2026 Perspectives for the Public Sector

defense assets over time. However, challenges remain, including national budgetary practices, legal exemptions under Article 345 of the Treaty on the Functioning of the European Union (TFEU), and procurement complexities that favor domestic suppliers. In the U.S., the Trump administration’s “One Big Beautiful Bill Act” channels $150 billion into the Department of Defense budget, specifically to fund innovative technologies such as drones, hypersonic weapons, cyber capabilities, and space systems. 9 This bill favors agile, relatively recent entrants to the sector, such as Anduril and Palantir, over traditional defense giants, fueling rapid R&D and boosting Silicon Valley’s role in defense modernization. 10 Across Asia, countries are ramping up spending in response to rising geopolitical uncertainty and intensifying perceived security threats. From land borders to sea frontiers, the security landscape is becoming increasingly complex. Major economies, such as China, Indonesia, and Japan, have all significantly increased their defense budgets. In parallel, the AUKUS alliance is evolving with investments in nuclear submarines, AI, quantum computing, cyber warfare and hypersonic missiles. Among defense Original Equipment Manufacturers (OEMs) significant challenges remain that affect their ability to operate efficiently and invest in future capabilities. The first hurdle is high capital intensity and long payback periods. Large research and development costs place considerable strain on company finances and result in very high cost per unit. For example, each F-35 fighter jet costs between $83 million and $136 million depending on the variant. Extended development cycles, particularly when plagued by overruns as in the case of the F-35, create liquidity problems that hinder operational flexibility. 11 Second, budget uncertainty and government funding gaps create planning difficulties. Political shifts often cause volatility in defense appropriations, which disrupts long-term strategies. While defense OEMs rely heavily on government budgets, private investment is becoming more prominent. For example, Rheinmetall recently raised €1 billion in bonds to fund expansion. 12 In the United States, appropriations vary significantly with election cycles, adding another layer of unpredictability. Third, supply chain and working capital constraints are a persistent challenge. Disruptions in the supply of semiconductors and rare earth elements can hamper production schedules. Effective inventory financing and access to just-in-time capital are critical; however, companies such as BAE Systems have faced costly delays due to these shortages. Finally, currency and interest rate risks further complicate the picture. Rising debt servicing costs and difficulties in hedging against currency fluctuations can undermine financial stability, particularly for European OEMs operating across multiple jurisdictions. 9 https://www.congress.gov/bill/119th-congress/house-bill/1/text 10 https://www.techpolicy.press/how-trumps-budget-bill-sells-out-the-future-to-big-tech/ 11 https://moderndiplomacy.eu/2025/06/09/sixth-generation-fighters-redefining-air-power-in-a-tense-world/ 12 https://www.rheinmetall.com/en/media/news-watch/news/2023/jan-mar/2023-01-31_ad-hoc-rheinmetall-ag-successfully-places-eur-1-billion- convertible-bonds Citi Perspectives for the Public Sector 9