Prime Minister Mark Carney speaks during an announcement on Canada’s first sovereign wealth fund in Ottawa last month.Justin Tang/The Canadian Press
Prime Minister Mark Carney’s sovereign wealth fund is a great idea on many levels but one. It does not disguise the reality that his government has no ambitious plan to generate the stream of public and private investment needed for Canada to compete globally. The new wealth fund is a good start, but it’s a bauble.
Sovereign wealth funds are nothing new. Some 50 countries have them and they play a big role in boosting national prosperity, meeting pension liabilities, building infrastructure, diversifying economies, creating a financial cushion for future generations, and supporting strategic industries, national budgets and the diversity of capital markets. Some work better than others, of course.
Canada was one of the few Western countries rich in natural resources not to have one. The biggest and best-known example is Norway’s wealth fund, which used North Sea oil revenue to build US$2.2-trillion in wealth, equivalent to some US$390,000 for every citizen. That fund, launched in 1990, has huge national support even though it does not hand out dividend cheques to citizens.
Editorial: A ‘wealth fund’ is a poor substitute for real reform
The Canada Strong Fund, as it’s awkwardly known (why not just the Canada Fund?), was announced in late April. It will be an independent Crown corporation. It has not been launched and details of its goals, funding and governance are still a work in progress. But its main features are known.
It’s a slow-burn fund. It will receive $25-billion over three years from the federal budget. Since the budget is in deficit, big-time, the money is in effect being borrowed. How the cost of that borrowed money will show up in the investment-return calculations is not known. The fund will focus on domestic investments, unlike most sovereign wealth funds. The Norway fund, for instance, buys only foreign assets.
What truly sets the Canada fund apart from others is that it will have a retail component. The initial capital put in by individual investors will be protected, meaning the government will have to find some way of insuring it. How the insurance will be structured, and its cost, are not known. Giving the fund broad appeal is a nifty idea. For investors, it seems almost too good to be true – no downside, only upside.
Another question is potential conflict of interest. The fund would have to deliver investor returns that, say, match or exceed those of 10-year government bonds (their yield on Friday afternoon was 3.67 per cent). Otherwise, what’s the point? But the investments it makes to enhance Canada’s productivity may not produce appealing, sustainable returns. Should the fund invest in, say, high-speed train service between Toronto and Montreal? That project, with an estimated cost as high as C$90-billion, probably wouldn’t make a cent for years, if ever.
Opinion: A sovereign wealth fund with more questions than answers
The Canada fund is not going to move the needle on the domestic investments front for many years. In the meantime, Canada is suffering from waning competitiveness and productivity.
What might reverse this story of decline is a compelling and bold national investment strategy to lift Canada out of its economic malaise. “We don’t have a plan for this,” David Dodge, the economist who was governor of the Bank of Canada between 2001 and 2008 and was succeeded by Mr. Carney, said in an interview. “To generate public and private investment to be able to compete with the world, Canada needs a big plan, and it’s just not there.”
The general idea for a national strategy to invest in everything from ports and clean energy to critical minerals and defence is to find ways to shift from consumption to savings and investment.
There are a lot of options, many of which would face blowback from various sectors of the economy and voters. How about raising the GST? Doing so would reduce consumption and provide extra revenue for the government, which could be deployed into national projects or various crown corporations devoted to infrastructure projects.
Another idea is to force pension funds to build up their Canadian portfolios. Neither the Public Sector Pension Investment Board (known as the PSP) nor the Canada Pension Plan, among others, have any requirement to invest domestically. The overall regulatory system in this country is onerous, and the tax system needs an overhaul to cut taxes on profits that are reinvested in the business.
While we’re at it, why not tax share buybacks? Canadian companies typically spend tens of billions of dollars a year on buying their own shares. Every dollar spent on buybacks (which boosts earnings per share by reducing the shares outstanding) is a dollar not spent on research and development, salary increases and capital expenditures. The buybacks are out of control pretty much everywhere and come at a cost to the economy and its competitiveness (buybacks were effectively banned by the U.S. Securities and Exchange Commission until 1982).
The new Canada fund, to be sure, can play a role in improving Canada’s ability to compete on the world stage. But it amounts to a minor contribution – a bauble – to national strategy that has yet to be born.