Source: EURLEX
Language: en
Format: md

#### EUROPEAN COURT OF AUDITORS

# EN

###### Special Report No 7  2009

### THE MANAGEMENT OF THE GALILEO PROGRAMME’S DEVELOPMENT AND VALIDATION PHASE

(pursuant to Article 248(4), second subparagraph, EC)

EUROPEAN COURT OF AUDITORS

2

EUROPEAN COURT OF AUDITORS

12, rue Alcide De Gasperi
1615 Luxembourg

LUXEMBOURG

Tel. +352 4398-45410

Fax +352 4398-46410

E-mail: euraud@eca.europa.eu
Internet: http://www.eca.europa.eu

###### Special Report No 7  2009

More information on the European Union is available on the Internet (http://europa.eu).

Cataloguing data can be found at the end of this publication.

Luxembourg: Office for Official Publications of the European Communities, 2009

ISBN 978-92-9207-317-6

doi: 10.2865/44017

© European Communities, 2009

Reproduction is authorised provided the source is acknowledged.

_Printed in Belgium_

Special Report No 7/2009 — The management of the Galileo programme’s development and validation phase

**Paragraph**

3
#### CONTENTS

**ACRONYMS**

**I–XII** **EXECUTIVE SUMMARY**

**1–2** **INTRODUCTION**

**3–29** **THE HISTORY OF GALILEO**

**3** **–** **8** **EARLY DAYS (BEFORE 1999)**

**9** **–** **12** **DEFINITION (1999–2002)**

**13** **–** **26** **DEVELOPMENT AND VALIDATION UNDER THE GJU (2003–06)**

**27** **–** **29** **DEVELOPMENT AND VALIDATION POST-GJU (SINCE 2006)**

**30–33** **AUDIT SCOPE AND APPROACH**

**34–74** **OBSERVATIONS**

**35** **–** **42** **CONCESSION NEGOTIATIONS FAILED**

**43** **–** **50** **TECHNOLOGICAL DEVELOPMENT ACTIVITIES DELAYED AND OVER BUDGET**

**51** **–** **57** **LIMITED USEFULNESS OF RTD ACTIVITIES**

**58** **–** **65** **EGNOS INTEGRATION ONLY PARTIALLY SUCCESSFUL**

**66** **–** **74** **INADEQUATE PUBLIC-SECTOR GOVERNANCE**

**75–86** **CONCLUSIONS AND RECOMMENDATIONS**

**ANNEX I — THE EUROPEAN SPACE AGENCY**

**ANNEX II — EGNOS FACTS, FIGURES AND ILLUSTRATIVE EXAMPLES**

**ANNEX III — INTERNATIONAL COOPERATION ON GALILEO**

**ANNEX IV — CRITERIA USED BY THE ECA TO ASSESS THE PUBLIC SECTOR’S MANAGEMENT OF THE GALILEO**

**CONCESSION PROCESS, TOGETHER WITH A SUMMARY OF ITS ASSESSMENT**

**ANNEX V — GLOSSARY OF TERMS USED IN THIS REPORT**

**REPLY OF THE COMMISSION**

Special Report No 7/2009 — The management of the Galileo programme’s development and validation phase

Special Report No 7/2009 — The management of the Galileo programme’s development and validation phase

5
#### ACRONYMS

**ARTES** Advanced research in telecommunications systems
**CNES** Centre National d’Etudes Spatiales
**CS** Commercial service
**EC** European Communities
**EGNOS** European Geostationary Navigation Overlay Service
**EOIG** EGNOS Operator and Infrastructure Group
**ESA** European Space Agency
**FP6** Sixth framework programme of the European Community for research,
technological development and demonstration activities, contributing to the
creation of the European research area and to innovation (2002 to 2006)
**GCC** Galileo control centre
**GCS** Ground control segment
**GDP** Gross domestic product
**GIOVE** Galileo in-orbit validation element
**GJU** Galileo joint undertaking
**GMS** Ground mission segment
**GNSS** Global Navigation Satellite System
**GPS** Global Positioning System
**GSA** European GNSS Supervisory Authority
**GSTB** Galileo system test bed
**HoT** Heads of terms
**Intosai** International Organisation of Supreme Audit Institutions
**IOV** In-orbit-validation
**JTI** Joint technology initiative
**NRSCC** National Remote Sensing Centre of China
**OS** Open service
**PB-Nav** Programme board on satellite navigation
**PFI** Private finance initiative
**PPP** Public–private partnership
**PRS** Public regulated service
**PwC** PricewaterhouseCoopers
**RTD** Research and technological development
**SAR** Search and rescue
**SESAR** ‘Single European sky’ ATM research
**SoL** Safety of life
**TEN-T** Trans-European transport network

Special Report No 7/2009 — The management of the Galileo programme’s development and validation phase

**V.**
The Court concluded that management of
the development and validation phase was
inadequate. The Galileo programme experienced problems at different levels.

(i) The GJU was not a strong programme
manager nor was any other body assigned
this role. The GJU did not achieve most
of its objectives — owing, however, to
factors that were largely outside the
GJU’s control.

(ii) The programme lacked a strong strategic
sponsor and supervisor: the Commission
did not proactively direct the programme,
leaving it without a helmsman.

(iii) Owing to their different programme
expectations, Member States intervened
in the interest of their national indus
tries and held up decisions. The compromises made led to implementation
problems, delays and, in the end, to cost

overruns.

**VI.**

The PPP was inadequately prepared and conceived. As a result, the GJU was required to
negotiate a PPP which was unrealistic.

**VII.**
The GJU’s task of supervising the technological development activities was seriously constrained by governance issues, an
incomplete budget, delays and the industrial
organisation of the development and validation phase.

7

#### REPLY OF THE EXECUTIVE COMMISSIONSUMMARY

**VIII.**

Discontinuities, the inappropriateness of
the sixth framework programme (FP6) for
funding market development activities, the
absence of a comprehensive market development approach and delays account for the
limited usefulness of Galileo RTD results.

**IX.**
The integration of EGNOS into Galileo was
only partially successful because the GJU’s
mandate was not clear, the decision to
include EGNOS in the concession negotiations held up the achievement of the EGNOS
programme, the EGNOS institutional framework was not clear and the GJU devoted little

effort to market development for EGNOS.

**X.**

The programme’s governance was inadequate. The division of roles between the
entities involved in the development and
validation phase of the programme (EU and
ESA Member States, Commission, GJU and
ESA) was not clearly defined. The Commission did not provide adequate leadership in
developing and managing Galileo.

**XI.**

If the mid-2007 redirection of the EGNOS

and Galileo programmes is to succeed, the
Commission must considerably strengthen
its management of the programmes. This
report includes a number of recommendations aimed at supporting the Commission
in this task.

**XII.**

Finally, should the EU resolve to engage in
other large infrastructure programmes, the
Commission must ensure it has access to the

appropriate management tools.

Special Report No 7/2009 — The management of the Galileo programme’s development and validation phase

8
#### INTRODUCTION

**1.** This audit report is about the European Union’s involvement in satellite
navigation in the period 2003–06.

**2.** The European Union’s satellite navigation strategy consists of two programmes: EGNOS [1] and Galileo.

(a) EGNOS is a regional system for Europe that monitors and corrects
the signals emitted by existing satellite navigation systems [2] by
improving their accuracy and assessing their reliability.

(b) Galileo is currently under construction as Europe’s Global Navigation Satellite System (GNSS). It is the European counterpart of the
American GPS and a joint initiative of the European Commission
and the European Space Agency (ESA) (see _**Annex I**_ ).

Special Report No 7/2009 — The management of the Galileo programme’s development and validation phase

1 European Geostationary

Navigation Overlay Service.

2 GPS (Global Positioning System),

a GNSS developed and operated

by the United States Department

of Defense; Glonass, a GNSS

developed by the former Soviet

Union and now operated for

the Government of the Russian

Federation by its Space Forces.

9
#### THE HISTORY OF GALILEO

**EARLY DAYS (BEFORE 1999)**

**3.** The history of Galileo began in 1994, with the European Commission’s
proposal to engage Europe in satellite navigation [3] . Based on this proposal, in December 1994 the Council of the European Union invited
the Commission to initiate the necessary activities [4] .

**4.** The Commission’s initial strategy for the development of a GNSS comprised two stages. The first (GNSS-1) was to develop a complement to
the existing GPS and Glonass systems. This stage, known as EGNOS,
consists of three transponders on geostationary satellites and a network of ground stations covering all of Europe which are used to
improve the accuracy of GPS and Glonass (see footnote 2) and to
assess the reliability of their signals.

**5.** EGNOS was first implemented in 1994 as an ESA programme with financing from several sources (ESA Member States, the European Commission, Eurocontrol and a number of national civil aviation operators
and other organisations [5] ). It was initially intended as a demonstrator,
but gradually it was decided to convert it into a pre-operational and
then an operational programme (see also _**Annex II**_ ).

**6.** The second stage (GNSS-2) was to implement a global civil satellite
navigation system, known as Galileo. This will ultimately consist of
30 satellites at a fixed altitude of approximately 23 000 km, as well
as a network of ground stations, and will offer five levels of services
(see _**Box 1**_ ).

3 COM(94) 248 — Satellite

navigation services: a European

approach.

4 Resolution of the Council

of the European Union of

19 December 1994 on the

European contribution to

the development of a Global

Navigation Satellite System (GNSS).

5 Grouped into the EGNOS

Operator and Infrastructure

Group (EOIG).

Special Report No 7/2009 — The management of the Galileo programme’s development and validation phase

10

**7.** There were three motives underlying the creation of Galileo:

(a) political (Galileo is a declaration of an independent European
GNSS capability);

(b) economic (Galileo was seen as commercially viable and was justified by predictions of substantial economic and social benefits);

(c) technological (Galileo was to become the most sophisticated navigation system available).

**8.** The Galileo programme was divided at the outset into four phases (see
_**Table 1**_ ):

(a) technical definition;

(b) development and validation;

(c) deployment;

(d) commercial operation.

11

**PHASES OF THE GALILEO PROGRAMME AS FORESEEN IN NOVEMBER 2000**

|Phases and main objectives|Initial timing|Governance structure*|
|---|---|---|
|**_Def nition phase_**<br>Technical activities<br>Technical studies<br>• <br>Technology pre-developments<br>• <br>Other activities<br>Preparation of governance structures for<br>• <br>the next phase<br>Legal and business development feasibility<br>• <br>studies<br>International agreements<br>•|1999–2000|European Commission and the ESA<br>separately plus coordination via PMB<br>(programme management board),<br>GPO (Galileo Programme Of  ce)<br>and GISS (Galileo Interim Support<br>Structure)|
|**_Development and validation phase_**<br>Technical activities<br>Detailed def nition of space, ground and<br>• <br>user segments<br>Development and construction of<br>• <br>prototype satellites and minimal ground<br>segment<br>‘In-orbit’ validation of the system<br>• <br>Other activities<br>Research grants (FP6)<br>• <br>Development business plan<br>• <br>Concession negotiations<br>• <br>EGNOS integration<br>• <br>International agreements<br>•|2001–05|European Commission and the ESA<br>through GJU|
|**_Deployment phase_**<br>Technical activities<br>Satellite assembly and launch<br>• <br>Installation of complete ground segment<br>• <br>Other activities<br>Business development<br>•|2006–07|European GNSS Supervisory<br>Authority (GSA) + concession holder|
|**_Commercial operation phase_**<br>Technical activities<br>Satellite renewal<br>• <br>Operation of the centres<br>• <br>Maintenance<br>• <br>Other activities<br>Commercial activities<br>•|2008+|European GNSS Supervisory<br>Authority (GSA) + concession holder|

- The amendments to the Galileo management structure proposed by recent (2007) Commission

communications and Council resolutions are not reflected in this table.

Special Report No 7/2009 — The management of the Galileo programme’s development and validation phase

12

**DEFINITION (1999–2002)**

**9.** The Galileo programme got underway in 1999, when the Council gave the
go-ahead for the definition phase [6] . During this phase, both the Commission and the ESA undertook technical studies, pre-developments
and feasibility studies. Funding from the European Community budget
was mainly allocated via the fourth and fifth framework programmes
for research and development [7] . ESA funding was allocated through
its GalileoSat programme.

**10.** In November 2000 [8], the Commission presented the European Parliament and the Council with the results of the definition phase. These
contained concrete proposals on the definition of the system, its
economic and financial aspects and its management structure. The
timetable for the next phases of the Galileo programme was established as follows (see also _**Table 1**_ ):

(a) the development and validation phase would run from 2001 to
2005;

(b) the deployment phase would run from 2006 to 2007;

(c) the commercial operation phase would start in 2008.

The communication planned for EGNOS to become operational in
2003.

**11.** The Commission stated in the same communication that ‘cost/benefit
studies show Galileo to be cost-effective and sufficiently attractive
to obviate the need for any further public funding in the form of
subsidies from 2007.’ The Galileo system was to cost a total of 3,3 billion euro (see _**Table 2**_ for a detailed breakdown). The Commission
considered the PPP to be ‘an essential factor for the success of the

Galileo programme’. The communication also highlighted the urgency
of taking a political decision to continue the programme at the Nice
European Council in December 2000.

Special Report No 7/2009 — The management of the Galileo programme’s development and validation phase

6 Council Resolution of

19 July 1999 on the involvement

of Europe in a new generation of

satellite navigation services —

Galileo-definition phase.

7 Decision No 1110/94/EC of

the European Parliament and

of the Council of 26 April 1994

concerning the fourth framework

programme of the European

Community activities in the field

of research and technological

development and demonstration

(1994 to 1998) (OJ L 126, 18.5.1994,

p. 1); Decision No 182/1999/EC

of the European Parliament and

of the Council of 22 December

1998 concerning the fifth

framework programme of the

European Community for research,

technological development and

demonstration activities (1998 to

2002) (OJ L 26, 1.2.1999, p. 1).

8 COM(2000) 750 of

22 November 2000: Commission

communication to the

European Parliament and the

Council — On Galileo.

13

**12.** As requested by the Council of the European Union in its Resolution of
5 April 2001, the Commission had several studies made of a business
plan for Galileo. These studies recommended a ‘concession’-model of
PPP [9] . The Council confirmed the choice of a concession to fund the
deployment and operational phases of the Galileo programme and
agreed in March 2002 ‘to work to secure a cost-share of at most 1/3
for the Community budget and at least 2/3 for the private sector’ for
the deployment phase.

**DEVELOPMENT AND VALIDATION UNDER THE GJU**
**(2003–06)**

**PURPOSE**

**13.** From a technical point of view, the development and validation phase
consisted of the _technological development_ of part of the system — an
initial core satellite constellation of two experimental and four operational satellites, the associated ground segment and test user segments, making validation possible through in-orbit and ground-based
tests (also called In-Orbit Validation or IOV). The ESA was responsible
for implementing these technological development activities through
its GalileoSat programme.

**14.** In parallel with technological development, the Commission focused,
during the development and validation phase, on other activities
aiming at bridging the gap between the system and its future users
in order to prepare for the successive phases of the programme,
through business development and mobilisation of funds. Early development of user segments was seen as the key to subsequent use of
the Galileo system if direct revenue was to be generated. Therefore,
the Commission targeted private-sector involvement through a PPP.
Additionally, the focus was on funding RTD activities through the
sixth framework programme for Research (FP6) [10] in order to support
both technological development and business development and on
using EGNOS as a precursor programme to prepare the market for
Galileo. EGNOS will deliver regional services similar to three of the
five future Galileo services — OS, SoL and SAR (see _**Box 1**_ ).

9 A DBFO (design-build-finance

operate) type of PPP where the

private party recovers costs

from user charges or availability

payments.

10 Decision No 1513/2002/EC of

the European Parliament and

of the Council of 27 June 2002

concerning the sixth framework

programme of the European

Community for research,

technological development

and demonstration activities,

contributing to the creation of the

European Research Area and to

innovation (2002–06) (OJ L 232,

29.8.2002, p. 1).

Special Report No 7/2009 — The management of the Galileo programme’s development and validation phase

14

**THE GALILEO JOINT UNDERTAKING — THE MANAGEMENT**

**VEHICLE FOR THE DEVELOPMENT AND VALIDATION PHASE**

**15.** The development and validation phase was to be managed by the GJU,
a dedicated structure set up by the Commission and the ESA after
approval by the Council of the European Union and the ESA Council.
The former Council’s decision to proceed in full with development
and validation was not taken until March 2002 [11], 15 months later
than expected. This delay was caused by lengthy negotiations among
the EU Member States concerning the use of the system for military
purposes and private-sector funding and participation in the programme. The ESA Council’s official go-ahead for development and
validation was further delayed until May 2003. This was caused by
lengthy discussions among the ESA Member States on their industrial
participation in the programme. The GJU was set up by EC regulation
in May 2002 [12] [13], its Foundation Act was signed in June 2003 and it
became operational in September 2003.

**16.** The main reason for setting up the GJU was the need for a coordination
platform between the ESA and the Commission. There were several
other reasons [14], such as the need to run the programme through a
single entity and the capacity to attract private funds for development and validation. However, although the private sector indicated
its readiness to contribute up to 200 million euro to the development
and validation phase [15] by signing a memorandum of understanding,
this intention never materialised.

