Government Incentives to the Commercial Space Launch Industry

Transcription

1 Government Incentives to the Commercial Space Launch Industry Analysis and Recommendations August 5, 1999 WASHINGTON INTERNSHIP FOR STUDENTS OF ENGINEERING Student Policy Paper Eric A. Lund Embry-Riddle Aeronautical University Sponsored by The Institute of Electronics and Electrical Engineers, Inc. United States Activities (IEEE-USA)

2 TABLE OF CONTENTS Executive Summary...3 Issue Definition...4 Introduction...4 Significance to Engineers...5 Significance to the Public...5 Background...6 History...6 Existing Regulatory Framework...7 Current Legislation and Key Players...8 Positions of Engineering Societies...10 Industry Positions...11 Positions of Federal Agencies...12 Government Policy Influence...13 Key Conflicts and Concerns...14 Changing Customers...15 Funding Cuts...15 National Security...15 Global Competition...16 Inequality of Government Assistance...16 Conflicts within Industry...16 Too Much Government?...17 Policy Alternatives...19 Maintaining the Status Quo...20 Tax Incentives...21 Advanced Purchase...22 Infrastructure Investment...23 Research & Development...24 Recommendations...26 Acknowledgements...27 About the Author...28

3 GOVERNMENT INCENTIVES TO THE COMMERCIAL SPACE LAUNCH INDUSTRY 3 EXECUTIVE SUMMARY Government incentives would to enable the aerospace industry to research, develop, and test new technologies and business practices to reduce the cost and risk of access to space. This paper will examine how different types of incentives offered by the federal government could affect the success of commercial space launch industry in reducing the costs and risks of Earth-to-orbit travel by orders of magnitude within the next ten years. The era of commercial space transportation began with the Space Shuttle, is currently dominated by expendable launch vehicles, and will soon thrive on privately operated reusable launch vehicles. Loan guarantees are one method suggested in Congress to meet the financial needs of commercial launch vehicle manufacturers. Several engineering societies support the commercialization of space, but do not make recommendations on how the space launch industry should be commercialized. Not all members of the aerospace industry agree on what type of government involvement is needed. The resolution of how the government should invest in the commercial space launch industry has been difficult due to a number of conflicts. Three key constraints to this issue are disagreement between industry and Congress on the best method(s) of investment, internal conflict within industry on determining the benefactors of investment, and issues concerning the role of government in the commercial aerospace sector. Congress must take national security, budget caps, and concerns of corporate welfare into consideration when finding a solution to provide incentives the commercial space launch industry. Four often-cited alternatives to loan guarantees are analyzed; these are tax incentives (of which there are numerous types), advanced purchase of launch services, infrastructure investment, and research & development. Maintaining the status quo was also analyzed, as this is the outcome if Congress takes no action. Recommendations include implementing tax breaks for space-oriented investors and small aerospace businesses, tax-free bonds for use by the states to develop their own commercial spaceports, upgrades of existing spaceport infrastructure, government-funded high-risk technology demonstrator projects, and elimination of government competition in the space launch industry.

4 GOVERNMENT INCENTIVES TO THE COMMERCIAL SPACE LAUNCH INDUSTRY 4 ISSUE DEFINITION Introduction This paper will define the present commercial space launch situation, introduce the players involved, examine conflicts and concerns surrounding the issue, investigate and evaluate policy alternatives, and make recommendations concerning government incentives to the commercial space launch industry. The new and existing industries and markets spurred by the development of space are of interest to the members of the Institute of Electrical and Electronics Engineers (IEEE). The official position of IEEE on the commercial development of space is to promote economic growth and international competitiveness, open up space to the private sector, and sustain activities of direct social benefit. 1 Military and civilian federal agencies, corporations, small businesses, the scientific community, entrepreneurs, universities, and even prospective colonists of the Moon and Mars have all cited cheap access to Earth orbit as the critical element in achieving their goals in space for the 21 st century. Government incentives would to enable the aerospace industry to research, develop, and test new technologies and business practices to reduce the cost and risk of access to space. This paper will examine how different types of incentives offered by the federal government could affect the success of commercial space launch industry in reducing the costs and risks of Earth-to-orbit travel by orders of magnitude within the next ten years. To better focus on the issue of government incentives to the commercial launch industry as a whole, this paper will not differentiate between expendable launch vehicles (ELVs), reusable launch vehicles (RLVs), vehicles with capability or necessity to carry crew, or vehicles with different payload capabilities (e.g. a certain mass to a particular orbit). While funding needs vary widely from one type of vehicle to the next, these differences will go unmentioned henceforth for reasons of simplicity and brevity. This paper will only distinguish between start-up companies and subsidiary or spin-off companies obtaining significant financial support from a parent or partner company. 1 IEEE United States Activities Board Position Paper on the U.S. Civil Space Program, December 1996

