21 December 2023 (*1)

(Reference for a preliminary ruling – Transport – Public passenger transport services by rail and by road – Regulation (EC) No 1370/2007 – Article 1(1) – Article 2a(2) – Article 3(1) – Article 4(1) – Article 6(1) – Contract for the provision of public passenger transport services by bus – Procedure for awarding a public service contract – Open, transparent and non-discriminatory tendering procedure – Specifications – Amount of compensation granted by the competent national authority – Indexation limited in terms of time and categories of specific costs – Spreading of risk)

In Case C‑421/22,

REQUEST for a preliminary ruling under Article 267 TFEU from the Augstākā tiesa (Senāts) (Supreme Court (Senate), Latvia), made by decision of 21 June 2022, received at the Court on 22 June 2022, in the proceedings

‘DOBELES AUTOBUSU PARKS’ SIA,

‘CATA’ AS,

‘VTU VALMIERA’ SIA,

‘JELGAVAS AUTOBUSU PARKS’ SIA,

‘Jēkabpils autobusu parks’ SIA

Iepirkumu uzraudzības birojs,

‘Autotransporta direkcija’ VSIA,

THE COURT (Fifth Chamber),

composed of E. Regan (Rapporteur), President of the Chamber, K. Lenaerts, President of the Court, acting as a Judge of the Fifth Chamber, Z. Csehi, M. Ilešič and D. Gratsias, Judges,

Advocate General: M. Campos Sánchez-Bordona,

Registrar: R. Stefanova-Kamisheva, Administrator,

having regard to the written procedure and further to the hearing on 8 June 2023,

after considering the observations submitted on behalf of:

–‘DOBELES AUTOBUSU PARKS’ SIA, ‘CATA’ AS, ‘VTU VALMIERA’ SIA, ‘JELGAVAS AUTOBUSU PARKS’ SIA and ‘Jēkabpils autobusu parks’ SIA, by S. Novicka, advokāte,

–‘Autotransporta direkcija’ VSIA, by S. Bērtaitis, advokāts,

–the Latvian Government, by J. Davidoviča and K. Pommere, acting as Agents,

–the Cypriot Government, by I. Neophytou, acting as Agent,

–the European Commission, by P. Messina, I. Rubene and F. Tomat, acting as Agents,

after hearing the Opinion of the Advocate General at the hearing on 14 September 2023,

gives the following

1The reference for a preliminary ruling concerns the interpretation of the second subparagraph of Article 1(1), Article 2a(2) and Article 3(2) of Regulation (EC) No 1370/2007 of the European Parliament and of the Council of 23 October 2007 on public passenger transport services by rail and by road and repealing Council Regulations (EEC) Nos 1191/69 and 1107/70 (OJ 2007 L 315, p. 1), as amended by Regulation (EU) 2016/2338 of the European Parliament and of the Council of 14 December 2016 (OJ 2016 L 354, p. 22) (‘Regulation No 1370/2007’).

2The request has been made in proceedings between ‘DOBELES AUTOBUSU PARKS’ SIA, ‘CATA’ AS, ‘VTU VALMIERA’ SIA, ‘JELGAVAS AUTOBUSU PARKS’ SIA and ‘Jēkabpils autobusu parks’ SIA, companies incorporated under Latvian law and operating in the transport sector (together, ‘Dobeles and Others’), and Iepirkumu uzraudzības birojs (Office of Public Procurement Oversight, Latvia) and ‘Autotransporta direkcija’ VSIA (‘the contracting authority’) concerning the detailed rules for calculating the amount of compensation due for the provision of a public passenger bus transport service on the network of lines of regional interest.

Legal context

European Union law

Regulation No 1370/2007

3Under recitals 4, 7, 27 and 34 of Regulation No 1370/2007:

(4)The main objectives of the [European] Commission’s White Paper of 12 September 2001“European transport policy for 2010: time to decide” are to guarantee safe, efficient and high-quality passenger transport services through regulated competition, guaranteeing also transparency and performance of public passenger transport services, having regard to social, environmental and regional development factors, or to offer specific tariff conditions to certain categories of traveller, such as pensioners, and to eliminate the disparities between transport undertakings from different Member States which may give rise to substantial distortions of competition.

