This issue is critical to our international economic competitiveness and our ability to provide space launch services to the robust commercial satellite market. Mr. Chairman, let me begin by expressing our deep appreciation for your leadership and support in addressing this important issue, culminating today with this hearing. The progress that we have made thus far is due, in no small measure, to your efforts to advance US policy objectives for cooperative threat reduction and economic competitiveness.

In my remarks, I would like to talk about International Launch Services (ILS) and, in particular, the arm of ILS -- the Lockheed Khrunichev Energia International (LKEI) joint venture -- that supplies commercial Proton launches to international satellite operators and service providers.

I will also tell you what I believe will happen to this venture if it continues to be restricted by quota-based trade agreements or "held hostage" to proliferation concerns and the potential adverse impact on another very important US-Russian joint venture that will co-produce in the US the world's best rocket engine-the Russian RD-180. Lastly, I would like to offer our recommendation for addressing these issues.

International Launch Services was established in 1995, upon the merger of the Lockheed and Martin Marietta companies, to market Atlas and Proton commercial launch services in the world wide satellite telecommunications marketplace.

Lockheed and Martin Marietta, prior to the merger, were each individually competing in the commercial launch service market with their Proton and Atlas launch vehicles respectively. Lockheed entered the launch market in 1993 with the establishment of the Lockheed Khrunichev Energia International (LKEI) joint venture to exclusively market the Russian Proton launch vehicle.

Similarly, Martin Marietta had entered the commercial launch market with the purchase of the General Dynamics Space Systems Division and its Commercial Launch Services subsidiary (now LMCLS) which marketed the Atlas launch vehicle. Both LKEI and LMCLS are within the ILS structure, and serve as the contracting entities for executing Proton and Atlas launch service contracts.

ILS, headquartered in San Diego, California, is a commercial company servicing a broad range of both domestic and global satellite operators and manufacturers, as well as the US government.

Today, ILS has a backlog of $3.5B representing launch contracts for 23 Atlas vehicles and 19 Proton vehicles. This is comparable to Ariane, which reports a backlog of 42 satellites at this time.

To date, Atlas and Proton have flown 68 launches commercially with, the largest component being 52 Atlas launches. The Atlas began flying commercially in 1990 following the change in National Space Policy to require all commercial satellites to fly on expendable launch vehicles after the Challenger disaster.

Sixteen commercial Proton flights have been conducted since Proton entered the western market, 12 of which have been under the auspices of ILS. Three Iridium satellites and the INMARSAT 3 were contracted directly with Khrunichev prior to the establishment of the LKEI joint venture.

The LKEI Proton program has already provided over $1.5B of revenue to our Russian business partners, which is forecasted to grow to nearly $2B by 2003. A significant number of Russian engineers, scientists, and technicians -- some 100,000, -- are gainfully employed as a result of this very successful joint venture.

The demand for launch services has experienced significant growth since the early 1990's and remains very robust. In fact, this market far exceeds the anticipated demand for launch services when the trade quota was initially established.

The worldwide launch revenue in 1998 was slightly over $2B, however, it is important to note that these space transportation services enabled a global telecommunications market that was estimated to have revenues of approximately $1 trillion in 1998, and a satellite market having revenues of $27B.

Satellites requiring launch into Geostationary Transfer Orbits have represented the majority of the launch demand until only recently. The total number of commercial GTO satellites placed into orbit has grown from 8 in 1989 to 23 in 1998.

The emergence of the new Low Earth Orbit (LEO) telecommunications constellations utilizing medium-to-heavy lift launch vehicles began with the initial deployment of Iridium satellites in 1997.

The LEO market is projected to require an average of 15 medium-to-heavy launchers and 11 small-to-medium launchers over the next ten years, essentially doubling the overall demand for launch services.

Because both GTO launch requirements and LEO deployments favor the use of medium-to-heavy launch vehicles, the same launch assets and launch capacity are required to support the two market segments.

The 1999 COMSTAC and FAA forecasts indicate the total demand for launches will continue into the next decade at an average annual rate of 51 per year. While the new entrants in the launch market may cause supply to eventually exceed demand, the availability of Proton is critical to the interests of a large customer base in the near future as GTO growth continues and the initial LEO constellations are deployed.

With its proven reliability and value, the Proton performance level has begun to emerge as a "sweet spot" in the market. Satellite operators and manufacturers have designed their systems to make full use of the Proton's performance, which can only be matched by Ariane.

Although the next generation of US launchers is expected to meet and perhaps exceed Proton's capability, the current generation of US launchers falls short of Proton's 4500kg performance level.

