[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]



                       NASA CONTESTS AND PRIZES:
                       HOW CAN THEY HELP ADVANCE
                           SPACE EXPLORATION?

=======================================================================

                                HEARING

                               BEFORE THE

                 SUBCOMMITTEE ON SPACE AND AERONAUTICS

                          COMMITTEE ON SCIENCE
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                               __________

                             JULY 15, 2004

                               __________

                           Serial No. 108-66

                               __________

            Printed for the use of the Committee on Science


     Available via the World Wide Web: http://www.house.gov/science


                                 ______

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                          COMMITTEE ON SCIENCE

             HON. SHERWOOD L. BOEHLERT, New York, Chairman
RALPH M. HALL, Texas                 BART GORDON, Tennessee
LAMAR S. SMITH, Texas                JERRY F. COSTELLO, Illinois
CURT WELDON, Pennsylvania            EDDIE BERNICE JOHNSON, Texas
DANA ROHRABACHER, California         LYNN C. WOOLSEY, California
KEN CALVERT, California              NICK LAMPSON, Texas
NICK SMITH, Michigan                 JOHN B. LARSON, Connecticut
ROSCOE G. BARTLETT, Maryland         MARK UDALL, Colorado
VERNON J. EHLERS, Michigan           DAVID WU, Oregon
GIL GUTKNECHT, Minnesota             MICHAEL M. HONDA, California
GEORGE R. NETHERCUTT, JR.,           BRAD MILLER, North Carolina
    Washington                       LINCOLN DAVIS, Tennessee
FRANK D. LUCAS, Oklahoma             SHEILA JACKSON LEE, Texas
JUDY BIGGERT, Illinois               ZOE LOFGREN, California
WAYNE T. GILCHREST, Maryland         BRAD SHERMAN, California
W. TODD AKIN, Missouri               BRIAN BAIRD, Washington
TIMOTHY V. JOHNSON, Illinois         DENNIS MOORE, Kansas
MELISSA A. HART, Pennsylvania        ANTHONY D. WEINER, New York
J. RANDY FORBES, Virginia            JIM MATHESON, Utah
PHIL GINGREY, Georgia                DENNIS A. CARDOZA, California
ROB BISHOP, Utah                     VACANCY
MICHAEL C. BURGESS, Texas            VACANCY
JO BONNER, Alabama                   VACANCY
TOM FEENEY, Florida
RANDY NEUGEBAUER, Texas
VACANCY
                                 ------                                

                 Subcommittee on Space and Aeronautics

                 DANA ROHRABACHER, California, Chairman
RALPH M. HALL, Texas                 NICK LAMPSON, Texas
LAMAR S. SMITH, Texas                JOHN B. LARSON, Connecticut
CURT WELDON, Pennsylvania            MARK UDALL, Colorado
KEN CALVERT, California              DAVID WU, Oregon
ROSCOE G. BARTLETT, Maryland         EDDIE BERNICE JOHNSON, Texas
GEORGE R. NETHERCUTT, JR.,           SHEILA JACKSON LEE, Texas
    Washington                       BRAD SHERMAN, California
FRANK D. LUCAS, Oklahoma             DENNIS MOORE, Kansas
J. RANDY FORBES, Virginia            ANTHONY D. WEINER, New York
ROB BISHOP, Utah                     VACANCY
MICHAEL BURGESS, Texas               VACANCY
JO BONNER, Alabama                   VACANCY
TOM FEENEY, Florida                  BART GORDON, Tennessee
VACANCY
SHERWOOD L. BOEHLERT, New York
                BILL ADKINS Subcommittee Staff Director
                 ED FEDDEMAN Professional Staff Member
              RUBEN VAN MITCHELL Professional Staff Member
                  KEN MONROE Professional Staff Member
                 CHRIS SHANK Professional Staff Member
         RICHARD OBERMANN Democratic Professional Staff Member
                      TOM HAMMOND Staff Assistant


                            C O N T E N T S

                             July 15, 2004

                                                                   Page
Witness List.....................................................     2

Hearing Charter..................................................     3

                           Opening Statements

Statement by Representative Dana Rohrabacher, Chairman, 
  Subcommittee on Space and Aeronautics, Committee on Science, 
  U.S. House of Representatives..................................    13
    Written Statement............................................    14

Statement by Representative Nick Lampson, Ranking Minority 
  Member, Subcommittee on Space and Aeronautics, Committee on 
  Science, U.S. House of Representatives.........................    14
    Written Statement............................................    15

Statement by Representative Eddie Bernice Johnson, Member, 
  Subcommittee on Space and Aeronautics, Committee on Science, 
  U.S. House of Representatives..................................    17
    Written Statement............................................    17

Statement by Representative Sheila Jackson Lee, Member, 
  Subcommittee on Space and Aeronautics, Committee on Science, 
  U.S. House of Representatives..................................    50
    Written Statement............................................    51

                               Witnesses:

Rear Admiral Craig E. Steidle, USN (Ret.), Associate 
  Administrator for Exploration Systems, National Aeronautics and 
  Space Administration (NASA)
    Oral Statement...............................................    18
    Written Statement............................................    20

The Hon. Robert S. Walker, Chairman, Wexler & Walker Public 
  Policy Associates
    Oral Statement...............................................    25

Dr. Peter H. Diamandis, Chairman and CEO, X-Prize Foundation
    Oral Statement...............................................    26
    Written Statement............................................    28

Dr. Molly K. Macauley, Senior Fellow, Resources for the Future
    Oral Statement...............................................    31
    Written Statement............................................    34
    Biography....................................................    41

Dr. Douglas Holtz-Eakin, Director, Congressional Budget Office
    Oral Statement...............................................    42
    Written Statement............................................    43

Discussion
  Organization of Prizes.........................................    47
  Budget Treatment for Prizes....................................    53
  Prizes and Diversity...........................................    53
  Safety.........................................................    55
  Public vs. Private Prizes and Return on Investment.............    58

              Appendix: Answers to Post-Hearing Questions

Rear Admiral Craig E. Steidle, USN (Ret.), Associate 
  Administrator for Exploration Systems, National Aeronautics and 
  Space Administration (NASA)....................................    62

The Hon. Robert S. Walker, Chairman, Wexler & Walker Public 
  Policy Associates..............................................    69

Dr. Peter H. Diamandis, Chairman and CEO, X-Prize Foundation.....    73

Dr. Molly K. Macauley, Senior Fellow, Resources for the Future...    77

Dr. Douglas Holtz-Eakin, Director, Congressional Budget Office...    80

 
 NASA CONTESTS AND PRIZES: HOW CAN THEY HELP ADVANCE SPACE EXPLORATION?

                              ----------                              


                        THURSDAY, JULY 15, 2004

                  House of Representatives,
             Subcommittee on Space and Aeronautics,
                                      Committee on Science,
                                                    Washington, DC.

    The Subcommittee met, pursuant to call, at 10:06 a.m., in 
Room 2318 of the Rayburn House Office Building, Hon. Dana 
Rohrabacher [Chairman of the Subcommittee] presiding.



                            hearing charter

                 SUBCOMMITTEE ON SPACE AND AERONAUTICS

                          COMMITTEE ON SCIENCE

                     U.S. HOUSE OF REPRESENTATIVES

                       NASA Contests and Prizes:

                       How Can They Help Advance

                           Space Exploration?

                        thursday, july 15, 2004
                         10:00 a.m.-12:00 p.m.
                   2318 rayburn house office building

1. Purpose

    On Thursday, July 15, 2004, the Subcommittee on Space and 
Aeronautics of the Committee on Science will hold a hearing to examine 
whether and how the National Aeronautics and Space Administration 
(NASA) could use prizes to spur innovation.
    NASA has requested permission to begin a small prize program and is 
seeking legislative authority to run an expanded program. (See details 
below.)
    The type of prizes NASA would offer are known as ``inducement 
prizes''--prizes offered to induce someone to undertake research with a 
particular goal--as opposed to prizes given for previous achievements 
(such as the Nobel Prize).
    In its report issued last month, the President's Commission on 
Implementation of United States Space Exploration Policy (also known as 
the Aldridge Commission for its Chairman, former Under Secretary of 
Defense Edward ``Pete'' Aldridge) recommended that NASA offer 
inducement prizes.
    Inducement prizes have also been in the news recently because of 
the flight of Burt Rutan's SpaceShipOne--the first privately financed 
flight into space--which was prompted by the X-Prize, a $10 million 
inducement prize for a human sub-orbital space flight. The X-Prize is 
privately funded and administered by a private foundation that was set 
up for that purpose.

2. Witnesses

Rear Admiral Craig E. Steidle (Ret.) is the Associate Administrator at 
NASA for Exploration Systems, and oversees the Centennial Challenges 
program, NASA's program of prize contests.

The Honorable Robert Walker is the Chairman of Wexler & Walker Public 
Policy Associates and former Chairman of the House Science Committee. 
He was also a member of the Aldridge Commission.

Dr. Peter Diamandis is the Chairman of the X-Prize Foundation, a non-
profit organization dedicated to promoting the formation of a space-
tourism industry through a $10 million prize.

Dr. Molly Macauley is an economist and Senior Fellow with Resources for 
the Future. Dr. Macauley's research interests include space economics 
and policy and the economics of new technologies.

Dr. Douglas Holtz-Eakin is the Director of the Congressional Budget 
Office.

3. Overarching Questions

    The hearing will discuss the following topics:

        1.  What are the advantages and disadvantages of NASA using 
        prizes to spur innovation?

        2.  Should prizes be offered for the development of specific, 
        discrete technologies (such as the development of a better 
        astronaut glove), or for large technological feats (such as 
        sending a person into orbit), or should there be a wide range 
        in the size of prizes?

        3.  To what extent should NASA rely on prize competitions for 
        the development of important new technologies? Should NASA ever 
        rely exclusively on prize competitions for the development of a 
        technology, and if not, how should it determine how to meld 
        competitions with more traditional contracting?

        4.  How can NASA ensure that technologies resulting from a 
        prize competition are safe, as well as relevant to NASA's 
        objectives?

4. NASA's Proposal for Greater Prize Authority

    As part of the Space Exploration Vision that the President 
announced on January 14, NASA proposed the ``Centennial Challenges'' 
program--a set of prize contests for designing particular technologies. 
NASA requested approval from the Appropriations Committee to begin the 
Centennial Challenges this fiscal year by transferring $2 million from 
other programs into the prize effort. The Appropriations Committee 
denied the request, saying it ``was not included as part of the fiscal 
year 2004 budget submission nor was the initiative approved in the 
appropriations Act.''
    This year's program was to award prizes up to $250,000. NASA is 
also seeking statutory authority to expand the program to $50 million 
annually and to allow it to award prizes of up to $10 million (and 
greater amounts, up to $50 million, with the approval of the NASA 
Administrator). NASA included the proposal in the reauthorization bill 
proposal it sent to Congress earlier this year. (See attached list of 
potential contest topics.)

5. Issues

Could prizes open new pathways to technological innovation for NASA?
    Traditionally, NASA has used several tools to spur the development 
of technologies it needs to carry out its mission. It has awarded 
grants to universities and other non-profits, it has relied on its own 
in-house scientists and engineers, and it has drawn up specifications 
and then awarded contracts for the development or procurement of 
specific technologies.
    Prizes would presumably involve less direction from NASA than would 
any of the traditional routes. Instead, NASA would offer a prize for 
the development of a particular technology or achievement, and then 
would wait to see what contestants produced. Proponents of prizes argue 
that this would be less costly and less bureaucratic, and might spur 
more creative thinking. In addition, they argue that inventors and 
entrepreneurs (as opposed to large aerospace corporations) would be 
more able to compete than they can under traditional processes, which 
involve more ``red tape.''
    Some of these benefits are discussed in a 1999 National Academy of 
Sciences report, ``Concerning Federally Sponsored Inducement Prizes in 
Science and Engineering.'' The report recommended that Congress 
encourage federal agencies to experiment more extensively with 
inducement prize contests in science and technology.
    The report noted that traditional peer review processes tend to 
favor proposals that seem safe over those that may produce surprising 
and potentially more innovative results. The report also noted that the 
federal procurement system can be intolerant of risk, and can place 
costly bureaucratic demands on private-sector contractors.
    In summary, the Academy cited prizes as having these benefits:

          the ability to attract a broader spectrum of ideas 
        and participants by reducing the costs and other bureaucratic 
        barriers to participation by individuals or firms;

          the ability of the Federal Government to shift much 
        of the risk and the financial burden of technology development 
        from the government to the contestants;

          the ability to educate, inspire, and mobilize the 
        public for scientific, technological, and societal objectives.

What are the pitfalls of using prizes to spur technology development?
    Prize contests can be less clear-cut than they first appear. 
Problems can develop in the design of the contest, the selection of a 
winner, and in the aftermath.
    First, NASA would have to be careful in its design of prize 
contests. The goal for which the prize was being awarded would have to 
be clearly enough described that contestants (and NASA) had a firm 
sense of what NASA was seeking and why. On the other hand, too detailed 
a description by NASA would limit the kinds of ideas that a contest 
could yield. A very detailed description would not end up being much 
different than contract specifications.
    The selection of a prize winner can also be difficult. Judges need 
to be open to unexpected ideas. There are historical examples of 
revolutionary ideas losing prize contests because the judges were not 
open to unexpected ways of achieving the stated goals. (See below.) On 
the other hand, NASA would also have to be careful to test prize 
entries carefully to ensure that there were no safety or other problems 
that might not be initially apparent.
    Finally, in terms of the aftermath, NASA would have to decide how 
to put a winning idea into actual use. A prize winner might not have 
the financial wherewithal or even the technical capacity to actually 
turn their winning idea into a viable product.
    The 1999 Academy report suggested these steps to avoid some of the 
pitfalls:

          Contest rules should be seen as transparent, simple, 
        fair, and unbiased.

          Prizes should be commensurate with the effort 
        required and goals sought.

          Treatment of intellectual property resulting from 
        prize contests should be properly aligned with the objectives 
        and incentive structure of the prize contest.

    Finally, it is unclear whether prizes would necessarily be a less 
costly way of doing business once all the costs NASA would have to 
incur in running a successful contest are taken into account.
How dependent upon prizes should NASA be for the development of 
        critical technologies?
    If a technology is critical to a NASA objective--returning to the 
Moon by 2020, for example--should NASA depend on prizes for the 
development of relevant technologies? The timing of technology 
development may be easier to control through traditional means of doing 
business (although traditional programs have been plagued by delays at 
times). If NASA wanted to use both prizes and traditional grants and 
contracts to develop a technology, would those two paths be undertaken 
simultaneously? Would those with a contract have an unfair advantage? 
NASA and prize advocates have not yet made clear how they would answer 
such questions.
What kinds of goals are appropriate for prize contests?
    NASA has proposed to use prizes primarily to develop specific, 
discrete technologies necessary to enable space exploration, such as 
the development of a better astronaut glove. However, the Aldridge 
Commission recommended a different type of prize program that would 
``accelerate the development of enabling technologies. As an example of 
a particularly challenging prize concept, $100 million to $1 billion 
could be offered to the first organization to place humans on the Moon 
and sustain them for a fixed period before they return to Earth.'' (p. 
33)
    The Commission did not elaborate on the idea. It is unclear, for 
example, what responsibility NASA would have, if any, for ensuring the 
safety of participants--or even if NASA would have any role at all 
other than seeing if the expedition succeeded. Nor did the Commission 
discuss how NASA would evaluate the long-term viability of whatever 
technology was used on such a mission or how NASA would use any 
technology that resulted. In one view, NASA would just stand back and 
offer prizes to create incentives for a wholly private space endeavor. 
But then would the government take on any manned missions itself?
    In general, the more complex the goal of a contest, the more 
complex NASA's role would likely be. (For example, evaluating a set of 
technologies to go to the Moon is a more demanding undertaking than 
evaluating an astronaut's glove.) At some point, the complexity might 
eliminate the advantage of a contest over traditional means of 
technology development.

