A working document from the European Parliament assesses the mid-term status of the European Union’s satellite navigation program, which consists of a geostationary system called EGNOS (European Geostationary Navigation Overlay Service) and the non-geostationary Galileo system.

Although the definition stage for Galileo was completed in 2001, progress was delayed in 2007 by the collapse of the public–private partnership that would have involved industry paying for two-thirds of the cost. The EU re-established a legal and financial framework in which Galileo will be owned by the EU government, and an EU budget of 3.4 billion euros ($4.5 billion) was approved for 2008-2013.

The EU now is nearing the middle of that budgetary period. The Parliament’s mid-term review stems from the Commission’s first report on the program issued in mid-2009. A working document prepared by the Industry, Research and Energy (ITRE) parliamentary committee focuses on “future challenges and financing perspectives” for Galileo. This report was issued at the end of March, discussed in April committee meetings and may be used in further hearings this month.

One of the challenges for Galileo is that the original EU budget may not cover the entire cost of deploying a full constellation of the 30 low-Earth orbiting satellites originally contemplated. The ITRE paper says that four satellites are expected to be launched by the beginning of 2011 to finish the In-Orbit Validation stage (IOV). Cost overruns of 376 million euros ($500 million) in the IOV stage already have eaten up most of the contingency funds planned for the entire system. The ITRE paper says that it is “questionable” whether the remaining budget will allow the launch of the additional 26 satellites planned for the fully operational system.

In January, the EU granted contracts for system engineering, construction and launch of another 14 Galileo satellites in addition to the original four in the IOV stage. The European Commission has said that it can refine the implementation approach to provide “early services” in 2014, using the 14 additional satellites “within the current budget,” according to ITRE.

The ITRE report notes, however, that Europe needs to operate the full constellation of 30 satellites, including ground infrastructure, to provide a fully independent, state-of-the-art, global satellite navigation system. “Any radical changes to the actual system configuration,” according to the report, “would bring risks for delays, require costly redesign and would destabilize the user base world-wide.”

The ITRE report is by no means the last word on financial projections or planning. The report itself says, that at this stage, there are more questions than answers. As a working document, the paper is the precursor to a report that may be debated several more times.

One of the questions raised is the justification for the EU budget funding Galileo’s large annual operating cost — about 750 million euros per year, or more than $1 billion dollars annually. Nevertheless, there is no doubt expressed in the paper about Europe’s commitment to setting up its own global satellite navigation system. The EU wants strategic independence from American, Russian or future Chinese systems. European policy makers also want the EU to have a share of the potentially tremendous worldwide market for satellite navigation services (which today is dominated by the U.S. GPS system).

But how to pay? The ITRE report says that one possibility is to re-examine operations with the private sector after perhaps five years of Commission operation. This would be a return to the public-private scenario that did not work in the first place and does not answer how to get the additional satellites up.

Moreover, there are open questions on the commercial potential of Galileo. Fees and royalties on the receivers probably will not work, because this approach likely would create trade barriers to U.S. terminals. Fees for providing the service are difficult to apply, because no system to date has proposed direct commercial revenues. Persuading a commercial entity to operate the system seems to be a daunting task.

The ITRE paper lays out the questions and future debate in Europe has to develop the answers. The main conclusion from the ITRE committee paper is that Galileo is of strategic importance to Europe. The program thus requires an unequivocal political statement of support from the EU. The nagging question still left open is how to pay for it.

Gerry Oberst is a partner in the Hogan & Hartson Brussels office.