**17.** As established by its statutes, the GJU was to:

(a) supervise all Galileo programme activities planned for the development and validation phase;

(b) make any necessary adjustments in the light of developments
occurring during the development and validation phase;

(c) prepare for the deployment and operational phases.

Special Report No 7/2009 — The management of the Galileo programme’s development and validation phase

11 Preliminary approval for some

activities was given in April 2001.

12 Council Regulation

(EC) No 876/2002 of

21 May 2002 setting up the

Galileo Joint Undertaking

(OJ L 138, 28.5.2002, p. 1).

13 Article 171 of the EC Treaty:

‘The Community may set up

joint undertakings or any other

structure necessary for the

efficient execution of Community

research, technological

development and demonstration

programmes.’

14 Regulation (EC) No 876/2002;

European Council conclusions

of March 2001; COM(2001) 336

of 20 June 2001 — Proposal

for a Council Regulation on the

establishment of the Galileo Joint

Undertaking.

15 Whereas 13 of Regulation (EC)

No 876/2002.

15

**18.** The GJU’s main tasks, as established by its statutes, were:

(a) management of a tendering procedure resulting in the conclusion
of a concession agreement;

(b) supervision of the ESA’s technological development activities;

(c) initiation and management of research activities;

(d) integration of EGNOS into Galileo.

**19.** At the start, the GJU consisted only of its two founding members, the ESA
and the Commission. The National Remote Sensing Centre of China
(NRSCC) joined the GJU in October 2004, to be followed in September
2005 by the Israeli company Matimop (see also _**Annex III**_ ). The GJU’s
governance structure is presented in _**Figure 2**_ .

**FUNDING**

**20.** During the development and validation phase, EU funds (from TEN-T [16]
and FP6) were channeled through the GJU while the ESA co-financed
Galileo through its GalileoSat and ARTES programmes ( _**Figure 1**_ ). From
1999 to 2007, the funds allocated to Galileo came to 1,94 billion

euro.

**PROGRESS**

**21.** In October 2004, the Commission sent a communication on the programme’s progress to the Parliament and the Council [17] . This communication prepared the ground for a Transport Council meeting in
December 2004, at which it was decided to move to the programme’s
deployment phase. The Commission did not present an updated timetable. At that point the technological development had accumulated
a delay of about three years.

16 Council Regulation (EC)

No 2236/95 of 18 September

1995 laying down general rules

for the granting of Community

financial aid in the field of

trans-European networks

(OJ L 228, 23.9.1995, p. 1); Decision

No 1692/96/EC of the European

Parliament and of the Council

of 23 July 1996 on Community

guidelines for the development

of the trans-European transport

network (OJ L 228, 9.9.1996, p. 1),

as amended by Decision

No 1346/2001/EC

(OJ L 185, 6.7.2001, p. 1).

17 COM(2004) 636 final:

Communication from the

Commission to the European

Parliament and the Council —

Moving to the deployment

and operational phases of the

European satellite radio-navigation

programme.

Special Report No 7/2009 — The management of the Galileo programme’s development and validation phase

16

**GALILEO DEVELOPMENT AND VALIDATION PHASE — FINANCING FLOW (1999–2007)***

ESA Member States European Commission Other
**902 million** **946 million** **92 million**

GalileoSat GalileoSat TEN-T TEN-T

Infrastructure development RTD GJU operations and
**1 716 million** **110 million** activies

          - The Chinese and Israeli contributions consisted of a contribution to the GJU’s base capital (5 million and

4 million euro respectively) and a contribution to be used to finance the activities of their own national industries

(through contracts with the ESA). The latter was not mobilised in full.

_Source_ : ECA estimate.

Special Report No 7/2009 — The management of the Galileo programme’s development and validation phase

17

**22.** The communication stated that the GJU had ‘successfully completed the
procedure for selecting the future concession holder’. However, the
concession selection phase had just been extended until the end of
January 2005. In February 2005, moreover, the GJU did not select a
preferred bidder between two candidate consortia [18] . Instead, the
tenderers proposed to join into a merged consortium, to which the
GJU agreed in June 2005, and made a joint bid.

**23.** Between July and December 2005, both the concession negotiations and
technological development activities were blocked owing to intervention by some Member States. Disagreement between Member States
focused on the composition of the merged consortium which was
to bid for the concession contract and the location of the system’s
activity centres, ground infrastructure and headquarters. Through
mediation [19], an agreement was reached in December 2005. Negotiations with the merged consortium actually started in January 2006.

**24.** On 28 December 2005, the first experimental satellite, called GIOVE-A,
was successfully launched, thus securing access to the Galileo frequencies allocated by the International Telecommunications Union.

**25.** In June 2006 [20], the Commission released an updated timetable for
Galileo [21] . The development and validation phase would now run until
early 2009, and deployment would take place in 2009 and 2010 (a
three-year shift with regard to the initial timetable). This communication also expanded the budget for the development and validation phase to 1,5 billion euro (400 million euro more than the initial
budget). On the concession negotiations, the Commission said: ‘It has
become clear that a concession solution is best suited to the specific
features of the programme. […] By the end of 2006, the estimated
costs and income and the public sector contribution will have been
finalised. In addition, the financial plan will be confirmed and the
main terms of the contract will be fixed.’

**26.** In November 2006, the negotiators from the GJU and the merged consortium initialled the Galileo PPP heads of terms (HoT) v.1, the first
draft of a non-contractually binding statement. This document was
the GJU’s nearest approach to a concession agreement.

18 The Eurely and iNavsat

consortia. A third pre-selected

consortium led by Eutelsat

withdrew from the selection phase

in summer 2004.

19 In October 2005, the Vice

President of the European

Commission appointed a

former European Commissioner

as mediator — Press release

IP/05/1345.

20 COM(2006) 272 of 7 June 2006:

Communication from the

Commission to the European

Parliament and the Council —

Taking stock of the Galileo

programme.

21 The first time the Commission

released this schedule was in the

‘note to editors’ of press release

IP/05/1345 dd. 25 October 2005.

Special Report No 7/2009 — The management of the Galileo programme’s development and validation phase

18

**DEVELOPMENT AND VALIDATION POST-GJU**
**(SINCE 2006)**

**27.** At the end of 2006, the GJU considered that it had ‘successfully concluded the main tasks’ [22] . The GJU was wound up at the end of December 2006 [23] and its activities were transferred to the European GNSS
Supervisory Authority (GSA), which had been set up in July 2004 to
manage the public-interest aspects of the European GNSS programmes
and to act as the regulatory authority for the programmes during the
Galileo deployment and operational phases [24] . This activity transfer
resulted in a change in the GSA’s role, which was not foreseen at its
creation.

**28.** The concession negotiations with the merged consortium stalled in early
2007. In a communication of May 2007 [25], the European Commission
acknowledged that EGNOS and Galileo had accumulated substantial
delays (five years with regard to the initial timetable) and cost overruns. In 2007, the Council of the European Union [26] decided to redirect
the programme: the system would now be deployed by 2013 with
full funding from the Community budget (see _**Table 2**_ ), and with the
ESA in the role of delegated procurement agent. On this basis, the
European Parliament and the Council adopted a regulation on the
further implementation of the GNSS programmes [27] . On 1 July 2008
the Commission published a call for expressions of interest for the
purchase of infrastructure for the Galileo system, under six headings
(system support, ground mission segment, ground control segment,
space segment (satellites), launch services and operations). After preselection of suitable candidates, preliminary proposals were received
at the end of 2008. The competitive dialogue process is expected to
be finalised in the course of 2009.

Special Report No 7/2009 — The management of the Galileo programme’s development and validation phase

22 GJU press release of

30 November 2006 — Next step in

the Galileo programme; Handover

of the management from the Galileo

Joint Undertaking to the European

GNSS Supervisory Authority.

23 Council Regulation (EC)

No 1942/2006 of 12 December 2006

amending Regulation (EC)

No 1321/2004 on the establishment

of structures for the management

of the European satellite

radio-navigation programmes

(OJ L 367, 22.12.2006, p. 18); Council

Regulation (EC) No 1943/2006

of 12 December 2006 amending

Regulation (EC) No 876/2002 setting

up the Galileo Joint Undertaking

(OJ L 367, 22.12.2006, p. 21).

24 Council Regulation (EC)

No 1321/2004 of 12 July 2004

on the establishment of

structures for the management

of the European satellite

radio-navigation programmes

(OJ L 246, 20.7.2004, p. 1).

25 Communication from the

Commission to the European

Parliament and the Council —

Galileo at a cross-road:

The implementation of the

European GNSS programmes,

SEC(2007) 624, 16 May 2007.

26 Council resolutions

and conclusions of

6–8 June, 1–2 October and

29–30 November 2007.

27 Regulation (EC) No 683/2008

of the European Parliament and

of the Council of 9 July 2008 on

the further implementation of

the European satellite navigation

programmes (EGNOS and Galileo)

(OJ L 196, 24.7.2008, p. 1).

19

**29.** In its communication of May 2007 the Commission analysed the failure
of the concession negotiations in considerable detail. This document
aimed to clear the way for redirecting the programme. In that light,
it provides a non-exhaustive view of some of the reasons for failure.
It addresses the fact that the Commission’s assumptions on timing,
budget and transfer of market risk and design risk ‘may have been
optimistic’. The communication also addresses issues such as public
governance, private sector governance and the fact that Member
States’ national interests had prevailed over the programme’s longterm strategic aims. However, it does not address issues such as the
preparation of the PPP (including time and expertise) and reporting,
factors that are elaborated futher in this report.

**GALILEO COST ESTIMATES**

|Col1|Original cost estimate<br>in million euro<br>(COM(2000) 750)|Updated cost estimate<br>in million euro<br>(COM(2007) 261 and ESA<br>documents)|
|---|---|---|
|**Def nition phase**|80|80|
|**Development and**<br>**validation phase**|1 100|2 100|
|**Deployment**|2 150|3 400|
|**Total**|**3 330**<br>**_(of which 1 800 million to be_**<br>**_borne by the public sector)*_**|**5 580**<br>**_(all to be borne_**<br>**_by the public sector)**_**|

- Annual operating costs, including constellation replacement, were estimated at

220 million euro.

** Availability payments (fixed part) for operating cost, maintenance and

replenishment debt interest until 2030 are estimated at 5 300 million euro.

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20
#### AUDIT SCOPE AND APPROACH

**30.** The Court carried out an audit of the management of the Galileo development and validation phase by examining:

(a) which factors accounted for the failure of the concession

process;

(b) which factors accounted for the reported delays and cost overruns
of technological development;

(c) to what extent spending on research and development activities
has benefited the Galileo programme;

(d) how well the GJU had integrated EGNOS into Galileo;

(e) whether the Galileo programme was adequately governed.

**31.** The audit addressed the period during which the GJU managed the development and validation phase (September 2003 to December 2006),
focusing in particular on its mandate, the process of setting it up
and the management of its tasks. Audit work was performed during
2007 and 2008. The Court followed the programme’s development,
including its redirection, up to the end of 2008.

**32.** The Court gathered audit evidence through file reviews and interviews
at the GJU, the Commission and the ESA, and through interviews
with other Galileo stakeholders such as representatives of Member
States, the GSA (GNSS Supervisory Authority), beneficiaries of research
projects, European space industry representatives, companies bidding
for the concession, and consultants contracted by the GJU.

**33.** In order to assess the quality of the GJU’s management of research and
development activities, the Court conducted a survey of 482 beneficiaries of one or more research projects funded under the ‘Aeronautics
and space’ thematic priority of FP6.

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21
#### OBSERVATIONS

**34.** The following audit findings cover the different tasks of the GJU during
the development and validation phase (paragraphs 35 to 65) as well
as issues related to public-sector governance (paragraphs 66 to 74).
Each section describes in detail the GJU’s objectives and uses them
as a benchmark for its results. Next, the Court assesses the reasons
why the GJU did not achieve most of its objectives. Where relevant,
experience of existing programmes, projects or organisations has
been used as a benchmark. In other cases generally accepted project
management principles were used. In particular for paragraphs 35 to
42, the Court has also used a set of audit criteria derived from best
practice in establishing PPPs [28] (see _**Annex IV**_ for a detailed overview
of this analysis).

**CONCESSION NEGOTIATIONS FAILED**

**OBJECTIVE**

**35.** The GJU’s most important task was to negotiate a PPP under which the
private sector would invest, in partnership with the European Commission, in the creation and use of the Galileo infrastructure. It was
initially foreseen that a concession holder (the private companies
concerned) would be designated before the end of 2004, that the
GJU would conclude the negotiations in 2005 and that the GSA would
award a concession contract by the end of 2005.

**RESULTS**

**36.** As planned, the GJU launched the concession process in steps (pre-selection, selection, negotiation). It issued an initial set of tender documents in April 2004, after which it organised a competitive dialogue
procedure and provided bidders with a draft concession contract and
evaluation criteria.

**37.** The GJU was unable to select a preferred bidder, either in October 2004,
or after the selection phase was extended, in February 2005. Negotiations did not start until January 2006, after the bidders had merged
into one consortium.

28 Intosai Guidelines on Best

Practice for the Audit of Public/

Private Finance and Concessions

(revised) — November 2007.

Special Report No 7/2009 — The management of the Galileo programme’s development and validation phase

22

**38.** The deadline for awarding the concession contract was postponed twice,
from December 2005 to December 2006, and then to December 2007.
Early in 2007, the Commission and the GSA decided to cancel the
negotiations.

**REASONS FOR FAILURE**

**39.** The PPP was inadequately prepared and conceived. As a result, the GJU
was required to negotiate a PPP which was unrealistic.

**P** **REPARATION**

**40.** There is considerable experience of PPP projects in Member States and
third countries. Experience indicates that best practice includes the
following elements.

(a) Proper preparation: the public sector should clearly define project
requirements, assess private-sector capabilities, evaluate potential benefits, examine alternative ways of meeting its needs, investigate the appropriate risk allocation, consider affordability and
likely value for money, and outline a business case. The choice
of a particular type of PPP should be preceded by an appropriate
risk assessment.

(b) Sufficient time: the experience of other organisations 29 suggests
that defining a robust PPP approach and public-sector positions
takes more than a year, even with PPP projects that are less complex than Galileo.

(c) Appropriate management resources: managing a PPP project
requires a dedicated team with appropriate skills, assembled in
good time.

(d) Maintaining effective competition.

(e) Regular review of an ongoing PPP project to ensure that it continues to offer value for money.

Special Report No 7/2009 — The management of the Galileo programme’s development and validation phase

29 PPP/PFI practices in the UK.

23

**41.** A number of these best practices were not observed by the Commission
during the preparatory phase of the Galileo PPP [30] :

(a) Proper preparation: Despite the fact that it had several studies carried out, the Commission did not investigate traditional
public procurement and a public sector comparator was never
constructed [31] . In addition, the Commission did not investigate in
advance how risk might realistically be allocated between the public and private sectors; at what stage in the project or in respect
of which part of Galileo’s activities a PPP might be most likely to
succeed; or the relative benefits of different PPP models [32] . The
Commission proposed, and the Council adopted, a PPP for the
deployment and operational phases of Galileo in order to obtain
a political consensus. Having examined the case for public and
private sector investment through several studies, the Commission
chose a ‘concession’ for the PPP (see paragraph 12). The Commission’s documentation defined the characteristics of a concession,
but with arguments based on general statements rather than on
reasoning specific to Galileo, and an ambitious timetable was
proposed for procurement. Although several of the risks and difficulties that would have to be overcome were identified at the
preparatory stage [33], the Commission did not clearly assess how
these might affect the feasibility of the deal or how the public
sector might tackle them effectively.

(b) Sufficient time: Given the ambitious timetable, according to which
it was to report to the Transport Council in December 2004, the
Commission did not allow the GJU sufficient time [34] to define a

concession approach. Several bidders also expressed concern that
insufficient time was available to prepare a credible business plan
during the competitive dialogue procedure. As a consequence, the
GJU’s initial tender documentation did not set specific objectives.
In particular, it failed to address most difficulties inherent in the
concession model. This resulted in industry bids containing no
firm pricing or commitments, and which were qualified with conditions and caveats to such an extent that they were an insufficient
basis for comparison and evaluation. For the same reason, the GJU
had no robust evaluation criteria for a comparative evaluation of
incoming bids. The first clear statement of the public-sector position on a number of issues important to Galileo was the heads of
terms agreed with the bidders at the end of 2006.

30 A detailed overview of the

criteria used for auditing the

public sector’s management of

the Galileo concession process,

together with a summary of the

assessment for each criterion is

given in _**Annex IV**_ .

31 A public sector comparator is an

estimate of what the project would

cost if traditional procurement

methods were used. This is used

to help determine whether

private finance offers better

value for money than traditional

procurement.

32 Only the joint venture model

and the concession model were

investigated.

33 Several constraints for a

PPP were highlighted, such as

revenue uncertainty (market

risk), technological risks,

interdependencies between

development and deployment

phases (design risk), and industrial

concentration in the space

manufacturing sector.

34 The GJU issued a first set of

tender documentation less than

eight months after becoming

operational.

