The tender issued by the European Union on 28 March for the first phase of a sprawling satellite network PPP came with one small problem: although RFQs are due by 26 April, the core encrypted communication system on which the satellites will eventually rely hasn’t been developed yet.

What could go wrong?

The yet-to-be-developed encrypted communication system is just one of the project’s many uncertainties — all of which have some questioning whether private parties will invest the time and expense of preparing bids for the first tender: a broad-based call for a private party to design, build and operate the network’s ground and space infrastructure.

Hanging over the Europe Satellite-Based Connectivity System PPP — known officially as Infrastructure for Resilience, Interconnectivity and Security, or IRIS — is the experience of a previous attempt to enlist the private sector in building a European satellite system. That PPP, the Galileo Satellite Project, was launched in 2003 but unravelled and was taken on-balance sheet in 2007 following a series of disagreements between the public and private sector.

The Galileo experience aside, EU and European Commission officials are declaring all systems go for the launch of IRIS, which they want to be at least partially operational in 2024 and fully operational by 2027. From the RFQ submissions, officials expect to prequalify as many as 20 bidders by late May and a preferred bidder by early 2024.

Many technical details will depend on the proposals received by the private sector, and such a bottom-up approach could run into difficulties within such a tight timeframe, according to Gerry Oberst, a senior counsel at Hogan Lovells in Washington, DC, who specializes in satellites.

Still, existing satellite operators are well aware of the tender and very likely have been exploring consortia partnership opportunities, Oberst said. Participation in the IRIS tender is limited to EU companies, with SMEs and start-ups in the emerging commercial space industry encouraged to bid.

The PPP calls for a 12-year concession contract, and envisions a total project value of EUR 6bn. Investments are expected to be funded 2:1 public vs. private, with the EU contributing EUR 2.4bn.

A heavy lift

Calling the project ambitious is a bit of an understatement. Indeed, only a few satellite PPPs have reached financial close globally:

The project will utilise non-geostationary orbit communication, where satellites are usually positioned around 700km-1,500km from the Earth.

More significantly, it promises “end-to-end Quantum communication infrastructure” to enable secure, encrypted communication throughout the EU and regions of strategic interest such as the Arctic and parts of Africa.

If history is any guide, the IRIS system faces obstacles downrange (see Galileo box). To avoid the fate of the EUR 3.4bn Galileo project, IRIS’s managers must listen to the private sector and clarify sooner rather than later the exact role of private operators and the returns that they can expect, according to Oberst.

The Musk of resentment

The IRIS project, approved by the European Parliament last November, is driven by European concerns about the predominance of American and Chinese satellite communications systems. “They don’t want to be left behind,” Oberst said. “They see American and Chinese and other esoteric systems taking up a vast proportion of the available satellite planes, frequencies, orbit services and they don't see general European services being as competitive.”

Major European operators are active in space, including Luxembourg’s IntelSat and SES and France’s Eutelsat. But the EU doesn’t like the level of influence E.ON Musk’s Starlink has had over the war in Ukraine, Oberst said. Having no control over this has “probably caused them to have a few sleepless nights,” he said.

Uncertain flight path

For its project to work, however, the EU must define exactly what the private sector’s role will be in IRIS — and that is as yet far from clear, sources said.

The tender documents released in March focus only on the first part of the procurement, involving the design, development and operation of the ground and space assets needed to support the provision of commercial services.

Those services, expected to be tendered in 3Q23, will be split between “hardgov” services — which entail high-security communication services restricted to government-authorised users — and “lightgov” services, or the provision of commercial services. The commercial services could involve the provision of broadband Internet and phone service as well as “narrowband” frequencies — used in technologies such as smart meters and intelligent parking management.

The lack of clear guidance about what, exactly, the government wants the satellites to do raises some concerns.

“On the commercial side, you have to make a large series of decisions on how a satellite system is structured and how the system is provided,” Oberst said. He questioned when the government will find time to “thrash out what type of commercial projects might work,” particularly considering the project’s tight timeframe.

