Autumn Statement 2011
On 9 December 2011, the London Institute of Space Policy and Law hosted a workshop attended by representatives from across the space and satellite community to debate the proposed protocol to the Cape Town Convention on matters specific to space assets (the Space Protocol). The discussions highlighted significant issues of concern to many across the satellite industry about the implications of the Space Protocol for the financing of space and satellite programmes.
Introduction and Context
The workshop was chaired by Professor Richard Crowther, Chief Engineer at the UK Space Agency, and hosted by Professor Sa'id Mosteshar of the London Institute of Space Policy & Law.
Professor Richard Crowther introduced the workshop and confirmed that the UK Space Agency was keen to understand the views of industry on the Space Protocol and the outstanding issues. On the basis that it had received no indications from industry of support for the Space Protocol, the UK Space Agency's intention was not to sign or ratify the Space Protocol.
Professor Sir Roy Goode (RG) provided an overview of the Space Protocol, whose objective was to reduce borrowing costs for satellite and space projects through providing:
- defined default remedies
- protections relating to insolvency and
- an international registration structure,
building on the experience from the Aircraft Protocol to the Cape Town Convention.
The Space Protocol was designed to facilitate dealings in space assets and provide a structure for registering international interests in space assets (which would include security agreements, conditional sale agreements and transponder leases). The registration structure/framework would allow international interests in space assets to be recorded and provide for priority of a registered interest as against competing interests which were either not registered or registered later. Registrations would be managed by a supervisory authority.
The parties to an agreement could choose the governing law.
The Space Protocol would allow contracting states to choose from a range of types of protection against insolvency.
The Space Protocol working party had discussed how best to address salvage interests. In this context, the insurance market had made it clear that they wished to ensure their salvage interests were not prejudiced. The likely outcome at this stage was that no provision relating to salvage would be included.
Among the key comments from industry representatives were:
- while the stated objective of the Space Protocol was to simplify financing and reduce financing costs, there was significant concern that it might have the opposite effect.
- operators and banks were concerned that financing may be adversely affected (or even dry up) because banks could not be sure of how far they would be able to exercise security rights. While RG suggested that there were parallels to be drawn with the Aircraft Protocol, industry representatives recognised that the airline industry relied primarily on asset-based financing, whereas the space industry typically used project finance structures more widely. Thus, parallels with the Aircraft Protocol were not necessarily relevant.
- Industry representatives (including established operators and emerging operators) stressed that their existing/recent financing transactions would have been made more complex (and potentially could not have been concluded at all) if the Space Protocol had applied.
- Industry representatives also questioned whether the Space Protocol reflected any acknowledged need or demand from industry.
- Concern was expressed about the lack of a clear definition of the term "space assets". In particular, this needed to be clearly distinguished from rights of use of spectrum. RG indicated that the term "space asset" was intended only to refer to the physical asset and the protocol was not intended to affect the ITU regulatory regime. However, an assignment of the income stream could be registered as a creditor's right.
Industry was also concerned about the uncertainties about which assets are capable of registration. RG suggested that uncertainties surrounding the precise scope of registrable interests should be clarified through decisions of a working group driven by industry. This led to a discussion about how such a working group would operate in practice. In particular
- operators would be unlikely to feel comfortable about disclosing their proprietary developments in order to ascertain from the working group whether a new programme would be covered by the scope of registrable assets.
- sharing any information may be impractical by virtue of ITAR or other applicable export control regimes.
- any need to obtain clarification from a working group about how an innovative space project would be treated under the Space Protocol could significantly delay the development, promotion and financing of the project. This would tend to increase cost and inhibit innovation.
The workshop also discussed some of the outstanding issues relating to the Space Protocol.
Public service (Article XXVII)
RG: while governments had asked for specific protection for public services delivered by satellite, creditors also wanted to ensure that their protections against payment default by borrowers were protected.
The current proposal was that the relevant parties may agree to register a public service notice, providing some protection for government users. During a period of six months from the registration of a creditor's notice, a creditor would be prevented from exercising its default remedies which would prevent the use of the satellite for public service. Nevertheless, the creditor would be entitled to exercise its other remedies if the government user failed to perform its duties.
Key comments focussed on a number of concerns:
- there was no definition of public service and it would therefore be left to each contracting state to define, leading to differing international requirements and hence uncertainty
- there was a risk that what was fairly regarded as a public service at the start of a transaction may not always retain that quality (or a service may become a public service after a transaction was concluded)
- a government user could use this structure to increase its status and distort the dynamics between operators and creditors
- government users may be inclined to bring unrealistic expectations to the negotiations and hence complicate or delay the conclusion of negotiations.
Restrictions on remedies relating to physically linked assets (Article XVII)
RG: an asset in which creditor A has an interest may have a physical link to an asset in which creditor B has an interest (such as a hosted payload). In such a case, where creditor A exercises its default remedies and thereby causes physical damage (or inability to operate) for creditor B, the Space Protocol looked to provide one of two possible solutions:
1. insert no provision (or expressly leave the position to be dealt with by applicable law);
2. allow creditor A to exercise its remedies but with a requirement to compensate any damage caused to creditor B.
Industry representatives generally felt it was preferable to adopt option 1.
Remedies in relation to controlled goods (Article XXVI)
RG: the Space Protocol proposed language to enable a contracting state which had pre-existing laws controlling or licensing the operation of certain goods to continue to exercise those controls.
Industry representatives were concerned about the risk of uncertainty resulting from the interrelationship between the Space Protocol and export control laws.
RG requested industry representatives to provide revised proposals as appropriate to refine and improve the Space Protocol ahead of the diplomatic conference scheduled for February/March 2012.
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