Public service contracts (PSCs) in passenger rail are a cornerstone of sustainable mobility policy, ensuring the provision of socially necessary but commercially unviable services. However, evolving regulatory frameworks, rising operating costs, decarbonisation targets and rising service quality expectations are putting pressure on traditional contracting models. This report examines the contemporary challenges faced by PSCs in passenger rail, with a focus on the tension between public service obligations and market-driven efficiency. The study focuses on the consequences of market liberalisation and the introduction of competitive tendering under the EU's Fourth Railway Package. Key risks are identified, including information asymmetry between contracting authorities and operators. Through policy analysis, the report proposes a bargaining model that balances flexibility, accountability, and long-term investment incentives. The findings contribute to the ongoing debate on how to structure effective and sustainable public service contracts (PSCs) that can adapt to changing economic, technological and environmental conditions, while maintaining accessibility and affordability for passengers. Practical recommendations are proposed for policymakers, transport authorities and rail operators seeking to optimize public services in a rapidly changing mobility landscape.