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Canada Overdue for New SWFs, Says Report

The Great White North needs more than its current two sovereign wealth funds to shelter and grow its resource wealth, a report argues.  

(January 11, 2013) – Canada is ready and overdue for new sovereign wealth funds to preserve its resource wealth for later generations, according to new report from the Canadian International Council. 

“I think every province that has revenues from non-renewable resources should set one up,” Madelaine Drohan, the report’s author, told aiCIO. “And the ones that have them should be putting away more money. When the Alberta Heritage Fund was started out in 1976, contributions were supposed to be 30% of oil and gas royalties. Now, if you compare Alberta’s contribution record with that of Norway’s, Alberta would look pretty bad.” 

In 2008, the Alberta Heritage Fund was rolled into the Alberta Investment Management Company (AMICo)—one of Canada’s two sovereign funds. AMICo manages $70.8 billion, much of it oil wealth. Quebec’s Generation Fund Managed by Caisse de Dépôt et Placement du Québec, holds $4.3 billion in mineral and hydroelectric profits. 

Natural resources belong to the Canadian provinces, which is why a national fund like Norway’s is unlikely to be set up in Canada. But new funds for resource-wealthy provinces like Newfoundland and British Columbia are a possibility, according to Drohan. 

“I think the chances are pretty good more will pop up in Canada,” she said. “It is not likely that they’ll be a national one anytime soon. The federal government does get some direct revenue from mining in NWT and Nunavut, but it’s tiny.” 

Drohan’s money is on British Columbia, which benefits from strong forestry, fishing, mining, and hydroelectric industries, to open Canada’s next sovereign fun. Whereas Newfoundland, in contrast, “has made some pretty strong statements against it.” 

But if British Columbia or another province decides to take the leap, it’s worth taking the time to proceed as thoughtfully as possible, according to an HSBC Business School professor. In a recent paper, Christopher Balding critiqued a raft of recent funds for being poorly conceived and hindrances to their country’s economy. 

“Most original sovereign wealth funds were making valuable economic policy innovations to prevent inflation and macroeconomic instability,” Balding contends. “Most new sovereign wealth funds are being used to distort markets hindering national development. The landscape is dominated by vanity funds that seem better suited for the purpose of joining a sovereign country club rather than funds designed to solve difficult policy and development questions. The highest quality ‘innovations’ in sovereign wealth funds come from some of the oldest funds but are lessons well learned."

Read Drohan's entire report here.

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