In fact, the evolutionary Proton M/Breeze M will increase the Proton performance to 5500kg at least one year before the next generation Atlas and Delta launch vehicles are available. Consequently, those customers who have already contracted for Proton launch services must turn to Ariane in the event the Proton is not available in the market due to quota restrictions.

The background and history of the US - Russia Launch Trade Agreement is important to understanding why we believe the quota has served its purpose and should be lifted in its entirety.

The US - Russia Launch Trade Agreement was signed in September, 1993, "to facilitate early Russian entry into the international commercial space launch market in a manner that encourages market-oriented reform in the Russian economy, including its space launch sector; permits Russian entities to offer commercial space launch services to international customers at fair and reasonable prices, consistent with market principles; and does not disrupt the international market for commercial space launch services."

Essentially, the quota was designed to protect the US launch industry from non-market economy entrants gaining significant market share at prices significantly below those of Western launchers.

This basic Agreement allowed for the launch of 16 Western GTO satellites, including INMARSAT 3, which was contracted outside the auspices of ILS.

The agreement stipulates holding regular annual consultations to review and examine its implementation and to review market developments in commercial space.

If the market develops more favorably than anticipated, the parties may increase the quantitative limit by amending the agreement. In 1996, the agreement was in fact amended and a total of 16 launches to GTO or GEO orbits was agreed upon.

The amended agreement also included a provision for automatic increases of 2 launches if the market sustained an average of 24 GTO satellites launched over 1996-1998 time period, and another 2 increase if the average of 24 was sustained through 1999.

As of mid-July this year, we are pleased that the Administration has decided to increase the quota by 4 additional Proton launches, for a total of 20. This is a significant step and will enable ILS to meet our 1999 launch commitments.

To date ILS has launched 12 GTO satellites including Inmarsat. We have nineteen additional launches under contract, of which 7 are non-GTO launches, and therefore, unaffected by the quota issue. ILS has 12 contractual commitments to provide GTO launches.

Of these, 8 are still covered by the quota and 4 are potentially outside the quota. As our manifest currently stands, there are customers with launch commitments in the year 2000 who would not be covered by the quota, even at 20. We risk losing those customers, most likely to Ariane.

In addition, as long as the quota remains in place, ILS has been unsuccessful in selling additional GTO launches on Proton. As a result, the quota continues to seriously affect our ability to compete in the international launch market today.

It is also important to understand the broader context of the commercial space industry and I would like to highlight some of the key aspects of this international market.

The major players are the satellite manufacturers, the launch service providers, and the customers - satellite operators, service providers, PTTs (government-owned Post, Telegraph & Telecommunications providers). The customers provide telephone and paging services, carry voice, fax and data traffic, communicate radio and television signals, and so on.

A customer wants to place a particular satellite at a particular orbit at a particular time. The customer hires satellite manufacturers and launch service providers to perform that mission. To the customer, time is money -- the services of a single satellite may generate hundreds of millions of dollars in annual revenues to the customer.

Uncertainty over whether or not the satellite will appear at the right orbit at the right time jeopardizes both the revenue stream and the substantial investment behind it.

For these reasons, the customer cannot tolerate substantial delays and uncertainty. The use of quota restrictions on launch services leaves the customer uncertain as to when or if a launch will occur.

Our marketing teams from ILS and Lockheed Martin Commercial Satellite Systems report conversations with a major European customer that has in the past bought US-built satellites for launch on the Proton vehicle, but is now forced to consider alternatives.

The principal beneficiaries of a decision not to "buy American" will be European satellite manufacturers and the French Ariane launch provider.

This demonstrates that the United States has no monopoly in the global market for either satellites or launchers.

It has taken nearly fifteen years to recover from the effects of the Challenger disaster on America's ability to launch commercial payloads to space.

We have risen to the challenge with grit, determination, and a major investment of resources. Nevertheless, foreign competition has come on strong, and is still growing. The European Ariane launch vehicle, which operates at capacity without any US-imposed trade constraints, has been the international market leader for commercial GEO/GTO satellite since 1986, with a 50-60% market share until this year, when US launch providers led the field for the first time (albeit by the slimmest of margins).

Competition also has intensified with China's introduction of the Long March 3B, and the Ariane 5. Japan is still working to bring down the cost of the H-II launch system and its eventual emergence will further fuel competition.

Along the way, we have risen to other challenges. First, defense and civil space budgets have been declining and the demand for government launches has diminished accordingly.

The government no longer can be counted on to the extent it once was to act as the core -- let alone sole -- customer. Industry no longer can look to government to shoulder the entire burden of non-recurring investment in technological development or infrastructure.

