Australian government underwriting arms exports is ‘baffling’, expert says

The financial aspects of the Turnbull government’s plan to turn Australia into an arms exporting powerhouse are baffling, a leading defence expert says, but the decision to promote defence products overseas is welcome.

Andrew Davies, the Australian Strategic Policy Institute’s director of defence strategy, said the Coalition’s plan to use a $3.8bn fund to underwrite an expansion of arms exports made little economic sense because manufacturers had no trouble securing funding from private sources.

“That baffles me,” Davies told Guardian Australia. “I’ve been around this business a long time and no one’s ever said to me, ‘If only we could get more government funding, we could export more.’

The government plans to create the $3.8bn defence export facility to provide finance to local manufacturers to help them sell more of their defence equipment overseas. It is part of the government’s plan for Australia to become one of the world’s top 10 arms exporters.

The fund will be administered by Australia’s export credit agency, the export finance and insurance corporation, a specialist financier that helps Australian exporters when their bank is unwilling or unable to lend them money.

The government says there are now limits to Efic’s ability to finance defence exports, such as when the financial commitment is too large for Efic’s balance sheet, so it will allow the agency to refer applications for export finance to be written on its “national interest account”.

Efic’s legislation provides for two distinct platforms from which Australian exports can be supported: the commercial account, and the national interest account. For the national interest account, the minister can direct Efic to enter into a facility if the minister believes it is in the national interest to do so. Once a transaction is written on the national interest account, the commonwealth receives the net income from Efic and must reimburse it for any losses.

But Davies says the plan to allow Efic to finance $3.8bn in arms exports was a strange one because it wasn’t fixing a market failure.

He said it was highly unlikely Australia could ever join the ranks of the top 10 arms exporters because the things it was good at producing – component parts for foreign assembly lines; niche sales of intellectual property, and services (training, consultancy, and acquisition) – were not big money makers.

“The top 10 arms exporters have 90% of the world market share and things thin out pretty quickly after that,” he said. “An easy way to earn lots of money would be to export whole platforms – like large ships and aeroplanes – but that was unlikely because the United States, Russia, and the European Union had pretty much got that market sewn up.”

“And it’s unlikely that Australia will be able to produce warships and submarines at less cost than well established shipyards overseas.”

But he said the government’s plan to create a specialist export advocate was welcomed. “What the defence industry has complained about very consistently is not having the marketing support from the government that other countries’ suppliers do,” he said.

Malcolm Turnbull has robustly defended his plan against doubts raised by experts like Davies, saying naysayers wanted Australia to “give up at the outset”.

Peter Whish-Wilson, the Greens defence spokesman, said the plan was designed to shore up a handful of defence industry-centric seats “at the cost of Australia’s soul”.

“What I have been arguing for a number of years now is that all the so-called free trade agreements Australia has signed have increasingly limited the ways a government can support Australian industry,” he said. “However, from the US FTA to the Trans-Pacific Partnership, the only industry that is exempted from these rules is the defence industry.”