(7)Studies carried out and the experience of Member States where competition in the public transport sector has been in place for a number of years show that, with appropriate safeguards, the introduction of regulated competition between operators leads to more attractive and innovative services at lower cost and is not likely to obstruct the performance of the specific tasks assigned to public service operators. This approach has been endorsed by the European Council under the Lisbon Process of 28 March 2000 which called on the Commission, the Council [of the European Union] and the Member States, each in accordance with their respective powers, to “speed up liberalisation in areas such as … transport”.

(27)The compensation granted by competent authorities to cover the costs incurred in discharging public service obligations should be calculated in a way that prevents overcompensation. Where a competent authority plans to award a public service contract without putting it out to competitive tender, it should also respect detailed rules ensuring that the amount of compensation is appropriate and reflecting a desire for efficiency and quality of service.

(34)Compensation for public services may prove necessary in the inland passenger transport sector so that undertakings responsible for public services operate on the basis of principles and under conditions which allow them to carry out their tasks. Such compensation may be compatible with the [EC] Treaty pursuant to Article 73 under certain conditions. Firstly, it must be granted to ensure the provision of services which are services of general interest within the meaning of the Treaty. Secondly, in order to avoid unjustified distortions of competition, it may not exceed what is necessary to cover the net costs incurred through discharging the public service obligations, taking account of the revenue generated thereby and a reasonable profit.

4Article 1 of Regulation No 1370/2007, entitled ‘Purpose and scope’, states, in paragraph 1:

‘The purpose of this Regulation is to define how, in accordance with the rules of Community law, competent authorities may act in the field of public passenger transport to guarantee the provision of services of general interest which are among other things more numerous, safer, of a higher quality or provided at lower cost than those that market forces alone would have allowed.

To this end, this Regulation lays down the conditions under which competent authorities, when imposing or contracting for public service obligations, compensate public service operators for costs incurred and/or grant exclusive rights in return for the discharge of public service obligations.’

5Article 2a of that regulation, entitled ‘Specification of public service obligations’, states:

‘1. The competent authority shall lay down specifications for public service obligations in the provision of public passenger transport services and the scope of their application in accordance with Article 2(e). This includes the possibility to group cost-covering services with non-cost-covering services.

When laying down those specifications and the scope of their application, the competent authority shall duly respect the principle of proportionality, in accordance with Union law.

…

(a)achieve the objectives of the public transport policy in a cost-effective manner; and

(b)financially sustain the provision of public passenger transport, in accordance with the requirements laid down in the public transport policy in the long term.’

6Article 3 of that regulation, entitled ‘Public service contracts and general rules’, provides, in paragraphs 1 and 2:

‘1. Where a competent authority decides to grant the operator of its choice an exclusive right and/or compensation, of whatever nature, in return for the discharge of public service obligations, it shall do so within the framework of a public service contract.

7Article 4 of Regulation No 1370/2007, entitled ‘Mandatory content of public service contracts and general rules’, provides, in paragraph 1:

‘Public service contracts and general rules shall:

(a)clearly set out the public service obligations, defined in this Regulation and specified in accordance with Article 2a thereof, with which the public service operator is to comply, and the geographical areas concerned;

(b)establish in advance, in an objective and transparent manner:

(i)the parameters on the basis of which the compensation payment, if any, is to be calculated; and

(ii)the nature and extent of any exclusive rights granted, in a way that prevents overcompensation.

In the case of public service contracts not awarded according to Article 5(1), (3) or (3b), these parameters shall be determined in such a way that no compensation payment may exceed the amount required to cover the net financial effect on costs incurred and revenues generated in discharging the public service obligations, taking account of revenue relating thereto kept by the public service operator and a reasonable profit;

(c)determine the arrangements for the allocation of costs connected with the provision of services. These costs may include in particular the costs of staff, energy, infrastructure charges, maintenance and repair of public transport vehicles, rolling stock and installations necessary for operating the passenger transport services, fixed costs and a suitable return on capital.’

8Article 6 of that regulation, entitled ‘Public service compensation’, provides, in paragraph 1:

‘All compensation connected with a general rule or a public service contract shall comply with Article 4, irrespective of how the contract was awarded. All compensation of whatever nature connected with a public service contract not awarded according to Article 5(1), (3) or (3b) or connected with a general rule shall also comply with the provisions laid down in the Annex.’

