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4. Public Service Contracts ( PSCs)

4.1 With many lifeline routes and services, the commercial market does not provide adequate services as identified by governments despite minimum service requirements and significant financial contribution to the services through concession fare schemes. In such cases, the local, regional or national government is forced to intervene further with direct subsidy to individual routes. Public Service Contracts ( PSCs) are then established.

4.2 PSCs are contractual arrangements that guarantee services at desirable levels and prices to the off-shore islands. In return, the contracts grant operators certain protection.

4.3 Governments generally employ three mechanisms to ensure that the lifeline services are provided. These are:

• Establishing discount fares for islanders;
• Imposing PSOs alongside PSCs; and
• Directly subsidising operators.

Establishing discount fares for islanders
4.4 As discussed before, discount fares for islands can stimulate demand for ferry services.

4.5 The practice of charging island residents discounted fares and then reimbursing operators for the difference between discounted and full fares applies to both PSOs and PSCs.

4.6 Our research indicates that not all countries have discounted fares for islanders.

PSOs alongside PSCs
4.7 PSOs are sometimes imposed alongside PSCs in order to protect against cherry picking during the peak seasons. By insisting that operators must provide a minimum level of service operators operating without a PSC are forced to cross-subsidise their services. Under the EC Regulation, however, in such cases the PSOs should be "light".

4.8 PSOs are not always used alongside PSCs to protect the contracted operator(s). In Scotland, Malta and Greece, operators enter into contracts with the government to provide a minimum level of service in exchange for subsidies. There is, however, no other barrier to market entry. Any third - party operator that wishes to cherry-pick can do so without being subject to any service level requirements.

Direct subsidies
4.9 Lastly, if protection against skimming behaviours and mechanisms to boost demand is not enough to ensure service provision, the governments can enter into PSCs with, and provide direct subsidies to, operators.

4.10 Table 4.1 summarises types of government intervention set up in the surveyed countries to ensure ferry services to remote islands.

Table 4.1 Government Protection of Lifeline Services

4.11 Subsidised island ferry services are often paid for by the national governments. The governments either have a central agency that deals with the procurement of lifeline services out of the state budget, or they delegate the responsibility to the local authorities where these services serve.

4.12 Even in cases where the contracting and regulating authority has been devolved to local governments, the local governments receive grants and subsidies from the central government in order to procure the services. Table 4.2 outlines the various government bodies involved in the regulation and procurement of lifeline services in the surveyed countries.

4.13 In Greece, the national budget supplies the funding for the lifeline services. In addition, a 3% surcharge is imposed on all other ferry services (not subsidised) in order to subsidise the thin routes.

Table 4.2 Lifeline Service Regulators in Surveyed Countries

4.14 In addition, tax relief is in essence another form of financial subsidy by the central government. On March 2002, the European Commission approved a Finnish scheme providing a subsidy to passenger vessels. The subsidy scheme gives EU seafarers working on board Finnish passenger ships a 97-percent reduction of withholding tax on their marine work income. The tax relief benefits Finnish passenger vessels engaged in international transport and calling regularly at Finnish ports.

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