New Forms of Contributions to ESA's Optional Programmes: In-Kind Deliveries

M. Ferrazzani

Legal Affairs, Directorate of Administration, ESA, Paris

The evolution in the general political and financial environment in which ESA's Programmes are conducted has prompted the Agency's Member States to consider new forms of financial constraint for contributions to the Optional Programmes. The debate is well under way on the issue of national 'contributions' to ESA Optional Programmes outside the usual scheme of financial contributions provided for by the Convention, and it has already produced some interesting and innovative schemes. Also, the Council meeting at Ministerial Level on 4 March 1997 (reported in ESA Bulletin No. 89), in its Resolution on the Agency's industrial policy (Chapter III), indicated the need to examine these issues with a view to establishing rules applicable to 'In-Kind Deliveries' (IKDs).

Introduction

Previous cases

Meteosat
In the Arrangement between the Member States and ESRO for the Meteosat Programme in 1972, it was recognised that ESRO would "make use of the result of the studies already covered under the French national programme, and of certain facilities and personnel of CNES". Detailed conditions were then agreed in an ESRO/CNES Agreement. This formula was implemented by ESRO (later by ESA) with a specific ESRO project team in charge of the execution of the programme, based at the CNES Toulouse Centre, and with CNES personnel made available free of charge at the specific request of ESRO, plus functional support. Contracts for carrying out the project were concluded initially by ESRO and later by ESA.

Remote-Sensing Preparatory Programme
The Declaration on a Preparatory European Remote-Sensing Satellite Programme provided that, for the purposes of the programme: "Germany and France shall make available to the Agency, free of charge, each within the area concerning it, the results of studies and development work undertaken at national level, identified by the Executive and recognised by the Participants as being of direct interest to the Preparatory Programme and of a value equal to, or greater than, the difference between the 'direct costs' contributions actually paid, and the contributions of the other participants".

The Programme was actually carried out between 1979 and 1982 on this basis. This allowed both Germany and France to each contribute to external costs at a minimal level of 50000 AU whilst other participants were contributing substantially towards them but with provision for a guaranteed 100% geographical return.

Ariane
The Arrangement on the Ariane Programme signed in September 1973 delegated programme management to CNES. This Arrangement was accompanied by an ESRO/CNES Agreement, whereby CNES was to provide a team (free of charge, except for mission costs), place contracts and so on. This was followed by the Resolution on the Ariane promotion series and the Declarations on the following programmes based on Article V.1(b) of the Convention, which were always supplemented by an ESA/CNES Agreement. Much the same provisions are used for the Agency's overall responsibility and CNES's technical and financial management.

Hermes
The starting point was the Europeanisation of the programme proposed by France involving a preparatory programme, the development programme proper, a Declaration and an ESA/CNES Agreement on the management scheme. Much the same provisions were used for the respective roles of the Agency and CNES, the arrangements for reporting technical information, and in this case the setting-up of an 'integrated' team at the CNES Centre in Toulouse (F).

Envisat-1

Germany proposed that certain tasks included in the content of the POEM-1 Declaration, and included in the Envisat-1 Programme element funding, be funded by a special cash contribution from Germany on the explicit condition that contracts of the corresponding value be assigned to its national industry. These tasks are Ground Segment/Payload Data Segment items managed by ESA on behalf of Germany. Germany recognised that "the elements developed with this national funding are considered to be part of the Envisat Programme, and in particular part of the approved Ground Segment concept". This special German contribution amounts to approximately 5.5 MAU (including an element reserved for ESA management costs).

Risk factors, as well as management aspects, remain under the close scrutiny of ESA, in accordance with additional arrangements established between ESA and DARA. Considering these special circumstances, this Envisat case cannot merely be likened to the previous cases of national works contributed in-kind, but has to be regarded rather as a special financial contribution by Germany outside the criteria of the Programme Declaration and its envelope. This extra contribution has also been made in the spirit of easing the impact of the existing under-subscription of the financial envelope. In this respect, it does not have a direct parallel with earlier events and should not be confused with a typical in-kind delivery. In fact, the accepted documents explicitly mention that this 'special contribution offered by Germany remains outside the financial envelope'.

Artes-9
The Artes Programme participants have defined and have subsequently subscribed to Element 9 of the Artes Programme, covering works related to the GNSS (Global Satellite Navigation System). The relevant Appendices A and B to the Artes Declaration have inserted in the Programme the concept of 'In-Kind Deliveries' (IKDs), funded nationally outside the ESA programme framework, and put at the disposal of the ESA programme through a grant in-kind and transfer of ownership. The legal status of such an IKD is explained in the Artes-9 Implementing Rules, approved by Council on 20 July 1995. A precise description of each of the agreed IKDs is added to the Appendix B before being included in the programme's work planning.

