It’s unclear just where the money to fund Canada’s new sovereign wealth fund will come from, say finance experts, who also suggest the new fund could end up duplicating existing nation-building efforts.
The Canada Strong Fund, announced Monday by Prime Minister Mark Carney, will receive an initial $25 billion “endowment,” but the precise source of that funding isn’t clear, said Paul Calluzzo, a professor at Queen’s University’s Smith School of Business.
“It’s hard to be too critical or too supportive until we see all the nuts and bolts, and we just don’t have a lot of details yet,” said Calluzzo, a research fellow at the Smith School’s Institute for Sustainable Finance.
Investing in the fund will also be open to individual Canadians, the Prime Minister said.
The most well-known sovereign wealth funds, such as those in Norway or Saudi Arabia, started as a way to invest surplus oil revenues.
But Norway’s government takes a much larger levy from oil production than Canada does, and most Saudi oil production is directly controlled by the Saudi government, Calluzzo noted.
“It’s not necessarily bad if it’s from general taxes,” said Calluzzo, “but what’s more standard is for it to come from oil and gas extraction.”
The idea behind most sovereign wealth funds, said Calluzzo, is often twofold.
“There’s a windfall today, and we want to spread it across future generations,” Calluzzo said. “And the second element is to what extent does a country like Norway or Saudi Arabia use that to diversify their economy away from oil and gas? You’d be hard-pressed to find countries and societies more different than Norway and Saudi Arabia, but they both basically use the same approach.”
While sovereign wealth funds typically start out as a surplus from resource revenues, that is almost certainly not the case with the Canada Strong Fund, according to Mahmood Nanji, a Fellow at the Lawrence National Centre for Policy and Management, which is based at Western University’s Ivey Business School.
“It’s pretty clear from reading between the lines that the seed money will be coming from the government’s balance sheet, which means they’ll be borrowing the money to do this,” said Nanji, a former senior finance department official with both the federal and Ontario governments.
The idea, said Nanji, is to then use that seed money to help attract private sector funding, both from institutional investors such as pension funds, and from individual Canadians. The pool of money in the fund would then be used to invest in various projects.
“The goal is to get a higher return than the interest they’re paying on the initial seed money,” said Nanji, who also suggested that the federal government could put existing infrastructure assets — potentially including airports — into the fund’s holdings.
In a speech Monday, Carney said the Canada Strong Fund will operate as a Crown Corporation and focus on “nation-building” projects.
“We will begin with an initial endowment of $25 billion,” Carney said. “Over time, the fund will grow through asset recycling and reinvestment, creating even greater opportunities for future generations.”
That focus would appear to duplicate some elements of the Canada Infrastructure Bank, said Calluzzo, who also noted the federal government funds the Business Development Bank, which focuses on venture capital, and that the Canada Pension Plan Investment Board also has global investments, including in Canada.
“There’s a concern about redundance, and … the government says they’re going to review the redundance across these organizations,” said Calluzzo.
The Montreal Economic Institute, a pro-market think tank, was even more direct.
“What the Carney government is announcing … is essentially the Canada Infrastructure Bank under a different name,” Emmanuelle B. Faubert, an economist at the MEI, said in an emailed statement.
Still, said Lawrence National Centre’s Nanji, the Prime Minister appears to have already tipped his hand on how he feels about the suggestion there’s too much duplication.
“They’re going to have to look at all these different funds and organizations for synergies and efficiencies,” Nanji said, “but Carney has already said that most of the institutions provide loans, and don’t take an equity stake.”
While borrowing to provide seed money might seem counterintuitive, it’s not necessarily a problem, Nanji argued. The biggest risk in sovereign wealth funds, he said, is in setting up the right corporate governance structure, and hiring the right leadership team.
“You don’t want the government dictating ‘you have to fund Project A or Project B,’” said Nanji. “Governments will make bad investment decisions, and a bad structure will also scare off other investors.”
