A Pipeline Only Government Could Screw Up
Published in June, 2018
The Trans Mountain pipeline expansion project only superficially appears to have been “saved.” The federal government’s nationalization “solution” was birthed by its earlier botching of energy and environmental regulation and policy.
Federal and provincial permit reviews and other stalling tactics delayed, then killed the Northern Gateway and Energy East pipeline opportunities. That the government has made it so much harder to bring oil exports to tidewater imperils Canada’s future prosperity. Oil exports are the single most important element of the Canadian economy. These export proceeds help support public services while making all other imported goods possible.
Recognizing the errors of their ways, the politicians have hastily papered over them with nationalization. But when government inserts itself in commercial, industrial, or financial activities, private sector investors and corporate management become wary at best, alarmed at worst. They rightly fear that government, upon taking the reins, will engage in uncompetitive behaviour, as has happened — and in many cases, is still happening — with the CBC, Petro-Canada, the Business Development Corp. and the Canadian Mortgage and Housing Corp.: things like undercutting rivals, bullying suppliers, enacting laws and regulations to benefit the Crown corporation, liberally adding debt capital using lower government interest rates, abusing non-taxable status, and disregarding normal profitability and performance standards. This insertion of government into commercial realms also repels and reduces foreign investment.
Generally, governments — provincial as well as federal — ensure their Crowns have monopolies in their jurisdictions, especially energy-related ones (such as Saskatchewan Power and Manitoba Hydro). These government-monopoly utilities borrow copiously, relying on implicit government guarantees, and at near to government low interest rates. Their boards of directors are stuffed with friends of the government, appointed in the absence of competition. Federal and provincial Crowns tend to have goals and missions that are social and political versus financial, being beholden to government sponsors (Hydro One, only partly divested, is a hot Ontario political election issue).
Then there is the long history of potential corruption, waste and mismanagement — see the Export Development Corp. and Canada Post pensions — too often characteristic of Crown corporations. They are neither subject to direct public scrutiny nor accountability; demanding and skeptical shareholders tend to provide both in the private sector.
Yet another aspect of state ownership of companies — particularly in resources and infrastructure, where major investment projects such as Trans Mountain feature — is that cost overruns and completion delays become far more magnified than in the private sector, where private investors watch costs carefully. B.C.’s Peace River Site C dam, the Wuskwatim-Keeyask-Bipole III hydro expansion black hole in Manitoba, and the Muskrat Falls debacle in Labrador are cautionary lessons. All are far over budget and way behind schedule.
Government has a poor record in managing its own operations, and a horrific one stewarding commercial and industrial enterprises. Many of those are unprofitable, even when monopolies, and budgets are commonly exceeded. The $7.4-billion price tag Kinder Morgan forecast for the construction of Trans Mountain will likely end up being far more, likely to balloon merely by its transfer to government control.
Kinder Morgan has made a sweet deal. Full recovery of its costs plus a healthy profit, all at no risk. And, even if the project, now under the control of the federal government, finally breaks through the British Columbia government’s obstacles and court challenges and is built, the taxpayers will be getting a multi-billion-dollar bill. A newly expanded Trans Mountain pipeline could be sold off by the federal government at a price that may not include the full, time-value and risk-weighted cost of capital it required. All the risks now fall to federal taxpayers.
Canadians have been brought to this sad and ominous point by virtue-signalling politicians pandering to disingenuous global-warming extremists, while disregarding the hard-working energy industry people who pay the taxes that support their hold on power. We can only hope the federal ownership period is brief and constrained. The dismal, seemingly unending history of Crown ownership in Canada does not give much hope that it will be so. Despite a few past high-profile divestitures, most Crown corporations still remain.