5 GOVERNMENT INCENTIVES TO THE COMMERCIAL SPACE LAUNCH INDUSTRY 5 Significance to Engineers The aerospace, telecommunications, and electronics industries will need engineers to design, develop, and test systems for use in new vehicles, ground equipment, and payloads spurred by an increase in the affordability of space travel. As of December 1997, the aerospace industry employed 134,000 scientists and engineers. 2 The method in which Congress chooses to invest in the commercial space launch industry will determine who benefits in this industry and by how much. Engineers need to be involved in the policy making process to ensure that technical data and analysis is interpreted by non-technical people (i.e. Congress) in the same manner in which it was written. Industry cannot afford misinterpretation of data written by well-meaning engineers who do not understand the political context in which it will be used. Significance to the Public A number of facets of this issue are of interest to different groups within the general public. First, it impacts millions of workers in aerospace and telecommunications firms not just the managers or engineers. Second, national security is dependent on reliable access to space as reconnaissance becomes increasingly satellite-based. Third, the commercial potential of the space launch industry has the ability to affect the national economy not unlike the aerospace industry, which has developed into a $41 billion annual positive trade balance for the U.S. 3 Fourth, it can encourage and inspire a new generation of engineers and scientists, maintaining U.S. leadership in technology and innovation. Last, launch operations and vehicles affect the environment, which in turn affects everyone. 4 2 personal communication with Bruce Mahone, Director of Space Policy, Aerospace Industries Association, July 29, Douglass, John W., Executive Update, Aerospace Industries Association, Spring Saradzhyan, Simon. Measures Needed to Limit Launch Pollution, Officials Say. Space News. April 5, 1999

6 GOVERNMENT INCENTIVES TO THE COMMERCIAL SPACE LAUNCH INDUSTRY 6 BACKGROUND History To better define the current space launch situation, I will briefly examine the first flexible U.S. space launch system the Space Transportation System (STS), also known as Space Shuttle. The original purpose of STS was to reduce the cost of launching military and civil non-commercial payloads into space, in particular the Space Station as envisioned in the mid-1970s. At that time, few people considered commercial payloads to ever be a major fraction of all payloads lofted into space. Technical and political compromises during the development phase of the STS resulted in the current design, which is costly to operate due to its dual-role capability as research lab and cargo truck, 25-year-old technology, and extensive refurbishment process between flights. 5 A number of factors have contributed to the need to replace the STS. After the Challenger tragedy in 1986, the STS was dismissed from its role as the primary launch vehicle for U.S. payloads and banned from ferrying commercial satellites. 6 Unmanned launch systems were and continue to be developed from Intercontinental Ballistic Missiles (ICBMs) and from scratch to provide the U.S. with an indigenous satellite launch capability without risk to human crew. Within a few years, much of the research lab role of the STS will be replaced by the International Space Station. This will leave the U.S. Shuttle fleet with little unusual capability and a very unacceptable upkeep price. A growing low earth orbit (LEO) commercial satellite market, an international launch vehicle market, and promising new markets in space medicine, imagery, and tourism, are dictating drastically lower costs and greater supply in the space launch business than STS technology will ever provide. 5 For more detailed history of the STS, read Space Shuttle: The History of Developing the National Space Transportation System by Dennis Jenkins, Sackheim, Robert. A Near-Term Solution for Lowering Launch Costs. Launchspace, Oct./Nov. 1998

7 GOVERNMENT INCENTIVES TO THE COMMERCIAL SPACE LAUNCH INDUSTRY 7 According to a report published in May 1999, commercial space launches are predicted to increase forty percent over the 36 commercial launches of The same report estimates between 1,200 and 1,400 payloads will be launched into Earth orbit within the next ten years with two-thirds going into low earth orbit. 8 These facts, as well as dreams of capitalizing on new markets, have caused many to consider entering the commercial space launch market. At least a dozen subsidiary and start-up companies are poised to launch their first flights within the next five years provided that sufficient financial support can be found. These companies have experienced management and engineers from all across the aerospace industry; Kistler Aerospace CEO Dr. George Mueller is former head of NASA's Apollo program and Dr. Edward Gibson, Director and President of Pioneer Rocketplane was the scientist-pilot of Skylab 3. The vehicles that these companies propose vary in capability and will serve a number of different markets. 9 Existing Regulatory Framework The issue of non-military (see inset) government investment in the commercial launch industry began with the passing of the Commercial Space Act of This legislation created the Office of the Associate Administrator for Commercial Space Transportation (AST) under the Department of Transportation. This office was transferred to Federal Aviation Administration (FAA) in 1995 and remains the sole space travel-related office in the DOT. Under this legislation, the DOT had the re- The U.S. Air Force will invested over $3 billion in the launch industry through the Evolved Expendable Launch Vehicle (EELV) Program, began in 1994, to develop a family of launch systems based on common core components, common payload adapter, and a common launch platform Commercial Space Transportation Forecasts, Federal Aviation Administration s Associate Administrator for Commercial Space Transportation (AST) and the Commercial Space Transportation Advisory Committee (COMSTAC) 8 Ibid. 9 for an overview of proposed vehicles, read the 1999 Reusable Launch Vehicle Programs & Concepts report by AST and COMSTAC 10 Air Force awards EELV contracts. Air Force News. July 29, 1999