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24

(c) Appropriate management resources: the GJU was a new organisation, with a novel legal set-up, a newly-assembled team, a new
chief and no past experience in concession negotiations. External
advisors were not called upon until September 2004 (i.e. after the
issue of tender documentation and the initial stage of competitive dialogue).

(d) Maintaining competition: from autumn 2004 onwards, there were
two competing industrial consortia. They proposed in May 2005 to
join forces to present a single bid. The GJU agreed to the merger
on certain conditions [35] and in the hope of achieving greater value
for money. In the absence of a public sector comparator, any
competitive element in the procedure was lost.

(e) Regular review: the public sector should regularly review an ongoing PPP project to ensure that it continues to offer value for money.
Although the GJU’s reports evaluating the concession identified
several risks and problems [36], its reporting on the programme’s
progress was unduly positive. In its regular official statements
it never questioned the feasibility of the concession but merely
postponed the deadline for awarding the contract each year for a
further twelve months. As a consequence, those Member States,
which relied on the GJU did not have sufficient information on
which to request corrective action (see also paragraph 74(f)).

**T** **HE** **PPP** **MODEL** **CHOSEN**

**42.** The choice of a PPP in the form of a concession was proposed by the
Commission and decided upon by the Council as a political consensus
between Member States. This PPP concession, based on a cost share
of at most 1/3 public and at least 2/3 private contributions which
the GJU was required to negotiate, differed substantially, in several
respects, from any other PPP then in existence [37] :

(a) Galileo has a high level of technological risk. It comprises a constellation of 30 medium earth orbit satellites with new components (such as a new type of atomic clocks) so far untested in

space.

(b) Revenue generation is difficult to predict as GPS open signals are
freely available. An exploitation model still has to be defined.

Special Report No 7/2009 — The management of the Galileo programme’s development and validation phase

35 Compliance with EU

legislation on public markets and

competition, a rigid time frame,

substantial bid improvements with

respect to the previous individual

offers and a commitment by the

merged consortium to a common

and adequate legal structure.

36 Evaluation reports of

October 2004, February 2005 and

June 2005.

37 Traditional PPP infrastructure

projects relate for instance to

tunnels and roads. The most

comparable PPP, Paradigm/Skynet

(UK defence telecommunications

system), is however different from

Galileo in many ways: it has a

lower technological risk, the UK

Ministry of Defence represents a

secure baseline revenue source, an

existing track record of operations

is available and the project is

piloted by a single sponsor with

PPP experience (UK Ministry

of Defence).

25

(c) The Galileo concession was to start after rather than before system design and partial infrastructure development by the public
sector. While close to the DBFO (design — build — finance —
operate) concession type, the Galileo PPP differed significantly
in that a private concession holder was expected to commit itself
to building, financing and operating a new system that had been
conceived and handed over by the public sector ( _**Box 2**_ ).

**THE MAJOR RISKS OF THE CONCESSION**

The three main factors impeding the concession negotiations were the transfer from the public to the
private sector of market risk, design risk and the third-party liability regime.

To transfer market risk, there was a need for confidence that market revenue could be obtained in
accordance with an agreed baseline market development scenario. However, market uncertainty, the
prospect of revenue being far in the future and the anticipated major role of the public sector in market
development made it difficult to transfer this risk to the private sector.

To transfer design risk, there was a need for assurance that the design (prepared by the ESA during the
development and validation phase) had no inherent problems that might result in a faulty or underperforming system (for which the concession holder would be responsible during operation). It was
difficult to transfer this risk, not only because of the technical complexity of the Galileo design and the
outputs expected of the concession holder during the operational phase, but also because of the division of duties between, on the one hand, design and development (the ESA) and, on the other hand,
deployment, operation and maintenance (concession holder).

The third-party liability regime concerns extra-contractual liabilities towards potential victims of Galileo
failures, for which no specific legal or insurance model is available.

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26

**TECHNOLOGICAL DEVELOPMENT ACTIVITIES DELAYED**
**AND OVER BUDGET**

**OBJECTIVE**

**43.** The second of the GJU’s four main tasks was to supervise the ESA’s
technological development activities so as to ensure that sufficient
satellites and ground segment installations were constructed and
made operational to demonstrate the capability and reliability of the
system, all within the planned time and budget (see paragraph 13).

**RESULTS**

**44.** By December 2006, only one experimental satellite (GIOVE-A) was operational and had successfully secured frequency filings for Galileo with
the International Telecommunications Union. The second experimental satellite (GIOVE-B) was launched in April 2008, 30 months later
than originally planned. The current schedule [38] has the development
and validation phase terminating in 2010 — five years late. According
to the cost estimates produced by the ESA in July 2008 [39], development
and validation will cost 1 billion euro more than the initial budget of
1,1 billion euro (see _**Table 3**_ ).

38 Regulation (EC) No 683/2008.

39 The estimates were earlier

updated in February 2005 and

May 2007.

|Activity|Initial budget estimate|July 2008 budget estimate|
|---|---|---|
|Galileo System Test Bed (GSTB-V2)|85|173|
|Launchers|90|224|
|In-Orbit-Validation (IOV)|747|1 253|
|ESA cost|110|303|
|Other|68|151|
|**Total**|**1 100**|**2 104**|

27

**REASONS FOR DELAYS AND COST OVERRUNS**

**45.** The GJU’s task of supervising technological development activities was
seriously constrained by governance issues, an incomplete budget,
delays and the industrial organisation of the development and validation phase.

**46.** The GJU was given the task of supervising technological development,
but this task was not further defined. In practice, ESA worked without
supervision from the GJU but in accordance with its own rules and
procedures. The GJU’s supervisory role vis-à-vis the ESA was at odds
with its governance structure. It is further treated as a governance
issue in paragraphs 66 to 74.

**47.** The _Galileo budget_ for development and validation, as presented to the
Council [40], was _incomplete_ . It did not contain any explicit contingency
budget or reserve [41] . It was lower, at 1,1 billion euro, than the cost
estimates resulting from the definition phase. Moreover, no allowance
was made for the Commission’s 50 million euro financial contribu
tion to the GJU, and security requirements (120 million euro) were
not factored in [42] . The overall resource requirements and costs of a
project should be established at the planning stage, including, where
needed, change and contingency budgets. The experience of other
organisations suggests that space programmes typically need a contingency budget of between 10 % and 40 %, depending on programme
complexity, the degree of innovation and the number of unknowns.

**48.** The development and validation phase did not start until May 2003,
_29 months later than planned_ (see paragraph 15). According to ESA
calculations, confirmed by the GJU, some 142 million euro in extra
costs can be attributed to this delay [43] .

40 COM(2000) 750 of

22 November 2000.

41 On ESA’s participation in the

development and validation phase

(which is half of the total budget)

a _de facto_ contingency allowance

of 20 % applies: if the cumulative

cost overrun is lower than 20 %

of the programme’s financial

envelope, no participating Member

State is allowed to withdraw from

the programme.

42 Security requirements were

considered too late in the

programme: in 2004 the Galileo

Security Board announced

additional requirements worth an

estimated 120 million euro in extra

costs. The resulting 1 000 change

requests had far-reaching

consequences on the technical

baseline and thus on ongoing

development activities.

43 This sum comprises:

(a) 41 million euro to develop

a second test satellite in order

to mitigate the risk entailed

in securing frequency filings

before June 2006, there being

too great a risk with only one

satellite; (b) 15 million euro for

additional payload developments;

(c) 40 million euro in extra costs

incurred by ESA for the major

change in schedule; (d) 46 million

euro in extra labour costs

for industry due to changing

economic conditions.

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28

**49.** The _industrial organisation_ of the development and validation phase,
characterised by a specific set up based on an ad hoc prime contractor, _led to delays and cost overruns_ . A competitive environment is
expected to be beneficial for achieving results on time and within
budget. In 2000, a joint venture of leading European space companies
was created [44] to act as industrial prime to develop and deliver the
Galileo infrastructure. In an oligopolistic environment such as the
European space industry, the creation of the joint venture further
reduced competition. The ESA had no choice but to place several contracts with this joint venture between July 2001 and December 2004.
Several of the contracts suffered from significant delays and cost overruns. According to ESA reports, these problems were to be attributed
to problematic management, non-clarity of reporting and decision
lines and the fact that the selection of subcontractors was driven
by ‘self-imposed industrial distribution constraints rather than cost
and schedule efficiency’. As a consequence of serious problems in
the implementation of the main contract of the development and
validation phase, the ESA decided in December 2007 to modify substantially the IOV _industrial organisation_ and contractual framework.
The ESA took over the tasks and responsibilities of the overall prime
contractor. This reorganisation will mean that additional costs [45] are
incurred during the development and validation phase. According
to ESA estimates, this will include 350 million euro for the revised
industrial framework and 194 million euro for ESA costs [46] .

**50.** The _stalling of the concession negotiations_ in the second half of 2005
(see paragraph 23) also affected technological development: the
programme was delayed by four and a half months, and extra costs
of 103 million euro can be attributed to this delay and to the implementation of the 5 December 2005 agreement [47] .

**LIMITED USEFULNESS OF RTD ACTIVITIES**

**OBJECTIVE**

**51.** The GJU’s third task [48] was to initiate and manage the necessary research
activities to support achievement of the key tasks and objectives
of the Galileo development and validation phase (i.e. technological
development and early development of user segments — see also
paragraphs 13 and 14).

Special Report No 7/2009 — The management of the Galileo programme’s development and validation phase

44 The location and functions of

the headquarters, the company’s

management structure and the

allocation of work packages to the

various subcontractors were the

subject of an agreement between

different governments.

45 Including termination of the IOV

contract.

46 Extension of IOV coverage

until 2010 and preparation of

procurement responsibilities for

full operational capability (FOC).

47 The partners in the merged

consortium agreed to establish

two identical Galileo Control

Centres (GCC) composed of a GMS

(ground mission segment) and a

GCS (ground control segment),

but to cross-implement the GCC

through the Germany-based GMS

and the Italy-based GCS, rather

than having one operational

and one back-up GCC. It was

also agreed to set up a third

GMS in cold back-up mode and a

third GCS.

48 The Commission gave this

mandate to the GJU in its FP6 work

programme of 9 December 2002

(thematic priority 1.4: ‘Aeronautics

and space’). It was translated into

three annual specific support

action (FP6) contracts with

the GJU.

29

**RESULTS**

**52.** Between September 2003 and December 2006 the GJU selected, negotiated and monitored a total of 70 research projects worth 110 million euro and financed from FP6 through several calls for proposals.
Activities focused on user segment development, which consisted in
fostering innovative services and applications of appropriate technology (receivers, local components), and on market development in
different user communities. RTD activities also included some technological development of the Galileo system and EGNOS demonstration
activities.

**53.** The audit showed [49] that the GJU was generally perceived as an efficient
structure for implementing the Galileo area of the FP6 work programme [50] . The research projects raised interest and awareness in the
user communities and have succeeded in bringing different organisations and stakeholders together. However, the ultimate use of the
RTD activities for the Galileo programme is limited. The GJU did not
sufficiently exploit the project results to formulate a coherent set of
user-validated requirements that could serve the ESA as the basis for
the Galileo system specification. A high number of projects consisted
in a detailed analysis of the regulatory efforts required both at EU and
Member State level to foster GNSS applications in a large number of
economic and social sectors. No follow-up was given to the results
of these projects.

**REASONS FOR LIMITED USEFULNESS**

**54.** Discontinuities, the inappropriateness of FP6 for funding market development activities, the absence of a comprehensive market-development
approach and delays account for the limited usefulness of Galileo RTD
results.

**55.** When the Commission proposed winding up the GJU, it intended to
ensure programme _continuity_ by making a smooth transfer of activities to the GSA [51] . However, transferring the task of monitoring more
than 50 projects from the GJU to the GSA led to delays and caused
problems in terms of project support, project follow-up, and the dissemination of project results [52] .

49 Especially through the survey

and interviews of FP6 participants.

50 The survey results reveal

a positive overall view of the

GJU management, especially

in the following areas: tender

documentation (statements of

work), contract management,

monitoring and reviews. The areas

considered to need improvement

included: the policy of intellectual

property rights and the

dissemination and use of results.

51 COM(2006) 261 — Proposal for

a Council Regulation amending

Regulation (EC) No 1321/2004 on

the establishment of structures

for the management of the

European satellite radio-navigation

programmes, 2 June 2006.

52 75 % of the 482 survey

participants reported a negative

impact on their project(s).

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30

**56.** The instrument for granting FP subsidies is inappropriate for funding
market development activities. FP6 grants (following a call for proposals) essentially follow a bottom-up approach with no centralised
exploitation of results. Ideally, the FP6 activities should have been
supported by consolidating their results in a _comprehensive top-down_
_market development approach_ at the level of the GJU/GSA (see also
EGNOS — paragraph 65). Without such a pro-active approach, it is difficult to ensure projects’ continued utility for the Galileo programme
once they have been completed.

**57.** The survey results also confirmed that the _cumulative programme delays_
(in technological development, EGNOS operations and the concession
negotiations) adversely affected both the execution of FP6 projects
(for instance through the unavailability of the EGNOS signal) and the
future exploitation of project results (due to their impact on GNSS
business and research development opportunities).

**EGNOS INTEGRATION ONLY PARTIALLY SUCCESSFUL**

**OBJECTIVE**

**58.** As Galileo’s precursor, EGNOS has a crucial role in the early development
of user segments (see also paragraph 14). The GJU’s fourth task was
to ‘oversee the optimal integration of EGNOS into Galileo’ (see footnote12). EGNOS and Galileo being two fully independent systems (see
_**Annex II**_ for a detailed comparison of EGNOS and Galileo), integration
does not relate to the technical sharing of infrastructure but to the
following.

(a) Integration into the Galileo governance and management structures was considered necessary in order to handle issues such as
the conclusion of an agreement among the owners of EGNOS [53],
the integration of EGNOS and Galileo financing [54] and the timing
for appointing an EGNOS economic operator.

(b) At market level, the purpose of integration was to prepare the way
for the market introduction of Galileo, using EGNOS as a precursor
system, since it will deliver regional services similar to three of
the five future Galileo services.

Special Report No 7/2009 — The management of the Galileo programme’s development and validation phase

53 Also called the EGNOS

framework agreement.

54 This objective arose because

of the financing problems facing

EGNOS in January 2006.

31

**RESULTS**

**59.** On the political front, EGNOS and Galileo have been integrated into a
single European GNSS policy. Similarly, from a financial point of view,
Commission funding for EGNOS has been incorporated into Galileo
funding.

**60.** However, EGNOS has suffered from delays, and the main challenges of
the programme, such as market development, certification and the
role of the different stakeholders, are still unresolved:

(a) Since October 2004 a framework agreement on the ownership and
future exploitation of EGNOS has been under negotiation. As of
September 2008, there was still no such agreement. The EGNOS OS
signal has technically been available since July 2006, but without
an economic operator it cannot be declared operational [55] .

(b) The GJU’s market penetration plan was never implemented and a
certifiable version of EGNOS is not expected until March 2009, at
least two years later than expected [56] .

**REASONS FOR LIMITED SUCCESS**

**61.** The GJU’s success in attaining its fourth objective was hampered by a
number of factors:

(a) the GJU’s role and mandate vis-à-vis EGNOS was not clear;

(b) the decision to integrate EGNOS into Galileo was detrimental for
EGNOS;

(c) the EGNOS institutional framework is very complex;

(d) the GJU devoted too little effort to market development activities.

55 Due to liability issues and

uncertainty about the future of

EGNOS financing and governance.

56 In the absence of clear

milestones and planning

for EGNOS, this is only a

conservative estimate.

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32

**62.** The GJU’s _role and mandate vis-à-vis EGNOS was not clear_ . The GJU stat
utes stated only that the GJU would ‘oversee the optimal integration
of EGNOS in Galileo’. According to the Tripartite Agreement [57], ESA
was responsible, through its ARTES-9 programme, for the technical
development and operation of EGNOS. But these legal texts do not
make clear who was the overall EGNOS programme manager. In the
_absence of a programme manager_, EGNOS clearly lacked a long-term
strategic vision [58], which led to uncertainty, delays and cost overruns
( _**Annex II**_ ).

**63.** Even though the decision to _integrate EGNOS into the concession nego-_
_tiations_ secured continued Community funding, it at the same time
held up the achievement of the EGNOS programme because:

(a) delays in the concession negotiations put back the EGNOS technological development deadlines; and

(b) all activity in connection with the appointment of an economic
operator for EGNOS was stopped because this was the responsibility of the Galileo concession holder.

In addition, the need to conclude a framework agreement for EGNOS
made the concession negotiations more complex.

**64.** The EGNOS _institutional framework is very complex_ . The various financial
stakeholders in EGNOS all have different priorities. As the owner of
EGNOS assets for the duration of the ARTES-9 programme, the ESA acts
on behalf of the countries with a financial stake in that programme.
Any transfer of ownership is conditional on their consent [59] . The Commission has no ownership rights to EGNOS, but through the GSA,
according to Regulation (EC) No 1321/2004, it should become the
owner of EGNOS assets. The absence of a clear mandate for the GJU as

EGNOS programme manager resulted in doubts as to whether the GJU
was empowered to negotiate a framework agreement for EGNOS.

