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2001 Roadmap:       MILESTONES       BARRIERS

Economic Barriers to Space Settlement

Political
Barriers

Economic
Barriers

From Ad Astra January-February 2001
by Mark Hopkins

One way to advance the cause of space settlement is by removing economic barriers. Often the cost to society of removing an economic barrier is minor or at least much lower than the costs of more direct methods of advancing the day of space settlements, such as technological improvements.

Supporting the removal of economic barriers through legislative action and other member activities can be an extremely cost effective way of using NSS resources to reach our goals.

The Barriers

No Long-term Government Funding Mechanism

Under current law Congress is not allowed to make financial commitments for more than one year. This is a major
economic barrier. It forces the management of space projects to worry about next year's funding in every year of a project. This is true even if the project is on schedule and under budget.

Companies can sign contracts that commit them to purchase a large number of items over a long period of time. This approach is frequently used when airlines purchase aircraft or communications satellite companies purchase launch vehicles. Block buying, as it is called, is a win-win way of doing business. It creates economies of scale and reduces the risk for both the supplier of the items (i.e., airplanes or launch vehicles) and for the company that purchases these items. It is also something the U.S. government is currently not allowed to do.

Much worse than the inability of the government to do block buys are the implications for the design stability of major space projects. The early history of the International Space Station is a classic example of this problem. When the level of funding from year to year for a project becomes unstable and unpredictable, project plans must be frequently changed. The cost of redesign becomes a large fraction of the project expenses. Morale of employees can also become a problem. Who wants to spend a year of his or her life helping to design something, only to have most of his or her work thrown away?

The program also becomes politicized. A savvy prime contractor needs to spend significant resources keeping the program sold in Congress. Decisions need to be made not only for technical, cost and efficiency reasons, but for political reasons as well. Selecting subcontractors so that they are located in the politically optimal congressional districts can become more important then selecting them on the basis of who can do the best job.

Few other democratic nations are doing business this way. They have multi-year funding. Why hasn't the United States already dealt with this problem? In a word, politics.

There is a broad consensus in the industry that a change to multi-year funding would substantially improve the efficiency of major space projects. However, it would also reduce congressional power. Members of Congress would give up a great degree of control and sacrifice campaign fundraising leverage. Asking any legislative body to vote to reduce its influence is asking a lot. Overcoming this economic barrier will require making a strong and persistent case based on international precedent, long-term savings, and more efficient results.

Lack of Incentives for Capital Investment

There are clear and widely accepted advantages to having the private sector run the parts of the space program where economic efficiency is important. Where markets exist, such as in communication satellites, private enterprise can do this without help from the government. In others, there may be insufficient incentive for capital investment without special help from the government.

Unless a reasonable profit can be made, commercialization will not occur. High risk levels and unproven market size are factors that frequently pose problems to making profits and thus to attracting capital investment contributing to commercialization. A traditional approach is for the government to fund research and development that can be transferred to the private sector. This can greatly reduce risk. If the government also funds early operations, then risk can be reduced even further. In recent years there has been discussion of stronger government-sponsored incentives for capital investment. This has been particularly true in the context of how to commercialize potential reusable launch vehicles (RLVs).

One suggestion is loan guarantees. In this proposal, the government would guarantee to an aerospace company the loans needed to build an operational RLV. This would cost the government nothing, unless the company failed to repay the loans. In this case the government would repay and thus lose the amount of the loans.

This approach can suffer in varying degrees from the fact that it requires the government to make decisions about which technology, design, and business plan would be best for the task at hand. Helping one company finance its plans for an RLV, for example, makes it more difficult for all other companies to compete. It is possible that help for one idea will prevent the development of a better idea and hence be counterproductive.

Another possibility is a tax incentive. At least two proposals are currently being discussed in Congress. One would provide tax credits for start-up and small companies investing in commercial space transportation companies. The other, proposed by Rep. Dana Rohrabacher (R-CA) and dubbed "zero-gravity, zero-tax," would provide a ten-year tax holiday for companies operating in space. If implemented, these incentives could have an impact far greater than loan guarantees because of their appeal and availability to individual investors and companies of all sizes.