A later tender, expected next year, will involve operation of the so-called “GOVSATCOM” hub, which will be used to control the provision of different satellite services for different government agencies.

Answers to the myriad questions raised so far about the project will be “addressed during the tendering process” as they depend on the exact architecture proposed by the private partner, said a European Commission official.

But such details need to be revealed sooner so that investors can undergo the due diligence necessary to make financing commitments, Oberst said.

It is possible that the EU is sitting on more details about the project than it can disclose officially at this stage.

Adding to the complexity, prospective satellite operators must submit a filing to the International Telecommunications Union (ITU) indicating which spectrums and orbital planes they wish the network to utilise. These filings have strict deadlines, making coordination with an open tender procedure quite challenging, Oberst said.

The Commission official said that “the project timeline is aligned with the ITU filing process, and takes relevant deadlines into account where applicable.” The Commission already has the relevant filings required for the governmental services, and will also utilise member states’ existing filings, the official said.

Unidentified infrastructure object

Yet another wild card is the “quantum communication infrastructure,” or “EuroQCI,” the EU has said it will be “developing further and gradually integrating” into the project. It will launch the tender for this infrastructure at a later date.

At the moment, EuroQCI is defined as “an interconnected space, ground and terrestrial infrastructure integrated into the secure connectivity system, using quantum-based technology.” First agreed upon in 2019, EuroQCI will be built by member states together with the European Commission and European Space Agency but will be owned by the member states.

But it is not yet exactly clear what EuroQCI will entail and how it will be integrated. More importantly, how much investment from the private sector will be required?

According to guidance released to date, the infrastructure is to be developed in “two main phases,” including “preliminary validation,” whereby the feasibility of different technologies and protocols will be assessed, followed by the “full-deployment phase.”

EuroQCI will support quantum key distribution, a secure communication method involving encrypting and decrypting data between two parties using a shared random key. But the EU admits that “to date,” such technology is not “sufficiently mature” to transmit classified information.

Dedicating considerable amounts of funding to as yet unproven technology will not fill investors with confidence, Oberst said.

“I imagine that's a lot of high-tech type of activity that we don't know about,” Oberst said. Such uncertainties will not support the project’s bankability at these early stages and could mean difficulty in judging the project’s rate of return, he said.

The Commission official did not disclose the planned deadline for completion of EuroQCI but said more details will be released soon.

Obstacles downrange

Yet another unanswered question is how interactions between commercial and government uses work. After all, commercial imperatives are different than government imperatives, Oberst said.

Such differences cross the level of agreed coordination and many other required decisions on project structure and provision, potentially leading to “enormous tensions,” he said. Indeed, similar tensions led to the collapse of the Galileo PPP and its conversion into a purely public project.

Early on in the competitive dialogue process, a clear distinction will need to be made between what government services are to be provided free of charge, and what other services the private sector will be providing and be able to charge for, Oberst said. If not, this could create problems further down the line.

Potential investors will also wonder whether their commercial services will be affected or constrained by governments. Will both sides have equal share of the transponders, which pick up the satellite signals? Or if government services become too important, will capacity for the commercial side be reduced?

The Commission official said that “governmental and commercial services are equally important, but there may be specific and limited times when governmental services will require a higher priority.”

Ensuring commercial services are guaranteed in the contract “will take some very artful legal drafting,” particularly when the private sector is footing up to one-third of the bill, Oberst said.

Another point to consider is how conjunctions with existing satellite systems will be managed. A new system that is competitive, rather than additive, to existing systems owned by EU member states, could cause political obstacles, Oberst said. Existing commercial operations “could very well be affected” by the “competitive aspects of a system that’s sponsored and given … EU state aid,” he said.

According to the Commission official, the “exact synergy” between public and private parties will depend on the proposals received, but the aim is for both to work together to create an “effective partnership between institutional and industrial actors.”

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