The Mark Carney Government's Major Projects Office: State-Led Industrial Policy in a Liberal Democratic Context

Introduction: The Strategic Pivot and Contemporary Context

The announcement by Prime Minister Mark Carney of the Major Projects Office (MPO)—established under the Building Canada Act which came into force in June 2025 and officially launched on August 29, 2025, under the leadership of Chief Executive Officer Dawn Farrell—represents a substantive strategic pivot toward state-coordinated industrial policy within the Canadian political economy. The first and second tranches of projects announced through the MPO represent combined investments exceeding $116 billion and are framed as mechanisms to realize Canada's potential as an energy superpower, create new trade corridors, build critical minerals leadership, and establish data sovereignty.

This strategic reorientation has catalyzed a robust and multifaceted academic and political debate, extending far beyond the specific merits of individual projects. The underlying fiscal framework is marked by a projected federal deficit of $78.3 billion in 2025-26—nearly double the previously forecast $42.2 billion shortfall—with deficits expected to exceed $50 billion for the subsequent five-year period, reflecting a deliberate pivot from operating expenditure toward capital formation and productivity investment. The federal debt-to-GDP ratio is projected to rise from 41.2% to 43.1% over the five-year planning horizon, though this remains below the 2020-21 peak.

The debate surrounding the MPO illuminates three critical tensions: the balance between regulatory streamlining and active government financing; the implications of a dual-track project approval system for economic efficiency and distributional equity; and the macroeconomic sustainability of a coordinated state-led investment strategy within a liberalized fiscal and monetary framework.

The Dual-Track System: Structural Fragmentation and Regulatory Inequality

The Regulatory Architecture and the Problem of Institutional Bifurcation

The empirical foundation for evaluating the MPO's institutional structure merits careful examination. The MPO was designed to function through two principal mechanisms: first, by streamlining and accelerating regulatory approval processes through a "one project, one review" approach with a maximum two-year approval timeline, and second, by helping to structure and coordinate financing from the private sector, provincial and territorial partners, and government initiatives including the Canada Infrastructure Bank, the Canada Growth Fund, and the Indigenous Loan Guarantee Program.

However, it stands to reason to expect that the practical instantiation of this dual-track system may generate significant institutional asymmetries. Critics observe that there exists a pronounced gap between the government's regulatory streamlining rhetoric and the MPO's actual operational function, with evidence suggesting the initiative has evolved into a government financing mechanism rather than a regulatory facilitation tool. Industry commentary indicates that projects fundamentally capable of attracting private capital—such as certain oil pipeline initiatives and conventional energy infrastructure—are notably absent from the MPO portfolio, while projects seeking government financing and demand-risk guarantees comprise the substantive project slate.

This bifurcation creates what might be characterized as a "regulatory tiering" problem. Small and medium-sized enterprises (SMEs) and locally-scaled infrastructure initiatives remain subject to the existing regulatory framework, characterized by multiple bureaucratic layers, complex permitting processes, and protracted environmental and social impact assessments. The balance of probabilities suggests that this legacy regulatory environment imposes higher transaction costs and creates greater approval uncertainty for smaller projects relative to the centrally-coordinated MPO process. Consequently, the system may inadvertently distort capital allocation patterns, creating incentives for projects to seek MPO designation not primarily because they satisfy stringent criteria of national importance, but because government coordination offers regulatory relief and preferential financing terms.

Distributional Implications and Economic Efficiency

The bifurcated approval structure raises substantive concerns regarding equality of economic opportunity and allocative efficiency. Industry experts have characterized scenarios in which "your economic development strategy is to go to Ottawa instead of to the banks or the markets or the investors" as evidence of misaligned development priorities, suggesting that the current institutional design privileges political coordination over decentralized market signaling.

It might be reasonably argued that this structural arrangement systematically disadvantages regional development initiatives, particularly in peripheral or economically less-dynamic regions, where projects may possess genuine local significance but lack the scale or national-profile criteria necessary for MPO consideration. The institutional design therefore creates a presupposition that economically consequential development must be nationally coordinated, potentially suppressing endogenous regional entrepreneurship and market discovery processes.

Macroeconomic Implications: Debt, Crowding-Out, and Fiscal Sustainability

The Debt and Interest Rate Dynamics

The macroeconomic critique of the MPO funding approach articulates concerns that extend beyond near-term fiscal accounting. Critics aligned with fiscal conservative and market-oriented economic perspectives advance several interconnected arguments regarding the long-term consequences of deficit-financed large-scale project investment.

Debt service costs are expected to climb substantially from $55.6 billion in 2025–26 to $76.1 billion in 2029–30, representing a $20.5 billion increase or 36.9% growth over the five-year forecast period. Debt servicing charges as a share of federal revenues are projected to increase from 10.5% in the previous fiscal year to 13% by 2029–30.

