Military Information Technology – Commercial satellite operators are hailing a recently approved congressional provision that encourages the Department of Defense to investigate using multi-year leases for commercial satellite services and for procuring government-owned payloads on commercial satellites.
Signed by President Obama in late 2013, the National Defense Authorization Act (NDAA) for fiscal year 2014 includes a section criticizing DoD for habitually using single-year leases for securing commercial satellite services, calling them “the most expensive and least strategic method” of procurement.
The measure directs the under secretary of defense for acquisition, technology and logistics, in consultation with the DoD chief information officer, to come up with an acquisition strategy by March 2014 to enable the multi-year procurement of commercial satellite services.
Specifically, lawmakers declared, the strategy should include an analysis of financial or other benefits of doing multi-year acquisitions; analysis of risks associated with such acquisitions; identification of methods to address planning, programming, budgeting and execution; liability in the event of a contract termination; identification of changes needed in the process of developing and approving requirements; and the identification of any necessary changes to policies, procedures, regulations and statutes.
Assuming this strategy evolves on pace, industry experts predict that DoD could begin procuring additional commercial satellite services toward the end of fiscal year 2014, or possibly early in fiscal 2015.
A host of commercial satellite operators support the move to multi-year leasing, and have also proposed a series of other steps to make the communications satellite bandwidth procurement process more efficient.
Last year, for example, an industry group comprising Intelsat General, SES Government Solutions, Eutelsat America Corp., XTAR, and Telesat submitted a list of suggestions in a paper entitled: “The Seven Ways to Make the DoD a Better Buyer of Commercial SATCOM.”
The paper included several key concepts for achieving “better” buying, noted Andrew Ruszkowski, chief commercial officer for XTAR.
The recommendations included “establishing a baseline of how much commercial satellite communications DoD needs, and then budgeting and contracting for it; partnering with industry to build a protected communications infrastructure for space systems; using hosted payloads; and having a single office that handles all commercial and military satellite capabilities to seamlessly allocate military requirements between commercial and military assets,” said Ruszkowski, whose company specializes in providing customized X-band communications services exclusively to U.S. and allied governments worldwide.
“XTAR and the commercial satellite operators are very encouraged to see our multi-year efforts for this action finally come to fruition,” said Ruszkowski. “We believe acquisition changes will save critical dollars that DoD needs for other programs that may be cut.”
By leasing commercial capacity on a long-term basis, he argued, DoD will have an opportunity to take a broader approach to planning its space architecture. That architecture includes both commercial and government-owned satellites.
Ruszkowski and industry executives such as Myland Pride, director, government affairs and congressional relations for Intelsat General, and Air Force Brigadier General Tip Osterthaler (Ret.), president and chief executive officer for SES Government Solutions, concurred that funding a COMSATCOM infrastructure through short-term, spot market purchases is the most costly and inefficient method for fulfilling critical DoD needs.
“This discourages industry partners from making the investments necessary to ensure there are sufficient, advanced capabilities available to support the nation’s long-term national security goals,” said Pride.
Actually, single year leases with the government are not necessarily detrimental to industry, Osterthaler acknowledged. That is particularly the case for SES, since more than 85 percent of its business is with commercial customers.
“In contrast, single year leases yield the highest prices on average as discounts are applied for both quantity of bandwidth leased as well as the length of the lease,” he said. “As a commercial satellite owner/operator, we actually gain terrific margin from short-term leases in high demand regions as a premium can be applied. For the commercial side of our business, most of our commercial customers understand that our SATCOM services are vital to their ability to take their product to market.”
Commercial customers view SES Government Solutions as critical infrastructure to their business, and plan and purchase accordingly with long-term leases, Osterthaler continued.
“In doing so, not only do they receive favorable rates, but they also secure access to the infrastructure they rely upon for the long term,” he added. “In response, we at SES are able to make investment decisions on behalf of our long-term strategic customers, as it is to our mutual benefit that we have the type of capacity they need, where and when it is needed.”
Osterthaler said he sees this as the core benefit to the federal government, since it currently is not able to take advantage of the existing acquisition approach. “In fact, the current approach presents not only the greatest cost. More importantly, it presents the greatest risk of not having access to the communications capability they need, where they need it in the future.”
Pride emphasized that under the NDAA provision, industry will be in a much better position to plan for the government’s future satellite capacity and capability requirements.