The Artes-9 Implementing Rules regulate in detail, within the General Implementing Rules of Artes, the special cases of in-kind deliveries and the related activities, including the administration and charging of ESA internal costs covering management and monitoring activities within the programme. This heavy regulatory exercise was necessary in order to incorporate this novel approach. In this case, important portions of the programme are intended to be contributed by Participating States, as in-kind deliveries, accompanied by some financial contribution to cover internal costs and other programme activities. Therefore, for the first time in an ESA Optional Programme and in a very new programme approach, a substantial part of a project consists of a coordination of national activities, or development works to be undertaken nationally, with a view to a European coherence for unified ultimate use and exploitation.

Other cases

This list is not intended to be exhaustive, but is rather a series of examples chosen to illustrate past practice in ESA's Programmes and its evolution. Based on past experience and accepted practice, the following should not be considered as national in-kind deliveries:

• the coordinated test facilities, where the Agency has a classical contractual relationship with these facilities (see Agreements with CNES, IABG, IAL based on a policy agreed by Council)

• the national space programmes sometimes carried out in close coordination with some Agency activities under cooperative Agreement with ESA

• nationally funded and developed instruments destined to fly on an ESA spacecraft on the basis of a selection process known as an 'Announcement of Opportunity'. This practice has been developed in the Science and Earth- Observation Programmes on the basis of specific requirements by some well-identified scientific groups and institutes which are also able to develop hardware. This activity is purely national and is accepted by ESA for meeting the mission objectives, well established at the outset by common agreement between the Participating States on the basis of rules approved by Council (see Rules concerning Information and Data adopted in December 1989).

Definition and legal analysis

In attempting to arrive at a 'uniform' definition of an IKD on the basis of ESA's experience to date in this domain, it might be identified as:

"Goods transferred or services rendered to the Agency by a Member State and falling within an agreed programme content, not being funded by means of Article XIII of the Convention, but contributed by the Participating State free of charge to the Agency for the purpose of the programme in question".

In order to identify issues associated with such a method of participating in ESA programmes, and analyse its impact on the Agency's framework and management practices, this definition has to be measured against the basic assumptions and elements of the Agency's system vis-a-vis the following points :

1. The Convention
   An IKD, as described above, in essence 'deviates' from applying one of the fundamentals of the Agency's system, as formulated in the Convention. In lieu of financial contributions, as provided for in Article XIII of the Convention, such alternative schemes allow for voluntary and free grants from Member States, which do not have the same obligatory character towards other States as exists today in the commitments entered into by virtue of the provisions of the Convention, and accordingly expressed for each Optional Programme in a Programme Declaration. The nature and effect of a Delegation's commitment outside the framework of a Programme Declaration cannot guarantee the same level of commitment afforded under an international treaty obligation, such as that deriving from the provisions of the Convention. In fact the ESA Convention, as an international treaty between States, has been duly ratified and published as a domestic law of each Member State. Because of the ratifications, financial provisions contained in the Convention now constitute part of national laws and administrative procedures concerning the commitments and payments of financial contributions to the Agency. An IKD, deriving from the intention of one Delegation at programme level, is not covered by any provision of the Convention and therefore not guaranteed by a national ratification law, and may not be regarded as having the same power and legal security on the part of the national administration.

   
   

   There is an obvious difference here which cannot be avoided by any ESA internal decision or text approved by Delegations of Member States. However, a new Optional Programme containing in-kind deliveries should be transparent and have the same character as other ordinary commitments towards ESA Programmes. To achieve this, the IKD needs to be defined and included already at the Programme Proposal stage and subsequently inscribed clearly in the Enabling Resolution approving the Programme and in the Declaration constituting the multilateral agreement between Participating States. The modalities of its execution need to be set in the Implementing Rules, thus implying the conclusion of a government-level agreement between ESA and the State concerned. Any IKD proposed by a Participant after the entry into force of the Declaration and not yet included in the work content would require an addition to the Programme content and also some adaptations to the Implementing Rules. Most of these decisions will have to be taken by unanimous vote of the Participating States. However, not all of the legal risks explained above may be avoided with such an alternative solution.

2. Cost overruns
   In cases of cost overruns beyond the cumulative costs assumed in an agreed initial envelope, there is provision for the obligation of each Participating State to contribute to a level of 120%, beyond which any State may with-draw from the Optional Programme.