These developments have forced American launch providers to pursue commercial customers to survive, an effort the US government has actively supported since the price it pays for a launch is largely dependent on the extent to which industry can spread its costs across production lines for both government and commercial customers.

Second, the break-up of the Soviet Union created the potential for former Soviet space launch vehicles either to flood the marketplace at prices that could undermine American launch providers' competitiveness, or to become a major national security threat should Former Soviet Union (FSU) republics, now independent countries, sell missiles or related technologies to third countries for use in their ballistic missile programs.

Faced with the end of the Cold War and the break-up of the Soviet Union, both the Bush and Clinton Administrations, as well as the Congress, fully recognized new threats associated with the proliferation of nuclear, chemical, and biological weapons and the means to deliver them.

In response, both Administrations adopted a vigorous policy of opposing such dangerous transfers, while promoting cooperative programs that would provide commercial opportunities for Russia's vast military industrial potential, so that Moscow would see its self-interest best served by cooperating with the United States rather than with rogue states.

The cooperation between the United States and Russia on commercial space ventures is particularly noteworthy. In several ventures, Russian technology is being exported to American partners.

The United States has opposed dangerous transfers through a variety of means, including direct diplomatic engagement with Russia and other nations, and through the use of export controls and interdiction of illicit commerce where possible.

We have promoted cooperative programs through such efforts as the establishment of the International Science and Technology Center, through which Russian weapons scientists and engineers are supported in redirecting their talents toward peaceful endeavors.

Turning to commercial space, we have encouraged industry-to-industry partnerships in US-Russian commercial space business ventures - like Lockheed - Khrunichev - Energia International (LKEI).

These partnerships engage thousands of highly-skilled Russian aerospace engineers and scientists in commercial pursuits, thereby fulfilling cooperative threat reduction objectives.

Because this is being done on a company-to-company basis, there is no expenditure of public funds and the opportunities to effect real change in the way business is carried out in Russia -- to establish greater accountability and adherence to export control regimes -- are significant.

In the case of LKEI, Khrunichev and its subcontractors employ thousands in the production and launch of the Proton, which generates economic activity supporting one million Russians.

Moreover, Khrunichev has instituted a rigorous program of export controls and is fully integrated into the ILS-LKEI market-oriented approach to the marketing and supply of commercial Proton launch services.

US-Russian commercial space cooperation not only benefits the Russian economy, but it also has promoted US interests. US military superiority, and therefore our national security, depends upon our dominance of space.

US partnership with Russia -- like the LKEI business which offers one of the world's most powerful launch capabilities available today, -- has contributed to our competitiveness in the international marketplace.

Particularly as the Pentagon turns more and more to commercial suppliers of space technology and services, it is critical that we keep America's launch and satellite industries strong.

We have survived the end of the Challenger era, the end of the Cold War, and the threat of unfair competition from the FSU. However, I respectfully submit, it is less clear that we will be able to survive our own policies.

Let me explain. In the case of Russia, I believe that the two-track non-proliferation strategy the United States has pursued -- vigorously opposing Russian entities that proliferate, while promoting commercial engagement with compliant Russian entities to provide incentives for them to refrain from proliferating or doing business with proliferators -- is fundamentally sound.

Last summer, and earlier this year, the United States imposed sanctions against Russian entities found to be assisting others in the development of ballistic missile capabilities. At the same time, to the best of our knowledge, the Russian entities that are participating with Lockheed Martin in commercial space ventures are not engaged in any proscribed activity. It is therefore critical that we keep the incentives to comply properly aligned.

That is why I am troubled by the current situation in which the two tracks are tangled up with one another. Specifically, the effective extension of US economic sanctions from Russian entities that are engaged in illicit commerce to those that are not, by blocking the latter from conducting commercial launches of commercial satellites, is a serious mistake.

There are two reasons why this is so. First, from a nonproliferation perspective, a policy of "shooting the hostages" will either be counterproductive, ineffective, or both. Second, such a policy will also damage long-term American interests.

From a nonproliferation perspective, the original premise of US policy -- that it is in our national interest to provide peaceful civil and commercial avenues for Russian military capabilities -- remains valid.

To the degree that we close off those avenues, we risk a counterproductive result: driving our would-be Russian partners straight into the arms of whatever rogue state will pay the freight for buying Russian missile technologies, equipment and know-how.

Beyond its purely financial dimension, such an approach would reinforce those within the Russian Federation who believe that Moscow's long-term strategic interest is better served not through partnership with the United States, but rather through leveraging their nation's diminishing economic and military strength through assistance to rogue nations and America's rivals.

