Using Public – Private Partnerships to Finance Very Large Space Projects

*Sherman & Howard, Denver, CO.  This article expands on the author’s Commentary, “P3 or not P3:  What can space ventures learn from terrestrial infrastructure projects?” SpaceNews, (April 19, 2018) at 10; https://spacenews.com/op-ed-p3-or-not-p3-what-can-space-ventures-learn-from-terrestrial-infrastructure-projects/.

Abstract

Public-Private Partnerships (”P3s”) are not new to space activities.  They have been extensively used in the United States via Space Act Agreements with NASA and use of “Other Transaction” authority by DARPA and the Air Force.  But most transactions have been relatively simple from a contractual perspective and typically involve one company and one governmental entity.  This paper will examine complex, very large, multi-party construction projects where P3s have been used, mainly for infrastructure.  What are the best practices developed over decades of experience and can they be applied to very large space projects?  This paper also will examine the legal regime of the International Space Station (”ISS”) to evaluate what provisions have worked well and could be adapted for very large international P3 space projects.  Combining lessons learned from very large P3 infrastructure projects and the ISS may help guide the establishment of successful public-private partnerships for very large space projects.

Introduction

“Public-private partnerships” (“P3s”) are alliances between a government entity and a private enterprise to accomplish a common purpose.  While P3s are associated with a large collection of projects – large to small, complex to simple, high-tech to low-tech – there are some common elements.  P3s have been used fairly extensively and effectively for funding space activities, and P3s are attracting even more attention as sources of public financing grow scarce.  It is inevitable that P3s will play a large role in future space activities.  Thus, it is time to examine the best practices and lessons learned from decades of experience with terrestrial infrastructure P3 projects and evaluate how best to adapt them to major space projects going forward, including projects with international participation.

Space P3s

Examples of P3s for space activities in the United States include NASA’s use of funded Space Act Agreements[1] (“SAA”) for the Commercial Orbital Transportation System (“COTS”).  SpaceX and Orbital Sciences were awarded COTS SAAs and, because both companies successfully demonstrated medium class launch vehicles and cargo capsules, they were subsequently awarded follow-on Commercial Resupply Services contracts in 2008.  NASA required SpaceX and Orbital Sciences to share in the cost of the COTS research, development and demonstration and provided incentives to timely perform.  The SAA terms and conditions established reasonable cost and risk-sharing, which enabled performance. [2]  NASA also used SAAs for its Commercial Crew Program (“CCP”) in which NASA partnered with commercial companies to provide reliable and cost-effective human space transportation to and from the International Space Station (“ISS”) and low-Earth orbit.  This multi-phased program has involved SAAs between NASA and numerous U.S. companies including Boeing, SpaceX, Sierra Nevada Corporation, Blue Origin and ULA.  Funding for the development programs has been through NASA and the commercial companies.  Following demonstration of capabilities, contracts have been awarded to several companies for certification of commercially built and operated crew transportation systems.[3]

NASA’s new Administrator, Jim Bridenstine, is a P3 fan.  He has stated “we need to enable public funds to support private equity and private funds to deliver more commerce, more economic growth, and solidify American leadership in space, science and discovery.”[4]

The U.S. Defense Advanced Research and Projects Agency (“DARPA”) and U.S. Air Force use their Other Transaction Authority (“OTA”)[5] for programs similar to SAAs.  OTAs are legally binding agreements that may be used to involve industry and academia in a broad range of research and prototype projects including the option to extend the program to production.  DARPA’s Robotic Servicing of Geosynchronous Satellites (“RSGS”) program aims to develop technologies to enable cooperative inspection and servicing of satellites in GEO and demonstrate those technologies on orbit within five years.  A DARPA-developed modular toolkit, including hardware and software, will be joined to a privately developed spacecraft “to create a commercially owned and operated robotic servicing vehicle (RSV) that could make house calls in space.”[6]  DARPA selected Space Systems Loral (SSL), as its commercial partner.  After a successful on-orbit demonstration of the RSV, SSL will operate the RSV and make servicing available to military and commercial GEO satellite owners for a fee.  In exchange for providing property and other assistance to SSL, the government will obtain reduced-priced servicing of its satellites and access to commercial satellite servicing data during the operational life of the RSV.  DARPA also intends to provide the government-developed space robotics technology to other interested U.S. space corporations through licensing arrangements.[7]

An example of U.S. Air Force use of OTAs is its support for development of the Raptor engine for the future Big Falcon Rocket (“BFR”).  The Air Force has given SpaceX over $40 million in a cost-sharing arrangement for the Raptor.  SpaceX also expects similar government support for development of the BFR launch system.[8]

These SAA and OTA agreements facilitate the combination of public and private financing, escape the burdens of the Federal Acquisition Regulations, and promote speed and innovation to secure new capabilities.[9]  They have helped SpaceX, Orbital ATK, NanoRacks and many other companies achieve success.  At the state and local level, P3s have been used for space launch infrastructure projects such as Spaceport America and the Mid-Atlantic Regional Spaceport where state and local authorities provided funding to build space launch facilities.

