Noncompete Provision Design for Transportation PPP Projects

Abstract

Projects with poor noncompete provision design have caused heavy costs for both public and private organizations, primarily due to the embedded monopoly right of the private sector to collect toll revenue. Prior studies have investigated the financial impact of including noncompete provisions in public-private partnership (PPP) contracts to ensure project attractiveness to private entities, although the potential impact of such provisions on the public interest has not been well documented. This study contributes to the literature by incorporating social benefits into an evaluation model to balance the protection of public and private interests. Three contract design alternatives—strict noncompete, compensation for competing facilities, and compete without compensation—are evaluated and compared. This study demonstrates these alternatives with the I-77 Express Lane project in North Carolina and provides several insightful results. First, a strict noncompete provision often worsens congestion, negatively affecting the public interest, and should be avoided. Second, both public and private organizations may benefit from inclusion of a compensation provision that eliminates a prospective monopoly while offering compensation for competing facilities. Third, public benefits from competing facilities present a convex curve over time, suggesting optimal timing for the government to build the competing facility. The results illustrate the significant effect of the noncompete provision on the public interest, and provide governments with a reference to balance protection of the public interest and attractiveness to private investors when designing the noncompete provision.