Module_5

MODULE - 5: FINANCING OUTER SPACE ACTIVITIES

5.1. INCREASE IN PRIVATE SPACE ACTIVITIES

“When you look at the stars and the galaxy, you feel that you are not just from any
particular piece of land, but from the solar system” – This was a famous quote by
Kalpana Chawla which reflected upon the unimaginable mysteries that are hidden in
space.

One of man’s greatest achievements is his venture into outer space. The launch of Sputnik
in the year 1957 has opened doors to new developments in the scientific and
technological field. Every day there seems to be a new discovery to be explored. Space is
in fact the latest economic frontier as it has large resources which can benefit all of
humanity in the near future. The steady emergence of a space economy shall have
widespread effects on the global economy, hence creating opportunities for billions of
people.

Space economy is basically the full range of activities and the use of resources that create
value and benefits to human beings in the course of exploring, researching,
understanding, managing, and utilizing space.1

Over the past few decades there has been increase in the scientific exploration of space
propulsion, navigation, and communication. These advances have resulted in
commercially viable technologies and business methods. Today, the commercial
component of the space economy encompasses everything from satellite communications,
broadcasting, and remote imaging to the terrestrial infrastructure and workforce that
supports those satellites.

All research and mission goals are majorly depended on government funding however in
recent times private companies too have entered into this domain as outer space is no
longer a playground reserved only for nation states. Besides powerful nations guided by
presidents and premiers, the new competitors in this space race are tech start-ups and

1 SPACE ECONOMY , SPACE SAFETY MAGAZINE ( 10th Sep 2018 )
<http://www.spacesafetymagazine.com/space-on-earth/space-economy/>

private businesses led by billionaire entrepreneurs. Technological developments from
outer space have been applied to terrestrial life since the earliest days of space
exploration. The National Aeronautics and Space Administration (NASA) maintain a
website that lists technologies that have spun off from such research projects.2

As space exploration requires a lot of financing the option to insure and invest into space
programs is needed to be expanded beyond the scope of the government thereby inviting
many high net worth entrepreneurs to participate in this zone. In fact private companies
have propelled this sector forward more vigorously and swiftly than would be the case if
it was left just to the governments alone. However government funding still
preponderates over private sector investments.

The private space entrepreneurs are working toward funding of space tourism, lunar and
asteroid mining, space freight and mostly financing a sustainable ecosystem giving rise to
proper living conditions on the Moon and Mars.

One of the greatest examples of private sector participation in space programs is the
development of the public-private partnership (PPP) model which is now being eyed to
realise ISRO’s workhorse Polar Satellite Launch Vehicle (PSLV), with a joint venture
between ISRO and the private sector. While the first rocket by the PPP model may be
slated for launch only in 2020 or 2021, ISRO has also invited the private sector to
build 30 satellites.3

Development in space products and services by private companies will eventually lead
to excellent boom in the market globally. This also helps government entities to spend
their resources in an organised manner thereby helping to create next-generation
technologies and applications. Working with commercial companies for capabilities
can reduce costs while providing strength through variation. For example, currently
commercial satellites provide the military with 80 per cent of its satellite
communications needs.

2 NASA, “NASA SPINOFF 2016,” INSIDE 2016, < https://spinoff.nasa.gov/Spinoff2016/toc_2016.html >
3 THE WIRE , WHY YOU SHOULD CARE ABOUT INDIA'S NEW PRIVATE SECTOR SPACE
ACTIVITIES BILL (9th Sep 2018 ),
< https://thewire.in/law/care-indias-new-private-sector-space-activities-bill >

Besides direct benefits such as generation of scientific knowledge, innovation and
creation of global markets, various agreements created between the countries engaged in
exploration etc. many indirect benefits such as improved economic prosperity, health,
environmental quality, safety, and security as result due to the involvement of private
sector companies in space products.

One of the major examples of Private Sector Company is SpaceX which was founded by
tycoon Elon Musk, which became the first private company to return a spacecraft from
low-earth orbit to Earth. SpaceX has ever since won contracts with NASA to run supply
trips to the ISS and has landed a 72 reusable booster system several times.4 From
OneWeb to SpaceX, more and more companies are looking to deploy their own satellite
systems to provide direct Internet connections around the world.5

With the aid of private companies it is expected that in the near future Space tourism and
resource recovery like mining on planets, moons, asteroids etc. may become large parts of
that realm.

