2026 Perspectives for the Public Sector

13 https://defence-industry-space.ec.europa.eu/eu-defence-industry/defence-smes_en 14 https://documents1.worldbank.org/curated/pt/278561468201609212/122290272_201503114042949/additional/461810PUB0Box3101OFFICIAL0USE0ONLY1.pdf How the Private Sector Can Support the Public Sector in Managing Global Risks As public defense budgets come under increasing strain, the private sector’s role in supporting security and stability becomes more pivotal. This requires not only financial participation but also a cultural shift to better align corporate objectives with government defense needs. The involvement of the private sector in defense capability acquisition can take various forms: from the provision of short-term liquidity, risk management solutions, cross-border payment offerings, export agency financing or asset monetization offerings. a) Supply Chain Finance The expansion of military budgets and expenditures means Ministries of Defense (MoDs) will see their role expanded to foster, facilitate, and secure new technologies while continuing to run the day-to- day of the ministry. The private sector can support Treasuries and MoDs to ensure they have adequate liquidity to process sizeable orders, either through cash management or short- or longer-term debt facilities. As governments strengthen their supply chains to gain access to technical and expert resources, SMEs, non-traditional contractors, and academia will play an increasingly important role as sources of innovation. 13 To help smaller actors fulfill their role, global banks can provide working capital financing programs, export and pre-export transactions or reverse factoring transactions. b) Risk Management Risk management is similarly key to ensure supply chains are resilient to shocks. MoDs that operate large transport fleets providing passenger and freight transportation are particularly vulnerable to high oil prices. Fuel alone can account for over 70% of the variable costs in the transportation business, 14 which is why many MoDs use commodity hedging products to mitigate price risk exposures. Similarly, in the context of fluctuating interest rates affecting debt servicing costs and where inflation has surged the cost of defense contracts, governments should consider protecting their interest rate exposure going forward. Furthermore, defense contracts often involve multiple currencies, which highlights the need for foreign exchange hedging to manage currency risks effectively. This is especially critical due to the extended duration of defense contracts, during which there may be large currency fluctuations. c) Export Agency Financing As much as countries need to protect their domestic borders, national security also necessitates ongoing international relationships and alliances, such as NATO, AUKUS, and Euro-Atlantic partnerships. These international partnerships can benefit from the tools that global financiers can provide to secure supply chain financing and flows, achieve export success and cross-border solutions. Given the size and volume of current defense contracts, governments could benefit from diversifying their funding sources, with Export Credit Agency (ECA) financing providing a solid alternative to expand debt capacity and offer long-term repayment profiles. Not only does ECA-backed financing help insulate from capital markets volatility, create savings on cost of carry and preserve bank lines, it is also attractive to the private sector given the low Risk Weighted Asset consumption and high Return on Tangible Common Equity of the ECA business. d) Asset Monetization MoDs are often one of the largest holders of land and assets, representing significant potential to unlock value and increase operational efficiencies through asset monetization. There is often a question of whether governments and specifically MoD’s need to own these assets, and whether a sale-leaseback can provide a better alternative, unlocking the cash needed to fund new defense equipment and personnel. 10 Fueling Defense: The Financial Front