Why does Canada need a sovereign wealth fund?

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put in to their sovereign wealth funds. Carney has no surplus and therefore no wealth to put in such a fund. He's talking about a sovereign debt fund. We'll get to what the liberals need to do to make this fund successful in just a moment, but first to explain what it is and how it will work I'm joined by the C-Ebron. ABC's senior business reporter, Peter Armstrong. He's in Ottawa. Peter, good morning. Good morning, Matt. What is a sovereign wealth fund? That's a good question, especially on day like today. And not to, you know, oversimplify it,

but a sovereign wealth fund is just, it's a fancy term for an investment fund. It's a fancy term for an investment fund that's state owned, right? There's a ton of them. We know a lot of them sort of intrinsically. Norway's, I think, is probably the most famous. It's also, in a lot of ways, the most comparable to what Canada could have and maybe could have built already, right? It's a small country. It used its oil revenues to grow the fund, but it started a long time ago. And as Pierre Poilievre pointed out, it started with a surplus. So those are some issues, but it's got like $2.1 trillion in assets. And the idea of this is to build something that initially at least, the idea was to use these to help countries, you know,

get off their dependence of that one single industry that had come to dominate things, you know, like oil. That's not necessarily the case in Canada. The tricky part for these and for all of them is they're state-owned, but they're supposed to be at arm's length. How do you do that? How do you actually execute that? Those are always tricky. When you'll look through the long list of these kinds of sovereign wealth funds, you see some that are really successful at keeping government meddling out. You see some that are quite obviously a little bit less successful at that. How is this different from something like the Canada Infrastructure Bank,

which was meant to attract private investors for infrastructure projects, or even perhaps CPPIB, the Canadian Pension Plan Investment Board? Oh, listen, the list is long of things that, you know, how is this different from the Maple 8 pension funds? How is this different from the Infrastructure Bank, the Business Development Bank, Canada? how is it different from those is kind of a subset to, I think, the most important question that comes out of any announcement like this is what problem is this thing we're trying to build

meant to solve? And I think what is it doing that all of these other institutions already do is a really important question that we frankly don't have an answer to? And I am going to be frustratingly repetitive in saying we don't know yet because there's a lot of stuff we don't know right now, where the money is coming from, what it's going to be like. But the issue that I think most Canadians think we're trying to solve is that Canada has an issue trying to attract capital. But is the problem there a lack of capital or an overabundance of regulations? I think there you start to get into, well, what is this thing really trying

to solve? And that's going to be, I think, one of the biggest and most important questions we're going to try to get answered today and tomorrow and through next week. You hinted at one of those other questions, which is where is the money going to come from? The prime minister says that this will start with an endowment of $25 billion. Do we know what the source of that is? Weirdly, no, we don't. And it is weird, right? And the way sovereign wealth funds are usually built is they're built through a surplus. Canada is certainly kind of obviously not running a surplus right now. So where will that come from? And, you know, it depends on so many things. Like, are they going to draw this capital? He talked about having Canadians invest in it, and that would be a

portion of the money that would come in. But clarity around that, like, you have people that are already concerned that the Carney government has done all the right things in terms of talking. It's made really good points. It's said all the right things, but it hasn't executed on a, as enough of those, or as many of those, that industry would have liked to have seen by now. And this really starts to play into that. So you have economists, you have energy, you know, sort of industry people saying, well, hold on a second. Are we talking here about an investment fund that will find money somewhere, maybe borrow it, as Pierre Pali have said, and invest in projects, or is it looking to draw capital by adding an extra tax on top of resource generating projects like pipelines and, you know, mines and, and, you know, mines and. forestry and a million other things, those are really deep-held concerns.

Those are really important concerns. And those are questions that we really do need to get some answers. The potential for this is interesting. And you mentioned Norway. There are people who are saying that a much closer comparison, perhaps geographically, but also in terms of what this project may do, is happening in Quebec. Michael Sabia, who was the CEO of the wealth fund there, the Casano, Po is a very close advisor to Mark Carney.

