House of Commons - Public Accounts

Select Committee on Public Accounts Twenty-First Report

3 The cost of space and its commercial benefits

11. Investment in space activities is inherently expensive, and some of the management arrangements adopted have contributed to increased costs or weak cost control. For national projects, the current procurement strategy is based on competition, and the contracting strategy uses fixed price contracts to transfer project management risks to the contractor. This approach cannot however be applied to all space projects at all stages. The number of potential contractors may limit competition and fixed cost contracts may not work well at early project definition and development phases.

12. Beagle 2 provides an example where these arrangements were not fully applied. The cost of the lander increased from an estimate of £27 million in April 1998 to an outturn of £45.2 million in 2003.[13]Figure 2: Costs of Beagle 2

Increment Commitment date DTI
£m
PPARC
£m
ESA
£m
DTI/OST
£m
Open
University
£m
EADS
Astrium
(main contractor)
£m
Totals
£m

Cost of the Instruments July 1999 2.7 2.7

The initial ROAME statement July 1999 5 5.0

Funding the project in lieu of sponsorship being obtained August 2000 5 3.5 3.5 12.0

ESA support November 2000 9.7 9.7

Increased funding in lieu of sponsorship being obtained August 2001 8.3 1.9 10.2

Risk reduction work on the parachutes July 2002 1.5 1.5

The Planetary Protection Facility November 2001 1.95 2.0

Post launch support/operations April 2002 2.1 2.1

Project Total 45.2

NOTES

(1) The Open University also received £2.6 million from the Wellcome Trust biomedical research charity to help develop miniaturised mass spectrometer technology with some overlap with Beagle 2. This activity is continuing

(2) EADS Astrium was the main contractor on the project. They declared a £1.5 million loss on the project.

(3) Significant but unquantifiable 'in-kind' contributions were made by many further organisations in both academia and industry

(4) PPARC terminated the operations grant before completion: £1.86 million cost was incurred

(5) ROAME stands for Rationale, Objectives, Appraisal, Monitoring and Evaluation statement. These statements were produced by the Department as an appraisal and planning tool for most DTI initiatives at their outset.

13. The increase in costs reflected difficulties in estimating costs for a novel project, and the use of cost-plus contracts during the development phase. In the summer of 2001 BNSC made it a condition of providing further funding that Astrium, the main industrial contractor on the project, should take full responsibility for delivery of the Beagle 2 project to cost and schedule under a fixed price contract and secondly that fixed price contracts should be used for all future contracts awarded by the consortium. BNSC and ESA also improved their monitoring of the project. Costs nevertheless increased by a further £5.5 million before the project was finished.[14]

14. Cost control has also been hindered by weak management information. PPARC, for example, were not able to provide cumulative cost data for all the projects for which they provided funding in 2003-04.[15] The long life of some space projects provides a compelling reason to monitor their cumulative cost, so that the significance of low levels of annual expenditure over extended periods is not lost. PPARC assured us that the new management information system it is currently installing will enable it to produce comprehensive data about all its current projects.[16]

15. Policies adopted by partners also have cost implications. ESA operates a policy of fair return which means that each member state should receive a level of return in work contracts which is proportionate to their contribution to the ESA budget. Experience in the defence area has shown that such an approach can lead to the artificial splitting of work and the allocation of contracts on grounds other than on the basis of best value. It was described by the then Chief of Defence Procurement as a "tax on defence".[17] The Department acknowledged the risk that the operation of fair return by ESA could reduce value for money.[18]

16. The operation of fair return also requires the maintenance of accurate records linking contracts awarded to countries. ESA in 2000 revised their system for tracking returns with the result that for two years they misallocated some contracts to the United Kingdom. This was spotted in 2002 by a British company who brought the matter to BNSC's attention. This misallocation had the effect of artificially overstating the United Kingdom's level of return, which might have restricted the ability of United Kingdom firms to bid for and win contracts with ESA. Since 2002, BNSC has been working with ESA to rectify the position which has resulted in ESA reallocating approximately £10 million of contracts from the United Kingdom to other ESA member states.[19] BNSC assured us that all possible steps have been taken to prevent such errors happening again.[20]

17. British firms in the space industry need to be sufficiently competitive and well informed to take advantage of opportunities that arise. CERN, another pan-European body to which PPARC also pays a substantial annual subscription, does not operate a fair return system. In this case British firms had often not been successful in competitions for contracts,[21] emphasising the need for all members of the BNSC Partnership to ensure that firms in the United Kingdom are well placed to win international space contracts.

18. The Department's national space programme, aimed mainly at positioning UK firms to compete successfully for ESA contracts, has been subject to a significant reduction in recent years.[22] The Department now does not have a separate national space budget but a more general technology budget within which space competes for resources along with many other types of scientific activity.[23] In principle this competitive approach has the merit of directing resources to the most promising technology areas. But its success depends on good quality information on costs and prospects. And there are risks of variable flows of support to a space industry which needs a degree of stability to promote a long-life-cycle business.

19. More generally, the BNSC partnership provides advice and support for firms in the space industry when competing for contracts in ESA. Surveys indicate that large firms find it easier to access such advice than small firms. The Department pointed to a number of general initiatives which it and the Small Business Service has to support small and medium size firms generally, but agreed that there was more they could do to reach out to small firms in the space sector.[24]

20. BNSC have no performance measures which summarise commercial benefits from space, or which assess progress towards the strategic objective to "stimulate increased productivity by promoting the use of space in Government, science and commerce". But some insights can be drawn from commercial data sources. For example, despite the United Kingdom's significantly smaller spending on the space sector the ratio of the turnover of our space industry to national space expenditure is better than either France or Germany, both of which spend significantly more in space than the United Kingdom.[25]

21. There are a number of examples where BNSC support has assisted United Kingdom firms in developing new products and winning key contracts with ESA and other bodies. For example, the United Kingdom has developed a world leading capability in small satellites which has been supported in part by funding from the Department's programme for Micro Satellite Applications in Collaboration (MOSAIC) which is designed to encourage the United Kingdom's small satellite capability. That programme has led to sales worth £50 million with the potential for more to come.[26]

22. One of the largest current space projects which the United Kingdom is involved in is the Galileo project, a joint initiative between ESA and the European Union designed to provide Europe with its own global civil satellite navigation system. If successful, Europe would no longer have to rely on using the two existing satellite navigation systems owned by the United States of America and Russia. Providing such a system is estimated to cost up to £2 billion in the development phase alone[27] but the estimates of the economic benefits that such a system could generate are also estimated to be considerable. The BNSC Partnership is forecasting a likely increase in net economic benefit to the United Kingdom from the introduction of Galileo of £6.3 billion by 2020.[28] The House of Commons Transport Committee has recently issued a report on Galileo stating that they "are not convinced that the costs and benefits have been properly assessed", and that "the Government should not go ahead with the programme until a further, independent, cost benefit analysis has been undertaken".[29] The Committee heard evidence which indicated that some of the benefits being claimed for Galileo should properly be ascribed to an existing smaller European Navigation system.[30]

13 Ev 17 Back

14 C&AG's Report, Figure 18 Back

15 C&AG's Report, para 4.8 Back

16 Q 106 Back

17 17^th Report from the Committee of Public Accounts, Maximising the benefits of defence equipment co-operation, (HC 586, Session 2001-02), para 14 Back

18 Qq 60-61 Back

19 C&AG's Report, para 3.9 Back

20 Q 104 Back

21 Qq 62-63 Back

22 C&AG's Report, para 3.12, Figure 16; Q 65 Back

23 Qq 69-71 Back

24 Q 105 Back