6. Background

Recent events
    The Defense Advanced Research Projects Agency (DARPA) has been a 
trailblazer in the use of alternative procurement mechanisms. In the 
2000 Defense Authorization Act, Congress gave DARPA authority to offers 
prizes for ``outstanding achievements in basic, advanced, and applied 
research, technology development, and prototype development'' with 
military applications. DARPA has used that authority to establish its 
Grand Challenges program, which is offering prizes for a successful 
field test of autonomous ground vehicles over difficult terrain. In the 
first such test in the Mojave Desert this March, no one won the $1 
million award. The next field test will be held in October 2005 for a 
$2 million prize.
    On June 21, SpaceShipOne, the spacecraft built by Burt Rutan 
completed the first privately funded manned space flight in history. 
The flight was a preliminary test in preparation for an attempt Rutan 
plans to make later this year to win the X-Prize--a $10 million 
privately-sponsored prize awarded to the first team to launch three 
humans up 100 kilometers (62 miles) into space, return them safely to 
Earth, and repeat the launch within two weeks with the same ship. The 
X-Prize has resulted in increased attention to the role of prizes as an 
innovative way of attracting non-traditional players to the space 
industry. (See attached article.)

History
    Inducement prizes have been used for centuries.
    One well known example is described in the best-selling book 
Longitude by Dava Sobel. By the 17th century sailors had mastered the 
ability to determine their exact latitude at sea, but calculating their 
exact longitude proved to be more complicated. In 1714, through an Act 
of Parliament, the British Government offered a reward of 
20,000 (millions of dollars in today's money) for a 
``practical and useful'' method of accurately determining longitude at 
sea. The size of the prize reflected both the importance of the issue 
and the fact that no reliable method was within reach at the time. John 
Harrison, a working class man with little formal education, eventually 
solved the problem by developing the first accurate clock that kept 
time accurately even during a ship's pitching and rolling at sea. 
However, despite the proven test of his invention at sea, the group 
administering the prize (the Board of Longitude) refused to award him 
the prize money--which historians attribute to the Board's domination 
by astronomers who favored a rival, astronomy-based method of 
determining longitude. The longitude case illustrates both the ability 
of a large prize to draw serious proposals and the problems that can 
arise if the judges have conflicts of interest.
    Other prize contests of this type have included privately sponsored 
prizes for feats of aviation in the early part of the 20th century. In 
1919, Raymond Orteig, a New York hotel owner, offered $25,000 to the 
first aviator to cross the Atlantic from New York to Paris (or vice 
versa) without a stop. Charles Lindbergh, an unknown airmail pilot, won 
the Orteig prize on May 28, 1927, 33 1/2 hours after taking off from 
Roosevelt Field on Long Island. During this period, many skilled, 
famous aviators died attempting to win the prize. In fact, the study of 
aviation prizes (and early aviation in general) illustrates that 
fatalities were highly likely in the attempts at such prizes. This 
raises the issue of whether fatalities can be expected in the area of 
prizes associated with manned space flight. If such prizes are 
conducted and a fatality does occur, it is important to determine if 
this could impede the development of such contests and stifle the 
potential innovation that could result from inducement prize programs.

7. Questions for the Witnesses

    The witnesses were asked to address the following questions in 
their testimony:
Questions for Admiral Steidle

        1.  How does NASA plan to design and administer prizes to 
        induce the greatest possible innovation and advances in space 
        technologies? Why has NASA decided to offer prizes for the 
        development of specific, discrete technologies (such as the 
        development of a better astronaut glove) rather than for large 
        technological feats (such as sending a person into orbit)?

        2.  How does NASA plan to ensure that technologies resulting 
        from a competition are safe, as well as relevant to NASA's 
        objectives?

        3.  How involved does NASA plan to be in specifying either the 
        technologies that must be developed (or the goal that must be 
        achieved) to win a prize, overseeing the work of companies 
        competing for prizes, and judging the outcomes of prize 
        competitions? Are there any models NASA is using in designing 
        its prize program?

        4.  What are the benefits and drawbacks of prizes over other 
        ways the government can spur innovation within the private 
        sector? Are prizes better at drawing participation from non-
        traditional players in private sector who are not normally 
        involved in government contracts?

Questions for Mr. Walker

        1.  What are the benefits and drawbacks of prizes over other 
        ways the government can spur innovation within the private 
        sector? Are prizes better at drawing participation from non-
        traditional players in private sector who are not normally 
        involved in government contracts?

        2.  To what extent should prizes supplement or replace the 
        existing methods within NASA of developing new technologies, 
        such as contracting, procurement and grants?

        3.  How can prizes be designed and administered to induce the 
        greatest possible innovation and advances in space 
        technologies? Should they be offered for the development of 
        specific, discrete technologies (such as the development of a 
        better astronaut glove), for large technological feats (such as 
        sending a person into orbit), or should there be a wide range 
        in the sizes of prizes?

        4.  How involved should NASA itself be in specifying either the 
        technologies that must be developed (or the goal that must be 
        achieved) to win a prize, overseeing the work of companies 
        competing for prizes, and judging the outcomes of prize 
        competitions? Wouldn't NASA's involvement in prizes become more 
        intrusive the larger the technological feat that is being 
        encouraged?

        5.  How could NASA ensure that technologies resulting from a 
        competition are safe, as well as relevant to NASA's objectives?

Questions for Dr. Diamandis

        1.  What key ingredients have made the X-Prize so successful in 
        spurring participation by the private sector? To what extent 
        has the X-Prize attracted interest from NASA's traditional 
        contractors to participate in the competition?

        2.  How can prizes be designed and administered to induce the 
        greatest possible innovation and advances in space 
        technologies? Should they be offered for the development of 
        specific, discrete technologies (such as the development of a 
        better astronaut glove), for large technological feats (such as 
        sending a person into orbit), or should there be a wide range 
        in the sizes of prizes?

        3.  Might offering prizes encourage competitors to cut corners 
        when it comes to safety? How could NASA ensure that 
        technologies resulting from a competition are safe, as well as 
        relevant to NASA's objectives?

        4.  Should NASA offer prizes or are they best offered only by 
        private organizations such as yours? If you believe NASA should 
        fund prizes, how involved should NASA itself be in specifying 
        either the technologies that must be developed (or the goal 
        that must be achieved) to win a prize, overseeing the work of 
        companies competing for prizes, and judging the outcomes of 
        prize competitions? Wouldn't NASA's involvement in prizes 
        become more intrusive the larger the technological feat that is 
        being encouraged?

        5.  What needs to happen to transition technologies from a 
        prize winner to a successful ongoing concern? What are the 
        steps the Federal Government can take to make that transition 
        more likely?

Questions for Dr. Macauley

        1.  What are the benefits and drawbacks of prizes over other 
        ways the government can spur innovation from the private 
        sector? Are prizes better at drawing participation from non-
        traditional players in private sector who are not normally 
        involved in government contracts?

        2.  Some have argued that either the design or administration 
        of certain prizes (e.g., the Longitude Prize) was biased 
        towards a particular technological solution. Are there lessons 
        from the historical record of scientific and technological 
        inducement prizes that could be learned to avoid potentially 
        serious flaws in the design and administration of such 
        programs?

        3.  How can prizes be designed and administered to induce the 
        greatest possible innovation and advances in space 
        technologies? Should they be offered for the development of 
        specific, discrete technologies (such as the development of a 
        better astronaut glove), for large technological feats (such as 
        sending a person into orbit), or should there be a wide range 
        in the sizes of prizes?

        4.  Should NASA offer prizes or are they best offered only by 
        private organizations? If you believe NASA should fund prizes, 
        how involved should NASA itself be in specifying either the 
        technologies that must be developed (or the goal that must be 
        achieved) to win a prize, overseeing the work of companies 
        competing for prizes, and judging the outcomes of prize 
        competitions? Wouldn't NASA's involvement in prizes become more 
        intrusive the larger the technological feat that is being 
        encouraged?

        5.  What needs to happen to transition technologies from a 
        prize winner to a successful ongoing concern? What are the 
        steps the Federal Government can take to make that transition 
        more likely?

Questions for Dr. Holtz-Eakin
    Please discuss your view of prizes with respect to the following 
issues:

        1.  How would prizes be scored for budgetary purposes?

        2.  What are the benefits and drawbacks of prizes over other 
        ways the government can spur innovation from the private 
        sector? Are prizes better at drawing participation from non-
        traditional players in private sector who are not normally 
        involved in government contracts?

        3.  How can prizes be designed and administered to induce the 
        greatest possible innovation and advances in space 
        technologies? Should they be offered for the development of 
        specific, discrete technologies (such as the development of a 
        better astronaut glove), for large technological feats (such as 
        sending a person into orbit), or should there be a wide range 
        in the sizes of prizes? Wouldn't NASA's involvement in prizes 
        become more intrusive the larger the technological feat that is 
        being encouraged?

        4.  What is the experience private sector experience in the 
        area of prizes, including the issues of risk and intellectual 
        property?

        5.  What is the experience of the Federal Government in the 
        area of inducement prizes? If Congress were to consider a 
        program of inducement prizes for NASA, what issues does this 
        bring up, and what are the options, for either the 
        authorization or appropriations process?

        6.  What needs to happen to transition technologies from a 
        prize winner to a successful ongoing concern? What are the 
        steps the Federal Government can take to make that transition 
        more likely?

8. Attachments

    New York Times article, ``Into Space, Without NASA'' (August 26, 
2003).

    Summary of candidates for NASA Centennial Challenges prizes.
    
    
    
    Chairman Rohrabacher. Good morning. This hearing will be 
called to order. And welcome to today's hearing entitled NASA 
Contests and Prizes: How Can They Help Advance Space 
Exploration?
    Earlier this week, I collaborated with the American 
Institute of Aeronautics and Astronautics in holding a 
roundtable discussion, which Bob Walker, of course, was 
moderator, on how commercial space transportation activities 
can be utilized to enhance and facilitate the national space 
exploration initiative. Not surprising, the topic of 
competitive prizes dominated the discussion. The panel 
participants agreed that prizes provide a potentially critical 
near-term solution for re-invigorating the Nation's civil and 
commercial space capabilities. Today's hearing will continue 
that discussion, but we will continue that discussion on the 
record by examining whether and how federally-sponsored prizes 
inspire private sector innovation and encourage the development 
of advanced technologies for space exploration.
    Space entrepreneurs are anxious for policies that encourage 
further commercial activities and for future opportunities in 
space transportation. I was particularly pleased that the 
Aldridge Commission recommended prizes as a significant means 
for increasing the private sector's involvement in space 
exploration. The good efforts of the Commission and the X-Prize 
have given us the historic opportunity to do space in a smarter 
way. In particular, the organizers of the X-Prize contest never 
wavered in their belief that non-traditional players some day 
would make a tremendous impact on space transportation. Indeed, 
last month Burt Rutan's hybrid spacecraft design successfully 
achieved suborbital flight and safely returned a human to 
Earth. In performing this monumental task, he demonstrated that 
space travel is no longer the sole domain of government. This 
is compelling. It is a compelling example that a revamped 
national space program fueled by inspired market-based 
creativity and innovation holds promise for America in the 
exploration and utilization of space.
    As we go forward in further study of this concept, critical 
issues will need to be addressed. What are the difficulties in 
establishing a process to oversee the management of space 
prizes on behalf of NASA? Should these prizes be within NASA or 
outside of NASA? Is a separate space foundation the best way to 
go? How do we determine the appropriate level for space prizes? 
What space exploration missions or objectives are suitable for 
competitive prizes? Our expert of witnesses will provide us 
today and we hope with some very useful thoughts and some 
creative ideas of their own when it comes to these issues and 
how to make these things real.
    We will celebrate the 35th anniversary of Apollo 11, that 
mission to the Moon, next week on July 20. In recognizing the 
courageous achievements of Armstrong and Aldrin, and Collins, 
let us not forget that equally dedicated and courageous 
individuals are now coming forward to write a second chapter of 
America's space experience. These new pioneers are to be 
applauded for their efforts in charting our future in the--in 
space. I think of them sort of, as I mentioned at the 
roundtable, as, perhaps, the Hans Solos of this generation, 
maybe inspired by that film of the last generation.
    So I am encouraged that today's hearing will help us move 
forward and will help us see if this concept can be made real 
in terms of space prizes.
    [The prepared statement of Chairman Rohrabacher follows:]

            Prepared Statement of Chairman Dana Rohrabacher

    Earlier this week, I collaborated with the American Institute of 
Aeronautics and Astronautics in holding a roundtable discussion on how 
commercial space transportation activities can be utilized to enhance 
and facilitate the national space exploration initiative. Not 
surprising, the topic of competitive prizes dominated the discussion. 
The panel participants agreed that prizes provide a potentially 
critical, near-term solution for reinvigorating the Nation's civil and 
commercial space capabilities. Today's hearing will continue that 
discussion by examining whether and how federally sponsored prizes 
inspire private sector innovation and encourage development of advanced 
technologies for space exploration.
    Space entrepreneurs are anxious for policies that encourage further 
commercial activities and for future opportunities in space 
transportation. I was particularly pleased that the Aldridge Commission 
recommended prizes as a significant means for increasing the private 
sector's involvement in space exploration. The good efforts of the 
Commission and the X-Prize have given us the historic opportunity to do 
space smarter. In particular, the organizers of the X-Prize contest 
never wavered in their belief that non-traditional players some day 
would make a tremendous impact on space transportation. Indeed, last 
month Burt Rutan's hybrid spacecraft design successfully achieved sub-
orbital flight and safely returned a human to Earth. In performing this 
monumental task he demonstrated that space travel is no longer the sole 
domain of government. This is a compelling example that a revamped 
national space program, fueled by inspired market-based creativity and 
innovation, holds the promise of America exploring space.
    As we go forward in further study of this promising concept, 
critical issues will need to be addressed. What are the difficulties in 
establishing a process to oversee the management of prizes on behalf of 
NASA? Is a separate space foundation the best way to go? How do we 
determine the appropriate level for prize awards? What space 
exploration missions or objectives are suitable for competitive prizes? 
Our expert of witnesses will provide us with their views and opinions 
on these and other critical issues.
    We will celebrate the 35th anniversary of the Apollo 11 mission to 
the Moon next week on July 20th. In recognizing the courageous 
achievements of Neil Armstrong, Buzz Aldrin, and Mike Collins, let us 
not forget that equally dedicated and courageous individuals are now 
coming forward to write the second chapter of America's space 
experience. These new pioneers are to be applauded for their efforts in 
charting our future in space. I am encouraged that today's hearing will 
help us move towards that future.