8 GOVERNMENT INCENTIVES TO THE COMMERCIAL SPACE LAUNCH INDUSTRY 8 sponsibility to license and regulate commercial launch vehicles. Another Commercial Space Act, introduced by Rep. James Sensenbrenner (R-WI), Chairman of the House Science Committee, was passed on October 28, This new act expanded AST s regulatory authority to cover reusable launch vehicles, reentry vehicles, and spaceports and also requires the government to purchase commercially available launch services whenever possible. Overall, the aerospace and communication satellite industries saw these Acts as positive first steps toward the commercialization of the space launch industry. 11 AST has developed regulations concerning the licensing both ELVs and RLVs, particularly from government-owned launch sites, which became effective June 21, The licensing regulations exist for public safety and U.S. national interests without hindering new technologies. 12 Current Legislation and Key Players Several losses of launchers and/or payloads in 1998 and 1999 caused potential investors in the space launch market to look toward less risky investments while the insurance industry is also on edge due to the recent catastrophes. Under S.469, commercial 13 Fearing a drop in U.S. leadership in space, launch vehicle manufacturers several members of Congress decided to take action. would apply for loans from On February 25, 1999, Sen. John Breaux (D-LA and commercial lenders with the government covering the company ranking member on the Senate Subcommittee on (up to the fraction of the $500 million previously agreed Science, Technology, and Space) introduced The Commercial Space Transportation Cost Reduction upon) in case of default by the Act (S. 469) that proposed $500 million be made company. available for government loan guarantees to com- 11 Divis, De Ann. Commercial Space Act: Entrepreneurs Get Some Federal Help. Ad Astra, March/April Testimony of Esta Rosenberg, Office of Chief Counsel, FAA, before the House Subcommittee on Space and Aeronautics, April 21, Covault, Craig. Perilous Times Jolt Booming Launch Market. Aviation Week and Space Technology, May 17, 1999

9 GOVERNMENT INCENTIVES TO THE COMMERCIAL SPACE LAUNCH INDUSTRY 9 mercial space launch vehicle manufacturers (see inset). Senator Breaux introduced a similar bill nine months earlier that never passed the subcommittee level. The Commercial Space Act of 1984 was amended in 1988 to provide indemnification (see inset) to the commercial space launch industry. This amendment has been continuously extended through the end of Current U.S. commercial launch providers, represented by the Aerospace Industries Association, have cited continued indemnification essential to Commercial launch providers must insure their launches up to $500 million through private insurance companies. Under indemnification, the government covers the next billion dollars of potential third-party liability. 14 keeping domestic launches competitive with foreign launch systems, which are government subsidized. 15 The Commercial Space Launch Industry Indemnification Extension, S.832, introduced by Sen. John McCain (R-AZ) on April 20, 1999 and approved by the committee one June 23, 1999, would further extend indemnification for another ten years. On April 22, 1999, Rep. Dave Weldon (R-FL and vice chairman of the House Science Committee) introduced the Commercial Space Competitiveness Act of 1999 (H.R. 1526) into the House of Representatives. This bill was referred to the House Subcommittee on Space and Aeronautics on May 5, 1999 where it awaits a hearing. The Act has the following main functions: to provide the greatest possible access to launch opportunities to private sector launches; to encourage transfer of Federal property and services, including utilities, for the support of commercial launch efforts to the private sector and State governments; and to extend indemnification of the launch industry by another ten years. 14 testimony of John W. Douglass, President and CEO, Aerospace Industries Association, before the Senate Committee on Commerce, Science and Transportation Subcommittee on Science, Technology, and Space, May 20, Renew Space Launch Indemnification, 1999 Top Ten Issues, Aerospace Industries Association, 1999

10 GOVERNMENT INCENTIVES TO THE COMMERCIAL SPACE LAUNCH INDUSTRY 10 On June 7, 1999, ProSpace (a grassroots space lobbying group) introduced the Commercial Space Transportation Investment Incentives Act of 1999, which would encouraging private investment in the commercial launch industry with a 20% tax credit on stock purchases of launch vehicle providers. 16 This act differs from the others by directly encouraging private investment instead of focusing on government actions and investment. This bill is very different from Sen. Breaux s bill and presents a conflict of ideas between Congress and the public about how the government should encourage and facilitate growth in the commercial space launch industry. As of the beginning of August 1999, no Congressman has sponsored this bill. Rep. Dana Rohrabacher (R-CA) introduced the Commercial Space Transportation Competitiveness Act of 1999 (H.R. 2607) on July 26, This bill authorizes over $31 million for the activities of AST, extends indemnification through 2004, and requires the Secretary of Transportation to produce a report on the liability risk-sharing regime in the United States for commercial space transportation within 18 months of the passing of the Act. As of August 2, 1999, this bill was awaiting House Science Committee vote. Positions of Engineering Societies The Institute of Electrical and Electronics Engineers-United States Activities (IEEE- USA) Aerospace Advisory Committee issued a position statement in December of 1996 that called for the use of U.S. space-related public funds and talent in strengthen[ing] commercial and industrial competitiveness in today s civil space business arena. This position statement does not state how this should be accomplished. I believe that the how is the most important component of this issue and will focus the majority of my recommendations on how the government might implement such a policy. The American Institute of Aeronautics and Astronautics (AIAA) issued a statement in January of 1996 that stated, in order to encourage commercialization of space, the government policy strategy should reduce the perception of risk, increase perceived return on 16 The Commercial Space Transportation Investment Incentives Act of ProSpace. July 29, 1999