9As stated in point 7 of the annex to that regulation, entitled ‘Rules applicable to compensation in the cases referred to in Article 6(1)’:

‘The method of compensation must promote the maintenance or development of:

–effective management by the public service operator, which can be the subject of an objective assessment, and

–the provision of passenger transport services of a sufficiently high standard.’

Guidelines

10The fifth paragraph of Section 1 of the Communication from the Commission on interpretative guidelines concerning Regulation No 1370/2007 (OJ 2014 C 92, p. 1) (‘the Guidelines’), entitled ‘Introduction’, provides:

‘In this Communication, the Commission sheds light on its understanding of a number of provisions of the Regulation, inspired by best practices, to help Member States reap the full benefits of the internal market. This Communication does not aspire to cover all provisions in an exhaustive manner, nor does it create any new legislative rules. It should be noted that, in any event, the interpretation of Union law is ultimately the role of the Court of Justice of the European Union.’

11As its title suggests, Section 2.4 of the Guidelines deals with public service compensation.

12Point 2.4.3 of those guidelines is worded as follows:

‘…

The Annex states that “‘reasonable profit’ must be taken to mean a rate of return on capital that is normal for the sector in a given Member State and that takes account of the risk, or absence of risk, incurred by the public service operator by virtue of public authority intervention”. However, no further guidance is offered on the correct level of “return on capital” or “reasonable profit”.

…

In any event, depending on the particular circumstances of each public service contract, a case-by-case assessment by the competent authority is needed to determine the adequate level of reasonable profit. Among other things, it must take into account the specific characteristics of the undertaking in question, the normal market remuneration for similar services and the level of risk involved in each public service contract. For example, a public service contract that includes specific provisions protecting the level of compensation in the case of unforeseen costs is less risky than a public service contract that does not contain such guarantees. All other things being equal, the reasonable profit in the former contract should therefore be lower than in the latter contract.

The use of efficiency incentives in the compensation mechanism is generally to be encouraged … It should be underlined that compensation schemes which simply cover actual costs as they occur provide few incentives for the transport company to contain costs or to become more efficient over time. Their use is therefore better confined to instances where uncertainty about costs is large and the transport provider needs a high degree of protection against uncertainty.’

Under point 2.4.5 of the Guidelines:

‘Recital 27 of Regulation (EC) [1] No 1370/2007 states that in the case of a direct award or general rules, the parameters for compensation should be set in such a way that compensation is appropriate and reflects a “desire for efficiency and quality of service”. This means that the competent authorities should, through the compensation mechanism, encourage the service providers to become more efficient, by providing the required level and quality of service with the fewest resources possible.

The rules on compensation in Regulation (EC) No 1370/2007 leave some leeway for the competent authorities to design incentive schemes for the public service provider. In any event, competent authorities are obliged to “promote the maintenance or development of effective management by the public service operator, which can be the subject of an objective assessment” (point 7 of the Annex). This implies that the compensation system must be designed to ensure at least a certain improvement in efficiency over time.

Efficiency incentives should nevertheless be proportionate and remain within a reasonable level, taking into account the difficulty in attaining the efficiency objectives. This may, for example, be ensured through a balanced sharing of any rewards linked to efficiency gains between the operator, the public authorities and/or the users. In any event, a system must be put in place to ensure that the undertaking is not allowed to retain disproportionate efficiency benefits. In addition, the parameters of these incentive schemes must be fully and precisely defined in the public service contract.

Incentives to provide public services more efficiently should not, however, prevent the provision of high-quality services. In the context of Regulation (EC) No 1370/2007, efficiency must be understood as the relation between the quality or level of the public services and the resources used to provide those services. Efficiency incentives should therefore focus on reducing costs and/or increasing the quality or level of service.’

The second and third paragraphs of point 2.4.8 the Guidelines state that:

‘This means that not only do the rules of Regulation (EC) No 1370/2007 aim to prevent any possible overcompensation for public service obligations, but also that they aim to ensure that the offer of public services defined in the public service contract is financially sustainable to reach and maintain a high level of service quality. The public service obligation should therefore be appropriately compensated so that the operator’s own funds under a public service contract are not eroded in the long run, preventing the efficient fulfilment of its obligations under the contract and the maintenance of the provision of passenger transport services of a high standard as referred to in point 7 of the Annex to Regulation (EC) No 1370/2007.