The theoretical mechanism underlying the crowding-out concern operates as follows: large-scale government borrowing to finance capital projects increases the aggregate demand for credit in financial markets. Assuming relatively inelastic short-run credit supply and fixed monetary policy parameters, this increased government demand for loanable funds necessarily increases the cost of borrowing, reflected in both sovereign bond yields and corporate credit spreads. Consequently, private enterprises face higher marginal costs of capital, which it stands to reason may depress discretionary private investment, particularly in projects with longer time horizons or higher perceived risk profiles.

However, it is important to qualify this mechanism with contemporary macroeconomic context. The Conference Board of Canada assessment notes that Canada remains in an enviable position relative to other advanced economies, with low debt levels relative to the size of the economy providing sufficient room to absorb deficit-financed spending without affecting creditworthiness, particularly as the federal debt-to-GDP ratio remains lowest among G7 countries. The balance of probabilities thus suggests that while crowding-out dynamics may emerge in moderately tight credit conditions, the current Canadian fiscal position provides meaningful buffer capacity.

Moral Hazard and Risk Allocation Distortions

A second line of macroeconomic critique emphasizes the moral hazard implications of structured government financing and risk absorption. The MPO helps coordinate financing arrangements that may include government guarantees, conditional loans, and risk-sharing structures through the Canada Infrastructure Bank and related mechanisms. When government entities systematically absorb key dimensions of project risk—including demand risk, completion risk, and refinancing risk—private project sponsors face attenuated incentives for rigorous cost-benefit analysis and operational discipline.

It might be reasonably argued that this risk allocation structure creates asymmetric accountability dynamics. Private partners benefit from upside returns if projects perform favorably, while catastrophic downside risks are partially or wholly socialized through government absorption. This arrangement departs from pure market-determined risk pricing and may induce excessive risk-taking on the part of project operators, knowing that ultimate failure costs are distributed across the taxpayer base.

The intergenerational distributional implications merit explicit attention. Deficit-financed public investments, particularly when coupled with government guarantees of project returns, effectively transfer financial obligations to future taxpayers who will bear debt servicing costs while potentially benefiting unequally from project externalities or services.

The Economic Rationale for Strategic State Intervention: Market Failure and Market Making

Addressing Persistent Market Failures in Structural Transformation

The defensive case for strategic state intervention in the MPO framework rests upon rigorous economic foundations, particularly the concepts of market failure and strategic market making. The critics of the MPO approach, it should be noted, frequently neglect or underweight these economically grounded justifications for coordinated state action.

Positive Externalities and Quasi-Public Goods. Announced projects focus on areas such as critical minerals processing, national digital infrastructure, and large-scale green energy transition hubs, which generate massive positive externalities—benefits to the broader society and economy that cannot be fully captured by private investors. The economic logic is straightforward: when private return on investment (R_{private) is substantially less than the social return (R_{social}), markets will systematically underinvest relative to social optimality. A private entity constructing national digital backbone infrastructure or developing domestic supply chains for critical minerals necessary for global clean-energy transitions will capture only a fraction of the social benefits accruing from these investments.

High Start-Up Costs and Extended Investment Horizons. Large-scale infrastructure projects, particularly those involving transformative technologies such as advanced critical minerals processing, hydrogen production, or integrated supply chain development, require enormous upfront capital commitments with highly uncertain time-to-profitability horizons. These characteristics—high initial expenditure coupled with extended periods before revenue generation begins—often exceed the risk tolerance and time-preference structures of conventional private capital markets. The balance of probabilities suggests that purely private market mechanisms would deliver systematically inadequate investment in such transformative infrastructure.

Coordination Failure and the Chicken-and-Egg Problem. Building a new industrial ecosystem—for instance, a vertically-integrated domestic supply chain for critical minerals encompassing extraction, processing, manufacturing, and logistics—requires coordinated, simultaneous investment across multiple discrete sectors and actors. No individual firm possesses sufficient scale or market power to initiate such an ecosystem unilaterally, yet the gains from ecosystem development are substantial once achieved. This represents a classic coordination failure: the absence of a central coordinating mechanism results in all parties waiting for others to move first, producing equilibrium underinvestment. Government intervention through an entity like the MPO serves the function of a necessary coordinating agent, capable of simultaneously signaling commitment across multiple stakeholder groups and absorbing initial coordination risks.

Strategic Market Making and Infant Industry Development

Beyond correcting market failures, strategic government financing can function as a powerful instrument for actively creating new markets and industrial sectors—a concept extensively developed in the literature on the "entrepreneurial state" and "developmental state" models.

