
The authority issuing the auction may be a ministry of transport, county, province, state, municipality 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, size of vehicle, timing of service, the maximum permitted fare paid 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 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 services in districts of for instance in Northern Norway or Ireland, 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. Most cities subsidize their public transport, 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 in Sweden, or car ferries on the road network of Norway. Ferry routes serving outlying islands in Hong Kong are also subsidised since recently, as a result of rising oil price and therefore the costs of operations.
Read more about this topic: Public Service Obligation