Special Report No 7/2009 — The management of the Galileo programme’s development and validation phase

57 Agreement between the

European Community, the

European Space Agency and

the European Organisation for

the Safety of Air Navigation

on a European contribution

to the development of a

global navigation satellite

system (GNSS), signed in 1998

(OJ L 194, 10.7.1998, p. 16).

58 For instance: long-term financial

commitment, stable technical

baseline, clear path towards future

governance, prioritisation of

objectives with regard to EGNOS

extension outside Europe, clear

vision on complementarity of

EGNOS and Galileo.

59 According to the bilateral

agreements between ESA

and eight national air traffic

(management) service providers

and other agencies.

33

**65.** In addition, the GJU‘s attention was dominated by institutional, financial
and international cooperation issues and _limited time and resources_
_were devoted to the early development of a set of service enablers_ for
EGNOS: the GJU did not exploit FP6 market development results in
a centralised way (paragraph 56) and did not implement the EGNOS
market penetration plan.

**INADEQUATE PUBLIC-SECTOR GOVERNANCE**

**66.** The following sections focus on the division of roles and on how the
Commission fulfilled its role as the key promoter of the Galileo

programme.

**UNCLEAR DIVISION OF ROLES**

**67.** The division of roles between the entities involved in the development
and validation phase of the programme (EU and ESA Member States,
Commission, GJU and ESA) was not clearly defined.

**68.** The GJU’s ability to manage the programme effectively was constrained
by:

(a) Its governance structure ( _**Figure 2**_ )
The GJU statutes gave it a supervisory role vis-à-vis the technological development work to be done by the ESA. However, the
ESA was both a founding member of the GJU (and thus represented
on the Executive Committee and the Administrative Board) and a
’contractor’ (recipient of funding and responsible for implementation under the ESA/GJU agreement). Thus, in practice, the GJU
was not in a position to supervise the ESA effectively due to this
conflict of interest for the ESA within the GJU.

(b) Its temporary nature
Closing down the GJU before the end of the development and
validation phase undermined its authority [60] .

60 The Commission acknowledged

in its communication of May 2007

that ‘the timing of the hand-over

of activities from the GJU to the

GSA on 1 January 2007 has proven

to be suboptimal (…). The GSA was

still in the process of being built

up and its relationships with the

Commission and ESA not settled.’

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**69.** The ESA/GJU agreement on implementing technological development
activities in the development and validation phase (negotiated by the
Commission before the GJU became operational [61] ) was not specific
enough (a better model would be the ESA–Eumetsat agreements [62,] [63] ).
This resulted in a lack of clarity regarding the rules governing the
placing of contracts [64], transfer of ownership, reporting and implementation [65] . The agreement did not clarify the roles of the different actors.
In the spirit of the framework agreement between the ESA and the
European Community [66], these roles should have been complementary:
the ESA as the competent technical body, the Commission addressing
the political dimension and the GJU addressing user requirements
and certification.

**70.** The ESA was both involved in programme management (through the GJU)
and responsible for the day-to-day management of the technological
development activities of both Galileo and EGNOS.

**71.** The unclear division of roles resulted in unclear lines of accountability.
Many decisions relating to Galileo were affected by the fact that
no one actor (Commission, GJU, ESA, Member States) assumed full
responsibility: the decision in favour of separate development and
deployment phases, the choice of a PPP, acceptance of the bidders’
merger proposal, the ESA/GJU agreement, incomplete budgeting,
delays to EGNOS technological development and the IOV industrial
organisation.

**72.** Management of the programme was also made more difficult by interventions by Member States in the management of individual programme
components (paragraphs 23 and 49).

61 Later formally adopted by the

GJU Administrative Board and

signed by the Executive Director.

62 Eumetsat (the European

Organisation for the Exploitation

of Meteorological Satellites) is an

intergovernmental organisation,

formed to service a total of

21 Member and nine Cooperating

States.

63 The ESA is responsible for the

development of the space segment

of Eumetsat programmes, and

Eumetsat is responsible for the

overall system. The ESA–Eumetsat

agreements are more elaborate on

aspects such as:

- financial liability, its breakdown

into industrial price and ESA

costs, and procedures to ensure

that limits of financial liability

are respected;

- the use of a management

margin and approval

procedures;

- the establishment of clear

communication lines;

- clear procedures for dealing

with change notices that are

not covered by the work initially

envisaged;

- ownership of physical and

intellectual property.

64 ESA applies the ‘fair-returns’ principle as part of its industrial policy. In other words, a country paying a contribution to ESA will

receive, within a certain margin, industry contracts of a value equivalent to that contribution. In theory, this principle applies to only

50 % of the budget for development and validation. In practice, it is not possible to apply such rules to 50 % of an activity that is

managed as being one and indivisible.

65 For example, on the implementation and financing of certain change notices, such as authentication, data exchange, high

precision positioning service and the 5 December agreement.

66 Framework agreement between the European Community and the European Space Agency (OJ L 261, 6.8.2004, p. 64).

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**GOVERNANCE STRUCTURE OF THE GJU**

The GJU was governed by an Executive Director, four Boards and an Executive Committee. All issues
on the agenda of the Administrative Board were prepared at Executive Committee meetings and
were first discussed at the level of the EU Member States by the Supervisory board and at the level
of the ESA Member States at the PB-Nav (Programme Board on Satellite Navigation). The ESA and the
Commission had an equal number of votes on the Administrative Board, which required a consensus
for all decisions.

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**THE PROGRAMME LACKED A STRONG STRATEGIC SPONSOR**

**AND SUPERVISOR**

**73.** Between 1999 and 2004, the Commission actively played its role of initiating the programme and getting it started. Delays and cost overruns
became apparent in the course of 2005, but no significant corrective
action was taken until March 2007.

**74.** Throughout the programme, the Commission, as the programme’s key
promoter, did not observe a number of management principles, such

as:

(a) Setting clear, realistic and acceptable objectives: the programme
has multiple objectives, which resulted in a diverse range of stakeholder expectations. In addition to its political, economic and
technological motives (paragraph 7), Member States have seen
Galileo as a means of consolidating the European space industry.
For some Member States, the possible military or defence use of
the system has been an equally important objective. The Commission did not prioritise the programme’s objectives.

(b) Defining appropriate strategies and instruments to pursue them:
the Commission has not pursued a long-term strategic vision for
the EGNOS and Galileo programmes [67] but has focused on shortterm goals and decisions. This is illustrated by:

(i) the absence of a roadmap for EGNOS and Galileo. Issues relating to, for instance, the future exploitation model for Galileo and EGNOS, the implementation of system priorities (e.g.
which service to implement first) or the development of noncivil aviation markets for EGNOS still had to be resolved at

the end of 2008;

(ii) the problems encountered in negotiating a framework agreement for EGNOS. As part of European satellite navigation policy, the Commission proposed uniting the EGNOS and Galileo
programmes under a single umbrella: the European satellite
navigation programmes. However, this was done without
the prior agreement of the other EGNOS stakeholders (paragraphs 5 and 64) and with little thought for the complexity
of the institutional framework. The GJU (and later the GSA)
was charged with negotiating such an agreement, but at the
end of 2008 no progress had been made. As a result, technical
issues (managed by the ESA) apart, no entity was empowered
to take key decisions concerning EGNOS and to direct the

programme;

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67 Such as the complementarity of

the two programmes, models for

the future exploitation of EGNOS

and Galileo or the implementation

of system priorities.

37

(iii) the Commission’s preoccupation with navigating the programme from one Council meeting to the next (see for example
paragraphs 21 and 22 on the Commission’s communication of
6 October 2004).

(c) Setting up a future (permanent) organisation: between July 1999
and December 2006 the Commission charged six different temporary structures with providing technical support for Galileo
programme management or with the actual management task.
The GJU was the fifth such initiative. As a flexible and dedicated

organisation with an entrepreneurial mindset, it could have been
an effective programme manager. However, its position was
undermined by its temporary nature [68], its governance structure
( _**Figure 2**_ ) and its lack of expertise.

(d) Securing the appropriate skills to perform all programme components managed and supervised by the public sector: when setting
up the GJU, the Commission did not pay sufficient attention to
the fact that it was a new organisation and that it had insufficient experience and expertise to perform its tasks (see also
paragraph 41(c)).

(e) Providing for risk management: at the programme’s outset, the
Commission did not adequately address the risks related to the
Galileo concession (e.g. market risk, design risk and technological
risk) (see also paragraph 41(a) and _**Box 2**_ ) and thus launched the
concession process without the necessary preparation.

(f) Taking timely decisions on all programme features: the Commission did not sufficiently critically review or monitor the GJU’s
progress reports. Commission communications consistently echoed the positive tone of official GJU statements. As a consequence,
the Commission did not request or take significant corrective
action until March 2007, even though the concession deadline
was postponed annually for a further twelve months.

68 Even before the GJU became

operational, the Commission

published a proposal for a Council

Regulation setting up the GSA as

its successor (COM(2003) 471 final

of 31 July 2003).

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#### CONCLUSIONS AND RECOMMENDATIONS

**75.** The management of the development and validation phase was inadequate. The Galileo programme experienced problems at different
levels:

(a) The GJU was not a strong programme manager nor was any other
body assigned this role. It did not meet most of its objectives —
owing, however, to factors that were largely outside the GJU’s
control.

(b) The programme lacked a strong strategic sponsor and supervisor:
the Commission did not proactively direct the programme, leaving
it without a helmsman. The programme’s management suffered
a number of shortcomings: an absence of realistic objectives, an
appropriate strategy and skills; insufficient preparatory work; and
the long reaction time before the taking of corrective action.

(c) Owing to their different expectations for the programme, Member States intervened in the interest of their national industries

causing decisions to be held up. The resulting compromises led
to implementation problems, delays and, in the end, to cost

overruns.

**WHICH FACTORS ACCOUNTED FOR THE FAILURE**
**OF THE CONCESSION PROCESS?**

**76.** The PPP was inadequately prepared and conceived. As a result, the GJU
was required to negotiate a PPP which was unrealistic (paragraphs 35
to 42).

**WHICH FACTORS ACCOUNTED FOR THE REPORTED**
**DELAYS AND COST OVERRUNS OF TECHNOLOGICAL**
**DEVELOPMENT?**

**77.** The GJU’s task of supervising technological development activities was
seriously constrained by governance issues, an incomplete budget,
delays and the industrial organisation of the development and validation phase (paragraphs 43 to 50).

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**TO WHAT EXTENT HAS SPENDING ON RESEARCH**
**AND DEVELOPMENT ACTIVITIES BENEFITED**
**THE GALILEO PROGRAMME?**

**78.** The RTD results were of limited usefulness because of discontinuities, the
inappropriateness of FP6 for funding market development activities,
the absence of a comprehensive market development approach and
delays (paragraphs 51 to 57).

**HOW WELL HAS THE GJU INTEGRATED EGNOS**
**INTO GALILEO?**

**79.** The integration of EGNOS into Galileo was only partially successful
because the GJU’s mandate was not clear, the decision to include
EGNOS in the concession negotiations held up the achievement of
the EGNOS programme, the EGNOS institutional framework was not
clear and the GJU devoted little effort to market development for
EGNOS (paragraphs 58 to 65).

**WAS THE GALILEO PROGRAMME ADEQUATELY**
**GOVERNED?**

**80.** The programme’s governance was inadequate. The division of roles
between the entities involved in the development and validation
phase of the programme (EU and ESA Member States, Commission,
GJU and ESA) was not clearly defined. The Commission did not provide adequate leadership in developing and managing Galileo (paragraphs 66 to 74).

**LESSONS FOR THE FUTURE**

**81.** The Galileo programme organisation has changed markedly since 2007.
But many of the lessons learned from the GJU are of relevance both
to the continuing Galileo programme and to further possible joint
undertakings and industrial programmes.

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40

**82.** The Commission has proposed itself as _programme manager_, a ch _alle_ nging
role for which it has little experience. While this may be an expedient
solution for the short term, the Commission should consider whether
this would be the most appropriate long term arrangement. The Court
has the following recommendations.

**83.** Galileo needs a clear direction to be successful. Decisions on its future

cannot be taken by the Commission alone but clear leadership is
paramount.

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41

**84.** The failure of the concession negotiations does not imply that there is no
basis for a Galileo concession in the future. But any future attempts to
involve private finance need to be based on a more realistic assessment of what is marketable and if the case for a PPP really exists. It
should be noted that successful exploitation models exist for other
international satellite projects, such as Inmarsat, Intelsat, Eutelsat
or Eumetsat.

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42

**85.** Depending on the decision of how Galileo should be positioned as a
commercial system (see recommendation 2), the European Union will
either have to engage in fostering early market development of Galileo/EGNOS revenues (for generating direct revenues to offset against
costs) or accept to fund Galileo’s total potential costs (potentially
10 billion euro over the coming 20 years). In the former case, an
appropriate framework for users should be created.

**86.** The Commission has since created other joint undertakings (SESAR, ITER
and several Joint Technology Initiatives (JTIs)). Experience of Galileo
suggests that the approach to these new ventures should be well
planned and realistic.

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This report was adopted by the Court of Auditors in Luxembourg at its
meeting of 14 May 2009.

_F_ _**o**_ _r_ _**t**_ _h_ _**e**_ _**Cou**_ _r_ _**t**_ _**o**_ _f A_ _**ud**_ _i_ _**to**_ _r_ _**s**_

Vítor Manuel da Silva Caldeira

_President_

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**THE EUROPEAN SPACE AGENCY**

The ESA is an intergovernmental organisation, created in its current form in
1975 from the merger of two existing agencies, ELDO (European Launcher
Development Organisation) and ESRO (European Space Research Organisation). The ESA has 18 Member States: Austria, Belgium, Czech Republic,
Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the
Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United
Kingdom. The national bodies responsible for space in these countries sit
on the ESA’s ruling Council.

The ESA’s purpose is to provide for and to promote, for exclusively peaceful purposes, cooperation among European States in space research and
technology and their space applications, with a view to their being used for
scientific purposes and for operational space applications systems.

The ESA’s activities fall into two categories — ‘mandatory’ and ‘optional’. Programmes carried out under the General Budget and the Science programme
budget are ‘mandatory’; they include the Agency’s basic activities (studies
on future projects, technology research, shared technical investments, information systems and training programmes). All Member States contribute to
these programmes on a scale based on their GDP. The other programmes,
known as ‘optional’, involve a reduced number of Member States which are
free to decide on their level of participation. Both ARTES-9 and GalileoSat
are optional programmes. The ESA’s budget spending for 2006 amounted
to almost 3 billion euro.

The ESA and the European Community are mutually independent organisations. They have different Member States and are governed by different rules
and procedures. The ESA is not bound by EU regulations.

A framework agreement between the ESA and the European Community (in
force since May 2004) formalises cooperation between the two institutions.
The European space policy, signed in May 2007, unifies the ESA’s approach
with those of the individual EU Member States and creates, for the first time,
a common political framework for space activities in Europe.

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**EGNOS FACTS, FIGURES AND ILLUSTRATIVE EXAMPLES**

**COMPARISON BETWEEN EGNOS AND GALILEO**

|Col1|EGNOS|Galileo|
|---|---|---|
|Link with other GNSSs|Augments the GPS and Glonass signals|Fully independent from other GNSSs|
|Services|3: OS, SoL, SAR|5: OS, CS, PRS, SoL, SAR|
|Coverage|Regional (Europe)|Global|
|Space segment|3 transponders on geostationary (GEO)<br>satellites orbiting at 36 000 km|30 medium earth orbit (MEO) satellites<br>orbiting at 23 000 km|
|Ground segment|4 MCCs (Mission Control Centres)<br>34 RIMS (Ranging and Integrity<br>Monitoring Stations)<br>6 NLES (Navigation Land Earth Stations)|3 GCCs (Galileo Control Centres)<br>20 GSSs (Galileo Sensor Stations)<br>5 S-band up-link stations<br>10 C-band up-link stations|
|Financed by|ESA, European Commission, Eurocontrol,<br>EOIG, GJU stakeholders|ESA, European Commission, China, Israel|

**EGNOS FUNDING SOURCES**

**EGNOS funding sources (Total 630 million euro, 2001 prices)**
**Funds allocated between 1995 and 2007**

Eurocontrol

GJU

staholders
7 % European
Commission

(TET + FP7)

28 %

ESA Member

States

(ARTES)

37 %

EOIG

26 %

_Source_ : ECA estimate.

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**EGNOS LACKED A LONG-TERM VISION**

The EGNOS objectives were gradually adapted during the programme’s transformation from a demonstrator to a fully fledged operational programme. It
suffered from the absence of a long-term strategy and political commitment.
The following are some examples.

(a) EGNOS grants from the European Commission were paid in annual
tranches and systematically arrived late. Contributions from ESA Member States were also late. Some programme activities were therefore
delayed, giving rise to uncertainty about the programme’s deployment
planning.

(b) Mid-term, changing requirements, evolving standards and new ideas on
the certification of the system caused delays and extra costs.

(c) As of September 2008, there was still no roadmap for EGNOS.