Do you see his fingerprints on something like this? Yeah, I think you can. And you can look to Quebec for frankly both inspiration and a cautionary tale of what not to do. The case is a private bank. It has an amazing wealth fund. I think it's something like $500 billion, but like $100 billion of that, I'm guessing. But it's just shy of $100 billion. Is invested solely in Quebec aimed to really bring about.

great Quebec projects. And it's done a really good job. It's really kept pace with those other. The Maple 8 was the one I referenced earlier, the other big eight Canadian pension plans. It's kept pace with them in spite of the fact that it's really tried to have that deliberate focus on investing in Quebec. I do say there's also a cautionary tale out of Quebec because the Quebec government,

the provincial government introduced, I don't know if you remember this, the Generations Fund. I think it was back in like early 2000s. And that hasn't worked out as well. And that hasn't had that arm's length distance. One economist on Twitter yesterday was saying it's just three card Monty applied to public finance. So, like, there are examples out there that we can draw from. And I think a lot of people, you know, even the most skeptic, have to say there is a potential that this could work.

But we've got to get all these answers to these questions. And we know how Michael Sabia built up the case fund and did a really good job with that. We don't yet know how this government intends to build up this fund, intends to draw the money to make it, how it's going to work, what it's going to invest. Like, we still need answers before we can really say which model at Quebec it's going to end up following. We're going to speak in just a moment with somebody who has been calling for this and sees real potential, but just in the last minute or so that we have. As you understand it, if we are at a time when, I mean, the phrase is build, baby build, what sort of may be. national projects that would make Canada more sovereign could have fund like this help support? Oh, listen, I think if you can get after all of those questions that we've raised,

where's the money come from, how's it going to work, what's the arm's length part of this going to be, I think there is fantastic opportunity here. We have great things happening in Canada. The Port of Montreal, I think, is one that keeps coming up and the expansion there. But there are projects across the country. If we are going to grow and build our resource exports, whether that's from the new copper mine that was approved through the major projects office that's going to come online this summer or, you know, the LNG line that's now just been approved last week, there are all kinds of exciting things happening in Canada.

The case for Canada is very strong right now. There is a lot that is wanted, you know, Canada makes stuff the world wants and desperate. needs right now, we just need to find a way to get it to market. And getting it to market takes money, it takes infrastructure, it takes expertise, it takes skilled workforce to get it done. And if this can help with that, hallelujah, I think people will be very excited about that. And I think it's a fund that could probably end up making a lot of money. Those questions hover over this because we don't have a great history of execution on some of these files in the past.

We will wait for the answers to those many questions. Peter, good to talk to you. Thank you. Oh, you bet. Peter Armstrong, CBC's senior business reporter. Still waiting in line? Again? That's time you'll never get back. Save time and money with Stamps.com. Over four million businesses have skipped the line with Stamps.com. Join them to save up to 90% off carrier rates from your computer or phone right now. Print postage for certified mail, registered mail, and packages in seconds.

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And if you aren't yet, please find and follow Front Burner wherever you get your podcasts. And please get it in the chat. John Ruflow is the founder and managing partner of Maverick's private equity here in Toronto. Last fall, he wrote an opinion piece in the Globe and Mail that was advocating for just such an idea, a sovereign wealth fund. John, good morning to you. Good morning. You wrote in the Globe and Mail, if we can't control our own destiny, someone else will. How does a sovereign wealth fund give us that control?

Sure. So here is the real issue that it's trying to solve. Canada has a capital formation problem. So we're not generating the domestic capital that we need to build critical industries or sovereign industries. And hoping for foreign capital to come in to rent. rescue the way is really an ill-fated idea. So the sovereign wealth fund is the solution to help alleviate this lack of domestic capital. What do you think in the best case scenario it will do?

So just a couple of things. A sovereign wealth fund is not a pension fund. So we have a great pension fund model. But those belong, those dollars belong to the individual members of those pension funds. and that includes the CPBIB, which belongs to the Canadian pension plan model. What this is really doing here, and the comment that, yes, traditionally, this is seeded by excess surplus revenues. But think of it this way. Canada has a great credit reading.

And right now, let's just say that Canada could borrow money at three and a three and a a half percent. Using Canada's pension funds as a proxy, the lowest returning pension fund over 20 plus years has generated 7 percent compounded. If you could use that as a proxy, it is really the spread between what you can generate versus what you can borrow at is really the source of the wealth creation. So you would be comfortable if this the 25 billion dollar endowment, you would be comfortable if that is provided by government and is added to the to the balance sheet in some ways. Well, yeah, I mean, the truth of the matter is we're already doing it. I mean, Canada is already borrowing. The real issue is can you take that seeding of $25 billion and it's coming

