I’m taking a break from writing about my experiences in leading a team to share an intriguing topic from my recent past. The motivation is from some light reading I did while on vacation. (Yeah yeah, I know – a vacation is meant as an opportunity to get away, yet I’m compelled to read.) During this past week I read a paper written by Eva-Jane Lark (@EVA_Interviews on Twitter) for the 2006 International Space Development Conference entitled, “Investment Financing of Exploration to New Worlds.” It’s a fascinating paper which you can download from here. While I was reading it, I was struck by some analogies Eva made that were similar to some I made in a different context. It is that context that I’m going to share with you today, simply put as this: How much SHOULD it cost to operate the International Space Station each year?
The obvious answer is that “it costs what it costs.” Yet that answer does not sit well with me. NASA is dealing with never-ending budgetary challenges, and answers like that are irresponsible in my view to the American taxpayer. Every dollar we spend in operations costs is a dollar taken away from development and exploration, which is what I view as the true mission of NASA. I was slowly formulating this point as one of my personal values while I was in NASA’s leadership development program and articulated as much to a NASA executive one evening at a social gathering. A few months later he gave me the opportunity to “put my money where my mouth was” and issued me a challenge: figure out how the annual operations cost of ISS compares with other “similar entities.”
I accepted the challenge, and paused immediately: what is a “similar entity” to ISS?
The 2005 NASA Authorization Act designated the US segment of the ISS as a national laboratory and directed NASA to develop a plan to “increase the utilization of the ISS by other Federal entities and the private sector…”. So, one obvious direct and relevant comparison would be to compare the cost to operate ISS versus the cost to operate other national labs. Yet is that a fair comparison? Other national labs are not in orbit 200 miles above the earth and don’t have to deal with the extreme and harsh conditions of low earth orbit. So merely performing a comparison against other national labs would be incomplete, in my opinion. Well, there are classes of national labs that do exist in extreme conditions – the various research bases in Antarctica, such as McMurdo Station and the South Pole Station. Better, but still not an exact match.
Really, there is no exact analog of the ISS to be found, at least in the very brief six weeks I had available to do my study. There are entities that come close, but not close enough. Therefore, I chose to gather data on as many “near-similar” entities as I could get quickly, based upon various characteristics in common with ISS, analyze the data associated with the annual operations costs of each, and draw conclusions based upon the comparative analysis. Here are the six major characteristics that drive the operations costs for ISS and families of entities I identified as having that characteristic:
- High dollar-cost entities that have labor costs constituting an appreciable fraction of the operations cost – Aircraft Carrier Programs (conventional and nuclear)
- Entities that are research oriented and are funded within the federal budgetary environment – NASA Research Centers, Federal Laboratories (such as Berkeley National Lab, Los Alamos, and the South Pole Station) and Federal Projects (such as Keck Observatory)
- Entities that have a focus on research and development – Drug/Pharmaceutical Companies, Biotechnology Companies, Semiconductor Companies and Computer Storage Device Companies
- Entities with an exploration focus – Independent Oil & Gas Companies
- Entities that involve the operation of ground- and space-based infrastructures – Satellite-Based Operations Companies (such as Iridium, DirecTV, and Sirius Satellite Radio)
- High dollar-cost entities that operate for long periods of time as self-contained environments – Nuclear Powered Submarine Programs
The next challenge is this: how should the annual operations costs for the above be analyzed on a level playing field? The choice I made was to make a comparison on something I call the “capitalization” cost, defined roughly as the value of the entity. For ISS, this is easily understood in terms of the cost to build it in the first place. Other similar values can be obtained for the entities based upon construction cost, replacement value, or market capitalization. What is interesting, and perhaps somewhat intuitive, is that the annual operations cost for each of the above entities is somewhat related to the capitalization cost: in general, the more expensive the entity is in capitalization, the more expensive its annual operations cost is likely to be. I chose entities within the above families with capitalization costs above and below ISS. Although the cost to build ISS is fairly large in everyday terms at roughly $25 billion (not including launch costs), many of the large commercial companies in my sample population, such as pharmaceuticals, have capitalization costs that are much larger than that of ISS. I found 60 entities that bracketed ISS in capitalization cost, ranging from capitalization costs of $100 million (with an “M”) to $100 billion (with a “B”). Roughly 20% of the entities in the sample were above ISS in capitalization cost.
Once I gathered the data for my entities, the next step was to determine where ISS fell in comparison. The method I chose was through statistical analysis, from which I built a model that would predict an annual operations cost based upon a given capitalization cost. Using capitalization costs and annual operations costs for the above entities, and a little linear regression, I built a model that predicts an annual operations cost (in 2005 dollars) of $2.4 billion for the ISS. The nature of statistics is in predicting probabilities, not certainties; the relevant quantity here is that the model predicts a lower bound annual operations cost of about $1.2 billion and a upper bound of about $6 billion (again, all in 2005 dollars). So, how well does ISS’s actual annual operations cost match the model? Actually, fairly well. At the time of my study, the ISS annual operations cost was around $1.3 billion (in 2005 dollars), which says it is near the lower bound that the model predicts. You can read the gory details here.
What I concluded from my study is this: the annual operations budget for ISS is about as low as it can go given the investment made in the infrastructure. (Some out-year planning had a higher operations cost, closer to the $2.4 billion value, and it is those years that I would encourage us to look at carefully when those years are ready for appropriations.) However, there is a BIG and important underlying assumption in the comparison: that ISS produces results on par with the entities in the sample. One can spend tremendous amounts of money building something, and each year in operating it; yet if the results aren’t there, what have we gained? I see a strong need for a right-sized operations cost built in partnership with OMB and Congress, one at a level necessary to operate a $25 billion dollar investment. I also see a strong need for NASA to better communicate the purpose and results we are achieving with ISS. I assert (and this is my position alone and does not represent any official policy from NASA) that we need to achieve and share compelling results comparable to the entities in the study to justify the cost of ISS as a national lab. Now that we have a six-person crew on board ISS, we’re out of excuses. It’s time to produce.
I hope my bosses are reading this.