Good luck trying to sell this to the private sector

Finally, we know how the Liberals will try to salvage our last opportunity to ship oil overseas, an overriding problem of their own making. At a price of $4.5 billion the government of Canada will purchase the Trans Mountain pipeline (TMX) from Kinder Morgan Canada (KM) (whose market capitalization interestingly is $1.75 billion) and indemnify the cost of construction. Then it hopes to find a private-sector buyer in the short or medium term. A desperate buyer will become a desperate seller. Good luck!

Finance Minister Bill Morneau dodged questions about the total hit to taxpayers. The project’s capital cost is still officially $7.4 billion, but rumours are circulating that expenses could mount to $11 billion. So the total federal investment, with a potential $2-billion Alberta participation, will be well over $11 billion, in addition to overruns and environmental risk.

Financial indemnification, which most Canadians opposed, was not enough to entice KM to stay in the game because Trudeau could not guarantee a definitive legal result, a co-operative B.C. government or social peace. Therefore, he could not preclude lengthy delays. Nor could he prevent a reputational hit to the company when Aboriginal elders and environmental activists carry signs decrying how KM is threatening the B.C. coast, before soldiers cart them off to jail. Capital is scarce and the company has investment alternatives that do not pose comparable risks. Now Trudeau must summon the fortitude to confront all those challenges and enforce the rule of law, or construction will be blocked indefinitely.

The government had to buy TMX because the project is crucial to Canada’s economic prospects and national unity. Otherwise, our proven oil reserves, the third largest in the world, would be effectively landlocked. However, Trudeau devoted the previous two and a half years crowing about his green bonafides here and around the world. It has to be excruciating for him to nationalize a pipeline transporting diluted bitumen from the oilsands across British Columbia to Vancouver where workers will be confronted by irate protesters decrying his stunning betrayal. If it does not leave his environmental legacy in tatters it will, at the minimum, tarnish it irrevocably. Also, nationalization clearly signals that Canada was unable to retain or attract private-sector capital for a major resource project. Public money may address Trans Mountain, but resource development generally is in considerable doubt.

When the finance minister hightailed it down to Houston to meet Richard Kinder, his bargaining power was exceptionally weak. Kinder, doubtless frustrated by roadblocks and $1 billion in sunk cost, knew Morneau had run out of options, since his government burned the other two possibilities — Northern Gateway with a direct rejection and Energy East with regulatory impediments. Furthermore, the new Impact Assessment Act made it untenable for anyone to propose a major pipeline. Not surprisingly, Canada is viewed around the globe as a resource-rich country that literally cannot deliver.

Furthermore, this decision does not eliminate the possibility the project becomes bogged down in court challenges or civil disobedience, with no end in sight. Also, there are no guarantees private investors will show up in the intermediate term, if ever. In spite of initial support, a skeptical public may come to consider open-ended risk to be a very bad deal.

Morneau has suggested our pensions funds, including the Canada Pension Plan Investment Board, might be interested in investing in the project. The politicization of our national pension fund would undermine public confidence in the safety of our savings. Instead, pension fund managers will weigh TMX against alternative opportunities with less uncertainty or politically risky projects with considerably higher returns. The Feds will have to assure a healthy profit before a pension fund or private sector investor commits billions.

Federal legislation will not help. Senate Bill S-245 declared TMX a work “for the general advantage of Canada.” While the House could pass that Bill, our legislators know it will not substantively add to federal jurisdiction, so it is pure showboating.

All this is a colossal political failure, which the prime minister will attempt to spin into an accomplishment. Even those who support the pipeline are worried about public ownership, government playing favourites, the open-ended cost to taxpayers and regulatory impediments that mean death by delay.

Fence sitting, obstruction and vacuous sloganeering have come to naught for the prime minister who pretended he could achieve a social licence by promoting both environmental protection and resource development. Consensus was always a naïve delusion. Now the government will have to muscle it through over entrenched opposition. It did not have to come to this, but when Trudeau promised to reconcile the irreconcilable, something had to give. The give is that taxpayers just bought a pipeline no one else wanted.

NO GUARANTEES PRIVATE INVESTORS WILL SHOW UP.