Liability Insurance Costs and Conditions

By international agreement, there is an upper bound on the amount of liability that airlines have when one of their planes crashes. This reduces the possibility that a single crash will bankrupt an airline. Less risk for the airlines results in lower ticket prices. As the number of launch vehicle firms increases and failure rates approach those of commercial airlines, we can expect that RLVs will be treated similarly. Today, however, launch vehicles are known to have a much higher probability of failing. Moreover, there are virtually no players in the game and until there are more, insurance costs will remain a barrier.

Current law makes the government liable for damages caused by launch vehicles being developed by the government. A private firm is liable for vehicles being developed with its own funds. In the case of a joint program, such as the X-33 project, where both government and private funds are being used to pay for development, the liability situation is unclear. This uncertainty adds needlessly to costs. We need clarifying legislation.

Congress recently voted to extend for five years government indemnification of commercial launches. The indemnification agreement requires commercial launch companies to purchase several hundred million dollars of insurance coverage in the event of a launch accident. The government, in turn, agrees to provide up to $1.5 billion in third-party excess liability coverage in the event of a catastrophic accident that affects people or property not related to the launch site. The bill also requires the federal government to study over the next 18 months whether the current risk-sharing arrangement between the government and commercial launches, dating back to 1988, should be revised.

A reasonable solution might be to expand this to have the government liable for joint development projects. The original plan for the X-33 assumed that success would result in a follow on project where launch vehicles would be built and operated by a firm using its own funds. As part of a reasonable solution, liability for such operational vehicles could be legally assigned solely to the firm that produces and operates them.

What Can YOU Do?

Legislative Action

Shortly after the start of each legislative year, NSS determines which part of our agenda should be pushed in Congress during the upcoming year. The decision is made based on the importance of an issue to our goals, our available resources, and the estimated opportunity for making progress on the issue in question.

Planning a legislative campaign has many similarities to the planning of a military campaign. We need to marshal our forces, work with allies, determine immediate, interim and final objectives, and plan where, when and how to fight the relevant battles.

Each and every NSS member can take legislative action by establishing a relationship with his or her federal legislators, including congressional representatives and senators. NSS members can establish that relationship by communicating with them regularly with information on space-related issues and by meeting with them in their home and Washington offices. It is important that you be a registered voter and vote in every election to be taken seriously.

Education

Education of the NSS membership about the relevant issues plays an important role in a legislative campaign. Every NSS member needs to understand the problems at hand and our proposed solutions. When you are educated, you can, in turn, educate others.

Ad Astra and other space-related publications are very helpful in keeping yourself informed and educated. On some issues, NSS makes available other educational tools that can be used for presentations to chapter members and the general public.

After the education phase of a legislative campaign, NSS members can exert individual influence through various grassroots activities, such as writing letters and making phone calls to key members of Congress. It is important, too, that members respond to NSS campaigns on various issues via donations to NSS and calls, e-mails, or signed petitions to members of Congress when NSS calls an alert for action. Also, make sure that NSS Headquarters has your email address.

Through website alerts, NSS provides guidance on when and to whom letters and other grassroots communications should be sent. Coordinating this activity maximizes the effect of our efforts.

Spread the Word

There are other ways NSS members and chapters can help when called upon to do so. You can build and maintain a supplementary e-mail list that can be used to relay alerts from NSS to other chapter members (chapter members are not necessarily national members), pro-space fellow employees (particularly if you work for a pro-space company), and pro-space friends. If each NSS member relays an e-mail alert to ten non-NSS members, then the number of individuals that we can reach would be increased by an order of magnitude.

Members and chapters can also form relationships with the local branches of other pro-space organizations, such as astronomy and science fiction clubs. Arrangements could be made, among other cooperative activities, to relay e-mail alerts.

Invest in Space

If you are an investor, give extra consideration to investments in space-related businesses. Regardless of whether the company is a start-up or an established aerospace giant, your investment and those of people you know and other NSS members provide additional capital and a show of confidence in the industry.

NSS has the membership and the resources. Organized action based on your enthusiasm and active involvement is the key. You can play a major role in the elimination of the Economic Barriers to Human Settlement of Space.


Mark Hopkins led the legislative efforts of the L5 Society and, later, NSS and its affiliated organizations. He has been an officer of L5 /NSS for 20 of the previous 24 years and was instrumental in the merger, which created the National Space Society in 1987. Hopkins, a California Institute of Technology and Harvard educated economist, has written numerous articles concerning space economics.




Political
Barriers

Economic
Barriers

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