    Chairman Rohrabacher. Now Mr. Lampson, you may have a few 
words to say.
    Mr. Lampson. Thank you, Mr. Chairman.
    And I was most curious to know about your house full of 
babies and how well they are doing, and I am anxious to meet 
them one of these days.
    Chairman Rohrabacher. Technology helps there, too.
    Mr. Lampson. Well, good morning, everyone. And I also want 
to welcome our witnesses this morning to today's hearing, 
including Bob Walker, the former Chairman of the Science 
Committee.
    We are here today to examine the role that government-
sponsored prizes might play in promoting the development of 
needed space technologies and, equally important, how such 
prize programs would need to be structured to be both effective 
and efficient. While there are numerous precedence for prizes 
offered by individuals and organizations in the private sector, 
there has been little experience today with governmentally-
supported incentive prizes or contests. The often-sited 
Longitude Prize, first offered by the British Government in 
1714, provides a historical example of the potential value of 
incentive prizes. On the other hand, it took decades and some 
politics for that prize finally to be awarded to the inventor 
of the first accurate marine chronometer. In addition, the 
winning inventor was, in fact, ``sustained for many years by 
research grants from the group administering the prize.'' That 
is a quote from a 1999 National Academy's report. And that is a 
fact that is not often acknowledged.
    The most recent government-sponsored prize appears to be 
the DARPA Grand Prize Challenge, which has not yet produced a 
winner. Nonetheless, DARPA indicates that it is pleased with 
what has been accomplished to date. I think we need to take a 
serious look at prizes, strip away the hyperbole, and determine 
a few things: when such prizes make sense; what it would cost 
to provide adequate prize incentives; and thirdly, how the 
rules governing the prizes should be structured.
    There is no question that the recent success of 
SpaceShipOne in reaching the edge of space has generated a lot 
of excitement. I applaud Burt Rutan's achievement, as mentioned 
by the Chairman. I wish all of his X-Prize competitors the best 
with luck.
    The development of a healthy commercial space sector is 
important to the future of this country, and it is something 
that I have long supported. It can also provide valuable 
capabilities to aide the Nation's civil space program, and 
perhaps prizes could have and could play a role in increasing 
the involvement of the private sector, and I look forward to 
hearing from our witnesses on that particular point.
    However, the establishment of incentive prizes should not 
be viewed as a substitute for adequate and sustained investment 
by the Federal Government in aeronautics and space R&D. We need 
to support a robust NASA budget this year and in the years to 
come. I hope that today's focus on prizes will not divert from 
the importance of continuing that critical federal involvement 
in space exploration and utilization.
    I want to offer an apology to our panel. I have a conflict. 
I am going to not be able to stay for the entire period. I 
will, indeed, look at all of what your comments and the 
questions and answers are, so forgive me for not--I assure you, 
this is one of the things that my greatest interest, as the 
Chairman knows, and I find it difficult for me to place a 
higher priority than this, but sometimes it just has to be 
done.
    So again, I welcome you and thank you very much for coming. 
I look forward to learning more about your testimony, and I 
yield back my time, Mr. Chairman.
    [The prepared statement of Mr. Lampson follows:]

           Prepared Statement of Representative Nick Lampson

    Good morning. I'd like to welcome the witnesses to today's hearing, 
including in particular Bob Walker, the former Chairman of the Science 
Committee. We are here today to examine the role that government-
sponsored prizes might play in promoting the development of needed 
space technologies and equally importantly, how such prize programs 
would need to be structured to be both effective and efficient.
    While there are numerous precedents for prizes offered by 
individuals and organizations in the private sector, there has been 
little experience to date with governmentally-supported incentive 
prizes or contests. The oft-cited ``Longitude'' prize first offered by 
the British government in 1714 provides a historical example of the 
potential value of incentive prizes. On the other hand, it took decades 
and some politics for that prize finally to be awarded to the inventor 
of the first accurate marine chronometer. In addition, the winning 
inventor was in fact ``sustained for many years by research grants from 
the group administering the prize'' [to quote a 1999 National Academies 
report], a fact not often acknowledged. The most recent government-
sponsored prize appears to be the DARPA ``Grand Challenge'' prize, 
which has not yet produced a winner. Nonetheless, DARPA indicates that 
it is pleased with what has been accomplished to date.
    I think we need to take a serious look at prizes, strip away the 
hyperbole, and determine:

          when such prizes make sense,

          what it would cost to provide adequate prize 
        incentives, and

          how the rules governing the prizes should be 
        structured.

    There is no question that the recent success of SpaceShip One in 
reaching the edge of space has generated a lot of excitement. I applaud 
Burt Rutan's achievement, and I wish all of his X-Prize competitors the 
best of luck. The development of a healthy commercial space sector is 
important to the future of this country, and it's something I have long 
supported. It can also provide valuable capabilities to aid the 
Nation's civil space program. And perhaps prizes could have can play a 
role in increasing the involvement of the private sector--I look 
forward to hearing from our witnesses on that point.
    However, the establishment of incentive prizes should not be viewed 
a substitute for adequate and sustained investment by the Federal 
Government in aeronautics and space R&D. We need to support a robust 
NASA budget this year and in the years to come. I hope that today's 
focus on prizes will not divert from the importance of continuing that 
critical federal involvement in space exploration and utilization.
    That said, I again want to welcome our witnesses, and I look 
forward to your testimony.

    Chairman Rohrabacher. Well, thank you very much. And you 
know, no one can doubt your commitment. You are the ultimate 
activist in these things, so I hope you are successful in 
your--okay.
    Today we have some fine witnesses with us, and I would like 
to introduce them at this time. And we have with us, of course, 
the Chairman of the Full Committee, Mr. Boehlert. Would you--
Chairman Boehlert, would you like to have an opening statement 
of any kind?
    Mr. Boehlert. No, Mr. Chairman. I applaud you for following 
through on your commitment to this. It is an idea that we are 
all enamored with, and we want to develop it to its maximum 
potential, and you have got great witnesses. Let us hear from 
them.
    Chairman Rohrabacher. All right. Thank you very much.
    So we do have great witnesses. We have Rear Admiral Craig 
Steidle, who is NASA's Associate Administrator for Exploration 
Systems. He oversees the Centennial Challenges Program, NASA's 
program prize contest. And Admiral, we appreciate having you 
here. We will be--and we have had many good meetings together.
    Rear Admiral Steidle. Certainly.
    Chairman Rohrabacher. And the Honorable Bob Walker, Robert 
Walker, who is the Chairman of Wexler & Walker Public Policy 
Associates, and of course, as we have mentioned, former 
Chairman of the House Science Committee, my former boss, also a 
member of the Aldridge Commission, which recommended that NASA 
offer large prizes in order to spur innovation. Peter 
Diamandis, Chairman of the X-Prize Foundation, a non-profit 
organization dedicated to promotion and promoting the formation 
of space tourism through a $10 million prize and a man who is 
now basking in the spotlight of success, and everyone is 
patting him on the back. And when someone succeeds, they get 
pats on the back in politics, and when they fail, there are 
knives in the hands of the people who are patting you on the 
back. And then Dr. Molly Macauley, an economist and Senior 
Fellow with Resources for the Future. Dr. Macauley's research 
interests include space economics and economic policies for new 
technologies. We will all appreciate hearing from you. And Dr. 
Douglas Holtz-Eakin is the Director of the Congressional Budget 
Office, Chairman and someone whose expertise is important for 
us, because every decision in terms of policy also is a 
decision about budget, which we know.
    Chairman Rohrabacher. So our witnesses should know that 
they--we know you have a lot to say, but we would hopefully 
hear only about five minutes at--in your opening statement, and 
then we will get to questions and answers.
    Ms. Johnson from Texas.
    Ms. Johnson. Thank you very much, Mr. Chairman, and Ranking 
Member, who just stepped out, Mr. Lampson, for holding this 
hearing. And let me welcome Mr. Walker, who chaired this 
committee. It is good to see you.
    I understand the purpose of this hearing is to examine 
NASA's proposed Centennial Challenges Prize Program and the 
role that prizes might play in encouraging technological 
developments. At a time when NASA's space program is at a 
virtual standstill because of the unfortunate accident in 
February of 2003 and budget shortfalls, it is increasingly 
necessary that this agency be extremely careful in setting 
priorities for the future.
    With that in mind, I have two major concerns about this 
prize program proposed: safety and fairness. The safety of all 
participants must remain a primary concern since space travel 
is inherently dangerous. Under no circumstances should we allow 
the desire for profit to ever interfere with the responsibility 
of maintaining safety. NASA should also strive for higher 
standards of fairness. This proposed program would award a 
prize upon delivery of a desired technological development. 
Unfortunately, no funding will be provided to the participants 
in advance. While such an approach may bring in some 
entrepreneurs who might not otherwise participate in technology 
development for NASA, it may also eliminate participation of 
researchers from universities or not-for-profit organizations 
who typically are dependent on research grants to support 
themselves and their graduate students. I strongly urge that 
this prize proposal includes stipulations requiring the 
inclusion of small and/or minority-owned businesses and 
educational interests, otherwise, entire segments of our 
business community will be unfairly excluded from participating 
in financially lucrative NASA activities.
    With that being said, I am hopeful that Congress and NASA 
can work together amicably to devise an effective and inclusive 
program. I look forward to hearing the testimony of our 
distinguished witnesses today.
    Thank you, Mr. Chairman, and I yield back.
    [The prepared statement of Ms. Johnson follows:]

       Prepared Statement of Representative Eddie Bernice Johnson

    Thank you, Mr. Chairman. I would like to thank you and Ranking 
Member Lampson for holding this Subcommittee on Space and Aeronautics 
hearing today on Space Prizes.
    The purpose of this hearing is to examine NASA's proposed 
``Centennial Challenges'' prize program and the role that prizes might 
play in encouraging technological developments.
    At a time when NASA's space program is at a virtual standstill 
because of the unfortunate accident in February of 2003 and budget 
shortfalls, it is increasingly necessary that this agency be extremely 
careful in setting priorities for the future.
    With that in mind, I have two major concerns about this prize 
program proposal: safety and fairness.
    The safety of all participants must remain a primary concern since 
space travel is inherently dangerous. Under no circumstances should we 
allow the desire for profits to ever interfere with the responsibility 
of maintaining safety.
    NASA should also strive for a higher standard of fairness. This 
proposed program would award a prize upon delivery of the desired 
technological development. Unfortunately, no funding will be provided 
to the participants in advance.
    While such an approach may bring in some entrepreneurs who might 
not otherwise participate in technology development for NASA, it may 
also eliminate the participation of researchers from universities or 
other not-for-profit organizations, who typically are dependent on 
research grants to support themselves and their graduate students.
    I strongly urge that this prize proposal include stipulations 
requiring the inclusion of small and/or minority owned businesses and 
educational interest. Otherwise, entire segments of our business 
community will be unfairly excluded from participation in financially 
lucrative NASA activities.
    With that being said, I am hopeful that Congress and NASA can work 
together amicably to devise an effective and inclusive program. I look 
forward to hearing the testimony of our distinguished witnesses today.
    Mr. Chair, I yield back my time.

    Chairman Rohrabacher. Thank you very much.
    Now we have heard the yin and the yang, so--Admiral 
Steidle, you might--you may proceed.

 STATEMENT OF REAR ADMIRAL CRAIG E. STEIDLE (RET.), ASSOCIATE 
    ADMINISTRATOR, OFFICE OF EXPLORATION SYSTEMS, NATIONAL 
              AERONAUTICS AND SPACE ADMINISTRATION

    Rear Admiral Steidle. Yes, sir. Thank you very much, sir.
    Mr. Chairman, Members of the Subcommittee, thank you for 
the opportunity to appear today to discuss the past 
accomplishments and the future promise of prize competitions.
    Prize competitions are proving to be an important tool for 
innovation, not only for NASA in our Centennial Challenges 
Program, but for private efforts, like the X-Prize, and other 
federal agencies, like the Defense Advanced Research Projects 
Agency and their Grand Challenges competition. Congress's 
attention and support will be important in the months and years 
ahead for all of these efforts.
    I would like to take just a few minutes, sir, to do a--to 
describe NASA's new prize competition program, Centennial 
Challenges, including how it supports NASA's new direction, the 
program's goals, the past prize competitions that Centennial 
Challenge is modeled on, and the recent developments. And I 
will close by outlining future directions for Centennial 
Challenges and describing how Congress can help to support this 
exciting new program.
    On the 14th of January, President Bush visited us at NASA 
Headquarters and announced a new Vision for Space Exploration. 
Embodied within the vision are many difficult technical 
challenges. Meeting these challenges will require us to unleash 
the best innovative talents our nation has, recognizing that 
NASA needs a dynamic mechanism for tapping the ingenuity of the 
Nation, wherever it may be, we created Centennial Challenges.
    Centennial Challenge is a very different approach from how 
NASA and nearly all federal R&D agencies have traditionally 
gone about technical innovation. Instead of soliciting 
proposals for a grant or contract award, NASA will set a 
technical challenge, the prize amount to be awarded for 
achieving that challenge, and a set of rules by which teams 
will compete for that prize. Through this particular program, 
we hope, first of all, Ms. Johnson, to be fair and safe. We 
hope to stimulate innovation in ways that standard federal 
procurement can not. We hope to enrich NASA's research with 
these new innovations and innovators. We hope to address 
traditional technology development obstacles. And we hope to 
achieve returns that significantly outweigh the program's 
investment. And also, we hope to educate, inspire, and motivate 
the public to participate with us.
    Centennial Challenge is modeled on and grows from the 
successes of prior programs, some of which Congressman Lampson 
eluded to this morning. These prior successes demonstrate the 
important advantages of prize competitions, that being the 
ability to reach out to new inventors, innovators, and risk-
takers and have them apply their experience, thinking, and 
resources toward the development of novel and unorthodox 
solutions. It is exactly these kinds of unexpected winners and 
their ingenious solutions that we hope to identify and 
leverage.
    The science and engineering community has long recognized 
the value of prize competitions. In 1999, the National Academy 
conducted a blue ribbon workshop entitled ``Concerning 
Federally-sponsored Inducement Prizes in Engineering and 
Science.'' The central recommendation of that workshop was that 
Congress should encourage federal agencies to experiment with--
extensively with inducement prize contests in science and 
technology.
    We recognize the need to obtain external inputs on our 
future prize competitions. To obtain these external inputs, we 
held our first annual Centennial Prize Workshop here in DC last 
month. This two-day workshop was a significant success. We had 
over 200 attendees that participated, including representatives 
from both established and emergent aerospace companies, 
representatives from other industry sectors, researchers from 
universities, non-profit organizations, members of various 
financial institutions, educators, students, and hobbyists. It 
was a tremendous success, and we saw an overwhelming support 
for this program.
    About 30 managers from NASA's field centers and from other 
federal R&D agencies and from the X-Prize Foundation moderated 
these particular workshops for us. Keynote speakers included a 
Member of Congress, the President's Science Advisor, and the 
Captain of the Aerospace Industry. Together these participants 
provided invaluable inputs, which are being summarized in a 
report on our website, CentennialChallenges.NASA.gov.
    Simultaneously with this workshop, the President's 
Commission on implementation, thanks to Mr. Walker, the House 
Space Exploration Policy released its report entitled ``A 
Journey to Inspire, Innovate, and Discover.'' Among the many 
important recommendations included, Congress increased the 
potential for commercial opportunities related to the Nation's 
space exploration vision by creating significant monetary 
prizes for the accomplishment of these space missions.
    I would like to take just a second, sir, if I could to 
introduce to you Mr. Brant Sponberg who is sitting behind me 
right here. Brant is my assistant at NASA and is NASA's manager 
of the Centennial Challenges Program. He and his staff are 
currently working extremely hard at revising their program 
plans based on these inputs from these workshops, other 
studies, and the Commission's report in developing specific 
prize competitions. Examples of the kind of challenges that we 
are examining include: complete robotic and human space 
missions, key technologies, leveraging partnering 
opportunities, educational enrichment programs. In all of these 
competitions, it will be important to review the proposed rules 
to ensure that it is safe and fair, that the objective is 
transparent, that they can not be gained by competitors, that 
they will attract a strong field of competitors. Depending on 
the size of the prize purse, we plan to subject the draft rules 
for each competition to independent internal and external 
review. In the case of the largest prizes, we will likely have 
a public comment period to obtain additional inputs on these 
draft rules and processes.
    With the exception of these prize competitions targeted at 
students, we plan to make all challenges open to any U.S. 
competitor who is not a federally employed. The Program Manager 
is committed to keeping overhead costs as low as possible so 
that the maximum amount of funding is available for these 
prizes and purses. And we will shortly release a request for 
information nationally to solicit inputs on how to structure 
the Centennial Challenges support and maintain this low 
overhead.
    And so Congress is extremely important to the success of 
this Centennial Challenges program. We have requested specific 
authority from Congress to conduct large prize competitions 
with purses up to $50 million in size and to retain funding in 
prize purses over multiple years. Both of these authorities are 
important to maximize the agility of the Centennial Challenges 
Program. NASA's fiscal year 2005 budget request for Centennial 
Challenges is $20 million, and NASA has requested a $2 million 
reprogramming change in fiscal year 2004 to start and kick-off 
the Centennial Challenge Program.
    This program is exciting and is an integral part of NASA's 
new direction and significantly a part of the Exploration 
Initiative. It represents an opportunity to reach new 
communities of innovators to find novel solutions to hard 
technical problems that we face in the future. And I greatly 
look forward to our future prize competitions, the new 
approaches that they will inject into our programs, the new 
ways of doing businesses and processes, and I look forward to 
that day where I can shake hands with the first prize winner.
    I thank you, sir, for the opportunity that the Committee 
has provided us today, and I look forward to your questions.
    [The prepared statement of Rear Admiral Steidle follows:]

      Prepared Statement of Rear Adm. Craig E. Steidle, USN (Ret.)