Many other countries have also used P3s for space projects.  The United Kingdom Skynet Program is but one such example.  The U.K. government and NATO buy satellite services from a commercial company.  Instead of the U.K. government funding and owning the infrastructure with taxpayer dollars, private capital companies fund satellite development, manufacturing, launch, and operation to meet the purchaser’s specific requirements. Government purchases provide a revenue stream.

P3s for space projects, while fairly common, have generally been relatively simple agreements involving one public entity and one private entity.  Nevertheless, it is helpful to understand the lessons learned from these projects.  These lessons recently were summarized by The Aerospace Corporation:

·       The government partner must conduct a comprehensive review of a commercial partner’s business plan including market projections, market risk, and related cost projections.  These factors may impact the ability to reliably deliver on time and within budget.

·       Avoid business models that are overly optimistic or uncertain.

·       Create a shared vision among stakeholders.

·       Establish contingencies for changing requirements.

·       Strategically leverage seed money for private sector development and encourage healthy competition by selecting multiple partners.

·       Use the partnership to incentivize industry to meet the more stringent demands of the government partner.

·       Scale contracts to the mission’s longevity and extended success. Be wary of commitments that are longer than technology refresh or capital reinvestment cycles.

·       Use success to fuel incremental growth and to build longer term trusted partnerships with commercial sector partners.

·       Carefully structure technical and financial milestones and measure success criteria for meeting milestones, including adjusting payment schedules to reflect any slippage.

·       Optimize value through shared data agreements between the public and private partners, focusing on a range of intended applications and niche markets.[10]

While such lessons learned are helpful, future large space activities such as privatizing the ISS, establishing a Deep Space Gateway, installing a base on the moon, and active removal of space debris will require far more complex contractual arrangements, international participation, and much longer performance periods.  The ISS provides some guidance.

The International Space Station

International participation in large, long-duration space projects is best exemplified by the ISS.  The ISS has a complex legal structure.  The Intergovernmental Agreement (IGA) is a detailed international treaty between all ISS partner nations[11] establishing a long-term cooperative framework for the design, development, operation, and use of the ISS for peaceful purposes in accordance with international law.  Pursuant to the IGA, each partner state retains jurisdiction, ownership and control over the station elements it registers and over personnel who are its nationals.  The IGA also has provisions for the exchange and treatment of technical data and goods and allocates utilization rights and resources including power, storage, crew time, EVA capacity and transportation of people and cargo to and from the ISS.  ISS partners are able to barter or sell any portion of their allocations and select users for its allocations.

Four Memoranda of Understanding (MOUs) between NASA and other cooperating space agencies (those of Europe, Russia, Canada, and Japan), describe in detail the roles and responsibilities of the various agencies in the design, development, operation and utilization of the ISS, as well as establish the management structure and interfaces necessary to ensure effective use of the ISS.  Importantly, one of the main objectives of the IGA is to enhance the commercial use of outer space.  Numerous bilateral Implementing Arrangements between the space agencies have been established as needed to implement the MOUs.  These Arrangements provide concrete guidelines and tasks among the national agencies that allow them to get tasks and objectives done and enable the trading of rights and duties.[12]

Each ISS partner bears the full cost of fulfilling its various responsibilities and there is a complex system of cross-waivers of liability between the ISS member states and their related entities (e.g., contractors, subcontractors, suppliers, etc. at all tiers).  The cross-waivers allow the ISS partners to collaborate on space activities without dreading the legal claims that might otherwise arise out of the inherent risks of doing business in outer space.  The ISS legal framework has been sufficiently flexible to allow effective functioning of the ISS activities.  In many respects, the ISS has been a tremendous success and it is now facing issues of what to do next.  Privatization using a P3 structure is one option.[13]

As space activities and investments mature, we must keep in mind lessons learned from space activity P3s and also look to industries like construction for lessons learned on major infrastructure P3 projects.  Although there are similarities – both infrastructure and space projects involve large sums of capital and allocation of considerable risks[14]  – there are also differences.  In any event, to have people living and working in space will involve P3 leveraging of the government budget with commercial collaboration.  Consequently, we can learn from Infrastructure P3s.

