European Transport Commissioner Jacques Barrot warned the industrial consortium negotiating a contract to run Europe’s Galileo satellite navigation system June 15 that European governments were not prepared to sign a blank check.
While conceding that Galileo reached a point of no return in late 2004 with the European Commission’s go-ahead financing, Barrot said the industrial group that will run Galileo under a 20-year concession should not believe it can dictate its terms.
“I want to be very clear on one point: The commission is not ready to pay any price just to obtain Galileo,” Barrot said in remarks prepared for the 3i3s institute here. “Costs must be reasonable and allow us to see value for money.”
Barrot said the commission is ready to delay Galileo’s commercial start date, now tentatively scheduled for 2011, if that is what it takes to secure acceptable contract terms.
“Here too, the commission is not ready to accept any and all conditions just to meet this schedule,” Barrot said. “The main thing for us is to get a balanced contract in terms of risk sharing. The rest is secondary.”
In a brief interview after his remarks, Barrot said the commission has long known that a monopoly consortium might try to take advantage of its position to negotiate unreasonable terms. He said the commission is determined to assure that this does not happen.
Barrot’s remarks were delivered a week after the publication of a commission report on Galileo that disclosed how far negotiations still have to go before a Galileo concession contract is signed.
Despite months of negotiations, the Galileo Joint Undertaking, which represents the commission in the negotiations, and the industrial consortium are still far apart. In its June 7 update, “Taking stock of the Galileo program,” the commission said the negotiators had not yet figured out how to apportion the risks related to the 30-satellite Galileo constellation’s design. More importantly, the negotiations have yet to agree on how the commission and industry should share the risk of Galileo becoming a commercial failure.
The European Commission and the European Space Agency so far have invested about 1.5 billion euros ($1.9 billion) in Galileo’s design and early development. The investment includes most of the system’s ground installations and the first four Galileo satellites, to be launched in 2008.
An additional 2.2 billion to 2.4 billion euros is estimated to be needed to build and launch the remaining 26 satellites and complete the ground segment. The industrial consortium is expected to pay two-thirds of these costs, with the European Commission paying the remaining third.
Galileo is estimated to cost 220 million per year to operate, and the commission is expected to pay a portion of this, with the rest coming from revenues generated by the consortium from selling Galileo services worldwide, including to European governments.
But these costs do not include the repayment of a large bank loan that the Galileo consortium will take out to finance the constellation’s development. They also do not include the full costs of replacing the constellation when its satellites are retired.
The commission has said it is willing to pay 1 billion euros between 2007 and 2013 to help Galileo perfect its business plan. But industry officials say the consortium is demanding some 2.5 billion euros during this period.
The biggest question for Galileo remains whether it can carve out a profitable global business in the next decade despite the existence of a free, if less accurate, U.S. GPS service, plus the Russian Glonass system, a possible Chinese system and regional satellite navigation projects approved in India and Japan.
Rainer Grohe, executive director of the Galileo Joint Undertaking, said June 12 that it will cost about 10 billion euros in capital and operating expenses to manage Galileo over 20 years. This figure includes building and launching a second-generation satellite constellation. The 680-kilogram Galileo spacecraft, operating on three orbital planes 23,200 kilometers in altitude, are expected to have a 12-year service life.
“The [industrial] concessionaire is expecting a decent return on equity,” Grohe said. “That means more than 15 percent [annually] over the 20 years. We expect the concessionaire will break even 10 years after the start of Galileo operations, and that after that there will be higher profit because the recurring costs are not high.”
The European Commission expects to share in the system’s profits once it reaches break-even, Grohe said.
Comments: pdeselding@compuserve.com