    Mr. Chairman and Members of the Subcommittee, thank you for the 
opportunity to appear today to discuss the past accomplishments and 
future promise of prize competitions. Prize competitions are proving to 
be an important tool for innovation, not only for NASA and our 
Centennial Challenges program, but also for private efforts like the X-
PRIZE and for other federal agencies like the Defense Advanced Research 
Projects Agency and their Grand Challenge competition. Congress's 
attention and support will be important in the months and years ahead 
to all of these efforts.
    I would like to take a few minutes to describe NASA's new prize 
competition program, Centennial Challenges, including how it supports 
NASA's new direction, the program's goals, the past prize competitions 
that Centennial Challenges is modeled on, and recent developments. I 
will close by outlining future directions for Centennial Challenges and 
describing how Congress can help support this exciting new program.

Centennial Challenges and the Vision for Space Exploration

    On January 14th, President Bush visited NASA Headquarters and 
announced a new Vision for Space Exploration. The Vision lays out a 
strategy for sustained, long-term human and robotic exploration of our 
solar system and the worlds that lay beyond. Embedded within the Vision 
are many difficult technical challenges, from autonomy and 
communications to power and propulsion to structures and spacecraft. 
Meeting these challenges will require us to unleash the best innovative 
talents our Nation has to offer. Recognizing that NASA needs a dynamic 
mechanism for tapping the ingenuity of our Nation, wherever it may lie, 
we created Centennial Challenges.
    Centennial Challenges is a very different approach from how NASA, 
and nearly all federal R&D agencies, have traditionally gone about 
technical innovation. Instead of soliciting proposals for a grant or 
contract award, NASA will set a technical challenge, the prize amount 
to be awarded for achieving that challenge, and a set of rules by which 
teams will compete for that prize. Through Centennial Challenges, we 
hope to:
    Stimulate Innovation in Ways That Standard Federal Procurement 
Cannot--By specifying technical goals but not pre-selecting the best 
way to achieve them, a large number of approaches to a problem will be 
developed, including unorthodox approaches that would likely not be 
pursued in a traditional procurement.
    Enrich NASA Research With New Innovators--Centennial Challenge 
winners will be judged and earn awards based on actual achievements, 
not proposals. Using this approach, we hope to reach new innovators who 
would not normally work on NASA issues and find novel or low-cost 
solutions to NASA engineering problems that would not be developed 
otherwise.
    Help Address Traditional Technology Development Obstacles--In each 
Challenge, multiple teams will be developing, integrating, testing, or 
flying various approaches to the same technical goal. With multiple 
teams and multiple approaches, Centennial Challenges will help 
transition new technologies into operation and address other 
traditional technology pitfalls.
    Achieve Returns That Outweigh the Program's Investment--History 
shows that the total resources spent by teams to win prize competitions 
usually exceeds the value of the prize many times over. By having 
multiple teams bring varied resources and knowledge to bear on a 
problem, we will get more solutions developed and tested.
    Educate, Inspire and Motivate the Public--Highly visible Challenges 
will draw substantial public, educator, and student interest in NASA, 
the competitors, and the technical field of the Challenge itself.

Short History of Prize Competitions

    Centennial Challenges is modeled on and builds on the success of 
prior prize competitions in stimulating technological innovation, 
scientific discovery, and new exploration achievements.
    As early as the 18th century, the British government offered the 
Longitude Prize, a competition for a navigational solution to the 
accurate determination of longitude on the high seas. At the time the 
prize was set, it was assumed that the solution laid in using star maps 
as navigational aides and that the winner would be an astronomer.
    The solution was actually achieved by a London clock maker and his 
invention, the marine chronometer.
    In the early 20th century, numerous prizes were offered for new 
achievements in aviation by governments, the U.S. airmail service, 
wealthy individuals, and even newspapers in both the United States and 
Europe. Perhaps the most famous of these aviation prizes was the Orteig 
Prize for the first crossing of the Atlantic Ocean by air. Again, at 
the time the prize was set, many assumed that a famous Arctic explorer 
of that age would win. Instead, a relatively unknown airmail pilot 
named Charles Lindbergh won the Orteig Prize and went down in history 
as the first person to cross the Atlantic in an airplane, opening a new 
avenue of transcontinental transportation.
    These two historical examples demonstrate an important advantage of 
prize competitions--the ability to reach out to new inventors, 
innovators, and risk-takers and have them apply their experience, 
thinking, and resources towards the development of novel and unorthodox 
solutions. It is exactly these kinds of unexpected winners and their 
ingenious solutions that we hope to identify and leverage through 
Centennial Challenges.
    More recently, the privately funded X-PRIZE Foundation has 
demonstrated the tradition of prize competitions in stimulating 
innovative solutions to technical challenges. Established in 1996 with 
the goal of demonstrating private, reusable, sub-orbital human space 
flight, the X-PRIZE spurred Mike Melvill's June 21st test flight above 
100 kilometers, making him the first astronaut to fly a vehicle 
developed by the private sector to space. The achievements of Burt 
Rutan and Scaled Composites, the team behind Melvill's flight, are a 
remarkable private sector engineering achievement. We at NASA are 
looking forward to a winning X-PRIZE team, hopefully later this year.
    The science and engineering community has long recognized the value 
of prize competitions. In 1999, the National Academy of Engineering 
conducted a blue ribbon workshop titled ``Concerning Federally 
Sponsored Inducement Prizes in Engineering and Science.'' The central 
recommendation of this workshop's report was that:

         ``Congress should encourage federal agencies to experiment 
        more extensively with inducement prize contests in science and 
        technology.''

    The workshop's report also includes a number of important 
recommendations regarding how agencies should structure and conduct 
prize competitions.
    The Defense Advanced Research Projects Agency (DARPA) is the first 
federal agency to pursue the Academy's recommendations and establish a 
major prize competition. The DARPA Grand Challenge is an annual race 
aimed at developing autonomous vehicle capabilities for the 
battlefield, and the first race was held earlier this year in the 
California desert. We at NASA have a great deal of interest in 
autonomous systems and robotics and are eagerly anticipating next 
year's Grand Challenge race.

Recent Developments

    Building on this successful history and recognizing the potential 
value of prize competitions to augment our ability to implement the 
Vision for Space Exploration and ongoing NASA programs, we conducted an 
internal study to gather ideas for NASA prize competitions. Two of the 
founders of the X-PRIZE, including Dr. Peter Diamandis who is with us 
here today, assisted with this study. We collected almost 130 prize 
competition concepts and winnowed the list to 15, which was the basis 
for the initial formulation of Centennial Challenges.
    However, we also recognized the need to obtain external inputs on 
our future prize competitions. Since the teams competing for a 
particular Challenge will come from outside NASA, we felt it was 
important to understand what Challenges outside organizations would be 
interested in competing for and to get their thoughts on how to 
structure these competitions. To obtain these external inputs, we held 
the first annual Centennial Challenges Workshop here in Washington last 
month. The two-day workshop was a great success, both in terms of the 
attendance and the inputs we received. Over 200 attendees participated, 
including representatives of both established and emergent aerospace 
companies, representatives from other industry sectors, researchers 
from universities and non-profit organizations, members of various 
financing communities, educators and students, representatives of space 
advocacy groups, and even hobbyists and interested members of the 
public. About 30 managers from NASA's field centers, from other federal 
R&D agencies, and from the X-PRIZE Foundation helped moderate the 
workshop. Keynote speakers included a member of Congress, the 
President's Science Advisor, and a captain of the emergent aerospace 
industry. Together, these participants provided invaluable inputs. They 
identified excellent prize competition concepts that were missed by our 
internal study and gave us important feedback on goals and rules for 
specific competitions. The inputs from the workshop are summarized in a 
report that is available through a link on our website at 
www.centennialchallenges.nasa.gov.
    Simultaneous with our workshop, the President's Commission on 
Implementation of U.S. Space Exploration Policy released its report 
titled ``A Journey to Inspire, Innovate and Discover.'' Among the many 
important recommendations made by Chairman Pete Aldridge and the 
Commission is that:

         Congress increase the potential for commercial opportunities 
        related to the national space exploration vision. . .by 
        creating significant monetary prizes for the accomplishment of 
        space missions. . .

    The Commission goes on to state, ``NASA should expend its 
Centennial prize program to encourage entrepreneurs and risk-takers to 
undertake major space missions.'' We have taken the Commission's words 
to heart and are actively exploring ambitious prize competition 
concepts.

Future Directions for Centennial Challenges

    My Centennial Challenges Manager, Mr. Brant Sponberg, and his staff 
are currently hard at work revising their program plan based on the 
inputs from our internal study, the June workshop, and the Commission 
report and are developing the specific prize competitions that NASA 
would like to begin in FY 2004 with a few small ($250,000) prizes and 
then expand the effort in FY 2005. Examples of the kinds of Challenges 
they are examining include prize competitions:
    For Full Missions--These would be prize competitions for the 
successful completion of a challenging robotic or human space mission 
by a private sector organization. The size the purses for these kinds 
of prize competitions would be in the single to few tens of millions of 
dollars and competitors will likely include aerospace companies and 
university teams. Examples include Challenges for: the first private 
robotic soft landing on the Moon, the return of samples from near-Earth 
asteroids, or even the first private orbital human space flight.
    For Key Technologies--These would be prize competitions for the 
successful development and demonstration of a technological capability 
that is important to future space exploration or other NASA programs. 
The size of the purses for these prize competitions would range from 
hundreds of thousands of dollars to a few million dollars and 
competitors will likely include industry researchers, university 
researchers, and other inventors. Examples include Challenges for: a 
more dexterous astronaut glove; an aerocapture mission demonstration; a 
highly accurate descent and landing system; autonomous robots capable 
of retrieving science samples from Earth environments that are 
analogous to those on other worlds; a highly-efficient and low mass 
power distribution system for robotic or human bases on other worlds; 
and highly efficient lunar resource processing techniques.
    To Leverage Partnering Opportunities--These would be prize 
competitions for technical goals and capabilities that are common 
between NASA and other organizations. The size of the purses for these 
prize competitions would range from hundreds of thousands of dollars to 
a few million dollars. Partners would cost-share the purse with NASA or 
be responsible for competition administration. Partners could include: 
professional organizations, corporations and non-profit research 
organizations, other federal R&D agencies, hobbyist organizations, and 
public space advocacy groups. Examples include Challenges for: an 
autonomous, low mass drilling system for accessing underground science 
samples and resources on other worlds and on Earth; an improved power 
storage system for rovers and for various Earth-based applications; a 
fully autonomous unmanned aerial vehicle for cargo delivery; high 
strength-to-weight materials; and a solar sail mission to provide space 
weather data for various government customers.
    For Educational Enrichment--These would be prize competitions to 
excite and encourage college and secondary school students to pursue 
educations and careers in science, technology, engineering, and math. 
The size of the purses for these kinds of prize competitions would 
range from the thousands to tens of thousands of dollars. Examples 
include a robot ``survivor'' contest and a contest for a model rocket 
that must launch after being dropped from a certain height and re-land.
    In all of these competitions, it will be important to review the 
proposed rules to ensure that: they are fair, objective and 
transparent; that they cannot be ``gamed'' by competitors; and that 
they will attract a strong field of competitors. Depending on the size 
of the prize purse, we plan to subject the draft rules for each 
competition to independent internal and/or external review. In the case 
of the largest prize competitions, we will likely have a public comment 
period to obtain additional inputs on draft rules.
    With the exception of those prize competitions targeted at 
students, we plan to make all Challenges open to any U.S. competitor 
who is not a federal employee. My program manager is committed to 
keeping overhead costs low so the maximum amount of funding is 
available for prize purses. We will shortly release a request for 
information (RFI) to solicit inputs on how to structure Centennial 
Challenges support and maintain low overhead.

Congressional Support Is Key

    Congress is important to the success of Centennial Challenges. NASA 
has requested specific authority from Congress to conduct large prize 
competitions with purses up to $50 million in size and to retain 
funding for prize purses over multiple years. Both of these authorities 
are important to maximize the utility of Centennial Challenges. Without 
them, the ability of Centennial Challenges to conduct prize 
competitions for space missions or significant technology 
demonstrations and to partner with other NASA programs will be greatly 
diminished. NASA's FY 2005 budget request for Centennial Challenges is 
$20 million, and NASA has included a $2 million reprogramming change in 
the FY 2004 Operating Plan to undertake a few small ($250,000) prizes.
    Centennial Challenges is an exciting and integral part of NASA's 
new direction. It represents an opportunity to reach new communities of 
innovators and to find novel solutions to hard technical hurdles. I 
greatly look forward to our future prize competitions, the new 
approaches that they will inject into our programs, and to one day 
shaking the hand of our first Challenge winner. Thank you for the forum 
that the Committee provided today. I look forward to responding to your 
questions.

    Chairman Rohrabacher. Thank you very much, Admiral. And it 
is getting into the details and see how this Centennial 
Challenge works. And it is going to be a very interesting new 
innovation to watch. It is, clearly, a step in the right 
direction, and a step in the direction that some of us have 
been advocating.
    But now Mr. Walker may think that it is only one step in 
the right direction. He may want to go maybe 150 or 300 steps 
in another direction. So Mr. Walker, you may proceed.
    Mr. Walker. Thank you, Mr. Chairman.
    I am delighted to be with you. And thank you for your kind 
words and Mrs. Johnson for her kind words. And I am delighted 
to be back in the room.
    Chairman Rohrabacher. Mr. Walker, could I--can I sort of 
take the prerogative of the Chair at this moment? Mr. Burgess 
has joined us and has a request to make.
    Mr. Burgess. I thank you, Mr. Chairman, and appreciate the 
indulgence of the members of--the witnesses who are here today. 
But I wanted to take a moment to introduce a guest to this 
committee. This is Taghreed Qaraghuli, a member of the Iraqi 
Women's Delegation. And Mr. Chairman, I ask for unanimous 
consent that she be allowed to sit at the dais for today's 
Subcommittee hearing. The Iraqi Women's Delegation is visiting 
Congress to learn firsthand how American democracy works.
    Chairman Rohrabacher. With unanimous consent, hearing no 
objections, so ordered.
    And let me express--Ms. Johnson, you have a guest as well? 
Would you like to have her join us as well? Would you like to 
introduce her to us?
    Ms. Johnson. She is one of the leaders of the delegation 
from Iraq.
    Chairman Rohrabacher. Well, we have two ladies who are 
joining us. And let me note that we want to welcome both of 
them to our hearing, and with unanimous consent, hearing no 
objection, we will have them join us today. And let me note 
this to our guests. We wish you all of the success in the 
world, and we hope that Iraqi women will be a role model for 
women throughout the Islamic world and show how democracy and 
freedom can work and how everyone will be included in a 
democratic society. And so we are very, very pleased to have 
you both with us today. And as we talk about technology and 
talk about the prizes.
    So excuse me, Mr. Walker. You may proceed.