In any event, if the competent authority does not pay appropriate compensation, it risks reducing the number of bids submitted in response to a competitive tendering procedure for the award of a public service contract, creating serious financial difficulties for the operator if the public service contract is awarded directly and/or reducing the overall level and quality of the public services provided during the lifetime of the contract.’

Latvian law

Article 10 of the Sabiedriskā transporta pakalpojumu likums (Law on Public Transport Services) of 14 June 2007 (Latvijas Vēstnesis, 2007, No 106) provides:

‘1. The carrier shall be compensated for any losses and expenses connected with the provision of public transport services, in accordance with Articles 11 and 12 of this Law.

…

Article 11(1) of the Law on Public Transport Services [2] states that:

‘The carrier shall be compensated for any losses connected with the provision of public transport services in the amount and on the terms determined by the Council of Ministers. …’

Ministru kabineta noteikumi No 435 – ‘Kārtība, kādā nosaka un kompensē ar sabiedriskā transporta pakalpojumu sniegšanu saistītos zaudējumus un izdevumus un nosaka sabiedriskā transporta pakalpojuma tarifu’ (Government Decree No 435 establishing the procedures for determining and compensating for losses and expenses related to the provision of public transport services and the pricing of such services) of 28 July 2015 (Latvijas Vēstnesis, 2015, No 155), includes the following provisions:

‘…

…

56. A contract for public transport services may determine the amount of compensation (the fare chargeable under the contract) or the procedure for calculating such compensation (the fare chargeable under the contract). When determining in a contract for public transport services the amount of compensation (the fare chargeable under the contract) or the procedure for calculating such compensation (the fare chargeable under the contract), the contracting authority shall take into account the extent of the rights granted, the frequency of provision of the public transport service, the cost-effectiveness of the public transport service, the conditions governing the standard of quality to be met by the public transport service, the conditions governing the technical servicing of the vehicles and any other objective criteria compliance with which is directly linked to the amount of compensation payable.’

The dispute in the main proceedings and the question referred for a preliminary ruling

The contracting authority launched an open tender procedure with a view to awarding the right to provide public passenger transport services by bus on the Latvian network of lines of regional interest for a period of 10 years.

Dobeles and Others brought an action before the Iepirkumu uzraudzības biroja Iesniegumu izskatīšanas komisija (Complaints Review Board of the Public Procurement Supervision Office, Latvia), by which they challenged the provisions set out in the specifications. In support of that action, they claimed that those specifications and the corresponding draft contract together established an unlawful mechanism for compensating the public transport service in question, since, in their bids, tenderers must be able to forecast the price of the proposed service for the next 10 years, on the basis of which the compensation payable to operators during the term of the contract is determined, whereas the latter does not provide for a full procedure for revising the price of the service in the event of changes in costs having an effect on that price.

By decision of 11 November 2019, the aforementioned board dismissed their action.

Dobeles and Others then brought actions before the Administratīvā rajona tiesa (District Administrative Court, Latvia), seeking annulment of that decision. In support of those actions, they criticised the procedure for revising the contractual price of the provision of transport services, set out in the annex to the draft public procurement contract, for excluding from the indexation of the contractual price laid down for solely the cost of fuel and salaries, as well as for the social security contributions, first, the variations of the costs of fuel and salaries not exceeding, respectively, 5% and 8%, and, second, the first four and the three last years of the supply of services. Dobeles and Others also challenge the provisions of the specifications relating to the rules for revising the contractual price per kilometre, according to which that price may be revised only if the volume of services to be provided is reduced by the contracting authority by more than 30%, in so far as such provisions do not lay down objective and transparent criteria relevant to the revision of the contractual price.

By judgment of 29 May 2019, that court dismissed those actions on the ground, in essence, that the State is not obliged to cover all the costs of the operators of a public transport service, regardless of their operational efficiency, and that the procedure for indexing the contractual price laid down in the draft public procurement contract is not contrary to the requirements imposed by Regulation No 1370/2007.

Dobeles and Others brought an appeal on a point of law before the Augstākā tiesa (Senāts) (Supreme Court (Senate), Latvia), the referring court, seeking the annulment of that judgment. In support of their appeal, Dobeles and Others submitted that the financial model set out in the specifications does not guarantee the carriers concerned ‘appropriate compensation’ within the meaning of Regulation No 1370/2007, since the compensation granted does not cover all the objectively justified costs to ensure the service required by the contracting authority. In particular, the indexation provided for in the draft public procurement contract would be excessively restrictive and it would not be objectively possible to foresee the increase in costs that may occur during the 10-year period covered by that contract. The financial model chosen therefore tends not to ensure the operational efficiency of the carrier; instead it transfers the risk of increased costs from the State to that carrier.