5.2. ASSET-BASED FINANCING

Asset-based finance is a specialized method of providing companies with working capital
and term loans that use accounts receivable, inventory, machinery, equipment and real
estate as collateral. It is essentially any loan to a company secured by one of the company's
assets.6

In order for a commercial enterprise to have the chance to grow and become profitable, it
usually has to spend money first on various necessities to establish its business, and this
usually means that it must borrow money from an available source. At present, the
financing for space is unlike many other large, industrial, international industries.
Financing is based on the creditworthiness of the borrower however when deciding
whether to extend credit the potential lender or creditor will first try to comprehend
whether their money is likely to be repaid. They will look to assets the potential debtor

4 THE FUTURE OF SPACE COMMERCIALIZATION , JOSHUA HAMPSON , (10th Sep 2018 )
<https://science.house.gov/sites/republicans.science.house.gov/files/documents/TheFutureofSpaceCommercializ
ationFinal.pdf >
5 PATTERSON, THOM, “GOOGLE, FACEBOOK, SPACEX, ONEWEB PLAN TO BEAM INTERNET
EVERYWHERE,” CNN, (13th Sep 2018), < http://www.cnn.com/2015/10/30/tech/pioneers-google-facebook-
spacex-oneweb-satellite-drone-balloon-internet >
6 INVESTOPEDIA ( 15th Sep 2018 ) < https://www.investopedia.com/terms/a/assetbasedfinance.asp >

owns which they could repossess in case the potential debtor cannot subsequently repay
the money loaned to them. This makes their extension of credit more protected than would
otherwise be the case, and they will want their interests in the asset protected against other
creditors who have extended credit to the debtor.

Under an international legal framework of asset-based financing, a creditor could enforce
its rights against the equipment in the event of default by the debtor. Such financing lends
itself to borrowing involving high-value space assets. Under the current legal regime, it is
the law governing the location of the equipment that will normally decide questions
regarding the validity, priority ranking and enforcement of security and leasing rights in
such equipment. However, there is currently no applicable law governing the location of
equipment in space. From the viewpoint of a lender, this situation makes the risks of asset-
based financing less acceptable. 7

The Cape Town Treaty and the Space Protocol together represents the co-ordinated efforts
of both Governments and the commercial space sector to render asset-based financing
more accessible to an industry that is presently searching for innovative ways to obtain
start-up capital for space-based services.

5.3. UNIDROIT CONVENTION AND DRAFT SPACE PROTOCOL

In the year 2001 a diplomatic conference was held in Cape Town, South Africa which
gave rise to the Cape Town Convention on International Interests in Mobile Equipment, or
Cape Town Treaty which is an international treaty intended to standardize the transactions
involving movable property. This convention was specific to three kinds of movable
apparatus namely: The Aircraft Equipment (aircraft and aircraft engines; which was signed
in 2001), railway rolling stock (which was signed in 2007) and space assets (signed in
2012).

The UNIDROIT (International Institute for the Unification of Private Law) committee
which is an intergovernmental organization on the harmonization of private international
laws acts as the depository of The Cape Town Treaty which also includes its three
protocols. As of 2017 UNIDROIT has 63 member states.

7 INTERNATIONAL TELECOMMUNICATIONS UNION , PROTOCOL TO THE CONVENTION ON
INTERNATIONAL INTERESTS IN MOBILE EQUIPMENT ON MATTERS SPECIFIC TO SPACE ASSETS
< https://www.itu.int/en/ITU-R/space/Pages/spaceAssets.aspx >

Due to the increase in privatization and commercialization of space activities, the
development of the space industry has also proliferated and thus it requires huge
investments. Besides Government organisations space equipment is also being financed by
private entities such as banks, investment companies, insurance companies and other
financial institutions. Nevertheless these on-going developments in the space industry
creates more financial risk for private sector financiers hence these investment activities,
especially for the asset-based financings, which need to be protected and stabilized under
law. Since space equipment such as satellites are highly movable in nature, and it may
keep crossing national borders or operate outside sovereign territory during its lifetime.
This movable nature may cause legal uncertainties when a security interest is created on
cross-border space equipment through asset-based financing, as which domestic law shall
apply to regulate the security interest is questionable8. Given such situation, the
UNIDROIT Convention on International Interests in Mobile Equipment (the "Cape Town
Convention") which was adopted in 2001, along with the Protocol to the Cape Town
Convention on Matters Specific to Space Assets (the "Space Protocol") which was adopted
in 2012, marked a significant step forward in harmonizing and unifying the rules of
national laws on the subject of asset-backed finance for mobile space equipment.

Since the stakes are high and full of uncertainty, the financing of such space elements
were prohibited but by the introduction of a uniform mechanism so as to regulate the
creation, perfection and enforcement of international interests in space assets it was
conceived that there would be reduction in risk and investments hence the Space Protocol
was established which created a level of transparency and predictability for financiers,
thereby making financing more widely available to a greater number of players in the
commercial space sector.

