Could PPPs play a role in delivering the UK’s defence ambitions?

The UK’s defence ambitions will require significant investment, and the latest Budget signals a greater role for private capital. There is understood to be significant appetite amongst the private sector to participate in defence public–private partnership (PPPs). Alongside funding the Defence Investment Plan, the government announced a commitment to develop a pipeline of private-finance opportunities, including PPPs, and an Innovative Defence Financing Taskforce to explore private and international investment.

With up to £5 billion also earmarked through the National Wealth Fund and British Business Bank for defence and related sectors, the question is: what should the next generation of defence partnerships look like?

Defence has been here before

Private finance isn't new to UK defence. Project Allenby/Connaught, for example, combined construction, accommodation and support services across Aldershot and Salisbury Plain under a 35-year arrangement. The government’s PFI data lists 22 defence projects for assets as diverse as accommodation, aircraft and utilities. Defence PFIs have also covered training, simulators, vehicles amongst other assets and services.

However, the current opportunity shouldn't simply default to a revival of PFI. Traditional PFI attracted criticism for inflexible long-term contracts, complex payment mechanisms and costly risk transfer, particularly where requirements and laws changed over time. Those limitations are particularly significant in defence, where technology, operational requirements and threats can evolve rapidly. Learning from the lessons of PFI enables the PPP toolkit to be applied more selectively.

What could the new model look like?

There is unlikely to be a single model suitable for every defence requirement: different defence requirements and assets will require different financing and partnership structures, reflecting their particular assets and risk profiles.

Availability-based PPPs

For relatively predictable infrastructure, such as accommodation, training and logistics facilities, traditional availability-based PPP could still integrate design, construction, maintenance and lifecycle obligations, with government paying for an available, maintained asset. A modernised model could build on lessons from PFI through simpler payment and risk allocation mechanisms and more effective provisions for change, benchmarking and refinancing and a more effective and considered approach to handback.

Mutual investment PPPs

The Mutual Investment Model provides another potential template, allowing the government to retain a minority economic interest and greater oversight alongside private investment. Government shareholding (and associated rights) could suit defence infrastructure. A defence version would, however, require bespoke arrangements for security, information rights, changes of control and military decision-making.

Regulated Asset Base

For exceptionally capital-intensive projects, elements of Regulated Asset Base financing could also be adapted to provide investors with revenue during construction, potentially reducing financing costs. While a conventional RAB model may not translate directly to defence, aspects of the approach could be relevant to projects involving significant upfront investment and long construction periods and/or defence utilities infrastructure.

Progressive partnerships

For complex, change-heavy or technology-dependent projects, a progressive or co-development model could allow the government and its preferred partner to refine design, cost, risk allocation and financing before committing to a long-term arrangement. This may be particularly valuable in defence, where security, technology, operational and supply-chain requirements can make it difficult to define and price the solutions at the outset.

Strategic industrial partnerships and joint ventures

Building strategic industrial capacity may require different models: joint ventures, co-investment and long-term purchasing commitments could help unlock private investment. Providing greater confidence in future government demand, particularly in areas such as munitions, energetics, drones and autonomous systems, could drive emerging investment in those areas.

The defence-specific challenge

Whatever models emerge, there are common issues that future financing structures will need to address include:

• Operational flexibility, so long-term arrangements can respond to changing threats and priorities

• Technology and obsolescence, including technology refresh and interoperability

• National security and control, including ownership, information, supply chain transparency, changes of control and lender rights

• Changes in law/policy, recognising that government may need to retain risks driven by changes in defence policy

• Contract management and the role of the intelligent client, ensuring government has the capability to manage complex, long-term partnerships

The underlying principle should be that the financing model follows the asset and its risks, rather than the project being made to fit a particular PPP structure.

From policy commitment to investable pipeline

The Budget could be the first step in opening a significant new market for privately financed defence projects. The next challenge is turning that policy commitment into an investable pipeline to encourage industry to mobilise.

For investors and industry, key questions will include which projects come forward, procurement timescales, the level of government support and how construction, demand, technology and security risks will be allocated.

Those considering opportunities in this market should consider now:

• Where their assets or capabilities could support the emerging pipeline

• Whether conventional project finance, joint venture or co-investment structures are most appropriate for their sub-sector

• What level of long-term government demand or revenue certainty will be required to unlock investment

• How security and foreign investment requirements could affect funding and ownership structures

• Whether proposed solutions can accommodate technological and operational change over the long term

The issue isn't whether PFI is returning, but whether the UK can use its experience of PPPs to develop new defence investment models capable of mobilising private capital while maintaining flexibility, security and value for money.

If it can, private finance could play an important part in turning increased defence spending into resilient infrastructure, industrial capacity and operational capability.

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