PBO warns of billion-dollar losses if Trans Mountain expansion doesn't go ahead
Published Thursday, January 31, 2019 10:35AM EST
Last Updated Thursday, January 31, 2019 6:15PM EST
OTTAWA -- Canada's parliamentary budget watchdog says the Liberal government paid one of the highest possible price tags for the Trans Mountain pipeline – and that value decreases with every delay, bump to construction cost and change in risk profile.
That means the government could lose billions of dollars if construction doesn’t go ahead.
"It’s very likely that construction will be delayed and construction costs will increase and that these two factors will probably decrease the value of the pipeline and its expansion by a billion dollars," Parliamentary Budget Officer Yves Giroux said in a new report out Thursday.
The government purchased the Trans Mountain Pipeline, the Trans Mountain Expansion Project and its related assets for $4.4 billion. The PBO's analysis found the actual value of all those together is between $3.6 billion and $4.6 billion, meaning the government paid close to the highest possible price it could have paid for the pipeline, the project and all the trimmings.
The report revealed that with every one-year delay, the value of the government’s purchase drops by $700 million. It also discovered a 10 per cent increase in construction costs would reduce value by $450 million. On top of that, if the perceived risk of the project goes up and boosts the discount rate by 2 per cent, the government's purchase would reduce in value by $1.3 billion.
If the project is never built, the value of the pipeline with no revenue generating capacity is between 1.8 billion and $2.8 billion, meaning a huge financial blow for the government.
"The worst case scenario is that the Trans Mountain expansion project doesn’t see the light of day, and then the value of the asset that the government has acquired is diminished significantly and the government could lose anywhere between $2-2.5 billion in that worst case scenario," Giroux said.
It's unlikely that construction will be completed by 2021, according to the PBO, meaning a reduction in value is extremely likely.
Giroux said a private company would probably not have gone ahead with the project.
"The fact that Kinder Morgan was keen to sell it to the government suggests that a private company would not have done that," he said.
In early 2018, Kinder Morgan suspended non-essential spending on the expansion project, sparking the beginning of negotiations between the company and the government. These talks ultimately resulted in the government's May 29 announcement that they'd purchase the pipeline for $4.5 billion and, on August 31, the purchase went through for $4.4 billion.
However, an Federal Court of Appeal ruling on August 30 – the day before the government completed their pipeline purchase – quashed the construction and forced the feds to go back to the drawing board on issues of tanker traffic and Indigenous consultation.
Today, the construction of the pipeline is suspended pending a National Energy Board reconsideration of the project.
The NEB will release the report on its reconsideration no later than Feb. 22. In the meantime, the feds continue bleeding money on their investment.
However, it isn't all doom and gloom. Giroux acknowledged that should the pipeline be built, there will be some positive tradeoffs – despite the risks. The Trans Mountain Pipeline is currently the only major pipeline that allows Canadian oil to be shipped to the Pacific Rim, allowing for market diversification.
"Should this get built it will be a relief for the oil sector in Alberta because it will accelerate the opening of markets for Canadian oil," Giroux said.
"So there are, financially speaking, lots of tradeoffs to be had and, financially speaking again, lots of risks."
Morneau disputes PBO's purchase figure
Speaking to reporters Thursday, Finance Minister Bill Morneau claimed the government did not in fact pay the $4.4 billion that put them at the high end of the pipeline's valuation. Instead, he claimed a lower figure that hit the middle of the valuation range.
"We paid $4.1 billion net for the Trans Mountain pipeline expansion," Morneau said.
He attributed the lower figure to "tax advantages" from the federal government.
"After significant negotiations, we got to a price of $4.5 billion and that price was netted out with tax advantages from the federal government, meaning our net price was $4.1 billion," Morneau said.
The tax advantage Morneau was referring to was the capital gains tax. It was applied when Kinder Morgan made a profit on the purchase. That means that after the government purchased the pipeline for $4.4 billion, they ended up getting a little over $300 million in capital gains tax.
Giroux disputed Morneau's claim that this changes the purchase price.
"The $300 million should not be subtracted from the purchase price [because], had Kinder Morgan sold that asset to somebody else, the government would still have pocketed the $300 million capital gains tax. So what the government paid is $4.4 billion, it’s not $4.1 [billion]," Giroux said.
He also flagged that the capital gains tax actually signals something potentially embarrassing for the government in their pipeline purchase negotiations -- that Kinder Morgan walked away with enough of a profit to trigger a multi-million capital gains tax.
"They sold the asset, the Trans Mountain pipeline, with a profit. That’s what triggered a capital gains tax. So it suggests that the price that the government paid made Kinder Morgan generate a profit," Giroux said.
Opposition reacts to PBO report
The opposition didn't hold back as they digested the PBO’s findings on Thursday. NDP MP Nathan Cullen slammed the government for a rushed process and accused them of not doing due diligence.
"It’s just like Justin Trudeau went out to buy a house, paid beyond market value, didn’t bother to have a home inspection, and has lost money every single day since that purchase. This is frustrating to us and infuriating to Canadians," Cullen said.
"It feels like to me like they got themselves boxed in, and they went and played Texas Hold 'em with a Texas oil company and lost, big time."
Conservative Leader Andrew Scheer also issued harsh criticism of the government's pipeline purchase.
"Trudeau's mistake on the entire energy file is costing Canadians billions of dollars," Scheer said.
"It's preventing First Nations communities from being able to partner in these important projects that bring prosperity to their communities."
However, the government had a different take on the report. Morneau said the PBO report actually indicated that the government had made the right call in their decision to purchase the Trans Mountain Pipeline.
"I think what the PBO report said was, in fact, first of all, the decision to purchase the Trans Mountain pipeline expansion was a good economic decision," he said.
Morneau said the government's focus is now on responding to the Federal Court of Appeal ruling.
"That's what we're working through right now in order to make sure we do this the right way to move forward," Morneau said.