A new newsletter! And a $15 billion mystery

The biggest item in Chrystia Freeland's budget raises more questions than it answers.

Welcome to my new subscription newsletter. This will be my main outlet for political analysis, with occasional broader discussions of culture and society. I could not possibly be more excited about this project, which I explain in more detail here, but I thought the best way to show you what sort of work I’ll do is to start with some journalism, not with a manifesto. So without further ado…

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After all the dust settled from Chrystia Freeland’s latest federal budget, I still had questions about the Canada Growth Fund.

Described (on Page 60 of the budget document) as a means “to attract substantial private sector investment” to “help meet important national economic policy goals,” the Canada Growth Fund was announced as something that would be “initially capitalized at $15 billion over the next five years.”

Fifteen billion is big. The budget’s entire chapter on housing, for instance, allocates a total of $10.1 billion in new spending over five years. The military gets a total of $9.4 billion in new spending. Health care, $7.1 billion. But the Canada Growth Fund (let’s just call it the Fund) is bigger than all of those. And for each dollar of the $15 billion it will spend, it will “aim to attract at least three dollars of private capital.”

The urgency with which the budget describes the Fund is hard to miss. To “attract the trillions of dollars in private capital that are waiting to be invested in the good jobs and new industries of today and tomorrow,” the budget says, “Canada’s peers have begun to launch growth funds.” Since everyone’s doing it, “Canada must keep pace.” 

What are the stakes? Apparently they’re high: “Facing the challenges of climate change, technological change, and a changing global economy,” the section on the Fund says darkly, “Canada’s economic success is not guaranteed.”

The model for this new thing, clearly, is the Canada Infrastructure Bank (hereinafter, “the Bank”), which the lamented Bill Morneau announced in the 2016 fall economic update: $35 billion to build big new things, with a goal of attracting $4 in private investment for every $1 in government spending. The Bank has famously struggled, both to spend down its endowment and to attract those private dollars. So already I had questions: Why do it again? And why expect better results with the new Fund than with the old Bank?

But almost as soon as it announced its existence, the new Fund began to look a bit ghostly. “Funding for the Canada Growth Fund will be sourced from the existing fiscal framework,” the budget document says. And indeed, here’s what that looks like in my marked-up copy of the chart at the end of Chapter 2:

This is handy: For every dollar this crucial new thing will cost, a dollar will be “sourced from the fiscal framework,” for a net cost of nothing in new spending.

The other thing you notice is that the total “cost” of the Fund over five years — before that cost goes away through the magic of sourcing from the fiscal framework — is $1,510 million. Which is $1.51 billion. 

Which is one-tenth the $15 billion mentioned in the text.

This caused great excitement on budget day, among the tiny number of people who read fiscal tables. Was it a typo? An elementary arithmetical error? Can’t anyone in this government even count to $15 billion? That would be bad if it were so.

A few observers suspected an explanation could be found in a line in the budget which said the new Fund will invest “on a concessionary basis.” I’ve covered dozens of federal budgets, and I don’t recall seeing that phrasing before. Apparently it’s a term of art in impact investing: you sacrifice financial gain in return for a social good. Concretely, you eat a small loss on returns from an investment, in return for getting the investment. 

But everyone who was speculating about this online was doing just that: speculating. Theoretically the government should know. I sent Freeland’s office a bunch of questions. Four days later, here’s what I got back.

“The $15 billion of funding for the Canada Growth Fund,” the department’s email to me began, “refers to the amount of dollars that the fund will invest.” So that’s clear enough.

The $1.51 billion in the tables, on the other hand, “refers to the accrual profile of the fund given that by its nature it will be a fund that provides concessionary financing.” Wait! Come back!

This is actually straightforward, and more or less as we suspected. Because the Fund will be concessionary, the department wrote, “it will therefore not always earn back its initial investment. The amounts set out in the table are initial estimates of this difference.”

So the fiscal chart that adds up to $1.51 billion amounts to a bet that the Fund will earn back about 90 cents on every dollar it invests. This is consistent with “other federal initiatives,” the Finance people told me.