11 GOVERNMENT INCENTIVES TO THE COMMERCIAL SPACE LAUNCH INDUSTRY 11 investment, increase industry s awareness of opportunities, and create new investment opportunities. This position statement does not specifically mention how or if the government should encourage the U.S. launch industry in particular. However, an earlier position statement expressed research programs, technology demonstration programs, and long-term infrastructure development as prerequisites to enhancing U.S. launch vehicle industry competitiveness. 17 Industry Positions The Aerospace Industries Association (AIA) issued a statement in March of 1999 that stressed full funding for Range Standardization and Automation IIA (RSA-IIA). RSA- IIA would upgrade existing government-owned launch site infrastructure from 1960s technology for the purpose of making these sites safer and more able to handle an increased number of launches. This position statement does not deal with direct government support of launch vehicle providers but does address an important issue that most other participants do not mention. While all members of AIA support government-funded basic research, not all agree that loan guarantees would be the best form of government support. Bruce Mahone, Director of Space Policy at AIA, said, Some companies feel their programs will fail without loan guarantees, while other companies believe their own programs will be severely disadvantaged if competitors are granted loan guarantees. 18 More disagreements within industry will be discussed later. AIA supports export license policy that serves the national security interest while not being detrimental to the space industry by forcing customers to non-u.s. service providers. Indemnification extension is also supported by AIA as critical to the U.S. launch industry The Civil Space Program: Investment in America, AIAA Position Paper, October personal communication, July 9, testimony of John W. Douglass, President and CEO, Aerospace Industries Association, before the Senate Committee on Commerce, Science and Transportation Subcommittee on Science, Technology, and Space, May 20, 1999

12 GOVERNMENT INCENTIVES TO THE COMMERCIAL SPACE LAUNCH INDUSTRY 12 Positions of Federal Agencies The Commercial Space Act of 1984 created The Commercial Space Transportation Advisory Committee (COMSTAC). This committee advises the FAA on issues relating to U.S. commercial space transportation and generates a number of annual and monthly reports on space launch activities. COMSTAC is made up of 25 members who are appointed by the Secretary of Transportation to a 2-year term. The members are primarily senior executives from U.S. commercial space industry. COMSTAC has not yet replied with its viewpoint on this issue. According to Lori Garver, NASA Associate Administer for Policy and Plans, A primary goal of NASA s investments in space is to ensure maximum safety and lower our future space transportation costs, through commercially-owned and -operated systems with very high reliability. 20 Ultimately, NASA would like to procure all of its launch needs from the private sector. NASA is spending millions of dollars to upgrade flight and ground equipment to improve the safety and reliability of the Space Shuttle. NASA invests over $1 billion in research to reduce technical risks and demonstrate RLV and next-generation technologies and sees government incentives as a way of reducing business risks for commercial launch providers. In 1995, the Office of Technological Assessment (OTA) described the Defense Department as less interested in developing new launch systems because the current systems meet its fundamental needs. 21 The report cited the Air Force s EELV program as a costcutting measure rather than a path to greater capabilities. However, in the effort to reduce costs through consolidation there is the risk that a single vehicle failure may ground the entire Defense Department fleet if the failed component(s) is common to all launch vehicles in the EELV family. This report is still relevant because the EELV program still exists. 20 testimony before the Senate Subcommittee on Science, Technology and Space and the Committee on Commerce, Science and Transportation United States Senate, May 20, U.S. Congress, Office of Technology Assessment, The National Space Transportation Policy: Issues for Congress, OTA-ISS-620 (Washington, DC: U.S. Government Printing Office. May 1995)

13 GOVERNMENT INCENTIVES TO THE COMMERCIAL SPACE LAUNCH INDUSTRY 13 Government Policy Influence The National Defense Authorization Act of 1999 has hurt the U.S. satellite industry by restricting launch of domestic satellites on foreign launchers because of security concerns over dual-use (military and civilian) technology. This Act classifies satellites as munitions and shifts export control to the State Department from the Commerce Department. By limiting the supply of domestic launches, this legislation forces launch prices up and schedules behind and discourages any foreign purchase of U.S.-built satellites. Looking toward the future, this act hurts the industry by decreasing experience that university students gain from launching their satellites as secondary payloads often on foreign launchers. 22 This might seem good for U.S. launch providers, but it will hurt them in the end as well. Decreased competition will allow foreign launchers to gain market share and lead to higher-priced, and thus fewer, U.S. launches. 22 Grey, Dale M. Why has the U. S. State Department Declared War on the American Satellite Industry? Space Policy Digest