The contracting authority points out that Regulation No 1370/2007 aims to avoid any risk of overcompensation by leaving, moreover, the Member States the possibility to decide whether or not to grant compensation to passenger carriers; that the compensation scheme must be used to encourage service providers to become more efficient by ensuring services of the required level and quality with the least possible resources; and that the rules on compensation in that regulation, which leave the competent authorities discretion, do not lead to the conclusion that the State is obliged to cover all the costs of public transport service providers, regardless of their operational efficiency.

In that context, the referring court notes that it follows from Article 1(1) of Regulation No 1370/2007 and from the Guidelines, in particular point 2.4.8 thereof, that the State has an obligation to guarantee a public transport service system that aims to provide a higher-quality service by granting the provider of that service appropriate financial support to achieve that aim.

According to that court, there are a number of arguments that invalidate Dobeles and Others’ claim that Regulation No 1370/2007 requires compensation for all losses that the provider of a public transport service may incur.

In particular, according to the referring court, it follows from recital 27 and point 7 of the annex to that regulation, as well as from points 2.4.3 and 2.4.5 of the Guidelines, that the State is not obliged to cover all the costs of the operators of a public transport service, regardless of their operational efficiency. In that regard, the launch of the open tendering procedure laying down the contested provisions and the financing model of the public transport service at issue forms part of the context of implementing the national approach to developing public transport services. With a view to ensuring more efficient use of the State budget, the compensation granted for the provision of such services from 2021 onwards is no longer based on the system under which the State assumes, in essence, all risk by covering all of the costs of the provider of transport services linked to supply and demand, but on a contractual model based on the difference between the contractual price offered by that provider in an open tender procedure and the revenue derived from the public transport service.

That said, that court takes the view that it should be ascertained whether, as Dobeles and Others submit, that new model and the instruments which implement it do not require tenderers to take excessive risks when determining the price of the service and whether such risks do not reach a threshold such that it is justified to take the view that the State has failed to fulfil its obligation to grant appropriate compensation for the expenditure associated with the public transport service. This is because, generally speaking, it would not be possible accurately to predict energy prices 10 years from now, average salaries in the sector concerned, or the amount of social security contributions. In a compensation scheme which allows recalculating prices only in an interval of every few years and only in respect of some of the costs, there could be a risk that, due to insufficiently accurate forecasting, increases in costs will result in losses for the operator, even if it is operating an efficient economic activity.

There is nothing to prevent tenderers from including in the calculation of their tender price the cost relating to the risk for which they are responsible by setting a price for a fixed period that takes account of the variable nature of the relevant economic and commercial conditions.

However, this would not entirely rule out the possibility that the proposed compensation scheme will not cover all of the losses sustained by the operator in the course of performing the contract. Indeed, in the context of a call for tenders, the tenderers could, in the hope of winning the contract, refrain from offering a price chargeable under the contract that would offset that risk, even though they may have to remedy the difficulties they encountered in the course of implementation by reducing the availability or quality of the service. Consequently, the question arises as to whether, in the present case, the price review mechanism provided for by the contracting authority guarantees sufficient compensation in accordance with the objective pursued by Regulation No 1370/2007.

In those circumstances, the Augstākā tiesa (Senāts) (Supreme Court (Senate)) decided to stay the proceedings and to refer the following question to the Court of Justice for a preliminary ruling:

‘Do the second subparagraph of Article 1(1), Article 2a(2) and Article 3(2) of [Regulation No 1370/2007] permit a compensation scheme which does not impose on the competent authority an obligation to compensate a public transport service provider in full, by periodically index-linking the fare chargeable under the contract (the compensation sum), for any increase in the costs connected with providing the service which fall outside the service provider’s control, and which, therefore, does not entirely eliminate the risk that the service provider will incur non-compensable losses?’

The question referred for a preliminary ruling

By its question, the referring court asks, in essence, whether Regulation No 1370/2007 must be interpreted as precluding a compensation scheme which, in the context of a public service contract and following an open, transparent and non-discriminatory tendering procedure, does not require the competent national authorities to grant a public transport service provider full compensation, by means of regular indexation, covering any increase in the costs associated with the management and operation of that service which are beyond its control.

