Many states have expressed reservations about the non-compete clause in the ?state support agreements? proposed by the Centre. In this backdrop, let us look at alternative mechanisms that guard revenues of PPP concessionaires if unplanned public facilities come up.
The ?non-compete? clause has been designed to provide a degree of comfort to concessionaires and project lenders and help them reach early financial closure. International experience suggests these objectives could be met through alternative approaches that do not limit public bodies? ability to build additional infrastructure.
A blanket non-compete clause, besides restricting states? freedom to pursue public objectives, may also run counter to Section 3 of the Competition Act that disallows anti-competitive agreements that restrict the provisioning of services. A recent study by the Competition Commission of India has identified many areas of concern in infrastructure concessions. So, the extensive use of non-compete clauses could rather aggravate the problem than lead to best-value decisions.
Requiring states to give up planned or ongoing infrastructure projects merely to facilitate a public-private partnership (PPP) could run counter to the commonly expected due-diligence responsibilities of bidders to anticipate ground situations. Also, such restrictions may eventually decelerate infrastructure growth by limiting states? ability to cater to additional demand.
In the US, only one transportation PPP project that prohibited construction of competing facilities was ever built?the restriction was subsequently renegotiated and withdrawn. Instead of the non-compete clause, most of its state regulatory frameworks provide for possible compensation to be paid to the private operator if unplanned facilities lead to a proven reduction in revenue for the private facility. While some states have statutory provisions to do this, others insert specific clauses to the effect, especially in contracts for development of toll roads.
In California, the statutory ?reasonable compensation? formula applies with certain exceptions like safety projects, additional high-occupancy vehicle lanes and conversion of existing lanes to high-occupancy lanes. But under the Colorado statute, a non-compete agreement is generally unacceptable, barring very few exceptions. The transport department in North Carolina is under the statutory responsibility to maintain an existing, alternative, comparable non-toll route corresponding to each turnpike project.
Under the Indiana toll road (ITR) project, concessionaires were entitled to compensation for any decrease in net revenue directly attributable to the opening of a ?competing? highway. A competing highway is defined as one that is continuously within 10 miles of the ITR and stretches to at least 20 miles. Similar provisions and definitions were mandated for contracts relating to the Pocahontas Parkway/Transurban Concession and many other state highways, skyways and hotlanes.
In strict legal sense, non-compete clauses require the public partner to prove that it has not constructed a competing facility, whereas a compensation-based provision lays the onus of proof of harm on the private partner. The latter option creates a narrow window that effectively contains monopolistic behaviour. The non-compete clause must, therefore, remain a choice of last resort for policy planners rather than a blanket ab initio insistence, though it?s more attractive to investors or project lenders.
It?s is important that the government applies the non-compete restriction selectively, on a case-by-case basis after due economic diligence and taking into account the long-term supply and demand-side projections for transportation networks. The ?compensation for proximate revenue impact? formula, as successfully implemented elsewhere, should be explored as a superior option. Simpler alternatives could also be designed in the form of public sector entitlement to create additional infrastructure in the event of traffic on a privately-operated facility hitting a specified upper-bound.
The author is an IAS officer and he runs http://www.BuyLawsIndia.com, a Website dedicated to public procurement law research. These are his personal views