September 2019 – January 2020, BGI Consulting carried out ex-ante evaluation of the possibilities and need for the use of financial instruments in the defence industry sector. The evaluation was commissioned by the Ministry of National Defence of the Republic of Lithuania.

 

Financial instruments are implemented according to market needs, as this form of financing is effective only in those areas where there is a demand for repayable financing, which for various reasons is not met by private financial institutions. For example, banks refuse to lend to some applicants because of their over-commitment or too long payback period, or by avoiding investing in little-known areas or sectors with little data on the financial viability and payback of projects, making investment risk particularly high. As a result, publicly funded financial instruments do not compete with private financial institutions, which provide financing and investment services. In addition, when investing public funds in areas where market financing gaps have been identified, various measures (such as reducing the risk for private investors) are aimed at attracting private funds.

The main objective of the study is to identify the shortcomings of market financing in the defence industry sector. The study is intended to propose a financial instrument that can cover these shortcomings.

 

A wide range of research methods was applied in the evaluation - case studies of 4 foreign countries, 5 semi-structured interviews with representatives of external financing providers and a focused group discussion with representatives of research institutions and companies. For the purposes of analysis of defence and security industry market shortcomings, optimal investment situations and investment needs, questionnaire surveys were conducted (for 4 groups of respondents - all identified business entities, which potentially create and/or produce and/or provide defence sector products/services, which are defined in the Lithuanian Defence and Security Industry Development Guidelines 2018–2026., research institutions, credit institutions, representatives of venture capital funds).

 

The study provides an overview of the defence industry, analysis of defence market failures, optimal investment situations and investment needs, detailed analysis of foreign experience in the defence industry, analysis of tax and legal framework issues and analysis of state aid in the defence industry, financial instruments in the defence industry, the assessment of added value, analysis of financial products in the defence industry sector, formulated proposed conclusions on possible investment measures in the defence industry.