(d) Although the EGNOS OS signal became available in July 2006, as of September 2008 the system had still not been declared operational due to
issues of third party liability, uncertainty about the programme’s future
in terms of financing and governance and the Commission’s reluctance
to accept the system technically.

(e) Despite the ESA’s and the GJU’s efforts to demonstrate the capabilities
of EGNOS overseas (e.g. in Africa, China and South America), there is no
real strategy to support EGNOS outside Europe.

(f) In the GJU’s organisational structure EGNOS was assigned to the technical division rather than treated as a fully fledged, cross-sectoral programme. Until 2006 the GJU did not receive the financial means from
the Commission to devote to specific EGNOS-related studies.

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**INTERNATIONAL COOPERATION ON GALILEO**

The EU has entered into several international agreements related to
Galileo.

Cooperation agreements have been signed with the United States (2004)
and with Russia (2006) in order to ensure interoperability and compatibility
between Galileo and existing GNSSs such as GPS and Glonass.

Cooperation agreements with China (2003) and Israel (2004), respectively,
brought GJU membership of the NRSCC and Matimop.

General cooperation agreements have been signed with Ukraine (2005),
India (2005), Morocco (2005), and South Korea (2006) but have never led to
a concrete participation or GJU membership.

The purpose of all these agreements was to minimise the technological
and political risks, promote and reinforce industrial and political know-how,
stimulate the provision of system applications, offer third-country market
penetration, promote Galileo as an international standard and prepare the
ground for the installation of terrestrial-segment components in different
regions of the world.

Relations with the Chinese and Israeli undertakings were damaged when
the GJU was wound up and problems arose with transferring the relevant
agreements to the GSA. Discussions on cooperation with further other countries such as Brazil, Mexico, Chile, Canada, Argentina and Australia were also
discontinued after the GJU was closed down.

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|Summary of assessment|A. Scoping the project|A.1 Selection of the project|Galileo was a unique project and the decision to implement it was of a political nature. Following a Commission initiative launched in the early 1990s, the Council approved the Galileo programme and entrusted the European Commission with its management. Subsequently, at the Commission’s proposal, and in order to launch the development phase, the public–private partnership / concession was decided upon as a political consensus between Member States. It was envisaged that the management and i fnancing of the subsequent phases would use this scenario. See successive Commission communications, Commission studies and Council conclusions from 1994 to 2003.|A.2 De i fnition of project requirements|As can be derived from the Commission’s preparatory work and decisions taken by the Council, the European public sector stated its requirements in very broad terms. The proposed concession was supposed to cover the i fnancing and management of deployment and operation — including replenishment — of the Galileo system. To that end, the concession holder would procure, launch, operate, exploit and maintain the system and its components during the concession period so as to deliver the i fve Galileo satellite services and to serve the subsequent development of downstream applications. Consideration was also given to including the management of EGNOS and the provision of EGNOS services in the contractual arrangements for the Galileo concession. The Commission’s preparatory work for the concession left a good deal of uncertainty on crucial issues, such as the underlying revenue model and the transition path between the development and deployment phases. While it identi i fed brie l fy some of the constraints facing the private sector’s participation in the project, it did not outline a public-sector strategy that could be proposed to the private sector. The Commission’s preparatory work thus failed to provide the private sector with clear requirements and constraints for the proposed Galileo concession.|
|---|---|---|---|---|---|
|**Have criteria**<br>**been met?**|**Have criteria**<br>**been met?**|**Have criteria**<br>**been met?**|Not assessed<br>(political<br>choice)|Not assessed<br>(political<br>choice)|Partly|
|**Body**<br>**responsible**|**Body**<br>**responsible**|**Body**<br>**responsible**|Commission<br>(Council)|Commission<br>(Council)|Commission<br>(Council)|
|**Criteria (based on Intosai**<br>**guidelines on best practice**<br>**for the audit of public/private**<br>**f nance and concessions)**|**Criteria (based on Intosai**<br>**guidelines on best practice**<br>**for the audit of public/private**<br>**f nance and concessions)**|**Criteria (based on Intosai**<br>**guidelines on best practice**<br>**for the audit of public/private**<br>**f nance and concessions)**|_How did the audited body prioritise_<br>_potential projects? Did it implement_<br>_them in that priority order?_|_How did the audited body prioritise_<br>_potential projects? Did it implement_<br>_them in that priority order?_|_Did the audited body state its_<br>_requirements clearly from the_<br>_start and express them in output_<br>_terms making clear any particular_<br>_constraints to which the private sector_<br>_will be subject?_|

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|A.3 Private-sector capabilities|The Commission’s preparatory work concluded positively, if in broad terms, on the feasibility of a concession as opposed to the alternative joint venture model (which took the form of capital shares in the GJU). The private sector was judged reluctant to participate and invest in the latter owing to uncertainty about the expected i fnancial returns and the potential for con l ficts of interest in the development and validation phase. It also concluded positively that the European private sector had the necessary capabilities to deliver the Galileo system and services through its established technical know-how and its proven experience in i fnancing and managing large projects. However, as stated in A.2, the project requirements were not su if fciently clear. Consequently, the assessment of the private sector’s capabilities for delivering these requirements remained overly general. The Commission was therefore not in a position to make a preliminary assessment of the private sector’s capabilities.|A.4 Evaluation of potential bene i fts|The rationale for implementing Galileo through a PPP included the following arguments (cf. Commission Communication of 10 February 1999): complementary i fnance, improved project design, overall value for money, better take-up of the service, central importance given to users’ needs and better management of costs. One study carried out at the Commission’s behest produced a list of objectives: to achieve full operational capability as soon as possible, ideally by early 2008 in order to meet windows of opportunity in the GNSS market, to obtain a signi i fcant proportion of the deployment cost through private funding (with an indicative 2/3 share), to obtain value for money (by optimising the technical solution and system, optimising procurement competition and e if fciency, achieving an appropriate degree of risk transfer and creating i fnancial incentives for performance), to involve European industry so that it could bene i ft from the contracts to build the system and manufacture user equipment, to give the private sector responsibility for ensuring that system performance and speci i fcations met the performance requirements of the market as well as the public sector, to optimise revenue generation from the market, to reduce the need for public expenditure and spread the public contribution over a longer period, and to optimise whole life costs by introducing private-sector e if fciencies. The study recognised that a project with such a multitude of objectives would require trade-o f fs. However, the Commission’s preparatory work presented no trade-o f fs. What is more, these general objectives were not speci i fc enough for the proposed Galileo concession. The Commission should have outlined a strategy stating, for instance: (i) the public sector’s preferences for Galileo’s commercial exploitation; (ii) the public sector’s strategy for ensuring a practical transition path to resolve interdependencies between the development and deployment phases. Such elements could have subsequently served as meaningful evaluation and selection criteria against which to judge the bids submitted during the competitive tender process.|
|---|---|---|---|
|**A.3 Private-sector capabilities**|Partly|Partly|Partly|
|**A.3 Private-sector capabilities**|Commission|Commission|Commission<br>(Council)|
|**A.3 Private-sector capabilities**|_Did the audited body make a_<br>_preliminary assessment of the private_<br>_sector’s capabilities for delivering the_<br>_requirements?_|_Did the audited body make a_<br>_preliminary assessment of the private_<br>_sector’s capabilities for delivering the_<br>_requirements?_|_Did the audited body make a_<br>_preliminary evaluation of the benef ts_<br>_it sought?_|

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|Summary of assessment|A.5 Wider policy objectives (incl. regulatory aspects)|The Galileo project is hemmed in by strategic considerations (e.g. the potential for military use). The Member States disagree among themselves on such issues. Nevertheless, approximately one third of Galileo’s potential revenue is expected to come from the use of the PRS (public regulated service) by e.g. emergency services, security forces, the millitary. The development of GNSS applications also depends heavily on regulatory measures to be introduced at both Member State and EU level. Again approximately one third of potential revenue was judged to depend on legislative support from the public sector, without which the private sector cannot anticipate revenue. However, the Commission did not present a plan to boost Galileo’s chances of success by regulatory measures.|A.6 Selection of the most suitable form of partnership|A traditional public procurement was not investigated as part of the Commission’s preparatory work. The Commission limited itself to examining (i) the development of a business plan for the Galileo programme and (ii) the appropriate structure for a PPP. The Commission’s preparatory work proposed a PPP in the form of a concession model as opposed to a joint venture model. Contrary to one of the recommendations of two studies executed by PricewaterhouseCoopers (November 2001 and January 2003), no public-sector comparator was subsequently built to provide a benchmark against which the overall bene i ft of private-sector bids for the PPP could be measured, with a view to improving the public sector’s negotiating position.|A.7 Innovation|The Commission’s preparatory work recognised the need for innovation in the proposed Galileo concession, but did not precisely identify where or how innovation was possible. The Commission did not conduct any further preparatory work. At the outset of the concession selection process, the tender documentation encouraged bidders to propose innovative solutions by authorising them to present variant bids. However, the lack of clear requirements for the Galileo concession (see A.2) made it impossible for innovation to be considered up front during the selection process.|A.8 Risk assessment|No examination of the risk allocation at the preparatory stage took place. This would have been possible if clear requirements had been established for the private sector.|
|---|---|---|---|---|---|---|---|---|
|**Have criteria**<br>**been met?**|**Have criteria**<br>**been met?**|Partly|Partly|No|No|Partly|Partly|No|
|**Body**<br>**responsible**|**Body**<br>**responsible**|Commission<br>(Council)|Commission<br>(Council)|Commission<br>(Council)|Commission<br>(Council)|Commission|Commission|Commission|
|**Criteria (based on Intosai**<br>**guidelines on best practice**<br>**for the audit of public/private**<br>**f nance and concessions)**|**Criteria (based on Intosai**<br>**guidelines on best practice**<br>**for the audit of public/private**<br>**f nance and concessions)**|_Did the audited body assess the_<br>_impact any wider policy objectives_<br>_might have on the project?_|_Did the audited body assess the_<br>_impact any wider policy objectives_<br>_might have on the project?_|_Did the audited body examine a_<br>_range of alternative ways of meeting_<br>_its needs, such as traditional public-_<br>_sector procurement or privatisation,_<br>_before choosing the public/private_<br>_f nance and concessions option?_|_Did the audited body examine a_<br>_range of alternative ways of meeting_<br>_its needs, such as traditional public-_<br>_sector procurement or privatisation,_<br>_before choosing the public/private_<br>_f nance and concessions option?_|_Did the audited body identify the_<br>_scope for innovation in advance in_<br>_areas such as design and construction,_<br>_operation and project f nancing?_|_Did the audited body identify the_<br>_scope for innovation in advance in_<br>_areas such as design and construction,_<br>_operation and project f nancing?_|_Did the audited body investigate in_<br>_advance the appropriate allocation of_<br>_project risks between the public-sector_<br>_and private-sector parties af ected by_<br>_the project?_|

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|A.9 A f fordability and likely value for money|Although risks and di if fculties that would need to be overcome before establishing a concession with private partners were identi i fed at the preparatory stage, there was no assessment of the extent to which these uncertainties might a f fect project feasibility. The potential bene i fts of the Galileo project were examined, but the arguments for and against the concession approach were not fully developed. The a f fordability and likely value for money of the Galileo concession were not considered before starting the procurement process.|A.10 Outline business case|At the Council’s request (Council Resolution of 5 April 2001), the Commission undertook some preparatory work to support the development of a business plan for the Galileo programme and investigate an appropriate model (business case) for the PPP. Although this work made the case for public-sector support, citing the strong cost/bene i ft ratio, it did not clearly present the merits and drawbacks of using the concession model.|B. Project management|B.1 Project team|The GJU became operational in September 2003 when it took over existing sta f f from GISS. There were additional recruitments, but the GJU failed to recruit sta f f with prior direct experience of managing the process of setting up PPPs and concessions. The GJU appointed external advisors only at a late point in time in the selection process (i.e. after the issue of tender documentation and the competitive dialogue).|B.2 Market investigation|On 22 February 2003, the Commission launched a call for expressions of interest (OJ C 43, 22.2.2003, p. 12) from undertakings for the ‘Galileo concession’. This call aimed at constituting a database of interested companies and allowing them to prepare for the tender process. 85 companies expressed an interest and were registered in the database. Although an information day was organised for interested parties, no e f fort was made to assess their understanding and perception of the proposed concession requirements. In general,the interest of potential suppliers existed for a Galileo project, but they needed more precise requirements before entering into a concession.|B.3 Contractual matters|A draft contract was prepared during the selection phase and the competitive dialogue. However, the draft contract was still very premature given the existence of numerous uncertainties, not the least of which was the lack of any preference for an applicable law.|
|---|---|---|---|---|---|---|---|---|---|---|
|**A.9 Af ordability and likely value for money**|No|No|Partly|Partly|Partly|Partly|Partly|Partly|Partly|Partly|
|**A.9 Af ordability and likely value for money**|Commission|Commission|Commission|Commission|Commission|Shared<br>Commission —<br>GJU|Shared<br>Commission —<br>GJU|Commission|Commission|GJU|
|**A.9 Af ordability and likely value for money**|_Before starting the procurement_<br>_process, did the audited body consider_<br>_the extent to which the project was_<br>_likely to be af ordable and of er value_<br>_for money?_|_Before starting the procurement_<br>_process, did the audited body consider_<br>_the extent to which the project was_<br>_likely to be af ordable and of er value_<br>_for money?_|_Did the audited body prepare a proper_<br>_business case to support the decision_<br>_to begin the project’s procurement?_|_Did the audited body prepare a proper_<br>_business case to support the decision_<br>_to begin the project’s procurement?_|_Did the audited body prepare a proper_<br>_business case to support the decision_<br>_to begin the project’s procurement?_|_Did the audited body assess the skills_<br>_it would need to deliver the project_<br>_successfully? Where could the audited_<br>_body obtain these, e.g. from in-house_<br>_staf or external advisers? Did the_<br>_audited body then assemble its project_<br>_team in good time?_|_Did the audited body assess the skills_<br>_it would need to deliver the project_<br>_successfully? Where could the audited_<br>_body obtain these, e.g. from in-house_<br>_staf or external advisers? Did the_<br>_audited body then assemble its project_<br>_team in good time?_|_Did the audited body investigate the_<br>_market prior to beginning the formal_<br>_procurement in order to establish that_<br>_there were suppliers who were willing_<br>_to tender for the project?_|_Did the audited body investigate the_<br>_market prior to beginning the formal_<br>_procurement in order to establish that_<br>_there were suppliers who were willing_<br>_to tender for the project?_|_Did the audited body identify the_<br>_contractual issues that were likely to_<br>_arise during the procurement and_<br>_drew up a draft contract, setting out_<br>_initial proposals on each issue?_|

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|Summary of assessment|B.4 Tender strategy|The Commission’s preparatory work produced an indicative procurement plan for selection and negotiation by way of a call for expressions of interest, a call for concessions, a pre-selection phase and a selection phase. The contract award was envisaged within 14 months of the start of the process. Despite the delayed start of GJU operations, the Commission and the GJU initially kept to the plan of organising selection and negotiation over a short period in 2003 and 2004 (concession notice OJ 2003/S 200 — 179789). However, this timetable was very ambitious. PPP/PFI practice in the United Kingdom suggests that it takes considerably longer (a period of 18 months is not exceptional) to de i fne speci i fc and coherent objectives even for an average, not particularly complex PPP project. Well-established ESA procurement practices also suggest that de i fning a robust approach in the European space industry landscape requires much more than a year, even for an experienced organisation.|B.5 Project timetable|The initial overall timetable for the Galileo programme was communicated on several occasions between 2000 and Table 2004 (see 1). The timetable was, however, very general and did not contain intermediate milestones to be used for reviewing the programme’s viability. Updates to the timetable were o if fcially noti i fed in 2006 and 2007. Intermediate milestones relating to the concession process were postponed on several occasions, but with no comment on the project’s continued feasibility.|B.6 Cost and bene i ft comparison|The Commission’s preparatory work included a cost/bene i ft analysis of the Galileo project, but there was no such analysis of its proposed concession approach against an alternative procurement option. As indicated under A.6, studies by PricewaterhouseCoopers recommended the preparation of a robust public sector comparator. However, this recommendation was never taken up.|B.7 Tender list|Pre-selected consortia (see also B.2) included a good range of European industrial capabilities to deliver the Galileo system. However, operators and downstream industries were marginalised by space manufacturing companies. This situation was further exacerbated after one of the three pre-selected consortia decided to withdraw from the selection process during summer 2004.|
|---|---|---|---|---|---|---|---|---|
|**Have criteria**<br>**been met?**|**Have criteria**<br>**been met?**|Partly|Partly|Partly|Partly|No|No|Partly|
|**Body**<br>**responsible**|**Body**<br>**responsible**|Shared<br>Commission —<br>GJU|Shared<br>Commission —<br>GJU|Shared<br>Commission —<br>GJU|Shared<br>Commission —<br>GJU|Shared<br>Commission —<br>GJU|Shared<br>Commission —<br>GJU|Shared<br>Commission —<br>GJU|
|**Criteria (based on Intosai**<br>**guidelines on best practice**<br>**for the audit of public/private**<br>**f nance and concessions)**|**Criteria (based on Intosai**<br>**guidelines on best practice**<br>**for the audit of public/private**<br>**f nance and concessions)**|_Did the audited body prepare a_<br>_tendering strategy covering the_<br>_number of tender rounds to be held,_<br>_the number of bids to be invited_<br>_at each tender stage, the body’s_<br>_approach to communicating with_<br>_bidders and a realistic timetable for_<br>_the tender process?_|_Did the audited body prepare a_<br>_tendering strategy covering the_<br>_number of tender rounds to be held,_<br>_the number of bids to be invited_<br>_at each tender stage, the body’s_<br>_approach to communicating with_<br>_bidders and a realistic timetable for_<br>_the tender process?_|_Did the audited body prepare a_<br>_credible project timetable which_<br>_identif ed milestones against which_<br>_progress could be measured, and_<br>_points within the process at which_<br>_the body was to review the project’s_<br>_continued viability?_|_Did the audited body prepare a_<br>_credible project timetable which_<br>_identif ed milestones against which_<br>_progress could be measured, and_<br>_points within the process at which_<br>_the body was to review the project’s_<br>_continued viability?_|_Did the audited body assess costs_<br>_and benef ts of the public/private_<br>_f nance option against an alternative_<br>_procurement option?_|_Did the audited body assess costs_<br>_and benef ts of the public/private_<br>_f nance option against an alternative_<br>_procurement option?_|_Did the audited body succeed in_<br>_creating a good tender list?_|

