By Jerome Gessaroli
May 21, 2026
Canada faces a challenging economic environment. Productivity growth, essential to improving living standards, has lagged the OECD average, while US protectionism threatens access to our most important export market. Prime Minister Mark Carney’s Liberal government has identified the need for more investment in energy, minerals, and related infrastructure, and the proposed Canada Strong Fund (CSF), a proposed sovereign wealth fund seeded with $25 billion over three years, is presented as part of its response.
The government’s spring economic update states that “the Fund will invest in key, strategic Canadian projects and companies on a commercial basis and alongside private sector investors.” The fund is intended to operate as an arm’s-length Crown corporation, focus primarily on equity investments, take minority positions, and invest alongside other investors. If Canada’s problem is a lack of available capital, that may sound reasonable.
But the sovereign wealth fund label invites scrutiny. Conventional funds of this kind are typically built from excess resource revenues or fiscal surpluses and invest globally to diversify the national asset base. The CSF appears different because it is debt-financed, domestically focused, and aimed at strategic projects.
A poorly designed fund could shift risk to taxpayers, duplicate existing institutions, and use public capital to offset policy barriers governments should be fixing directly. Capital is fungible. Canada has a relatively open economy for foreign direct investment, and investment managers are well-equipped to identify commercially attractive opportunities.
If Canadian projects offer strong risk-adjusted returns, capital should generally flow into them. Canada’s domestic pension funds, including the Canada Pension Plan Investment Board, the Ontario Teachers’ Pension Plan, OMERS, and others, collectively manage well over a trillion dollars in assets[1], and routinely invest in infrastructure and energy projects abroad, including Australian toll roads, European airports, and South American utilities. If these same institutions are not deploying comparable capital into Canadian LNG terminals or infrastructure projects, that points to a problem beyond the availability of capital and toward the risk-return profile created by Canada’s regulatory environment.
The more likely problem is an investment environment that makes too many projects uncertain, slow, or unattractive. Regulatory uncertainty, permitting delays, unclear consultation obligations, energy-policy risk, and weak expected returns are not solved by creating a public investment fund. If underlying policy problems are deterring private capital, the fund treats the symptom, not the cause. Instead of improving the investment climate, Ottawa may use taxpayer capital to make selected projects viable despite the same barriers that discouraged private investment in the first place.
Ottawa should ask whether these projects would attract private capital on their own if Canada had clearer rules, faster approvals, and more predictable policy. If the answer is yes, the priority should be reform. If the answer is no, the federal government must explain why taxpayers should invest where private investors will not.
Duplication and the question of institutional purpose
Even if additional public capital were needed, the government must explain why we need a Canada Strong Fund given the existence of several other investment vehicles that use public financial capacity to support companies, infrastructure, exports, and strategic investment.
The Canada Growth Fund invests public capital to attract private investment into Canadian projects and businesses. The Canada Infrastructure Bank uses federal capital to support revenue-generating infrastructure and crowd in private and institutional investors. The Canada Development Investment Corporation manages federal commercial holdings and investment vehicles. The Business Development Bank, Export Development Corporation, and Farm Credit Corporation provide financing, capital, guarantees, insurance, or credit support to Canadian firms in specific sectors and markets.
None of these bodies is identical to the CSF, and their mandates vary widely. Ottawa says the fund will complement existing financing institutions, and it has promised mandate reviews to avoid duplication across the federal financing ecosystem. That acknowledgement is useful, but it also confirms the risk the government must address. If the problem is scale, existing institutions could receive more capital. If the problem is coordination, Ottawa could assign that role to an existing agency.
If the problem is mandate gaps, Parliament could adjust existing mandates. Before creating another federal investment vehicle, the government should explain why the existing system cannot do the job. Without that explanation, the CSF risks layering a new program over existing ones, increasing administrative costs and complexity without adding corresponding capability.
The governance problem: Commercial returns vs. political priorities
The government describes the Canada Strong Fund as a government-backed investment vehicle that will invest on commercial terms alongside private capital. But the fund is tied to “nation-building” projects and strategic sectors, and that tension is built into its design in ways that are difficult to resolve through governance alone.
