TMX shows Ottawa should let industry do the job
Cost overruns seem nearly inevitable when it comes to government projects
According to the latest calculations, the Trans Mountain pipeline expansion project, which the federal government purchased from Kinder Morgan in 2018, will cost $3.1 billion more than the $30.9 billion projected last May, bringing the cost to about
$34 billion — more than six times the original estimate.
This is yet another setback for a project facing rising costs and delays, underscoring the need for urgent policy reform.
To understand how we arrived at this point, let's trace the project's history.
In 2013, Kinder Morgan applied to the National Energy Board (NEB) to essentially twin the existing pipeline built in 1953, which runs for 150 kilometres between Strathcona County and Burnaby, B.C., with the goal to have oil flow through the expansion by December 2019.
In 2016, after three years of deliberations, the NEB approved the pipeline, subject to 157 conditions. By that time, according to Kinder Morgan, costs had risen by $2 billion, bringing the total cost to $7.4 billion.
And yet, despite Kinder Morgan following the legal and regulatory process to get the necessary approvals, the B.C. NDP and Green party formed a coalition to “immediately employ every tool available” to stop the project.
At the same time, the Trudeau government was planning regulations that would increase the cost and uncertainty of infrastructure projects across the country.
Faced with mounting uncertainty and potential setbacks, Kinder Morgan planned to withdraw from the project in 2018. In response, the federal government intervened, nationalizing the project by purchasing it from Kinder Morgan with taxpayer dollars for $4.5 billion.
Once under government control, costs skyrocketed to $12.6 billion by 2020 and $21.4 billion by 2022, reportedly due to project safety and security requirements, financing costs, permitting costs and, crucially, more agreements with Indigenous communities.
One year later, the federal government said the cost has risen to $30.9 billion.
To recap, since Ottawa purchased the project from Kinder Morgan for $4.5 billion in 2018, the cost of the expansion project has ballooned (in nominal terms) to $34 billion. Shocked? You shouldn't be. When government attempts to build large-scale infrastructure projects, it often incurs cost overruns and delays due to a lack of incentives to build in an efficient and resourceful way.
According to a study by
Bent Flyvbjerg, an expert in this field, a staggering 90 per cent of 258 public transportation projects (in 20 countries) exceeded their budgets.
The reason behind this phenomenon is clear: Unlike private enterprises, government officials can shift cost overruns onto the public without bearing any personal financial consequences.
And the federal government continues to make a bad situation even worse by adding uncertainty and erecting barriers to private-sector investment in vital infrastructure projects including pipelines.
Federal Bill C-69, for instance, overhauled the environmental assessment process and imposed complex and subjective review requirements on major energy projects, casting doubt on the viability of future endeavours. What's the solution? If policymakers want to help develop Canada's natural resource potential, they must enact regulatory reform and incentivize investment.
Rather than assuming the role of construction companies, governments should create an environment conducive to private-sector participation, thereby mitigating risk to taxpayers.
By implementing reasonable and competitive regulations that enhance investment incentives, policymakers can encourage the private sector to build largescale infrastructure projects that benefit the economy.