This could better position Russia to act as a potential spoiler in relation to US interests, thereby enhancing Russia's ability to seek to extract concessions on critical issues.

Moreover, in today's global economy, any US effort to coerce better behavior through unilateral economic sanctions is far more likely to be ineffective.

In the short run, if the United States blocks access to Russian launchers, customers for launch services -- satellite builders and satellite telecommunications and information services providers -- can and will go to Europe to buy another ride to space.

Moreover, the Russian companies involved in these ventures with US industry may find the lure of other partners irresistible. If that happens, any US "leverage" will evaporate. Since no other nation has export controls as strict as the United States, Russia would face fewer nonproliferation constraints let alone incentives to refrain from proliferation in any such transactions.

In the long run, launch services customers may very well invest in European and other launch systems in order to assure their access to space, further diminishing US ability to exert meaningful leverage through coercive use of launch quotas.

And the business base for the US satellite industry -- which has long been the undisputed leader in cutting-edge space-based information and communications technology -- may erode as customers turn to our European and other foreign competitors that are not limited in their access to the full range of launch capability available in the marketplace.

This prospect leads directly to my second concern. Denying Russian entities not involved in proliferation activity the opportunity to provide commercial space launch services will damage US interests in the long-term.

Such a policy sends a signal not just to Russia, but to the world. It tells every nation, every telecommunications company, and every satellite services provider, that the United States is an unreliable partner in commercial space business ventures.

The long-term strategic damage this could inflict on our country cannot be overstated. As I stated earlier, American leadership in space is vital to this nation's economic future and, more importantly, to our ability to prevail in any future military conflict.

In the current defense budget climate, preserving that leadership depends on a robust commercial space industry. Actions that tell customers of US goods and services to shop elsewhere if they need a predictable, transparent environment in which to conduct their business play right into the hands of our already formidable foreign competitors.

This policy -- of restricting compliant Russian launch suppliers from commercial satellite launch opportunities -- also calls into question for key market participants the commitment of the US to execute the agreed-upon terms of its bilateral launch trade agreements.

LKEI has facilitated the smooth transition of Proton vehicles into the market, ensured market pricing for commercial Proton launch services and accomplished the transition of our Russian partners to market-oriented, commercial business practices. Moreover, market demand is robust and far exceeds the forecasts on the basis of which the quota was put in place in 1993 and amended in 1996.

Yet, despite the fact that the terms of the launch trade agreement have been fully complied with and the trade criteria for lifting the quota have been met -- and, further, despite the fact that our Russian partners are not engaged in proliferation the quota continues, albeit at a new ceiling of 20 launches. Mr. Chairman, this is a good first step toward the elimination of the quota.

It demonstrates that the Administration recognizes the importance of this venture and that its near term viability is dependent on the continued availability of Proton launch services.

But the fact remains that the quota should be lifted entirely. As long as the quota exists, there will continue to be uncertainty as to the long term viability of this joint venture.

Therefore, it will be necessary to increase the number of allowed launches before the expiration of the Launch Trade Agreement at the end of next year. In holding the quota hostage to the proliferation issue, under these circumstances, US credibility to make and keep its trade-related commitments may be seriously compromised.

If Proton is not allowed to enter into a free and open trade environment, not only will this be ignoring requirements outlined in our country's National Space Policy, our space industrial base could be threatened along with Russia's economic stability.

Should this occur, the principal beneficiary would be the French Ariane program, currently the only launch system capable of taking the heavier payloads to GTO orbits.

The US would lose market share in the highly competitive international launch market; it would lose the positive non-proliferation incentives the LKEI venture provides to Russia; and the RD-180 engine program could be adversely impacted.

This Russian engine, the best rocket engine in the world, is currently available to Lockheed Martin in the US through a United Technologies/Pratt & Whitney and NPO Energomash joint venture, RD-AMROSS, that was established in 1997.

This joint venture has two key components: RD-180 engines built in Russia, that will power our new commercial Atlas vehicles, the Lockheed Martin Atlas III and Atlas V, and through a co-production arrangement, the RD-180 engine for the Lockheed Martin EELV launch system, the Atlas V, will be produced in the United States and will power the next-generation launch system for US government payloads. The reliability and consistency of the US as a partner in joint ventures with Russia is critical to their success.

In conclusion, Mr. Chairman, I believe that -- in the specific instance of the Proton space launch quota we need a more reasoned, deliberative process to increase the chances that U.S. policies will achieve their desired results. Removing the quota on commercial Proton launch services now and preserving the LKEI venture, will yield significant economic and national security benefits to the United States.

Launcher: SpaceDaily Special Report

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