400 Million-Euro Shortfall Prompts Moratorium on Some ESA Contracts
PARIS — The European Space Agency () has issued a moratorium on all new contracts valued at more than 10 million euros ($14.9 million) because of a cash-flow shortfall estimated at 400 million euros and is asking its member governments for permission to take out a loan to fill the gap, ESA and European government officials said.
The freeze means contracts for three Sentinel Earth observation satellites, which had been expected this year, likely will be delayed until early 2010. It also may mean a delay in the contract for Europe’s Meteosat Third Generation weather satellite system, officials said.
ESA issued the ban on new contract commitments the week of Nov. 16 following an assessment by its Directorate of Resources Management that the agency would run out of cash in late 2010 at the most-likely spending rates, especially given the financial stresses of many of its 18 member governments as they deal with the costs of the recession.
Ludwig Kronthaler, ESA’s finance director, said the decision to refuse fresh contract commitments of more than 10 million euros is likely to be lifted by the end of the year. In a Nov. 27 interview, Kronthaler said the agency will ask its member governments during a Dec. 16-17 meeting of ESA’s ruling council to authorize a loan that could be negotiated by early January.
Kronthaler said ESA has a triple-A credit rating and can secure bank financing at extremely low interest rates. “The cost of the overdraft would be a few hundred thousand euros, not in the millions,” he said.
“Our member states have a choice,” Kronthaler said. “We can ask them for higher payment contributions at a time of financial difficulty, a decision that would not be well-received. Alternatively, we could delay 400 million euros in contracts to account for this period of economic crisis, and renegotiate existing contract-payment milestones, which would increase the cost of these contracts. Or we can agree to a bank overdraft to support our industry.”
ESA governments in November 2008 agreed to billions of euros in new program commitments, saying investing in technology programs is an appropriate government response to economic hardship.
But these same governments assumed that ESA had a sufficient cash reserve to permit payments to occur at a relatively slow pace. That has proved not to be the case, for two reasons, Kronthaler said.
The first is that ESA’s industrial contractors have performed work faster than expected, meaning payment milestones have arrived sooner. The second reason for the cash-flow deficit is that ESA agreed to accelerate contract payments, and to front-load them, to help its industrial contractors make it through the Europe-wide recession with a minimum of layoffs.
The agency also committed itself, in response to industry com
plaints, to speed expense reimbursements to its contractors.
Taken together, the demands on cash at the agency have been higher than ESA governments had foreseen a year ago and have reduced ESA’s habitual cash reserve. Current estimates are that the agency’s accounts would be drawn down to near zero by late 2010.
ESA governments pay their obligations to the agency three times per year. The payment amounts are based on each government’s binding commitment to ESA programs, but can rise and fall depending on how fast industry is progressing on the contracts.
Instead of waiting until mid-2010 to see whether contract work might slow and reduce the cash requirement, ESA decided to act now.
“I simply cannot enter into new commitments until I am sure we are able to pay them,” Kronthaler said. “So we have put on hold new commitments until we have a solution.”
The decision affects only work for which contracts are yet to be signed. Existing contracts, Kronthaler said, will remain in effect. Demanding new payment schedules for existing contracts, he said, would end up costing the agency an unacceptable amount.
“We have covered all existing contracts. We can pay them,” Kronthaler said. He said no ESA member government has asked the agency to reduce its planned 2010 payment because of financial hardship.