The U.S. Government Account-ability Office (GAO) informed the U.S. Department of Defense (DoD) that work remains in reforming how the government procures commercial satellite bandwidth and services.
The GAO’s latest comments, released Sept. 27, were in response to a July 2005 U.S. Department of Defense report, “Defense Commercial Communications Satellite Services Procurement Process.” That report was created to update Congress on the Pentagon’s progress in meeting seven recommendations on procurement reform the GAO made in December 2003.
The debate is centered around the Defense Information System Network Satellite Transmission Service-Global (DSTS-G) contracts awarded by the U.S. Defense Information Systems Agency.
The contract vehicles, held by Arrowhead Space & Telecommuni-cations Inc., Artel Inc. and Spacelink International LLC,are designed to provide the DoD, federal agencies and other authorized customers with an easy way to procure Fixed Satellite Services, ground equipment and related business and enterprise services and applications. It also provides a contractual vehicle for the federal government to acquire terminals on an ownership basis. Commercial communication satellite operators would like to have more direct access to the government business, bypassing the DSTS-G integrators.
In its response to the DoD report, the GAO acknowledged that the Pentagon fully addressed two of the GAO’s recommendations: inventorying current and potential users of commercial bandwidth to determine existing and long-term requirements, and improving the current funding structure by considering new approaches such as centralized funding and seeking legislative authority for multiyear procurements.
Five of the GAO recommendations have been only partially addressed, the GAO said, including identifying and exploiting consolidation opportunities for bandwidth requirements; adopting commonly used commercial practices such as pricing discounts based on overall volume; developing performance metrics to assess user satisfaction in acquiring satellite services; strengthening DoD’s capacity to analyze commercial bandwidth requirements, spending and the capabilities of commercial satellite providers; and assessing and implementing changes to the key elements of the existing acquisition process to facilitate a more strategic approach.
Integrator Applauds
Executives on both sides of the debate agree with the GAO assessment of the Pentagon’s progress but disagree on what the next step should be.
“The reaction we had as contractors is very, very positive,” Abbas Yazdani, founder and CEO of Artel, told Satellite News. “What GAO basically is saying is that even according to DoD, the current contract can be improved. We have been saying that all along. Even today, having read the DoD report that was sent to Congress and having seen the GAO report that was sent to Congress, we don’t have any disagreements with them.”
According to the commercial satellite industry, the best way to improve the process would be to remove the integrators from certain parts of the procurement equation, particularly when it comes to acquiring satellite capacity only with no additional services. Commercial satellite operators also are calling for more open competition for satellite services and network services contracts, a move operators argue would result in lower total costs to the government.
“The best way to get discounts from satellite operators is to copy what telecoms and media outlets do,” David Helfgott, CEO of Americom Government Services, said. “That is to buy up bulk capacity for a long period of time. When you do that, we can offer significant discounts. When you go out to market for one-year contracts and you do a competitive [request for proposal], you are not going to get the same level of aggressive discounting because what is driving satellite operators is depreciation.”
Helfgott noted that without long-term contracts, commercial satellite operators cannot offer the discounts to the government that they provide to the private sector. Without long-term contracts, “there is too much uncertainty. The opportunity cost is too high,” he said.
The use of long-term contracts, up to 10 years at the time for example, would provide the satellite operators “certainty that we have revenues for that contract to cover the operating costs and depreciation of these very expensive assets. The industry is driven by EBITDA (earnings before interest, taxes, depreciation and amortization) and these assets need to have revenue against them. If we have a longer-term commitment for revenue, we can be more generous with our discounts. We need to be able to cover the EBITDA on our very expensive satellites. We don’t want the risk of one-year contracts. We want multiple-year contracts and the return for that shared risk is a much better rate.”
That economic need and the focus on the bottom line will actually drive prices up for the government, Yazdani said.
“At the end of the day, [the major commercial satellite operators] are owned by Wall Street,” Yazdani said. “Wall Street is run by better margins and better revenues. At the end of the day, each person and each company that has invested in any of these [satellite communications] companies likes to turn around and sell them for two to three times more and take them public. The only way for them to successfully do that is to have direct satellite contracts.”
The outcome of procurement reform proceedings will determine how commercial companies will split up a multi-billion market. The use of commercial transponders for providing military communications has grown steadily since 2000 and is expected to peak at nearly 180 36-megahertz equivalent transponders in 2006, according to the Euroconsult’s “World Satellite Communications and Broadcasting Market Survey, Market Forecast through 2014.”
The number of commercial transponders leased for military satellite communications services will dip slightly beginning in the 2006-2007 timeframe as new U.S. military systems become operational. But demand will rebound before the end of the decade and reach new heights by 2014, Rachel Villain, executive vice president of Euroconsult, said Sept. 6 at a press conference at the 9th World Summit for Satellite Financing.
Gregory Twachtman
