Struggling Galileo

Struggling Galileo

May 22nd 2007
From The Economist Intelligence Unit ViewsWire

Taxpayers may have to subsidise the EU's space project

Little positive came out of the recent EU-Russia summit in Samara, except an agreement to "consider" pooling efforts on their respective Galileo and Glosnass satellite projects. That such a commitment should appear half-hearted is hardly surprising. Galileo, the flagship of EU space ambitions, lacks a strong commercial justification, something that the EU Commission itself admitted to in a May 16th review, when it conceded that the proposed public-private financing consortium had effectively broken down. This has not, however, deterred EU officials from doggedly pursuing its ambitions. Jacques Barrot, the EU transport commissioner, rejected any suggestion of abandoning the project, insisting that "our industry must be at the front of this technological revolution and therefore we must ensure there are no further delays". But if the private sector cannot see the commercial benefits, the Commission is surely not in a position to insist on them. Instead, it looks set to turn to the EU taxpayer to underwrite what may turn out to be an expensive "prestige" project, with little value to either the military or consumers.

Conceived almost a decade ago as a joint undertaking between the European Commission, the European Space Agency (ESA) and the private sector, the project aims to provide navigational, telecoms and transport services, ending Europe’s dependence on the omnipresent but less precise US global positioning system (GPS). The private sector was to foot the bill for the development phase and two-thirds of the deployment and operational phases, the latter to begin in early 2008.

The private sector participation was to come from a consortium of eight major aerospace groups: Franco-German giant EADS, France’s Thales and Alcatel-Lucent, the UK’s Inmarsat, Italy’s Finmeccanica, Spain’s AENA and Hispasat, and TeleOp, a German consortium led by Deutsche Telekom. This heterogeneous alliance resulted from the merger in 2005 of two rival bidding teams, as a political solution intended to avoid offending the losers. But it has been dogged from the start by internal disputes over the division of labour and major ground installations, leading to substantial delays and cost overruns.

Meanwhile, contract negotiations which should have led to the deployment and operation of Galileo’s network of 30 satellites have stalled this year, with the consortium demanding that the public sector guarantee its commercial risks. Although worldwide demand for satellite navigation services and downstream applications is estimated at €450bn (US$605bn) annually by 2025, the commercial prospects of Galileo are cloudy, given that its rival GPS is available free of charge. As a result of the delays so far, full deployment has been pushed back to 2014 or later, by which time GPS will have been upgraded and Russian and Chinese systems will add to the global competition.

Starstruck

A major argument against relying on the US satellite system is that the US military retains the right to cut it off in an emergency. But this has not happened despite two ongoing wars; and any terrorist or military threat deemed large enough to force a US shut-down might apply to the EU system too. Nor has EU concern about potential technical failures in the US system been borne out, with three of the 27 satellite systems in orbit used as back-up. And although the Galileo system is regarded as being more accurate than the current US network, the difference in terms of consumer application is marginal—a matter of a few metres—and the latter system will be upgraded shortly in any case.

But abandoning the whole project would be unacceptable, as satellite navigation systems are rapidly developing into critical infrastructures for modern society, and Europe would be the only major economy without such a strategic asset.

The Commission therefore proposes that the planned public/private partnership be “re-profiled”, with the public sector covering the full cost of deployment and the private sector taking responsibility for the operational phase, with a contract covering 2010-30. The ESA would handle design and procurement of the infrastructure (with competitive tendering for all space or ground elements and dual-sourcing wherever possible), while the Commission would exercise overall programme management.

Under this scenario, full deployment should be achievable by end-2012, a slippage of five years from the initial schedule. The total cost to the EU budget would rise by €1bn to €3.4bn in 2007-13, requiring a revision of the current long-term budget. But the Commission maintains this is better value-for-money than guaranteeing the private consortium’s debt and return on equity under the present scheme.

The Commission’s paper will be submitted to the next meeting of EU transport ministers on June 7th. If they give a green light, it will then draw up detailed proposals by September on how to close the immediate funding gap, as well as for a longer-term financing mechanism to cover the entire period until 2030. EU officials may nonetheless find it hard to persuade the UK, Denmark, and EU taxpayers overall that Galileo will be more than an EU "prestige" project, bringing few real consumer, let alone military, benefits.