TEXT: LETT ON INTERNATIONAL TELECOMMUNICATIONS SATELLITES
(U.S. favors privatization of INTELSAT, Inmarset)

July 30, 1997


Washington -- The United States favors privatization of international, intergovernmental telecommunications satellite organizations such as the International Telecommunications Satellite Organization (INTELSAT), a State Department official says.

Steven Lett, deputy United States coordinator for international communications and information with the State Department, told a Senate Commerce subcommittee on July 30, 1997 that privatization of INTELSAT and Inmarsat, the International Mobile (formerly Maritime) Satellite Organization, will help spur global competition in satellite telecommunications.

Lett says the U.S. has helped foster more competitive satellite telecom services through restructuring of these telecom satellite organizations but more work needs to be done to increase competition in this sector. Lett pointed out, however, that progress on restructuring of these organizations has been agonizingly slow.

Following is Lett's testimony as prepared for delivery:

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INTRODUCTION

The International Telecommunications Satellite Organization, INTELSAT, and the International Mobile Satellite Organization, Inmarsat, were born of the need to bring unproven new technology to a communications-starved world often divided by Cold-War tensions. The United States wanted the free world to cooperate in sharing the risks and benefits of communications satellites through intergovernmentally chartered commercial organizations. These organizations have unquestionably succeeded beyond their founders' wildest expectations.

Today, the world is dramatically different. The industries of former Cold-War adversaries are unleashing their energies and private capital to bring the best of market economics to the important telecommunications sector. Private investment and entrepreneurial spirit mean that new satellite innovations arrive daily to our rooftops, our trucks and planes, and to our laptops. We even can hold these innovations in our hands. The times that brought us the need for intergovernmental institutions for satellite communications have passed. The need has come to mold INTELSAT and Inmarsat to fit the future.

For the United States this is not a recent revelation. For over a decade the administrations of both political parties have strived to ensure fertile ground for new satellite entrepreneurs. This has not been an easy task. When the first "separate" satellite initiatives were being advanced in 1985, virtually all other countries of the world relied upon the post, telephone and telegraph (PTT) agency model of telecommunications infrastructure. The government owned and controlled PTT was the INTELSAT and Inmarsat "Signatory" investor and service agent. They saw no need to muddy the clear and simple monopoly waters with unknown interlopers. But as the unknown interlopers have become refreshing choices for new ways of communicating, and as more countries have accepted the benefits of free and fair market competition, U.S. initiatives to bring INTELSAT and Inmarsat into step with the times have steadily progressed. It is our duty to build on that progress to bring ever more benefits to telecommunications users worldwide.

BACKGROUND

The United States led the creation of INTELSAT in 1964 as a means to share the then new telecommunications satellite technology with the rest of the world. Using a commercial entity, but one sanctioned through an intergovernmental agreement, allowed for a self-sustaining financial structure that required no U.S. taxpayer funding and which facilitated the financial support of other countries in the then risky venture. It was an important symbol of cooperation with other countries, particularly the developing world, during a difficult political period in history. The success of INTELSAT served as a model for the creation in 1979 of the second intergovernmental commercial cooperative, Inmarsat, which was to focus on bringing satellite communications capability to ships at sea (and to aircraft on an ancillary basis)

Today, INTELSAT, with 141 member states, provides global satellite services to approximately 200 countries. Its "core" business mission is to supply capacity for public-switched network (PSN) traffic, i.e., to provide global connectivity for basic telecommunications services. It also provides a variety of video, data and other emerging services. INTELSAT is headquartered in Washington. Inmarsat, based in London, has 80 member states. Aside from its commercial activities, Inmarsat has the treaty responsibility of providing maritime distress and safety communications services. It currently provides satellite communications services to approximately 41,000 ships and offshore facilities (such as drilling rigs), 1,800 aircraft, and 30,000 land mobile and remote terminals throughout the world.