But it’s a funny thing. Anticipating that claim — we do this all the time! — I had already asked Finance to tell me which other federal initiatives had been funded on the same basis. On this I received no answer.

Similarly, I had asked how, precisely, that $1.51 billion would be “sourced from the fiscal framework,” so as to end up costing no new money at all. Again, the reply was murky. The department said that wording “refers to the reallocation of amounts provisioned that have similar objectives, and/or the application of unused amounts set aside in past budgets.” Somehow that “and/or” isn’t entirely reassuring and/or persuasive. 

So far we had a Fund that would spend $15 billion while costing one-tenth as much, and/or nothing at all. I asked how it would attract $3 for every $1 it invests, given that its big brother the Canada Infrastructure Bank has never come close to attracting $4 for every dollar it spends.

Finance didn’t answer this question, instead simply restating the 3:1 claim.

These questions are all the more pertinent, given that the Fund is apparently meant to be quite creative in its investments. Edgy, even. There’s sweeping language in the budget: the Fund will use “a broad suite of financial instruments, including all forms of debt, equity, guarantees, and specialized contracts.”

Equity? It’s going to take out ownership in some of the ventures it invests in?

Here, Finance actually rewarded me with more than I asked. “Examples” of the financial instruments available to the new Fund, they said, “include debt, mezzanine debt, equity, subordinated equity, guarantees and certain types of specialized contracts.” Some of these terms may need definitions. Here are some: “Subordinated” and “mezzannine” are terms for debt that has a lower claim on repayment than other classes of debt. It’s essentially a promise to get into line behind other lenders when payback time comes. So it’s considered risky. Though not as risky as equity. Which the Fund will also contemplate.

I had further questions about the Fund’s arms-length relationship to government and the level of public accountability we could expect as a result. I think it’s fair to say the department doesn’t yet have detailed answers for that. (I’m going to post my entire correspondence with the department on my free Medium page, which I’ll use over time as a kind of scratch pad/ endnotes/ annex to this newsletter.)

Let’s recap.

Freeland and her department discern a pressing need for massive investment. The language they use is strong: it’s a “critical time” requiring “transformative steps,” without which Canada’s success is “not guaranteed.” 

The instrument chosen, a growth fund plainly modelled on the Canada Infrastructure Bank, will hope for greater success luring private-sector partners than the Bank ever managed to attract. It will invest $15 billion but cost only $1.5 billion or, depending how you count these things, nothing new at all. It expects to lose only 10 cents on the dollar even though it will be using aggressive financing instruments that are commonly thought to carry considerable risk. 

But the hell of it is, the government may not even be wrong on its central claim: that the transition to a net-zero carbon-emission economy will cost vast amounts of money.

“We are going to need capital,” a senior finance official told reporters on budget day, speaking on the condition that we identify them only as “senior finance official.” They added, for emphasis: “Massive amounts of capital.”

How massive? The big McKinsey consulting group published a report three months ago that said “spending on physical assets on the course to net-zero” would require a global annual spending increase of $US3.5 trillion. That’s “about half of global corporate profits, one-quarter of total tax revenue, and 7 percent of household spending.” While much of this spending would generate returns, it’s hard to know how much, and anyway the up-front cost will be real, and there’s not a lot of time to futz around trying to figure out the rate of return, McKinsey said: “Delay itself is costly.” 

What’s Canada’s share of that cost? About $125 billion to $140 billion a year, the budget says. Higher than our share of global population, because we’re also running a carbon-intensive economy. 

So this decidedly rickety new investing tool, inspired by a decidedly rickety old investing tool, will be Canada’s main mechanism for chasing stunning quantities of investor dollars — at the same time every other country is chasing the same money for the same reasons. 

Finance says the details of the Fund will be announced in Freeland’s fall economic update, perhaps six months from now. We should all pay really close attention to this project as it evolves. The stakes are high. The dollar amounts are vast. (Or zero! It depends how you count it!) The level of uncertainty is greater still. And to say the least, the Trudeau government has not earned a blank cheque when designing programs like this.