Benjamin Dachis is associate director of research at the C.D. Howe Institute.
We all know the Trans Mountain saga by now. Kinder Morgan wants certainty by May 31 on being able to proceed with its proposed pipeline expansion from Alberta to the B.C. coast. If not, it threatens to walk away, stranding Alberta’s oil. The federal government has committed to making the project happen, and has just the shiny new tool to help: the Canada Infrastructure Bank.
Ottawa, which approved construction, said it will use “all tools” available to get the pipeline built. The Alberta government has even mused about buying the project from Kinder Morgan. Both governments want to see it completed, for good reason. A new pipeline to tidewater will increase the price Canadian oil fetches because of the Alberta supply glut, and a new pipeline means a stronger Canadian economy and higher government revenues.
What’s the case for the government stepping in? Kinder Morgan doesn’t care about the revenues governments would forego and the jobs lost if the pipeline stalls. It simply wants to make money on its investment. With costs rising because of delays caused by the B.C. government, Kinder Morgan’s prospect of making money is looking dicey. That creates a disconnect between the private incentive of the company and what’s best for society.
Governments step in to deal with costs to society, such as a tax on pollution, that businesses wouldn’t otherwise pay for. Pipeline-safety regulations prevent spills. These steps make society better off by adding costs onto businesses.
Governments can also make society better off by increasing the social benefits that a business wouldn’t see in their bottom line. That’s why the federal government should give some kind of support for Kinder Morgan. Ottawa is best placed to reduce the financial risk that Kinder Morgan faces because of resistance to the project from British Columbia. The question is how.
Governments should not be in the pipeline business. Adding political involvement to daily operating and building decisions will bog down the project. Nor should government support be unlimited. If Kinder Morgan demands too much, then Ottawa should walk away.
So, how will we know if the government can get a good deal?
Enter the Canada Infrastructure Bank.
Established in June of 2017, the Canada Infrastructure Bank is a “Crown corporation that uses federal support to attract private-sector and institutional investment to new revenue-generating infrastructure projects in, or partly within, Canada that are in the public interest.”
In the public interest? Check. Ottawa’s approval of it made that clear. Revenue-generating project? Check. The pipeline project will be self-financing, not requiring any continuing long-term government support once built.
As economist and public-policy researcher Trevor Tombe has argued, the best option would be a short-term loan during construction, not an equity investment; a loan that would need to be repaid at the end of construction would offer support during the most politically-risky period. After that, the bank can cash out. The bank has the legislative power to offer Kinder Morgan the kind of support that makes the most economic sense. The bank, instead of politicians, can negotiate with Kinder Morgan to make sure taxpayers get a good deal.
Tasking the bank with the project can help solve another problem: The appointment of leadership at the bank has been painfully slow. Nearly a year after the legislation creating it passed, there’s still no CEO in place. Requiring the Canada Infrastructure Bank to structure an agreement with Kinder Morgan will light a fire underneath the bank’s board and the government to get on with setting it up.
The dilemma Kinder Morgan is facing is an example of why the Canada Infrastructure Bank was a good idea: a socially-worthwhile infrastructure project bogged down by risks that only a government can step in to solve. The government can kill two birds with one stone by bolstering the bank quickly to support the construction of the Trans Mountain pipeline.