  STATEMENT OF HONORABLE ROBERT S. WALKER, CHAIRMAN, WEXLER & 
                WALKER PUBLIC POLICY ASSOCIATES

    Mr. Walker. Thank you, Mr. Chairman. And I am delighted to 
be back in the room.
    As a matter of fact, one of the things I was going to 
mention as I started here is that some people asked me about 
the Connestoga wagon that is in the portrait that--of me that 
stares so ominously down on this room back there. And they 
wonder how it--how a Connestoga wagon got in there. And I can 
explain to them the reason why it is there is because the 
Connestoga wagon was invented in my old Congressional District, 
and it was, in fact, the high-tech of its era. Now some of it--
my constituents still cling to that high-tech, even to this 
day, but I thought it was a nice symbol, also, for the reason 
why we are here talking about prizes today, because the 
Connestoga wagon became symbolic of Americans moving on to the 
new frontier of the west.
    And in large--the large reason why they went was for a 
prize of some sort. Now it wasn't a specifically designated 
prize. Often, it was Sutter's gold. It was opportunity of one 
kind or another. But in some cases, they went for 180 acres of 
land that was being offered by the Government. And those were, 
in fact, real incentives that inspired people to do things that 
they wouldn't otherwise do. I would suggest to you that the 
reason why you want to do prizes is because you will get people 
involved to win prizes who would never dream of pursuing a 
government contract. What you will do is encourage people to 
take risks that they might find unacceptable if there wasn't a 
prize out there, and certainly take some risks that the 
Government inside of its regular institutions would probably 
find unacceptable. So what you will end up with prizes is 
people willing to do things that are outside the box, that you 
won't necessarily have RFPs or specs. You will have a goal. And 
if there will be people who will take that desire to pursue 
that goal and extend it in ways that we can't even imagine.
    Now I don't suggest that this should be NASA's sole way of 
pursuing space technology for the future. NASA has a lot of 
contributions to make on the high-tech arena or in the high-
tech arena. And this should simply be a mechanism by which NASA 
reaches out beyond what it can traditionally do to get new 
thinking into the mix. I think that NASA can play a role in 
helping some of these people who are pursuing prizes by being a 
high-tech advisor to them along the line and give them ideas 
where they run into places where they might otherwise stumble. 
But it should be a part of a totality of a program, not just 
the only piece of the program.
    In my mind, the prizes here should be big. I think that you 
ought to have a couple of these prizes that are very large so 
that smaller developments are done in the wake of that big 
goal. And I would offer you one example. I sit on the Board of 
a company called Space Dev. Space Dev has a technology called 
``hybrid rocket technology.'' It is not new. It is not a new 
idea. In fact, this company bought it from a company called 
Amroc that went out of business some years ago. For years, this 
little company has tried to get people interested in hybrid 
rocket technology. The Government wasn't interested. NASA 
wasn't interested. The Defense Department wasn't interested. 
Nobody was particularly interested.
    But Burt Rutan was going after the X-Prize, and he needed a 
rocket. And he needed a rocket he could buy pretty cheap. And 
it doesn't cost you very much to make hybrid rockets, because 
they are made out of rubber and laughing gas. So our rocket 
went out, and they tested it about three or four times on the 
ground, and then they put a man on it, and he flew. And he flew 
a couple test flights, and then just the other day, he went 
suborbital on that technology.
    Now since that time, because it is the first new human-
rated rocket in 25 years, there has been lots of interest in 
it, and it all came about, because there was somebody willing 
to invest in Burt Rutan's idea of how you pursue a prize. That 
is the wake of technology that you can begin to build behind 
the prize. And so Space Dev may end up with a technology that 
will have broad application that does not necessarily even 
reference the prize in the end.
    So it seems to me that you do want to have a big enough 
goal so that you get this technology in the wake and maybe a 
goal big enough that you can't even write specs for it. The way 
in which this can really begin to have an impact is if you set 
a goal so big that people can't sit around and write a lot of 
specifications for it, you simply give people the opportunity 
to move ahead.
    Now in my mind, one of the things that you have got to be 
very careful of as you do this is how much risk you are willing 
to accept. I would suggest to you that the idea behind these 
prizes should be to increase the amount of risk that you are 
willing to accept. But you can not absolutely ensure safety if 
you are pursuing some of these prizes. The prizes are a risk-
taking mechanism. And risk toward reward should be something 
that should be very inherent in what you do. And so I would 
hope that as you develop your mechanisms, maybe you need to go 
off-line and establish a charter or a foundation that offers 
some of these prizes so that Government doesn't have to get 
involved in the questions before appropriation committees every 
year about why did this fail, because in all honesty, you will 
probably get as much failure in these programs as you will get 
success, but that will be a good thing. Risk has to be a part 
of the end results that you want out of a prize program.
    Thank you, Mr. Chairman.
    Chairman Rohrabacher. Mr. Diamandis.



 STATEMENT OF DR. PETER H. DIAMANDIS, CHAIRMAN & CEO, X-PRIZE 
                           FOUNDATION

    Dr. Diamandis. Mr. Chairman and honorable Members, thank 
you. I am thrilled to be here.
    And I wish to speak on three subjects: the X-Prize to give 
everybody an update; the--our support and interest in 
Centennial Challenges; and third, to echo Mr. Walker's remarks, 
the need to embrace increased levels of risk fundamentally.
    We kicked off the X-Prize because there is an inherent 
interest in the U.S. public to go and fly into space. Over 60 
percent of the people consistently say they would like a chance 
to go. But you know, up until recently, it has been very rare 
that you can go. In 1995, after reading ``The Spirit of St. 
Louis,'' I proposed the idea of a $10 million cash prize we now 
have named the Ansari X-Prize. And we have now 27 teams from 
seven countries building private spaceships to compete to win 
this $10 million. And they are spending in excess of probably 
$100 million, some say as much as $400 million, I will say, for 
the record, over $100 million to go and win this. And the 
beautiful thing is we don't pay $1, not a single dollar, until 
someone does it, unlike traditional government procurements 
where you will spend the money inherent--you know, independent 
of whether someone does it or not. And in fact, they may never 
reach the design goals they desire. We don't spend $1 until it 
is actually won. And that is the beauty of the competition.
    The other element is we have been able to attract people 
that would never look at a government contract, as Mr. Walker 
said. The--this is a way of, in one essence, getting fixed-
price science or fixed-price engineering. You put out the goal. 
It is a challenging goal. And once that is put out there, if 
enough money and time is given, it will be achieved. And you 
are bringing levels of entrepreneurship and levels of 
intelligence and levels of motivation you can not buy with a 
contract. There is no way you can secure that through a 
traditional mechanism.
    We are getting people thinking about this around the world 
during shower time, during, you know, time when they are at 
dinner. This is bringing out the human spirit, the need to 
achieve that greatness, that goal, to do something that is 
meaningful with their lives. And the U.S. Government and NASA 
can do that and capture that level of enthusiasm and get the 
world excited. You know, I want to see kids getting on the Net 
and looking at the prizes to help shape what they do in their 
careers. What do people say out there is exciting to do? What 
can I go after? Because right now, if you want to be an 
astronaut, you know, the last 40 years have told you the 
chances are 1 in 1,000. And even if you become an astronaut, 
your chances of flying are 50 percent. And people say, ``Well, 
space isn't really something I can do.'' Well, this makes it 
available for everybody.
    Now I want to address the issue of risk. I feel 
fundamentally that unless we embrace risk, especially as 
Americans, we will not have the innovation. The price of going 
to orbit has gone up over 40 years, arguably, not down, and it 
has not become less risky. We need to embrace risk to offer new 
breakthroughs. The day before something is a breakthrough, it 
is a crazy idea. If it is not a crazy idea or an idea that is 
not--it is not a breakthrough, it is a small incremental 
improvement. So how do we allow breakthroughs if we don't allow 
risk? I mean, we are Americans. 500 years ago, thousands of 
people risked their lives to cross the Atlantic. And we are 
thankful for that. And then 200 years ago, they risked their 
lives to cross the Americas right now in Los Angeles. I mean, 
why would I want to stop taking risks now as we are on the 
verge of the greatest frontier ever? Please, don't say we 
shouldn't go with risk. You know, that old motto, ``Failure is 
not an option,'' well, if we can't fail, we can't have 
breakthroughs. We have to allow mechanisms to do that.
    One of the issues that have made X-Prize a success so far--
and I appreciate your kind words, Mr. Chairman, but until we 
write that $10 million check, we have not yet succeeded, but we 
hope to do that in the next three months. The key ingredients 
here are the rules. The rule-making process will determine 
whether there is a success or there is a failure, whether you 
get garbage or you get nothing at all. We have spent 80 percent 
of our time up front thinking about the key rules. That is 
fundamental. The second thing that is important is it has got 
to be romantic and exciting. It has got to capture the hearts 
and minds of nine-year-old boys to CEOs of companies. And the 
third part that has made the X-Prize successful is the back 
end, the potential marketplace, the fact that there is a $1- to 
$3 billion-a-year space travel marketplace that will 
materialize out of that.
    Those three components, the rules, the excitement of the 
concept, and the fact that there is someplace it can go, and it 
doesn't have to be someplace you can go, necessarily only to 
government, and government--it isn't government's job to make 
sure there is a business market there. But if the rules are 
properly written, like we did with the X-Prize where we said 
three people versus one person, we--and reusable, that 
inherently said the vehicles coming out of this could service a 
marketplace. And that was our--that was the important thing 
that we set out there.
    I want to--in the--my last minute here, give my support to 
the Centennial Challenges Program. I think it is the most 
fundamentally critical thing that NASA could be doing. The 
level of excitement. And rather than $20 million or $25 million 
a year, I would love to see, you know, a good 10 percent of the 
NASA budget put toward prizes. Why not for every contract that 
is--let there be a series of prizes attached to those to allow 
people who would never go after the same things that Lockheed 
and Boeing did? In fact, you know, when asked why isn't 
Lockheed and Boeing going for the X-Prize, well, the fact of 
the matter is the current procurement methods have ruined the 
large contractors. They do not take the risks. They don't build 
the 777 until they know there is enough orders there. They 
don't go and build any new launch vehicle until they know the 
government is prepared to pay--foot the bill. It is really only 
the small entrepreneurial companies, the university people, the 
people who could never go after this that are willing to take 
the level of risk. So there has to be both sides of the 
equation. And I think prizes could enable that.
    Thank you, Mr. Chairman.
    [The prepared statement of Dr. Diamandis follows:]

                Prepared Statement of Peter H. Diamandis

    Chairman Rohrabacher, Members of the Subcommittee, it's an honor to 
be here.
    Today I wish to brief you on three subjects: First, the X-PRIZE 
Competition; Second, the critical need to support NASA's plans for the 
Centennial Challenges; and third, the need to embrace an increased 
level of risk in our exploration of space.

X-PRIZE:

    There is little doubt that there is a large and vibrant marketplace 
of individuals willing to pay for the opportunity to fly into space. 
Surveys consistently indicate that over 60 percent of the U.S. public 
would welcome the opportunity to take such a trip, and the most recent 
Futron Corporation study quantifies this public space flight market at 
over $1 billion dollars per year during the next twenty years.
    Unfortunately, the private spaceships needed to service this market 
do not yet exist. To solve this challenge, in 1995 I proposed the idea 
that a prize be offered to the first private team to develop such a 
ship. In May 1996, in St. Louis under the Arch, with then NASA 
Administrator and 20 astronauts, the X-PRIZE was announced. Ten million 
dollars was offered to the first team able to privately build a ship 
and fly three people to 100 kilometers altitude, twice within a two-
week period.
    Today we have twenty-six teams from seven nations competing and we 
expect a winner of the X-PRIZE in the next three to four months.
    The results of this competition have been nothing short of 
miraculous. For the promise of $10 million, more than $50 million has 
been spent in research, development and testing. And where we might 
normally have expected one or two paper designs resulting from a 
typical government procurement, we're seeing dozens of real vehicles, 
motors and systems being built and tested. This is Darwinian evolution 
applied to spaceships. Rather than a paper competition with selection 
boards, the winner will be determined by the actual ignition of engines 
and the flight of humans into space. Best of all, we don't pay a single 
dollar until the result is achieved. The bottom line is that prizes 
work!
    I'm also very proud that the X-PRIZE has played a roll with NASA in 
the creation of the newly announced Centennial Challenges. These annual 
NASA prizes will help encourage out-of-the-box thinking that is sorely 
needed in our risk averse space community. While the annual budget for 
NASA's Centennial Challenges is only $25 million today, I imagine a 
future where 2.5 percent of the NASA budget, some $400 million, would 
be offered each year. Entrepreneurs will solve the problems that large 
bureaucracies cannot. Prizes offer NASA and the U.S. Government both 
fixed-cost science and fixed-cost engineering. More importantly they 
offer NASA the passion and dedication of the entrepreneurial mind that 
cannot be purchased at any price.
    I encourage the Congress to fully embrace and support the use of 
prizes by NASA. Admiral Steidle and all of Code T are to be 
congratulated for their efforts in launching the Centennial Challenges 
and should be fully supported to encourage this new way of doing 
business within the Agency.

DETAILS ABOUT PRIZES:

What are the key ingredients that have made the X-PRIZE so successful?
    I would attribute our success to three key components. First, the 
rules were well thought through and clearly presented. You'll hear me 
speak of this over and over again--writing the rules is more than 80 
percent of the battle. Our second key to success was the romance and 
excitement involved with the prize topic. Sub-orbital space flight 
included the human element, the potential to create heroes and a 
personal message to every viewer of the competition, that message being 
``You can go next!'' The third key component was the existence of a 
business or market to support the teams after the prize was won. The 
potential for a billion dollar space tourism market has helped teams 
justify their investments and fuel their enthusiasm.
To what extent has the X-PRIZE attracted interest from NASA's 

        TRADITIONAL CONTRACTORS TO PARTICIPATE?

    None of the traditional contractors have demonstrated any interest 
in the X-PRIZE competition. In fact, shockingly, none have had any 
interest in supporting us as a non-profit educational organization, 
even though, in my opinion, these large corporations may be one of the 
greatest beneficiaries from our activities.
    The current contracting methods have spoiled the incumbents. They 
are paid for paper designs and are paid in cost-plus contracts whether 
they deliver or not.
    But luckily, it is not the traditional contractors who we seek to 
attract with these competitions. They lack the ability to take the 
risks involved in achieving breakthroughs and to achieve low-cost 
solutions.

How can prizes be designed and administered to induce the greatest 
        possible innovation?
    Writing the prize rules is the most critical step to achieving this 
goal. Well written rules will deliver breakthroughs, diversity and 
innovation. Poorly written rules will result in no entries, or worse 
yet, trivial solutions.
    In addition the competing teams must believe that there is an even 
playing field without bias for a preferred technology or company. 
Judging must be independent of the offering agency and teams must be 
left alone to the maximum extent possible.

Should prizes be offered for discrete technologies, or for large 
        technological feats?
    The answer is, of course, both. However in the case of discrete 
technologies, they need to be wrapped into a competition which makes 
for good theater in some fashion. Remember that teams must create 
sufficient interest from a group of potential financiers to underwrite 
their effort. As such what they are doing must fall into one of the 
following areas:

          It must be great theater; likely to involve the human 
        element in some fashion.

