Galileo Completion Not Anticipated Until About 2011

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Backers of Europe’s Galileo satellite navigation project conceded that the 30-satellite constellation is likely to go into service around 2011, not the 2008 date still used in formal European Union government documents.

Even the 2011 estimate assumes the project encounters no further delays. In presentations here Sept. 8 at the World Summit for Satellite Financing, organized by Euroconsult, these same officials also highlighted the key issues that continue to challenge the project’s business plan.

“There is clearly a question: Why would an end user pay for Galileo if GPS remains free?” said Mike Mattner, head of business development at the Galileo Joint Undertaking, a Brussels, Belgium, organization created to select Galileo’s concession winner. “Galileo must bring specific added value. We have the feeling there is a robust business case. We don’t know the top line, but the bottom line is very promising.”

Galileo currently is being funded by the 25-nation European Union’s executive commission and by the 17-nation European Space Agency (ESA). ESA continues to have trouble winning its governments’ support for a final 200-million-euro ($251 million) payment to complete Galileo’s validation phase, including the ground infrastructure and four initial satellites.

A 20-year Galileo concession contract is scheduled to be signed in 2006 with a consortium that has been assembled from the two competing finalists. Olivier Ferrand, a member of consortium member Alcatel’s trade and project finance team, said the constellation could be in service by late 2010 if the concession contract is signed by mid-2006.

The bidding consortium has lined up financing on the assumption that the private sector will pay two-thirds, and governments one-third, of the 3 billion euros in costs for deploying the remaining 26 Galileo satellites, paying financing charges, launching the first four satellites and funding early operations.

Ferrand said financial institutions in Europe have agreed to provide debt equivalent to 90 percent of the private sector’s share of the costs. The consortium member companies will furnish the remaining 10 percent through equity in the Galileo project.

Ferrand said one problem in the financial scenario is that well before the 20-year concession contract ends, the contractor will need to start financing a second generation of Galileo satellites. How this will be factored in to who pays how much up front is unclear. “We are still discussing this with the public sector,” Ferrand said.

Another issue that remains unclear is whether the concession manager will be free to select Galileo contractors based on competence and value alone, rather than political concerns.

“Decisions should be made on value for money and on the best technology,” Ferrand said. “There is no other way.”

Ferrand said that in the case of Galileo launch services, government authorities have urged the concession manager to “take into account” Europe’s launch capability before making a final decision. There is no requirement to select the bid made by European suppliers, he said. “More important is: What is the financial impact?”

Frank Beckers, co-head of project and capital advisory at Deutsche Bank AG, said contractor selection is a question that is unclear.

“Are we free to choose launch providers on a commercial basis?” he asked. “The more limited we are in supplier selection, the less we are able to replace an underperforming one.”

Beckers said government financing of Galileo in the early years of its operations is key but has not been spelled out. The project, he said, is operating in unknown territory — a commercial market for navigation services — and governments will be able to reduce their financial support as the market develops. But when that will happen cannot be known in advance. “What this means has yet to be defined” in the negotiations with the concession consortium, he said.

One of Galileo’s differences with the U.S. GPS system is that Galileo’s managers will be guaranteeing the accuracy of their satellites’ signals for commercial and government users. This means that if an aircraft using Galileo’s commercial services were to crash because of a faulty signal, the Galileo concessionaire would be libel for damages.

“Third-party liability damages can be huge. How can we insure this risk?” Ferrand asked.

Two competing teams of insurance brokers have submitted proposals to the concession consortium. One is led by Marsh S.A. and International Space Brokers, while the other is led by Aon Space. Beckers said a Galileo insurance policy that minimizes launch and in-orbit insurance premiums has yet to be developed.

“We have not yet dealt with the nitty-gritty details,” Mattner said. “And the devil is in these details.”