14 GOVERNMENT INCENTIVES TO THE COMMERCIAL SPACE LAUNCH INDUSTRY 14 KEY CONFLICTS AND CONCERNS The resolution of how the government should invest in the commercial space launch industry has been difficult due to a number of conflicts. Three constraints to this issue are Disagreement between industry and Congress on the best method(s) of investment, Internal conflict within industry on determining the benefactors of investment, and Issues concerning the role of government in the commercial aerospace sector. One concern about government incentives to the commercial launch industry is that industry projections and market forecasts contain many unknowns and uncertainties thus decreasing the credibility of analysis and reducing its role in the policy making process. This does not eliminate analysis as a factor in making policy. 23 Uncertainties about the future of the economy and risks associated with new technologies exist and can be addressed with flexible, effective policies using both politics and analysis (examples of which will follow in the Policy Alternatives section). If the Congress votes not to pass legislation financially Due to the relatively small and greatly fluctuating favorable to commercial launch companies, there launch market, trends are would be several results. First, existing launch systems often difficult to analyze. will continue to be used at significantly greater life cycle cost than new, more economical systems could pro- However, one estimate is that the U.S. has lost over half of the launch market vide. This will have an impact on the federal budget in share since the mid the long term if access to space remains at current cost. 1980s. 24 Second, the U.S. will continue to fall behind in the global launch market (see inset). Third, the current launch industry will continue to consolidate, causing loss of jobs, expertise, and industrial base needed for national security reasons. 23 Lindbolm, Charles E. and Edward J. Woodhouse. The Policy-Making Process. 3 rd ed. (Upper Saddle River, New Jersey: Prentice-Hall, Inc., 1993). 24 testimony of Bruce L. Mahone, Director of Space Policy, Aerospace Industries Association, before the House Subcommittee on Space and Aeronautics, March 11, 1999

15 GOVERNMENT INCENTIVES TO THE COMMERCIAL SPACE LAUNCH INDUSTRY 15 Changing Customers The largest obstacle facing this issue is industry s shift away from government contractcentered business methods to market-based business practices. Civilian customers do not necessarily need services and capabilities needed by the government. Non-governmental entities have different modes of financing than do the Air Force and NASA, for example. Most of all, new commercial launch operations must be profitable in the long run without government contracts. Funding Cuts New conflicts could emerge between industry and government if new launch systems fail because of degraded federal launch facilities. 25 Congress has routinely cut funding to RSA-IIA (Range Standardization and Automation IIA) which would upgrade 1960s technology at government-owned launch sites to a modern standard that would allow an increased number of safer launches. Pork barrel legislation may factor into this as only a handful of districts currently harbor non-commercial launch facilities. Spaceports are low on the priority list for most members of Congress because launch facility maintenance is not currently a concern of most of their constituents. National Security The U.S. satellite industry (Hughes, Space Systems Loral, among others) and the Department of Defense are at odds because satellites and satellite parts sent abroad are considered munitions under a recent federal act (the Strom Thurmond National Defense Authorization Act of 1999) to prevent compromising domestic dual-use technology. However, export restrictions could also benefit the U.S. satellite companies, according to Rep. Weldon who stated, Keep[ing] launches here at home will help stem the flow of technology transfers and reduce the costs per launch for the government and the private sector. 26 No easy solution exists between national security and free enterprise. 25 Space Launch Modernization and American Space Leadership An Industry Perspective, Aerospace Industries Association of America, Inc., testimony to the Space and Aeronautics House Subcommittee, March 11, Weldon, David, U.S. Rep. Meld U.S. Defense and Commercial Sector Needed. Space News, June 14, 1999

16 GOVERNMENT INCENTIVES TO THE COMMERCIAL SPACE LAUNCH INDUSTRY 16 Global Competition Another major conflict exists between corporate R&D and global competition. As recently as a decade ago, defense contracts frequently bolstered the aerospace industry with new weapons contracts thus providing incentive and funds for those companies to finance their own R&D to develop new products to market to the Defense Department. The situation has changed: companies have downsized, economized, and focused on near-term profit generation and shareholder satisfaction. This leaves the nation in a precarious position where corporations can no longer afford large R&D projects and federal agencies already have their R&D budgets scrutinized by Congressional oversight committees. Without R&D, this technology can very likely fall behind that of other industrial nations where launch services are heavily subsidized by their governments. Some sort of agreement between the aerospace industry and Congress would clarify this issue and perhaps shed light on possible paths of action. Inequality of Government Assistance One concern is that loan guarantees might not fairly distribute government financial assistance to commercial space launch vehicle providers due to what boils down to pork barrel politics. Conservatives believe market forces are better suited to choosing winners and losers; in this case loan recipients and non-recipients. This concern is twofold: the $0.5 billion pot is too small to be equally divided among potential borrowers for any net affect, and only those companies with the most powerful lobbying force will be able to rein in the government funding. 27 While not unique to this issue, Congressional discrimination will be addressed later in this paper. Conflicts within Industry Commercial launch vehicle manufacturers who already have sufficient funding and/or operating vehicles dislike government involvement in the marketplace. Newcomers to the launch vehicle market would like direct investment, government or otherwise, to assist them in introducing their vehicles to the market. For example, Boeing privately fi- 27 commentary from Space News, June 7, 1999

