OPINION | Keystone XL is Jason Kenney's $7.5B bet
We need government investment, but we can’t afford costly mistakes now
This column is an opinion from Sara Hastings-Simon, a research fellow at the School of Public Policy at the University of Calgary.
The recently announced Government of Alberta investment in the Keystone XL pipeline was characterized by Premier Jason Kenney as a $7.5-billion "bet," with the promise of near-term jobs and a longer-term increase in royalty and tax revenues.
The key question in evaluating the merits of that bet is not if the project will create jobs or some economic benefit — it would be hard not to with such a large investment — but rather how those public benefits compare to what could have been created by investing the $7.5 billion in other ways.
And at this particular time, there is something else to consider as well.
We should expect that other governments around the world will be deploying loan guarantees as part of their pandemic/recession recovery packages. And there is a high likelihood that electrification of transport will be a big part of these, with any funding to the auto sector, for example, almost sure to have these kinds of strings attached.
So as Alberta invests billions in a pipeline, it's very likely that governments elsewhere will be investing their billions in efforts to shift us away from the products that pipeline will carry. More on this later.
History littered with failures
Government has a clear role to play in economic development, but the investment must be done well, and history is littered with examples of failures.
Good government investment requires careful evaluation of different project options, and it is unclear if that was done in this case.
Government investment is an opportunity to ensure companies are thinking about the longer term — either by opening up new industries or future-proofing investments that might require higher upfront costs. By future-proofing, I mean building infrastructure in a way that can be repurposed or easily retrofitted to meet demands in the future as markets shift.
Neither of those reasons appears to apply here.
The connection made by Premier Kenney to previous investments made by the Lougheed government, saying that this pipeline investment will "kick-start the oilsands again," misses the fundamental difference between Lougheed's investment in industry creation and the plan today.
To be clear, Lougheed was transitioning us into something new. Kenney is not.
At the same time, it is unclear if there is any future-proofing in the planned construction of Keystone XL.
Market failures, or lack of market?
Loan guarantees and equity stakes are good tools for governments to use to overcome market failures.
Certainly there are situations where there might be risks that can be better managed by the government, public benefits that can't be captured by investors, or an information gap for new technology.
However, one of the key risks cited in this project, the political risk in the U.S. jurisdiction, where much of the pipeline is located, is largely out of control of the Alberta government.
And market failures must be carefully differentiated from cases where the markets are hesitant to invest because of project fundamentals. Sometimes there is no private investment because there just isn't a market.
The current economic situation certainly introduces new market liquidity challenges, but as the government noted, the work on the investment negotiations was started six months ago, long before the COVID-19 pandemic and any talk of oil dumping.
Changing the trajectory
As an exporting province, Alberta must pay careful attention to government investment in other jurisdictions that could change the trajectory for oil demand.
Investment in vehicle electrification via support for the auto industry with "clean strings" requirements for EV production attached to manufacturing support, as well as direct subsidies to consumers, could accelerate EV uptake significantly.
This has happened before.
The American Recovery and Reinvestment Act of 2009 included investments in advanced battery and EV manufacturing, a loan guarantee to Tesla that enabled construction of its first manufacturing facility, as well as direct electric vehicle credits to support EV purchases by consumers.
This combination played a significant role in kick-starting the EV industry.
It is too early to say how COVID-19 recovery investments will be directed, but China has already discussed extending its EV subsidy, which was planned to end this year, for an additional two years, and many countries have previously announced internal combustion engine bans.
More care required
There is little doubt that we need government investment in securing the future of our economy, but now more than ever we can't afford costly mistakes.
Rather than defining the desired outcomes — metrics, such as jobs and economic development — and running a transparent process where proponents bring forward different projects to be evaluated on their relative performance, this project seems to have been selected behind the scenes.
It appears to have been advanced through a closed-door negotiation, resulting in an investment in a single company and a single project with a high amount of risk.
Prudent government investment requires more care.