The legislative basis for U.S. membership in INTELSAT and Inmarsat is contained in the Communications Satellite Act of 1962, as amended. It provides that U.S. participation in INTELSAT and Inmarsat shall be through Comsat Corporation, a publicly traded U.S. stock corporation. Comsat, as the U.S. Signatory to INTELSAT and Inmarsat, is, among other things, responsible for the U.S. share of contributions to capital expenses of the two organizations and is the exclusive agent in the United States for provision of space segment capacity of the two systems. Under the Communications Satellite Act and Executive Orders, the Departments of State and Commerce, and the Federal Communications Commission (FCC) are responsible for supervising Comsat, and issuing to it instructions, to ensure that its actions and relationships within the organizations are consistent with the national interest and foreign policy of the United States.

Both INTELSAT and Inmarsat have been hugely successful economic cooperatives. These intergovernmental satellite organizations ("ISOs") have brought satellite communications capability to every corner of the Earth and have expanded the range of service offerings to include things only imagined 30 years ago.

Today, however, satellite technology is well proven and, in many cases, available "off-the-shelf" to private entrepreneurs wanting to start their own business. Another space-age technology, fiber-optic cable, gives many countries new alternatives to satellites for high-volume, "point-to-point" traffic like switched telephone service. In short, what once were natural monopolies are now markets ripe for full competition. We believe that the activities of the ISOs should be consistent with this new environment, and that the restructuring of INTELSAT and Inmarsat should promote a more competitive marketplace for international satellite services.

SLOW BUT STEADY PROGRESS

Global attitudes change slowly, and attitudes within international bureaucracies can be particularly difficult to nudge. But progress has and is being made. The United States led in the creation and operation of the ISOs, and beginning in the 1980s, the United States has been leading them along the path to a more open and competitive international communications satellite market.

In 1984, INTELSAT's Signatories made a consensus decision to boycott private satellite systems such as the U.S. systems then proposed in applications before the FCC. In 1986 and 1987, INTELSAT resisted attempts by the United States to successfully coordinate the operations of the PanAmSat-1 satellite scheduled for launch a few months later. But the United States persisted and international approvals were grudgingly given. In 1988 PanAmSat-1 was launched and the world experienced for the first time the benefits of serious international satellite competition. By 1989, the United States successfully coordinated a second major satellite system, Orion, with INTELSAT. Although the Orion system was comprised of enough capacity that INTELSAT's management judged that it could divert substantial traffic off of the INTELSAT system, thereby potentially causing INTELSAT "significant economic harm," the organization nonetheless granted a "favorable finding" to Orion under the consultation provisions of the INTELSAT Agreement. This was a milestone in the thinking of INTELSAT's members. Competition had arrived to the market, and fear was not going to keep it away.

The obligations to consult with INTELSAT's Assembly regarding economic harm to INTELSAT and technical compatibility with INTELSAT for non-INTELSAT satellites are contained in Article XIV of the INTELSAT Agreement. By 1990 INTELSAT formed a special working group to examine whether the economic-harm consultation obligations were in need of overhaul. The answer was a reluctant yes. Again with U.S. leadership, INTELSAT began progressively waiving the requirements for economic-harm consultations. These efforts over the intervening years culminated in April of this year with an Assembly decision waiving the procedure of economic harm consultation for all competing systems.

Similar obligations are contained within the Inmarsat Convention. Article 8 requires that non-Inmarsat systems that would compete in the maritime services market provide notification to Inmarsat to avoid technical interference or economic harm. An Inmarsat working group and the Inmarsat Council have recommended to the Inmarsat Assembly of Parties that Article 8 should be deleted. At its 9th Session (October 1993) the Assembly decided to presume that any notifications would not involve economic harm. Because Inmarsat was considering amendments to its Convention in order to restructure the organization, at its 11th Session (26-29 January 1996), the Assembly of Parties, rather than decide on one amendment to delete Article 8, decided to extend, until its next regular session (Spring of 1998) the practice of presuming no economic harm in any further notifications. The Assembly anticipated that its next session will address an entire package of amendments to restructure the organization, and that an amendment to delete Article 8 should be part of that package.

The changes to INTELSAT's Article XIV process and Inmarsat's Article 8 process, many of which were done at the request or insistence of the United States, represent small, but symbolic and important steps: a shift in the thinking of the organizations' membership over time, and a growing acceptance of the inevitability and hopefully, the value, of competitive systems.

