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RR RUEHAG RUEHAST RUEHDA RUEHDBU RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA
RUEHLN RUEHLZ RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHFR #2634/01 1701114
ZNR UUUUU ZZH
R 191114Z JUN 07
FM AMEMBASSY PARIS
TO RUEHC/SECSTATE WASHDC 8347
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEHBS/AMEMBASSY BRUSSELS 6314

UNCLAS SECTION 01 OF 03 PARIS 002634 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR OES, ISN, EUR 
BRUSSELS FOR ESTH SMITHAM 
 
E.O. 12958: N/A 
TAGS: TSPA ECPS FR
SUBJECT: INDUSTRY SOURCE DISCUSSES GALILEO WOES 
 
 
THIS MESSAGE CONTAINS PROPRIETARY INFORMATION; NOT FOR INTERNET 
DISTRIBUTION 
 
¶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 
 
PARIS 00002634  002 OF 003 
 
 
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 
Comment. 
 
STAPLETON