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If not implemented and managed correctly, the structure of Mark Carney’s new sovereign wealth fund could shape not only public finances, but also mark the beginning of a repricing of Canadian assets. (Credit: Blair Gable\/Postmedia) <\/p>\n If not implemented and managed correctly, the structure of Mark Carney’s new sovereign wealth fund could shape not only public finances, but also mark the beginning of a repricing of Canadian assets. (Credit: Blair Gable\/Postmedia) <\/p>\n
Prime Minister Mark Carney on April 27 announced plans for a $25-billion sovereign wealth fund<\/a>. By definition, these funds are built from surplus capital, typically accumulated through trade surpluses, natural resource royalties or excess fiscal revenue captured over time.<\/p>\n However, Canada continues to run persistent deficits, which raises an unavoidable problem. In the absence of surplus capital, this fund will almost certainly require additional borrowing, meaning higher public debt recycled into an investment vehicle whose structure, incentives and discipline remain undefined.<\/p>\n The problem is that larger issuance of Canadian government bonds<\/a> places upward pressure on yields, particularly when global investors begin to question<\/a> our country\u2019s overall fiscal direction.<\/p>\n Higher government bond yields<\/a> transmit quickly through the economy, feeding directly into higher mortgage rates, worsening the affordability pressures already facing households.<\/p>\n Those yield effects also extend further. Office real estate, already adjusting to higher capitalization rates and uncertain demand, becomes harder to finance as refinancing costs rise and valuations reset. That adjustment works its way into pension funds, insurers and lenders whose balance sheets remain tied to commercial property values.<\/p>\n Consumer credit follows the same curve. Auto loans, lines of credit and small business borrowing re-price off the same yield environment, tightening access to credit just as living costs remain high. Projects that previously cleared hurdle rates fall away as financing assumptions shift, not because the opportunities deteriorated, but because the cost of capital moved higher.<\/p>\n What I worry about is the track record of this government in managing large-scale projects such as this.<\/p>\n The Canada Infrastructure Bank<\/a> was created in 2017 with a clear mandate to co\u2011invest alongside private capital in large-scale, revenue-generating infrastructure projects. The publicly stated capital envelope was $35 billion, but, according to the Parliamentary Budget Officer, less than $15 billion is expected to be deployed by 2027 to 2028, more than a decade after launch and far less than 60 per cent of the original headline figure.<\/p>\n More troubling than the pace of deployment is the absence of any meaningful performance disclosure. There is no project-level reporting, no portfolio internal rate of return and no aggregation of realized versus expected economic performance that would allow Canadians to assess whether this capital is earning a competitive return relative to its risk<\/a>.<\/p>\n Story Continues <\/p>\n That backdrop makes a recent Cable Public Affairs Channel exchange<\/a> particularly unsettling. In it, Carney described a vision where federal participation acts as a catalyst for projects under provincial jurisdiction, supported through taxation measures, incentives and regulatory alignment. He went further by saying that when a commercial enterprise sits at the core of such projects, Canadians should directly share in the profits.<\/p>\n That argument raises some difficult questions. Does participation imply mandated profit sharing as a condition of federal regulatory approval or support? What form would that participation take in reality: equity stakes, revenue participation or implicit economic rents layered into approvals? And why would private capital accept an open\u2011ended framework when it can deploy funds globally under more favourable and transparent regimes?<\/p>\n For the Canadian energy sector, this simply adds another layer of uncertainty at the worst possible time. If profit sharing becomes embedded in project approval, it begins to resemble a discretionary profit tax layered onto an already overly complex fiscal and regulatory environment.<\/p>\n The risk is that Canada quietly removes itself from opportunities just as global energy conditions elevate the value of reliable supply.<\/p>\n Russian production is being reduced as sanctions, infrastructure damage and logistical constraints translate into durable output declines rather than short-term adjustments. Tensions involving Iran continue to destabilize the broader Middle East, a region that remains central to energy pricing. Co-ordination within the Organization of Petroleum Exporting Countries (OPEC) has weakened, a shift underscored by the United Arab Emirates signalling its intention to leave the organization after decades of membership.<\/p>\n It bears remembering that OPEC discipline is the primary reason oil prices avoided a collapse over the past several years, preserving a price environment high enough to sustain long-term reinvestment. Fractures in that discipline point toward significantly higher volatility, and volatility carries consequences for producers and consumers alike. Canada needs to be prepared for that environment.<\/p>\n The broader concerns surrounding this sovereign wealth fund extend well beyond resources. Canada has spent decades reinforcing oligopolistic structures in groceries, banking, asset management and telecommunications, sectors that already exhibit weak competition and persistently high product and service prices.<\/p>\n A sovereign wealth fund that exerts influence without clear market discipline risks entrenching that concentration rather than disrupting it.<\/p>\n Canada needs fewer outcomes such as the Rogers Communications Inc. acquisition of Shaw Communications Inc., where a combined workforce of roughly 30,000 fell to about 25,000 within three years, with management offering packages to reduce that number by even more.<\/p>\n A sovereign wealth fund could play a constructive role in Canada\u2019s future if it operates with rigour, transparency and an understanding that capital responds to incentives rather than narratives. It also needs to be funded out of a surplus situation rather than debt.<\/p>\n Without that discipline, the risk is that the fund becomes another well-intentioned structure that concentrates power, discourages private investment and delivers far less than promised. Markets have seen this story before, and they will also remember how it ends.<\/p>\n