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Appendix H Italy (Sicily) Case Study

H1. Introduction

H1.1 This case study sets out the key information that has been gathered on maritime cabotage and public service operations in Italy. The Ministry of Infrastructure and Transportation in Rome and the transport office of the Sicily regional government have been contacted to obtain the information. The majority of the information was provided by the Regione Sicilia.

H2. Ferry Legislation and Licensing

Domestic ferry services

H2.1 There are a number of domestic ferry services that are operated within Italy. The most prominent services are those that connect the mainland with the islands of Sicily and Sardinia. In addition to these, there are a number of services that connect the mainland with smaller islands just off the coast such as Isola d'Elba and Ischia as well as services that connect Sicily to the small islands to its north, west and south.

H2.2 The majority of domestic passenger and freight services operate in the Tirrenian Sea, with only a few operating in the Adriatic, concentrating mainly on international traffic with the Balkan States and beyond. Of the large number of services that operate in the Tirrenian Sea, the only public interest services are those that link the island of Sicily to the surrounding islands under its competency. The routes are:

• Sicily (Trapani) to the Egadi Islands
• Sicily (Milazzo and Messina) to the Eolie Islands
• Sicily (Porto Empedocle) to the Pelagie Islands
• Sicily (Trapani) to Pantelleria

H2.3 Furthermore, within these routes, the public interest services that are let by the public administration are those relating to fast passenger services and those relating to freight and the transportation of dangerous goods (petroleum related products).

Operators

H2.4 The companies that operate on these routes are listed in the table below, with their respective country of origin.

Table H1 Domestic Maritime Operators in Italy (Passenger and Freight

H2.5 RFI is the only wholly state owned maritime company of those listed above. It is owned by the Rete Ferroviaria Italiana, the Italian Railway infrastructure manager which operates the maritime transportation of railway carriages and rail freight wagons between Villa San Giovanni (on the mainland) and Messina in Sicily, as well as between Civitavecchia and Sardinia. RFI is 100% owned by FS Holdings, which is 100% owned by the Italian State. Siremar, a subsidiary of Tirrenia da Navigazione, is also part owned by the State.

Regulator

H2.6 The national body that looks after the provision of ferry services in Italy is the Ministry of Infrastructure and Transport. Through recent efforts to devolve national powers to regional authorities, most of the powers relating to the provision of ferry services have been passed on to the regions. This was enacted through National Law 296 of 2000. In the case of the public interest services mentioned above, the contract was specified and let by the Regione Sicilia as the contracting authority. In the next year, all transport related activities will be passed on to the regions.

H2.7 All ferry operators require a licence to operate in Italian waters, these licences are issued by the Ministry of Infrastructure and Transport.

H3. Lifeline Services

Definition of lifeline services/ PSO

H3.1 Following the requirements set out in the EC Regulation EEC 3577 of 1992, the Regione Sicilia stipulated regulation n.12 of 2002 for the allocation of ferry services to the Minor islands of Sicilia.

H3.2 These services are defined as lifeline services as they are necessary for the economic viability of the islands and to reduce their remoteness from Sicily and the rest of the country. The public interest routes have allowed the passenger and freight services to be introduced all year round, allowing a continual connection to Sicily.

H3.3 The public interest services are lifeline services which are essential for the economic wellbeing of the islands. The public interest services that operate from Sicily are part of what is known as the "Unita' della Rete" (Net Unity). The routes are operated as shown in the table below.

Table H2. Public contract lines, company and timeframe

H3.4 In addition, there are also freight and dangerous materials PSOs for these routes. While the competitions were initiated at the same time as the fast passenger connections, only one of the routes had bidders. This was the Sicily Eolie islands route which went to Navigazione Generale Italiana Spa with a reduction on the required maximum budget of 1.5%.

H3.5 The definition of a Public Interest Service was established by the Regione Sicilia following extensive consultation with the mayors of each of the islands to see what services were necessary, and with the various port authorities to establish the technical requirements for the ferries.

Objectives of PSO

H3.6 The main objective that needs to be met by the Public Service Obligations ( PSO) services are the economic wellbeing and the reduction of the peripherality of the islands. Furthermore, these PSO contracts are ensuring, for the first time, a year round connection between Sicily and the minor islands.

Operators

H3.7 None of the operators on the PSO routes are government-owned.

H3.8 The operator of the services to the Egadi, the Pelagie and Pantelleria is Ustica Lines Spa, a privately owned company. The operator of the services from Sicily to the Eolie Islands is SNAV Spa, also a privately owned company.

H4. PSO/ PSC Services: How Are They Operated

History of Government Intervention

H4.1 Commercial services had been in operation before the introduction of PSO/ PSC/protection. However, they only operated during the summer months to support the increased flows. The PSO contracts have ensured that they are now in operation all year round.

H4.2 Slow ferry services to the minor islands are undertaken by a part state owned operator, Siremar, also part owned by Tirrenia. These contracts are still in operation, they provide a public service, and are stipulated directly by the Ministry. These contracts are soon to expire (2005), at which point they will be substituted by standard PSO contracts let by the Region as was done for the fast passenger and freight services. Under these contracts, the Region is obliged to meet the company's losses in each financial year. No further information was available on the Siremar contracts.

Minimum PSO/ PSC requirement

H4.3 The requirements of the public interest services are defined in great detail, illustrating not only the frequency of the service but also the specifications of the ferries to be used. The Technical Appendices to the competition documents list both the exact timetable that the ferries need to follow, the tariffs that need to be charged for each category of vehicle and/or passenger and the number and type of ferries that need to be used to carry out the service (the latter being specified in size, speed, capacity, age, comfort, stability, safety and ability to carry normal and dangerous goods).