          It needs to inspire youth and educate the public

          It must attract the attention of the global press

          It must portend a large and vibrant marketplace

    For example a device able to detect a bacterium or virus in a 100 
grams of soil might be boring, but dress it as a life-detection prize 
or better yet, a home-land defense pathogen detection prize and the 
concept will get the attention of the media and corporate sponsors.
Might offering prizes encourage competitors to cut corners when it 
        comes to safety? How can NASA ensure that the technologies 
        resulting from a competition are safe and relevant to NASA's 
        objectives?
    I will speak more about risk at the end of this testimony. Safety 
is a relative issue. It is balanced against many factors. Would you 
preclude two personally funded bicycle mechanics from Dayton Ohio from 
building a self launching powered aircraft? Did they cut corners? Who 
can judge them? If the government attempts to regulate safety issues 
related to teams competing for prizes, it will kill the potential for 
innovation.
    The goal for the technology resulting from competition is not to 
put them directly into production or use, it is to explore new 
approaches or ways of thinking. The idea is to invent the transistor 
not to perfect the process leading to a Pentium Chip. We should not 
expect technologies resulting from a competition to be safe--we should 
expected the technologies to be different and full of potential and 
possibilities.

Should NASA offer prizes or are they best offered by private 
        organizations such as the X-PRIZE?
    NASA should most definitely be offering prizes! This is in addition 
to private organizations, or in cooperation with private organizations 
like the X-PRIZE.
    As a taxpayer I cannot think of a better thing NASA can be doing 
with my money than offering prizes.

How involved should NASA be in specifying the technologies that must be 
        developed?
    The most dangerous thing NASA could do is to over-specify the rules 
or specify what technologies should be used. The rule making process 
will determine the success or failure of a competition. Writing these 
rules is an art form requiring specifying just enough, but not so much 
as to limit the creativity of the contestants.

How involved should NASA be in overseeing the work of companies 
        competing? How involved should they be in judging the 
        competition?
    Again, oversight of the teams competing needs to be very carefully 
managed. It needs enough agency involvement to support team needs, 
clarify rules and must support the credibility of the prize effort with 
potential sponsors, but should NOT direct their creative approach in 
any fashion. Teams need to be allowed to explore non-traditional 
approaches which might seem 180-degrees out of phase with current 
accepted practices. This is the only way to bring about true 
breakthroughs.

What needs to happen to transition technologies from a prize winner to 
        a successful ongoing concern? What can the government do to 
        support this transition?
    The best way to achieve this lies once again in the writing of the 
rules. As an example, the X-PRIZE chose to require a three-person 
vehicle rather than a one-person ship. The reason for this was to allow 
for the creation of a capability that would most easily make the 
transition to a revenue generating spaceship.

ACCEPTING RISK:

    Finally I'd like to address the issue of risk. In contrast to 
individuals who speak about reducing exposure to risk, I want to speak 
in favor of accepting more risk.
    There is no question that there is risk involved in winning the X-
PRIZE, as well as risk in going to the Moon or Mars or opening any 
portion of the space frontier. BUT, this is a risk worth taking!
    As American many of us forget the debt we owe to early explorers. 
Tens-of-thousands of people risked their lives to open the `new world' 
or the American west. Thousands lost their lives and we are here today 
as a result of their courage.
    Space is a frontier and frontiers are risky! As explorers and as 
Americans, we must have the right to take risks that we believe are 
worthwhile and significant. We owe it to ourselves and future 
generations. In a time when people are risking their lives in motor 
sports or bungee jumping, it seems a bit shallow to be concerned about 
the risk involved exploring space.
    It is also critical that we take risk in our technology development 
and that we allow for failure. Without risk and without room for 
failure we can not have the very breakthroughs we so desperately need.
    A breakthrough, by definition, is something that was considered a 
``crazy idea'' the day before it became a breakthrough. If it wasn't 
considered a crazy idea, then it really isn't a breakthrough, is it? It 
would have simply been an incremental improvement.
    Remember those immortal words, ``Failure is not an option?'' If we 
live and work in an environment where we cannot fail, than 
breakthroughs may not be an option either.
    I urge both this committee and NASA to take steps which will help 
the American people understand that space exploration is intrinsically 
risky, yet a risk worth taking. Let's make space explorers heroes once 
again.

    Chairman Rohrabacher. Tell us how you really think.
    Great. Thank you very much for that testimony.
    Dr. Macauley.

 STATEMENT OF DR. MOLLY K. MACAULEY, SENIOR FELLOW, RESOURCES 
                         FOR THE FUTURE

    Dr. Macauley. Thank you, Mr. Chairman, and Members of the 
Committee. It is an honor to be here and for our guests, our 
Iraqi guests, it is an honor for me to be here with you. And I 
notice that your joining Congresswoman Johnson has increased 
the participation of women up there 50 percent, so thank you 
very, very much.
    In my short answer to are prizes a good idea is yes, but 
being the researcher that I am, I have a couple of buts to add 
with that, so let me go ahead and mention those. First of all, 
we are not working with a clean slate. We have a heavy hand of 
government in space R&D already through procurement contracts 
and through peer-reviewed research, which hasn't been mentioned 
a lot yet, so we have to think of prizes as a tool in an 
already existing portfolio. But with that in mind, you know, 
peer-reviewed research and contracts have a lot of 
imperfections, as do prizes. But some of them offset each 
other, so taken together, these are all a set of tools that I 
think we can effectively use to marshal innovation in our space 
program.
    In my written statement, I look at the history of prizes, 
because we are forging somewhat new territory here both by 
bringing back prizes and having them governmentally sponsored. 
So one question is what can we learn from the history of 
prizes, and there is a rather large history. We can look at 
prizes in aviation, automobiles, and rocketry, and I think very 
important for discussion of the Centennial Challenges, which 
may involve innovation in technologies that may be unique to 
NASA that may not have commercial payoff, that may not have an 
enduring relationship with government as customer. These may be 
very specific technologies that further space exploration per 
se. And interesting from the history of prizes, those are still 
good candidates.
    If you look at the history of aviation prizes, Curtiss, 
Bleriot, Sigorsky, and Farman were among aviators winning 
prizes, but there were many, many dozens of others. The thing 
about those four individuals is they did end up developing a 
product line of aircraft. But dozens of others who were 
successfully competitive for prizes didn't. Apparently they 
were motivated just by the thrill, and that is my point that we 
can also see prizes given for solving mathematical theorems. 
And there was a prize offered by the French Academy of Sciences 
in 1790 for producing a soda alkali from salt. So again, the 
point is if some of the Centennial Challenges are addressing 
very unique, maybe NASA-specific innovations, they still may be 
fair game for prizes if one of the motivations is the thrill of 
invention and not necessarily the lure of a market.
    However, these inventors were often interested in patenting 
their innovation. So NASA prizes don't necessarily have to 
target innovation for commercial profitability but the 
assignment of property rights to the inventor may be necessary 
to attract participation.
    Also, the heyday of prizes in our U.S. history took place 
during an era of very limited government. These aviation prizes 
and these prizes for automobile races were taking place largely 
even before we had the personal income tax or corporate taxes. 
It was the heyday when the private sector owned a lot of the 
mass transit, the railways, the trolley cars, the private 
sector-owned electricity companies and water companies. It was 
the era of innovation spurred by Carnegie, Rockefeller, J.P. 
Morgan, Jay Gould, Vanderbilt. Today's culture is very, very 
different I would assert. We have the very heavy hand of 
government both in tax policy and in R&D policy, and I think 
that it is fair to say we can't look at prizes as the silver 
bullet that is going to reinvigorate enthusiasm for space like 
prizes seemed to do in the early decades of the 1900's.
    Times have changed, and so I don't want to unfairly burden 
with prizes as being that silver bullet that will all of a 
sudden encourage the Appropriations Committee to begin spending 
a lot more money on space. I think we need to realistically 
look at the bowl of prizes here. They can, nonetheless, 
complement existing approaches to contracts and peer review, et 
cetera.
    As mentioned, another advantage of prizes is the financial 
risk rests largely with the competitors and those whom they 
find to fund their work. That is an advantage for the taxpayer, 
because the risk is allocated somewhere else in our economy, 
but this can have some problems. For example, if the prize is 
offered for a technology that is a tent pole, absolutely 
critical for one of NASA's ideas, and we find out we are unable 
to award the prize because we simply find that our best and 
brightest can't do it, then we may be delayed in the pursuit of 
that technology and government may end up spending more money 
to find a substitute or a work-around. So offering a prize for 
something that is a critical tent pole in our pursuit of our 
objectives, we have to think a little bit about that. And of 
course, grants and peer-reviewed research have no guarantee of 
success, either, but again, for tent pole technologies, we 
might have to think a little more carefully about prizes.
    There is another advantage of prizes that is particularly 
important in Centennial Challenges, and that is that an 
unawarded prize, a prize that we offer but we find no winner, 
is still important. Failure can be very important, because we 
learn from that. What we would learn from offering a prize for 
which there is no winner is that our best and brightest right 
now, given the current state of technology, simply can't do it, 
and that is very important information for managers of 
innovation in something that is unique and interesting. So 
failure, in and of itself, is not necessarily bad. It brings us 
information. Albeit it brings us delay and we figure out a 
work-around, but it is important information.
    A couple of disadvantages of prizes, as mentioned earlier, 
a cash flow problem for those entrepreneurs who want to step up 
to the plate but really are going to have to spend some time 
finding funding to underwrite the effort. And also there is a 
lot of economics research about possibly wasteful effort if you 
have got a lot of folks competing for a prize. From a broad, 
societal perspective, some economic theories have suggested 
that can be very wasteful. There is a duplication of effort in 
some of those cases.
    Now problems with government-sponsored prizes, I know that 
Doug to my left here will address these, but one of them is 
committing to a prize across Administrations, Congresses, and 
fiscal years. Another problem is how we want to allocate 
property rights. In my testimony, I have a note that the 
government, in 1960 or so, ended up paying Mrs. Robert Goddard 
and the Guggenheim Foundation a large settlement for government 
use of more than 200 of Robert Goddard's patents. Mr. Goddard 
died in 1945. So that is an example of where figuring out in 
advance how we want to handle property rights is very 
important.
    I also think involving an outside board of experts to judge 
the prize is very desirable, appropriate, and perhaps even 
necessary. I think eligibility for the prize should be broad 
and include government employees and FFRDCs. So here I differ a 
bit with the present structure of Centennial Challenges. A lot 
of our Nation's talent in space does rest with some of the 
FFRDCs and the NASA centers, and I think it is important that 
eligibility be very broad, but that is why we have an outside 
Board of Directors completely unrelated to NASA serving as 
judges and other administers of the prize.
    Let me also say that NASA often uses these kinds of success 
measures: create jobs, attracts students to science and math. 
Prizes will not necessarily create jobs. Prizes will not 
necessarily attract students to science and math. Prizes will 
not necessarily increase the number of engineers and scientists 
or broaden participation of underrepresented minorities or prop 
up a group of suppliers, say, of space transportation to 
protect that industry. And again, those are often objectives 
that we have used in our space program. And prizes are not 
necessarily going to further those. We can argue whether those 
are appropriate success metrics, but prizes are likely not to 
be well aligned with those.
    And then finally I want to echo some comments that have 
already been made about the issue of safety and risk. Again, if 
we look at the history of prizes in aviation, my research 
assistant, Maria Shriver, seated behind me, has not only looked 
at the history of prizes but the history of fatalities during 
that era of the heyday of aviation prizes. And aviators were 
dying left and right each year, and yet the prizes continued to 
be offered, and many continued to be awarded. It was a very 
different attitude toward loss of life and risk sharply in 
contrast to our responses to Apollo I, Challenger, and 
Columbia. And I would assert that we really need to rethink 
attitudes toward and public policy for fatalities in the space 
program.
    And I think I will stop there and look forward to your 
questions.
    [The prepared statement of Dr. Macauley follows:]

                Prepared Statement of Molly K. Macauley

  Advantages and Disadvantages of Prizes in a Portfolio of Financial 
                    Incentives for Space Activities

    Mr. Chairman and distinguished Members of the Committee, thank you 
for inviting me to meet with you today. My name is Molly K. Macauley 
and I am a senior fellow at Resources for the Future, a nonpartisan 
research organization established in 1952 upon the recommendation of 
the presidentially appointed Paley Commission. Researchers at RFF 
conduct independent analyses of issues concerned with natural resources 
and the environment. I emphasize that the views I present today are 
mine alone.\1\ Resources for the Future takes no institutional position 
on legislative, regulatory, judicial, or other public policy matters.
---------------------------------------------------------------------------
    \1\ I thank Maria Schriver for excellent research assistance, 
particularly in collecting and organizing information about the history 
of aviation prizes. Responsibility for opinions and errors in this 
testimony rests exclusively with the author.
---------------------------------------------------------------------------
    My research interests are space policy issues with a focus on 
economics. My areas of study include: space transportation and space 
transportation vouchers; economic incentive-based approaches, including 
auctions, for the allocation of the geostationary orbit and the 
electromagnetic spectrum; management of space debris; the public and 
private value of remote sensing information; the roles of government 
and the private sector in commercial remote sensing; and the economic 
viability of satellite solar power for both terrestrial power 
generation and as a power plug in space for space-based activities. 
This research has taken the form of books, lectures, and published 
articles. My research on these topics is funded by grants from the 
National Aeronautics and Space Administration, the Federal Aviation 
Administration, and Resources for the Future. My comments on today's 
discussion of space prizes are funded solely by my discretionary budget 
at Resources for the Future.
    Before offering my comments I'd like to make two introductory 
points.
    The first is that for years, we have searched for the ``silver 
bullet'' that would propel our nation back into space by way of the 
Shuttle and Space Station for the multiple pursuits of scientific 
exploration on one hand and a vibrant commercial space industry on the 
other. There is no lack of ingenuity in ideas for both of these goals. 
But critics of NASA's plans--regardless of the specific details 
involved--assert that they take too much time and money away from more 
pressing societal needs. And, critics of commercial space activities 
assert that such projects carry unique risks, take too much time to 
develop, and take too much time before they earn any money.
    Obviously, priority determines the allocation of budgets in both 
the private and government sectors of the economy. There is ``ample'' 
money in general but competing priorities for spending it. Risk, long 
lead times, and long payback periods cannot be blamed as a death knell 
of space because significant investment takes place in other high risk, 
highly uncertain industries including pharmaceutical development, 
information technology-related hardware and software, and hybrid autos.
    A second introductory comment summarizes my conclusions. Prizes, 
although not a silver bullet for invigorating enthusiasm for space or 
elevating its priority in spending decisions, could nonetheless 
complement government's existing approaches to inducing innovation--
procurement contracts and peer-reviewed grants. Even if an offered 
prize is never awarded because competitors fail all attempts to win, 
the outcome can shed light on the state of technology maturation. In 
particular, an unawarded prize can signal that even the best 
technological efforts aren't quite ripe at the proffered level of 
monetary reward. Such a result is important information for government 
when pursuing new technology subject to a limited budget.
    The remainder of my testimony addresses these topics: previous 
experiences of using prizes to encourage innovation, including prizes 
in aviation, automobiles, and rocketry; use of prizes in the current 
era of heavy government involvement in R&D (most experience with prizes 
pre-dated ``big government''); and advantages and disadvantages of 
prizes compared with procurement contracts and peer-reviewed research 
grants. The concluding sections draw from these observations to offer 
comments about NASA prizes.

