As the solidarity movement with the Wet’suwet’en hereditary chiefs continues across the country, a federal Crown corporation is considering a loan to Coastal GasLink.

If Export Development Canada (EDC) issues the loan, it will in effect be subsidizing an extremely profitable and powerful company for a pipeline project that, as currently designed, violates the rights and jurisdiction of the Wet’suwet’en Nation.

Why would EDC support a contentious project that has generated significant civil unrest across the country? Wet’suwet’en traditional leaders evicted Coastal GasLink workers from their territory, citing their title and opposition to the project. Land defenders set up blockades to protect the land. Coastal GasLink sought and received an injunction from the B.C. Supreme Court.

The RCMP enforced the injunction by dismantling barricades and arresting land defenders. Solidarity actions across Canada have blocked legislatures, highways, bridges and rail lines.
Court and police actions undertaken on Coastal GasLink’s behalf should also be counted as subsidies — public funds are being used to support a private company.

Maybe the Canadian public supports government subsidization of private companies. But before deciding, we must first recognize and understand the meaning and effect of government financial intervention.

Financing a pipeline

Pipeline construction requires a lot of money. Even the planning phase is costly. Kinder Morgan spent over $1 billion on the planned Trans Mountain Pipeline Expansion without getting any pipe in the ground.

On the one hand, because pipelines take a long time to construct, there is a significant wait before capital expenditures generate returns. On the other hand, because pipelines have relatively secure customer bases and regulated fee structures, they produce stable cash flows, which makes them attractive investments.

In order to mitigate the risks associated with high upfront costs, companies use a combination of funding sources — retained earnings, share sales and borrowing will all be used. Companies often secure lines of credit to ensure access to cash.

Coastal GasLink’s parent company, TC Energy (known previously as TransCanada), appears to have no shortage of funding. The oil and gas infrastructure giant, which also owns the controversial Keystone Pipeline, has a market value of $51 billion (USD). In 2019 it had revenue of almost $14 billion and net income of $4 billion.

The Coastal GasLink pipeline is part of LNG Canada, a mega-project jointly backed by five large transnational corporations, including Royal Dutch Shell and PetroChina.

In a conference call with financial analysts about its fourth quarter results in 2019, the company touted its strong financial performance, 20 consecutive years of dividend increases and low debt load. It also noted that up to 80 per cent of Coastal GasLink’s construction expenditures would come from a credit facility backed by a consortium of banks.

Given the company’s seemingly strong finances and access to market lenders, this raises the question: Why is the company seeking a loan from EDC?

TC Energy did not respond to an email query from Ricochet about why it wants the loan.

De-risking pipelines

“We take on risk, so you can take on the world,” states EDC in its 2018 annual report.

An arms-length state-owned enterprise, EDC has a mandate from the Canadian government to “support and develop trade between Canada and other countries.” To that end, it provides insurance, loans, and other kinds of financial backing. It also gives clients access to its network of relationships, including government officials, past clients and other companies.

Risk is an important financial concept and key to corporate decision-making. An export market might hold the promise of high returns. However, if the assessed risks are too high, Canadian companies will refrain from exporting. By taking on risk through insurance, lending and other supports, EDC makes it possible for more companies to enter the export market.

The Coastal GasLink pipeline is part of LNG Canada, a mega-project jointly backed by five large transnational corporations, including Royal Dutch Shell and PetroChina. TC Energy has operations in the U.S. and Mexico. In December 2019, TC Energy announced the sale of a 65 per cent stake in Coastal GasLink to the Alberta government’s investment fund AIMCo and to KKR, a U.S. hedge fund with global assets (the sale is provisional, and TC Energy is currently the sole owner).

Because Coastal GasLink already has access to plenty of institutional knowledge and connections, it may not be clear how a loan to Coastal GasLink could fit within the EDC mandate. It begins to make more sense if we understand the risk to corporate finances from Indigenous jurisdiction.

Coastal GasLink proposed the pipeline based on presumed Canadian jurisdiction for the entirety of the route. That was a factor in its evaluation for whether to go forth with the project.

With Wet’suwet’en traditional leadership refuting Canada’s rights to issue permits and permission for their land, jurisdiction has become less certain. It is even less certain with the eviction of Coastal GasLink workers and blockades by land defenders. In other words, the mere possibility of Wet’suwet’en jurisdiction has increased the riskiness of the pipeline project.

As the pipeline’s construction is delayed, the cost increases. Coastal GasLink will need more financing. With the increased risk, market lenders may demand more onerous terms. Given EDC’s stated purpose of de-risking projects, Coastal GasLink is seeking the agency’s help.

Risk reduction is a subsidy

EDC touts its self-funded status. It does not receive continual financial injections from the government. However, it borrows from investors and its debt is fully backed by the government. In other words, while EDC provides financial backing to its clients, the Canadian government provides financial backing to EDC.

Will the Canadian government always help to reduce the risk associated with Indigenous jurisdiction?

If EDC provides the loan to Coastal GasLink, it will be at least the second time the Canadian government has intervened to reduce the risk of a contentious pipeline. Canadian Finance Minister Bill Morneau routinely justifies Canada’s purchase of the Trans Mountain pipeline as needed to “de-risk” the expansion project.

“EDC does not provide grants or subsidies,” EDC spokesperson Jessica Draker wrote to Ricochet in an email. What Draker means is that EDC requires repayment of financing. But this is an overly narrow definition of subsidies — subsidies are anything that shifts the costs from one entity to another.

If EDC offers insurance or loans below market rates, or with more lenient repayment terms, that constitutes a subsidy. It is a direct benefit to the borrower, and the government pays the cost of foregone returns.

Referring to the nationalization of the Trans Mountain pipeline, Morneau touted risk reduction as a way to increase the pipeline’s value. The same would apply to a loan by EDC to Coastal GasLink. Again, by increasing the value of the contentious project, EDC would be subsidizing the highly profitable TC Energy.

What message would it send to other companies if EDC extends a loan to Coastal GasLink? Will the Canadian government always help to reduce the risk associated with Indigenous jurisdiction? What other forms might that assistance take?