Infrastructure P3s

In evaluating P3s, the space industry should judiciously review P3 experience on large infrastructure projects and evaluate best practices and lessons learned.   Typical infrastructure P3 projects have included airports, toll roads, higher education facilities, water projects, telecommunications, energy, and utilities. 

Infrastructure P3s typically involve complex long-term contracts of 15 to 25 years or more.  The key to a successful P3 resides in allocating risks and defining how to deal with changes that will naturally occur over such a long period of time.  In evaluating a P3 project, it is not just the initial cost of capital that is important – one needs to evaluate the entire cost of the project over its life cycle.  P3s can be structured to allow incremental private engagement over the course of many years.  Additionally, whenever the government is involved, change can be expected and the P3 needs to be able to accommodate change over long periods.

Europe, Canada and Australia have outpaced the United States in their use of P3s for infrastructure projects.  The United States is catching up, however.  It is turning more toward P3s for infrastructure projects because of the limited availability of federal, state and local government funding for necessary projects. 

The largest P3 project is the Channel Tunnel between England and France, now known as the Eurotunnel.  It cost about $25 billion, took eight years to build, and was financed by private debt and sales of shares in a private company formed to build and maintain the tunnel under a long-term management contract.  Although the project experienced significant financing problems during construction, it has certainly provided great benefits.  A 2016 study by Ernst & Young calculated that the Eurotunnel enables trade and tourism worth more than $120 billion dollars each year.[15]  Perhaps the main reason for the early troubles on the project was a lack of planning and appreciation for exactly what the partners were getting into.  No multinational project this large had ever been done before.  This project is a great example of the benefits a large P3 infrastructure project can provide and of the need for early planning involving all partners. 

Another example of a very large P3 infrastructure project is Boston’s “Big Dig.”  This project replaced a six-lane elevated highway with an underground highway through the heart of downtown Boston.  It also included two bridges and associated improvements.  Although initially priced at about $2.4 billion, it ultimately cost about $14 billion.  The project generated negative headlines and had serious construction flaws.  Despite its troubles over many years, all the P3 contracts were completed.  Now the project generates cost savings of about $500 million dollars each year.[16]  One aspect that enabled completion of the project was the surety bonds that were required of the contractors.  When the contractor experienced difficulties, the surety stepped in to finish the work.  Surety bonds in the U.S. and letters of credit elsewhere are often used to ensure completion of infrastructure projects, including P3 projects. 

A full infrastructure P3 project involves a partnership among all phases of a project from design-build construction, to finance, to operations and maintenance.   The projects often span decades and there are many different types of P3s involved.  Arranging financing and developing an equitable allocation of risks among partners over many decades are probably the most challenging tasks.  Thanks to the vast number of P3 projects around the world and their often substantial cost, there has been considerable analysis of the various types of P3 projects and an articulation of the best practices.  This is not an easy task, given the complexities and differences in P3 projects.

The typical sources of payments in P3 projects come from some form of a user fee.  In transportation projects, tolls are the most common revenue stream.  Given the extended duration of such projects, however, the modeling of projected toll-based fees is critical.  For example, misleading traffic forecast models for a P3 airport road in Australia that went bankrupt in 2013 resulted in an estimated $1.7 billion lawsuit because traffic reached only approximately 25% of the forecast.[17]

Airport authorities also frequently use P3s for large projects.  Those who travel through the Denver International Airport (“DIA”) will now see a fairly new P3 infrastructure project.  This project, known as the “Great Hall,” involves several private sector partners.  This project will renovate 63,000 s.f. of space in the DIA terminal.  The project will enhance security, increase capacity, update aging systems, and improve passenger flow through the terminal.  It will also create 50 commercial spaces.  Ultimately, the private partners will derive revenue from operating concessions within the newly constructed Great Hall.

Schools have also been built and/or operated using the P3 model, but these projects are not generally mega projects.  The private party often is provided an opportunity to generate revenue by offering fee-based after school programs or renting available space outside of school hours.  An elementary school in Washington, D.C. is an example of a successful P3 project.  The private partner was paid a fee from a government-issued bond.  Additionally, the P3 deal provided for the sale to the private partner of a portion of the unused school property for the construction of an apartment building (known as “asset recycling”), which provided the private partner additional income.  Further incentives to the private partner included allowing it to rent out space for after school programs and community uses.  Universities have used P3s to construct dormitories to specification and then operate the dormitories on long-term management contracts, recovering investment from rental fees.