ultimately from borrowings or other government programs, but it's all being borrowed. The question is, with good governance and good investing and not being a slush fund, if we believe we can generate a return greater than the interest rate, then you do it all day long, just like you would go out and borrow money or invest using margin if you felt comfortable that you would generate a return. That's the bet, and it's all about the execution. So this is why the structure and the execution of this is absolutely fundamental. You use the phrase slush fund, and this is something that you raised in the globe piece,

it's something that Pierre Poilievre has raised as well. He says that this is going to create, in his words, a liberal slush fund. What has to be done to ensure that the party in power doesn't just use this for its priorities, and it becomes a slush fund or a piggyback? Correct. So what this needs to have is a separate board, separate professional management, and undue influence politically. We have two very good examples in Canada already of this. One bad, one good. The interesting example is Canada was the first to create a sovereign wealth fund before Norway. It's called the Alberta Heritage Fund. It started off bigger than Norway. in the early days. And what happened?

Politicians grabbed those dollars for political purposes in Alberta. And today it is $28 billion or so in size versus $2 trillion for Norway. Compare this to CDPQ or La Kes in the province of Quebec. Now, that is a pension fund. It is not a sovereign wealth fund. But it has a dual use. It has an economic. economic development purpose in Quebec.

And, you know, they will tell you there that it's, you know, it's challenging but very doable. They have delivered a spectacular return for over 20 years. And they've, they've achieved economic development objectives for Quebec. Why? They have a very separate governance. And politicians cannot direct where the ultimate capital goes to, to, to serve pet projects in their particular writings. You said that focus with an idea like this is critical.

What should this fund, the Canada Strong Fund, back? What should it be focused on? Yeah. So now this is again, and I think Peter had mentioned, there are still lots of questions. I do have one major question. The issue that I was trying to solve, and I come from a venture and growth background. I am trying to invest

in the most innovative Canadian companies to really position Canada for our future. The announcement spoke to infrastructure projects, which are absolutely fine as well too,

whether they be energy projects as an example, but they must be projects that generate an actual identifiable economic return. And what I want to see in this is that not only for these large projects, but for this early and

growth stage companies that really are going to be the future stars and driving our future wealth of our country. So does that mean that it's not a fund like this? Do you think it could fund or help get the backing for a pipeline, for example? This is one of those projects where there isn't a backer yet. People believe that the backers would come in if there was a backstop provided by government, for example, or by a fund like this. So could something like this help kickstart the development of a pipeline? Yeah, absolutely.

No, the thing that people have to remember, we are going through the geopolitical disorder right now. And the reality is going to be the world is going to revert to way the world was before World War I. where it was every country looking out for itself. And you're already seeing this. So to think that foreign sources of capital are going to come to serve Canada's sovereign needs, I don't think is going to happen. They're worried about their own sovereign needs. You already have heard jurisdictions like Saudi Arabia, for example,

they're in debt borrowing now, and they're using their own capital to, protect their own industries. So it is every man, women, and child, so to speak, for themselves. And Canada has to take control of its own reins. And we have to guide our own future. One of the things about capital is capital influences control ultimately. If the foreign capital comes from a jurisdiction that, you know, perhaps we have tensions with, you know, now remember, you've just sold out the influence of critical industries like a pipeline to foreign jurisdictions. And that may not bode very well for Canada. We're just about out of time.

Let me ask you just finally. Before the last federal election, you were part of an organization called Build Canada. We spoke with some of the members of that organization here on this program, entrepreneurs, people in the tech sector, people in the business sector. Very critical of where Canada was. And talking about a country in some ways in decline that we, wasn't able to build big things. Do you see a change in that now? I see a change in attitude, absolutely. You know, and I'd say, you know, the last decade's been very trying,

and it's been very, very frustrating for entrepreneurs in this country. There is an attitude that not only can we build it, we need to build it. And so the real question is it's now, Now, it's go time now. It's about execution. So what will show you, just very briefly, what will show you that it's go time? What's a measure of success for this? Actually backing these projects that we've been talking about for so long. And you think that now is the time that it's possible to do that now?

Absolutely. There's nothing in our way. It's only our ambition is in our way. I hope we have the chance to talk again as this moves forward. In the meantime, I'm really glad to have you here this morning. John, thank you very much. Great. Thank you very much. John Rufelo is the founder and managing partner of Maverick's private equity. He was in Toronto.

You've been listening to the current podcast. My name is Matt Galloway. Thanks for listening. I'll talk to you soon. For more CBC podcasts, go to cbc.ca slash podcasts.