The Canadian government should establish a sovereign wealth fund to benefit citizens in the decades to come after Canada’s finite natural resources run out or extraction is no longer feasible because of market changes or government mandates.Justin Tang/The Canadian Press
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.
As Canada looks to extract more critical minerals to meet demand for electric-vehicle production and related investments, we are looking at the potential for great economic gains.
This new wealth must be used wisely. Federal and provincial governments have the ability to create an endowment today that will benefit citizens for decades to come: a sovereign wealth fund. This is the path that our governments must choose.
It is critical that we think about what will happen when Canada’s finite natural resources run out or extraction is no longer feasible because of market changes or government mandates.
Internationally, sovereign wealth funds have been created by nations and subnational jurisdictions of different political stripes that recognize that the financial benefits currently derived from finite natural resources should be collected, invested and developed to serve the needs of the population far into the future.
These intergenerational wealth-transfer tools produce long-term sources of income in support of societal objectives and priorities and enable the long-term prosperity and well-being of a population.
An example is Norway’s Government Pension Fund Global (also known as the Oil Fund), which invests royalties from its petroleum sector. It was established in 1990 and has over US$1-trillion in assets. Another example is Saudi Arabia’s Public Investment Fund, which in 2022 had assets of US$620-billion.
Likewise in Canada, the Alberta Heritage Savings Trust Fund was established by a Progressive Conservative government in 1976 with a mandate to invest a portion of the province’s non-renewable resource revenues to produce income for government programs. It is managed by the Alberta Investment Management Corp., with assets valued at $18.6-billion.
Quebec established its Generations Fund in 2006 under a Liberal government with revenues from renewable and non-renewable resources including Hydro-Québec, mining activities and the tax on alcohol. Managed by the Caisse de dépôt et placement du Québec, the Generations Fund is already valued at $19.1-billion and, with annual budget commitments by the Coalition Avenir Québec government, is expected to grow to $37-billion by 2027.
But while provinces always have the choice to advance independent programs, there is significant benefit to considering a co-operative management approach across federal and provincial jurisdictions to drive greater efficiencies, leverage economies of scale, and reduce costs in the management of a wealth fund.
We are advocating for such a collective approach whereby each jurisdiction would still own and maintain full control over their respective funds, with specific investment decisions managed by independent professionals, free from political direction. Each jurisdiction would determine the investment guidelines for their portfolio, the timing and size of dividends, and decide how to allocate these dividends within their own budgets (e.g., as tax reductions, debt repayment, investments in social programs). Funding sources wouldn’t need to be limited to natural-resource royalties but could include windfalls from privatized assets, portions of planned budget surpluses, and other such revenues.
To begin, interested provinces could work together to set up a model and leave the door open to future entrants once success is demonstrated. There is ample precedent for this structure. There are multiple examples of pension funds from different organizations being grouped under a single administrative entity to leverage investment expertise while ensuring that contributed pools of capital are managed in separate portfolios with their own mandates, objectives and risk tolerances.
Similarly, on this national sovereign wealth fund, political leaders should take a pragmatic approach to leveraging the advantages of a co-operative approach to maximize benefits for all.
To put the benefits of this in perspective, let’s take a look at the lost opportunity of not saving for the future. From 2015 to 2019, governments collectively in Canada derived $20.1-billion annually from natural resources, including energy, forestry and mining activities. Had these amounts been invested instead of used to increase government expenditures, Canada would have greater assurance regarding its future ability to sustain social programs, reduce taxpayer burdens and maintain citizens’ quality of life.
Canadians understand the imperative to do better for future generations and are only persuaded by short-term tax-and-spend policies when well-executed alternatives aren’t presented to them by politicians. We believe that a sovereign wealth fund would find great support among Canadians.
Creating these funds requires that we think in a far-sighted manner and find the backbone in our divisive political arenas to do more than react to spending demands today at the expense of sensible planning for the future.