   IKDs could be regarded as a way of fulfilling programme content without fully subscribing to the financial envelope. This has the indirect effect of creating structural deficits within the envelope, by diverting financial resources out of the programme envelope towards national investments. Such a solution has the disadvantage of leaving the Agency with the problem of managing an incompletely financed programme and also avoiding the normal allowance of a cost-overrun margin for the investment in question. The different obligations of States are also obvious here. Whatever the attitude taken by the national investment covering the IKD, there is still the risk of a cost overrun with the IKD and, because of their mutual interest in the total programme's success, in fine all of the other Participating States might end up bearing the additional cost to complete the programme.

   In order to avoid this situation, a clear-cut separation has to be made between IKDs and the overall financial envelope: the ESA financial envelope should only contain funding for internal costs plus ESA-initiated industrial contracts. Such an envelope will then be 100% financed without any deficit, and the usual 120% rule can then easily be applied for its original purpose. IKD elements would have to be announced and committed to in the same Declaration and Financial Annex, but on a separate basis, outside the ESA financial envelope. Cost overruns on IKDs would then be solely the responsibility of the providing entity. An efficient project would need to keep full control of the programme content entrusted to it, with full management authority for each of the elements composing it. This would minimise, although not eliminate, the cost overrun risk for the programme.

3. Programmatic risk
   A project including in-kind deliveries will inevitably involve more programmatic risk, because of the work items initially falling, either partially or even totally, outside the general management and supervision of the ESA project manager. There may be schedule impacts, and therefore cost consequences, for the remaining normal portion of the programme, and hence eventual financial responsibilities to be assumed by other Participating States.

   The debate to date within ESA has shown that several Delegations refuse to accept solidarity towards this kind of programmatic risk, seeing the desirable solution in the case of a Participating State's non-compliance with its responsibility to deliver in time as a corresponding obligation to provide alternatives to the programme. These 'alternatives' would need to be fully understood and accepted by the other Participants, thereby causing some delay in the decision-making process. In any case, this solution does not complete the programme as planned and may cause disappointments and cost increases for the other participants.

4. Internal costs
   The Agency's financial system, set up with the explicit approval of the Member States, has established a refined system for charging internal costs to the programmes and the activities approved under Article V of the Convention. The Agency's budget structure and charging policy for all mandatory activities and optional programmes are defined by Articles 11 and 12 of the Financial Regulations, which have recently been revised to reflect a new charging policy approved by Council. There is as yet no explicit rule or alternative system, nor any special financial provision, for the case of a national delivery in-kind.

   
   

   As the price tag of each IKD activity will have to be known at the start of the programme, the ESA charging policy for internal costs could be applied, so that the general overheads need not increase substantially. This has already been done in the case of Artes-9, the programme currently most affected by the IKD concept.

   For the future, therefore, special criteria need to be considered for insertion into the Financial Regulations to cover this point. Such criteria might allow various rate levels to be applied, depending on the return of the development work, service or other activity. The cost of reproduction or the recurrent price of the IKD should form the basis for the calculation. Also, for such activities which can be likened in a way to external customer activities, a handling charge has to be levied as a fair percentage so as not to favour this approach unduly, and not to encourage such a regime compared with the classical method of contributing to the Agency's programmes. The 'income' from this handling charge because of the programme management cost involved, may appropriately be credited to the Programme concerned and not to the General Budget as in the case of external customers.

5. Industrial Policy
   Participating States in an Optional Programme could view IKDs as a method of guaranteeing the granting of a portion of work to a given industry identified in advance, outside the normal procedures in force at the Agency. This could tempt Delegations to try to circumvent the competition provided for in the usual system, or else to distort that competition by granting a national contract which would be executed prior to the ESA competition and thereby pre-empt the subsequent situation. The prevailing delicate balance would be compromised. As such activities are not funded by the usual financial contributions and not covered by the usual ESA contracts, they would not be included in the calculation of the global industrial return of the Agency's programmes, although they would be regarded as an official part of its activities.

   The situation could be clarified if, at the start of a programme, Participating States clearly and unanimously separate and define what is to be managed by ESA and what is not. Activities not managed by ESA would remain outside the Agency's programmes and responsibility as regards industrial- policy considerations. All IKDs should be evaluated against the industrial return of the country offering them: IKDs counted as part of the industrial return of a country would have the effect of increasing the industrial work foreseen for that country. If on the other hand, IKDs were to be omitted from industrial-return statistics, they would be carried out over and above the 'normal' share of work that should go to that country. Clearly, this would provide an incentive to offer more and more IKDs, either to have critical work done at home, or to move the project in the direction sought by the donor country, or simply as a means of avoiding competition.

