Navigating the surge in Australian defence investment

Lessons learnt from the Australian infrastructure industry can help support growth in defence

Australian defence spending is set to rise rapidly over the coming years. Projected to hit a record $55 billion for 2024-25, investment is then set to grow to $67 billion by 2027-28 before exceeding $100 billion per year during the 2030s.

There is an interesting parallel with the recent surge in civil infrastructure spending, which surpassed $100 billion per annum for the first time in 2022, up from approximately $40 billion in 2016-17.

Ramping up to meet this growing demand will be a significant task for the defence industry. To help organisations scale up and manage the risks, there are some important learnings to be considered from the delivery of the civil infrastructure spending program.

Learnings from surges in civil infrastructure spending

The 2021 Infrastructure Market Capacity Report found that the impacts of the pace and scale of surging investment contributed to cost escalation (around 9%) and project delivery time slippages (around 10% slower than forecast).

Tight timeframes and a fixed funding envelope mean that scope is at risk of being compromised. A contractor operating within a fixed price, fixed timeline contract is motivated to reduce scope to ensure a project is delivered on time and on budget.

The strength of the relationship between client and contractor, and a supportive commercial model, are key to avoiding these risks. The right commercial model focuses the delivery team on the most material priorities for the client and project, while aligning incentives to ensure a fair return for their partners – this is particularly important in the current environment of highly complex projects and variable market conditions.

Alternative contracting approaches present an opportunity to manage the trade-off more effectively. Models to better support an open dialogue between client, contractor and supply chain have been developed in response to the challenges experienced in civil infrastructure, and are improving risk management and project performance.

A potential solution

To respond to the rapid investment surge, we need new tools in our toolkit. Not every problem is a nail in search of a hammer. A collaborative approach allows for more nuance, with project risk allocation tailored to the project, the market conditions, and the capability of the client and the supply chain.

Collaborative contracting offers an opportunity to actively manage risk, accelerate delivery, and support innovation. It encompasses a spectrum of commercial arrangements, ways of working, contractual models and behaviours to support, rather than a set and forget approach.

The defence sector is well placed to unlock the benefits of collaboration and leverage established, long-term strategic relationships. Collaborative contracting models, such as Delivery Partner, provide the opportunity for Australian clients to partner with domestic and international industry to leverage experience gained offshore and to bring this experience to the local market. These models have been proven in the defence industries of our AUKUS partners, as well as the Australian water and transport infrastructure sectors.

The role of private investment

In addition to collaborative delivery models, partnering relationships with private capital can also strengthen the sector’s ability to respond to growth. Increased commercial discipline, upfront innovation and whole of life asset optimisation are key benefits. Private finance can also allow projects to be brought forward from the planned delivery program, enabling capabilities to be operationalised sooner in a constrained budget environment. They also allow government access to world-class capabilities and research.

Partnering defence projects with private finance is also a well-worn path for AUKUS partners. The UK and USA have sector-specific models of private finance collaboration, as well as borrowing from the infrastructure sector. Meanwhile, the NZ Defence Force has committed to the exploration of the use of private finance to deliver the Ōhakea Air Force base program, which includes a new accommodation block and explosive storage facility.

While not consistently acknowledged, forays in the use of private finance to deliver supporting infrastructure, such as barracks and headquarter facilities, have been successful in Australia. The defence sector has been willing to explore the potential to deliver new projects on brownfield assets using private finance within their current pipeline, including at Garden Island Defence Precinct in Sydney.

The return of private finance to the defence sector is a welcome opportunity to accelerate the program to deliver new capability and can also provide long-term options to maintain and optimise existing facilities, helping to flatten and plateau the investment surge. The benefits are significant, bringing forward capability, reducing capital expenditure and controlling pressures on costs and the workforce.

As a trusted partner for some of the most complex and critical defence and security equipment and infrastructure programmes worldwide, we’re giving our clients what they need to be operationally ready and effective. Contact us to learn more about how our world-class engineers can support your defence and security projects.