'Erm...Brussels we have a problem' (Or "If EU did satellites..." Part III)

This week has seen the latest farcical episode in the EU's foray into space. The independent European Space Agency (ESA), which is based in Paris and is building the so-called Galileo satellite navigation system for the EU, was left with egg on its face after the two latest satellites for the system were launched into the 'wrong' orbit. In total, the project has now launched six satellites - two are in the wrong orbit and one, it emerged previously this year, isn't working.

Bad in its own right, but forgivable. We're dealing with some pretty advanced technology after all. Except, as we have chronicled before, this project has been absolutely bedeviled by unfortunate incidents, delays, infighting, poor planning and all sorts of other problems.

To re-cap:

Massive cost-overruns: The cost of completing the project and running it for 20 years (including maintenance) was under the original estimates (from 2000) €7.7 billion, of which only €2.6 billion was to be borne by taxpayers and the rest by private investors. In 2007, following the collapse of the private-public partnership, this cost had risen to € 11.8 billion, all of which was to be borne by taxpayers. In the autumn 2010, leaked information suggested that the cost had risen to a staggering €22.2 billion – again with the entire bill footed by taxpayers. But, it didn't end there…

The Commission all over the place on numbers: In 2010, Industry Commissioner Antonio Tajani denied new cost over-runs, saying “I don't know where these figures come from.” He insisted that the deployment budget (which is only part of the cost) remained at €3.4 billion (not €5 billion as the leaked info suggested). Only a few months later, in January 2011, however, Mr. Tajani and the Commission admitted that Galileo needed not just another €1.5-1.7 billion as was thought in 2010, but an extra €1.9 billion of taxpayers’ cash to cover the booming deployment cost – taking the deployment cost above €5 billion. At the same time, the Commission put the annual operation cost at €800 million (not €750 million as assumed in the 2010 estimate). This means that even €22.2 billion for deployments and running cost was an under-estimate.

Tajani has since announced what he calls “savings” of some €500 million on the huge cost overrun, but frankly, at this point we simply don’t trust any of the numbers coming out of the Commission on this one.

Taxpayers getting hammered: The cost for taxpayers for deployment plus 20 years’ worth of running cost may well have increased by some 750% - from €2.6 billion to somewhere in the region of €20 billion+. Shocking.

Delays: Originally Galileo was to be finished by 2008 – a date that was subsequently pushed back several times due to a series of delays, disruptions and other embarrassments. Between July 2005 and December 2005, the project came to a complete halt as member states and the private investors argued. According to the European Court of Auditors, these six months of doing absolutely nothing added an extra €103 million to the cost of the project. Encouragingly, the project managed to make up some time and the satellites were launched this year. However, with only three of the four previously launched working and this latest setback, the performance of this project leaves a lot to be desired to say the least.

Public-private partnership flawed from the very start: As the European Court of Auditors concluded in a damning investigation, the original public-private partnership proposal was “unrealistic” and “inadequately prepared and conceived.” Symptomatically, the private investors withdrew due to fears over the cost of the project spiralling “out of control” and that they wouldn't outweigh the benefits.

The original estimated benefits delusional: In 2006, the Commission estimated the market for Galileo as potentially consisting of 3 billion receivers and revenues of some €275 billion per year by 2020 worldwide – in addition to potentially leading to the creation of more than 150,000 high qualified jobs in Europe alone. The European Space Agency and others have estimated 3.6 billion users by 2020. These are such delusional assessments that it’s hard to know where to start. Indeed, a 2010 report from the German government admitted that "All in all, it is assumed, based on the currently available estimates, that the operating costs will exceed direct revenues, even in the long term.” And according to American diplomatic cables, released by WikiLeaks, Berry Smutny, the CEO of OHB Technology, a company that has a £475 million contract to build 14 Galileo satellites, is claimed to have said: “I think Galileo is a stupid idea that primarily serves French interests.”

The Indian, Chinese, Russian, Japanese, American markets already crowded: One of the reasons why the idea of “3 billion users” is so ridiculous is that all major players already have, or are in the process of acquiring, their own satellite navigation systems. The newly-redeveloped Russian “GLONASS” system has already been launched, and the Chinese are developing their own Compass/Beidou system (not a global endeavour, but set to deprive Galileo of revenue in China). India’s equivalent technology, IRNSS, will be operational within the next two years. Japan has one too and the US is soon to boast a new generation GPS System (though to be fair, that too seems to be delayed) – GPS being what most people happily use in Europe anyway. Where in the world is Galileo going to get its 3 billion users? Is there a better of example of how the EU is falling behind in the 'global race'?