The key for many successful P3 projects is creative revenue streams.  Early involvement of all potential parties can lead to creative thinking and the identification of unique revenue streams.  Many of the projects described above are often delivered through traditional ways including the use of public funds and debt.  It is the extended operations and maintenance aspects that make them P3 projects and those aspects are often funded through creative revenue streams.  Additionally, the private partner agreements often include penalties for delays and incentives for early or under-budget delivery.

Infrastructure P3 Best Practices

The commonly recognized P3 “best practices” generally include things such as appropriately preparing, creating a shared vision, understanding the partners, clarifying long-term risks and rewards, establishing effective decision-making processes, negotiating fair and reasonable contracts that will withstand decades of implementation, and finding the right champion.  This later challenge can be the most difficult considering that large projects tend to take many years to plan and implement.  Politicians and administrators often have a limited shelf life.  Policies, including National Space Policies, often change with new administrations.

The National Council for Public-Private Partnerships has identified seven “keys to success,”[18] most of which are applicable to very large space projects.  They include:

·       Public Sector Champion:  Use of a well-recognized public figure as spokesperson can play a critical role in project success, particularly in the initial phases.  Given the long duration of large space projects, however, a succession of champions may be needed.  Additionally, with multi-national space projects, champions may be needed in many countries. 

·       Public Sector’s Organized Structure:  The public sector needs a well-organized team involved from project concept through negotiation of all initial agreements.  Like champions, these teams may change through the phases of large space project over time. 

·       Detailed Contracts:  Large space projects will be quite complex and likely involve countries, agencies and companies.  The agreements, like the ISS legal structure, will need to be both general and specific.  They will need to specify roles and responsibilities, assign risks, and establish fair and reasonable methods of resolving unforeseen disputes that may arise. 

·       Clearly Defined Revenue Stream:  Initial capital contributions to large space projects will be quite substantial, even with many participants.  For a real P3 to work, there must be some revenue stream sufficient to warrant the initial private investment and risk and provide a reasonable rate of return to the private partners.  This may be the biggest challenge for large space projects exploring a P3 delivery method. 

·       Stakeholder Support:  The public must support the public sector involvement in large space projects and shareholders must support the private partners (continued support of individual billionaires is also welcome!).  The long duration of such projects through good and bad economic cycles and changes in the political climate will present great challenges.  Those challenges will require basic things like good communications and public relations to garner continued support. 

·       Pick Your Partner Carefully:  Carefully evaluate what each partner (public and private) brings to the project that is of value.  Experience, financial capacity, vision, and relationships must be considered.  Very large space projects may also warrant involvement of developing countries who may not be able to make significant contributions up front.

Financing Finance Very Large Space Projects

The typical venture capital deal involves a payout in three to seven years, which will not happen for a very large space project, so other sources of financing are needed.  As detailed above, P3s have the potential to work well for large projects of a long duration, particularly where a revenue stream for the private partner can be found for the post-construction operations and maintenance of the project.  The thoughts below for two potential very large space projects just scratch the surface of the topic, but are intended to spur additional discussion.

Large space projects will need broad participation of multiple governments and multiple companies.  The ISS model is logical for use by large space projects.  The combination of multiple space-faring nations lends stability to the legal structure and credence to the proposition that the use is a legitimate exercise of freedom of use of outer space.  The ISS model provides governance, stability, flexibility and allows for participation by private partners.  Alternatively, establishment of an international organization on the ITU model could provide needed structure.  However, a model limited to space-faring countries likely is preferable to a UN-type organization with every country having an equal vote, which tends to promote debate and stifle prompt progress.

Active Orbital Debris Removal.  Even if all the space powers follow the U.N. Space Debris Mitigation Guidelines, the debris population will continue to increase.  This leads to the potential of cascading collisions – the Kessler Syndrome - which could endanger space activities in desirable low Earth orbits and increase insurance premiums and the overall cost of doing business in space.  No one wants this, but who will conduct Active Debris Removal (“ADR”) and who will pay?

In October 2017, the European Space Research and Technology Center had a conference on ADR.[19]  No feasible P3 model was foreseen for ADR, although incentive schemes and mandatory ADR insurance were discussed as well as disposal fees.  That should not, however, stop the creative processes of evaluating revenue streams for a P3 project.

For ADR, this could consist of multiple complementary revenue streams including, for example, a fund that launch service providers, satellite operators, etc. would pay into and/or the purchase of rights to insert new satellites into certain crowded orbits.

There are a myriad of legal problems associated with ADR, including securing the rights to a defunct satellite so that it can be removed.  It would be ideal if someone could determine a use for defunct satellites and/or their components, but this seems a long way off.  If an ADR system was able to service satellites as well as remove them, this could provide some revenue.  It would also, of course, result in more complex ADR satellites.

