Should Pension Plans Invest in the Trans Mountain Expansion?

As the May 31 deadline approaches for Kinder Morgan Canada Ltd. to abandon the Trans Mountain pipeline expansion, federal Finance Minister Bill Morneau is suggesting other investors, including pension plans, should be looking to enter the project.

While the premiers of British Columbia and Alberta remain at odds over the pipeline, Morneau told reporters at a news conference last week that the risk of conflict between provincial governments is something the federal government could “indemnify” for a private entity seeking to enter the project. Though there has been little clarification of what such a guarantee would entail, Morneau specified that Canadians could think of it as insurance, which the investor would have to pay. “Like any insurance, it will have a premium attached to it,” he said.

In a recent interview with Reuters, Mark Machin, chief executive of the Canada Pension Plan Investment Board, expressed interest in investing in the project. “If it’s an opportunity that has decent returns then we’ll look at it,” he said.

Taking on the pipeline would be a massive undertaking for any investor, according to Sherena Hussain, assistant professor in the real estate and infrastructure program at York University’s Schulich School of Business. “Pipelines are unique infrastructure businesses and only a handful of organizations are capable of extracting value from such a large capital spend to meet their return requirements,” she says. “I would argue that an institutional investor will have to seriously consider not only the construction and commercial risk/return profile of this pipeline but also the unique political and environmental risks that they will be inheriting.”

Hussain doesn’t believe Morneau’s comments will make a significant difference in whether or not a pension plan would get involved in the Trans Mountain pipeline project. “It is unlikely that it will make large institutional investors more likely to consider an investment as they tend to stay away from large greenfield investments due to the large construction risk profile of a pipeline of this size,” she says.

“In many cases institutional investors will first examine the fundamental risk and return profile of such an investment, then weigh the value of the federal government’s indemnity as a means to reduce political risk exposure in order to determine whether to proceed and on what terms.”

On Tuesday, the British Columbia government filed a constitutional lawsuit to counter a bill from Alberta intending to limit fuel sent to B.C. “It’s very interesting, on one hand they don’t want our oil and on the other hand they’re suing us to give them our oil,” said Alberta Premier Rachel Notley in response at a news conference.

British Columbia’s government has faced criticism as the debate over the pipeline project continues. For one, the British Columbia Investment Management Corp. owned $65.3 million worth of shares in Kinder Morgan as of March 31, 2017, among investments in other fossil fuel companies, including $54 million in Keyera Corp., a Canadian natural gas company; $49.3 million in Inter Pipeline Ltd., a petroleum infrastructure builder; and $91.3 in Imperial Oil, to name a few.

However, B.C’s Finance Minister Carole James told Global News that BCI makes its investment decisions independently. “It’s a huge portfolio, we have a very good record when it comes to our pensions in British Columbia, we’re known for having very good clear standards, so the B.C. management pension folks make those decisions themselves.”


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