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Prime Minister Carney recently announced his government’s intention to establish the “Canada Strong Fund,” a sovereign wealth fund (SWF) that will invest in key strategic Canadian companies and projects. While the government will provide more details about the fund’s mandate, structure and implementation plan over the coming months, the released information raises serious concerns about whether the fund is in the best economic interests of Canadians.
In its initial announcement, the government indicated that through an initial investment of $25 billion over three years, the fund will “strategically” invest alongside the private sector in Canadian projects and companies that will drive economic transformation. This will include projects in clean energy and conventional energy, critical minerals, agriculture and infrastructure. Future funding will be provided from reinvested earnings of the fund, other sources of government funding, and a retail investment product offered to the public. The intention is for the fund to invest alongside private sources of capital and operate at arms-length from the government through a new Crown corporation led by a CEO and a qualified board of directors.
Again, is this in the best economic interest of Canadians, particularly in light of their potential role as direct investors? A stated objective of the fund is to help build a stronger, more independent and more resilient economy. At the same time, it also has the objective of achieving commercial returns with a primary focus on equity investments. The implicit assumption in the government’s announcement is that the two objectives are in harmony. In fact, this assumption is at best simplistic. Political decisions about what’s in the national interest will often conflict with what’s in the best interest of private investors, since the national interest is typically broader than the financial interest of investors in specific projects or companies. That this caveat will apply to the fund is suggested by the fund’s broad interest in creating good paying jobs, supercharging innovation and keeping Canada internationally competitive.
Evidence from the performance of SWFs supports a concern that the simultaneous pursuit of political and financial investment objectives renders both SWF owners and senior executives weak monitors of the companies and projects in which they invest, because monitoring suffers when the attention of investors and managers is divided among multiple goals. As a result, both the industrial development outcomes and the financial returns to SWF investments are unsatisfactory. Hence, SWFs that have dual mandates to promote economic development and earn commercial rates of return have legally separate entities to carry out each mandate separately.
But pursuing an economic mandate separately from a financial return mandate does not address the concern that political interests and imperatives will unduly influence investment decisions made in pursuit of the SWFs development mandate. This concern is a reason why many SWFs, including Norway’s SWF (which is the world’s largest), are forbidden or restricted by legislation from investing domestically. Moreover, the troubling outcomes of government industrial policies over time and across countries undermine the Carney government’s optimistic promotion of the fund as a vehicle that will benefit all Canadians.
Encouraging domestic investments in productivity-enhancing assets should be a prominent policy objective. However, it does not follow that establishing a new Crown corporation to facilitate government industrial policy is an efficient instrument to pursue that objective. Streamlining the regulatory process to facilitate private-sector investments, including investments in infrastructure projects, would reduce both the costs and risks companies face in making major investments in projects such as the construction of pipelines and energy facilities. Reducing uncompetitive tax rates would encourage private investors to bear risks related to transformative innovation. The more the federal government becomes the arbiter of worthwhile investments, the more time and resources companies and other institutions, including provincial governments, will expend lobbying Ottawa to promote their preferred investment projects rather than focusing on improving their efficiency.
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