The Chinese have nicked the frequency: In 2003, China agreed to invest €230 million in the project but pulled out after disagreements. Lo and behold, the Europeans noted that the Chinese government was a little too interested in the security related aspects of the project, and got cold feet. But only after Beijing got its hands on some very useful information. So while Galileo was falling behind schedule, the Chinese were developing Compass/Beidou. Chinese officials told the International Telecommunications Union, the United Nations agency that allocates radio spectrum frequencies for satellite use, that China plans to transmit signals on the wavelength that the EU wants to use for Galileo. In other words, the EU is now in the absurd position of having to ask China's permission to run its secure 'encrypted' signal on Chinese frequencies.

All in all, Galileo has had a sorry history right from the very start. And we suspect we haven't heard the end of it yet...

Meanwhile, out there in space...

We have already reported on the EU's ill-fated attempt to conquer the final frontier a number of times. But the big day has finally arrived.

Three years after the original planned launch date of the European satellite navigation system Galileo, the first two operational satellites will be launched into orbit aboard a Russian Soyuz rocket.

Galileo, intended to break the hegemony of the US GPS system, is glowingly praised in yesterday’s Handelsblatt for its ability to provide positional data with up to one meter precision, instead of the ten meter precision provided by the GPS system (to the public).

The European Space Agency (ESA) is quoted claiming that possible uses for Galileo range from investigators using positioning data in manhunts to civil engineers using it in order to size-up future buildings. Furthermore, they claim that flights will be more punctual and reliable due to having more precise approach paths to airports, so it will even contribute to fuel savings.

Sounds great, is there anything Galileo can't do, you ask?

- Be operational on schedule. This will require 18 out of the total 30 satellites to be in orbit, something which Handelsblatt notes will take until 2014, six years after the original planned start date. Considering GPS became operational in 1994, and both Russia and China have their own navigation systems, Europe clearly has fallen far behind.

- Avoid continuous cost overruns. As we noted in a report on Galileo last year, we said that the EU Commission was under-estimating the deployment cost of the project and would in fact need an extra €1.5 billion to €1.7 billion, on top of the existing €3.4 billion estimate. The Commission later confirmed that the actual cost overrun would be an extra €1.9bn for deployment. The annual operational costs have also risen from the original Commission estimates.

Despite this sorry history, earlier this year, EU Industry Commissioner Antonio Tajani (pictured) had the temerity to claim that 'savings' (some €300-500m) had been identified in order to bring an additional 6 satellites into operation by 2014. In the face of such huge cost overruns, amounting to billions, describing this as a 'saving' in the overall context of the project strikes us as slightly disingenuous, to put it mildly.

- Attract private investors. Originally the intent was for private investors to fund approximately 66% of the cost of construction and the first 20 years of operations, however, partly due to lack of commercial prospects (other competing systems) private investors pulled out, and taxpayers have been asked to fund the project for the last decade.

-Generate profits. The ESA still maintains that “Galileo is facing a market with huge opportunities for growth in the next few years.” A German government report from 2010 paints a gloomier picture however, saying "All in all, it is assumed, based on the currently available estimates, that the operating costs will exceed direct revenues, even in the long term.”

But fear not, Galileo has, however, provided Commissioner Tajani and some selected journalists with a reason to charter a plane to fly to French Guiana and back in order to witness the launch first hand, Europaportalen reports.

Update 12:30pm Reuters reports that due to technical problems, specifically an anomaly detected during the fueling of the Soyuz launcher, the launch has been postponed until tomorrow. Given Galileo's track record so far, this really doesn't come as a huge surprise...

If the EU did satellites, they'd probably be...Part II

Back in October we estimated, based on leaked reports from a couple of European governments, that the EU's mismanaged Galileo project - aimed at creating a global satellite navigation system – was way over budget (and possibly ten years behind schedule).

We said that the EU Commission was under-estimating the deployment cost of the project and would in fact need an extra €1.5 billion to €1.7 billion, on top of the existing €3.4 billion, to keep the party going. In addition, we noted that the annual operational cost of Galileo could be in the area of €750 million.