A commercial investor allocates capital based on expected risk-adjusted returns. A project may be strategic or nation-building, or even neither. What matters is whether the project offers an adequate return for the risk assumed. Public-policy goals are not a substitute for commercial returns.
If a project’s public benefits exceed its private returns because of market failure, the correct policy response is a transparent subsidy with a defined cost, democratic accountability, and a sunset clause. It is not to place that subsidy inside a fund presented as commercial investment, where weak financial performance can later be justified by claims of broader social return.
Carney said these projects have “wider benefits to our economy” that “exceed private returns,” while François-Philippe Champagne, minister of Finance and National Revenue, said the fund would create “good-paying jobs” and support “shared prosperity.” Those goals may be valid, but they are not the same as earning commercial returns.
The federal government’s stated objective of achieving the “highest potential return for Canada and Canadians” can encompass non-financial objectives that are harder to measure and easier to justify after the fact. Commercial returns can be measured against a market benchmark, but broader public returns require separate criteria. Parliament should establish how the commercial-return objective will be applied, how broader public benefits will be measured, and which standard will govern when the two conflict.
Sovereign wealth fund governance has long been a concern. The Santiago Principles for sovereign wealth funds, adopted in 2008, set standards for governance, accountability, transparency, risk management, and investment decisions based on economic and financial grounds. They matter here precisely because the issue is not only whether the fund has an independent board, but whether its mandate preserves a clear and enforceable boundary between commercial investment and public-policy objectives.
International experience suggests that this boundary can weaken over time. The Australian government established the Future Fund in 2006 to strengthen the nation’s long-term financial position, with a mandate focused on risk-adjusted long-term returns. In 2024, the government updated the mandate to require the fund to consider national priorities, including housing, infrastructure, and the energy transition, while continuing to maximize long-term returns.
Ireland’s National Pensions Reserve Fund pursued investment returns to help fund future pension costs, but the Irish government later converted it into the Ireland Strategic Investment Fund, whose mandate now combines commercial investment with support for economic activity and employment. Canada has not yet provided a clear reason to expect that risk would be avoided here.
The recently announced Alto high-speed rail project illustrates how this ambiguity could matter in practice. Ottawa classifies Alto – a proposed $60–$90 billion high-speed rail network designed to connect Toronto, Peterborough, Ottawa, Montreal, Laval, Trois-Rivières, and Quebec City – as a “transformative” infrastructure project, and projects of that kind raise a basic concern. Would support from the CSF be judged by expected financial return, broader public benefit, or a blend of both? If the fund invests in such projects, Ottawa should state clearly which test applies and, if both financial and public benefits are considered, how they will be measured and who will be accountable. That ambiguity raises a governance problem and financial exposure for taxpayers.
Financial risk: Crowding out, adverse selection, and disguised subsidy
The CSF’s financial risks are not limited to poor investment decisions. Several risks follow from the fund’s structure.
The first is “risk-shifting.” The fund may make projects viable by moving risk from private investors to taxpayers. That could happen if it accepts lower returns, absorbs risks that private investors would otherwise price, or provides implicit protection against losses.
A second risk is “crowding out.” When the government enters a capital market with a $25 billion fund backed by taxpayers, it does not simply add capital to the system, it can distort the market. The result may not be more investment in total, but a displacement of private capital by public capital in projects that could have proceeded without government involvement.
A third risk is “adverse selection.” Projects that cannot attract private capital at market rates have failed an important market test. That does not prove they are bad projects, but it does suggest investors see the risk-adjusted return as inadequate. A government fund may therefore attract precisely the projects most likely to need public support, while projects with strong commercial prospects proceed without it.
The federal government says the fund is expected to allow individual Canadians to invest with upside potential while their initial capital is protected. That raises another risk-allocation concern. In normal investing, risk and return are linked. If investors receive upside while their principal is protected, the downside risk still has to be absorbed somewhere, whether through investor fees, capped returns, or some type of public backstop. Until Ottawa explains how that protection will work, taxpayers may face direct or contingent exposure.
