Cablegate: Industry Source Discusses Galileo Woes

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E.O. 12958: N/A


1. (SBU) Summary: Embassy officers recently heard a litany of
frustrations about the European Galileo Positioning, Navigation and
Timing (PNT) project from an EADS contact who had worked on various
aspects of the project. According to the contact, financing has
been only one of a number of trenchant difficulties Galileo faced
from the start. Essentially, the entire business model for the
project was wrong, according to this source. Using the European
Space Agency as the initial design entity caused an initial
"politicization" of the project. Two competing European business
groups - with differing interests and capabilities -- were asked to
join forces and have yet to agree on a number of general principles
of the concession contract. Our interlocutor dwelled on the
liability risk issues that any private concessionaire of a project
of Galileo's import would take on. Nonetheless, this contact
believes that while it may take years, eventually a European PNT
system will get off the ground, likely on a model very different
from that originally conceived. It will proceed for no other reason
than that European governments seek their own navigation system to
serve their own militaries. End Summary.

2. (SBU) In a meeting on June 12, 2007, a European industry contact
explained and fielded questions from ESTH and ECON officers on the
issues presented by the Galileo PNT system from a corporate
perspective. This individual has been involved in Galileo project
development work since its inception in 2003, managing the terms and
risks for his firm's involvement in the Galileo project.

Public Private Partnership

3. (SBU) The industry contact explained that early concepts for
Galileo looked to a model public private partnership (PPP) which was
highly successful. The PPP in question was between EADS subsidiary
Paradigm and the Government of the United Kingdom (HMG). In its
agreement, EADS built satellite infrastructure providing world wide
telecommunications capability primarily for the British military and
would run it for fifteen years, sharing profits with HMG. Any
excess capacity beyond the needs of the UK military could be sold to
other EU militaries and the private sector Service contracts with
NATO, and the defense forces of the Netherlands and Portugal
provided additional revenue to the project. The PPP project works
well and is profitable. HMG studies indicated that the partnership
enabled 30% more efficiency and 70% better service compared to
traditional procurement, and the project remained on schedule and
within budget. HMG believes that this system was the best executed
procurement contract signed over the last ten years.

Wrong Model for Complex Galileo

4. (SBU) The European Commission used the Paradigm PPP project as
the template for Galileo, a project containing magnitudes of greater
complexity, related our contact. The European Commission (EC)
interest was to develop the Galileo system primarily for political
reasons, rather than technological superiority. Although Galileo is
designed to pinpoint locations with greater accuracy for commercial
users than the present GPS system, GPS Third Generation will be as
accurate as Galileo. European policy makers note that GPS is a
military-driven program, and the USG could limit access or shut down
the system at will, said our industry contact. The Galileo system
would serve European defense purposes and encourage the development
of new products. One example is Open Service Authentication, the
ability to prove one's location at a specific time by accessing the
system's data recording a receiver's position. Such data is not
available on GPS because of its military control, according to the
industry interlocutor.

--------------------------------------------- ------
ESA's Involvement Compounds Problems
--------------------------------------------- ------

5. (SBU) The EC commissioned the European Space Agency (ESA) to
design, launch and test two satellites. The consortia would then
build and launch the other 26 satellites. EU funding was to cover
the two test satellites and the consortium's first two satellites.
ESA subcontracted the production of the satellites, one to Surrey
Satellite Technology Company which is the only Galileo-related
satellite to have been launched. ESA involvement raised several
issues. First, not all EU states are part of ESA so the cost of
building the system is not evenly distributed. Second, ESA
subcontracts must be determined based on the extent member
governments finance ESA; companies from nations that invest more
money in ESA receive more contracts. This work distribution would

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differ from that among the companies in the consortium. Third, ESA
has not been involved in the negotiations between the EC and private
firms; therefore its designs might not be consistent with what the
consortium is planning.

Private Industry Boxed In, Too....

6. (SBU) According to the source, the second phase of the project
was to establish the legal and contractual framework as a precursor
to seeking private financing. The EC asked two competing consortia
to come together as the Galileo industry consortium for this
purpose. But it took almost two years - until end 2006 - for the
companies to agree to some of the principle terms of agreement.
However, the contract still lacks several major principles and
contains almost no detail, agreement on work division, procurement,
and liability, as well as unified management structure needed to
take the project to the capital markets for financing. In short,
there remains no completed general agreement. Major issues from
both the public and private sectors prevent further negotiation, and
the consortium will likely dissolve by the end of 2007.

Other Challenges

7. (SBU) According to our interlocutor, one challenge from the
start was that Galileo has been highly politicized. The competing
interests of EU Member States conflicted with private interests.
Another challenge was that the EC intended for Galileo to be
supported by a 1:2 ratio of public to private funds, giving the
larger burden of risk to private industry in return for the use of
the system in commercial markets. Since the commercial markets were
not yet developed, the private sector was motivated more by the
possibility of getting large procurement contracts for building the
satellites and the ground stations that would be required to make
the system work. The private sector's focus on infrastructure
contracts resulted in the inability to determine the fixed price
value on procurement. As the ESA has not yet designed the satellites
for the Galileo network and was not involved in the consortium
negotiations, the costs and returns of building and operating the
system could not be established.

Future, What Future?

8. (SBU) The post-design phase of the project is 'In Orbit
Validation' (IOV), a 20 year program responsible for 26 satellites,
infrastructure and services. This program was supposed to be
financed by both private and public sources. Although legal title
to the system is public, users will be required to pay for access to
the system. According to the industry interlocutor, the public
sector is not as capable as the private sector in generating finance
and managing risk/potential liabilities. For Galileo, the EU has
overspent taxpayers money, and has no insurance. At the earliest,
Galileo will become operational by 2012-2014. Certainly, the final
product will differ from the initial vision. Without the
consortium's participation, Galileo might evolve into a smaller
scale system focused on military needs and not commercial markets.
The EC must determine commercial markets such as the safety of life
system in order to attract private interest. Moving forward depends
heavily on the question of securing public funding.

Where's the Money to Come From?

9. (SBU) On June 17, on the eve of the biennial Paris Air Show, at
a satellite seminar, in response to a query from ESTH officer, a
representative of EADS Astrium - like the interlocutor who met with
Embassy officers earlier - mentioned that most of Galileo's problems
resulted from a failure of the original business model. The
complexity of the politics and business aspects of the model - while
well intentioned - doomed the project to failure. The EADS
representative highlighted that, while the political will exists in
the EU to proceed with a Galileo-like system, the primary question
is where the public sector will locate the large resources required
to put this project on a sound footing.

10. (SBU) Comment: The consortium's participation in the Galileo
project appears dead, which must impact the project's ambitions and
scope. The financing of the project, yet to be determined, will
shape Galileo's final form. At one point in our interlocutor's
narrative, he said that when officials and industrialists come
together to discuss Galileo, they have long since stopped inserting
deadlines, or even timelines. In that regard, and considering the

PARIS 00002634 003 OF 003

ongoing financing challenges, having a European PNT system
operational in the 2012-2014 framework may be optimistic. End


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