INDUSTRY SOURCE DISCUSSES GALILEO WOES

UNCLAS SECTION 01 OF 03 PARIS 002634 SIPDIS SENSITIVE SIPDIS STATE FOR OES, ISN, EUR BRUSSELS FOR ESTH SMITHAM E.O. 12958: N/A TAGS: TSPA ECPS FR SUBJECT: INDUSTRY SOURCE DISCUSSES GALILEO WOES THIS MESSAGE CONTAINS PROPRIETARY INFORMATION; NOT FOR INTERNET DISTRIBUTION ¶1. (SBU) Summary: Embassy officers recently heard a litany of frustrations about the European Galileo Positioning, Navigation and Timing (PNT) project from an EADS contact who had worked on various aspects of the project. According to the contact, financing has been only one of a number of trenchant difficulties Galileo faced from the start. Essentially, the entire business model for the project was wrong, according to this source. Using the European Space Agency as the initial design entity caused an initial "politicization" of the project. Two competing European business groups - with differing interests and capabilities -- were asked to join forces and have yet to agree on a number of general principles of the concession contract. Our interlocutor dwelled on the liability risk issues that any private concessionaire of a project of Galileo's import would take on. Nonetheless, this contact believes that while it may take years, eventually a European PNT system will get off the ground, likely on a model very different from that originally conceived. It will proceed for no other reason than that European governments seek their own navigation system to serve their own militaries. End Summary. ¶2. (SBU) In a meeting on June 12, 2007, a European industry contact explained and fielded questions from ESTH and ECON officers on the issues presented by the Galileo PNT system from a corporate perspective. This individual has been involved in Galileo project development work since its inception in 2003, managing the terms and risks for his firm's involvement in the Galileo project. -------------- Public Private Partnership -------------- ¶3. (SBU) The industry contact explained that early concepts for Galileo looked to a model public private partnership (PPP) which was highly successful. The PPP in question was between EADS subsidiary Paradigm and the Government of the United Kingdom (HMG). In its agreement, EADS built satellite infrastructure providing world wide telecommunications capability primarily for the British military and would run it for fifteen years, sharing profits with HMG. Any excess capacity beyond the needs of the UK military could be sold to other EU militaries and the private sector Service contracts with NATO, and the defense forces of the Netherlands and Portugal provided additional revenue to the project. The PPP project works well and is profitable. HMG studies indicated that the partnership enabled 30% more efficiency and 70% better service compared to traditional procurement, and the project remained on schedule and within budget. HMG believes that this system was the best executed procurement contract signed over the last ten years. -------------- Wrong Model for Complex Galileo -------------- ¶4. (SBU) The European Commission used the Paradigm PPP project as the template for Galileo, a project containing magnitudes of greater complexity, related our contact. The European Commission (EC) interest was to develop the Galileo system primarily for political reasons, rather than technological superiority. Although Galileo is designed to pinpoint locations with greater accuracy for commercial users than the present GPS system, GPS Third Generation will be as accurate as Galileo. European policy makers note that GPS is a military-driven program, and the USG could limit access or shut down the system at will, said our industry contact. The Galileo system would serve European defense purposes and encourage the development of new products. One example is Open Service Authentication, the ability to prove one's location at a specific time by accessing the system's data recording a receiver's position. Such data is not available on GPS because of its military control, according to the industry interlocutor. -------------- -------------- ESA's Involvement Compounds Problems -------------- -------------- ¶5. (SBU) The EC commissioned the European Space Agency (ESA) to design, launch and test two satellites. The consortia would then build and launch the other 26 satellites. EU funding was to cover the two test satellites and the consortium's first two satellites. ESA subcontracted the production of the satellites, one to Surrey Satellite Technology Company which is the only Galileo-related satellite to have been launched. ESA involvement raised several issues. First, not all EU states are part of ESA so the cost of building the system is not evenly distributed. Second, ESA subcontracts must be determined based on the extent member governments finance ESA; companies from nations that invest more money in ESA receive more contracts. This work distribution would PARIS 00002634 002 OF 003 differ from that among the companies in the consortium. Third, ESA has not been involved in the negotiations between the EC and private firms; therefore its designs might not be consistent with what the consortium is planning. -------------- Private Industry Boxed In, Too.... -------------- ¶6. (SBU) According to the source, the second phase of the project was to establish the legal and contractual framework as a precursor to seeking private financing. The EC asked two competing consortia to come together as the Galileo industry consortium for this purpose. But it took almost two years - until end 2006 - for the companies to agree to some of the principle terms of agreement. However, the contract still lacks several major principles and contains almost no detail, agreement on work division, procurement, and liability, as well as unified management structure needed to take the project to the capital markets for financing. In short, there remains no completed general agreement. Major issues from both the public and private sectors prevent further negotiation, and the consortium will likely dissolve by the end of 2007. -------------- Other Challenges -------------- ¶7. (SBU) According to our interlocutor, one challenge from the start was that Galileo has been highly politicized. The competing interests of EU Member States conflicted with private interests. Another challenge was that the EC intended for Galileo to be supported by a 1:2 ratio of public to private funds, giving the larger burden of risk to private industry in return for the use of the system in commercial markets. Since the commercial markets were not yet developed, the private sector was motivated more by the possibility of getting large procurement contracts for building the satellites and the ground stations that would be required to make the system work. The private sector's focus on infrastructure contracts resulted in the inability to determine the fixed price value on procurement. As the ESA has not yet designed the satellites for the Galileo network and was not involved in the consortium negotiations, the costs and returns of building and operating the system could not be established. -------------- Future, What Future? -------------- ¶8. (SBU) The post-design phase of the project is 'In Orbit Validation' (IOV),a 20 year program responsible for 26 satellites, infrastructure and services. This program was supposed to be financed by both private and public sources. Although legal title to the system is public, users will be required to pay for access to the system. According to the industry interlocutor, the public sector is not as capable as the private sector in generating finance and managing risk/potential liabilities. For Galileo, the EU has overspent taxpayers money, and has no insurance. At the earliest, Galileo will become operational by 2012-2014. Certainly, the final product will differ from the initial vision. Without the consortium's participation, Galileo might evolve into a smaller scale system focused on military needs and not commercial markets. The EC must determine commercial markets such as the safety of life system in order to attract private interest. Moving forward depends heavily on the question of securing public funding. -------------- Where's the Money to Come From? -------------- ¶9. (SBU) On June 17, on the eve of the biennial Paris Air Show, at a satellite seminar, in response to a query from ESTH officer, a representative of EADS Astrium - like the interlocutor who met with Embassy officers earlier - mentioned that most of Galileo's problems resulted from a failure of the original business model. The complexity of the politics and business aspects of the model - while well intentioned - doomed the project to failure. The EADS representative highlighted that, while the political will exists in the EU to proceed with a Galileo-like system, the primary question is where the public sector will locate the large resources required to put this project on a sound footing. ¶10. (SBU) Comment: The consortium's participation in the Galileo project appears dead, which must impact the project's ambitions and scope. The financing of the project, yet to be determined, will shape Galileo's final form. At one point in our interlocutor's narrative, he said that when officials and industrialists come together to discuss Galileo, they have long since stopped inserting deadlines, or even timelines. In that regard, and considering the PARIS 00002634 003 OF 003 ongoing financing challenges, having a European PNT system operational in the 2012-2014 framework may be optimistic. End Comment. STAPLETON