Albertans, not only are you shareholders of a pipeline and soon-to-be buyers of new railcars, get ready to add another government-supported refinery
Before you get too excited, history has shown that this is a bad deal for taxpayers.
The North West Upgrader has become the prime example of a government development project becoming a taxpayer boondoggle.
This project involves the Alberta government financing an outside company to build facilities and refine its bitumen. Under the deal, the government keeps ownership of the resource until it’s upgraded and sold, and pays a fee to compensate the refinery for construction and operations.
So far, so good? Not so fast.
As former finance and energy minister Ted Morton explained, the processing agreements “effectively transferred the risk of upgrading to the government … Investors were assured of covering all costs — both construction and operations — plus a fixed return. All these costs would be included in the cost-of-service tariffs paid by the [government] (75 per cent) and CNRL (25 per cent).”
Taxpayers are required to pay financing costs. As Morton argued, “this contract amounted to a de facto government guarantee of the debt bonds that North West would need to sell to build the upgrader.” Due to project delays, tax dollars have been used to pay debt charges months before the commercial operations start-up date.
With taxpayers on the hook, it’s not surprising that costs have escalated from $4 billion to nearly $10 billion.
To add insult to injury, taxpayers bear a risk of having to sell the upgraded product below costs. A report from the University of Calgary estimates the North West Upgrader could lose taxpayers $18 million in its first year of operations.
In the end, politicians will get their refinery and investors will make their money all while taxpayers are on the hook for overruns, debt charges and the risk that products are sold below cost.
This isn’t a one-off example.
In 1984, the Alberta government announced a collaboration with Saskatchewan, the federal government and Husky Oil to build the Lloydminster Bi-Provincial Upgrader. Alberta taxpayers spent over $400 million on capital and operational costs.
With low oil prices and continual losses, the Alberta and federal governments decided to sell their shares in the refinery, resulting in Albertans losing hundreds of millions of dollars after receiving a mere $32 million for the province’s stake. Referencing this debacle premier Ralph Klein remarked, “I guess the one saving grace is that we were probably all stupid together.”
Both projects fit the general rule that taxpayers get burned when governments disguise corporate welfare under the pretense of economic development. Between 1973 and 1993, Alberta government’s “diversification” projects cost taxpayers $2.2 billion.
Although it may sound desirable to “refine it where you mine it,” it’s important to remember that producing everything in-house isn’t the path to economic success.
To better understand why this may not be desirable, ask yourself who are the most prosperous people in society? Are they individuals that produce everything they need to survive — from food and clothing to shelter? Hardly. Our prosperity has emerged precisely because we are able to focus on what we do best, or where we have an advantage, rather than trying to produce everything on our own. In this case, what makes sense for an individual also makes sense for a province.
If a business wants to open a refinery, great! And if there are government barriers stopping them from opening up shop, they should be removed. But taxpayer cash must not be risked on what should be a private business venture.
Rather than continuing the recent series of interventions in the energy industry, if the government wants to help the economy it should stop hammering businesses and households with extra costs like the carbon tax, business and income tax hikes along with costly labour policies.
So, should taxpayers be on the hook for a new government refinery? No thanks.
Franco Terrazzano is the Alberta Director with the Canadian Taxpayers Federation.