17 GOVERNMENT INCENTIVES TO THE COMMERCIAL SPACE LAUNCH INDUSTRY 17 nanced development costs related to its Delta II launcher while Lockheed Martin is receiving over $1 billion in federal money for the X-33 technology demonstrator, for which is planned a direct, scaled-up commercial-launch-capable version called VentureStar. Other conflicts are developing between the U.S. satellite industry and the U.S. launcher industry. The former prefers global competition in the launcher industry for lowest cost while the latter wants no competition from foreign launch systems for greatest market share and profit. Emerging launch firms sit apart on this issue because they see lowest cost as the path to greater market share. Policy makers should be aware of this conflict and decide before policy is made which of these three viewpoints will be shared by the policies created. Too Much Government? How will government involvement affect commercial investment firms, such as SpaceVest, which focus exclusively on space-related investments? The answer depends on how and who the government supports. To some investors, government involvement would increase the risk associated with their portfolio by giving capital to one or more competing firms. Investors, who hold stake in the companies in which the government also invests, believe federal involvement reduces their risk. Financial involvement by the federal government in the commercial space launch industry will have little affect on privatelysponsored competitions like the X PRIZE SM and the Cheap Access to Space (CATS) Prize 30 (see inset) but may affect the competitors after these competitions X PRIZE SM $10 million prize to first team who sends three people to 100 km altitude twice within two weeks. 28 CATS Prize $50,000 prize for first 2 kilogram payload to 120 km or $250,000 for 200 km for vehicle that is substantially privately designed, developed and built X PRIZE Foundation. July 29, The Cheap Access To Space (CATS) Prize. Space Frontier Foundation. July 29, Berger, Brain. Contest Encourages Small Rocket Builders Who Have Big Dreams, Space News, June 14, 1999

18 GOVERNMENT INCENTIVES TO THE COMMERCIAL SPACE LAUNCH INDUSTRY 18 are over. The entrants to these contests are prohibited from financing their vehicles with public funds. However, many of the entrants to these two competitions are looking toward commercial services after the competition is completed where they will likely compete in the marketplace against companies who did receive government support. Thus a company or group than won the competition may lose in the marketplace due to the fact that government support is likely to be greater than the winnings of the competition. How can Congress and the Administration justify to taxpayers and voters that giving hundreds of millions of dollars to the commercial aerospace sector makes sense when some recipients will not produce viable space launch vehicles? First, the U.S. has a desire to maintain expertise and technologies related to national defense. Increasingly scarce defense contracts are forcing many lower-tier suppliers in the aerospace industry to fold or consolidate reducing workforce knowledge base and increasing reliance on a single domestic source for certain parts. 31 Second, the commercialization of space is currently and is expected to continue to be a very profitable business and contribute hundreds of billions of dollars to the U.S. economy during the next decade. 32 Claiming that government investment will ensure U.S. leadership in space is not advised due to the dismal record of past projects that were sold on the same platform. Industry has continually proven to be motivated and best able to express U.S. technical leadership. 31 U.S. Congress, Office of Technology Assessment, The Lower Tiers of the Space Transportation Industrial Base, OTA-BP-ISS-161 (Washington, DC: US Government Printing Office, August 1995). 32 Space Transportation and the Global Space Commerce Market: Issues and Indicators. Futron Corp. 10/28/98

19 GOVERNMENT INCENTIVES TO THE COMMERCIAL SPACE LAUNCH INDUSTRY 19 POLICY ALTERNATIVES There are many alternatives to loan guarantees that Congress could implement to assist the U.S. commercial space launch industry in creating cheaper, more reliable access to space for people and cargo. Tax incentives, pre-sold launch slots, infrastructure investment, R&D, and simple inaction will be evaluated on the following criteria: effectiveness, efficiency, equity, flexibility, and feasibility. These alternatives were chosen for consideration because they represent the most cited alternatives in reference to the issue of government incentives to the commercial launch industry. Other alternatives, such as the creation of a National Space Council or commercializing the Space Shuttle were less frequently mentioned and will not be included in this analysis. The criteria are defined as follows: Effectiveness - how well the alternative achieves the policy objective. Efficiency - relates to the costs, risks, and benefits affecting the players involved. Equity - describes the distribution of costs, risks, and benefits between those affected by the policy. Flexibility - applicability to the policy objective and adaptability of the alternative to regional differences and future circumstances. Feasibility - conveys how easily the measure can be adopted and implemented. The primary objectives that the policy alternatives must meet are twofold. First, the policy must result in the commercial space launch industry as a whole 33 providing safer, more reliable, and more efficient access to space at competitive prices in the global market place by creating a business environment suitable to such outcomes. The creation of a business-based environment out of a contract-based environment is the critical finding of this policy paper. Second, the policy must be easily put into practice with minimum change in bureaucracy and be easily changed or adapted to new conditions once the policy is in place. 33 Sen. Breaux s bill is structured to facilitate larger corporations, which often represent the most cautious and least progressive fraction of the industry.

