Prime Minister Mark Carney makes an announcement at the Embleton Community Centre and Park in Brampton, Ont., on April 7.Carlos Osorio/Reuters
Matthew Bianco is the former managing director and head of capital markets risk optimization at Canada Pension Plan Investments and Elena Mantagaris is a senior adviser with StrategyCorp, a national public-affairs firm.
Prime Minister Mark Carney announced on Tuesday that Canada will be establishing a sovereign wealth fund that will invest in major national infrastructure projects. It is a landmark strategic decision that will have an impact on the nation’s economy for generations to come.
But the devil is in the details and there are few available at this time.
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Mr. Carney said the fund would be endowed with $25-billion, and it is not clear where that money is coming from.
The source of funding needs to be clearly identified. Internationally, dedicated revenues generated from natural resources (e.g., energy, forestry and mining) and other government-managed entities are often used to finance such a fund.
The worst-case scenario – and one that appears likely to happen – is that the $25-billion seed funding is an allocation from the general budget, funded by debt.
This government is already running deficits. There is an implicit message in the concept of using additional funds to make investments rather than paying down debt. It is that the investment fund must be confident that it can earn a return, after all fees and expenses, that exceeds the cost of that debt.
That is not impossible, but the risk of failure alone would be cause for concern.
Mr. Carney said the fund would operate at arm’s length from Ottawa and will have an independent board. This is crucial.
Political interference around project selection introduces investment risk because chosen projects may not be the best projects. Clearly stating the parameters upfront for what constitutes a good investment will be critical for the fund.
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But the management of the fund cannot be truly independent if politically motivated priorities are enshrined in the fund’s charter, as it currently appears. The sovereign wealth fund is connected to federal support for what Ottawa says is nation-building work, such as ports and natural resources projects.
Focusing too much on one area would elevate risk since investment diversification by geography and type of project is a cornerstone for success. That would also make this simply an off-balance sheet vehicle for fiscal policy.
At the announcement on Tuesday, Mr. Carney was asked how the new fund would interact with other similar federal bodies, such as the Canada Infrastructure Bank. He laid out a high-level distinction: The infrastructure bank largely provides loans, while the sovereign fund would hold equity stakes.
We need more information. How various federal bodies interact and leverage each other is important. From an investment strategy perspective we want to be maximizing efficiency and reducing overlapping mandates.
Then there is the creation of a retail option for Canadians to invest directly in projects, as Mr. Carney announced. It is a novel twist on a sovereign wealth fund. But is that simply a way to use public funds to de-risk projects that aren’t considered economically feasible by the private sector? A retail investment vehicle tied to the fund could put at risk the retirement savings of Canadians in projects that may never generate returns.
As the current artificial intelligence boom (or bubble, depending on your point of view) so clearly demonstrates, there is no shortage of capital to be deployed in the global economy today. If a given infrastructure project is not being developed, it is likely because the private sector has determined that it is not economically feasible, or too risky due to onerous regulatory restrictions.
The purpose of this new fund should be to act as a catalyst for private-sector investments rather than seeking to be the sole or primary investor in uneconomic projects, and possibly even crowding out those critical private investments.
This new sovereign wealth fund can be a tool to facilitate generational economic growth, but it is not a replacement for a capital-friendly tax, legal and regulatory environment. The question is whether, as a politician, Mr. Carney will ensure the fund is managed to the best international standards in order to benefit future generations and not his immediate political future.