Calls for greater commitment on defence contracts: lack of certainty ‘a super dilemma’

Uncertainty around defence spending is preventing investment in Australia’s military industrial base, especially from the $4.2 trillion superannuation industry, says Peter Malinauskas.

Federal Minister for Defence Richard Marles, The Australian’s editor-in-chief, Michelle Gunn, and South Australian Premier Peter Malinauskas at the Defending Australia conference at Parliament House in Canberra on Monday. Picture: NewsWire / David Beach

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A lack of certainty around defence spending plans is preventing investment in Australia’s military industrial base, especially from the $4.2 trillion superannuation industry, says South Australian Premier Peter Malinauskas, backed by defence contractors and former Coalition treasurer Joe Hockey.

As pressure builds on the Albanese government to increase defence spending as a percentage of GDP, industry participants say greater commitment on contracts is needed, especially if the government’s calls for superannuation funds to participate are met.

Mr Malinauskas issued a challenge to the Albanese government to provide a detailed chronology of how the Osborne navy shipyard in SA would be constructed.

“We have the chance to build a modern yard from scratch,” Mr Malinauskas told The Australian’s annual Defending Australia conference.

“It will require billions of dollars of investment. Now is the time to provide the market with certainty that this multibillion-dollar program needs approaching development stage

“I think the uplift we’re seeing in defence expenditure in this country will necessarily mean that private capital sees a greater opportunity, but consistency of policies, I think, is the most critical, and that’s because super funds aren’t just looking for returns, they look for long-term, consistent returns.

“Super funds have an exclusive obligation to deliver returns for their members. Now if we provide certainty into the long term on defence funding and procurement, that invites capital to respond accordingly.”

Federal Defence Minister Richard Marles responded directly to Mr Malinauskas’s request for clarity over defence investment plans.

“There will absolutely be that certainty,” he said. “And that certainty is really fundamental in terms of the Osborne shipyard.”

Mr Marles said the government had “the opportunity to gain strategic clarity” and since coming to office in 2022, “that’s exactly what we’ve been doing”.

Jim Chalmers has called upon super funds to play a bigger role in defence and national security as the federal government pushes for more institutional investment alongside public expenditure. Some industry observers have suggested assets such as the Port of Darwin and other lower risk ­defence-related property would be a good entry point.

Mr Hockey weighed into the debate, saying regardless of which party was in power, uncertainty around defence spending plans prevented investment in home-grown companies, which left Australia without the benefit of building parts of its own military industrial base.

“The reason why super funds and others don’t invest in Australian [defence] is because you are investing in companies that have one client, which is the Australian government, which is an un­reliable client under the Coalition or Labor,” he said. “In the US, every dollar they spend on procurement, probably 80c in the dollar is with American companies.

“In the UK, probably 80c in the dollar spent on procurement … is with UK companies. We are probably, today, 20c in the dollar. And if Austal goes to foreign ownership, it’ll be 5c in the dollar.”

Former Home Affairs secretary Mike Pezzullo said the uncertainty was also not encour­aging super funds and insti­tution­al investors.

“In every other facet of defence industrial base outside of AUKUS, you tend to have a stop-start, feast-famine problem,” he said.

“So defence will put out a tender or an expression of interest for a trial, then there’s no certainty about future orders, no certainty about mass or scale. And so whether you’re a super fund or … some other investor, how do you start to calculate your fixed-in, long-term return in the way that you can for, say, a toll road or you can for an airport?

“Once you get a sufficient critical mass of flow, firms can start to hire workers, build industrial sites and factories, (and) they then become more attractive investment opportunities.”

Last year, the government Integrated Investment Program led to the reprioritisation of $73bn worth of capabilities.

The chief executive of defence contractor DroneShield, Oleg Vornik, said super funds had been shy to enter less because of certainty for contractors but more because of environmental, social, and governance issues.

“Super funds have been shy to get into defence because of perceived ESG issues. The problem is that defence is considered under the same vein as coal, tobacco and pornography, Mr Vornik said.

“Instead, defence is providing the deterrence from the rising totalitarian regimes, and, as Australia can now clearly see from the US AUKUS review as an example, Australia needs to have its own thriving defence industry.

“We have a bizarre situation where in the US, it is often a badge of honour for funds to invest into defence, doing their part for the country, and in the process harnessing significant returns in what is one of fastest-growing segments in today’s world but in Australia it’s an ESG issue

“It would make a lot of sense (as our Treasurer pointed out a while back) for super funds to own defence companies.”

Vice-Admiral Jonathan Mead who also attended the Defending Australia conference, said the government of the day had a role to play to shape perceptions around defence as an investment, particularly nuclear-powered submarines. “I think that would have to be a government policy to make it more attractive to [super funds].”

“We talked about this social licence, not just to communities and to Australians at large, but to Australian companies that we want you to invest in be part of the nuclear program. We want you to be able to build material for nuclear powered submarines. We want to be able to export that to nuclear powered submarines. So we’re doing a lot of work at the moment in uplifting companies to enable them to sell their products to the US, for the Virginia programs.”

“Working with financial corporations, I think is one aspect working with the education industry is another aspect.”