The race by governments worldwide to 'raise defence spending' sharply is going to require funding. Returns to investors are likely to be outsized. The largest pool of funds are those in retirement savings investment accounts

If you have taken an interest in your KiwiSaver and perhaps shifted it to an "ethical" bias, you may be interested in the review below.

The Australian government, like many other governments facing security challenges, is planning a major 'investment' in its defence infrastructure and capabilities. Obviously, much of this will be funded by allocations of tax revenue. But increasing parts of it will be funded by "innovative" mechanisms involving private sector investors.

The largest group of these are in funds that house retirement savings. The fund managers who have the responsibility to protect and make these funds grow are about to be enticed with a range of new investment opportunities. With at least AU$425 bln involved just in Australia, there are likely to be strong incentives to participate with member funds.

The tension between 'returns' and 'ethics' is likely to challenge many individual members. If you are one of them, the following Westpac review will give you a good idea about what is coming (or what you will be foregoing).

Does a bank's embrace of the defence sector opportunities change your view of them? [This will explain the headline phrase.]

By Westpac Institutional Bank

The Federal Government is open to proposals from Australia’s private capital markets as part of plans for alternative financing to help build the nation’s sovereign defence capabilities.

Australia’s recently launched AUD 425 billion 2026 Integrated Investment Program aims to increase defence spending by AUD 53 billion to about 3 per cent of GDP by 2033, with around 30 per cent of that increase to be funded through alternative financing or “off-budget” structures.

In what’s being touted as a win-win for government and investors, the government is tapping private capital markets and inviting co-investment opportunities to enhance the nation’s defence. In the mix will be fresh government allocations and internal reprioritisations, including the establishment of a new Defence Delivery Agency.

The changing geopolitical environment and modern-day global conflicts are pressing reasons to move faster to bolster the nation’s self-reliance in defence with a range of approaches under consideration, from special government investment vehicles to partnerships and joint ventures with private investors.

Project pipeline

Australia will spend AUD 425 billion over the next decade on defence capability to overhaul the defence forces, with some AUD 15 billion expected to be delivered by alternative financing mechanisms, according to the 2026 Integrated Investment Program released in tandem with the defence strategy, presenting significant opportunities for defence sector businesses, investors and financiers.

While the news represents a myriad of potential outcomes, the process – which is being managed by the Department of Finance and Department of Defence – recognises the need to leverage all forms of investment to deliver defence capability at scale and speed. Alternative financing, by definition, means that spending won’t show up in the Federal Budget, instead allowing for the acquisition cost of capital-intensive spending to be spread across several budgets, or undertaken entirely off budget, which is not uncommon.

The move coincides with the UK’s announcement of similar objectives to mobilise international private capital and finance in its Defence Investment Plan (DIP). UK finance and profession leaders note that private finance and investment can help bring forward and scale up defence capabilities, improve efficiency and lower costs, using different mechanisms. 

In the broader European region, the total capital expenditure of public-private partnerships (PPPs) related to security and defence in the region amounted to EUR 18.9 billion between 2000 and 2023, which was spent across 44 projects. A closer look at the data shows that 27 commercial banks have participated in the financing of security and defence public-private partnerships. 

Locally, there’s a clear belief that alternative financing models can work in the defence sector. While finer details are still being mapped out, alternative financing options are expected to look beyond PPPs, to direct government investment in defence companies, private companies or super funds investing directly in projects through institutional banking arrangements, and strategic leasing arrangements where private investors may build assets or buy existing facilities and lease them back to the government.

For example, the Federal Government has taken a majority stake in Canberra-based firm CEA Technologies, both a government business enterprise and off-budget investment that produces critical radar technology. Australia and the United Kingdom have recently signed a joint statement to deepen cooperation on the Active Electronically Scanned Array radar capability supplied by CEA Technologies. The deal recognises the strategic importance of collaboration between both nations’ defence departments and defence sectors, strengthening defence industry cooperation.

At the recent Defence + Industry Conference 2026, Minister for Defence Industry Pat Conroy announced that he’s “absolutely convinced” that there’s at least AUD 15 billion worth of projects where PPPs or private capital, or other innovative funding models “make a lot of sense” for the Integrated Investment Program 2026. For reference, the Department of Defence added AUD 13.2 billion to its Non-Financial Asset base in the financial year ending 30 June 2025, taking the balance to AUD 139 billion, however only AUD 2.5 billion is leased. This significant and growing asset base includes AUD 93.7 billion of Specialist Military Equipment, AUD 28.9 billion in land and buildings and AUD 10.6 billion of Infrastructure. 

Conroy said: “Ultimately, private finance isn’t just about the shifting of some sort of investment off our balance sheet onto yours, it’s also looking at alternative revenue streams that complement the main work through Defence.”  

Mike Hughes, Director of Defence Strategy at the Australian Strategic Policy Institute (ASPI), believes appropriately structured private sector financing could unlock a significant source of funding as the government prioritises sovereign defence efforts. But just how quickly the financial ecosystems can be built with industry partners and private capital is yet to be seen.

In the spotlight

The Integrated Investment Program has earmarked initial areas of opportunity for private sector engagement, including consolidation of the Henderson Defence Precinct in Western Australia, upscaling the Guided Weapons and Explosive Ordnance Enterprise (GWEO) and, in the wake of its success with the Joint Operations Command HQ, further inroads on the defence estate.

