In certain jurisdictions, including California and Texas, the legislation authorizing PPPs provides guidance with respect to the construction of new facilities in the vicinity of the privately operated toll facility, but in most jurisdictions the public sector's ability to construct new, competing facilities is negotiated as part of the concession agreement. One way to negotiate this point is to permit the public sector to provide competing facilities as long as the public sector compensates the private sector for any loss of toll revenue that results from the provision of the competing facilities (with exceptions for facilities that were planned at the time the parties entered into the concession agreement). By assuming the risk that it will need to construct competing facilities, the public sector retains the right to construct these facilities and also realizes better value from the concession - if the private partner had to assume this risk the value of the concession, and any related payments made by the private partner, would be reduced.
This is the approach that California took in its PPP legislation, which mandates State flexibility to provide competing roads as long as compensation is provided to the concessionaire (with certain exceptions where compensation is not provided).146 In Texas, the legislature chose to deal with this risk by mandating a fixed amount of mileage from the PPP facility at which a competing facility can be built by the public sector. Whether mandated by legislation or negotiated in a concession agreement, the key is to ensure that an outcome acceptable to both the public and the private sector is agreed to before the concession commences so that disputes can be avoided or expeditiously resolved during the term of the concession.
It is important to acknowledge that publicly financed toll facilities are often protected through similar provisions in favor of the public operator and its bondholders. In these deals, state transportation agencies have agreed to use their best efforts to avoid creating any competing facility which could have an adverse impact on the economic viability of the tolled facility or its operation.147 These transactions may include exceptions similar to the exceptions included in a PPP. For example, projects that are required for safety or for maintaining existing capacity, or projects included in long-range transportation plans, may not violate the covenant. Nevertheless, it is clear that incentives to protect a project's cash flow from competing facilities exist whether the project is publicly or privately financed.
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146 California's legislation is discussed in Section IV(C).
147 For example, the Project Agreement for the SH-121 Toll Project between the Texas Department of Transportation and the North Texas Tollway Authority, dated as of October 18, 2007, states that TxDOT, in its consideration of any project that might affect the SH-121 project, "shall make best efforts to minimize or avoid any adverse impact on the [SH-121] Project and its operation." The agreement includes exceptions for projects with safety, maintenance or operational purposes and certain other identified projects, including those on long-range transportation plans.