The developmental state framework, pioneered in analysis of Japan and subsequently South Korea, Taiwan, and other East Asian newly industrializing countries, identifies states that prioritize economic growth and technological competitiveness through elite bureaucratic leadership and industrial policy formulation, coordinated through pilot agencies such as Japan's Ministry of International Trade and Industry (MITI).

Learning-by-Doing and Technological Development. By providing early-stage, patient capital and absorbing initial commercialization risks, government financing can facilitate the learning-by-doing process through which nascent industries achieve economies of scale and descend their technological learning curves toward global competitiveness. The role of patient capital—characterized by long investment horizons, tolerance for extended pre-profitability periods, and focus on long-term technological and market positioning rather than immediate financial returns—proves particularly critical in sectors such as advanced manufacturing, clean technology, and supply chain development.

Historical Precedent: Financing Mechanisms in Successful Developmental States

A comparative analysis of financing structures deployed across major developmental states provides instructive context for evaluating the MPO within historical perspective. It stands to reason to expect that the MPO's financing mechanisms represent institutional continuity with historically-proven state-coordinated development approaches, adapted to contemporary liberalized economic contexts.

Japan's Ministry of International Trade and Industry (MITI)

In Japan's post-war developmental period, the state substituted for a missing capital market, with the Ministry of International Trade and Industry holding authority to approve investment loans from the Japan Development Bank, allocate foreign exchange for industrial purposes, facilitate technology imports, and provide targeted tax incentives. The MITI deployed "policy loans" channeled through specialized development banks, often offered at below-market rates and carrying conditions tied to industrial output or technological adoption targets—representing deliberate, strategically-targeted market distortion.

The MPO's use of conditional, below-market financing structures, coupled with performance metrics tied to national strategic goals (domestic manufacturing requirements, emissions reduction targets, supply chain development milestones), mirrors this historical Japanese approach.

South Korea's Chaebols and Strategic Industrial Finance

Under Park Chung-Hee, South Korea emulated Japan's MITI model by establishing the Economic Planning Board (EPB) and Ministry of Trade and Industry (MTI), which controlled and manipulated the market system through organizing private enterprises into export-oriented conglomerates known as Chaebol. The Korean developmental state channeled capital, heavily subsidized through foreign loans or low interest rates, to key chaebol, with the government maintaining power through political interest group formation and developmental coalition-building.

The Korean state imposed rigorous performance standards on private firms, and upon meeting these standards, provided various forms of subsidy including low-interest capital to facilitate market entry into new sectors. It stands to reason to expect that the MPO's selective identification of "national champion" projects and their provision with privileged financing arrangements echoes this historical South Korean strategic firm-building approach, albeit adapted for a liberal democratic context with multiple stakeholder veto points.

China's State-Directed Development Banking

Contemporary China deploys what might be characterized as massive, sustained state-directed investment through the National Development and Reform Commission (NDRC) and state-owned development banks. Chinese firms in priority sectors identified in initiatives such as Made in China 2025 receive preferential treatment through preferred financing, subsidies, and access to coordinated investor networks, with the state bearing virtually all initial financial and political risk for strategic projects.

The MPO represents a more modest, institutionally constrained version of this state-coordinated capital allocation approach, with explicit coordination with private investors and provincial partners rather than purely centralized state control.

Empirical Outcomes and the Necessity Condition

The historical record demonstrates that strategic, targeted market distortion—while violating principles of pure economic liberalism—functioned as a necessary, powerful engine for rapid structural economic transformation in contexts of late development or competitive disadvantage. The success of these historical cases derived not from the market distortion itself, but rather from the rigor, clarity of strategic purpose, and performance accountability embedded within state-coordinated investment systems.

However, it is important to qualify this historical analysis with acknowledgment that globalization and capital market liberalization have substantially eroded the foundational features of historical developmental states, particularly through capital disembedding that enables firms to access alternative financing sources and reduce reliance on state-mediated credit allocation. The contemporary operating environment presents fundamentally different constraints and opportunities relative to the post-war Japanese context or South Korea's 1960s-1980s development trajectory.

Contemporary Challenges: Institutional Design and Performance Accountability

The Risk of Politically-Motivated Resource Misallocation

The central vulnerability in any state-coordinated project financing system concerns the potential for political capture and allocation of capital based on considerations orthogonal to rigorous project evaluation. Conservative political opposition has characterized early MPO projects as "low hanging fruit" on the basis that their development was already well underway prior to MPO designation, suggesting potential alignment of project selection with pre-existing political priorities rather than rigorous assessment of market failure or strategic importance.

The MPO operational framework establishes institutional safeguards intended to mitigate capture risks. The organization provides $40 million over two years to increase the capacity of Indigenous Peoples to engage early and consistently on major projects, and has expanded the Indigenous Loan Guarantee Program from $5 billion to $10 billion to support long-term economic opportunities for Indigenous Peoples across Canada. Additionally, the MPO's leadership, particularly Chief Executive Officer Dawn Farrell with extensive experience spanning four decades in Canada's energy sector including senior executive roles at TransAlta Corporation, BC Hydro, and Trans Mountain Corporation, brings deep expertise in large project implementation and regulatory processes.