Following our investigation and other reports in the media, the EU Commission hit back (as it usually does) with Industry Commissioner Antonio Tajani himself denying - with a straight face - that the project was over budget in any way. In his words:

I don't know where these figures come from

Tajani described the estimates as "exorbitant" and "unimaginable", and insisted that the deployment budget (which is only part of the cost) remained at €3.4 billion.

Well, we're forced to admit, it turns out that our estimates weren't quite correct.

In fact, as Mr. Tajani and the Commission finally admitted today, the Galileo project needs not another €1.5-1.7 billion as we claimed, but an extra €1.9 billion of taxpayers’ cash to cover the booming deployment cost. At the same time, the Commission now puts the annual operation cost at €800 million (not €750 million as we foolishly thought).

We do apologise to the Commission for having misrepresented the cost of the project.

But what's going on here? Either Tajani lied to taxpayers back in October or he displayed extraordinary incompetence. We're not sure what's worse.

And it turns out that the leaked estimates were more or less spot-on (we're now eagerly awaiting Tajani's appearance on the Commission's euromyths list for spreading 'half-truths', 'rumours' etc.)

Just to reiterate how badly managed this project has been from the very start. According to our under-estimates from October, the total cost of Galileo from start to completion, and then running it over a 20 year period, is a staggering €22.2 billion – a cost which will be borne entirely by taxpayers and which now has to be revised upwards yet again.

Under the original estimates (from 2000) this cost would have been €7.7 billion, of which only €2.6 billion was to be borne by taxpayers and the rest by private investors (the private investors pulled out in 2007, citing lack of commercial prospects). The project has been beset with delays and cost over-runs at every single stage of its history.

Perhaps it should come as no surprise, then, that even people who are benefitting from the project are raising doubts. According to American diplomatic cables, released by WikiLeaks (first revealed last week by Norwegian paper Aftenposten), Berry Smutny, the CEO of OHB Technology, a company that has a £475 million contract to build 14 Galileo satellites, is claimed to have said:

I think Galileo is a stupid idea that primarily serves French interests.

Ouch.

Mr Smutny also told US officials that in "his opinion the final cost [for the deployment cost] will balloon to around" €10 billion before all is said and done.

It's not getting any better.

Tajani is now asking European governments to cough up yet more cash to cover the shortfall. Sensibly, the UK Government is saying No - and will probably be joined by several other Governments. And they are right. Not a single penny more should be given to the Galileo project until we see a final, robust analysis of what the project will finally cost relative to the benefits it will generate.

Of course, Tajani is keen to point out that the satellite is expected to bring €90 billion to the European economy over 20 years. This has been revised down radically from the Commission's ridiculous original estimate of €275 billion per year in revenues worldwide by 2020 (in addition to the equally delusional 3 billion users and the creation of 150,000 new jobs).

Forgive us for not quite trusting Tajani on this one.

If the EU did satellites, they'd probably be...

It is hard to think of a better example of how not to run a large-scale infrastructure project than the EU's Galileo satellite system. In a new briefing we set out the latest cost over-runs and delays to a project that is now expected to be completed a decade late and cost taxpayers over €22bn to launch and run over a 20 year period. In 2000, it was projected to cost taxpayers only €2.6bn (UK taxpayers' share has gone from £385 million, under the original estimates, to £2.95 billion, under the revised figures).

This is an overspend which could rival with the previous UK government's handling of the defence budget for incompetence.

The scale of the strategic mistakes made in Galileo's development is simply shocking. The German government has admitted that "All in all, it is assumed, based on the currently available estimates, that the operating costs will exceed direct revenues, even in the long term." The reason for the astronomic rise in costs is primarily due to private investors withdrawing from the project, unconvinced by the project's commercial viability in a market where it is competing with US, Russian, Chinese and now also Indian and Japanese alternatives. Despite this, the European Commission saw a market of potentially 3 billion users and some €275 billion per year by 2020 worldwide. This looks ridicolously optimistic now.

The story behind the Chinese competitor is particularly sobering. Initial Chinese investment in the project was spurned and eventually withdrawn over fears that the Chinese government was a little too interested in the security related aspects of the project. But, due to the delays, China went ahead with its own system using the very radio frequencies the EU wishes to use for Galileo. So the EU is now in the absurd position of having to ask China's permission to run its secure 'encrypted' signal on Chinese frequencies.