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|B.8 Speci i fcation of requirements|The GJU tender documentation served mainly to help bidders structure their proposals. However, while it gave general principles it did not re l fect speci i fc objectives, clear risk positions or preferred approaches endorsed by the GJU as public-sector representative. In particular, the tender documentation did not address design l faws and inherent di if fculties of the proposed concession scheme. For instance, the GJU did not spell out its preferred option (or alternative options) for market development, but merely asked bidders to submit their proposed approaches. In addition, while the GJU asked bidders to describe their strategy on taking over the results from the IOV and with regard to the topic ‘third-party liability’, it did not establish the applicable law of the concession contract, although this could have served bidders as a basis for their analysis. The only exception related to launch options, where the GJU clearly indicated its preference for Ariane 5 and Soyuz. As a consequence, bidders did not have su if fcient details on the position and preferences of the public sector, and they were left to their own judgment when submitting bids, with no guidance for their proposals and no opportunity to respond precisely to clear requirements.|B.9 Maintaining competition|Inasmuch as it was unable to select a preferred bidder on two occasions and approved the merger, the GJU failed to maintain competitive tension.|B.10 Regular reviews|In its communications, the GJU regularly showed its i frm commitment to reaching an agreement with the private sector, but it failed to assess feasibility and potential value for money (see also B.5).|B.11 Budgets for project costs|The GJU relied on the approval of annual budgets for each of its tasks. However, the Commission and the GJU did not estimate the level of expenditure by both the public and the private sectors for the entire selection and negotiation process. The private sector presented an estimate of 24,5 million euros in October 2005.|B.12 Appointment of advisers|The GJU selected experienced external advisors by competitive tender, but it appointed them at a late point in time in the selection process (i.e. after the issue of tender documentation and the competitive dialogue).|
|---|---|---|---|---|---|---|---|---|---|
|**B.8 Specif cation of requirements**|No|No|No|No|No|No|Yes|Yes|Partly|
|**B.8 Specif cation of requirements**|GJU|GJU|GJU|GJU|Shared<br>Commission —<br>GJU|Shared<br>Commission —<br>GJU|Shared|Shared|Shared|
|**B.8 Specif cation of requirements**|_Did the audited body set out a clear_<br>_specif cation of the requirements?_|_Did the audited body set out a clear_<br>_specif cation of the requirements?_|_Did the audited body succeed in_<br>_maintaining competitive tension_<br>_to contract award and manage the_<br>_negotiations with the preferred bidder_<br>_well?_|_Did the audited body succeed in_<br>_maintaining competitive tension_<br>_to contract award and manage the_<br>_negotiations with the preferred bidder_<br>_well?_|_During procurement, did the audited_<br>_body regularly assess whether the_<br>_project continued to of er value for_<br>_money?_|_During procurement, did the audited_<br>_body regularly assess whether the_<br>_project continued to of er value for_<br>_money?_|_Did the audited body set and control_<br>_realistic budgets for all project costs,_<br>_including internal and external_<br>_resources?_|_Did the audited body set and control_<br>_realistic budgets for all project costs,_<br>_including internal and external_<br>_resources?_|_Did the audited body appoint good_<br>_quality external advisers after_<br>_competition?_|

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|Summary of assessment|B.13 Cost management|The GJU employed external advisors and consultants through framework contracts concluded following calls for tender. Costs were kept under control through the placement of individual work orders. However, the GJU had no long-term policy regarding the costs of external advisors.|C. Bids and contract|C.1 Bidders’ proposals|The bids received by the GJU re l fected the bidders’ expertise and experience as the European leaders in the industry. However, as the public sector gave no precise speci i fcations (see B.8), the bidders lacked guidance for their proposals and had no opportunity to respond precisely to clear requirements. This problem was identi i fed by one pre-selected bidder which accurately predicted the outcome of the concession process in spring 2004 (minute of a ‘Competitive Dialogue’ meeting): ‘The GJU’s tender documentation contains many good instructions, and the decision to hold bilateral fortnightly meetings (i.e. through competitive dialogue meetings) is wise, but signi i fcant concerns remain. There is far too little time to analyse the GJU’s requirements, plan the Galileo Operating Company business plan and present a bid by 1 September this year. Bids written in the time available will have to resort to guesswork on a grand scale. Verbal statements to bidders to do the best they can contradict the written instructions to create and present a legally binding o f fer. The GJU does not have the means to make a valid bid comparison based on public sector value. The GJU is not creating a public sector business plan with which it can make these comparisons, and cannot do so in the timescale of the competition. In particular, bid measurements will be inconsistent because of: (i) the need for bidders to heavily qualify their bids with conditions, conditions which will di f fer between the bids and which the GJU will not be able to evaluate; (ii) the GJU requiring bidders to create their own key output commitments, again which will di f fer between the bids and which the GJU will not be able to evaluate. As a consequence, bidders face a procurement risk quite out of order with the accepted principles of PPPs.’ As predicted, the submitted bids did not contain i frm pricing and commitments and the GJU was compelled to extend the selection phase. A technical note from a GJU advisor in December 2004 con i frmed the above judgement: ‘In a number of respects, the lack of developments in the bidders’ proposals re l fected the uncertainty about the GJU’s requirements. As a consequence of this uncertainty, there were singi i fcant structural di f ferences between the bids (making direct comparison di if fcult) and both bidders o f fered only indicative pricing.’|
|---|---|---|---|---|---|
|**Have criteria**<br>**been met?**|**Have criteria**<br>**been met?**|Partly|Partly|Partly|Partly|
|**Body**<br>**responsible**|**Body**<br>**responsible**|Shared|Shared|Shared|_Was a good range of solutions proposed by bidders?_|
|**Criteria (based on Intosai**<br>**guidelines on best practice**<br>**for the audit of public/private**<br>**f nance and concessions)**|**Criteria (based on Intosai**<br>**guidelines on best practice**<br>**for the audit of public/private**<br>**f nance and concessions)**|_How did the audited body monitor_<br>_and manage its project costs,_<br>_including internal and external_<br>_resources?_|_How did the audited body monitor_<br>_and manage its project costs,_<br>_including internal and external_<br>_resources?_|_How did the audited body monitor_<br>_and manage its project costs,_<br>_including internal and external_<br>_resources?_|_How did the audited body monitor_<br>_and manage its project costs,_<br>_including internal and external_<br>_resources?_|

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|C.2 Bid assessment|The GJU assessed and marked the bids received in accordance with its pre-established general evaluation criteria ( i fnancial, technical, management). However, in February 2005 the GJU ultimately gave the competing bids an equal overall assessment (see also C.1).|C.3 Choice of bidder|The GJU evaluated the bids by applying its formal tender evaluation criteria. However, it did not possess detailed and robust evaluation criteria re l fecting precise requirements against which to judge and compare competing bids (see also A.4). The GJU declared itself unable to select a preferred bidder on two occasions: in October 2004 and, after having extended the selection phase, February 2005.|C.4 Changes during negotiations with successful bidder|After the approval of the merger and the submission of a joint bid, the GJU lost its ability to drive the negotiation process. It was unable to compel the merger conditions to be observed, and the negotiations su f fered from the composition of the merged consortium and its inability to reach consensus (owing to the number of shareholders, their diverse interests, PPP experience, etc.).|
|---|---|---|---|---|---|
|**C.2 Bid assessment**|Partly|Partly|Partly|Partly|No|
|**C.2 Bid assessment**|_Did the audited body carry out a broad-ranging_<br>_assessment of the bids?_|_Did the audited body carry out a broad-ranging_<br>_assessment of the bids?_|_Did the audited body assess the results of the evaluations_<br>_so as to select the bid of ering the best value?_|_Did the audited body assess the results of the evaluations_<br>_so as to select the bid of ering the best value?_|_Did the audited body minimise changes to the terms of_<br>_the deal during the f nal negotiations with the successful_<br>_bidder?_|

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**GLOSSARY OF TERMS USED IN THIS REPORT**

Availability payment: A periodic payment made to a concessionaire by a
public authority for providing an available facility.

Business case: Information that describes the justification for setting up
and continuing a project. It provides the reasons and answers the question
‘Why?’ for the project.

Business plan: A formal statement of a set of business goals, the reasons why
they are believed attainable, and the plan for reaching those goals.

Concession agreement: An agreement between public and private partners
according to the latter the exclusive right to operate, maintain and carry out
investment in a public utility.

Conflict of interest: Situation in which a certain person or organisation is
acting in two capacities, the goals or interests of which are opposed.

Competitive tension: Situation in which competitors are forced to make their
offers of goods/services/bids as attractive to the procuring organisation as
possible so as not to lose their position to rival competitors, resulting in a
better deal for the awarding authority.

Galileo user segment: In contrast to the space segment and ground segment
of the system, the user segment translates the signals into services for the
final users. It consists of different types of user receivers.

Governance structures: The system of oversight in place to enable management to maintain control over the project, including the allocation of
management responsibilities and the processes and systems for reporting
to management.

Public–private partnership: A government service or private business venture
which is funded and operated through a partnership of government and one
or more private sector companies.

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Public sector comparator: An estimate of what the project would cost if
traditional procurement methods were used. This is used to help determine whether private finance offers better value for money than traditional
procurement.

Risk allocation: The agreement between the parties to a public/private
finance deal or concession which defines which parties or party is responsible for bearing the financial or other consequences of that event occuring,
minimising the chance that a particular adverse event should arise, and for
mitigating the impact of that event.

Risk transfer: The passing of risk normally borne by the procuring organisation to the private sector service provider.

Tender process: The practice of advertising for, then receiving and evaluating offers or bids from different private sector companies to operate the
services under the public private finance and concessions deal, with a view
to achieving the greatest value for money.

Traditional procurement: A contract in which the customer simply pays the
contractor for the provision of an asset as work in developing this asset
progresses. Such assets are fully paid for on their completion. The maintenance of these assets are dealt with in separate contracts, while their operation remains the responsibility of the public sector.

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**V.**

**(i)**
The GJU was set up to act as an interface
between ESA, responsible for carrying out
the technological development activities
(IOV or in-orbit validation phase), and the
European Commission in charge of the policy aspects.

**(ii)**
The Commission constantly supervised the
programme, without interfering with ESA’s
responsibility, especially as regards technical and industrial matters. The Commis
sion stepped in whenever needed to avert
blockages and propose adaptations of the

programme.

**VI.**

The choice of the PPP was a political decision taken by the Council. The Commission
received a clear political mandate to prepare
a PPP, within a limited timeframe, and prepared it on the basis of information available
at the time in this very specific and innovative sector. The industry came up with serious and realistic proposals in reply to the
call for a PPP concession.

**VIII.**

Through the GJU and then GSA, the Commission has used FP6 funds to fund tech
n o l o g i c a l d e v e l o p m e n t a c t i v i t i e s, a n d
application-related RTD. These RTD projects,
and especially application-related RTD are to
bear fruits in the medium/long run (2009–
15) and exploitation of such work is to be
included in the forthcoming ‘GNSS Application Action Plan’.

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#### REPLY OF THE COMMISSION

**IX.**

The Commission proposal to integrate EGNOS
into Galileo effectively saved the EGNOS
programme, and ensured availability of the
funding necessary to continue this project.
The Commission maintained this integrated
approach both during and after the concession negotiation.

**X.**
The statement of the Court does not fully
take into account the reality of the environment at that time. The programme involved
a large number of public sector stakeholders (EU and ESA member states, ESA, third
countries, Commission) with different institutional roles and responsibilities, and the
Commission worked actively to find the tools
to properly take on board these stakeholders. The Commission achieved real progress
in the field of international cooperation. The
creation of the GJU and of the GSA, as well
as the proposals to redirect the programme
that culminated in the adoption of Regulation (EC) No 683/2008, are illustrations of
the leadership exercised by the Commission
with due regard to the respective roles of
the stakeholders.

**XI.**

The Commission has received a clear man
date to take over the programme management of the deployment phase, and as a
consequence has started to adapt its management capacity, both in-house and with
the support of qualified external advisors.

**XII.**

The lessons learned through Galileo are
shared with Member States and other stakeholders to improve the management of large
infrastructure programmes.

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**INTRODUCTION**

**2.**

The European Space Agency and the Commission started EGNOS and Galileo as a joint
initiative, and obtained from their respective Member States strong support for the

programmes.

ESA took charge of the technological development and the Commission was responsible
for policy making. Together they set up the
Galileo Joint Undertaking as a coordination
platform to oversee the implementation of
the development and validation phase.

For the deployment and operations phase,
on the Commission’s proposal, the Council
set up a regulatory agency (the GSA) to represent the interests of the public sector in
the public private partnership (PPP).

**THE HISTORY OF GALILEO**

**15.**

For the implementation of the development
phase of the Galileo programme the GJU was
created to ensure the unity of the administration and the financial control of the project
for the research, development and demonstration phase of the Galileo programme,
and to this end mobilise the funds assigned
to that programme (Article 1 of Regulation
(EC) No 876/2002). The technical responsibility of this phase was entrusted to ESA in
the framework of its GalileoSat programme.
The approval of the GalileoSat programme
by ESA member countries triggered the start
of the industrial activities. The Galileo Joint
Undertaking was the coordination platform
between ESA and the Commission for the

development and validation phase.

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#### REPLY OF THE COMMISSION

**17–18.**

In accordance with Article 2 of the GJU stat
utes the main tasks are to:

(1) oversee the integration of EGNOS into
Galileo as well as the implementation of
the Galileo development and validation
phase;
(2) launch through ESA the industrial activities of the development phase;
(3) prepare, in cooperation with the Commission and ESA, the deployment and
operational phases by managing the
tendering procedure resulting in the
conclusion of a concession agreement;
(4) supervise the carrying out of all programme activities.

**21.**

The purpose given by the March 2004 transport Council to the Commission’s communication of October 2004 was not to report on
the progress of the development and validation phase, but on the start of the deployment and operational phases.

The delay in the technological development
(IOV or in-orbit validation phase) at that
time was considered not incompatible with
the start of the activities for the deployment
phase of the programme in 2006.

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**22.**

Information available at the time was supporting the idea that expecting a favourable outcome of the procurement process
was not unreasonable. The Communication

indicated that the procedure so far was successful and requested the Council’s confirmation in order:

— to enable the joint undertaking to complete the negotiation of the concession
contract due to be signed in the course
of 2005, and
— to enable private-sector stakeholders to confirm their bids and financial

commitments.

**23.**
The Commission, fulfilling the political
responsibility assigned to it, created the
conditions for agreement between Member
States by asking former Commissioner Van
Miert to mediate. The Commission managed
to unblock concession negotiation and that
part of the development and validation
phase activities that had been stalled by disagreements among Member States between
July and December 2005.

**26.**

Over 2006, and more particularly in the second half of 2006, with the strong support of
the Commission and the European Investment Bank, the GJU narrowed down the differences with the merged consortium to the
few substantial issues that were remaining
intractable. The result of these negotiations,
together with the negotiating team, and the
other activities of the GJU, were transferred
to the GSA at the end of 2006.

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#### REPLY OF THE COMMISSION

**27.**

At the end of 2005, the Commission prepared
the grounds for the deployment phase by
initiating the steps to ensure the handover
from the GJU, created for the development
phase, to the GSA, created for managing
public sector interests in the PPP scheme
for the deployment and operations phase.

Two assumptions were driving these actions
from Commission: (1) that concession negotiation could be completed by end 2006,
something that the status of negotiations
after the merging of the consortia was giving
some credibility to, and (2) that the delays
now apparent on the IOV phase meant that
the IOV phase would outlive GJU.

**28.**

In a parallel development, over 2006 and
2007, ESA continued to experience serious difficulties in its management of both
EGNOS and Galileo. On EGNOS the difficul
ties were mostly technical. On Galileo the
industrial set up and its management by ESA
was experiencing substantial delays and cost
overruns. ESA embarked in a major reshuffling of the contractual relationships it had
created for the GalileoSat programme.

