Trans Mountain—socializing costs is not the answer
Last week, the Trudeau government did what innumerable governments do when they become frustrated over failure to achieve a political aspiration—they throw money at it.
Federal Finance Minister Bill Morneau (pictured above) announced, with little detail, that Ottawa will backstop any “financial loss that derives from [B.C.] Premier Horgan’s attempts to delay or obstruct the [Kinder Morgan Trans Mountain expansion] project.”
The same undefined “indemnification” would also be offered to anyone else who agreed to build the pipeline, if Kinder Morgan pulls out in light of the looming May 31 deadline.
Premier Rachel Notley has already offered up Alberta taxpayers as the next possible source for pipeline-construction funding if private investors won’t finance the project. Clearly, socializing the cost and risk of building the pipeline is most troubling.
"Indemnification” offers some benefits to Kinder Morgan investors should the company decide to stay in the project—after all, having governments give you “free money” and indemnify you against risk is rarely unwelcome.
But this benefit comes with more than a few risks. The first risk is (naturally) to Canadian taxpayers who will underwrite the risk-indemnification. Rather than having private investors take on risks they find acceptable in exchange for investment returns they find worthy of that risk, average Canadians will have that investment decision made for them by governments, provincial or federal.
Another serious risk implicit in the Morneau plan is the potential precedent. What business, seeking to carry out a major energy or infrastructure project, will not seek similar pledges of indemnification in the future? If the federal government basically stipulates that provincial (or even municipal) governments can tie federally-approved projects up in knots for years, how could any potential investor responsibly forego such indemnification? And what incentive does this have on regulatory processes? If investors will be indemnified against losses, why would regulatory agencies feel any pressure to improve the efficiency of the permitting process? They wouldn’t.
There are other undisclosed details to the indemnification process that are also potentially problematic. For example, is there any compensation in the deal for the federal government (and thus taxpayers) taking on this risk, and if so, what will the government’s cut of profits be from operating the pipeline? How will taxpayers recoup any costs incurred in the pipeline, if at all?
The minister clarified that the indemnification will not cost taxpayers anything, but it’s hard to see how that can be true. If the government must cover costs of political delays, it will either be taxpayers who provide the money or private-sector companies who repay it after the fact. Either way, the value of the indemnification comes out of somebody’s pocket.
Another undefined element seems to be what constitutes “political delays?” Only decisions or actions of politicians, or does it include delays caused by activists, Aboriginals, frivolous law suits, redundant regulatory processes, redundant science inquiries or other actions by non-politicians? We don’t know.
Canada stands to gain some eye-popping economic benefits from the Trans Mountain expansion pipeline including $7.4 billion in direct spending in Canada’s economy. Ten times that in earnings over 20 years. Government revenues estimated at nearly $50 billion over that same time. More than 50,000 jobs created in Canada’s economy predicted per year of operation. It’s a project well worth doing.
But the answer is not socializing the cost of building the project. That unfairly transfers risk to taxpayers and creates a bad precedent for future infrastructure projects. It would be far better for Canada (and the prime minister) to steadfastly stand by the regulatory system that has served the country well over the years, including the project approval process practiced, in the case of Trans Mountain, by the National Energy Board and approved by the federal cabinet.