{"id":81810,"date":"2023-08-21T15:00:29","date_gmt":"2023-08-21T05:00:29","guid":{"rendered":"https:\/\/www.aspistrategist.ru\/?p=81810"},"modified":"2023-08-21T14:50:57","modified_gmt":"2023-08-21T04:50:57","slug":"rebooting-australias-defence-industry-policy-opening-an-investment-pipeline","status":"publish","type":"post","link":"https:\/\/www.aspistrategist.ru\/rebooting-australias-defence-industry-policy-opening-an-investment-pipeline\/","title":{"rendered":"Rebooting Australia\u2019s defence industry policy: opening an investment pipeline"},"content":{"rendered":"
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With AUKUS and the defence strategic review, we now have some clarity on Australia\u2019s defence capability needs, but the \u2018how\u2019 of delivery is to be determined. Defence industry is a key enabler, but Australia\u2019s defence industry policies have met with only partial success. Individual measures, like the acquisition of a controlling stake in CEA Technologies, indicate a willingness to act with resolve, but the scale of our strategic challenge demands fundamentally new thinking on defence industry policy and on the policymaking capability itself.<\/p>\n

The specific challenges for the Department of Defence and defence industry are well known: innovation, industry support, procurement and value for money.<\/p>\n

In my previous article<\/a>, I outlined the policy path that\u2019s been well trodden by countries that have attained rapid technical and industrial development. I highlighted the centrality of exporting firms, and our opportunity to harness the might of Australia\u2019s financial services sector. Here, I propose a means of doing this that specifically addresses some of the challenges.<\/p>\n

In the absence of a new federal department<\/a>, Defence should create its own investment arm with the core function of investing in and attracting private investment into defence industry, focusing on exporting firms, and with a role in policy formation.<\/p>\n

The benefits of greater private investor participation in the defence sector were succinctly set out<\/a> in the Australian Financial Review<\/em> by John Kunkel and Hayley Channer. Here I add further arguments in favour of this and note the centrality of an investor\u2019s mindset to the rapid development of industry capability.<\/p>\n

Such investors include superannuation funds and family offices that invest directly in assets, private equity funds and venture capital funds. They control around $4\u00a0trillion in assets, a good chunk of which is directly invested in infrastructure and firms. Investors can bring much-needed expansion capital to the defence sector, and expertise in growing companies or \u2018sweating\u2019 infrastructure assets to maximise return on investment. This is an invaluable base of knowledge for Defence.<\/p>\n

But the most profound contribution of private investors is cultural. Defence is culturally introverted\u2014a product of its approach to information security. The economic historian Joe Studwell notes<\/a> that economically introverted states tend to have economies that are \u2018technology-less\u2019 and \u2018dependent on multinationals, eking out a living as contractors\u2019. That description can apply to much of Australia\u2019s defence industry, which culturally reflects Defence.<\/p>\n

Rapid development requires more extroversion, and financial investors are the ultimate economic extroverts. They\u2019re wide open to new associations and opportunities, so long as their financial-return hurdles are met. An alliance between Defence introverts and financial investor extroverts could be a powerful driver to shape and grow industry.<\/p>\n

Given the cultural differences, making common cause won\u2019t be easy. In Silicon Valley, the Pentagon has reined in investors\u2019 extroverted interactions with China. Defence-oriented investors have their criticisms of the Defense Innovation Unit and of difficult Pentagon procurement processes, but there are a critical mass of defence-oriented investors and established pathways of engagement.<\/p>\n

In Australia, there\u2019s limited private investor activity. CPE Capital, a private equity firm, is aggregating parts of the F-35 supply chain. Venture capital firms make isolated investments in dual-use companies and technologies, such as Main Sequence (In-Q-Tel is active too, though with a narrow focus). But, given the scale of private capital in Australia and the size of the defence spend, activity levels in Australia are underweight.<\/p>\n

The investment arm of Defence (let\u2019s call it \u2018the Defence Investor\u2019) will invest in industry and work with Defence to shape investment cases capable of attracting co-investment from private financial investors. It will do that through direct investment in industry and by acting as a fund of funds, providing capital to investors willing to work towards strategic objectives.<\/p>\n

The Defence Investor will address the key challenges thus:<\/p>\n