When Prime Minister Mark Carney was making his pitch for why Canada needs a sovereign wealth fund, he pointed to another resource-rich western economy — Norway.
But that comparison doesn’t quite work, some experts argue.
“Many countries that are blessed with natural resources, like Norway, have sovereign wealth funds. Canada hasn’t had one. Until now. The new Canada Strong Fund will give all Canadians a direct stake in building Canada strong,” Carney told reporters while announcing the $25 billion fund.
Carney said it will “invest in the major projects that are transforming our economy.”
But while the precise structure of the fund remains unclear, fundamental differences between the political and industrial realities in Canada and Norway mean that comparison might not be so straightforward, experts say.
“I actually struggle to make the comparison to Norway,” said Sebastien Betermier, professor of finance at McGill University’s Desautels Faculty of Management and executive director of the International Centre for Pension Management.
“Sovereign wealth fund” is an umbrella term that can refer to many things, but in essence, it is a state-owned investment vehicle by which a government can invest public money towards a particular purpose.
It is that purpose where Norway and Canada’s funds fundamentally differ.
The Canada Strong Fund is geared towards funnelling money towards large public infrastructure projects and will “invest alongside the private sector in nation-building projects,” Carney said, pointing to the construction of the Canadian Pacific Railway in the 1870s as one nation-building example.
Norway takes a different approach with their fund.
“The Norwegian fund is prevented from investing in Norway. Everything is invested globally so that it can diversify the country from oil and gas price fluctuations on which the country is very dependent,” Betermier said.
The Norwegian Government Pension Fund Global (GPFG) takes oil and gas revenues, puts them into the fund and invests the money elsewhere. According to one estimate, it owns more than US$2.2 trillion in assets and has equity in more than 9,000 companies across more than 70 countries around the world.
This means the fund owns 1.5 per cent of the value of all of the world’s publicly listed companies, making it one of the largest institutional investors in the world.
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It does so to ensure that the country does not become too dependent on oil money, thereby buffeting it against the boom-and-bust cycles that places like Alberta have faced.
“Canada’s fund is not like that. Canada’s fund is aimed at investing, from what I can tell, in Canada to promote economic development. It’s a different category of sovereign wealth funds,” Betermier said.
Carney said the new sovereign wealth fund will begin with a domestic focus, potentially going global later.
“In some cases, they began with a domestic focus, then outgrew the scale of the domestic focus,” he said, pointing to the state-owned private investment fund Temasek Holdings in Singapore.
When it was founded in 1974, Temasek made largely domestic investments in Singapore. Recently, however, it has broadened its scope with global investments.
But Temasek’s goal, too, is different from the Canada Strong Fund.
“The goal (of Temasek) is to manage the large state-own companies like Singtel or Singapore Airlines through a vehicle that is competent, professional, run at arm’s length from government,” Betermier said.
Carney’s idea sounds a lot more like the wealth funds in the Persian Gulf countries than it does the Norwegian or Singaporean ones, he added.
Some of the Middle Eastern funds have development mandates inside their sovereign wealth funds, like in Qatar or in the Emirates,” Betermier said.
“Here it looks like it’s going to be exclusively an economic development mandate,” he added.
The idea of a government-run investment fund isn’t new.
Alberta, for example, has the Alberta Heritage Savings Trust Fund, which reinvests a portion of the province’s resource revenues, particularly from the oil and gas sector.
Quebec has the Caisse de dépôt et placement du Québec (CDPQ).
The Canada Pension Plan Investments is currently one of the largest institutional investors in the world, with over $780 billion in assets under its management globally.
The Canada Investment Bank and Canada Growth Fund both perform the functions that Carney outlined in his press conference — unlocking capital for large infrastructure projects in Canada.
“The Canada Infrastructure Bank, the Canada Growth Fund, have very similar mandates to support related projects in very similar sectors — clean energy, trade infrastructure, for example,” said Kate Koplovich, senior policy analyst at the CD Howe Institute.
How the new fund differs from these other investment vehicles and avoids stepping on their toes will be the “million-dollar question,” she added.
Broadly speaking, sovereign wealth funds draw money from two sources: revenues from resources like oil and gas, and budget surpluses.
Canada has no budget surplus. In the Spring Economic Statement, the Liberals estimated that last year’s federal deficit came in at $66.9 billion.
“Canada’s sovereign wealth fund will be based on debt,” Koplovich said.
“What that means for the fund is that, of course, the returns from the fund then have to be greater than the borrowing costs for the government to supply that debt,” she added.
While Canada, as a resource-rich nation, could finance this new fund with oil and gas revenue, like Norway does, there’s one key difference.
“The difference between Norway and Canada is Norway does not have provincial governments with nearly the power that we have in Canada,” said Concordia University economist Moshe Lander.
“Any attempt to try and deal with the oil and gas industry at the federal level will instantaneously be met with pushback, of course, from Alberta, but also from Newfoundland and Labrador,” he added.
Norway’s sovereign wealth fund is also known for its fiscal discipline.
By law, the government cannot draw any of the principal amount from oil revenues into its budget. Only the interest — which comes out to around three per cent of the revenues — can be put into the budget.
Alberta, in contrast, has in the past used their own as “a rainy-day fund, rather than as some sort of generational fund,” said Lander.
“Anytime something goes sideways in the province, which it inevitably does because it’s boom-and-bust cycle, they just go and grab the money,” he said, noting that wouldn’t be a sustainable approach for Carney’s proposed sovereign wealth fund.
The Canada Strong Fund has another difference from Norway’s model: everyday Canadians will be able to invest in the fund.
It is not yet clear how that will be implemented, whether it’s going to be through portfolios or bonds or any other way. But no other sovereign wealth fund in the world has this aspect to it.
The concern with that is that retail mom-and-pop investors often lack the patience for long-term projects, Betermier siad.
“I expect this fund most likely to be invested in long-term infrastructure projects that can take years before cash flows come out. Retail investors are usually not that patient,” he said.
Everyday investors often have a very limited amount of money they can invest, which means the Canada Strong Fund will be competing with global equities for investment.
“Why would I want to invest my money in building some bridge in Canada when I can invest my money in some tech company in the U.S.? That’s where private capital is going to say, ‘thanks, but no,’” Lander said.