Canada’s $25 Billion Sovereign Wealth Fund Explained
Why the new debt-financed initiative is drawing criticism, and how it measures up against the world-famous Norwegian oil fund.
What if Canada started investing like Norway and used a sovereign wealth fund to build the infrastructure future generations will depend on?
In this episode, Mike Moffatt and Meredith Martin explain what sovereign wealth funds are, how countries like Norway use them, and why Prime Minister Mark Carney wants Canada to create the new Canada Strong Fund.
They explore how the fund could finance major infrastructure projects and support long-term economic growth.
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Below is an AI-generated transcript of the Missing Middle podcast, lightly edited.
Mike Moffatt: Hi everyone! Sabrina is off today, and we’re releasing a mini-episode with producer Meredith Martin filling in on sovereign wealth funds. What they are, how they work, and why Prime Minister Mark Carney thinks they are a good idea for Canada.
Meredith Martin: Also, for those in the Toronto area, we’re recording a Missing Middle podcast episode in front of a live audience with all three of the hosts, plus Ron Butler at the National Club on June 1st.
A few weeks ago, just before the spring economic update, it was announced that Canada would be creating a sovereign wealth fund called the Canada Strong Fund, and it will be used to invest in infrastructure and other domestic projects. I have occasionally covered the oil and gas sector, so when I heard this, I immediately thought of Norway, which, similarly to Canada, is rich in oil and gas. And it’s the only other nation I knew of that had a sovereign wealth fund.
Mike, what is a sovereign wealth fund?
Mike Moffatt: It’s time to play Professor Mike here. So there are actually hundreds of sovereign wealth funds around the world, with some like the Alberta Heritage Savings Trust Fund at the sub-sovereign or provincial level. Norway’s is the most famous, with roughly $2 trillion in assets.
Sovereign wealth funds tend to spread their money across a mix of assets. So we’re talking public stocks, bonds, real estate, infrastructure, private equity, credit, sometimes hedge funds, or direct stakes in non-publicly traded companies.
Meredith Martin: Before we get into what Canada is doing, I think we should talk about Norway for a bit because it’s the largest and I think the one that’s most widely known in Canada. What’s the purpose of Norway’s sovereign wealth fund?
Mike Moffatt: Sovereign wealth funds differ on a number of dimensions. Two of the most important ones are: where does the money come from? And second, how is it used? What is it trying to accomplish?
So if we look at that second question around how the money is used and what it is trying to accomplish, Norway has two separate funds with two separate purposes.
We’ll start with the bigger of the two. The Government Pension Fund Global was established in the 1990s. It is used to invest the surplus revenue of Norway’s petroleum sector into all kinds of international investments, the same way most pension funds do. So it’s typically called the Oil Fund, and it owns stocks and things globally around the world.
The other fund is much smaller. It was created in 1967. It’s more of a national insurance fund, and it is managed separately from the much larger Oil Fund. Unlike the Oil Fund, which invests around the world and owns a lot of companies on U.S. stock markets, this fund mainly invests in Norway and the Nordic region. So it’s more focused on local and regional economic development, investing in local companies, infrastructure like roads and ports, that kind of thing.
Meredith Martin: My understanding is that the older, smaller fund was set up to diversify the economy. Norway is a very small country. It only has 5.5 million citizens today. Back when the fund was created, it had fewer than 4 million people. The country was generating a lot of revenue per person, and it could have just paid dividends back to its citizens, but instead, it pooled the profits and created the fund, which then helped invest in other industries.
Why do you think they created the second fund in the 1990s?
Mike Moffatt: The first fund was designed to grow the economy and develop infrastructure so they could build up the manufacturing sector, the tourism sector, and so on. But there are only so many kinds of investments you can make like that, locally, before you’re just throwing money towards anything and everything. The second fund, the larger one they set up, was: what do we do with this big pot of money that’s probably not going to last forever because the oil in Norway may eventually run out?
And you’re right, they could have just written cheques to existing residents, but that doesn’t really help the future. And if you start writing massive cheques to citizens, you’re going to get a lot of inflation. Everybody’s going to go out and spend that money. So by taking a lot of the cash, pooling it into a second fund, you can buy up stocks and bonds from around the world. You’re not going to get that huge surge of inflation. And it creates this fund where it can pay dividends to the citizens for hundreds of years, so as to ensure the ongoing prosperity of the country.
Meredith Martin: This seems like a really prudent thing to do and very reasonable. But I wonder how many citizens in the world would have been okay with not getting the money. I wonder how they actually got the consensus to do this.
Is the Canada Strong Fund more like the older Norway Fund or the newer, bigger one or something else entirely?
Mike Moffatt: So it’s designed more like the smaller fund, which is designed more for economic development rather than being a fund that’s buying Google stock. It’s really designed to fund large infrastructure projects.
The Prime Minister used the Canadian Pacific Railway in the 1870s as an example of a nation-building infrastructure that this thing can fund. It’s going to operate as an independent Crown corporation.
