The X-33 is one of the best-known examples of the failure of a public private partnership in the space field. (credit: NASA)

Fannie Mae, Freddie Mac, and lessons for space commercialization

by Taylor Dinerman
Monday, October 13, 2008

No one really knows how the financial crisis brought on by the subprime mortgage fiasco is going to end. What we do know that at its heart were the two government supported enterprises (GSE) known as Frannie Mae and Freddie Mac. These institutions were the epitome of public private partnerships (PPPs), sometimes referred to as private finance initiatives. Americans just don’t seem to have the knack of making these things work.

On the other hand, Europeans have been implementing PPPs for centuries. The Spanish conquests in the New World and the subsequent extraction of thousands of tons of gold and silver is a good example. The French and British privateering efforts to steal that wealth, notably Francis Drake’s raids, were also joint efforts between government and the private sector. Since then we’ve seen GSEs succeed at everything from Louis XIV’s glass- and mirror-making industry to building Volkswagens and Arianes.

The US has a pretty lousy record at harnessing the private sector to accomplish complex political goals. Washington has an excellent record when it comes to things like winning world wars or putting a man on the Moon. These projects used the private sector but there was never a pretense that the contractors were doing anything other than serving their government paymasters.

However, when it comes to government acting as normal investors with commercial entities, the record is not very good, especially in the space industry. The ill-fated X-33 project is a prime example of what happens when government and industry persuade themselves that they can work together as profit- and risk-sharing partners. The US government is not, nor can it be, a normal partner: they are simply too powerful and do not respond to market stimuli the way businesses do when not subject to a public partnership.

When asked why the X-33 failed, Newt Gingrich explained that is his opinion it was “over-managed”. One NASA post-mortem report explained that the X-33 tried to introduce too many new technologies in a single vehicle. This, the report said, contradicted the fact that the best X-vehicles were always limited to developing or proving one or at most two new technologies or procedures.

The X-33 VentureStar was intended to be both an X-vehicle and the basis for a new class of RLVs. At the time of its unveiling in 1996 some in the media were convinced that this was to be the replacement for the shuttle. Sadly, NASA did little to disabuse them. So the taxpayers and Lockheed Martin shareholders lost all or most of the $1.3–1.5 billion invested. That’s chump change by the standards of 2008 losses, but hurtful and embarrassing enough to have kept both Congress and the executive branch away from any serious subsequent investments in RLV.

This has left the field open for strictly private operators such as Elon Musk’s SpaceX and Jeff Bezos’ Blue Origin. In the long run this may be better for all involved, but it merely reinforces the message that private sector programs work best in America when they are truly private. In Europe they do things differently.

One important reason for this is that the political class in Europe is far more powerful than the political class in the US and they can persist in supporting programs far longer than we seem able to do. France, in particular, was able to sustain a long and expensive series of commercial aviation failures before they were able to lead the rest of Europe into the Airbus project. Germany has for years tried to lead the world in solar power. So far they have successfully subsidized parts of the US photovoltaic industry, but they may yet build themselves a powerhouse terrestrial solar industry.

Over the next twenty years the big projects for the space industry, aside from NASA’s return to the Moon and perhaps beyond, and ongoing military programs, will be the push for low-cost access to space and for space solar power. In both these areas there is a real temptation to go for some sort of public-private deal. The stakes are high and the strategic value of both programs is evident.

There is a real danger that if the industry accepts government as an investment partner instead of as a customer, it will find that the rules and the political requirements involved will overwhelm the value of the funds involved, even if these funds are astronomical.

Remember that one of Norm Augustine’s Laws said that, “If enough layers of management are laid one on top of another, failure will not be left to chance.”

Taylor Dinerman is an author and journalist based in New York City.

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