It must be borne in mind that, according to the first subparagraph of Article 1(1) of Regulation No 1370/2007, the purpose of that regulation is to define how, in accordance with the rules of EU law, the competent national authorities may act in the field of public passenger transport to guarantee the provision of services of general interest which are, among other things, more numerous, safer, of a higher quality or provided at lower cost than those that market forces alone would have allowed.

To that end, that regulation defines, in accordance with the second subparagraph of Article 1(1) thereof, the conditions under which the competent national authorities, when imposing public service obligations or contracting out the performance of those obligations to companies, should compensate public service operators for costs incurred and/or grant exclusive rights in return for the discharge of public service obligations.

Regulation No 1370/2007 therefore contains special rules providing for methods of intervention in general schemes for public contracts (see, to that effect, judgment of 27 October 2016, Hörmann Reisen, C‑292/15, EU:C:2016:817, paragraph 45), the aim of which is to establish a legal framework for compensation and/or exclusive rights for the costs incurred by implementing public service obligations (see, to that effect, judgment of 24 October 2019, Autorità Garante della Concorrenza e del Mercato (Direct award of a public transport service contract), C‑515/18, EU:C:2019:893).

paragraph 31).

Among the provisions forming that legal framework, Article 3(1) of that regulation provides that, where a competent authority of a Member State decides to grant to the operator of its choice an exclusive right and/or public service compensation, of whatever nature, in return for the discharge of public service obligations, it shall do so within the framework of a public service contract, that provision thereby laying down the principle that public service obligations and the related compensation must be established under such a contract (see, to that effect, judgment of 8 September 2022, Lux Express Estonia, C‑614/20, EU:C:2022:641, paragraph 52).

By way of derogation from Article 3(1) of Regulation No 1370/2007, Article 3(2) thereof authorises the establishment, by means of general rules, of public service obligations that seek to establish maximum tariffs for all passengers or for certain categories of passenger, in which case the competent authority is required to compensate the public service operator concerned (see, to that effect, judgment of 8 September 2022, Lux Express Estonia, C‑614/20, EU:C:2022:641, paragraphs 53 to 55 and 92).

However, in the present case, it is clear from the order for reference that the dispute in the main proceedings concerns the conclusion, following an open, transparent and non-discriminatory tendering procedure, of a public service contract for the provision of passenger transport services by bus, such that Article 3(2) of Regulation No 1370/2007, referred to by the referring court in the wording of its question, is irrelevant for the purposes of answering that question.

The first sentence of Article 6(1) of Regulation No 1370/2007 specifically states that the compensation connected with such a public service contract awarded following an open, transparent and non-discriminatory tendering procedure is to comply with the provisions laid down in Article 4 of that regulation, paragraph 1 of which specifies the arrangements for such compensation. That provision must therefore be taken into account in order to answer the question posed.

According to settled case-law, in interpreting a provision of EU law, it is necessary to consider not only the wording of those provisions but also their context and the objectives of the legislation of which they form part (see, to that effect, judgment of 24 October 2019, Autorità Garante della Concorrenza e del Mercato (Direct award of a public transport service contract), C‑515/18, EU:C:2019:893, paragraph 23).

As regards, in the first place, the wording of Article 4(1) of Regulation No 1370/2007, it should be noted that that provision specifies that public service contracts must, on the one hand, pursuant to point (b)(i) of that provision, establish in advance, in an objective and transparent manner, the parameters on the basis of which the compensation payment, where it is laid down, is to be calculated and, on the other hand, pursuant to point (c) of that provision, determine the arrangements for the allocation of costs connected with the provision of services, which costs may include, in particular, the costs of staff, energy, infrastructure charges, maintenance and repair of public transport vehicles, rolling stock and installations necessary for operating the passenger transport services, fixed costs and a suitable return on capital.

It is clear from such wording that the competent national authorities, in so far as they are responsible for setting the parameters for calculating the compensation due to a provider of a public transport service and determine the arrangements for the allocation of costs connected with the provision of that service, enjoy, in the context of a public service contract, a margin of discretion in devising the mechanism for such compensation.