6. Contracts
   In the case of the inclusion of an IKD in a traditional ESA procurement contract, we would have the situation of a procurement contract for the total activity not being totally funded by ESA finances. ESA would be committed to pay for work rendered, and services for which it does not have fully guaranteed financial backing, because of the non-binding character of the national delivery in-kind, or special financial contribution. This situation has to be analysed further on a case-by-case basis, not least in view of national laws that could still hold ESA liable for the total.

   The 'contribution-in-kind' may be the result of a national item (intellectual property, knowhow/design, software or hardware) that has already been developed or partially developed. In such a case it is likely to figure in the industrial development as 'Agency-furnished equipment' and the Agency takes responsibility for any technical shortfall, inadequacy or lateness. The firm concerned will try to avoid responsibility in its contract with the contributing State, and will have sufficient ammunition to do so (including externally imposed interfaces).

   
   

   If the contribution is only financial, then a contract will have to be placed with the firm identified, and this will presumably involve development. The only way that the programme can maintain its technical and programmatic integrity is to incorporate the work within the prime contract, subject to both the technical and managerial controls of the ESA Project Manager and the Prime Contractor, and the ESA contract conditions, despite national and industrial resistance to this control.

   Several of these problems can be solved by drafting appropriate contractual terms, but it would be necessary to:

   • Ensure that the 'contribution' meets the technical requirements of the programme. This is best done either by incorporating it fully within the development contract, or having it fully as a 'national' and then 'Agency'-furnished complete element on the basis of cooperative arrangements for this purpose included in the programme, undertaken as such by a Member State.

   • Require the contributing Member State and the industry concerned to fully guarantee the quality of the product and the consequences of performance not being met, even by means of a financial-liability clause or penalties.

   This will probably involve an interlocking series of agreements, and care will have to be taken that all cross- links between the parties are complete. If there are any gaps, then it will almost certainly be the Agency which bears the risks, consequences and subsequent costs. The situation may be aggravated by differences in applicable laws in the countries concerned.

7. Intellectual Property Rights (IPRs)
   If the IKD is taking place under the scheme of a national procurement contract, its legal terms and conditions may well be under different rules to those of the General Clauses and Conditions for ESA Contracts. The rights and obligations being created in such a contract might be distant from the ESA policy in the field of intellectual property for space research, as provided in Article III of the Convention and applied consistently in ESA contracts. Since such an in-kind delivery should in any case fall within the objectives, scope and content of an ESA Programme, there would again be a diversity of results. Also the terms of access to the IPR and results may prejudice future uses of such information by ESA for subsequent space programmes. The Intellectual Property rules for the IKD should as a minimum ensure access to, and sharing of the technology 'in order to facilitate the exchange of scientific and technological information' pertaining to space research technology and application within the Member States as provided by Article III of the ESA Convention and by the ESA Council document on Information and Data (ESA/C(89)95, rev.1). Member States have to understand and accept this general principle in the same spirit as when they signed the ESA Convention, and ensure that it is respected in every national contract aimed at preparing an IKD for future inclusion in the ESA framework.

Conclusion

In conclusion, there is no reason to reject the IKD principle as such, but some work still needs to be done within the Agency to accommodate these innovative methods of contributing to ESA Programmes. However, we have to recognise the complexity and the exceptional nature of the approach. The debate now in progress, and also the Council Resolution at Ministerial Level, recognises the need to establish Agency- wide guidelines for the future for IKDs. In order to be incorporated sensibly into the Agency's programmes on a realistic scale, IKDs will need to:

1. embrace work packages that are technically identified and clearly specified within an established system design, not constituting part of the core activity of the project nor a critical item of the system

2. be easily harmonised with the industrial-policy baseline decided for the programme

3. be in compliance with the system design without requiring complex or costly design solutions

4. be integrated promptly into the total work plan

5. be allocated a financial value to the programme, assessed by the Executive and accepted by the Programme participants

6. be committed by the contributing State on the basis of an irrevocable, free-of-charge grant in-kind and full transfer of ownership to the Agency by means of a binding agreement at governmental level. Such commitment shall include the general responsibility of the Member State towards ESA for the time of delivery and quality of the work. Depending on the requirements of the programme, the Agreement shall specify the terms of ownership and other rights. The providing entity shall have to plan for replacement deliveries or other forms of replacement, in cases of unforeseen difficulties.

On the basis of this analysis, it might be prudent to introduce into the Agency's legal framework some ground rules, guidelines or code-of-conduct commensurate with the above- defined issues associated with in-kind deliveries. The objective would be to have these guidelines approved by the Member States to govern all ESA Programmes in such cases and then used as a reference when drafting legal texts such as Resolutions, Declarations and Implementing Rules (completed by detailed financial provisions), therefore allowing greater security, transparency and flexibility in each new Optional Programme.