Privatization is the way! But How?

SpaceX and BlueOrigin are only two of the huge number of private companies which approached the space business of the new millennium and the last decade has probably seen the highest increment in this sense. But why and how is privatization of Space going on?

We often talked about interplanetary missions inside our newsletter and they have been funded by government agencies: think about NASA, ESA and UAE Space Agencies, just to think about Mars as a destination. How does this kind of mission distinguish with respect to private ones? Let's spread some light!

At first sight we can think about the turbulent years of the Space Race, whose turmoil allowed a fast and straight progress which conducted to the first human to fly in Earth's orbit, the first human on the Moon and the subsequent Space missions. If this spirit of national pride, aside of military supremacy, has been the red thread in those years, it is also true that still today most of the scientific research is kept alive by governmental institution. This is due to the high costs of these activities, but also to the not so immediate return on the business of the obtained results. Let's make a brutal example: if life was found tomorrow on mars, is there any existent business plan by a company that knows how to make some money on this?

It is also true that more and more companies are conducting scientific experiments onboard the International Space Station. With costs lowering consistently, scientific research in microgravity is becoming accessible also to smaller business.

Larger companies as the two we  mentioned, however, are setting ambitious goals to bring man back on the Moon and beyond, something hard to imagine only a couple of decades ago. Even though contracts are still funded by public agencies and the company's image for the public is a minor driver for those, the main purpose remains technological development for a competitive advantage and profit.

But, is this goal really wrong?

History tells us that almost every time companies flourished in search of profit, this has also spread a higher quality of life, a general improvement and so a shared benefit for humanity. The idea of using in situ resources to build human outposts on the Moon, Mars or asteroids will bring along margins for companies, but also huge technological improvement, new perspective and maybe we'll really become an interplanetary species, as a benefit for all.

Let's now give a look at how privatization has evolved along the last decades.

First of all: can you make a rough esteem of the total market value of the Space Market? Is it in the order of millions or billions of dollars?

Here are some data points: in 2006 it was evaluated around 180 billion dollars, in 2018 the global space marketplace has expanded to an estimate exceeding 345 billions. Nowadays it is estimated to be worth more than half a trillion. As a comparison, Apple has a market capitalization of 2.8 trillion dollars making it the biggest company in the world. However, General Electric only takes 100 billion dollars in market cap, but for sure we cannot label it as a small domestic business! So now you can place the whole Space market in a dimension and we leave to your imagination the thought of which direction it will take.

From 2000 through 2014, space start-ups received a total of 1.1 billion dollars in venture capital investments, or roughly 73 million dollars per year. In 2015 alone, more than 1.8 billion dollars in venture capital investments were made. In 2017, more than 120 investors contributed 3.9 billion dollars into commercial space companies.

An important milestone in the Space market is the International Space Station. We are not going to discuss all the amazing research that can be performed onboard, the new technologies and materials which have an everyday impact on our lives. We have already talked about this and we'll do again in the future, but today we won't. Let the plain numbers talk by themselves the most widely known language among humans: money.

The ISS and changes in contracting mechanisms associated with the it have played a significant role. Since 2006, procurement policies for the ISS have moved from the traditional cost-plus approach to a pay-for-performance framework every time it was possible. The first consequence was a forced search for cost efficiency and encouragement for competition.

While cost-plus refers to an arrangement where a contractor is paid for the expenses incurred, plus an additional margin payment; fixed-cost procurement moves the risks toward the contractor. With fixed-cost procurements, the contractor receives a pre-negotiated (i.e., fixed) value regardless of incurred expenses. You will clearly understand that now proper risk estimation and efficiency become the drivers of the game. For sure we are not reinventing the wheel now.

Cost-plus or fixed-cost approaches are a matter of risk, not a weird modernization. NASA has traditionally used cost-plus-based contract structures to design and develop new space capabilities, such as the space shuttle, the Space Launch System, and the Orion vehicle. However, when the risk is lowered by an existing knowledge of the environment, the mission and other aspects, shifting to a fixed-cost structure is the most valuable way. For this reason, this nimbler approach doesn't mean the extinction of public agencies, but a wider and more valuable collaboration between the private and public sector, with benefits for both.

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