It’s supposed to be at arm’s length from the government. It invests alongside the private sector, and the federal government is providing an initial endowment of about $25 billion over three years. In sovereign wealth fund terms, this is very small. We’re not talking about the $2 trillion of Norway’s big fund.
The plan is, over time, that they build a bunch of assets, infrastructure and so on, sell those things off and then use the proceeds to build more assets, which is asset recycling — a term that Liberal governments love. But we don’t know a lot of the details yet. The announcement was pretty nebulous.
Meredith Martin: I’ve been hearing a bunch of criticism about it, especially about the fact that the Canada Strong Fund is being debt-financed instead of created with surplus revenues. And I’ve heard a few people say it shouldn’t be called a sovereign wealth fund because it isn’t one. What do you make of that criticism?
Mike Moffatt: I’ve heard that too, people saying this should be a sovereign debt fund. But this really is the second dimension I talked about earlier, around where the money comes from.
It’s not uncommon to have a sovereign wealth fund from a government that has government debt. That’s actually the norm. It’s not the exception. Norway is the exception here. And it can make sense that if you are a government that can borrow for 30 years at three to four per cent, and you can use that money to build infrastructure, which will generate returns of eight, nine, 10%, - it makes sense to do that. The spread between earning 10% versus having to pay four percent makes the whole thing profitable.
I kind of agree with people pointing out that maybe it should be a debt fund rather than a wealth fund. But I still think there can be logic to this.
There’s this other kind of component to this fund, which hasn’t been well explained. But they’re also talking about allowing Canadians to invest directly into the fund. So just the same way you might invest in a mutual fund or an ETF, an exchange-traded fund, if you are a high-wealth investor and go, “Hey, I like what the government’s doing here. I’ll buy in at $100,000.” But it’s really not clear at this moment how that’s going to work.
Meredith Martin: When the fund was announced, Carney said, and this is a quote, “Over time, the fund will grow through asset recycling and reinvestment, creating even greater opportunities for future generations.” How do you think it will benefit future generations? And do you agree that having a sovereign wealth fund is a good idea?
Mike Moffatt: I think it can be a good idea. Like in most things, the devil’s in the details. But, at a high level, I like what they’re doing. And it can really help with a lot of things.
We talk a lot about housing and the housing theory of everything. If this helps Canada build water and wastewater treatment plants, which are needed to be able to build more homes, grow our subdivisions and things like that, that’s a good thing.
I do think there are some open questions around how this is going to fit in with other government programs. We already have a Canada Infrastructure Bank. We already have a lot of agencies out there building infrastructure. So where does this fit in the mix? I worry about duplication.
I don’t really understand the model here around Canadians buying in. But I think Canada needs a lot of infrastructure. I do think there are a lot of opportunities there to build infrastructure that will both be profitable and help the country. At a high level, I like the idea, but I’ve got a lot of questions when it comes to implementation and details.
Meredith Martin: The thing that I found most surprising about the announcement was that I don’t think many people know what a sovereign wealth fund is. I thought they didn’t outline it very well, which is always a complaint with the government. They’re not great communicators in general.
And then the few people I did see talking about it online reacted so strongly to it. And I think most citizens were just like, “What are you even talking about? Why is this a thing?” Do you have any thoughts on the reaction to it and how strong it was?
Mike Moffatt: I think some of the folks who were reacting to it are going to react strongly against anything that the government does. I think that they had some really good points around the fact that this is debt financed. I think they had a lot of good points around that this isn’t particularly detailed.
I don’t think 95% of Canadians care about the announcement. I think what they’ll care about is whether we’re able to build another port or expand the Port of Vancouver, get more goods or natural gas to Asia, grow the economy, and create a bunch of jobs. Canadians will all be happy with that. And the government needs to understand that the people don’t really care about the announcements. They care about the outcome.
We’ll have to see 3 to 10 years down the line whether or not those actually created opportunities. I did find it a little strange that it did seem to be the government’s headline in the spring economic update on a thing that 95% of the population won’t really care about or won’t understand.
Meredith Martin: That was exactly my point. It felt weird to me that this was the headline. It was a really odd type of thing to focus on when so few people would even understand what they were talking about.
I, too, am really interested in results, and that’s all I really care about. And I think most of the Missing Middle team agrees with that. Just show me the money.
Mike Moffatt: Show me the money.
Meredith Martin: Or show me the infrastructure project. Let’s see the high-speed rail.
Thank you so much for watching and listening. Sabrina will be back next week. Our producer today is Cara Stern, and our editor is Sean Foreman.
Mike Moffatt: And if you have any thoughts or questions about regional economic development policies in Scandinavia, please send us an email to [email protected].
Meredith Martin: And we’ll see you next time.
Additional Reading/Listening that Helped Inform the Episode:
The Canada Strong Fund: Nation-Building or State Venture Capitalism?
What Canada can learn from Norway’s Sovereign Wealth Fund
Our pension funds must be sovereign wealth funds, too – even if pensioners take a hit
Canada’s spring budget projects economy to grow and deficit to fall
Neither Norway nor Singapore: Decoding Canada’s new sovereign wealth fund
Funded by the Neptis Foundation
Brought to you by the Missing Middle Initiative