I. Observations about the history of using prizes to encourage 
                    innovation

    Prizes have a long history of encouraging innovation, and a look 
back at these contests can offer insights into what might be expected 
from NASA prizes. The following examples highlight use of prizes in 
basic and applied research in chemistry, autos, and aviation. Another 
example, rocketry, is a case in which prizes were scarcely used.
    Soda alkali. One of the earliest documented uses of prizes took 
place in the 1780s when the French Academy offered 100,000 francs to 
whomever could produce a soda alkali from sea salt. The competition 
successfully led to a process that became the basis of the modern 
chemical industry.\2\
---------------------------------------------------------------------------
    \2\ See Joel Mokyr, The Lever of Riches (New York: Oxford 
University Press), 1990.
---------------------------------------------------------------------------
    Autos. Prizes also figured prominently in the development of the 
automobile, with dozens of popular, well-publicized auto races 
beginning in the 1890s, mostly in Europe. One of the notable contests 
in the United States--the ``Great Chicago Auto Race ``--is credited 
with giving birth to the American auto industry. In 1895, H.H. 
Kohlstaat, publisher of the Chicago Times-Herald, sponsored this 
competition to test the overall utility, cost, speed, economy of 
operation, and general appearance of cars.\3\
---------------------------------------------------------------------------
    \3\ See Paul A. Hughes, ``A History of Early Electric Cars,'' at 
http://www. Geocities.com/Athens/Crete/6111/electcar.htm (accessed July 
2004) and Richard Wright, ``A Brief History of the Automobile Industry 
in the United States,'' at http://www.theautochannel.com/content/mania/
industry/history/chap10.html (accessed July 2004).
---------------------------------------------------------------------------
    Kohlstaat was surprised at the number of letters and telegrams he 
received expressing interest in participating in the contest. The auto 
business had seemed centered in Europe, yet he found that there were 
widespread efforts underway in the U.S. Most of the inventors were 
simply unaware of the work of the others. Unlike previous road races, 
the contest placed only secondary emphasis on the outcome of the race 
itself--rather, the awards were for evaluating performance of 
characteristics of the cars. Entrants included individual inventors as 
well as the R.H. Macy Company and the De La Vergne Refrigerating 
Company. Macy's had been importing German-built Benz cars and hoped to 
sell them in Chicago after publicity from the race.
    Only six cars ultimately participated--many competitors were 
discouraged by a large snowstorm the night before the race. Two cars 
finished the race, but four entries won cash awards: the first place 
finisher, inventor Frank Duryea, earned $2,000 (about $50,000 in 2004 
dollars) for his auto's speed, power, compactness, and overall race 
performance; the other finisher won $1,500 for performance and overall 
economy. The Macy entry, which did not finish the race, and another 
entrant won $500 each for general performance. A fifth entrant got a 
special gold medal for safety; the absence of noise, vibration, heat or 
odor; and general excellence of design and workmanship. Duryea later 
went on to become the biggest producer of autos in the U.S., building 
13 cars in 1896 (the cars were hand-built; mass production of autos was 
years away).
    Aviation.\4\ Another notable and frequent use of prizes--and much 
of the inspiration for the X-Prize--was in the early history of 
aviation. Between roughly 1908 and 1915, the heyday of privately 
sponsored competitions for distance, elevation, and speed jumpstarted 
the aviation industry. Three dozen or so individual prizes during this 
period--at roughly the rate of four or more annually--fostered 
innovations that decidedly gave birth to the industry. Some general 
observations about aviation prizes include:
---------------------------------------------------------------------------
    \4\ The history of prizes in this section is drawn from M. Josephy 
Jr., editor in charge (1962), The American Heritage History of Flight 
(American Heritage Publishing Company); ``The History Buff,'' at http:/
/www.ehistorybuff.com/wwrightals.html (accessed July 2004); and Gregg 
Maryniak (2001), ``When Will We See a Golden Age of Spaceflight?'' Pre-
publication draft at http://www.xprize.org/papers/XP-CATO-
Maryniak.5Mar01.doc (accessed July 2004).

        1.  Prizes were usually offered for incremental improvements. 
        For example, the first couple of prizes were for flights of 25 
        meters and 100 meters, then for over 1,000 feet in elevation. 
        Subsequent prizes were for longer distances, higher elevation, 
---------------------------------------------------------------------------
        and faster time.

        2.  Prizes were almost without exception offered by private 
        individuals and companies, not by governments. Sponsors were 
        mostly wealthy entrepreneurs such as Raymond Orteig, a New York 
        hotel owner; Jacques Schneider, a wealthy French industrialist; 
        Ralph Pulitzer, the son of newspaper publisher Joseph Pulitzer; 
        James D. Dole, a Hawaiian planter; Eduoard and Andre Michelin, 
        executives of what was to become the Michelin Tire Company; and 
        James Gordon Bennett, the publisher of the New York Herald. 
        Prizes were also offered by the French Aero Club, which 
        undertook private fundraising to obtain the prize money; the 
        French Champagne industry; the Harvard Aeronautical Society; 
        the Daniel Guggenheim Fund; the Daily Mail of London; and the 
        New York World. Governments funded military planes to race in 
        competitions after World War I but didn't supply the prize 
        money.

        3.  Big air meets were popular during 1909--1911 but then they 
        either continued without much publicity or became less 
        profitable. Many meets continued as annual races into the 
        1930s--the meets were not competitions for ``be the first to. . 
        .'' but were for speed and demonstrations of skill.

        4.  There were prizes that were never awarded or that were 
        awarded only after a long extension of the competition 
        deadline. For example, the Orteig prize, awarded to Charles 
        Lindbergh in 1927, was originally offered in 1919 for a period 
        of up to five years, but the deadline was extended.

        5.  Prizes were offered for generally specified objectives like 
        distance, speed, or minimum number of refueling and maintenance 
        stops. Prize guidelines typically did not include stipulations 
        about the technological approach or other engineering 
        characteristics.

        6.  In at least one documented instance, a company underwrote a 
        competitor in exchange for advertising the company's product 
        (consumer soft drinks) on his plane.

        7.  Prize amounts varied widely--in 2004 dollars, the amounts 
        ranged from about $200,000 to over $1 million. The typical 
        amount was around $300,000. Later prizes were almost always for 
        more difficult achievements, but prize monies didn't increase 
        accordingly. The amounts do not seem correlated with the 
        difficulty of the achievement required to win--but this 
        observation may be biased by the paucity of detailed 
        information about the prizes.

        8.  Accidents and fatalities were common--but did not lead to 
        standdowns in holding competitions.

        9.  Whether contestants sought commercial gain from their 
        innovation is not clear from the available records about the 
        prizes. Some winners--but by far the minority--became founding 
        fathers of a product line of aircraft--such as Louis Bleriot, 
        Glenn Curtiss, Henri Farman, and Igor Sigorsky.

    Rocketry. The success of prizes in fueling innovation in autos and 
aviation sharply contrasts with the history of rocketry and space 
travel.\5\ With one exception, the earliest efforts in rocket 
development never attracted prize money. Research grants rather than 
prizes typically financed studies of rockets--although even research 
grants were rare in the early decades. Konstantin Tsiolkovsky, Robert 
Goddard, and Hermann Oberth--the fathers of space travel--worked 
independently in self-financed home-based or academic laboratories. 
Tsiolkovsky received a grant of 899 rubles in 1899 from the Russian 
Academy of Science. Goddard, after making multiple requests (with the 
urging of Lindbergh), was given grants of $5000 and later, $3,500, from 
the Smithsonian Institution during 1917-1920.
---------------------------------------------------------------------------
    \5\ See Wernher von Braun and Frederick I. Ordway III (1975), 
History of Rocketry and Space Travel (New York: Thomas Y. Crowell 
Company)
---------------------------------------------------------------------------
    In 1927, some forty years after the first serious, scholarly 
articles on rocketry had been published, Robert Esnault-Pelterie, a 
well-known airplane inventor, and his friend, banker Andre Louis-
Hirsch, established a 5000-franc prize. The prize was to be awarded 
annually to the author of the most outstanding work on astronautics.
    Public interest in rocketry was generally cool to lukewarm--in 
fact, ``talk of rockets and space travel was viewed as crackpot by the 
public and as unscientific by most scientists.'' \6\ Newspaper 
reporters, seizing upon some of Goddard's writing about how rockets 
could get to the Moon, sensationalized the statements and referred 
sarcastically to Goddard as the ``moon man.'' The American 
Interplanetary Society--a professional organization that was a 
forerunner of the American Institute of Aeronautics and Astronautics--
changed its name to the American Rocket Society because interplanetary 
travel was so ridiculed.
---------------------------------------------------------------------------
    \6\ See von Braun and Ordway.
---------------------------------------------------------------------------
    For a long time, the early rocket scientists were unaware of each 
other's work, separated by geography and language. Beginning in the 
1920's and 1930's, rocket and interplanetary societies formed in 
Western Europe and the U.S., researchers began regularly to report 
results in professional journals, and many experimental studies of 
rockets began under the auspices of defense agencies abroad (but not in 
the U.S). At this time, research in rocketry was best organized in 
Russia, where the Soviets created a government bureau for 
interplanetary flight, staged an exhibition on rocket technology, and 
published conference papers and a nine-volume encyclopedia. Research 
programs in Germany and France were also active in both theoretical 
studies and experimental testing of rocket components.
    In the U.S., the Guggenheim Foundation was funding some of 
Goddard's research, but as late as 1940 the Army and Navy remained 
generally uninterested (although the Army was conducting some limited 
research on rocket propellants). The Air Corps responded to one of 
Goddard's proposals for support by writing that the Corps ``was deeply 
interested in the research work being carried out. . .under the 
auspices of the Guggenheim Foundation (but) does not, at this time, 
feel justified in obligating further funds for basic jet propulsion 
research and experimentation.'' \7\ By 1945, the U.S. government rocket 
program was more fully developed, with large expenditures and 
production facilities coordinated across the military services by 
President Roosevelt's National Defense Research Committee.
---------------------------------------------------------------------------
    \7\ See von Braun and Ordway.
---------------------------------------------------------------------------
    Some observations. These experiences show the usefulness of prizes 
in fundamental research (soda alkali) and in advancing technology 
(autos and aviation). Of course, the counterfactual question of ``would 
innovation have come about in the absence of prizes,'' and if so how 
fast and at what cost, is equally important--but hard to answer. These 
experiences also took place before the rise of government's heavy hand 
in R&D (more on this in a later section below).
    The absence of prizes in rocketry also raises questions. Several 
reasons could explain the difference between the role of prizes in 
spurring aviation and the virtual absence of prizes in the early 
development of space technology. The industrialists and media who 
funded aviation prizes appeared to be responding to an enthusiastic 
public in seeking publicity for derring-do involving human flight, and 
at least in one case (maybe more, if documentation were more complete), 
the chance to use a plane as a flying billboard by advertising consumer 
products on the fuselage. Public perception of rocketry was 
incredulous, less enthusiastic and as noted, even marked by ridicule.
    Rocketry, perhaps more so than aviation, was the ``stuff'' of 
science fiction. Visible success--a rocket that successfully launches 
high and far--was also more difficult to achieve than success in 
aviation during these formative years. In addition, far fewer 
individuals were experimenting with rockets--thus, many fewer 
contestants might have stepped up to rocketry prizes were they to have 
been offered. Finally, a reason for using prizes in aviation might at 
first glance be the potential for commercializing the technology, but 
as noted earlier, this motive is far from obvious. A commercial profit 
motive in competing for aviation prizes per se (as distinguished from 
using the plane as a flying billboard for consumer products) is not 
evident in the written record--most of the competitions were ``one-
shot'' (although, again as noted, some aviation product lines were 
spawned). More generally, the technological advances encouraged by 
aviation prizes were each incremental but taken together built a 
foundation for the evolving commercial aviation industry.

II. What's different now--an era of government-sponsored R&D

    The climate for aviation prizes to reward technological advance 
pre-dated today's complex relationship between the private and 
government sectors in general and in space-related R&D in particular. 
The heyday of prizes was about 1900 to 1917--two decades in which 
aviation feats made the news for an attentive public interested in the 
new technology, thrilled by its daredevils, and newly enamored of all 
modes of transportation as the era of the auto began. The period was 
undoubtedly one of the most distinctive periods in the history of 
innovation. The private sector reigned in almost all economic sectors. 
For instance, almost 100 % of public transit systems-street railroads 
and trolleys--were privately owned, and individuals or private 
syndicates held about 85 percent of electric companies and 50 percent 
of water companies.
    Economic growth was also rapid. Per capita income roughly doubled 
just after the turn of the century due to an economy-wide increase in 
output. It was the era of modernization in steel mills, the beginning 
of skyscrapers, and rapid urbanization. It was also the chapter of the 
great industrialists--Andrew Carnegie in steel, John D. Rockefeller in 
oil, J.P. Morgan in finance, and railroad magnates like Jay Gould, 
Edward Harriman, Collis Huntington, and Cornelius Vanderbilt These 
entrepreneurs and their companies did the bulk of R&D.
    Not surprisingly, government began to grow rapidly with the advent 
of personal and corporate income taxes in 1913 and a corporate excise 
tax enacted in 1909. Government spending increased from about $500 
million in 1902, to about $900 million in 1913, then to $1.8 billion in 
1922 (all amounts are adjusted for inflation). Per capita government 
spending increased 21/2 times from its level in 1902 to its level in 
1922. World War I, the Depression, and World War II brought further 
large increases in federal spending. Most expenditures before 1915 were 
for defense, the postal service, and veterans services; by 1920, 
expenditures included these activities plus growing interest on debt 
and financing of air and water transportation.
    Increased government expenditure during this time was not, however, 
directed towards R&D. About the only role of government in innovation--
albeit an important role--was protecting invention by way of the very 
active patent system. The large expansion of government R&D that 
characterizes today's public sector began after World War II in the 
form of procurement contracts and peer-reviewed research grants to 
universities. At the same time, a new, so-called social contract 
between government and researchers evolved to provide for freely 
sharing the results of research in exchange for funding.\8\
---------------------------------------------------------------------------
    \8\ See historical discussion and references in US Congress, Office 
of Technology Assessment (1991), Federally Funded Research for a Decade 
OTA-SET-490 (Washington, DC: U.S. Government Printing Office).
---------------------------------------------------------------------------
    Government involvement now extends well beyond protecting 
intellectual property to include direct subsidies and R&D tax credits 
as well as carrying out research at government laboratories or other 
facilities, often in partnership with the private and academic sectors. 
Government's influence is far wider because a host of other policies, 
although not directed toward R&D, also significantly affect the rate 
and direction of innovation. These include safety and health 
regulation, mandatory labor practices, and environmental protection. 
Analyses evaluating the fruits of government-sponsored R&D reveal a 
mixed record. The supersonic transport, the Clinch River Breeder 
reactor, synthetic fuels from coal, and the photovoltaics 
commercialization programs are among ``failures'' according to most 
analysts.\9\ In other cases, government investment seems to have paid 
off. For example, a recent National Research Council study of fossil 
energy research supported by the U.S. Department of Energy found that a 
least a handful of R&D initiatives ranging from electronic ballasts in 
compact fluorescent tubes to atmospheric fluidized-bed coal combustions 
were ``well worth it'' in that the estimated net realized economic 
benefits were positive.\10\
---------------------------------------------------------------------------
    \9\ The edited volume by Linda Cohen and Roger Noll (1991) The 
Technology Pork Barrel (Washington, DC: Brookings Institution) 
discusses these examples.
    \10\ National Research Council (2001) Energy Research at DOE: Was 
it Worth It? (Washington, DC: National Academy Press).
---------------------------------------------------------------------------

