Private financing in Defence part 2: three tests suitable projects should pass

Projects that are not selective, safe and strategic should not proceed simply because financing is available

Australia has traditionally funded Defence infrastructure and capability almost entirely through public expenditure. However, under pressure to increase spending amid changing geopolitical conditions, growing capability requirements, global supply chain constraints and increasing interest in sovereign industrial capability, the Defence pipeline is growing faster than traditional funding and delivery models can support.

This is why alternative financing is entering the conversation. Recent market soundings issued through AusTender, including work led by the Commonwealth Future Infrastructure Initiative (CFI), suggest there is growing interest in understanding how alternative financing models could support future Defence infrastructure.

Suitable private finance models may help bring forward enabling infrastructure, smooth investment peaks and accelerate delivery of priority programmes. But private financing is not a substitute for Commonwealth investment in sovereign capability. Nor is it appropriate for every Defence project.

Used selectively and strategically, it can improve affordability, programme sequencing and whole-of-life asset performance. Used poorly, it can create unnecessary complexity, reduce value for money and undermine confidence in future opportunities. The question, therefore, is where and under what conditions Defence should use private finance.

In our experience working across major Defence programmes in Australia, the UK and the US, suitable projects must satisfy three tests. They must be selective, safe and strategic.

Test 1: Is the project selective?

Selective application is essential because not all Defence programmes are suitable for private financing. The wrong project will struggle regardless of how sophisticated the funding agreement is.

One of the lessons from decades of project finance and  public-private partnership (PPP) delivery is that project selection matters more than financing structure. Credibility in private finance will come from identifying a small number of use cases and supporting them well.

Private finance often works best when Defence uses it to accelerate enabling infrastructure that unlocks capability rather than the capability itself. The strongest early opportunities are therefore likely to be in non-core, enabling infrastructure rather than core sovereign capability. This includes accommodation, training facilities, logistics infrastructure, support services and selected Estate upgrades. These projects are often lower risk, easier to define and capable of generating stable long-term operating models.

By contrast, highly specialised facilities, complex operational assets and nuclear-related infrastructure require greater direct government involvement because of their strategic importance, bespoke nature or sovereign sensitivities.

Our role as project manager and contract administrator on the Deep Maintenance and Modification Facility (DMMF) demonstrates what can be achieved when governance, industry capability and public-sector intent are aligned. Although not privately financed, the facility enabled Australia to bring advanced military aircraft sustainment capability onshore. Before Australia could sustain those aircraft onshore, it first needed the enabling infrastructure.

The same thinking could apply to parts of the Henderson Defence Precinct. As Australia progresses plans for sovereign submarine sustainment and shipbuilding, enabling infrastructure such as roads, utilities, buildings and supporting facilities may present opportunities for selective private sector participation.

As with the DMMF, Australia cannot build or maintain nuclear-powered submarines without the facilities and infrastructure to do so. The faster Australia delivers the enabling infrastructure, the sooner it can begin the mission-critical work that builds sovereign capability. Defence should therefore begin with carefully chosen pilot opportunities where the benefits are clear, risks are manageable and teams can capture lessons quickly.

Test 2: Is the project safe?

Safe projects protect sovereignty and accountability. A common misunderstanding is that private finance requires government to relinquish control. The opposite should be true. Private finance can transfer delivery responsibility, but it cannot transfer accountability. Defence agencies remain accountable for capability outcomes, security, operational effectiveness and public expenditure. This is why selected projects must be safe projects.

Safety in this context goes beyond physical safety. It is also about protecting sovereignty, maintaining operational control and ensuring government retains authority over capability requirements, security settings, operational access and strategic decision-making. Private partners can then contribute capital, expertise and delivery capability within those boundaries.

For this reason, low-risk, high-urgency programmes in early works and enabling infrastructure often present the strongest initial opportunities to demonstrate value while avoiding procurement complexity.

Safe programmes satisfy four criteria:

1. They are bankable and represent value for money.
2. They support Defence capability outcomes.
3. They are deliverable within the required timeframe.
4. They are in the interests of the taxpayers.

A programme that fails any one of these tests should not proceed simply because financing is available.

Those that do proceed must be supported by robust contracts, appropriate and transparent risk allocation, clear revenue certainty, strong governance and delivery controls, assumptions management and performance assurance from the outset.

Test 3: Is the project strategic?

Strategic projects finance capability, not assets. The success of private financing should therefore be measured by the capability it enables, not the capital it attracts. This distinction fundamentally changes how Defence should evaluate projects.

Rather than asking: Can this project be financed? Defence should ask: Will this project improve capability outcomes, accelerate delivery or create better long-term value?

Although not privately financed, our work as project delivery services (PDS) contractor on the Base Services Transformation Program illustrates this principle. The programme supports personnel living, working and training across the Defence Estate. It enhances operational readiness indirectly by improving the systems and infrastructure on which capability depends. In other words, it’s mission-led, not mission-critical. This is the type of strategic thinking that should underpin future alternative financing decisions.

Projects should only proceed where private financing:

1. Improves delivery outcomes, affordability or programme sequencing
2. Supports Defence without becoming critical points of operational dependency
3. Transfers risk appropriately
4. Creates whole-of-life value

Private capital follows trust

Private financing will not fix Defence delivery unless programmes are built to deliver from the start. A programme can be selective, safe and strategic. It can be bankable and even financeable. But that does not automatically make it deliverable.

A poorly structured financing model creates the same downstream cost, delay and uncertainty as a poorly developed design. This is why trust matters. Trust that government will stay the course, risks are understood and fairly allocated, accountability is clear, and capability outcomes will be achieved.

Australia’s private financing journey should therefore begin with carefully selected projects, clear boundaries around sovereignty and accountability, and a relentless focus on outcomes.

In the final article in this series, Emma Storm, defence and security market leader for Western Australia, explains how to turn funding intent into delivered capability, and why Defence, investors and delivery partners must design funding arrangements and delivery models together from the outset.

Read the final article in the series.