The Space Protocol or The Protocol to the Convention on International Interests in Mobile
Equipment on Matters specific to Space Assets was held in Berlin from 27th February
2012 to 9th March 2012.This diplomatic conference was a co-ordinated effort of both the
government and the commercial space sector to contribute to the asset-based financing of
space equipment.

8 GLOBALEX, SPACE ASSET UNDER THE SPACE PROTOCOL OF THE CAPE TOWN
CONVENTION, PAI ZHENG,
< http://www.nyulawglobal.org/globalex/Space_Asset_Protocol_Cape_Town_Convention.html >

5.3.1. Loopholes in the Unidroit System

The UNIDROIT system has failed properly to address certain concerns in the Space
Protocol of 2012 and The Cape Town Convention on International Interests in Mobile
Equipment. The main issues raising objections are the following:

❖ The draft is inconsistent with current market practices of commercial satellite
financing and thus will deter potential financial backing. There are also no new
benefits for potential financiers to support financing of start-up or emergent
satellite operators in developing countries.

❖ As for the case of creditors there are already adequate existing safeguards to
protect them. The Protocol would set up an extra legal regime that would overlap
with existing national laws and safeguards thereby conflicting with them. This may
create uncertainty and necessitate additional legal analysis.

❖ Insurance is an important element of satellite financing thus insurers have been
seeking protection for their rights granted under launch and in-orbit insurance
policies regarding possible salvage of satellites. However the satellite operators
feel that the inclusion of insurer’s salvage rights may create priority issues which
would be detrimental to creditors and would be inconsistent with market practice.
But it is now understood the final version of the Protocol may exclude provisions
relating to salvage rights. Here the problem arises that if insurers feel that their
salvage rights are prejudiced by implementation of the Protocol the likely outcome
insurance premiums would be increased causing duress to the policy holders.

❖ As for the case of definition of space assets the main problem here is that it totally
depends upon the limitation of space and space as we know is unlimited hence
without a clear answer to this question, i.e., where outer space begins, it is also not
clear whether an object or equipment can be qualified as a Space Asset which may
cause scepticism among member states.

❖ The term “public service” is a new concept introduced by the Space Protocol but
there is no clear definition as to what can be deemed to be a qualifying “public
service” and this uncertainty is compounded by the fact that satellite services can
be provided on an international basis to different States and those States may have
different interpretations of “public service” which could be in conflict. This
uncertainty, together with the restriction of creditors exercising their default

remedies for a period of six months from the registration of a creditor’s notice or
otherwise, could discourage potential lenders.
❖ The term “space asset” which has been defined in the Space Protocol refers to the
physical asset, the assignment of the foreseen revenue from use of the asset could
be registered as a creditor’s right, but not other rights granted specifically to the
operator by the ITU with respect to spectrum or licences granted by national
authorities. These rights cannot be readily assigned and are therefore effectively
not transferrable. This is significant as in practice; the right of use is the most
important asset.9

5.4. CREATION AND REGISTRATION OF INTERNATIONAL INTERESTS IN
SPACE ASSETS

As there was no suitable global registration mechanism for titles or security interests in space
property the Space Protocol was established which contains the legal foundation for the
creation, priority ranking and enforcement of security and leasing rights in space-based
equipment.

Chapter III of the PROTOCOL TO THE CONVENTION ON INTERNATIONAL
INTERESTS IN MOBILE EQUIPMENT ON MATTERS SPECIFIC TO SPACE ASSETS
which was signed in Berlin on 9 March 2012 deals with the registration and creation of
international interests in space assets under the broad heading of the REGISTRY
PROVISIONS RELATING TO INTERNATIONAL INTERESTS IN SPACE ASSETS.

The first component of this Chapter is that there must be a Supervisory Authority appointed
which shall oversee the operation of the Registry by the Registrar. In particular, it would
nominate and dismiss the Registrar, monitor its activities, establish regulations in relation to
the functioning of the Registry after approval by Contracting States and would be assisted by
a commission of experts nominated by Signatory and Contracting States. It would also
determine and periodically review the structure of fees for the Registry’s services.

9 UNIDROIT DRAFT SPACE ASSETS PROTOCOL < http://www.hfw.com/UNIDROIT-Draft-Space-Assets-
Protocol >

This Registry determines the priority among rights on the basis of the first-come, first-served
principle to give lenders a degree of legal certainty relating to asset-based financing.

Besides these the chapter specifies how a space asset shall be determined and what shall
consist of the entry points in the territories of contracting states.

