Stop calling Canada's latest big idea a sovereign wealth fund | About That

So look, the government can call this almost whatever it wants.A new pillar of our plan, the Canada Strong Fund.

Just don't call it a sovereign wealth fund.OK, but I'm just wondering, where's the wealth and who's funding it?The way sovereign wealth funds traditionally work is you start with a giant government piggy bank.And not only do you stuff it full of coins and cash and oil profits, you also plug it right into the stock market.You invest that money, rather than just finding new and imaginative ways to spend that money, as governments often do.This, the Canadian government is fully aware, is how Norway does it.

Many countries that are blessed with natural resources, like Norway, have sovereign wealth funds.Canada hasn't had one until now.

And I totally get why Mark Carney would want to put these two things side by side.Success by association.Look how rich we could get.In Norway's case, from very humble beginnings, an initial investment equal to about 23 billion dollars U .S.We will begin with an initial endowment of 25 billion dollars.

So far, so good.And fast forward a little over 25 years.Today, Norway's fund is the biggest in the world.At last count, worth 21 trillion kroner, or about 2 trillion US.And you see this blue section right here?That's the coolest part.

The part that's plugged into the stock market.The blue part of each bar is how much money Norway's money made through long -term investing.Compounding returns, baby!Except, settle down because I'm going to show you all the ways in which Canada's sovereign wealth fund is not like Norway's.

This is not a sovereign wealth fund.

It doesn't seem to be a traditional sovereign fund.

I think it's unfortunate that the government chose that name.

So you know how I said at the start, sovereign wealth funds arethe piggy bank plugged into the stock market.Well, the Canadian version has neither of these features.Let's start with the piggy bank.

Almost all the sovereign wealth funds that I'm aware of are owned by countries that produce a ton of oil.They derive a great deal of income from resource extraction.

Norway is a really good example of this.And just to warn you, they're going to come up a lot in this discussion.Its people have one of the highest per capita incomes in the world.That's driven by huge oil and gas profits.They make a killing.At least a fifth of their economy is oil and gas.

And it's what allows them to actually run annual budget surpluses most years.So the mechanics of a sovereign wealth fund are pretty straightforward for Norway.Have extra money, invest extra money.In Canada's case?

The government's deficit ballooned to close to $62 billion the last fiscal year.

A deficit of $68 .5 billion.

This year it rings in at $78 .3 billion.

One think tank pegs the running Canadian debt at just over $1 .4 trillion.The cost to service that debt?north of $50 billion per year, making it one of the single most expensive line items in the entire Canadian government annual budget.And that's forecast to go up to $80 billion by 2030.And how much deeper are we digging this hole each year?The Canadian deficit for this past fiscal?

Almost $70 billion.So, not to make anyone feel bad, but this country isn't exactly flush with cash.It consistently spends more than it makes and it's borrowing money to make ends meet every day.

Carney has no surplus and therefore no wealth to put in such a fund.He's talking about a sovereign debt fund.

The problem is that essentiallywe've had deficits year after year and the debt is growing and that debt is very costly for Canadians right now and in the future.

When we're taking government budget deficits and investing those deficits in these projects we shouldn't expect that that's going to generate you know a strong financial return for the Canadian taxpayer.It's probably not.

But maybe none of this is so unusual because Newsflash, governments spend borrowed money all the time.How's this any different?Well, let's examine what this money's being spent on.Back to Piggy and what he's plugged into.However you get the money you're stuffing in there, what's it doing?Here's what Norway does with its money.

They invest it around the world, most heavily in the United States, parts of Europe, Japan, but all over, really.Because if your goal is to maximize your return and make money, then diversifying in this way makes sense.And they've done fairly well with that strategy, notching a bland but productive 6 .6 % average annual return since the fund started in 1998.Canada's plan is to have no such diversification strategy.All of the fund is meant to support Canadian projects.

The fund will invest in key strategic Canadian projects and companies.It's going to be creating jobs.It's going to support innovation.It's going to make Canada more competitive.

It is not a sovereign wealth fund in the traditional sense of a sovereign wealth fund.This is an equity fund and investors both government and private side, take risk.

Right.This is really, at its core, a way to create a kind of public -private partnership.

Now, to be clear, just like with the construction of the Canadian Pacific Railway 150 years ago, Canada's major projects will mostly be built by private companies.And just as in the 1870s, the federal government will support these projects through loans, grants, and other incentives.

So let's say the government decides to build a bridge, a mine, a pipeline, a farm, a data center.We don't really know because the government hasn't worked out how the fund will work just yet.But basically the idea would be to say to the private sector, invest in our sovereign wealth fund.help us build these types of things you might otherwise have been too afraid to build, because maybe you thought they were too risky.And with $25 billion of government seed money backstopping and de -risking the whole thing, along with whatever perks and financial frameworks we can give you, we promise you'll get paid.

And that should give the project a bigger likelihood of succeeding, which means we all get paid.The prime minister is seeking to get investment from large asset managers that are able to make investments in, I think, large, discreet, illiquid investments that have very long time frames for payoffs.

