Galileo Contract Expected To Be Signed This Year; Funding Unsettled

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Merging the two competing bids to manage Europe’s Galileo satellite navigation project as a business is expected to result in a final contract to be signed with the concessionaire by the end of this year, according to the Galileo Joint Undertaking (GJU), which is negotiating the contract on behalf of European governments.

But government and industry officials say this schedule can be met only if the European Space Agency (ESA) and the Commission of the European Union agree to finance Galileo preparatory and other work as they have promised to do.

“Our negotiations will start on the assumption that the government financial commitments will be met,” said an industry official negotiating with the GJU. “We cannot sign a contract until we are sure this financing is secured.”

ESA officials estimate that any delays in signing the Galileo concession contract would cost about 1 million euros ($1.21 million) per working day starting in early 2006. “The governments are arguing about costs now, but the longer they argue, the higher the costs will be,” said the industry official.

The GJU announced June 27 that the Eurely consortium led by Alcatel of France, Finmeccanica of Italy, and Aena and Hispasat of Spain will be merged with the iNavSat grouping of EADS Space of Germany, France and Britain; Inmarsat of Britain and Thales of France and Britain.

Hans Peter Marchlewski, the GJU’s general counselor, said in a June 27 interview that the merger could result in a lower cost for Galileo’s deployment phase. Deployment of the 30-satellite constellation is expected to be financed two-thirds by the private concessionaire and one-third by European governments.

Marchlewski said the two-thirds/one-third split will not change, but that the overall cost of deployment might be less than it would have been if only one of the bidders had been selected. He declined to be specific about the nature and extent of the potential savings.

Galileo’s total costs still are being debated, but are divided into four phases.

The first phase of defining the system and building two stripped-down versions of Galileo satellites to secure the radio spectrum was paid by ESA and is estimated at around 250 million euros. The two test satellites are under construction, with the first set for launch in December.

The second phase, called In-Orbit Validation, is jointly funded by ESA and the European Union. This portion of the program includes building the Galileo ground network and designing and launching four Galileo satellites.

The In-Orbit Validation phase, budgeted at 1.1 billion euros, is behind schedule. The delays, plus the addition of performance specifications including Galileo’s security-related aspects, have added 400 million euros to its cost.

ESA and the European Commission have agreed to divide the overrun but have yet to secure the money from their member governments. ESA’s latest attempt, on June 22, failed. The agency will try again in late July, with a mid-September deadline set for receiving the needed funds.

To prevent Galileo from falling still further behind schedule and further over budget, ESA in December paid the Galileo Industries S.A. industry grouping an initial 150 million euros to begin work on the In-Orbit Validation phase while the governments debated the final bill. This initial deposit was intended to last six months, to June 30.

Guenter Stamerjohanns, chief executive of Galileo Industries, said June 29 that the start-up financing has now been spent, as scheduled.

“As of July 1 it’s a new business,” Stamerjohanns said. “Industry is not in a position to run without fuel. We are in a constructive dialogue with ESA and hope that by the end of July we will have a resolution of the problem. We need continuity to meet an already tight schedule. And everyone knows o f course that if we suspend work, and go several months without being funded, it could cost more money in the long run.”

The third phase of Galileo, featuring deployment of the full constellation, is what the GJU and the concession bidder now are negotiating. Marchlewski agreed that negotiations will be slowed at some point without a signed In-Orbit Validation contract.

The In-Orbit Validation financial difficulties are mainly on the ESA side of the Galileo program. But financing is not clear at the European Union concerning the fourth and final phase of Galileo: operations and maintenance.

Galileo operations are expected to cost about 220 million euros per year, to be paid for by users of Galileo’s commercial and government services. To tide the concessionaire through the first years of operations, when revenues are expected to be low, the European Commission has proposed spending 1 billion euros between 2007 and 2013.

But the failure of European Union governments on June 18 to approve a financial-spending plan for 2007-2013 has made it impossible for the European Commission to commit to this spending.

In addition, the European Parliament’s Industry Committee on June 21 approved a measure calling for the Galileo concession to share its profits with the European Union “to enable the [government] contribution to be repaid.” A vote of the full parliament on this proposal is expected Sept. 1.

If passed, such a measure could further complicate the GJU concession contract negotiations. “It’s not clear how ‘profit’ would be defined,” said an official on the concession bidding team. “Obviously we’ll have to discuss this.”