H4.4 The only other regulation that is applied to the services is fares regulation. The fares are predetermined by the contacting authority which establishes the tariffs in the bid documents.

Monitoring

H4.5 The contract is monitored by the Regional Transport Authority, a department of the Regione Sicilia government. In the event that the performance standards set out in the contract are not met, the financial penalties set out in the contract are applied to the operator.

Carrying statistics

H4.6 The statistics for each individual operator are not yet available as the contracts only started in June 2003 and the statistical gathering process takes time. The statistics that are available, however, relate to the amount of traffic (passenger, freight and dangerous goods) passing through the relevant ports for the period from 1st January 2003 to 31 December 2003. These statistics are included in the table below.

Table H3 Traffic Statistics for the Ports of Sicily Dealing with PSO Contracts 2003

( Note: The statistics are for all traffic passing through the above ports, including the non PSO routes)
Source: Regione Sicilia, Assessorato del Turismo, delle Comunicazioni e dei Trasporti, "Il Trasporto Marittimo Anno 2003"

H5. PSO/ PSC Services: Financial/ Commercial Support

H5.1 The amount of financial support that is provided to the operator that wins the contract is set out in the competition documents. Each bidder is required to offer a reduction on the subsidy set out in the bid documents to win the contract. The largest reduction (along with other parameters) wins the contract. The subsidies are paid on a three- monthly basis.

H5.2 The remuneration and the amounts that the winning operator finally offered are set out in the table below.

Table H4 Public Contract Lines Budgets: Maximum and Awarded for Passenger Services

Source: Regione Sicilia press notices. *after 2 failed attempts at letting this contract,the budget was increased.

H5.3 The revenues received from these services are not retained by the operating company, but are collected by the regional government.

Competition Risks

H5.4 PSO services do not overlap with commercial services. Overlapping does not occur and is not allowed to occur given that the EU regulations prohibit state support to an operator if the market is operating under open competition i.e. with other operators running services.

H5.5 PSC operators are not insulated from risks. In the event that the Regione Sicilia no longer requires these services they have the right to rescind the contract without anything being owed to the operators.

Ports

H5.6 Given that the port authorities were involved in the definition of the PSO contracts, the access to their facilities is included in the contract.

H6. PSO Services: The Contract

Structure of the contract

H6.1 The contract is a standard public administration contract following the civil code and State accounting requirements following the necessary reciprocal obligations requirements.

H6.2 These are gross cost contracts where the operator receives a guaranteed fixed income from the regional authority.

Risks
H6.3 Given that the contract is let on a fixed price basis and that all the revenue is collected by the contracting authority, the majority of the risks reside with the contracting authority. The operator needs to make sure that its costs are covered by the price it has asked from the Regione Sicilia while ensuring that the quality levels set out in the contract are adhered to.

H6.4 The risk relating to the operating costs of the company is mitigated by increasing the subsidy on an annual basis in line with the inflation forecasts produced by ISTAT (the national statistics authority).

H6.5 The other risk that remains is the performance risk. For example, the Egadi contract stipulates the following penalty payments if the required standards are not met:

• â'¬120.00 fine for every mile not operated (not force majeure)
• â'¬200.00 for every departure delayed by more than 1 hour
• â'¬60.00 for every mile travelled with ferries of a lower quality than those defined in the contract (not force majeure)
• â'¬25,000.00 for every time one of the above events takes place without authorisation.

H6.6 The contracts are 5 years long, the Eolie, Edagi and Pantelleria contracts started in June 2003 and will expire in May 2008 while the Pelagie contract started in February 2004 and will last until January 2009.

The Tendering Process

H6.7 An open competition was held for the operation of these services. Each potential operator was required to submit a bid based on the maximum amount of subsidy that they needed to receive from the contracting authority.

H6.8 The competitions were set up following National Law n.157 of 1995 relating to competitions involving government authorities. This law ensures that the tendering process is open to all those eligible and puts them all on an equal footing.

H7. EU Maritime Cabotage Rules

H7.1 The introduction of support for lifeline services was introduced into Italian law with the Regione Sicilia's regional law n.12 of 2002. The law required the preventative approval of the European Commission before it was enacted into law.

H7.2 In 1999, the European Commission opened a state aid investigation against Italian ferry company Gruppo Tirrenia di Navigazione under article 88(2) of the Treaty with regard to subsidies paid by the Italian authorities to the six companies of the ferry group Gruppo Tirrenia di Navigazione. The Commission's concerns related principally to the mechanism by which the companies were compensated for meeting public service obligations.

H7.3 The Commission had doubts as to the way in which the PSOs had been entrusted to Tirrenia and other companies in the group. It appeared that it was not the State itself which set the PSO requirements but the companies, even though the format must be approved by the State. Although the companies appear to have very significant market share on the routes they cover under these contracts, it appears that several of these routes are operated in competition with private operators who do not receive state subsidies.

H7.4 According to the Regione Sicilia, Italy did not have any problems with the Commission.

H7.5 As with all laws that are enacted, the ferry specific laws were sent to the Commission for comments before that they were enacted. The Commission requested the removal of a small number of clauses which the Regione Sicilia promptly removed. The only significant one of these clauses that were removed was the obligation that any new operator would have to employ all the staff of the previous operator.

H7.6 No changes regarding PSO/ PSC arrangements are intended following the EC's revised guidance issued in December 2003/ January 2004.

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