While the future Belgian government is still discussing its programme and budget allocation to finalize its formation, the political parties involved in the formation have already indicated clear commitments to substantially increase defence spending within the federal budget to catch up with Belgium’s international commitments and geopolitical realities. At the same time, the Belgian Defence Technological and Industrial base (BE-DTIB) needs to be supported to improve the EU’s defence readiness and, secondarily, so Belgium can capture economic and scientific spill-overs from increased EU-wide defence spending.

While the federal and regional governments certainly play a key role through increased support programs, they should also remove existing obstacles preventing private investment and access to finance for the BE-DTIB. The restrictive fiscal environment of the federal budget further adds to this necessity.

With the recent Draghi report on the (lack of) competitiveness of the EU once again reminding of the dangers for the DTIB’s lack of private financing sources[1], the European Defence Industrial Strategy’s (EDIS) advice on how misinterpretations of the sustainable finance framework can be addressed[2], and the appointment of the new defence commissioner who within his mandate will need to improve access to finance for the DTIB[3], the time is (over)ripe to address this longstanding issue. Belgium should not wait for the EU-level to take action, but rather include tackling this issue within the new government’s programme.[4]

The primary issue raised by industry and stakeholders regards the ‘5% threshold’ employed by Febelfin, the association of Belgian banks and financial institutions. Once a company obtains more than 5% of its turnover from defence-related activities it is labelled as a ‘defence company’, which complicates accessing further financing. The 5% threshold has taken an almost mythical status within discussions with defence industry stakeholders; even companies with only a peripheral defence focus or producing dual-use goods and technologies indicate being warry of the threshold. The result is a significant damper to growth strategies for companies with potential to expand relevant for the European DTIB. The fear of the 5% threshold – whether grounded or not for those limited to a peripheral focus – all starts with apparent ambiguity on the scope of Febelfin’s definition of defence-related activities to which this 5% rule applies, and regarding what extra measures could be taken once the threshold is surpassed to still obtain financing.

Banks also consider a host of other factors than the 5% threshold when considering to finance a business case. Lack of transparency, due diligence concerns, liquidity rates for paying suppliers, reputational risk to the bank brand are but a few examples of other driving factors that weigh into the decision making process for each case. Of course, also market demand for ‘Environmental-Social-Governance’ (ESG) compliant products from big customers such as pension funds, multinational investment companies and other institutional investors drives the loan exposure banks are willing to take.[5] After all, banks must churn their loan exposure into sellable financial products to the aforementioned customers. If demand from these customers for defence-related financial products is low, then there is little interest for the banks to include defence-related companies in its loan exposure.

Whatever the primary driver, the status quo pushes companies to obtain financing from foreign sources, which, depending on the source country may undermine Belgian and EU resilience and increase dependency issues. As noted by Belgian Economist Peter De Keyzer, “if our banks and private investors don’t do it, then there is a risk that companies will be financed through credits from Qatar, Dubai, India or Saudi-Arabia […].[6]” While no statistics are currently available on the extent, given overall EU-wide access to finance issues for the DTIB [7], the risk of financing from non EU/EEA (and non-NATO) third countries is a valid concern.

In a worst-case scenario, legislation can be passed to force Belgian financial institutions to provide financing if (minimum) criteria outlined in the legislation are fulfilled. While different in scope and content, such legislation would be similar in spirit to existing Belgian legislation forcing banks to provide financial services to companies in the diamond sector.[8] However, forcing such legislation on financial institutions should be avoided if possible. The legality is questionable and it is unnecessary to achieve the objective.[9] As stated above, the issue is largely driven by a lack of communication as it is unclear to many in the industry what it can do to alleviate the concerns of the banks. Instead, a preferable approach would be to draw up guidelines based on alignment between all involved parties.

For instance, last year UK finance together with ADS developed such a guideline based on a trialogue between banks, the government and industry.[10] The document provides 10 pages of guidance using concrete examples, shortly indicates steps to alleviate concerns held by financial institutions to enable receiving financing, and provides further links to specific policies. The document makes clear that banks require the defence industry to shift to more transparency and be open to due diligence to ensure continued business relations. Belgium could similarly engage in such a targeted trialogue to produce a guideline enhancing transparency on how to obtain continued access to finance from Belgian financial institutions.

The issue concerning access to finance and private investment, however, extend beyond the DTIB. As noted in the Draghi report, EU-wide competitiveness is hampered by limited access to finance for industrial activities, unclear and contradictive regulations, a lack of private investment in general but especially at vital points during the initial growth stage, and by high energy prices compared to other regions. While solving the access to finance issues for the DTIB should be a priority, the exercise can be expanded to other sectors with vital activities that have faced financing issues.

The financing issues for vital sectors speaks to a larger issue of how we approach necessary (industrial) activities that include negative effects (e.g., pollution) and risks (e.g., higher likelihood for corruption, higher potential of use for human rights abuses).  A sustainable approach should focus on improving such industrial and business processes, not on complicating the existence thereof within the EU to then become dependent on imports from non-EU third countries, which are often more polluting, less socially responsible and involve more governance concerns. A broader shift in thinking is thus required on how we seek to tackle ESG concerns. Once this takes hold, the invisible hand of the market will swiftly align renewed private market demand with increased financing supply.[11] Such a shift, however, currently requires a little push by the government(s) in order to set the gears into motion.

[1] European commission (2024) The future of European competitiveness – In depth analysis and recommendations, p. 161 [Link]

[2] See: (EDIS, p. 25). [Link]

[3] See: European Commission (2024) Mission letter to Andrius Kubillius [Link]

[4] Note: At the same time, Belgium can raise this as a key issue in the Working party on Competitiveness and Growth, which can further unpack the findings in the Draghi report and provide recommendations for better regulation to enhance access to finance and competitiveness for industry. [Link]

[5] Note: Febelfin indicates that primary and secondary activities (via NACE codes) and % turnover of “business activities that are [not] in line with the European taxonomy for sustainable activities” play a key role in the ESG reporting [Link]. Weapons are perceived as “harmful products” in the same category as tobacco and coal[Link].

[6] van Lier, R. (2024, March 02) Aandelen wapenfabrikanten stijgen tot 341,52 procent sinds oorlog. Kan en mag je erin beleggen. Expert analyseert. Het laatste nieuws. [Link]

[7] Cfr: Delponte et al. (2024) Access to equity financing for European defence SMEs. DG Defis [Link]

[8] AWDC (2023) Basic banking services for the diamond sector [Link]

[9] Note: Legislation forcing banks to finance certain companies also runs against basic free market principles of sovereignty and autonomy of private entities, setting a negative precedent. Any top-down imposition from the government compelling business practices is also prone to creating inefficiencies in resource allocation and may skew risk assessments.

[10] See: ADS and UK Finance (2023) Guide for the defence and security sectors for access to financial services in the UK [Link]

[11] Note: The market demand for defence goods and services is, of course, driven by governments their defence spending, meaning the concept of the ‘invisible hand of the market’ does not apply on this level. However, private financing from financial institutions (the financing supply for defence-related companies) is driven by the demand for defence-related financial products in portfolios by its customers. If large pension and investment funds or its customers demand more (options) for investing in defence, then bank access to financing is sure to follow private market demand for defence-related investment products. It is clear that ensuring a deterrent defence and technological industrial base is a vital component to maintaining the (collective) security that provides a fundamental basis for the continuation of our enjoyed freedoms. Hence it constitutes a part of the social responsibility towards society; something pension and investment funds could consider in their societal impact criteria when setting its portfolio demands to financial institutions providing the financial products.