Private financing in Defence part 1: Lessons for Australia from more than 100 public-private partnership deals

PPPs fail when outcomes are unclear, contracts are poorly constructed and risk is not properly allocated

Australia is under pressure to increase Defence spending amid volatile geopolitical tensions, global supply chain pressures and rising sovereign capability needs. Alternative financing models are becoming part of the conversation as Defence explores new ways to accelerate suitable infrastructure and capability investment.

For the first time in Australia, the 2026 National Defence Strategy identifies around A$5bn over the forward estimates and A$15bn over the decade in projects for which Defence will prioritise developing alternative financing options.

Our experience spans more than 100 project finance and public-private partnership (PPP) deals across the UK and US. Beyond individual transactions, we help governments and sponsoring authorities develop best practice, standardise procurement approaches and embed lessons learned into future guidance.

We have also been named International PPP Technical Advisor of the Year for six consecutive years. Through that experience, we have learnt that success often depends less on funding than on project selection, clear outcomes, aligned incentives, watertight commercial frameworks and appropriate risk allocation. Above all, projects need a clear structure and effective governance from the outset.

The following lessons can be adapted to Australian conditions and can inform the country's emerging interest in alternative financing for Defence infrastructure.

Get the outcomes right before financial close

Under traditional procurement models, governments fund asset construction and assume responsibility for operations and maintenance on completion. Under PPPs, the private sector funds delivery and governments pay to use the asset over a defined period, with the private sector often retaining responsibility for long-term operations and maintenance.

The critical difference is that, under a PPP, government is not only purchasing infrastructure. It’s procuring an ongoing capability or service outcome. Before selecting projects for private financing or signing any agreements, Defence needs to be clear on the capability it needs to develop.

Defence must clearly define and rigorously challenge the intended outcomes before financial close. After financial close, changes to PPP structures become extremely difficult and expensive. By then, multiple lenders are involved, financial models are locked, contracts are interconnected and risk allocations have been agreed. Ambiguity can quickly become expensive, and even small scope changes can create significant disruption across the programme. That uncertainty becomes exponentially more costly once financing is in place.

Enforce water-tight contracts

One of the main reasons PPPs fail is because of badly constructed contracts. Unclear requirements and outcomes have resulted in contractors being paid regardless of performance. In other cases, contracts created misaligned incentives, weak performance deductions or penalties so severe that minor failures created disproportionate financial consequences.

Defence-related investment also brings extensive legal considerations beyond standard investment analysis and infrastructure financing. Projects must comply with varying standards and regulations across Defence, different organisations, contractors, operators and locations. The ability to navigate and reconcile these often-contradictory requirements is vital to delivering right-first-time outcomes.

Yet this is where many projects become unstuck. A contract cannot simply allocate funding; it must clearly define responsibilities, performance expectations, governance arrangements and consequences when outcomes are not achieved. Developing these arrangements collaboratively helps build shared ownership, align expectations and create a stronger foundation for delivery.

Project teams must structure programmes and contracts so Defence can retain control, primes can deliver, taxpayers can trust the outcome and investors can understand the opportunity without compromising sovereign requirements. This is especially important for long-life, complex and strategically significant assets such as military communications infrastructure, nuclear submarine programmes and Defence satellite constellations, where project teams must balance security, operational and sovereign requirements with commercial considerations.

Incentivise the right behaviours

With all stakeholders confident in the outcome, parties can use contractual frameworks to set performance requirements, incentives and long-term service outcomes that share risk appropriately and reward strong performance.

Successful PPPs create commercial incentives that encourage the right behaviours. If incentives are too weak, contractors have little motivation to improve performance. If they are unrealistic or punitive, projects become unattractive to investors and increasingly difficult to finance.

The best contracts establish a fair balance between performance, accountability, risk and reward. They have governance mechanisms, objective performance measures and assurance processes built in, with payment linked to outcomes and performance. Commercial structures should encourage collaboration and continuous performance improvement, not simply transfer responsibility from one party to another. This drives desired behaviours without making projects unbankable.

Allocate risk fairly

Contracts fail when risks are distributed poorly or unevenly. Defence needs to strike a balance between holding providers accountable for performance and creating a commercially viable investment opportunity.

Delivery, commercial and sovereign risk should sit with the party best able to manage it. Misallocated risk increases costs, creates tension, reduces efficiency and can make projects too risky to finance. Investors do not fund uncertainty. Investor confidence comes from a clear scope, predictable outcomes, credible governance, transparent delivery controls and a stable programme environment.

Bankability ultimately tests whether a project’s structure gives all parties confidence in the outcome.

Match private financing with capability needs

Before selecting a funding model, Defence should focus on programme packaging, market testing and understanding investor appetite. One of the most common mistakes in PPP programmes is choosing a financing structure before testing whether the project itself is attractive to the market.

Early market sounding helps clients understand how investors, contractors and delivery partners view an opportunity. It provides insight into project risk, commercial viability, procurement strategy and potential barriers to participation. It can also unlock opportunities for innovation.

Through structured engagement with industry, clients can refine project scopes, improve risk allocation and identify delivery approaches that might otherwise be overlooked.

The infrastructure sector has already developed models that support this more collaborative approach. Rather than handing projects to the market with fixed assumptions, successful programmes increasingly create early dialogue between clients, contractors and the supply chain. This creates opportunities to tailor commercial structures to the project, market conditions and the capability of both the client and delivery partners. Just as important, it creates space for negotiation before positions become fixed.

Capital alone will not deliver capability

One of the most common mistakes in discussions about alternative financing is assuming that access to capital is the primary challenge. In reality, many projects are financeable. Far fewer are genuinely bankable.

A bankable project delivers value for money, is realistically deliverable, allocates risk appropriately and produces outcomes that are in the interests of Defence, investors and taxpayers.

Defence programmes may look investable on paper, but they can still fail through scope ambiguity, weak governance, poor interface management or slow decision-making. That's why Defence should not select projects solely for their ability to attract capital. It should select them for the capability they enable, and the confidence stakeholders have in their successful delivery.

The question for Australia then is not whether Defence can use private finance but whether it applies private finance to the right projects, for the right reasons and with the right delivery model.

In the next article in this series, Adrian Garnero, defence and security market leader for Australia, explores what makes a Defence project suitable for private financing and why project selection may be more important than the financing structure itself.

Read the next article in the series