In particular, it should be noted, as the Advocate General did in paragraph 35 of his Opinion, that the possibility of allocating costs necessarily implies that the competent national authorities are not required to compensate for all costs, but may transfer to the provider of that public service the risks associated with changes to some of those costs, whatever their nature and, therefore, irrespective of whether or not that provider can fully control such changes, such as to energy or certain social costs, since those fall within circumstances outside of that provider’s control.

It therefore follows from the wording of Article 4(1) of Regulation No 1370/2007 that the competent national authorities may, in the exercise of their margin of discretion, provide for a system of compensation which, by reason of the parameters for calculating such compensation and the arrangements for allocating costs defined by those authorities, does not guarantee, automatically, the provider of the public transport service full coverage of those costs.

In the second place, as regards the objective pursued by Regulation No 1370/2007, it should be recalled that, as is apparent from paragraph 34 of the present judgment, that regulation seeks, as follows, in particular, from Article 1(1), Article 2a(2) and point 7 of the annex thereto, read in the light of recitals 4, 7, 27 and 34 thereof, to define the conditions for granting compensation in order to ensure, under conditions of fair competition, the provision of a public passenger transport service which is both efficient and financially viable, with a view to achieving a high level of quality of that service (see, to that effect, judgment of 8 September 2022, Lux Express Estonia, C‑614/20, EU:C:2022:641, paragraphs 69 and 70).

It follows that any compensation scheme must aim not only to avoid overcompensation of costs but also to promote greater efficiency on the part of the provider of a public transport service. A compensation scheme that guarantees, in all circumstances, automatic coverage of all costs associated with the performance of a public service contract does not contain such an incentive to greater efficiency where the provider in question is not required to limit its costs.

In contrast, a compensation scheme which, in the absence of regular indexation, does not automatically cover all these costs, but results in the transfer of certain risks to the public service provider, is likely to contribute to the achievement of such an objective. Even with regard to costs that are beyond the control of the public service provider concerned, the efficiency gains that it has acquired will enable it to strengthen its financial viability in order to meet those costs, which will help to ensure the proper performance of the obligations under the public service contract.

In the third place, as regards the context of Article 4(1) of Regulation No 1370/2007, it should be recalled, as the Advocate General did in paragraph 65 of his Opinion, that Regulation No 1370/2007 does not contain any specific provisions applicable to the method for calculating compensation where a public service contract is awarded following a competitive tendering procedure. In such a case, the compensation, unlike the compensation which is linked to a public service contract awarded directly or pursuant to a general rule and, therefore, without competitive tendering, need not comply, under the second sentence of Article 6(1) of that regulation, with the more detailed rules contained in the annex thereto which aim to ensure, as follows from recital 27 thereof, that the amount of compensation is appropriate.

That difference in treatment introduced by the EU legislature is based on the premiss that, where there is a competitive tendering procedure, it is not necessary to adopt more precise rules concerning the calculation of the compensation in order to ensure that the amount is appropriate, since the effect of such a procedure is, in itself, to reduce the amount of compensation due to the provider of the public transport service to a minimum by reason of that competitive tendering, thereby avoiding, by means of automatic adjustment, not only excessive compensation, but also insufficient compensation.

As the Advocate General pointed out in points 72 and 82 to 84 of his Opinion, any service provider who decides to take part in a tendering procedure with a view to performing a public service contract itself determines the terms of its tender in the light of all of the relevant parameters and, in particular, the likely trend in costs that are likely to affect the provision of the service, regardless of whether or not it has any influence over those costs, thereby defining the level of risk that it is prepared to assume in connection with that trend.

It follows that a compensation scheme linked to a public service contract awarded following an open, transparent and non-discriminatory tendering procedure would, in itself, guarantee the provider of this public service coverage for its costs, also guaranteeing it appropriate compensation, the amount of which will vary according to the level of risk that the provider is prepared to assume.

Based on the foregoing, the competent national authorities are not required, in the context of a competitive tendering procedure, to apply regular indexation to automatically compensate for all of the costs incurred by the provider of a transport service in connection with the performance of a public service contract, regardless of whether or not they are under its control, such that that contract provides it with appropriate compensation.