20 GOVERNMENT INCENTIVES TO THE COMMERCIAL SPACE LAUNCH INDUSTRY 20 Maintaining the Status Quo Inaction on the part of the government is not a plausible solution because both the Administration and Congress have stated the desire to encourage the commercial space launch industry. At the other end, the commercial space launch industry desires any form of support. NASA, particularly its current Administrator Dan Goldin, does not like to operate a money guzzler like the STS when it has other ideas on how to use the money it is spending the STS. Report Card Effectiveness Efficiency Equity Flexibility Feasibility F D C D A EFFECTIVENESS: Inaction on the part of NASA would violate both the National Space Policy and NASA s mission statement. The aerospace industry would like any form of support, which this option does not provide. This option is counter-productive by delaying action of possibly effective policies. EFFICIENCY: If Congress decides to sit on this issue, the economic risk to U.S. business is to continue to lose market share in the world launch market. EQUITY: Inaction is not an equitable solution because established companies like Boeing, Lockheed, and others will continue to receive millions of dollars for existing EELV and technology demonstration contracts while smaller start-up firms must seek private investment. FLEXIBILITY: Inaction may seem flexible in that other measures can be taken up at any time. However, inaction may lead to shelving the issue entirely making future action less likely. FEASIBILITY: Doing nothing is politically easy and requires no change in the bureaucracy. However, doing nothing becomes more difficult as more companies, organizations, and agencies lobby for action.

21 GOVERNMENT INCENTIVES TO THE COMMERCIAL SPACE LAUNCH INDUSTRY 21 Tax Incentives A number of tax incentive options have been suggested: tax breaks for investors, tax breaks on launch services, and tax-free bonds. Mr. Andrew Beal, President and CEO of Beal Aerospace, suggested that the government only reward successful launches with tax breaks. 34 This could promote increased reliability rather than a possibly unsafe rush to first launch. Report Card Effectiveness Efficiency Equity Flexibility Feasibility B A A B C EFFECTIVENESS: Although tax incentives require the investment for initial vehicle launch to come from private sources, some types of tax incentives would make private investment more attractive (as is the intent of the ProSpace bill). Any form of tax incentive could lead to a net increase in federal revenue by encouraging industry activity and fostering market growth. EFFICIENCY: This option is efficient by not requiring any new bureaucracy. Industry bears the technical risks. Efficiency may be increased a year or so after implementation at some cost through analysis of how the tax incentives are affecting the commercial launch industry. EQUITY: Tax incentives are generally more equitable than loan guarantees by not involving Congress or federal agencies in the decision process as to which companies receive the loans. The benefactors of tax incentives depend upon the final language of the tax bill. FLEXIBILITY: Tax breaks rewarding only successful launches are less flexible than an industry-wide tax break on all products that go into space, for example. One compromise may be to encourage private investment through tax credits on stock purchases in space stock stocks of space-related corporations. FEASIBILITY: Tax breaks are more politically feasible during a budget surplus. Tax incentives for small businesses might be more easily implemented than the same tax incentives or multi-billion dollar corporations. The opposition to any tax incentive is expected to be strong because subsidies are politically hot topic when combined with fears of corporate welfare. 34 testimony of Andrew Beal to the Senate Subcommittee on Science, Technology, and Space, May 20, 1999

22 GOVERNMENT INCENTIVES TO THE COMMERCIAL SPACE LAUNCH INDUSTRY 22 Advanced Purchase A commercial launch provider would be guaranteed future government business pending a successful initial non-government payload launch. Future government business includes supplementing and eventually replacing the STS in its evolving role (launch of satellites and ferrying of supplies to the International Space Station). Report Card Effectiveness Efficiency Equity Flexibility Feasibility C C B C B EFFECTIVENESS: While this option requires industry to raise the required capital for the first successful launch, advanced purchase would decrease business risks associated with new commercial launch vehicles, thus attracting more private investors. Advanced purchase would be a more effective policy if it was the method by which all non-military government launch services were procured. EFFICIENCY: This policy is moderately efficient in that most of the costs and risks are borne by industry while both the industry and the public benefit. While industry would pay up front for vehicle development and production, buying launch services in advance could decrease costs for customers and taxpayers. EQUITY: Pre-selling launch slots would only benefit launch systems with capabilities useful to military and other government payloads. Advanced purchase does not completely level the playing field for market newcomers, thus larger companies with existing government contracts my gain the bulk of new launch contracts. FLEXIBILITY: One disadvantage is that a series of successful commercial launch attempts result in the government overselling its needed launch services. To maintain flexibility, there must be an escape clause by which the customer can back out if a launch system proves unreliable in operation. FEASIBILITY: This option would satisfy those who believe the government should play a smaller role in the marketplace because the public would only pay for services rendered rather than riskier R&D. The ability of Congress to reliably appropriate money to cover such purchases remains in questions.

