Unleashing Private Capital: A Strategic Shift to Boost Allied Defense
Unleashing Private Capital: A Strategic Shift to Boost Allied Defense
By John Nagl and Dan Rice
The U.S. stands at a pivotal moment in its global security strategy. As the world grapples with war in Ukraine and Chinese aggression in the South-China Sea, the need to bolster the defense capabilities of key allies has never been more pressing. Traditional methods of military aid and direct government spending are insufficient to meet the challenges posed by rising powers like China and Russia. A simple yet transformative policy change could unlock significant private investment in overseas defense manufacturing and strengthen the defense industrial base of U.S. allies in critical regions such as Eastern Europe and the Indo-Pacific. By expanding the mandate of the U.S. Development Finance Corporation (DFC) to include defense-related projects, the U.S. can incentivize private capital to flow into areas crucial for global security.
Established in 2019 through the BUILD Act, the DFC finances development projects in emerging markets. With a lending capacity of $60 billion, the DFC provides loans, loan guarantees, direct equity investments, and political risk insurance to private-sector-led initiatives to private investors. Created to counter China’s growing influence in economically developing key regions of the world, particularly through its Belt and Road Initiative, the DFC was designed to support projects that align with U.S. interests in fostering economic growth and stability abroad. Additionally, China is helping to expand and shore up deficiencies in the Russian defense industrial base through provision of drones, engines, machine tools, and electronics. However, the DFC’s current mandate excludes defense-related projects, limiting its potential to strengthen America’s allies and protect investment.
The concept of using government-backed financial mechanisms to stimulate private investment in defense-related projects is not new. The Marshall Plan, implemented after World War II, is a prime example of how U.S. government intervention in foreign industrial bases can promote stability and attract private capital. By investing in the reconstruction of European economies after the Second World War, the U.S. not only helped to rebuild war-torn nations but also laid the groundwork for long-term economic and political stability in the region. This, in turn, created a favorable environment for private investment, which further strengthened the economic and defense capabilities of U.S. allies. Today, a similar approach could be applied to regions like the Indo-Pacific and Eastern Europe. The threat of aggression from China and Russia necessitates a robust and resilient defense industrial base. By expanding the DFC’s mandate, the U.S. can replicate the success of the Marshall Plan.
The strategic benefits of this policy change are manifold. First, by lowering the financial risk for private equity firms, the DFC can unlock significant capital investment in defense manufacturing in critical regions. The DFC already contributes to stabilizing regions critical to U.S. interests by improving infrastructure, modernizing industries, and laying the groundwork for sustainable growth. Extending this mandate to defense would only further contribute toward this goal. This is particularly important in munitions production, where the demand for advanced weaponry and military equipment is high but the financial returns are often uncertain. By providing political risk insurance and other financial incentives, the DFC can make these investments more attractive to private firms leading to increased production capacity.
Second, expanding the DFC’s mandate aligns with U.S. national security priorities by creating robust public-private partnerships that enhance the defense capabilities of key allies. In regions like Australia and Ukraine, where the threat of military conflict is ever-present, a stronger defense industrial base can serve as a powerful deterrent against potential aggressors and encourage private investment that strengthens trade relations and return on investment to the US economy.
The current geopolitical landscape underscores the urgency of this policy change. In the Indo-Pacific, China’s aggressive actions in the South China Sea and its growing influence in the region pose a significant threat to the security of U.S. allies and global trade. Additionally, China has expanded its share of arms exports and according to an August report from Merics, an institute for China studies “Chinese weapons are gradually becoming dominant in South Asia, Sub-Saharan Africa and Southeast Asia, and are making inroads in Central Asia and the Middle East.” Although Chinese arms sales still only represent 5.8% of global arms sales, Chinese firms, operating at the behest of the state face little of the restrictions. They also are fond of selling arms to and engaging in technological cooperation with state sponsors of terrorism like Iran.
Meanwhile, Russia’s ongoing conflict with Ukraine underscores the critical need for a resilient defense industrial base in Eastern Europe to deter Russian aggression. In response, the DFC’s CEO, Scott Nathan, announced $357 million in political risk insurance to protect private investment in Ukraine, aiming to rebuild investor confidence. However, to truly secure Ukraine’s future, expanding the DFC’s mandate to include defense-related projects is essential. Despite the ingenuity of Ukraine’s 400 private and 100 state-owned defense companies, many rely on self-funding due to bureaucratic hurdles that stymie long-term planning and production. By unlocking DFC funding for these defense companies, Ukraine can not only bolster its defense sector but also attract further civilian investment, ensuring a more secure and stable recovery.
Expanding the U.S. Development Finance Corporation’s mandate to include financing for defense-related industrial projects in allied nations is a strategic move that can enhance global security, attract private capital, strengthen the defense capabilities of key U.S. partners, and subsequently aid the US economy. This policy change would align with national security priorities and create robust public-private partnerships that ensure long-term stability and deterrence in volatile regions. As the world becomes increasingly unstable, the U.S. must take bold steps to bolster the defense capabilities of its allies and expanding the DFC’s scope is a critical first step in that direction.
Dr John Nagl and Dan Rice are both West Point graduates and decorated Iraq War veterans.
Dr Nagl is a Rhodes Scholar, served a career as an Armor Officer, and is professor of Warfighting Studies at the U.S. Army War College. Dan Rice is president of the American University Kyiv and served as the Special Advisor to the Commander of the Ukraine Armed Forces for the first year of the war (volunteer).