It remains necessary to engage in negotiations to avoid technical interference among systems as the radio spectrum and satellite orbits become increasingly congested. Some of this work still takes place under the procedures of the 150 agreements, but the changes in attitude and approach within the ISOs have often been significant. None of the emerging competing mobile satellite systems have been impacted by Article 8. And over the past two years three PanAmSat satellites have been successfully coordinated with INTELSAT to ensure against interference between the systems, despite considerable technical complexities.

CHALLENGES AHEAD

With the victories of procedural reforms and increasingly changing international attitudes under our belts, the United States has been turning its energies over the past three years towards more comprehensive proposals for establishing the appropriate place of the ISOs in a fair, competitive market. If the ISOs did not exist today, we surely would not create them. Private enterprise is generating new ideas, alternatives and capacity for serving every corner of the globe. While there is an important need to ensure that all areas of the world have access to the benefits of satellite communication, there is no evidence that large intergovernmental, facilities-operating institutions are necessary for this purpose in today's environment. Indeed, in many cases there are substantial inefficiencies in the provision of services by the ISOs because of their intergovernmental character.

For these reasons, the United States proposed years ago that both ISOs be fully privatized. Existing and new mechanisms could be used to protect nations from the remote possibility of a market failure in providing universal access. Regrettably, however, fear and suspicion remain with many members which has prevented more progress in 150 restructuring. Some member governments do not want to lose their participation in the governance of what they see as vital "lifelines" to the rest of the world, and the 150 Signatories are reluctant to accept the fact that without real change, the historical money stream will dry up. Consequently, progress on 150 restructuring has been agonizingly slow.

But here again attitudes are beginning to change. Of paramount interest to the United States is ensuring that 150 restructuring brings benefits to all telecommunications users by enhancing competition. This means that restructuring efforts must be consistent with competition law and policy objectives. Two years ago, working group participants in both ISOs would not entertain any serious discussion of such topics. Over the past few months, compliance with competition objectives has moved well onto the front burner. Roth ISOs are moving into detailed discussions of rechartering themselves in whole or in part, and the full range of governmental concerns are being addressed.

INTELSAT RESTRUCTURING

Formal deliberations by INTELSAT Parties (member governments) and Signatories began at an Assembly meeting in the fall of 1994. These discussions regarding the restructuring of the $3.5 billion INTELSAT organization are a result of imperatives with two distinct origins. INTELSAT investors, including Comsat, are concerned about rapidly growing competition from fiber-optic cable and other satellite service providers, consultant projections of a market share decline for INTELSAT's core business, and a belief that INTELSAT is at a disadvantage to compete in expanding market segments under its cumbersome treaty structure. The imperative for the United States Government and several other INTELSAT member governments is to ensure a future "level playing field" for all satellite service providers. The creation of a commercial subsidiary or affiliate without either the constraints of international committee decision-making processes or the benefits of diplomatic privileges and immunities was determined to be a consensus way forward in the restructuring.

Under the kind of restructuring currently envisioned, the affiliate, dubbed INTELSAT New Corporation (or INC), would emphasize the rapidly expanding market for direct-to-home and other video and multimedia services. The continuing INTELSAT intergovernmental organization (IGO) would focus on its original mission of public telephony. Under this scenario, the INC affiliate would acquire a certain number of satellites in an asset transfer from INTELSAT IGO.

The United States' focus in the restructuring is to ensure a fair, competitive market without distortion from the intergovernmental satellite organization. Thus, the United States has insisted on an approach that would create an affiliate independent of the intergovernmental organization, and operating on a purely private, commercial basis. In February 1996 the U.S. submitted a proposal for INTELSAT restructuring which emphasized specific structural arrangements in the ownership of the new affiliate as a means to address these competition-related concerns.

