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Report on Business Likely construction delays will mean Ottawa overpaid for Trans Mountain, PBO says

Finance Minister Bill Morneau announced on May 29, 2018, that the federal government would step in to buy the pipeline, the expansion project and related assets for $4.5-billion. Once the deal was completed on Aug. 31, 2018, the final price was approximately $4.4-billion, net of adjustments.

DENNIS OWEN/Reuters

Parliament’s spending watchdog Yves Giroux warned there is a high risk that delays and cost overruns will mean the Liberal government overpaid when it spent $4.4-billion last year to purchase the Trans Mountain pipeline, its related expansion project and other assets.

In a report released Thursday, the Parliamentary Budget Officer estimates the value of the Trans Mountain pipeline and the expansion project at between $3.6-billion and $4.6-billion. The PBO’s figure does not include related assets such as pipeline terminals that were included as part of Ottawa’s transaction with Kinder Morgan Inc.

“If it was a car, we’d say they paid sticker price. They didn’t negotiate very much,” Mr. Giroux said. “Should there be a delay in construction costs or an increase in construction costs, then it’s quite clear to us that the government will have overpaid.”

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Mr. Giroux said those scenarios appear likely.

Finance Minister Bill Morneau announced on May 29, 2018, that the federal government would step in to buy the pipeline, the expansion project and related assets for $4.5-billion. Once the deal was completed on Aug. 31, 2018, the final price was approximately $4.4-billion, net of adjustments.

Speaking with reporters Thursday, Mr. Morneau disputed Mr. Giroux’s assertion that Ottawa could have obtained a better deal. His office pointed to corporate filings that showed Kinder Morgan’s original asking price was $6.5-billion.

“What I can tell you is the negotiations with the company were very difficult,” the minister said. “It’s clear that they wanted a lot more than what we ended up paying in the end.”

The minister said the final purchase price was closer to $4.1-billion after taking into consideration that Kinder Morgan will pay $325-million in capital gains tax on the sale. However, the PBO disagrees that capital gains revenue should be included as part of the final price, in part because that revenue would have been collected by Ottawa even if the pipeline had been sold to another buyer.

Opposition MPs said the report shows Ottawa overpaid for a pipeline and has no plan for what to do with it.

The Globe recently reported that the decision to purchase the pipeline was based on a rushed two-month analysis by various industry insiders hired by Ottawa on short-term contracts, including one consultant who had previously worked for Kinder Morgan.

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The existing Trans Mountain pipeline has been in operation since 1953 and transports Alberta crude oil and refined products to ports in British Columbia and Washington State.

In a worst-case scenario in which the expansion doesn’t happen, the PBO said the government would still have an asset that is worth as much as $2.8-billion.

Kinder Morgan had planned to spend about $9.3-billion to twin the pipeline to increase the amount of Alberta crude that can be shipped to Pacific export markets. Canadian crude destined for Pacific Rim markets can be sold at a higher price than crude shipped south through the United States, where pipeline capacity issues have forced lower prices on Canadian exports.

The federal government has indicated that it is not looking to sell the pipeline and expansion project for at least a year, until some of the key legal uncertainties have been resolved. The expectation is that the market value for the pipeline at that point will be higher than it is now.

Kinder Morgan announced in April, 2018, that it was suspending the expansion project in light of various risks related to government permits and judicial reviews.

After the government announced it would buy the pipeline and expansion project, the Federal Court of Appeal overturned a cabinet order approving the construction. The court ruling said the cabinet decision was based on a flawed National Energy Board report that failed to consider the impact of increased tanker traffic on killer whales. The court also said the federal government failed to properly consult Indigenous peoples.

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The NEB now faces a Feb. 22, 2019, deadline to reconsider the project in light of the court’s concerns. The government has been engaged in further consultations with Indigenous groups along the route.

The PBO estimates of the value of the pipeline do not take into account the potential for additional federal revenue that would come from increased economic activity should the expansion proceed. However, the report separately estimates that the expansion project would boost annual real gross domestic product by 0.11 per cent in 2020, based on current timelines.

That growth would coincide with a peak in annual employment of 7,900 jobs in 2020.

Mr. Giroux told reporters that the government ultimately had to weigh the risk of overpaying for a pipeline project with the potential benefit to Canada in terms of increased jobs and future federal revenue should the expansion proceed.

“If you look at the overall picture … then it probably makes a bit more sense economically speaking to have bought that asset,” he said. “But that’s all predicated on the Trans Mountain Expansion Project seeing the light of the day and being built.”

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