23 GOVERNMENT INCENTIVES TO THE COMMERCIAL SPACE LAUNCH INDUSTRY 23 Infrastructure Investment One alternative is for the government to invest public Report Card money into spaceports, which would inevitably be needed Effectiveness B to make the launch systems accessible to customers. This Efficiency C is analogous in the U.S. to public airports serving as the Equity C link between privately funded aircraft manufacturers, the Flexibility D airlines, and passengers. Infrastructure needs vary widely Feasibility C among different types of launch vehicles some require little more than a runway and a hanger while others require specialized launch platforms and processing facilities. The source funding for infrastructure could come from bonds (possibly tax-free) and user fees modeled after the airport use fees. EFFECTIVENESS: This policy alternative most effective after the commercial space launch industry has developed to the point where launch facility standards and requirements are in place and not expected to change drastically within the lifetime of the infrastructure. EFFICIENCY: Once built, infrastructure is expensive to modify to meet the needs of newer launch vehicles. The environmental impact of new launch facilities is tremendous. EQUITY: It is unlikely that spaceports will be practical (due to launch system technical capabilities and safety requirements) in all geographic locations within the next 10 years, thus only a few states may benefit from this alternative. FLEXIBILITY: The flexibility of this option is increased by including state and local authorities and commercial launch service providers in the decision-making process. One option is for Congress to make federal grants available to the States to build and improve their own launch facilities. FEASIBILITY: Improvement of existing infrastructure already is underway (RSA-IIA, see page 8), albeit a slower pace than industry would prefer. Involving state and local authorities decreases chances of possible federal-local conflicts of interest. Alaska, California, Florida, and Virginia already have spaceports and are seen as the most likely contenders for infrastructure investment.

24 GOVERNMENT INCENTIVES TO THE COMMERCIAL SPACE LAUNCH INDUSTRY 24 Research & Development Continued government investment in R&D alone will not Report Card fulfil industry s need for financial assistance. Many nearterm commercial launch vehicle systems have already Effectiveness D Efficiency B been tested or are based on proven technology and designs, thus negating much of the need for R&D. The Flexibility C Equity C launch vehicle industry desires capital to build and Feasibility B launch their first flight vehicles within the next 1 to 5 years. Currently, NASA has funding to continue projects (X-33, X-34, X-37, and X-43) that demonstrate technologies, operations, and safety scenarios of RLVs that are intended to eventually carry over into the private sector. Industry wants the government to continue basic research in hope that it will bring near-term profits without risking private capital 35 (is this a contradiction in terms?). Other government R&D into advanced propulsion and energy are not likely to generate commercially viable results within the next five years. Industry does not want the government to compete in the commercial launch vehicle market in terms of resources. This includes converted ICMBs, unless specific regulations were in place for use exclusively by academic institutions for educational purposes, for example. 36 Michael S. Kelly said before the Senate Committee on Commerce, Science, and Transportation, The government should not fund development of a new launch vehicle if it is to be used for commercial purposes. Industry does not want competition from government-subsidized launch system like the Space Shuttle as proposed by Dan Tam, assistant to the administrator for commercialization at NASA, at the Space Shuttle Development Conference July 29, EFFECTIVENESS: Federally funded R&D is endorsed by industry. However, R&D do little to change the business environment in which commercial space launch companies operate. 35 Anselmo, Joseph C. NASA Chief Rips Industry, Urges New Design Path. Aviation Week & Space Technology, May 10, as suggested by Scott Pace, Ph.D., of The RAND Corporation, before the House Subcommittee on Space and Aeronautics, July 31, Philipkoski, Kristen. Shuttle for Hire. 7/29/99

25 GOVERNMENT INCENTIVES TO THE COMMERCIAL SPACE LAUNCH INDUSTRY 25 EFFICIENCY: R&D are efficient in making use of existing research labs, staff, and the bureaucracy that oversees them. This option allows industry to take technology in the most economically sound direction. The federal R&D budget is much larger than industry could afford, but only a fraction goes into any single industry. EQUITY: Technology transfer remains an issue. FLEXIBILITY: In general, NASA-industry partnership R&D projects are designed to test a variety of technologies that have many applications. FEASIBILITY: The definitions of basic and applied research are politically sensitive and a subject of controversy in Congress over what research should be done. Research projects are subject to possible cancellation every year by Congress and/or the Administration.

26 GOVERNMENT INCENTIVES TO THE COMMERCIAL SPACE LAUNCH INDUSTRY 26 RECOMMENDATIONS In order for Congress to facilitate to its utmost capability commercial access to space and in the interests of the engineering societies and the commercial space launch industry, I recommend the following: Pursue tax credits on stock purchases of commercial launch vehicle providers as described in the legislation proposed by ProSpace on June 7, These tax credits should begin to phase out within 2 to 5 years of introduction to decrease industry dependence on such benefits. Implement moderate tax breaks for third-tier and lower suppliers for the space industry should to maintain industry capabilities related to national defense and market competitiveness. Again, these tax breaks should be implemented with full understanding that they are a temporary solution and will be phased out within ten years of introduction. Authorize the Office of the Associate Administrator for Commercial Space Transportation to tender tax-free bonds to the states for development of their own commercial spaceports. These bonds are to be repaid with future revenues incurred at such facilities. Appropriate funding as required to upgrade existing infrastructure where safety and efficiency are addressed to facilitate market competitiveness of U.S. launch systems and promote growth of the industry. Congress should continue to fund (at fiscal year 1999 levels) high-risk technology demonstrator programs unaffordable to the private sector through collaborations with industry, academia, and federal agencies. Congressional oversight committees should kill government-funded space programs that directly compete with commercial space transportation endeavors where national security is not at risk.