Labor will seek capital from private investors and the $4.5 trillion super industry to help bankroll a multi-billion dollar build-out of the nation’s missile stockpiles, but funds warn performance rules and return hurdles will limit how much money they can deploy.
Defence Minister Richard Marles announced last week the government would boost defence spending by $53 billion across the decade, with about $15 billion to be funded through “off budget” structures, including special government investment vehicles and joint ventures with private investors.
The first Australian-manufactured Guided Multiple Launch Rocket System (GMLRS) missiles are test fired at the Woomera Test Range in South Australia. AFR
Defence will look to private investors to help fund part of the $36 billion build-out of its Guided Weapons and Explosive Ordnance Enterprise – the military’s push to build a sovereign missile and munitions industry in Australia.
While the government will not seek private funding for the weapons themselves – a move likely to clash with most investors’ ESG constraints – it is examining private involvement for the billions needed to build and upgrade storage, manufacturing and distribution facilities, according to a government source speaking on condition of anonymity.
The Defence package announced by Marles positions it as one of the main winners of the May 12 budget, which is otherwise expected to include significant savings from reining in the $50 billion National Disability Insurance Scheme and limiting tax concessions for property investors.
However, if private investment does not materialise, the government risks having to bring more of the spending back onto its own balance sheet, increasing pressure on the defence budget.
Private investors can ease pressure on the budget by funding and building defence assets upfront and leasing them back to the government, or by buying existing facilities and renting them back – effectively turning sunk capital into cash while spreading costs over time.
There remains doubt within the $4.5 trillion superannuation industry about its ability to deploy member capital on major defence infrastructure, with funds telling the government the annual performance test of the industry constrains investment in so-called “nation building” assets, or even early-stage technology start-ups because it takes too long to present a viable return and hurts their test results for too long.
Private investors and super funds are required to prioritise members’ returns and only invest where projects stack up financially.
“You’re going to have to potentially wait for something that has a pay-off in 10 years’ time,” UniSuper chief investment officer John Pearce said last week when asked about the government’s defence plan. “Meanwhile, on these performance benchmarks, you will be underperforming for those 10 years.”
Administered each year by the Australian Prudential Regulation Authority, the performance test ranks super funds by investment returns against a pre-determined benchmark.
Performance concerns
Treasurer Jim Chalmers is readying to consult on potential changes to the test, but has warned funds the broader regime is here to stay.
A requirement to make decisions in the best financial interests of members could also prove a major obstacle, no matter the changes made to the APRA test, especially if the performance of these government-run initiatives does not match what is on offer in the private sector.
Marles said last week that private capital could help deliver capability to Defence more quickly. He stressed it was not a new idea, pointing to Headquarters Joint Operations Command at Bungendore – a facility built by the private sector and managed by IFM Investors, the $260 billion investment manager backed by Australia’s industry superannuation funds.
The government has already flagged it is keen for the private sector to stump up some of the funding required to build the $25 billion defence precinct in Henderson, Western Australia, a key site for the AUKUS submarine program.
Conexus Institute researcher David Bell said weapons storage facilities were similar in nature to industrial property assets – an area of familiarity for the super sector.
But he warned “the return on those [defence] assets needs to match up with the return available on other types of industrial property assets.
“That’s critical because funds operate under a best financial interest duty, and so that really does make the financials paramount to the funding investment decision makers,” Bell said.
Of particular concern to the industry will be the poor performance of the National Reconstruction Fund initiative, which is bleeding cash because many of its investments in renewable energy and war-affected investments do not clear the government’s borrowing costs.
Assemble – a property developer focused on affordable housing, and backed by AustralianSuper and HESTA – has also halved the number of affordable apartments in two major projects in Melbourne. When asked about the decision, an AustralianSuper spokesman said it was working with Assemble to increase housing supply, but “finances have to stack up for members”.
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