Classifying and Evaluating Space Projects                     Walter Peeters (ISU) peeters@isu.isunet.edu Ozgur Gurtuna (Futuraspace) gurtuna@futuraspace.com

OVERVIEW Traditional Financing Concepts Financial/social rate approach Dual-use effect Proposed Decision Diagram References

Space Business Traditional Financing Scenario

Traditional Public / Private Transfer Concept Space Projects Funding Economic Benefits Scientific, Research Public Knowledge Increase “Global Need” (climate,…) Social Utility Function Application (telecom,..) Private Market economy

Public-Private Partnership (PPP) Principles The private sector is able to detect early space business opportunities The investments and risk are too high for the private companies Private financing for such high-risk projects is difficult to find Technological know-how is available in the public sector The public sector is less interested in operating systems

Social vs. Private Return Social Return The ratio of benefits gained to costs incurred by the whole society deriving from an activity or project. Social benefits include: Labour rents Consumer surplus Social external benefits Private Return The ratio of benefits gained to costs incurred by the investing individual/company from an activity or project

Langford-GRA Model (1) (Vonortas & Hertzfeld, 1998) Step 1: Identification of commercial uses If there are commercial uses, government proceeds to Step 2; otherwise, government proceeds to Step 3 Step 2: Cost-benefit analysis from private sector perspective Positive Private NPV: private initiative, no government involvement Negative Private NPV: government proceeds to Step 3

Langford-GRA Model (2) (Vonortas & Hertzfeld, 1998) Step 3: Cost-benefit analysis from public sector perspective Positive Social NPV: government undertakes the project Negative Social NPV: government is not involved Step 4: Periodic Monitoring Government remains involved until private NPV turns positive, or both private social NPV turn negative

Traditional Tools for Financial Project Evaluation (1) Discounting Calculating the present worth of the benefits and costs of an investment by accounting for opportunity cost, risk and inflation. Present Value (PV) = 248.67 euros

Traditional Tools for Financial Project Evaluation (2) Net Present Value (NPV): Discounted value of expected returns minus the discounted value of the expected costs of an investment Decision criterion: Invest in the project if NPV is positive Internal Rate of Return (IRR): The discount rate which makes the Net Present Value of a project zero Decision criterion: Invest in the project if IRR is more than a predetermined hurdle rate

Traditional Tools for Financial Project Evaluation (3) CF = Net Cash Flow per period (after tax) r = discount rate IRR = the value of r such that NPV is zero (no closed form solution, has to be calculated iteratively).

NPV and IRR Example NPV with 15% discount rate is very close to zero, and NPV with 20% discount rate is negative. We can infer that IRR is slightly above 15% Actual IRR = 15.24%

Calculating Social Rate of Return (based on Mansfield et al., 1977) Step 1: Estimate social benefits for each time period Step 2: Estimate social costs for each time period Step 3: Determine the “net social benefits” from Steps 1 and 2 for each time period Step 4: Compute the internal social rate of return (just like the IRR calculation in the previous slides) Mathematically very straightforward method. The main challenge is estimating social benefits and costs

Financing Space Projects: Social vs. Private Return Matrix Private Hurdle Rate High High Social Return, Low Private Return Government intervenes to create societal benefits unilaterally or in cooperation with the private sector. Example: Security Funding: Public High Social Return, High Private Return Private sector develops and commercializes technologies and creates new applications and markets. Example: Navigation (GNSS) Funding: PPP Low Social Return, Low Private Return Typically very long-term projects that provide little or low societal benefit for the short and medium terms. Example: SETI (after 1993 U.S. Congress budget cut) Funding: “Maecenas” (Private or public, e.g. DARPA) Low Social Return, High Private Return Projects that have a low social return potential, but can still create private return. Example: Direct Broadcasting Funding: Private Social Hurdle Rate Social Return Low Low Private Return High

INTRODUCING THE DUAL-USE ASPECT Outlook : Forecast (15 yrs cycles) (Dupas, 1998)

DUAL USE FINANCING SOURCES Example: Europe (source: French Army) Appr. 9 Beuro requested over 10 years (now 530 million / yearly) Example: DoD space budgets (non-classified programs)

Financing Space Projects: Decision Diagram

References Link, A.N. and J.T.Scott, “Public/Private Partnerships: Stimulating Competition in a Dynamic Market”, International Journal of Industrial Organization, 19, 2001 Mansfield, E. et al., “Social and Private Rates of Return from Industrial Innovations”, The Quarterly Journal of Economics, 91 (2), 1977 Peeters, W.A.R., Space Marketing: A European Perspective, Kluwer, Dordrecht, 2000 Vonortas, N.S. and H.R. Hertzfeld, “Research and Development Project Selection in the Public Sector”, Journal of Policy Analysis and Management, 17 (4), 1998 Dupas, Lecture notes University of Versailles, 1998