Nationalizing the project is far from ideal. It’s an admission that Canada’s regulatory approval process is profoundly broken.
Last week, Finance Minister Bill Morneau announced that the federal government will buy the Trans Mountain pipeline expansion project for $4.5 billion. The government plans to construct the pipeline through a Crown corporation, with an expectation of selling it or otherwise transferring ownership in the future.
The project will nearly triple the capacity to move oil from Alberta’s oil sands to a tidewater port in Vancouver, netting higher prices for Canadian oil and breaking our dependence on a single foreign buyer – the United States – for our oil resources.
Because of that single market, which buys our oil at a discount, Canada’s energy sector will lose some $16 billion in 2018 compared to selling oil into higher-priced markets.
The Trans Mountain expansion will change that dynamic. The Conference Board of Canada estimates the pipeline will create 53,000 jobs per year over in its first 20 years. It also estimates that federal and provincial governments would rake in $18.5 billion over that time.
While the federal buyout might salvage some of the expected value of the project, the nationalization of the project is far from an ideal solution. It’s an admission that Canada’s regulatory approval process for major infrastructure programs is profoundly broken.
The plan turns what should have been a private project – risking private funds to generate private earnings – on its head.
Instead, taxpayers will take the risk should the project’s building costs exceed budget, and/or projected future earnings not pan out as expected. It’s also unclear who will reap the benefits, as the government has not specified who will buy out the project once it’s completed. Morneau mentioned the potential for First Nations to assume ownership or the Canada Pension Plan, but details were not offered.
So it’s partially good news that the Trans Mountain expansion may actually be built. But again, the nationalization of the project sets a deeply troubling precedent.
Having Ottawa step in with taxpayers’ money, essentially dropping all of the risk on the public, sends a terrible signal to private markets that might want to invest in energy infrastructure in Canada. The message is that, like Kinder Morgan, a firm might propose a project, spend billions on it, fight for it for five years, get approval from one of the world’s most rigorous environmental approval processes, face numerous legal and extra-legal hurdles to executing the project and still need to be bought out by the federal government.
Who would rationally think of investing their money in such a situation?
It’s absolutely critical that Canada find a way to fix a badly broken regulatory approval system. While the pipeline expansion is needed, it would have been far better if the normal order of good governance had worked.
In a healthy regulatory system, a company proposes an activity, it’s deemed safe by a reputable governmental entity, approved by the government and gets built.
That’s how the Canada we live in got built.
But that’s not Canada today.
The Trans Mountain pipeline will certainly benefit Canada but it’s a benefit with a very high price.
The precedent that nationalizing the pipeline sets will create dynamics that will ripple through Canada’s economy.
But it’s hard to see that any company will step forward to invest in Canada’s natural resource sector now. We must do better.
By Ken Green
Kenneth Green is senior director of natural resource studies at the Fraser Institute.