Now, there are all kinds of interesting questions we can ask at this point.One of them from the opposition leader.If a project has a business case.

Why would the government need to fund it?

I think that's a fair question.And of course, the answer is almost certainly going to depend on the project and whether the government can spot golden opportunities where the private sector could not or would not go it alone.But another question, don't public -private partnerships already exist?

Can you help us understand how this is going to be in its goals different from the Canada Infrastructure Bank that was launched under the previous government and why you need it?entirely new agency to do what you're doing.

Yeah, well thank you for the question because it's it's a crucial one.

Now I'm not one to rely on Wikipedia for research but I just think it's funny how the most elemental definition you can find out there of what this program called the Canada Infrastructure Bank is. does is that it is tasked with financially supporting revenue -generating infrastructure projects that are in the public interest by catalyzing private investment through methods such as direct investment and public -private partnerships.Isn't that how we just described Canada's brand new sovereign wealth fund?Carney says the difference with the wealth fund will be in having an equity stake in the projects that get greenlit.That, in theory, should lead to great wealth down the road.unless it doesn't.

In case a project goes south and fails and doesn't generate returns, the Canadian taxpayer is in a sense going to be left holding the bag on any of these investments that in fact don't work out.

Who underwrites that?Is it the fund?Is it the government?

Or will households make a loss?That's going to be politically costly.And let me just spoil the ending here for you.The track record of the Canada Infrastructure Bank is often debated.Just five years after it was founded, the House of Commons Transport Committee recommended that the bank be abolished.Projects got built, but they tended to be more expensive.

And there were all kinds of questions about whether the projects that were ultimately selected to be built were the right ones.Were they truly in the Canadian interest?Or were they just the ones that made the private sector the most money?

Many of the investments that the First Canada Infrastructure Bank made, I think, were widely perceived as being made largely on the basis of politics rather than on the economic or financial viability of those projects.The way in which this fund is run, it needs to, I think, inspire confidence among economists.and investors that, you know, the funds are going to be allocated towards projects in a way that makes financial and economic sense.

Now, in any responsible telling of this story, you should expect to hear the words, the devil is in the details an awful lot.That's because the government doesn't know how a lot of this will work yet.It says it still has a lot of studying and consulting and decision -making to do.But I think it's very reasonable to ask, what is the actual mandate of this fund?

Is it nation -building?The Canada Strong Fund is about solidarity amongst Canadians, no matter where they live.Or is it about creating and maybe even hoarding wealth?It's essentially a national savings and investment account.It's designed to grow wealth for future generations of Canadians.

Because on that point of let's all get rich together, one important thing I haven't mentioned at all yet is what the government says makes this sovereign wealth fund so unique.

For those Canadians who want to participate in an even more direct way, we will make it easy for individual Canadians to invest in the fund.and therefore own a small piece of nation -building projects and share in their returns.

Now, almost every expert I've heard from on this story has expressed a lot of skepticism about what this retail investor arm of the fund is going to look like.Because, as a baseline, investing in Canada is fine, but it's not really how you make the most money.Even the biggest institutional investors in this country know you only get so far buying Canadian.The Ontario teachers pension plan with almost 300 billion dollars in assets.It invests in the U .S.

more than it does in Canada.Canadian assets less than a third of Canada's.its overall portfolio. SoSo what kind of returns should a retail investor like you or me expect from a fund that is entirely Canadian?Investing in projects risky enough to require a partnership to fund to begin with, and mind you, whose mandate seems torn between two goals, nation building and wealth building, may not overlap.

generating strong financial returns for future generations of Canadians, and investing in major infrastructure projects that are in the national interest, but have nevertheless not received private sector backing.Those two goals do not go hand in hand.In fact, I think they're more or less diametrically opposed.

And let me just say one other thing, because I don't want to come across as being skeptical of Canada itself, but the other thing to consider here is the internal conflict of a fund guided by a crown corporation that is in the business of picking winners and losers in its own country.You remember that map of Norwegian investments?All those places their sovereign wealth fund has assets.You know one place on this planet Norway explicitly won't invest in?This cute little bendy guitar -shaped country, aka Norway.For these funds to succeed, what experts say you need is an almost ruthless insulation from the short -sighted nature of domestic politics.

Because if I'm running this fund and my decision on which project to back is swayed by whose riding it's in or how many jobs it creates, then maybe I'm at risk of missing the point.

He wants to put another $25 billion on the national credit card to gamble on a liberal slush fund that will enrich liberal insiders at the expense of hard -working Canadians.

I think many people see this as largely a continuation of the Trump administration.Canada Investment Bank 1 .0 strategy with some minor tweaks.What I think needs to happen for this project to be more successful than the first attempt at an infrastructure bank is that it needs to have a very strong governance It needs to have transparent, objective criteria for allocating investments.

So there it is again, that feeling of, well, let's wait until we have all the facts.That's fair.We should.But the facts so far have invited a lot of doubt.