THE VIEW FROM EUROPE: European satellite navigation system loses its way as partners continue to squabble

Galileo, the satellite navigation system billed as Europe’s biggest joint technology project, has lost its way.

May 1st, 2007

By Annie Turner

LONDON - Galileo, the satellite navigation system billed as Europe’s biggest joint technology project, has lost its way. It was supposed to be Europe’s answer to the Pentagon-controlled, Global Positioning System (GPS), but political interference, vested interests, and in-fighting have created an impasse. No wonder the fiasco has been dubbed “Airbus in space.”

Originally, the Galileo project was to be awarded on the basis of a competitive tender and two competing consortia were formed to bid for the $9.3 billion, 30 satellite contract. It was a political decision to include all the parties in a single effort.

Aena (Spain), Alcatel-Lucent (France), Deutsche Telekom (Germany), EADS (France, Germany, Italy), FinMeccanica (Italy, United Kingdom), Hispasat (Spain), Inmarsat (United Kingdom), and Thales (France) formed a joint concern to create a satellite constellation that was to be operational by 2010.

As a result of constant disagreements, a chief executive has never been appointed for this Frankenstein monopoly and, not surprisingly, the project is overdue and running over budget. Its history has been a constant power struggle between governments and industrial partners with everyone vying to fulfill the plum contracts in their home markets and to have the whip hand. The latest spanner in the works was thrown by Spain which is demanding a ground station be sited on its soil and a fairer (read greater) share of the investment and jobs.

Now European Union ministers have told the companies they must have a coherent plan in place by May 10, or else. Assuming they do-which is a huge leap of faith-Galileo is unlikely to be operational before 2012 and some pundits insist that 2014 is optimistic. No one is sure what will happen if they haven’t figured out a way forward; probably more of the same-nothing.

In the meantime, American, Chinese, and Russian GPS satellite systems are progressing apace, which does beg the question of whether the European system is needed at all. There are suggestions that before work resumes, participating governments will have to guarantee that Galileo will have some business-for instance, by pledging that their emergency services would use the public signal.

This is because the warring companies want to know that they will get some return on their investment; the companies involved in the development will be granted a 20 year operating license, but are alarmed by the spiraling development costs which have risen to $2.68 billion-twice the initial sum. The European Commission’s insistence that satellite services were worth $80.53 billion in 2005 and growing at 25 percent a year has done little to reassure them.

All of this has conspired (as has the original multinational Airbus saga) to undermine the laudable efforts of the European Defence Agency (EDA). In fact, the shenanigans illustrate why a common European security and defense policy is never going to work.

On March 29 the EDA launched its latest pet project, a business portal through which companies, from the smallest to the largest, can offer their products and services for the increasing number of cross-border subcontracts awarded for defense and aerospace.

The portal has the backing of European defense industry and the EDA says it is an important step toward creating a single European defense market. See www.eda.europa.eu/ebbweb for more information.

In a statement that reflects the triumph of hope over experience, EDA Chief Executive Nick Witney said, “The commitment and involvement of the defense industry in this initiative makes us all the more confident of success.”

Proponents believe that the portal will allow smaller companies to bid for contracts that they would never have been involved in previously because the information was not easily available and the procurement processes labyrinthine.

At launch, the new portal was advertising around 80 subcontracts, worth as much as €671,000 each. Central administrators are designated in 28 European defense companies to coordinate announcements about contract opportunities, according to the EDA.

Potential bidders are circling elsewhere too. Despite some big contract wins (such as the $31.53 billion contract to carry out the training of all the United Kingdom’s armed forces) and some progress in the U.S. market through subsidiaries, QinetiQ’s share price remains low.

QinetiQ was formerly the United Kingdom Ministry of Defence’s (MoD) research and development laboratory, and the United Kingdom government still holds a 19 percent stake in the company. Poor stock market performance though has given rise to another round of speculation about whether it would fare better as part of a much larger organization.

There are a number of interested parties, including Finmeccanica and the U.S.’ L-3 Communications and Boeing, both of which are keen to establish themselves in Europe’s largest defense market, the United Kingdom.

Some argue that the government should relinquish its shares to improve QinetiQ’s commercial sale potential, but the government would always retain a so-called golden share (as it does in BAE Systems and Rolls-Royce) so that it can prevent any change in ownership that it believes would not be in the national interest.

At the moment, the government is not interested in selling QinetiQ because it is engrossed in restructuring. The United Kingdom government has just finalized plans to merge two of the MoD’s biggest agencies (currently responsible for procurement and logistics) in a move to improve the country’s rotten record in weapons buying. The new, 29,000 employee agency will control a £16 billion (US$31.34 billion) annual budget. The merger is part of an initiative to partner with suppliers to maintain and modernize everything from armored cars to helicopters in the hope of reducing costs and extending options.

However, the sale of QinetiQ is a possibility for 2008, although given the core role it plays in the U.K.’s defense capability, its sale is likely to face stiff opposition, not least from BAE Systems. The U.K.’s biggest defense company protested long and loud when the government allowed the private equity group Carlyle, to buy a substantial stake in QinetiQ at a very good price, while preventing those from within the defense industry from acquiring shares when QinetiQ was floated. Unless, of course, the United Kingdom government decides to sell to BAE instead of an overseas buyer.

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