Moon Base.  A core element of many P3 infrastructure projects is tasking the private partner with ongoing operations and maintenance over the long term.  This could be particularly appropriate for an installation on the moon, in lunar orbit, or other large space projects which will have a long duration.  A project like a moon base must include evaluation of life cycle maintenance.  It should not be established for fixed period of years, but forever.  It is often this bundle of operation and maintenance services that provides the value-for-money proposition for the private partner.

It is foreseeable that a moon base could provide services for users.  This could include fuel and water, materials processing, food from crops grown on the moon base, facilities for space tourists, and research and development in labs similar to what is now conducted on the ISS.  Naming rights for various moon base modules could also be sold.  Perhaps a section of the moon could be used for small rovers controlled from Earth, for a fee.  The ultimate video game!

Conclusion

The ISS model could provide an excellent organizational basis for P3s for very large space projects, but vastly increased private participation will be needed.  Creativity will be required to find revenue streams that will enable the participation of private partners.  Lessons learned from large terrestrial infrastructure projects can also be applied to large space projects including finding effective public sector champions, ensuring support from stakeholders, and selecting all the partners carefully.

[1] See generally, Alternative Agreements for Research and Development with NASA, Briefing Papers, Second series, Issue 18-4, March 2018. 

[2] See generally, Commercial Orbital Transportation Services: a New Era in Spaceflight, https://www.nasa.gov/sites/default/files/files/SP-2014-617.pdf.

[3] See Commercial Crew Program - The Essentials, https://www.nasa.gov/content/commercial-crew-program-the-essentials/#.U_ung_ldUn3.

[4]  See https://spacenews.com/new-nasa-boss-jim-bridenstine-faces-his-first-challenge-a-balancing-act-between-the-moon-and-mars/.

[5] 10 U.S.C. § 237l (b) grants the U.S. Department of Defense authority to enter into transactions for prototype projects using OTAS, which are legal instruments other than a contract, grant, or cooperative agreement.  OTAs allows defense and other federal agencies to negotiate terms and conditions specific to their project.  OTAs are often used for P3 arrangements and offer flexibility to help agencies attract commercial partners.  Such flexibility is not found in standard U.S. government contracts. 

[6]  Robotic Servicing of Geosynchronous Satellites, by Mr. Joseph Parrish

https://www.darpa.mil/program/robotic-servicing-of-geosynchronous-satellites.

[7] See DARPA Selects SSL as Commercial Partner for Revolutionary Goal of Servicing Satellites in GEO, https://www.darpa.mil/news-events/2017-02-09.

[8] SpaceNews, November 20, 2017, at 8. 

[9] For a recent review of other space P3s see “Public-Private Partnerships: Stimulating Innovation in the Space Sector,” Karen Jones, (April 2018) The Aerospace Corporation.

[10] Supra note 8.

[11] For a complete list of the ISS partner nations, see https://www.nasa.gov/mission_pages/station/cooperation/index.html.

[12]  See e.g. International Space Stations Legal Framework, http://www.esa.int/Our_Activities/Human_Spaceflight/International_Space_Station/International_Space_Station_legal_framework.

[13] Another example of international participation involves the Dream Chaser.  The Sierra Nevada Corporation has teamed up with the U.N. Office for Outer Space Affairs in a type of international P3 where the Dream Chaser will be used by countries to fly payloads in low-Earth orbit.  Mark Sirangelo, the former Executive Vice President of Sierra Nevada Corporation’s Space Systems stated: "The benefits of a joint mission between government and private organizations on a level of this scale is incalculable.” See http://www.americaspace.com/2017/09/28/un-calls-for-interest-in-payloads-for-dream-chaser-mission/.

[14] Some risks are better handled by the public sector.  Transfer of such risks to the private sector will generally increase the cost of the project.  Risks that are not identified and allocated up front may become the subject of a costly dispute later on. 

[15] Nabers, Inside the Infrastructure Revolution – A Roadmap for Rebuilding America, (Platform Press 2018) at 31.

[16]  Id. at 43. 

[17] See ENR, “ARUP is latest to settle in suits over P3 revenue forecasting,” January 8, 2018, at 8.

[18] See https://ncppp.org/about/.

[19] See Leoni, Commentary, “For active debris removal, today’s concern is tomorrow’s opportunity,” SpaceNews, (April 18, 2018), at 14, https://spacenews.com/op-ed-for-active-debris-removal-todays-concern-is-tomorrows-opportunity/.