Nevertheless, it might be reasonably argued that these institutional safeguards, while substantive, may prove insufficient to fully insulate project selection from political pressure, particularly given the multi-jurisdictional context and the involvement of provincial governments with distinct political interests.

The Challenge of Technology and Supply Chain Sustainability

The balance of probabilities suggests that the MPO's greatest challenge concerns ensuring that government-financed projects achieve genuine sustainability and competitive viability independent of continued state support. Nascent industries built through infant-industry protection and patient capital provision must eventually compete in markets where government support is withdrawn. The historical record of developmental states reveals that the transition from protected development to competitive maturity presents substantial institutional and political challenges.

The exit strategy becomes critical: at what point do government guarantees expire? Under what conditions are returns on public equity investments achieved? How is success defined and measured? It stands to reason to expect that the MPO's operational performance will be substantially determined by the specificity and rigor of these sustainability metrics.

Fiscal Sustainability and the Macroeconomic Anchor

Balancing Deficit Financing with Fiscal Discipline

The Conference Board of Canada assessment characterizes Budget 2025 as marking a clear and welcome shift in priorities, taking advantage of Canada's strong fiscal position in effort to seize opportunities arising from geopolitical upheavals affecting the United States relationship, though the combination of slower growth and sustained program expansion underscores the need for a credible medium-term plan to stabilize debt dynamics.

The government has indicated its intention to balance day-to-day operating spending with revenues by 2028–29 and to maintain the deficit-to-GDP ratio on a declining path, with deficits projected to narrow to $57.9 billion (approximately 1.5% of GDP) by 2028–29. The fiscal framework reflects a Comprehensive Expenditure Review identifying $60 billion in savings and revenues across five years, with $56 billion in program cuts, planned reduction of approximately 16,000 full-time equivalent positions over two years, and an overall public service headcount reduction from a 2023–24 peak near 368,000 to roughly 330,000 by 2028–29.

The credibility of these fiscal consolidation targets remains subject to implementation risk. It stands to reason to expect that achieving significant public service reductions while simultaneously executing major infrastructure projects will present substantial organizational management challenges. The balance of probabilities suggests that the government's ability to maintain fiscal trajectory targets will depend critically on whether: (1) deficit financing translates into private sector investment and productivity gains as projected; (2) macroeconomic growth accelerates as assumed, generating revenue increases that moderate deficit trajectories; and (3) political pressures to modify or expand program spending remain manageable.

Conclusion: Strategic Assessment and Conditions for Institutional Success

The Mark Carney government's Major Projects Office represents a substantive, multifaceted experiment in state-coordinated industrial policy within a liberal democratic, highly integrated continental economy. The initiative simultaneously addresses genuine market failures in transformative infrastructure investment, incorporates historical lessons from successful developmental state models, and embodies significant risks regarding political capture, fiscal sustainability, and competitive sustainability.

The balance of probabilities suggests that the MPO's ultimate success or failure will be determined not by the principle of state coordination itself, but rather by:

1. Rigor in Project Selection: Stringent application of market-failure and strategic-importance criteria to project designation, insulating selection from predominantly political considerations.

2. Performance Accountability: Explicit performance metrics tied to project milestones, cost controls, employment targets, and technological development trajectories, with transparent public reporting and accountability mechanisms.

3. Sustainability Planning: Clear exit strategies specifying conditions under which government financing, guarantees, and coordination support will be withdrawn, with explicit targets for transitioning projects toward competitive market viability.

4. Institutional Capacity: Recruitment and retention of elite technical and managerial talent within the MPO, ensuring bureaucratic quality sufficient to coordinate complex multi-stakeholder projects and resist political capture.

5. Macroeconomic Discipline: Sustained commitment to fiscal consolidation targets and declining debt-to-GDP trajectories, ensuring that short-term deficit financing translates into long-term productivity gains rather than persistent fiscal imbalance.

The historical precedent from East Asian developmental states demonstrates that strategic market distortion, while violating neoclassical economic principles, can function as a necessary instrument for rapid structural economic transformation when embedded within rigorous, performance-accountable institutional frameworks. The critical question facing the MPO concerns whether the Canadian institutional and political context can sustain the discipline, transparency, and accountability required for such state-coordinated approaches to succeed.

It stands to reason to expect that ongoing academic and policy evaluation of the MPO will be essential to identify implementation challenges and institutional adjustments necessary to optimize outcomes while maintaining fiscal sustainability and distributional equity across regions and enterprise scales.