If taxpayers are protecting investors from losses without adequate compensation, the arrangement is closer to a subsidy than a commercial co-investment. Unless Ottawa can show a clear market failure, measurable public benefit, transparent cost, and defined exit, that risk transfer is not in taxpayers’ interests.
Canada’s record with comparable instruments offers caution. The Canada Infrastructure Bank has struggled to deliver results at the scale promised. Northvolt is another cautionary tale. Governments and a private investor backed the project as a strategic bet on EV batteries and clean technology. Quebec took a $270 million equity stake in the parent company. When the parent company collapsed, Quebec wrote off that investment. The case shows that private-sector participation does not guarantee commercial viability, especially when public funding mixes financial returns with policy goals such as jobs and industrial strategy.
The outcomes are not anomalies. Public-choice theory helps explain why public investment vehicles can drift from commercial discipline. Political incentives favour visible strategic projects with concentrated benefits and dispersed taxpayer costs. Firms, unions, and regional interests may all have incentives to press for public backing when projects can be framed as protecting jobs, creating well-paid employment, or advancing strategic industrial goals. Firms may also spend resources seeking public capital rather than improving the commercial case for private investment.
Once a government has backed a project, soft budget constraints can make it difficult to stop funding if costs rise or returns weaken. And if private investors or retail participants believe the government will absorb downside losses, moral hazard follows. These are not failures of individual decisions – they are predictable risks when public investment vehicles operate alongside political objectives.
The better path: Fixing the investment climate
Canada needs more investment. However, if investors are holding back because of uncertain rules, long approval timelines, unclear consultation obligations, and unstable policy, the priority should be direct reform of those conditions. Projects that require public capital mainly to offset avoidable policy or regulatory costs would be a sign that the investment climate still needs repair.
The Building Canada Act and Major Projects Office indicate that Ottawa recognizes the approval problem, but approval reform extends well beyond those measures. Regulatory reform is difficult, technical, and less headline-grabbing than launching a sovereign wealth fund, but it is more important.
Clearer rules, shorter approval timelines, more predictable consultation obligations, and stable long-term policy frameworks would make more projects commercially viable and attract private capital on market terms, without shifting risk to taxpayers, creating new layers of federal bureaucracy, or distorting the market signals that direct capital to its most productive uses.
The stronger case for the Canada Strong Fund is not a shortage of capital, but specific market failures that private investors cannot solve on their own. Large strategic projects can produce spillover benefits, require coordination among several firms and governments, involve timelines longer than private investors prefer, or carry risks that no single investor can reasonably absorb alone.
That is a narrower and more defensible rationale. But it still requires strict tests. The federal government should identify the specific market failure the fund is meant to address, explain why existing institutions cannot address it, state the investment test it will apply, and define the conditions under which the fund will decline to invest.
Parliament should apply two tests before approving the fund’s mandate and financing. First, the federal government must distinguish commercial returns from broader public-policy returns. Without that distinction, Parliament cannot assess whether the fund is succeeding financially, advancing public objectives, or using one standard to excuse failure under the other.
Second, the government must explain why the CSF should be considered a sovereign wealth fund at all. In its financing, focus, and strategic objectives, it differs from the classic savings-fund model associated with sovereign wealth funds built from fiscal surpluses or resource revenues. It looks more like a publicly capitalized industrial-policy vehicle designed to direct investment toward domestically preferred projects. If that is what it is, Parliament and the public deserve to be told so plainly.
About the author
Jerome Gessaroli is a senior fellow with the Macdonald-Laurier Institute, lead Canadian co-author of Financial Management Theory and Practice, and principal researcher for the Sound Economic Policy Project.
References
[1] CPP Investments reported $714.4 billion in net assets as of March 31, 2025; Ontario Teachers’ reported $279.4 billion as of December 31, 2025; and OMERS reported $138.2 billion as of December 31, 2024. Together, those three funds alone managed about $1.13 trillion.
