In cases where the private sector has assumed revenue risk on a particular highway as part of its financial proposal, the presence of a noncompete clause is often viewed as a critical part of the economics by both the private entity and its financial backers. A noncompete clause typically prevents the public sponsor from building a new road or expanding an existing road that is adjacent to and an effective alternative route for traffic on the PPP road. The purpose of such a clause is to avoid diverting potential toll traffic to alternative free routes. A contractual or legislative noncompete agreement could cause significant problems as well.
The SR-91 project in Orange County became embroiled in litigation and public outrage over the "absolute protection zone" clause that was negotiated as part of the original agreement between the public sponsor and the private operator. Ultimately, the California legislation was amended to eliminate the noncompete clause, and the contract with the successor operator was amended to eliminate this restriction.231 There are at least two states (Alabama232 and North Carolina) that have legislation explicitly prohibiting noncompete clauses.
A private-sector participant's concern about competition from adjacent roads can be addressed in a number of ways. First, the parties could attempt to negotiate a noncompete clause that adequately protects the private participant's financial interest while recognizing the obligations of the public sponsor to provide its constituents with adequate facilities to meet future traffic demand. Virginia has used limited noncompete clauses with apparent success. The amended agreement negotiated with Transurban for the Pocahontas Parkway contains such a limited restriction on "competitive transportation facilities." These clauses are narrowly structured in a way that addresses the predominant financial risks that could arise from competing facilities, but protect the public interest with regard to no-competitive facilities.
In addition, legislation could be passed to address this issue. Many public authorities, due in part to the problems with SR-91, have taken the position that no-compete clauses are unacceptable. This creates a huge impediment to the ability of private-sector entities to assume traffic and revenue risk. However, one alternative approach is to allow the public sector to retain traffic risk and to structure the transaction based on an availability-payment mechanism. This was done with the Port of Miami Tunnel Project.
The USDOT Report to Congress in 2005 concluded that successful highway PPPs should have the authority to establish a geographic noncompete zone.233 However, the Chicago Skyway transaction did not involve any restrictions on the establishment and development of competing toll roads. Similarly, the Texas PPP law234 provides that Texas DOT may not limit the public's access to the PPP facility with the intent to benefit an ancillary facility. On the other hand, the SR-125 project developed in California does have such a noncompete clause.235 Some state legislative provisions contain requirements that the public sector maintain comparable routes with no tolls when it establishes new toll roads. Such a requirement would reduce the ability of the public agency to solicit proposals for new or expanded projects. For example, the North Carolina Turnpike Authority is required to maintain such comparable nontoll routes when it enters into a PPP to develop a toll high-way or bridge. Mississippi adopted a similar approach in its recently enacted PPP legislation. An alternative approach could involve an agreement to fund improvements to the existing bus or rail transit service in that transportation corridor in order to offset the economic impact of tolling or congestion pricing. This is an approach that is being considered by many jurisdictions looking at long-term concessions, including Pennsylvania and New Jersey.
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231 Cal. Stat. & Hwy. Code § 143(A), Cal. Gov't Code §5956.
232 See Ala. Code § 8-1-1.
234 Tex. Code § 227.021(f).
235 See testimony of Michael Replogle before the Committee on Transportation and Infrastructure Subcommittee on Highways and Transit, May 24, 2007, available at http://www.edf.org/documents/6447_Testimony_HwyTran_24May07.pdf.