OTTAWA — The federal government is outsourcing the running of its new $15-billion Canada Growth Fund (CGF) to one of the country’s largest pension managers, relying on the organization’s expertise and connections to bring megaprojects to these shores and find private capital to fill them out.

Ottawa announced plans for the program in last year’s budget, noting that green spending in the Canadian economy needs to rise by $125 billion annually for the country to reach net-zero by 2050. The government hoped the CGF’s pot of money would attract at least three times as much private-sector cash to the projects it financed.

The November 2022 Fall Economic Statement positioned it as a down payment on Canada’s response to the US$369-billion U.S. Inflation Reduction Act, promising that it would finance emissions-reducing projects that were commercializing green products and deploying novel technologies like carbon capture, utilization and storage (CCUS). At the time, Finance Canada emphasized the need for a quick rollout and clear separation from the political sphere. The CGF “must be stood up quickly in order to keep pace with other jurisdictions—especially the U.S.,” it noted. It would need to choose which projects and firms to back “independent of government and political influence” so as to maintain the “market credibility” to attract private capital.

Tuesday’s budget offloads that decision-making to the Public Sector Pension Plan Investment Board (PSP Investments). The Crown corporation already manages over $225 billion in assets, mostly the retirement savings of federal civil servants. Canadian pension funds are “globally admired, and they’ve been globally successful,” a senior government official told reporters in the budget lockup Tuesday. “What we’re doing is hitching the wagon of the [CGF] to a high-quality organization that functions independently of government.” Finance Canada routinely conducts such briefings on the condition that participating bureaucrats not be named.

PSP will set up a team of investment managers to handle the CGF, but won’t mix Ottawa’s money with its own.

The pension fund’s current portfolio includes solar- and wind-power installations in Canada as well as Asia and Europe. In April 2022, it launched a climate strategy, including committing to grow its green assets to $70 billion and low-carbon transition assets to $7.5 billion. (It now classes 20.2 per cent of its assets in the first category and 2.8 per cent in the second). That July, the firm named Deborah Orida as its new CEO; she’d previously been the first-ever chief sustainability officer for the Canada Pension Plan Investment Board (CPP Investments), and oversaw its infrastructure and green-energy portfolios.

The new setup ensures that “highly-skilled investors working against commercial incentives” will be the ones making deal choices, which Ottawa hopes will “accelerate the development of domestic industries in the world of clean tech that will help decarbonize the economy,” the senior government official said. They cited “contracts for difference,” in which a government or investor promises to make up the shortfall if the market price for a project’s emissions reductions or gas falls below set targets.

The Liberal government has long hoped to attract private capital to domestic megaprojects. The $35-billion Canada Infrastructure Bank, established with that objective, has backed sewage plants, university building retrofits and municipal utility expansions; its record of bringing institutional investors into those projects has been mixed.

Ottawa is targeting similar sources of funding to meet its net-zero goals. It sees a “significant opportunity to drive investments from Canadian pension funds into Canadian clean technology firms and projects to help anchor the headquarters of these firms in Canada and achieve widespread decarbonization,” according to a December 2021 briefing note prepared by officials at Innovation, Science and Economic Development Canada, which The Logic obtained via an access-to-information request. The CGF will try to bring in that money by making less of a return than its private-sector partners.

Outsourcing the fund’s management to PSP allows Ottawa to tap into relatively scarce—and in-demand—expertise and experience in green-project financing. Canada-based institutional investors like Brookfield Asset Management, CPP Investments and Caisse de dépôt et placement du Québec have allocated billions to climate and transition funds.  There’s a limited number of dealmakers to staff them, noted Sahir Khan, vice-president at the University of Ottawa’s Institute for Fiscal Studies and Democracy, who used to work in finance on Wall Street.

Outsourcing its management to PSP helps Ottawa avoid that talent competition. It would have been “quite difficult” for the government to build the CGF from scratch, Khan said. “Leveraging an organization [like PSP] with an existing track record … means they plug into their business model, their HR model and presumably that’s a huge head start.”

CGF and PSP will sign an investment management agreement laying out the types of projects the public cash should be used to back, and what form that financing will take. PSP won’t charge the government the fees that typically accompany such outsourcing, but will be able to take the costs of operating the CGF from its kitty.

While their bank accounts will be separate, the agreement isn’t risk-free for PSP.  “It becomes challenging for institutional investors when they have to account for several different investment mandates within their portfolio,” noted Randall Bartlett, senior director of Canadian economics at Desjardins. While PSP should be able to balance the CGF while serving its own members’ needs, he said, “it’s not necessarily what it’s designed to do.”

Tuesday’s budget marked an evolution of Ottawa’s programming in support of growth and green-economy objectives, rolling out a buffet of tax credits for clean energy and manufacturing. While the CGF will offer targeted funding to specific projects and companies, Khan said it fits a similar theme. In its effort to green the economy, “the government seems to have taken itself out of the business of direct delivery,” he said. “We’re seeing a little more farming out, or using the tax code, or direct transfers to people and companies in order to achieve their objectives.”

That could provide companies faster access to funding, both Bartlett and Khan said.