An interesting idea, but more information needed

Prime Minister Mark Carney announced yesterday that his government plans to create a sovereign wealth fund, which will be named the Canada Strong Fund. He characterizes the proposed fund as both a “national savings and investment account” and “the peoples’ fund.”

A “backgrounder” document released immediately after the PM’s announcement says the objective of the fund is “to give all Canadians a direct stake in the Build Canada agenda.” It explains that the fund will invest in strategic Canadian projects and companies alongside other investors, with the objective of achieving commercial returns to build Canada’s wealth. “From infrastructure to advanced manufacturing to energy and mining,” the document says, “the fund will have a mandate to deliver market-rate returns for Canadians across the economy.”

The new fund will operate independently from government via a new Crown corporation, which will be guided by a CEO and an independent board of qualified directors. The government claims that such a level of independence and professional management ensures the fund can make long-term, economically sound investment decisions. It argues that the planned management structure is widely regarded as the “global best practice” because it strengthens transparency, credibility and long-term performance through consistent, expert management.

The government plans to contribute $25 billion in seed capital to the fund over the next three years, and says it will grow over time from both the returns that it generates and through other assets that government may allocate to it. It also says that it intends to offer Canadians the opportunity to invest in the fund through “a new, retail investment product” that will be available to all Canadians, and will be easy to purchase, hold and sell. Those factors, it says, will enable Canadians to “share in the upside, while their initial invested capital will be protected.”

The proposed fund appears promising at first glance but, on closer examination, there are legitimate reasons for concern. They begin with the fact that other nations’ sovereign wealth funds are often funded by surplus money generated by those governments, often derived from each country’s surplus reserves. The “seed capital” for the new Canadian fund, on the other hand, will be $25 billion in borrowed money, which means that all Canadian taxpayers will be paying interest on those funds so that a select few can earn a return on their investment.

Other nations’ sovereign wealth funds have also been criticized as being vulnerable to political abuse, including being used as a “slush fund” for political patronage, corruption or to fund risky vanity projects. Would Canada’s new fund be truly immune to reckless decisions and policies of future prime ministers and their respective governments? What would a government led by Justin Trudeau have invested in? Would a Pierre Poilievre government have invested the nation’s funds in crypto currency, as he promised?

Many sovereign wealth funds have also been criticized for operating with limited transparency, leading to concerns regarding governance and investment objectives, as well as increased potential for mismanagement and investment losses. There also concerns that sovereign wealth funds can become so large that their investment actions, whether buying or selling, can impact stock market prices and cause geopolitical tension. Even more serious is the worry that sovereign wealth funds that are heavily funded by natural resource revenues — Canada could eventually be in that category — may be subject to severe fluctuation in currency rates, which can harm other sectors of the national economy.

Carney told reporters on Monday that his government will spend the next few months consulting with “market participants and regulators” in order to finalize aspects of the fund. That’s logical, but we encourage him to also include ordinary Canadians in those consultations, taking the time to do a more effective job of explaining why a sovereign wealth fund endowed with billions of dollars of borrowed money is the best choice for Canada and its economy at this turbulent time. In particular, the PM must explain why he believes such a fund is a superior, safer investment choice for individual Canadians than other options that could also be used to fund major national projects.

Until those discussions happen, Canadians should reserve their judgment on this idea.