At the Henderson Defence Precinct AUD 12 billion of the AUD 25 billion capital estimated to be needed for further development and consolidation of the continuous naval shipbuilding and sustainment hub has been announced by the Federal Government. Central to Australia’s plans to acquire and service nuclear-powered submarines, it will provide infrastructure, facilities and services to maintain the nation’s fleet and support AUKUS partners.

Plans worth AUD 30 billion have been released by the Federal and South Australian governments to upgrade the Osborne Naval Shipyard with infrastructure to build eight nuclear-powered subs under the AUKUS pact, with AUD 8.5 billion of Federal funds so far announced. 

The industrial anchor for the Royal Australian Navy’s current and next generation fleets, Osborne models sovereign capability enabling Australia to reduce its dependency on external shipbuilders and to cultivate high-skilled jobs along the supply chain. 

The Commonwealth-owned Australian Naval Infrastructure (ANI), which owns and operates Osborne, estimates at least 4,000 workers will be needed to design and build its submarine construction yard. 

Ownership is also increasingly important to the Government, which controls Australia’s submarine company ASC and has sovereign shares in both ASC Shipbuilding and Austal Defence Australia. 

ASC Shipbuilding is an entity that was acquired by BAE Systems to produce the Hunter Class Frigates. Austal Defence Australia is a subsidiary of Austal Limited and was incorporated to be the Commonwealth’s strategic shipbuilder for Tier 2 surface combatants at Henderson. Australia is set to build five new nuclear-powered attack submarines in South Australia via a joint venture between ASC and BAE Systems.  Austal Defence Australia will initially build 18 Landing Craft Medium vessels followed by eight Landing Craft Heavy vessels.

The Integrated Investment Program tightens the focus on domestic manufacturing as a sovereign defence industrial priority by highlighting ambitions to acquire, stockpile and manufacture munitions and explosives on home ground, via the Guided Weapons and Explosive Ordnance Enterprise (GWEO). 

While the Federal Government is making a AUD 500 million commitment to support the local munitions industry as part of a total AUD 26-36 billion planned program investment, it will look to the private sector for significant support. 

To date we’ve seen Newcastle Airport developing Australia's first guided weapons manufacturing facility for Kongsberg at its Astra Aerolab precinct in Williamtown (NSW) and Lockheed Martin enter into a Teaming Agreement with Avalon Airport to store essential equipment required for the domestic assembly of Guided Multiple Launch Rocket System munitions. Both examples represent a form of alternative financing in that they are investments in defence-related infrastructure through the private sector.

Picking up pace

Venture capitalists, private investors, capital providers and institutional investors’ sights are now shifting to the defence sector as fresh opportunity comes knocking. 

The potential for off-balance sheet funding arrangements will require more innovative financing structures than have been utilised in the past, says Nick O’Brien, Head of Consumer and Industrials at Westpac. “We have been refining some of these proposals as we work with various sectors of the government to make alternative funding structures a workable reality.

“The deals we’re putting together are not purely economic for Westpac,” O’Brien says. “While pricing is important, the additional factor has been the desire to actively support large defence projects that bolster sovereign capabilities.”

The need for speed to market is real, O’Brien emphasises. The drive for national self-reliance is critical amid a shift to deterrence by updating core military weaponry. 

However, alternative funding pathways aren’t cut and dried, explains Australian Industry and Defence Network chief Mike Johnson. 

Venture capitalists will require a very clear return on investment and far more accountability from companies involved in defence projects than has been shared in the past. Most will also want quick success stories and even quicker failures, which is a challenging environment for defence companies to work within, Johnson says. 

“Capitalisation is much more than just writing a cheque. One of the largest parts of providing capital is a clear understanding of how the manufacturing process will work and how much revenue you need to generate the profit to cover your capitalisation,” he says. 

“To attract venture capital, you’ve got to have a product that is or can be ported outside of Australia, which brings with it a bunch of administrative overheads, such as compliance with defence export controls and regulations,” Johnson says.

Pricing risk

Westpac recognises that building a defence and finance ecosystem at speed is complex, requiring a reliance on strong partnerships and targeted policies, as lenders crowd in to support a burgeoning pipeline of critical defence projects across the nation.

As the expansion of defence capabilities moves ahead, there’s widespread recognition that more granular project detail will be required to ensure banks can price risk accordingly.

Westpac CEO Anthony Miller has been open about the bank’s ongoing commitment to support the roadmap for Australia’s defence sector alongside government, prime defence contractors and other authorities to ensure companies and smaller businesses can access the capital they need to grow.

The bank continues to engage with the Federal Government to deliver viable alternative financing funding proposals. As Australia’s oldest bank, Westpac can draw on its long track record of working with governments across sectors. Its expanded contract with the New South Wales Government, announced last year, continues a partnership that spans nearly two centuries.

Recent projects have included partnering with the Victorian Government on Melbourne’s North-East Link Project, and leading roles in the financing of housing and healthcare projects in New Zealand.

Defence is a priority sector for Westpac, says Nell Hutton, Chief Executive of Westpac Institutional Bank, demonstrated by recent increases to the bank’s institutional loan book for lending to defence firms, locally and internationally.

Hutton says: “Westpac is working closely with the Federal Government to make sure we understand how the bank can best support the National Defence Strategy’s ongoing plans with appropriate alternative financing mechanisms.”

The original of this Westpac note is here.