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Galileo: the Concession Merry-Go-Round

Inside GNSS, April 2006

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Risk allocation, avoidance, and management are the watchwords of the day as the contract negotiation for the Galileo concession moves into its endgame.

Talks have gone on for more than a year between the Galileo Joint Undertaking (GJU) and a superconsortium of leading European industrial entities, financial institutions, and communications service providers — including former competitors and a late-arriving German consortium integrated into the private sector team only last December.

“Love at second sight,” is how Martin Ripple, director of EADS Space’s Galileo program and chief negotiator in the contract talks, describes the merger of the iNavSat, Eurely, and TeleOp teams (See “Perils and Pearls of Galileo,” January/February 2006, Inside GNSS).

The consortium and GJU are well past a December 2005 goal for concluding a 20-year agreement that will guide deployment and operation of the European GNSS, but most participants now predict that a deal will not be signed much earlier than the end of this year.

Earlier delays in reaching agreements among European Union (EU) governments, ESA, the European Commission acting as the EU’s executive arm, and private sector companies finally led the project sponsors to acknowledge that a fully operational Galileo system would not be completed until 2010, two years later than originally planned.

The GJU will cease operations shortly after the signing of a concession contract, turning responsibility for monitoring contract fulfillment over to a Galileo Supervisory Authority (GSA) still in the process of being set up under the direction of Pedro Pedreira. Although not directly involved in the contract negotiations, the GSA is regularly briefed on the progress of talks.

Work on the Galileo deployment continues apace, however, following a €950-million contract signed by the European Space Agency (ESA) and Galileo Industries in January. The contract will continue rollout of the ground and space infrastructure, including four in-orbit validation (IOV) satellites to be launched in 2008.

Meanwhile, the first Galileo IOV experimental satellite, launched last December, began transmitting signals on January 12. According to ESA officials and Surrey Satellite Technology Ltd., which built and is operating the satellite, the GIOVE-A is performing well and expected to achieve its primary mission: securing the radio spectrum allocations sought by the Galileo program. The spacecraft must operate successfully in 17 frequency modes to achieve the complete Galileo filing with the International Telecommunications Union.

In March, ESA officials told the BBC News in London that successful results from GIOVE-A mean that the second experimental spacecraft, GIOVE-B, probably won’t need to be launched until this autumn. Also, late in March members of a bilateral EC/U.S. technical working group reached agreement on design of the new optimized civil signals in which the signal structure of the Galileo L1 OS will be the same as the GPS L1C.

Back in Brussels. Many aspects of the concession contract have already been worked out, leaving the complex and crucial issue of sizing, allocating, and providing against the financial risks associated with Galileo.

The stakes are high, and some associated tension is manifesting itself publicly.

Heinz Hilbrecht, director for trans-European networks in the EC Directorate-General for Energy and Transport, says, “The Commission will not sign up to a deal where risk is shifted to the EC. Have no illusions — the EC will not accept a deal that shifts all the risk to the public sector. We want the private sector to do what they say the do well: act as an entrepreneur rather than simply ensuring an acceptable return on an investment. We want a real [public/private partnership]; without that, there will be no deal.”

Carlo des Dorides, Head of GJU Concession Division, says the discussions have identified nine categories of risk in the project: cost overruns, completion, revenues (market), performances, design (interface between IOV and Concession program), overall risk coverage (spare, contingency, insurance), deployment program, compensation on termination, and replenishment.

GJU and consortium members agree, however, that only three of these pose serious challenges: the size of the market and prospective revenue sources for the concessionaire, liability risks, and the terms and timing of the hand-over of project management from ESA to the concessionaire.

The current business model identifies €8.5 billion in prospective concession revenues over the 20-year term of the contract, against €7 billion in costs. However, large unknowns revolve around the portion of the Galileo market that will be unregulated and accessible to the concession’s revenue measures.

As for liability against potential lawsuits for damages that Galileo users may bring, the concession has proposed a tiered risk-pool arrangement with what it believes to be the vast majority of exposure covered by insurance purchased by the concessionaire. It is asking the public sector to deal with financial risks above that level.

The transition from ESA to the concession is complicated by the fact that the design of the system took place under one contract (ESA/Galileo Industries) while another contract (consortium/GJU/GSA) will implement it.

One observer close to the process says the GJU hoped to have common position worked out with the concessionaire on the three key risk issues to take to European Transport Council for approval at its March 27 meeting. That would allow the two sides to resolve the lesser risk factors and finish the concession contract proposal, which has to be reviewed and approved by council before being signed and monitored by the GSA.

In the Same Boat? The strength of the two sides’ relative political positions are deeply intertwined as a result of the years of public and private process that have led up to the current situation.

On the one hand, the GJU would seem to be at a disadvantage, having only one candidate concessionaire after the competitors merged (reportedly with some quiet encouragement by the public sector). Moreover, Galileo has gained such a high profile — effectively serving as the flagship project for a unified European space initiative — that considerable political “face” would be lost with a collapse of the project now.

On the other hand, the would-be private partners have invested years of effort and budget to reach this point, and they are recipients of EC and ESA contracts for programs besides Galileo. As one observer noted, “The consortium will not abandon the project because they have to come back to the EC for other programs and project funding.”

Ripple acknowledges the complexity of the deal-making that sometimes has as many as 18–20 participants in the room — although only two directly negotiating and the remainder serving as information resources and de facto counselors on specific topics.

Asked if he “saw a danger that this concession contract negotiation could fail, Ripple says, “I don’t think so. We have advanced the discussion well beyond the point of no return. We have a commitment to sign an agreement by the end of the year, and I don’t think it can fail.”

“We can do it [reach agreement on a contract],” agrees des Dorides. It will be quite a challenge, but we can do it.”

Copyright 2006 Gibbons Media and Research LLC

Copyright © 2006 Gibbons Media & Research LLC, all rights reserved.

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