Faced with these difficulties and the stalling
of the concession process, the Commission
proposed to Council and Parliament to redirect the programme, fund the deployment
phase from the Community budget, act as
programme manager and use ESA as procurement agent for the deployment phase.
Regulation (EC) No 683/2008 on the further
implementation of the GNSS programmes
was adopted on 9 July 2008.

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**29.**
The scope of the communication of May 2007
was not to describe in details the reasons of
the failure of the concession negotiations,
but rather to take stock of the results of the
negotiations and propose a way forward.

**AUDIT SCOPE AND APPROACH**

**31.**

In the period audited by the Court (September 2003 to December 2006), the GJU
was established to ensure the unity of the
administration and the financial control of
the project for the research, development
and demonstration phase of the Galileo programme, and to mobilise the funds assigned
to that programme.

**OBSERVATIONS**

**39.**

The PPP’s conception was based on studies and reports elaborated in the course
of the Galileo definition phase, which had
shown the viability of delivering the Galileo deployment, operation and commercial
exploitation under a PPP structure entailing private financing. The choice of the PPP
has been encouraged and finally endorsed
by the Council. The preparation of the PPP
was constrained by the limited time available. The industry came up with serious and
realistic proposals in reply to the call for a
PPP concession.

**41.**

As shown by the studies available to the
Commission, best practices in the PPP
domain were definitely taken into account.
Nevertheless these best practices have
been developed with established industries
and services (motorways, hospitals, power
plants…), where risks are already relatively
well identified and cost comparators easy
to build based upon existing cost data. This
was and still is far from being the case for
the Galileo deployment, operation and commercial exploitation.

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#### REPLY OF THE COMMISSION

**(a)**
The unprecedented nature of the Galileo
Project made it extremely difficult to apply
PPP best practices, such as developing a
reliable public sector comparator for lack
of data.

The material difference in scope between
the IOV and FOC (full operational capability) made it impossible to apply the data
coming from the IOV to develop such a
comparator.

The studies commissioned by the Commission and the GJU clearly indicated the risks
at stake for the deployment, operation and
commercial exploitation of the infrastructure proposed and assessed their efficient
allocation as achievable under a PPP/conces
sion scheme.

**(b)**
In view of the time pressure, and the difficulty to find enough precedents to build
upon, the Commission and GJU opted for a
competitive dialogue process for the procurement, in order to enable for a gradual
fine tuning of the tender specifications.

The competitive dialogue procedure exists
to handle complex cases such as the Galileo
PPP given its technical, financial and legal
set up.

The unknown elements characterising the
Galileo PPP were indeed supposed to be
tackled through this procedure by interactions with extremely serious and dedicated
bidders.

The procedure was extended in time so as
to allow the candidates precisely to put
forward refined and more credible business

plan and financial models.

Special Report No 7/2009 — The management of the Galileo programme’s development and validation phase

The extension of the dialogue process and
the interactions between the GJU and the
candidates, even after their merger, produced important results, which were incorporated in the heads of terms.

**(c)**
The GJU staff encompassed professionals
having accrued specific experience in the
space domain and projects, having specific
management experiences in relation to public sector infrastructure projects and project
financing. There was no ‘knowledge gap’
when compared to industry teams.

Experienced advisors were involved in the
conception phase of the programme (see in
particular the inception study). As from the
start of the active phase of the competitive
dialogue, experienced advisors (PricewaterhouseCoopers, Lovell’s,…) and European
Investment Bank senior staff were assisting
the GJU in negotiations either before or after
the merging of the candidates and in the
context of the merger process itself.

**(d)**
The merger of the two offers was not encouraged nor supported neither by the GJU nor
by the Commission. To mitigate the effects
on the process described by the Court
(essentially loss of competition), the Commission imposed conditions on the merger
approval.

After careful scrutiny of the joint proposal,
the GJU, with the assistance of highly qualified advisors, assessed that the joined proposal delivered better value for money with
respect to the individual bids.

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**(e)**
The Member States did not have to rely
on GJU’s official reporting only since they
were represented at the Supervisory Board
of the GJU which was debriefed extensively
on the progress of the negotiations and
regularly updated on the progress of the

programme.

They were also represented in specific working groups, notably the PPP expert meeting,
to follow more closely the negotiation process and were given full visibility over the difficulties faced during negotiation, precisely
on matters related to the concession.

Though complex, the negotiations were
structured and conducted in a serious and
professional manner by the two parties, and
offered not sufficient ground for the GJU
to question the feasibility of the concession. GJU reports were targeting a broader
public than Member States, and as such had
to keep certain commercial information
confidential.

**42.**

The PPP model proposed by the Commission differed from other PPP models then
in existence. The very specific nature of
the activities and risks at stake meant that

other existing projects could not be taken as
a reference for the Galileo Project for what
regards the sharing of risks and financing
between public and private sector.

**(a)**
The technological complexity of the Galileo
Project is a fact well understood by all the
stakeholders involved and especially by the
private sector.

Special Report No 7/2009 — The management of the Galileo programme’s development and validation phase

**(b)**
Inception studies clearly indicated that revenue generation was difficult to predict, but
did not consider it as a show stopper for the
delivery of the PPP scheme.

Availability payments by the public sector
were considered a suitable instrument to
ensure financial viability.

The heads of terms included a possible availability payment structure upon which a high
level agreement was achieved with the pri
vate sector.

**(c)**
The fact that the design has been developed
under the responsibility of the public sector
through the development phase was known
to the private sector and was highlighted
as an element of complexity for the relevant risk allocation within the concession

scheme.

Nevertheless reports by experts in the field
never outlined this as a major blocking point
for the viability of the concession scheme.

It is to be recalled that the industry, having
developed the design during the development phase, was largely represented in the
candidates for the concession contract.

**Box 2**

Market risk, design risk and to a lesser extent
third party liability risks were the more contentious areas during negotiations.

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Nevertheless progress was achieved in the
course thereof at least for what concern lia
bility risk and market risk allocation.

Moreover it is probable that failure of the
concession negotiation can also be attributed to other factors, for instance industry’s
realisation of more advantageous financing
options.

The difficulty to transfer market risk was
identified and acknowledged, and as a consequence heads of terms were clearly pointing to a possible agreement where the risk
transfer would be minimal at a first stage,
with mechanisms for a gradual increase in
the degree of market risk transfer during the
course of the contract.

The transfer of design risk has been the most
controversial issue of the PPP negotiation.

The IOV phase originally conceived to reduce
design risks was perceived by the private
sector as a major constraint to the undertaking thereof.

The attitude of industry to refuse any undertaking of design risk on the basis of lack of
visibility, involvement and validation capabilities of the IOV phase has been strongly
challenged during negotiation given that
the potential concession holder was composed mainly of the same industrial actors
who had a visibility on their own performance at the design stage.

The founding elements for a third party liability mitigation structure were agreed at
head-of-terms level.

Special Report No 7/2009 — The management of the Galileo programme’s development and validation phase

**43.**

The GJU was instructed by its regulation to
‘charge to [ESA] the carrying-out of activities
required during the development phase with
regard to the space and the earth segment
associated with the system’.

These activities were carried out by ESA
in the framework of the GalileoSat programme, jointly funded by ESA member
states on a voluntary basis and the European
Communities.

**45.**
ESA was responsible for carrying out the GalileoSat programme and reported to GJU on
its actions. GJU supervision as stated in Art 2
paragraph 4, was limited to ensuring that
all phases of the programme dovetailed correctly, and was not conceived as a replacement of ESA technical expertise.

**47.**
The Galileo budget for development and
validation was established based on stud
ies commissioned by the Commission and
was accepted by ESA in the GalileoSat
declaration.

The GalileoSat declaration foresaw a standard ESA 20 % flexibility on its contribution,
creating a de facto 10 % contingency on the
total budget, which proved insufficient due
to the programme complexity.

**48.**
Late start of the GalileoSat programme
by ESA Member States resulted in upstart
delays and increased costs, which were
never recovered.

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**49.**

The procurement of the IOV phase was performed by ESA following its own procurement system.

ESA chose in favour of an industrial organisation led by a single prime contractor, but
still ensuring, at least on the part of the
programme funded by ESA Member States,
a geographical return to subcontractors.

Galileo was the first and only GNSS programme actually opened for European space
industry participation. As a result, the prime
contractor chosen was likely to enjoy a
definitive competitive advantage for future
competitions (primarily for the deployment
phase). This had major repercussions for the
industrial policy furthered by ESA.

As a consequence of this and of the actions
of several interested member states, the
prime contractor eventually elected was a
joint venture of antagonistic companies,
which never managed to work efficiently
together.

Faced with increased costs and delays, ESA
finally decided to opt in December 2007, for
a different industrial organisation and contractual framework, whereby it would take
direct prime responsibilities and contract
out directly to subcontractors the different
work packages.

**53.**
Research activities funded by the FP6
were focused on all the main user sectors,
addressing research on applications and
other aspects (standardisation, legal and
service provision aspects, market…) that
will enable the future use of Galileo. The

research projects in the various user sectors
have generally included development, tests
and demonstration activities.

Special Report No 7/2009 — The management of the Galileo programme’s development and validation phase

Exploitation of such work is to be included
in the forthcoming ‘GNSs application action
plan’.

The definition of the services, which were
the basis for the system specifications, had
been performed earlier, with FP5 funds.

**54.**

The aim of the FP is to foster the development of technologies and services, although
leaving the market actors freedom to choose
in which domain such developments shall
take place. This approach has demonstrated
its validity in the sense that several companies, notably SMEs, have acquired knowledge
and experience which has positioned them
as leaders on the market, such as Ifen and
Septentrio for dual Galileo/GPS receptors,
Polestar for indoor positioning solutions and
Telesys for location-based services.

As in any research activity, the outcome of
projects is not guaranteed, and depends on
several factors which are beyond the remit
of the Commission. The use of the results

on the commercial market has to remain a

decision to be taken by the project consortia
themselves.

**55.**
The follow up of the projects by GSA was
ensured mostly by personnel having previously worked for GJU on these projects. The
GSA fostered the dissemination of project
results by setting up an Internet-based database of project results, organising two successful ‘Growing Galileo’ events taking stock
of these results, and publishing a compendium of such results.

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A number of FP6 projects have experienced
delays, but a project-by-project analysis
points to various causes not necessarily
linked to the transfer.

**56.**

The activities funded with FP6 include the

development of new applications, evaluation
of related market potential, investigation of
possible business models, and research on
business plans suitable for their commercialisation. Experience of market development
and technological innovation shows that
most of market innovations are created by
the market, and not by a top-down approach.
This is especially true in non mature markets
such as this one, where the GJU/GSA would
have had difficulties in devising comprehensive development strategies.

**57.**

The delays on the Galileo/EGNOS programme
may explain part of the delays in some FP6
projects.

**60.**
EGNOS has suffered from delays that are
mainly due to technological issues not in
the control of the Commission, which imply
development delays.

**(a)**
The conclusion of the EGNOS agreement
proved to be very difficult due to intrinsic difficulties proper to the relationship
between the different parties involved in
EGNOS. Finally the agreement was finalised
by the end of 2008 and signed on 31 March
2009. Moreover, the ESA’s programme for
EGNOS (ARTES9) under which EGNOS is currently operated, is ending on 31 March 2009
time when the system should be compliant
with the technical specifications needed for
its exploitation by an economic operator.

Special Report No 7/2009 — The management of the Galileo programme’s development and validation phase

**(b)**
In March 2009 the system will effectively be
certifiable, and it is planned to certify the
operator by 2010 in accordance with Single
European Sky regulation.

**61.**

**(b)**
The integration of EGNOS into Galileo though
affirmed as an objective at political level has
always been the source of problems from a
contractual standpoint.

For this reason the candidates for the con
cession contract were required to address
the EGNOS integration into Galileo as an
optional scenario.

The bids received were clearly showing the
benefits of integrating the two systems, and
the negotiations of the concession contract
after the merger of the two candidates were
carried out on an integrated scenario.

**(c)**
The EGNOS institutional framework is com
plex due to historical reasons on how the
programme was set up.

**(d)**
The GJU has commissioned the preparation
of several business plans for EGNOS and
studies on the possible commercialisation
of its services which outlined a fairly limited
potential in terms of EGNOS revenue generation capabilities.

Discussions held with the aviation sector
have shown the difficulty of establishing
a revenue generation mechanism for the
EGNOS signal itself which is open and accessible to any user for free.

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In this respect it is to be underlined that
from a technical standpoint EGNOS OS and
SoL are not different in terms of accessibility
by users. They only differ from a certification
standpoint.

These assumptions justified the GJU attitude
not to invest in market development activities for EGNOS.

**62.**

The EGNOS programme was run as an ESA
programme (ARTES 9) principally funded by
ESA member states and EOIG. Funding from
the EU was limited.

Delays and cost overruns have been experienced in the framework of the ARTES 9 programme for various technical reasons.

**63.**

**(a)**
Independently from the concession process,
EGNOS faced a series of technological issues,
under the control of neither the Commission

nor GJU, which also resulted in programmatic delays.

**(b)**
It is very difficult to appoint an operator
for an infrastructure which is not completed
from a technical standpoint. Moreover it
would have been impossible for the Commission to entrust an operator without having
rights on the assets to be operated.

T h e a p p o i n t m e n t o f a n E G N O S e c o nomic operator is now under finalisation
under the responsibility of the European
Commission.

The need to conclude a framework agreement had a limited impact on the concession
negotiations.

Special Report No 7/2009 — The management of the Galileo programme’s development and validation phase

**64.**

The GJU received a clear mandate to inte
grate EGNOS into Galileo which made it
necessary to negotiate a framework agreement with the various EGNOS stakeholders,
to clear the path for the ultimate transfer of
ownership of EGNOS.

The framework agreement negotiations led
by GJU were ultimately not successful due
to the complex institutional framework recognised by the Court itself, but have served
as a sound basis for the current finalised

agreement with the Commission.

**65.**

Due to the delays experienced by the programme, the GJU did not implement the
EGNOS market penetration plan.

**67.**

The allocation of tasks between the parties
during the development phase was inspired
by the principle of cooperation between the
parties in order to create a joint platform for
the development of the programme.

This approach has been readdressed for the
purposes of the deployment phase by the
GNSS regulation which clearly provides for
a strict division of roles and responsibilities
between the involved parties.

**68.**

**(a)**
Regarding GJU main tasks see Commission’s
position under point 17.

The Commission notes that this governance
structure, and notably the dual role of ESA
were clearly identified in the founding regulation of the GJU.

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**(b)**
The winding up of the GJU does not have
any impact on the role of GJU in that phase
of the programme.

On the other hand closing down the GJU
was necessary to avoid duplication of roles
between GJU and GSA.

**69.**

The ESA/GJU agreement was intended to
set forth a partnership between the parties co-financing the project whereby ESA
would have applied its own rules for placing

contracts.

Implementation and reporting arrangements
were not detailed as in standard contrac
tual relationships due to the cooperative
nature of the agreement. The specific reporting modalities were established by the GJU
executive committee when payment obligations to ESA started to fall due.

The delegation agreement between the Commission and ESA signed on December 2008
for the deployment phase, provides for strict
monitoring and reporting obligations.

**70.**

ESA was responsible for both the IOV Phase
and EGNOS through two ESA programmes
GalileoSat and ARTES 9.

**71.**

The Commission is of the opinion that ESA
is clearly accountable for the results of the
technological development activities it is
conducting. The Commission has clearly
taken its political responsibilities in the programme. Every decision can be traced back
to the body entrusted to take it.

Special Report No 7/2009 — The management of the Galileo programme’s development and validation phase

**73.**

The Commission exercised a key promoter
role for the GNSS programmes.

In 2005–07 the concession negotiations were
in process and delivered in December 2006
the expected heads of terms.

Corrective actions were taken at the time

when evidence of the failure of the conces
sion negotiation became clear.

Difficulties experienced in the negotiations
up to the end of 2006 were not sufficient to
conclude on the impossibility of delivering
the Galileo infrastructure under a PPP con
cession scheme.

Only by the beginning of 2007 did the Commission have the elements to assess that

the concession process prolongation would
not have delivered good value for the public sector and therefore to terminate the

negotiations.

The Commission also refers to its reply to
point 23.

**74.**

The difficulties experienced in the development phase were due to reasons which were
largely outside the Commission’s control
and mostly not influenced by the management principles guiding its actions.

**(a)**
The Commission managed to get clear objectives for the European GNSS programmes,
endorsed by Council and Parliament.

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A programme of this magnitude is likely to
raise a diverse range of stakeholder expectations, and notably Member States may have
held and promoted different objectives but
this has not changed the objectives set at
the outset of the programme.

**(b)**
The choice of a PPP concession model capable to capture different phases of the project
(deployment, operation, commercial exploitation) corresponds indeed to a long term
strategic vision and planning.

The lack of success of this process does not
affect the long term approach adopted by
the Council.

**(i)**
Under a PPP concession scheme the exploitation model and roadmap is supposed to
be delivered by the private sector.