At the hearing, Dobeles and Others argued, echoing in that regard the doubts expressed by the referring court, such as recalled in paragraphs 28 to 30 of the present judgment, that the absence of regular indexation of the costs associated with the performance of a public service obligation that are outside of its control could result in the provider of that public service not receiving adequate compensation, in that the amount of that compensation could become insufficient, which, as referred to in point 2.4.8 of the Guidelines, could impact upon its financial viability or the quality of the service provided, or could even artificially reduce the number of bidders at the tendering stage.

In that regard, it should of course be noted that, by virtue of the principle of proportionality, which is a general principle of EU law, enshrined, as regards the specifications of public service obligations, in the second subparagraph of Article 2a(1) of Regulation No 1370/2007, to which the referring court refers in its question, the competent national authorities cannot impose any conditions on providers of transport services entrusted with the discharge of those obligations, such as those relating to the compensation arrangements, that are excessive or unreasonable.

Therefore, in accordance with that principle, the amount of compensation must vary according to the risk that the public service provider is prepared to assume, as is clear from paragraph 51 of the present judgment.

However, the absence of a mechanism for regular indexation of costs cannot, on its own, be regarded as constituting a breach of the principle of proportionality. Indeed, as has already been pointed out in paragraph 50 above, when a provider of transport services decides to take part in such a procedure, it determines the terms of its own tender. In particular, it is down to the bidder to examine the level of risk that it is prepared to assume having regard to the compensation arrangements set out in the public service contract, and in particular the absence of any such mechanism. Therefore, if a competent national authority were to consider, in the context of a competitive tendering procedure, conditions that are unreasonable or excessive in view of the risks to be assumed by the public service provider concerned, it would be unlikely that bids would be submitted, so that that authority would be forced to amend those conditions in order to make them compatible with the principle of proportionality.

However, as the Advocate General pointed out in point 86 of his Opinion, it does not appear in the present case that the specifications at issue contained such unreasonable or excessive conditions, since it emerged at the hearing that the competent national authorities received some one hundred tenders submitted by transport undertakings established in several Member States, a fact that the referring court is responsible for verifying.

As regards the risks referred to in paragraph 53 of the present judgment, as confirmed by the information provided by the referring court in paragraph 30 above, they arise from the possibility that a provider of passenger transport services might propose a fare chargeable under the contract that does not take sufficient account of a future increase in costs in the hope of winning the contract. However, the possibility that a provider of such services may offer a price involving a risk of being unable to duly perform the contract is inherent in every tendering procedure and may, where appropriate and depending on the circumstances, give rise to the application of provisions of EU law enabling national authorities to set aside abnormally low tenders. Conversely, that possibility does not justify the requirement that public service contracts concluded by the competent national authorities, in the context of a public service contract and following an open, transparent and non-discriminatory tendering procedure, should always include a regular indexation mechanism making it possible to automatically guarantee full compensation for any increase in the costs connected with their performance, regardless of whether or not they are under the control of the provider.

Having regard to all of the foregoing considerations, the answer to the question referred is that Regulation No 1370/2007 must be interpreted as not precluding a compensation scheme, which, in the context of a public service contract and following an open, transparent and non-discriminatory tendering procedure, does not require the competent national authorities to grant to a public transport service provider full compensation covering, by means of regular indexation, any increase in the costs associated with the management and operation of that service which are beyond its control.

Since these proceedings are, for the parties to the main proceedings, a step in the action pending before the referring court, the decision on costs is a matter for that court. Costs incurred in submitting observations to the Court, other than the costs of those parties, are not recoverable.

On those grounds, the Court (Fifth Chamber) hereby rules:

Regulation (EC) No 1370/2007 of the European Parliament and of the Council of 23 October 2007 on public passenger transport services by rail and by road and repealing Council Regulations (EEC) Nos 1191/69 and 1107/70, as amended by Regulation (EU) 2016/2338 of the European Parliament and of the Council of 14 December 2016,

must be interpreted as meaning that it does not preclude a compensation scheme, which, in the context of a public service contract and following an open, transparent and non-discriminatory tendering procedure, does not require the competent national authorities to grant a public transport service provider full compensation covering, by means of regular indexation, any increase in the costs associated with the management and operation of that service which are beyond its control.

[Signatures]

(*1) Language of the case: Latvian.

(1) Cited in view of the naming convention adopted in point 1; however, in this case it refers to the initial version, since this regulation was amended in 2016, whereas the Guidelines were drafted in 2014.

(2) Since another law is referred to in the citation in the preceding paragraph.