Some additional elements of this chapter are that the International Registry shall also provide
for-

❖ The recording of rights assignments and rights reassignments;
❖ The recording of acquisitions of debtor’s rights by subrogation;
❖ The registration of public service notices under Article XXVII(1) of the Protocol to

the Convention on International Interests in Mobile Equipment on Matters specific to
Space Assets; and
❖ the registration of creditors’ notices under Article XXVII(4) of the Protocol to the
Convention on International Interests in Mobile Equipment on Matters specific to
Space Assets.”. 10

It also states that the holder of a registered prospective international interest or a registered
prospective assignment of an international interest or the person in whose favour a
prospective sale has been registered shall take such steps as are within its power to procure
the discharge of the registration no later than ten calendar days after the receipt of the demand
described in such paragraph also all the centralised functions of the International Registry
shall be operated and administered by the Registrar on a twenty-four hour basis. As per the
insurance or financial guarantee referred to in Article 28(4) of the Convention it shall cover
the liability of the Registrar under the Convention to the extent provided by the regulations.

Hence we can conclude that this treaty has established that it offers a clear, uniform rules for
establishing priority and provides the creditor with a range of basic default and insolvency
related remedies including means for obtaining speedy repossession or control over the asset
and it also establishes electronic international registries of international interests to give
notice to third parties and enable the creditor to preserve its priority.

10 INTERNATIONAL TELECOMMUNICATIONS UNION , PROTOCOL TO THE CONVENTION ON
INTERNATIONAL INTERESTS IN MOBILE EQUIPMENT ON MATTERS SPECIFIC TO SPACE ASSETS
< https://www.itu.int/en/ITU-R/space/spaceAssetsProtocol/potocolSpaceAssets09032012-EN.pdf >

5.5 DEFAULT AND REMEDIES

Chapter II of the PROTOCOL TO THE CONVENTION ON INTERNATIONAL
INTERESTS IN MOBILE EQUIPMENT ON MATTERS SPECIFIC TO SPACE ASSETS
comprises of the matters dealing with Default and Remedies of the Space Protocol.

The Convention applies if a debtor is located in a Contracting State at the time of contracting.

If the debtor defaults, then the creditor has the following options:

❖ take possession or control of the assets,
❖ sell the assets or grant a lease,
❖ or collect income from the assets.

In the event of default, the creditor may obtain court assistance to preserve the assets, gain
possession, lease or manage them.

Some other important features of this chapter are the following:

❖ As per Article 8(3) of the Convention, it shall not apply to space assets. Any remedy
given by the Convention in relation to a space asset shall be exercised in a
commercially reasonable manner.

❖ A chargee who gives a fourteen or more calendar days’ prior written notice of a
proposed sale or lease to interested persons shall be deemed to satisfy the requirement
of providing “reasonable prior notice” as specified in Article 8(4) of the Convention.

❖ Unless otherwise agreed, a creditor may not enforce an international interest in a
space asset that is physically linked with another space asset as it may interfere with
the operation of the other space asset thereby causing disruption.

❖ In the case any relief which is pending final determination the Article implies that
there must be “speedy” redress towards it, within such number of calendar days from
the date of filing of the application for relief as is specified in a declaration made by
the Contracting State.

❖ The Ownership or any other interest of the debtor passing on a sale under is free from
any other interest over which the creditor’s international interest has priority under the
provisions of Article 29 of the Article.

❖ The courts of a Contracting State:
(i) in the territory of which the space asset is situated;
(ii) from the territory of which the space asset may be controlled;
(iii) in the territory of which the debtor is located;
(iv) in the territory of which the space asset is registered;
(v) which has issued a licence in respect of the space asset; or
(vi) otherwise having a close connection with the space asset, shall, in
accordance with the law of the Contracting State, must co-operate to the
maximum extent possible with foreign courts and foreign insolvency
administrators in carrying out the provisions regarding the remedies as
stated in the Convention.

❖ The Convention specifies that the Space Protocol will not affect the exercise by a
Contracting State upon its authority in regards to issue of licences, approvals, permits
or authorizations for the launch or operation of space assets or the provision of any
service through the use or with the support of space assets.

❖ As for the case of a debtor in the absence of a default within the meaning of Article 11
of the Convention, the debtor shall be entitled to the quiet possession and use of the
space asset in accordance with the agreement as against: (a) its creditor or (b) the
holder of any interest of the space asset.

❖ In case the debtor or an entity controlled by the debtor and a public services provider
enter into a contract which states that the use of a space asset is to provide services
that are needed for the provision of a public service in a Contracting State, the parties
and the Contracting State may agree that the public services provider or the
Contracting State may register a public service notice as per the Protocol.