Fraser Forum

Morneau's Trans Mountain pipeline promise creates a dangerous precedent

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After weeks of anticipation, federal Finance Minister Bill Morneau (pictured above) today announced that—in light of the uncertainty over the $7.4 billion Trans Mountain pipeline expansion project—the federal government will compensate Kinder Morgan, the project proponent, in case of “unnecessary delays that are politically motivated.”

While it’s laudable that Ottawa has expressed support for the continuation of the project, promising to cover potential costs of the project puts taxpayer dollars at risk and creates a dangerous precedent.

The project’s fate has been in doubt as the British Columbia government attempts to block the project despite it already undergoing a review and receiving approval by the federal government. In response, Kinder Morgan cancelled “non-essential spending” on the project and said it will decide after May 31 whether to continue with the project.

Minister Morneau’s proposed indemnity (taken at face value) does not actually assure that the project will continue. Instead, it simply suggests that Canadian taxpayers will be put on the hook if delays persist—a notion Kinder Morgan’s CEO has not greeted with a great deal of enthusiasm, saying only that the company “appreciates” the offer. Notably, Morneau has not said how the government will address the root of Kinder Morgan’s concern—the regulatory, legal and political barriers the project faces.

While details of the backstop may emerge in time, currently there’s a great deal of ambiguity over what exactly is being proposed. Under what conditions will taxpayers be expected to pay and how much?

Because this is a large project currently valued at $7.4 billion, the cost to taxpayers could be substantial. However, Ottawa is not in a financial position to bear an unexpected cost like this. The federal budget deficit is expected to be $18.1 billion in 2018/19, and there’s currently no plan to balance the budget over the next three decades. Promising to backstop the Trans Mountain pipeline project could dig the government into a larger budgetary hole, leaving more debt for future taxpayers.

There’s also the dangerous precedent this would create. Morneau insists “this is an exceptional situation,” but the door is now open to the possibility that future projects may be financially guaranteed by the federal government.

Such guarantees are problematic as they dampen the incentive of private companies to keep costs low and deliver projects on time and on budget because they do not bear the full costs—a situation that economists refer to as “moral hazard.” If a company such as Kinder Morgan knows that costs will be paid by taxpayers instead of shareholders, it’s less likely to invest the effort to minimize costs.

Again, it’s unclear under what circumstances taxpayers would have to pay. It’s possible we’ll be on the hook for more than just the costs directly related to B.C.’s pipeline obstructionism. For one thing, how would it be determined whether particular costs are due to political risk or some other factor? In other words, where will the backstop end?

It’s good to see the Trudeau government taking the potential cancellation of the Trans Mountain pipeline expansion seriously, despite its lacking support of other pipeline projects (Northern Gateway and Energy East). But putting taxpayers at risk for a private venture is not the right approach.


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