One of the reasons for choosing this model
lays exactly in the fact that the private sector has been judged to be in the position
to do so.

Following the GNSS regulation the Commission will be in charge to define such roadmap
for Galileo in parallel with the deployment
of the infrastructure.

As far as EGNOS is concerned the establish
ment of the roadmap will be a matter for
negotiations in the context of the selection
of the future EGNOS operator.

Special Report No 7/2009 — The management of the Galileo programme’s development and validation phase

**(ii)**
The problems encountered in negotiating a
framework agreement for EGNOS depended
largely on the dynamics between the EGNOS
stakeholders.

The negotiation of the agreement has been
taken over by the GSA and concluded by
the Commission without any discontinuity
or gap of negotiating power.

T h e E C – E O I G a g r e e m e n t w a s f i n a l ized by December 2008 and signed on
31 March 2009.

**(iii)**
Taking into account the political and strategic nature of the programme the Commission has taken care to regularly inform and
check the consensus at Council meetings.

**(c)**
Due to the provisions of the Treaty, the Commission had to create two legal structures:
the GJU (under Article 171) to serve as a
cooperation vehicle with ESA on the development and validation phase, and the GSA
(under Article 308) to pilot the deployment
and operations phase. To pave the way for
these two structures, support activities were
performed under four different contracts,
but these did not involve the creation of

legal structures.

**(d)**

S e e t h e C o m m i s s i o n c o m m e n t s u n d e r

point 41(c).

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**(e)**
The risk matrix for the concession has been
developed in a comprehensive form during
the dialogue phase and with the assistance
of experienced advisors by the GJU.

An extensive set of documents on the iden
tification and possible allocation of such
risks have been produced during the course
of the negotiations with the concession
candidates.

The nature of the project, as described
above, did not allow a thorough identification and appreciation of the magnitude of
these risks up front.

**(f)**
The Commmission exercised a key promoter
role for the GNSS programmes. Corrective
actions were taken at the time when evidence of the failure of the concession negotiation became clear.

Difficulties experienced in the negotiations
up to the end of 2006 were not sufficient to
conclude on the impossibility of delivering
the Galileo infrastructure under a PPP con
cession scheme.

Only by the beginning of 2007 did the Commission have the elements to assess that

the concession process prolongation would
not have delivered good value for the public sector and therefore to terminate the

negotiations.

Special Report No 7/2009 — The management of the Galileo programme’s development and validation phase

**CONCLUSIONS AND**
**RECOMMENDATIONS**

**75.**

Given the innovative nature and the technical sophistication of the project the Commission considers the Court’s evaluation of
the management of the development and
validation phase overly negative.

**(a)**
The GJU was not conceived as a strong operational programme manager. Regulation
(EC) No 876/2002 clearly states that: ‘For the
implementation of the development phase
of the Galileo programme, a joint undertaking within the meaning of Article 171 of the
Treaty is hereby set up for a period of four
years. The aim of the joint undertaking shall
be to ensure the unity of the administration
and the financial control of the project for
the research, development and demonstration phase of the Galileo programme, and to
this end mobilise the funds assigned to that
programme.’ It also requires from the GJU
to ‘charge to [ESA] the carrying-out of the
activities required during the development
phase with regard to the space segment
and the earth segment associated with the
system,’ effectively recognising ESA responsibility for carrying out the technological
development activities.

**(b)**
The Commission, within the limits of its
responsibility, constantly supervised and
guided the programme. The Commission
stepped in whenever was needed to avert
blockages, provide additional funds and
adapt the structures of the programme.

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The realignment of the programme proposed
by the Commission in 2008 clearly assigned
the role of programme manager to the Commission, to address the issue to which the
Court has given prominence.

**76.**

The PPP was prepared with the level of information available at the time, based on preparatory work having recourse to state of
the art external advice.

The PPP’s conception was based on studies
and reports elaborated in the course of the
Galileo definition phase, which had shown
the viability of delivering the Galileo deployment, operation and commercial exploitation under a PPP structure entailing private
financing. The choice of the PPP has been
encouraged and finally endorsed by the
Council. The preparation of the PPP was constrained by the limited time available. The
specific challenges of the Galileo PPP, linked
principally with technical and market specificities explain in a large part the inability
to conclude the concession process.

**77.**

ESA encountered technical and programmatic difficulties, which explain the delays
and cost overruns.

**78.**

RTD activities have been instrumental in
helping define the Galileo mission and performances, focus on all the main user sectors, addressing research on applications
and other aspects that will enable the future
use of Galileo.

Special Report No 7/2009 — The management of the Galileo programme’s development and validation phase

Those activities have raised significant
interest in the users’ communities and have

developed technologies and knowledge that
will be exploited in a later commercialisation phase.

**79.**
The integration of EGNOS into Galileo has
been essential to ensure the continuity
of the EGNOS programme, and secure the
needed financing.

In spite of the technological difficulties, and
thanks to the clarification of the institutional

framework at the initiative of the Commis
sion, EGNOS will be the first European GNSS
programme in operation.

**80.**

The Commission had to exercise its promoter’s role over the duration of the programme,
taking into account all stakeholders, especially ESA as partner in this joint initiative.
The Commission actively managed the situation, and regularly took the initiative to
unblock and foster the programme.

**81.**

The Commission has overhauled the management of the programme, taking on board
many recommendations of the Court of
Auditors.

**82.**

The Commission decided to propose to take
over the programme management of Galileo at a decisive time for the programme.
Council and EP endorsed this proposal by
adopting the Regulation (EC) No 683/2008.
It is part of the remit of Commission to propose the most appropriate solution over the
long term.

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**Recommendation 1**

The Commission has already made very concrete steps to adapt its resources and its
legal and financial instruments to act as a
programme manager. In order to facilitate
this process a Galileo Interinstitutional Panel
(GIP) has been set up.

**(a)**
The Commission has secured the transfer of

30 experienced staff from GSA (some with
experience dating back to GJU) and completed internal recruitments to set up a
dedicated Galileo team.

**(b)**
Regulation (EC) No 683/2008 is clarifying the
respective roles and responsibilities of ESA
and the Commission. In application of this
regulation, the Commission has entered into
the delegation agreements with ESA for the
performance of FOC procurement activities
and EGNOS further development activities.

**(c)**
Regulation (EC) No 683/2008 provided the
Commission with a dedicated Galileo budget
line to fund the infrastructure. The Commis
sion is using public procurement to purchase
the infrastructure.

As regards the operations and replenishment costs, the Commission is preparing
the next financial framework to ensure ade
quate budget coverage. It will also review
the financial instruments made available
under its financial regulation to make sure
they are adequate for the funding of the

programme.

**(d)**
The governance framework created by Regulation (EC) No 683/2008, clearly allocates
roles and responsibilities.

Special Report No 7/2009 — The management of the Galileo programme’s development and validation phase

**83.**

Regulation (EC) No 683/2008 has clearly
tasked the Commission to exercise lead
ership and to propose to Council and Parliament scenarios for Galileo beyond the
deployment phase. In addition a Galileo
Interinstitutional Panel is set up.

**Recommendation 2**

Regulation (EC) No 683/2008 has reiterated the programme’s political objectives
that have remained constant over the past
years. It has also provided the programme
with a solid roadmap for the deployment
phase, and has requested the Commission
to come up in 2010 with a communication
on the future of Galileo beyond the deployment phase.

**(a)**

T h e C o m m i s s i o n ’ s c o m m u n i c a t i o n w i l l

cover, inter alia, the strategic and operational objectives of Galileo. It will address
the question of the model for the operations
of the system taking into account market
realities, desirable positioning of the system on the value chain, and will clearly
highlight the consequences of models proposed in terms of budget and public sector
responsibilities.

**(b)**
The Communication will tackle the issue of
the integration of EGNOS into Galileo.

**84.**

The Commission has already started to work
with the various stakeholders to draft this

Communication and has sought the support
of external advisers to help it take stock of
the wealth of information gathered over
the years, notably thanks to the concession
negotiation experience.

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**Recommendation 3**
In order to be ready in time for the end of
the deployment phase, the Commission has
started the work for the preparation of the
operational phase. It will take into account
the experience available.

**85.**

The Commission will analyse the options as
required by Regulation (EC) No 683/2008 and
present its conclusion in 2010.

**Recommendation 4**

**(a + b)**
In the framework of the communication,
the Commission is compiling user requirements and mapping out the enabling actions
that are needed to foster the use of GNSS

technology. This will enable the Commission to propose an appropriate regulatory
framework.

**(c)**
The Commission has taken steps to ensure
that an operational EGNOS meets the needs
of its users, particularly in the aviation sector, and for that purpose has selected an
experienced operator with strong aviation
background.

**86.**

The Commission has set up and may set up
other joint undertakings. Each of those are
thoroughly planned and assessed against
the criteria relevant for their activity, on a
case-by-case basis.

**Recommendation 5**
The Commission carefully examines, on
a case-by-case basis, the rationale and
the optimal governance of any new joint
undertaking.

Special Report No 7/2009 — The management of the Galileo programme’s development and validation phase

**ANNEX II**

The EGNOS programme was conducted under
an optional ESA programme (ARTES 9) under
ESA programme management. As the first
ESA programme in navigation, it suffered
from numerous technical difficulties.

**(b)**
This research programme has been run for
more than 10 years, during which technical
requirements changed and the certification
environment evolved.

**(c)**
Due to the failure of the concession negotiation the roadmap for EGNOS had to be
redrafted in accordance with the new governance established in July 2008 by Regulation (EC) No 683/2008.

**(d)**
One of the main reasons for EGNOS not being
operational has been the difficulties experienced by ESA to keep the signal available
with the level of quality and reliability that
may enable its certification.

Technical acceptance by ESA only started
at the beginning of March 2009. This is a
prerequisite for handover of the system to
EC, which will, at that time, and not before
accept the system if it meets the objectives
that ESA has set for itself in the ARTES 9

programme.

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**(e)**
ESA’s and GJU’s efforts to demonstrate the

capabilities of EGNOS overseas have been
coordinated and funded by the Commission. Based on these preparatory studies,
the Commission will decide whether to propose or not the extension of EGNOS outside
Europe.

**(f)**
The GJU received from the Commission TEN-T
2004 and TEN-T 2005 funds specifically targeted at EGNOS, as well as funds from DG
AIDCO in 2005. In addition, several FP6
projects were dealing with EGNOS. Finally,
the GJU benefited from a discretionary studies budget approved on a yearly basis by
its Board, that could have been used, if GJU
management had so decided, to fund specific EGNOS-related studies.

**ANNEX III**

The agreements with NRSCC and Matimop
and the GJU were transferred to the GSA.
The winding up of GJU was agreed with Matimop and NRSCC at management board level.
Third country discussions were held by the
Commission, not by the GJU, and therefore
the closing down of the GJU had no impact
on such discussions.

Special Report No 7/2009 — The management of the Galileo programme’s development and validation phase

**ANNEX IV**

The Commission refers in general to the
replies provided above to the text of the
Court’s report, in particular paragraphs 39,
41 and 42.

**A.2.**

Due to the unprecedented nature of the
project it was not possible to reach the
level of maturity on requirements and constraints that can be found in projects with
established industries and services (motorways, hospitals, power plants…), where
risks are already relatively well identified
and cost comparators easy to build based
upon existing cost data. In view of the time
pressure, and the difficulty to find enough
precedents to build upon, the Commission
and the GJU opted for a competitive dialogue process for the procurement, in order
to enable a gradual fine tuning of the tender
specifications.

The competitive dialogue procedure exists
to handle complex cases such as the Galileo
PPP given its technical, financial and legal
set up.

The unknown elements characterising the
Galileo PPP were supposed to be tackled
through this procedure by interactions with
extremely serious and dedicated bidders.

The extension of the dialogue process and
the interactions between the GJU and the
candidates, even after their merger, produced important results, which were incorporated in the heads of terms.

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**A.3.**

See the reply to A.2.

**A.4.**

See the reply to A.2.

**A.5.**

In all its recent relevant regulatory activities, the Commission has included provisions
fostering GNSS applications (see for instance
the European Electronic Toll System).

The Commission has however been careful

not to distort competition in favour of Galileo or EGNOS.

The respective shares of revenues depending directly or indirectly on the public sector
were estimated by the prospective concessionaire at the time of negotiations. The
communication on the future of Galileo will
reassess these figures and propose adequate
regulatory measures.

**A.6.**
The choice of the PPP has been encouraged
and finally endorsed by the Council.

Developing a reliable public sector comparator was not a realistic option for lack of
relevant data, contrary to what exists for
more mainstream industries.

Even data coming from the IOV (in-orbit validation) could not be used to develop such
a comparator, because of the material difference in scope between the IOV and FOC
(full operational capability).

Special Report No 7/2009 — The management of the Galileo programme’s development and validation phase

**A.7.**

Through the competitive dialogue, innov a t i v e s o l u t i o n s h a v e b e e n g e n e r a t e d
and proposed by bidders, and thoroughly
discussed.

Particular care was given to assess those
innovative commercialisation solutions that
the bidders had identified. Through this
process the Commission was able to gain
insight into new applications and markets.

**A.9.**

These topics were covered under the preliminary studies conducted by PricewaterhouseCoopers, and the conclusion of those
studies were supporting the value for money
of the PPP option.

**B.1.**

The GJU staff encompassed professionals
having accrued specific experience in the
space domain and projects, having specific
management experiences in relation to public sector infrastructure projects and project
financing. There was no ‘knowledge gap’
when compared with industry teams.

Experienced advisors were involved in the
conception phase of the programme (see in
particular the inception study). As from the
start of the active phase of the competitive
dialogue, experienced advisors (PricewaterhouseCoopers, Lovell’s,…) and European
Investment Bank senior staff were assisting
the GJU in negotiations either before or after
the merging of the candidates and in the
context of the merger process itself.

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**B.2.**

Throughout the competitive dialogue phase,
full attention was given to the assessment
and fostering of the understanding of all
parties as to the requirements for entering
into a concession.

This was one of the reasons for the choice of

the competitive dialogue procedure.

**B.3.**

During the competitive dialogue phase,
the draft contract was further refined and

expanded, and extensive discussions on the
choice of applicable law were held.

**B.4.**

The planning was ambitious, and the GJU
amended it to take account of the fact that

negotiations were more complex than initially expected.

**B.5.**
The continued feasibility of the project was
regularly reviewed and commented upon,
notably in successive communications from
the Commission.

**B.6.**

See the reply to A.6.

**B.7.**

As noted by the Court, the tender process
managed to attract a diverse range of European companies, strongly dedicated to the
project. It is only natural that for an innovative and challenging space project, space
industry took a prominent role in the consortia. Operators were nevertheless present
in all competing consortia.

Special Report No 7/2009 — The management of the Galileo programme’s development and validation phase

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**B.8.**

See the reply to A.2.

**B.11.**

Private sector bid costs were not assessed

as there was no intention to fund them from

public money.

**B.12.**

See the reply to B.1.

**B.13.**

The costs of external advisors were con
stantly monitored.

**C.1.**

See the reply to B.2.

**C.2.**

The bids were thoroughly assessed and
compared.

**C.4.**
In spite of the merger, the GJU managed to
drive the negotiation process and achieve
convergence on many topics, which was
reflected in the heads of terms signed at the
end of 2006 with the merged consortium.

Special Report No 7/2009 — The management of the Galileo programme’s development and validation phase

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European Court of Auditors

**Special Report No 7/2009**

**The management of the Galileo programme’s development and validation phase**

Luxembourg: Office for Official Publications of the European Communities

2009 — 77 pp. — 21 � 29.7 cm

ISBN 978-92-9207-317-6

doi: 10.2865/44017

Special Report No 7/2009 — The management of the Galileo programme’s development and validation phase

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to +352 2929-42758.

THE GALILEO PROGRAMME WAS INITIATED IN THE MID-1990s WITH THE

AIM OF ESTABLISHING A EUROPEAN GLOBAL NAVIGATION SATELLITE

SYSTEM. IT HAS SEEN SERIOUS DELAYS AND COST-OVERRUNS. IN

THIS SPECIAL REPORT THE COURT AUDITED THE DEVELOPMENT AND

VALIDATION PHASE OF THE GALILEO PROGRAMME LOOKING AT WHICH

FACTORS ACCOUNTED FOR THE FAILURES. THE COURT CONCLUDED

THAT MANAGEMENT OF THE DEVELOPMENT AND VALIDATION PHASE

WAS INADEQUATE. IF THE MID-2007 REDIRECTION OF THE EGNOS AND

GALILEO PROGRAMMES IS TO SUCCEED, THE COMMISSION MUST

CONSIDERABLY STRENGTHEN ITS MANAGEMENT OF THE PROGRAMMES.

THIS REPORT INCLUDES A NUMBER OF RECOMMENDATIONS AIMED

AT SUPPORTING THE COMMISSION IN THIS TASK. FINALLY, SHOULD

THE EU RESOLVE TO ENGAGE IN OTHER LARGE INFRASTRUCTURE

PROGRAMMES, THE COMMISSION MUST USE THE APPROPRIATE

MANAGEMENT TOOLS.

EUROPEAN COURT OF AUDITORS