“The commercial satellite industry makes plans for future satellites based largely on known requirements,” Pride said. “As the commercial customers typically make long-term commitments, industry is able to sit down with them and discuss long-term planning issues for coverage, band, throughput and availability requirements, and other issues. Knowing that the end-customer will be signing up for the type of capacity [that comes from] a long-term lease makes it possible for the satellite service providers to incorporate these requests into future plans.”
Access to Service
For all of the above stated reasons, these executives collectively expect the big winner from NDAA to be the federal budget, since long-term commitments are priced more attractively than short-term commitments. “The end-user always pays less for a longer term,” Pride said.
There will be cost savings from the fact that customers who buy any service of limited supply on a short-term basis, relative to other buyers of the same service, are going to pay a higher rate and run the risk of losing access to the service they need because someone else, who is willing to commit, edges in front of them.
DoD’s one-year leases leave the government vulnerable to both higher rates and losing access to service. As Ruszkowski pointed out, industry is capable of operating with a one-year lease. But it is DoD that is accepting a risky position.
“But the real tragedy is the lost opportunity that DoD experiences,” he said. “By not committing to the COMSATCOM industry as a partner in doing things like exercising long-term leases, DoD is missing the valuable chance to realize a greater space capability at a lower cost from a reliable partner.”
Industry cannot plan and invest for the long term, since the single-year scenario does not give any assurance of what each year’s requirements and budget will be. “This means that industry cannot add new technology and resources, as we do not know what our role and the specific requirements will be beyond that one year,” he said.
DoD will benefit immediately from the multi-year leasing provision, said Ruszkowski, noting, “They have been buying commercial SATCOM for $1 billion each year for nearly a decade.”
The Defense Business Board has estimated that use of 10-15-year capital leases could save DoD $100 million each year.
“Some believe this amount is much smaller than the benefit they would see,” Ruszkowski commented. “These savings could then enable DoD to pay for other critical programs. In addition, XTAR and others could focus on the specific needs that get spelled out in the multi-year contracts and better tailor services to the warfighter’s specific need.”
For example, XTAR has the ability to address DoD security requirements to create resilience in the contested environments of the future. “With multi-year leases, we would target our resources to best suit these requirements,” Ruszkowski emphasized. “Airborne applications would be another good place to focus resources, since these applications tend to be bandwidth intensive and are well served by commercial satellite service.”
XTAR, in particular, has served various airborne applications for some time, including airborne ISR requirements. “If DoD were to make a clear commitment to leverage commercial SATCOM for airborne needs, XTAR and other operators would surely customize their payloads to be even more useful to those applications,” he added.
These steps could include directing fixed satellite beams where most needed, and directing steerable beam power to the most important coverage areas, as well as adjusting steerable beam width to provide the best balance of performance (power) and coverage.
Another helpful step could be to include specific funding levels in the budget for COMSATCOM. “The user would plan for a specific program and work with industry in that process,” said Ruszkowski. “This would also help DoD get more of the features they want, as they would buy the service for the program duration and not just lease it.”
With the authority to enter into long-term, multi-year leases to procure commercial SATCOM bandwidth, the government would be in position to engage in contracts with industry that are similar to those SES has with its commercial customers, Osterthaler said. Today, those customers make up the vast majority of SES’s business.
“Acting in this capacity and as a strategic customer to SES, we would be in a better position to make the investments in our fleet in the types of capability, locations and special features of interest to the government with the assurance they will be part of a long-term investment,” he remarked.
DoD officials, meanwhile, have responded cautiously to the provision.
“DoD is currently engaged in an effort to evaluate ways to better leverage, integrate and acquire commercial satellite communications capabilities. The evaluation of acquisition strategies includes contracting methods (multi-year versus multiple year operating leases), and investment strategies (capital leases and up-front investments). Various pilot projects are being considered to identify real impediments to these strategies to determine if changes to acquisition regulations, financial management regulations, or statutes are necessary,” said Lieutenant Colonel Damien Pickart, a DoD spokesman.
“That said, some of the acquisition strategies impose a level of risk that necessitates that DoD ensure that user demand exists to efficiently use the capacity acquired, funding is available to pay for the capacity over the period of the contract, and the commercial SATCOM resources are properly monitored, managed and shared with all potential DoD users,” he noted. “The ongoing analysis includes methods to improve the confidence of demand prediction tools currently available to the department, and to instantiate an enterprisewide resource utilization monitoring and management capability.”
The results of the evaluation will be reported to Congress, Pickart added.