CHAPTER
19
Smarter Budgeting for Space Missions
Mr. President, I strongly recommend that your administration reform the method by which the National Aeronautics and Space Administration (NASA) budget is allocated and administered. Doing so will avoid the massive cost overruns that plague the space station, space shuttle, Hubble telescope, and virtually every other ongoing program. Unless corrected, this problem will undermine all future NASA projects as well. The new approach that I propose—known as “incentive-compatible” institutional design—will accomplish two challenging objectives: it will minimize wasteful spending and, at the same time, enable NASA to better manage the highly uncertain costs naturally associated with space missions that push the frontier of technological know-how.
Background
Cost overruns have caused the space station and shuttle programs virtually to shut down—an embarrassingly detrimental outcome for the space program and the United States. The space shuttle program faced a $1 billion shortfall even before the Columbia shuttle accident in 2003, and the international space station is $4.8 billion, or 40 percent, over budget. NASA has had to cut the space station budget, cancel a habitation module and crew-escape vehicle, and reduce the station’s crew from seven to three.
One of the rationales that NASA often offers for its budgetary problems is that developing new space technology is inherently uncertain. As a result, the agency justifies perennial cost overruns. Reforming the NASA budget will both provide incentives to minimize cost overruns and help ensure that the agency carries out any space vision that you may have with financial and technical success.
At present, a built-in incentive exists for wasteful spending because of the way the NASA budget is distributed within the agency. Contrary to public impression, the bulk of the nation’s space activities—and the bulk of our $15 billion public expenditure on space each year—takes place not at NASA headquarters in Washington, but at NASA centers and facilities located across the country (see Figure 19-1).
Figure 19-1 NASA facilities and the regions they serve.
Some observers have suggested that it is time for an independent commission to review these facilities, much as the Department of Defense did in the process of military base closures and realignment that began in the late 1980s and continues today. The 2004 Presidential Commission on Moon, Mars, and Beyond recommends that NASA facilities be reorganized as federally funded research and development centers (FFRDCs). A review of NASA’s facilities could lead to a variety of outcomes, including closing some facilities outright, combining the functions of different NASA centers, establishing the centers as FFRDCs, redirecting a specific mission or function of a center, or even forming public-private partnerships to lease out underused facilities.
In short, there is wide leeway for a creative, fresh look. But even if some of these steps were taken, and even if some centers were closed, a key problem will still loom large at NASA facilities: how best to manage the highly uncertain costs associated with some missions that push the frontier of technological know-how—the kind of research and development that is unlikely to be carried out profitably by the private sector. Development and testing of one-of-a-kind instruments, spacecraft, and propulsion and launch systems can be expensive, be technologically risky, and result in unmarketable products. But this fact should not result in your giving a blank check to NASA centers that conduct critical R&D.
A key problem will remain: how best to manage the highly uncertain costs associated with missions that push the frontier of technological know-how.
How are you, as well as the NASA administrator, the Office of Management and Budget, Congress, and the public, to know what a new technology, fraught with unknowns, should cost? And why are there almost always cost overruns? Certainly underruns are possible, but the present system discourages them, because it gives the NASA centers no incentive to save. As with most government agencies, the budget process takes away savings rather than rewards them.
Recommendations
The best solution is one studied by space policy analysts, an approach specifically tailored to the problem NASA faces. The innovation here is an entirely new relationship between NASA headquarters and its centers in managing the cost of space projects. At present, the centers carry out missions subject to costs that are capped at a budget negotiated early in mission design and planning. These caps pose severe problems. Projects can encounter unexpected design, fabrication, testing, and integration troubles. And the cap may not give a manager the leeway needed to innovate in order to solve the problem. In addition, managers admit that they avoid taking the risks inherent in innovation, preferring to stick too closely with reliable, proven technology. These safe bets may help mission launch and deployment, but sticking with old technology may well reduce the returns to science—the new information, data, and insights that could be gained from a more daring approach that truly pushes the space frontier.
Managers admit that they avoid taking the risks inherent in innovation, preferring to stick too closely with reliable, proven technology.
The caps work the other way, too. They provide little incentive to save money if any appropriate cost reductions occur to engineers while carrying out the mission. Many managers report that they hurry to spend their budgets as the end of the fiscal year approaches, lest they “lose” the money.
These problems could be avoided, or at least reduced, if the centers had a pool of funds they could draw from for overruns or add to if managers and engineers find ways to save costs; and in this case, cost savings would not be taken away. Centers would have ownership and discretion for use of the funds, provided they maintain solvency and are subject to some general rules governing oversight. The rules could permit centers to use some of the funds for certain types of other investments, too, such as infrastructure or staff training.
To illustrate how this “bank account” approach might work, suppose that a NASA center is to design, build, test, and then launch a new rover for Mars within the next two years. The engineers face numerous engineering trade-offs: how much automation to build onboard the spacecraft versus relying on commands from controllers on the ground; how much onboard electrical power to provide, which ultimately determines how long the spacecraft can operate; and how much new technology to try out versus relying on old, off-the-shelf technology. Given the fast pace of technological innovations in lightweight high-strength materials, new battery designs, and new robotics techniques, engineers may find new ways of accomplishing the project during its two years of construction, and some of them are likely to save money. The incentive to take advantage of such savings is absent under the present system, but if the center can keep any savings, reallocating them to the next project or to other activities such as upgrading the center’s infrastructure or offering employee rewards, this would give engineers a much stronger motivation to make trade-offs that make sense. The account approach also is likely to balance the tendency for managers to understate their initial estimates of project costs, a practice that often causes the White House to be grossly misinformed about what a project is likely to cost.
A “bank account” approach would allow the center to keep any savings, reallocating them to the next project or to other activities such as upgrading infrastructure or offering employee rewards.
Would center “bank accounts” work? Researchers at Caltech, Purdue, and other institutions have tested the idea in hypothetical mission design projects involving real NASA managers. Compared with business as usual, the bank account approach worked well. Bank accounts led to less cost escalation during the life of the project, reduced mission costs overall, resulted in fewer delayed missions, brought equal if not greater scientific return, and encouraged more innovation. The approach gets financial incentives right, much in the same way that the U.S. Federal Communications Commission has successfully auctioned licenses to use some regions of the electromagnetic spectrum. Those auctions brought new opportunities for innovative telecommunications products and low prices for consumers. The approach also is similar to the now routine buying and selling of pollution permits by electric utilities under the oversight of the Environmental Protection Agency.
Conclusions
A significant step separates experimental settings from the real-world operation of an agency. But countless examples in the public and private sectors show that financial incentives do work. They can and should play a much greater role at NASA. Because the approach deals with the budget, it may well require congressional approval. And like any major reform, it will take time and leadership to achieve acceptance and implement a new way of doing business. But alternatives such as center closing and realignment also would be radical reform and likely unpopular. Please consider banking on the centers to do their job.
M.K.M.