However, many INTELSAT members seek a close, continuing "subsidiary" relationship between INTELSAT and the spin-off so that INTELSAT can reap the benefits of the affiliate's hoped-for success. The developing countries, in particular, are concerned about the impact of restructuring upon their countries' international connectivity and their participation in the decision-making of the organization. They emphasize a continuing link between what many view as the "parent" and "child" organizations. A number of countries are still reluctant to accept serious changes through a restructuring. In the negotiations, even those countries which support in principle our objective of a pro-competitive restructuring did not agree with the U.S.-proposed ownership related provisions to address these concerns.

In INTELSAT multilateral meetings, and in numerous staff and high-level U.S. Government international contacts between meetings, the United States emphasized that competition-related issues must be appropriately addressed, and that the United States would protect its market from the results of any anti-competitive restructuring decisions. By ensuring fair market access and a level playing field for INTELSAT, its affiliate, and all other satellite service providers, competition will be enhanced in the international satellite services market, bringing increased benefits to users worldwide. The United States also made clear that independence for the affiliate is critical to ensuring competition, and that it will not support the creation of an affiliate that is not independent.

Over time, the amount of attention devoted to the competition-related issues at INTELSAT meetings has dramatically increased. In the previous round of working-level meetings, a special sub-group was formed to discuss competition issues and seek mechanisms to satisfy the desire for an outcome that would be satisfactory to competition authorities. "Conduct remedies" or "competition safeguards" were proposed to address competition policy concerns, and were further developed by the INTELSAT General Counsel. While no such specific remedies have yet been finally agreed upon, by the time of the April 1997 INTELSAT Assembly of Parties, an increasing number of countries expressed support for developing a restructuring package which will be pro-competitive, including support in principle for such mechanisms.

At its April meeting, the Assembly of Parties, the principal decision-making body of the organization, was expected to approve a restructuring package. However, with the critical competition and asset transfer (i.e., number of satellites to be moved to the affiliate) issues not yet resolved, and with the expectation that given some additional time a restructuring package could be developed which will address competition-related issues in a manner acceptable to all INTELSAT members, including the United States, the Assembly chose to postpone a final decision on restructuring. Instead, the Assembly chose to form a follow-on working group, the primary purpose of which is to address the still-outstanding competition and asset transfer issues and to develop final recommendations for the next Assembly, now scheduled for March 1998.

At the first meeting of this follow-on group, the INTELSAT Management invited the European Commission's Competition Directorate to give an informal presentation to interested representatives on the Commission's perspective on the competition issues and on European competition law as it relates to the restructuring. Nearly every country's representatives remained for this informal session. While U.S. competition policy experts had made similar presentations at meetings only a few months earlier, the inclusion of non-U.S. experts demonstrated that this was not going to be a concern only of the United States.

The Administration has begun to identify and examine more closely alternative ownership arrangements that, combined with "conduct remedies" and "competition safeguards," would address our competition-related concerns. The U.S. will remain firm in its insistence on a restructuring which will create an affiliate independent from INTELSAT, and a more level playing field for all competitors in the satellite services market. We believe that other INTELSAT member governments share our desire to develop a package of proposals which will be satisfactory to all.

The United States has successfully re-oriented the nature of the discussions in the INTELSAT meetings on restructuring, and even within the Assembly of Parties. We have put the competition issues fully on the radar screen, and are working with our foreign counterparts to address them. The challenge will be to reach consensus among all 141 countries on the appropriate steps which must be taken to ensure that adequate protections are put in place before the affiliate is created and enters the marketplace.

INMARSAT RESTRUCTURING

Inmarsat satellites are virtually the only commercial means available today for providing global mobile satellite services. However, several companies in the United States, as well as in other countries, are in the process of launching competing systems. Plans of these new service providers include satellite service that can be provided globally to pocket telephones. System designs of the companies are those such as Iridium's 66 low-Earth-orbit (LEO) satellites using satellite-to-satellite links, Loral/Qualcomm's 48 satellite Globalstar LEO system, TRW's Odyssey system of 12 medium-Earth-orbit satellites, and Mobile Communications' Ellipso system with 16 satellites destined for elliptical orbits. Mobile systems in the planning or development stage, licensed or based outside the United States include France's EAST/WEST, the Arab-sponsored Thurryya, India's ASC, the joint Philippine-Thai ACeS, and China's AMPT. The systems licensed and based in the United States have significant international participation.