With the European Commission's EU budget review expected tomorrow, we can expect the usual calls for more investment in research and development as a way of modernising and redirecting the EU budget. Spending less money on the CAP and Structural Funds would certainly be welcomed but, on this evidence, the EU's R&D spending leaves a lot to be desired.

Barrot vague on Galileo's added value

In a press conference today EU Transport Commissioner Jacques Barrot was asked repeatedly why taxpayers are now being asked to fork out for the new Galileo system when private industry groups have decided it’s not worth the risk.

He replied that the failure of the public-private partnership for the design phase does not undermine the credibility of the project, insisting, “We know there is a big market for it.” He said the industry never said Galileo wouldn’t be profitable, but that they didn’t want to take the risk at this stage: “I don’t understand your question… no-one told us to give up on it.” Asked whose fault the failure of the initial plan for a public-private partnership was, he said, “Well, it’s not really a failure as such. A consortium was chosen, but was not able to answer the questions put to it.” He argued, “I’ve done my job. I’ve taken all the necessary decisions to change the situation… no-one is to blame as such, and certainly not me! I have tried to resolve the problem.”

A British journalist asked repeatedly when exactly civilian operations would be required to use Galileo rather than GPS, but the best Barrot could do was to talk vaguely about Galileo’s “many uses”, including “search and rescue”, and noting that the improved version of GPS will only be up and running much later on. He insisted that “Galileo will be much better than GPS... Galileo’s performance is very important and if it seen to be of high quality, then there’s no reason why people would go for GPS... Galileo will be superior. That is why people will choose it.”

On the funding, he confirmed that the costs at this initial financing stage are €3.4billion, of which we already have €1bn, so €2.4bn more is needed. Add to that the maintenance costs once the system is built - €200m a year over a 20 year period - plus replacement of certain satellites, gives €10bn as a general amount.

However, he argued that there would obviously be revenues generated from applications, and insisted that taxpayers are not actually being asked to stump up more - indeed there are in fact savings for the public sector, because under the previous arrangement, industry would advance the money and then ask that it be repaid each year with interest. He said it was “like the difference between buying a house outright and getting a mortgage... We need to draw a clear distinction between building costs and overall costs, which will actually now be less than under the previous system, because we won’t have to pay back the loan from industry. There would also be less risks, because with the new scenario, at least the risks are very clear. There’s the construction risk, which we shoulder, and then the private sector will shoulder the application risks.”

Asked again how come things so far had gone wrong, Barrot - getting quite heated now - insisted, “I don’t think Galileo has actually failed! That’s a misuse of language… we’ve had a change of scenarios.” He said, “There was a risk of delay… we’re changing scenarios to avoid failure.” He said the difficulties the consortium had in responding to the Commission, because companies disagreed, “may” have been due to state interference. He said, “Member states need to realise that the real results will come after the success of Galileo.... The project has not yet been completed – the return on the product will come when it is finished”, complaining that “Everyone wants their money back straight away!”

There were also a lot of questions about possible military uses for Galileo, to which Barrot replied, “Obviously there are civilian and military uses for this, but Galileo will remain a civilian system under civilian control, as the Council has reiterated time and time again. But that doesn’t mean that military users cannot use it, as long as they comply with certain principles. For example, we cannot stop the Italian Carabinieri or the Guarda Civil using Galileo to carry out their work, e.g. on search and rescue – these are military users.” He said Galileo “obviously cannot be off-limits to someone because they’re members of the military.” However he said he had no ‘mandate’ for discussing its military uses, saying he had tried to have conversations in London with ministers on this but lacked the necessary "mandate" for providing answers.

He summed up saying industry was “chomping at the bit” for Galileo, and that Europe must not wait, or it will fall further behind. Instead of wasting time asking “metaphysical” questions about its military uses etc, we should be seizing "Europe's chance to stay at the top of the league."

I feel so much clearer now...

PS nice summary of sentiments here : "According to the European Commission website, Galileo will be "fully operable in 2008 at the latest, with start of signal transmission in 2005." Let's hope the software is more up to date than the web page - If we're all going to be reamed for the cost of this unnecessary waste of cash - and we are - it would be nice if the ****ing thing works."

PPS - there's now a longer note on this whole issue on our website.