As it became evident in the early 1990s that bold new technologies were going to be the wave of the future, Inmarsat began to consider how it should position itself in the market for portable communications. The outcome of this self examination was the creation by Inmarsat of a commercial affiliate, ICO Global Communications (Holdings) Ltd. ICO would give Inmarsat's Signatories the freedom to choose whether, and at what level, to invest in this business, and would provide a more commercial structure in which to pursue this soon-to-be highly competitive market.

The United States accepted this decision, but insisted on ensuring that the relationship between Inmarsat and ICO would be such that ICO would function as an independent company, not benefiting from Inmarsat's intergovernmental status nor, particularly, from its privileges and immunities. It appears that this policy has been largely successful. ICO does seem to be functioning independently and shows promise as a genuine alternative in a competitive market. But it is important that this independence not be threatened. For this reason, the United States opposes any closer relationship between Inmarsat and ICO.

The remaining challenge with Inmarsat is the restructuring of its current operations. With the spin off of ICO and the inevitable fact of new competition, Inmarsat is facing somewhat of an identity crisis. The Inmarsat member governments created an Intersessional Working Group (IWG) to meet between the biennial meetings of the Inmarsat Assembly of Parties, in order to examine the future of Inmarsat's organization and treaties, and make recommendations to the Assembly about a broad restructuring of the organization.

In order to ensure that Inmarsat's existing Signatories, many of which continue to exercise control over access to their national markets, would have reduced incentives to favor a privatized Inmarsat over other competitors, the United States proposed that a public stock offering of the privatized Inmarsat be undertaken soon after its incorporation. The most recent session of the IWG, held 2-3 July 1997, recommended to the Inmarsat Council that Inmarsat be privatized and that the company should undertake an initial public offering (IPO) within approximately two years after its formation (with the precise timing to be recommended by an investment banker). The IWG further recommended that a commitment to the IPO be reflected in the founding documents of the company. While a Council meeting of Inmarsat's Signatories immediately following the IWG could not agree on a package that would include endorsement of those recommendations, the seeds have been planted to develop a consensus approach on these issues in September and October 1997. Any amendments to permit Inmarsat to function more like an ordinary corporation would be acceptable to the United States only if a privatized Inmarsat gives up its intergovernmental advantages in return for such new commercial freedoms.

A major concern of all Inmarsat Parties is maintenance of Inmarsat's provision of space segment capacity for the Global Maritime Distress and Safety System (GMDSS) of the International Maritime Organization. Inmarsat is obligated to the International Maritime Organization (IMO) to provide this capacity, under the terms of the International Convention for the Safety of Life at Sea, 1974. The U.S. Government is a Party to that Convention, and thus will seek to ensure that however Inmarsat may be restructured, space segment capacity for the GMDSS is continued. This should include the opportunity for other system operators to participate in this vital program.

In summary, the United States has gained agreement among member countries for Inmarsat to place its relationship with ICO Global Communications on an arm's length basis, and convinced Inmarsat's Intersessional Working Group to accept privatization of Inmarsat via an initial public offering. Notwithstanding these successes, there is still much to be done. Competition policy concerns will require more than merely opening up ownership of the organization to outsiders. Access to the Inmarsat space segment by additional land earth station operators is yet to be achieved. While privatization of all of Inmarsat's assets will help achieve competition policy goals, a means for assuring continued space segment capacity for the GMDSS must still be created.

CONCLUSION

The United States Government, as a Party to INTELSAT and Inmarsat, and as the provider of supervision and instructions to COMSAT on issues of governmental concern, has helped to foster changes in these organizations which will ensure a more competitive future satellite services marketplace.

Significantly, in the negotiations to restructure each of the organizations, the need to address competition-related issues now has been fully recognized, and an increasing amount of time is being spent in dealing with them. That does not mean that the United States and other member countries yet agree on precisely what competition concerns exist and how best to resolve them. There is much more work to be done to ensure a level playing field for all competitors providing international satellite services, before and after restructuring of each of these organizations takes place. It is our duty to keep things moving in a pro-competitive direction that will bring even greater benefits to the people of the world.

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