III. The tight coupling of government R&D funding and aerospace

    Government stepped in to fund and manage civilian space activity in 
response to Sputnik and the Cold War--putting a ``government in 
charge'' imprimatur on space activities. Government involvement 
continues--of all federal R&D money flowing to industry, about a third 
goes to the aerospace sector, and of that, 98 percent goes to nine 
companies.\11\ Two-thirds of R&D funding in aerospace is federally 
financed.\12\ Not all space developments have been publicly funded, 
however. There have been some important exceptions in which large 
amounts of private money were invested in developing space technology. 
NASA and the Department of Defense jointly funded a small amount of the 
development costs of the Hughes Aircraft Company to design the Syncom 
satellites (the first commercial geostationary communications 
satellites), but most of the funding came from the Comsat Corporation 
using money from common carriers and from a public stock offering.\13\ 
Private money also contributed to underwriting the cost and risk of 
developing the launch vehicle Pegasus and portions of the Sea Launch 
system. Like any industry, however, for every profitable success there 
are many more financial failures. There have been unsuccessful attempts 
to privately finance new space transportation systems, low-Earth orbit 
communications networks, and some commercial Earth-observations 
satellite systems.
---------------------------------------------------------------------------
    \11\ Federal funding of R&D increased from about $ 50 billion in 
1960 to over $80 billion in 1990 (all figures in 2002 dollars), growing 
rapidly during the ``golden years'' for research after the launch of 
Sputnik and the commitment to land on the Moon. Federal R&D funding in 
recent years has been around $105 billion.
    \12\ Tables A-9 and A-15, National Science Foundation, Research and 
Development in Industry: 2000, at http://www.nsf.gov (accessed July 
2004).
    \13\ At the time, the public held half of Comsat's stock and 
communications companies like AT&T, ITT, RCA, and Western Union held 
the other half. For more on the development of commercial 
communications satellites see John L. McLucas (1991) Space Commerce 
(Cambridge, MA: Harvard University Press).
---------------------------------------------------------------------------

IV. Prizes, procurement contracts, and peer-reviewed research grants in 
                    the 21st century

    As government grew, prize offerings tailed off not only in aviation 
but also in other fields. There may be no causal link, or maybe there 
is one. The answer would shed some light on whether reinstituting 
prizes now can be successful in inducing innovation. Part of the answer 
also rests with whether prizes are compatible with or offer significant 
advantages compared with the ingrained contracting and grant-making 
relationships between government and the private sector in space R&D. 
In any case, neither prizes nor, for that matter, other traditional 
approaches to R&D sponsorship by way of peer-review or procurement 
contracts guarantee ``success'' in bringing about innovation.
    Much of the preceding discussion has emphasized the historical 
success of prizes but they have some disadvantages. These include:

        --  no provision for up-front cash flow to defray expenses;

        --  duplication of research effort if many individuals or 
        groups compete;

        --  uncertainty about whether the innovation can succeed; and

        --  delays in the pace of innovation if a lot of time elapses 
        before it is determined that there are no winners.

    In addition, prizes are unlikely to meet other social objectives 
that government sponsorship in general, or NASA sponsorship in 
particular, has traditionally pursued. For example, prizes do not 
necessarily further these goals that NASA has frequently set forth as 
success measures in its R&D policy:

        --  increase the number of academic researchers;

        --  increase the number of scientists and engineers;

        --  create jobs;

        --  influence political support by way of job creation;

        --  broaden the participation of traditionally under-
        represented groups in science and technology; and

        --  prop up a particular supplier or group of suppliers to 
        ensure choice (say, to ensure that a range of capacities is 
        available in space transportation by dividing business among 
        companies that offer different classes of vehicle lift)

    In addition, there are some disadvantages of government-sponsored 
prizes compared with privately sponsored prizes:

        --  Government typically cannot commit to funding beyond a 
        fiscal year, thus limiting the timing of the prize competition 
        and cutting short the time that might be required for the 
        technical achievement it awards.

        --  Any uncertainty about whether the prize will actually be 
        awarded due to government budgets or changes in administration 
        will weaken if not eliminate incentives to compete.

        --  Intellectual property rights to the achievement may need to 
        reside with the competitor to induce participation, even though 
        the taxpayer, by financing the prize, could fairly claim 
        rights. It is interesting to note that after contentious 
        deliberations, in 1960 the U.S. government awarded the 
        Guggenheim Foundation and Robert Goddard's widow $1 million in 
        settlement for government use of more than 200 of Goddard's 
        patents (Goddard died in 1945).\14\
---------------------------------------------------------------------------
    \14\ See von Braun and Ordway.
---------------------------------------------------------------------------
    Some of these disadvantages are also an outcome of traditional 
grants and procurement contracts. And, grants and contracts offer some 
advantages over prizes. What follows summarizes some of the 
differences:
    Asymmetry of information. The engineer/entrepreneur may have a 
better idea of the technical riskiness of the R&D than the government. 
In this case, offering an award upon completion of rather than in 
advance of research lessens the cost to the government of pursuing 
highly risky innovation.
    Information and uncertainty. While prizes put the burden of proof 
on competitors, grants and procurement contracts, by requiring up front 
information, can more promptly reduce (although not eliminate) 
uncertainty about whether the innovation is feasible. Prizes may go un-
awarded for the duration of the competition, and only then, after this 
delay, might it be concluded that the technology is not yet feasible 
(although other reasons may explain the lack of a winner). Using prizes 
can thus delay a determination that a technology is infeasible and 
delay pursuit of alternative paths that might have been more quickly 
pursued under a grant or contract.
    Cash flow. Grants and contracts, by providing funding up-front, 
underwrite early stages of innovation. Prizes, by providing an award 
only upon completion, could create cash-flow problems for contestants 
or require them to spend time and resources to find financial support 
during the competition.
    Who bears financial risk. Financial risk rests largely with the 
taxpayer under grants and contracts and projects can fail or be 
terminated before providing any return to the taxpayer. Prizes do not 
guarantee success but the financial risk rests with competitors and 
their funders rather than the taxpayer.
    Safety risk. The early history of aviation is replete with 
accidents and fatalities in pursuit of innovation, but efforts 
continued with scarcely a hiccup. The government's approach to safety 
risk is wholly different, as illustrated by the lengthy standdown of 
U.S. human space flight activities in the wake of the Apollo 1, 
Challenger, and Columbia fatalities.
    Duplication of effort. A prize rather than a research grant made to 
one firm may have the advantage that ``two (or more) chances are better 
than one'' if there are several independent research programs. On the 
other hand, from a broad view of the Nation's resources as a whole, 
there may be wasteful duplication of effort if there are simultaneous 
research programs all pursuing the same goal.\15\
---------------------------------------------------------------------------
    \15\ Researchers have investigated the problem of ``patent races'' 
and whether simultaneous pursuit of a new technology leads to wasteful 
duplication. For example, see discussion in Jean Tirole (1988) The 
Theory of Industrial Organization (Cambridge, MA: MIT Press), Chapter 
10.
---------------------------------------------------------------------------
    Awardees' incentives. Most peer-reviewed grants result in 
publications and sometimes, patents. By and large, grants are not 
intended for nor do they typically result in commercial products or 
services. Procurement contracts can satisfy government-unique 
requirements or lead to commercial feasibility. The motives for 
competing for prizes are less clear--in the history of aviation prizes, 
only a few entrants themselves followed up with commercial product 
lines, but they may have collected patents (the data about the long-
term pay-offs to aviation prizes are sparse). Typically an award 
recipient, whether it is an individual competing for a prize or a 
corporation winning a procurement contract, capitalizes any expected 
commercial value of the research or innovation into their decision 
whether to compete.
    Basic research, technology development, and commercialization. All 
three approaches can underwrite basic research, technology development, 
or commercialization. For example, a university researcher with access 
to a laboratory may be as interested in competing for a prize as in 
competing for a research grant. A private inventor may compete for an 
award for modest improvements in technology or may be inspired to 
research more radical innovation, irrespective of commercial potential. 
Prizes have been awarded for solving mathematical problems (the 
Wolfskehl Prize for proving Fermat's last theorem\16\ ) as well as for 
technology development with commercial potential--the motives for 
pursuing an award seem varied.
---------------------------------------------------------------------------
    \16\ See National Academy of Engineering (1999) Concerning 
Federally Sponsored Inducement Prizes in Engineering and Science 
(Washington, DC: National Academy Press).
---------------------------------------------------------------------------
    Failure. All three approaches provide an opportunity to learn what 
``doesn't work.'' The Defense Advanced Research Projects Agency 
(DARPA), for example, had no winner in its recent, $11 million Grand 
Challenge race for robotic navigation of a 142-mile stretch of the 
Mojave Desert. DARPA admitted that it was pessimistic about a 
successful finish because the technology is not yet that advanced, but 
also pointed out that learning from mistakes is a way to advance 
technology. The agency plans to hold the competition again in 2006. 
Similarly, a recent government contract for a follow-on Earth 
observation satellite system for the Landsat program was not awarded to 
any bidder because proposals did not meet all the criteria. In these 
cases, failing to find a winner signaled that the technology, cost, or 
both was not yet up to the expected par. The chance to learn more than 
this--that is, to learn more about details of engineering design, 
engineering cost, and so forth--is limited, however, unless competitors 
are required to share information about their approach rather than keep 
the information proprietary.
    Because of these differences in prizes, grants, and contracts, all 
three approaches, taken together, can provide a good portfolio of tools 
to encourage innovation. As an additional note, in all three 
approaches, ownership of intellectual property needs to be determined 
and will affect the public and private pay-off to the innovation.

V. NASA prizes

    The candidate Centennial Challenges identified by NASA for prize 
awards range from very low cost spacecraft missions, to breakthrough 
robotic capability, to revolutionary technology demonstrations.\17\ 
There is precedent in the history of prizes for awards to address all 
of these types of innovations. However, the specific candidate 
challenges that NASA has identified do not include prizes for Earth 
science--even though the language accompanying the Challenges preamble 
embraces Earth science. Innovation in Earth sciences might be a good 
prospect for prizes given the rapid pace of new sensor development and 
the manifested interest of the private sector in Earth observations.
---------------------------------------------------------------------------
    \17\ See ``Centennial Challenges Program'' at http://
centennialcallenges.nasa.gov/workshop.htm (accessed July 2004).
---------------------------------------------------------------------------
    It is hard to outline a formula for determining the size of the 
prizes- awards set too low may just miss inducing an innovation; awards 
set too high result in taxpayers paying more than necessary to induce 
the innovation. Not all competitors will necessarily be pursuing 
commercialization or an ongoing supplier relationship, if the history 
of aviation prizes is a guide to motives for participation. For this 
reason, potential commercial profitability may not figure in 
competitors' participation decisions or be relevant to government's 
procedures for determining the size of the prize.
    In any case, if a prize is offered but not awarded, the outcome may 
signal that the technology is simply not yet mature enough at that 
price--important information for government R&D managers. For ``tent 
pole'' technology development--that is, technology that is essential in 
furthering a goal--the uncertainty of success in a prize competition 
weakens the usefulness of prizes (although grants and contracts do not 
necessarily guarantee success either).
    Shortcomings of government prize sponsorship, as noted earlier, 
include commitments to funding across fiscal years, political 
administrations, and different Congresses. Problems also involve 
determining an appropriate allocation of rights to intellectual 
property developed with taxpayer support but possibly of commercial 
proprietary value. It would be useful for competitors to share results 
even if their attempt is unsuccessful (learning by doing), but so doing 
could undermine expected private value and thus come full circle to 
discourage participation in the competition.
    Involving a broad range of expertise, including outside experts, 
may be an advantage in structuring government-backed prizes. For 
instance, it may be desirable for a board of directors consisting of 
experts outside of government to administer and judge contests. Because 
a prize can ``ferret out'' new ideas, eligibility to compete should 
also be broad (the Centennial Challenges prohibit federal employees and 
employees of federally funded research and development centers (FFRDCs) 
from competing, but much talent in aerospace is at NASA centers and 
FFRDCs).

VI. Conclusions

    The history of prizes is attractive enough to warrant experimenting 
with their use in NASA activities. Further review of the structure of 
previous contests (their guidelines, funding, and results) and in 
particular, their assignment of property rights would provide helpful 
``lessons learned'' as plans proceed. But prizes cannot fully 
substitute for peer-reviewed grants and procurement contracts. Even 
though these funding mechanisms are far from perfect, they balance some 
of the disadvantages of prizes. Taken together, all of these forms of 
financial support make up a portfolio of tools for encouraging 
innovation.

                    Biography for Molly K. Macauley

    Dr. Macauley is a Senior Fellow with Resources for the Future 
(RFF), a research organization established upon the recommendation of 
the presidentially appointed Paley Commission in 1952. Dr. Macauley's 
research at RFF includes the valuation of non-priced space resources, 
the design of incentive arrangements to improve space resource use, and 
the appropriate relationship between public and private endeavors in 
space research, development, and commercial enterprise. Dr Macauley has 
been a visiting professor at Johns Hopkins University, Department of 
Economics, and at the John Hopkins School of Advanced International 
Studies. She has also been a visiting professor at Princeton University 
in the Woodrow Wilson School of Public Affairs. Dr. Macauley has 
testified before Congress on the Commercial Space Act of 1997, the 
Omnibus Space Commercialization Act of 1996, the Space Business 
Incentives Act of 1996, and space commercialization. She has served on 
many national level committees and panels including the congressionally 
mandated Economic Study of Space Solar Power (Chair), the National 
Research Council's (NRC) Aerospace and Space Engineering Board's 
steering committee on issues of technology development for human and 
robotic exploration and development of space, the NRC Space Studies 
Board steering group on space applications and commercialization, and 
the NRC Space Studies Board task force on priorities in space research. 
In 1994, she was selected as one of the National Space Society's 
``Rising Stars,'' and in 2001 she was voted into the International 
Academy of Astronautics. Dr. Macauley has published extensively with 
more than 70 journal articles, books, and chapters of books. She has 
served on the Board of Directors of Women in Aerospace and is President 
of the Thomas Jefferson Public Policy Program, College of William and 
Mary. Her Ph.D. in economics is from Johns Hopkins University and her 
undergraduate degree in economics is from The College of William and 
Mary.

    Chairman Rohrabacher. Well, thank you very much for your 
provocative testimony. And I am sure we will get around to some 
dialogue, maybe even interpanel dialogue, on some of the issues 
you have brought before us today. Just to remind you, however, 
someone did say that the era of ``big government'' is over. I 
don't know what happened after that, but I remember somebody 
said that.
    So Mr. Holtz-Eakin--now pronounce it for me.
    Dr. Holtz-Eakin. Holtz-Eakin.
    Chairman Rohrabacher. Holtz-Eakin. Mr. Holtz-Eakin. Dr. 
Holtz-Eakin.

 STATEMENT OF DR. DOUGLAS HOLTZ-EAKIN, DIRECTOR, CONGRESSIONAL 
                         BUDGET OFFICE

    Dr. Holtz-Eakin. Mr. Chairman, Members of the Committee, 
international guests, the CBO is delighted for the chance to 
appear today. We have submitted our testimony for the record.
    Let me simply make four points that will reflect some of 
the comments that have been made by the panel members before 
me. In some circumstances, prizes--inducement prizes and 
incentive prizes are an effective means to acquire new 
technologies, and thus, as Dr. Macauley said, would be a useful 
addition to the portfolio of tools that NASA has to pursue its 
objectives in aeronautics and space. However, prizes are not a 
panacea. While at the level of individuals, it will alter the 
mix of risk and rewards and may induce new entrants: those with 
a greater taste for risk, those who are currently curtailed by 
the barrier from federal procurement compliance. This may 
induce these new entrants into the pursuit of accomplishment. 
At the aggregate level, the use of prizes does not change the 
ultimate technological challenges or the research requirements. 
And for that reason, if they are deployed in the pursuit of 
great and risky challenges, they will require correspondingly 
large prizes in order to be successful.
    And the prizes are more than the money. As has been 
emphasized before me, the rules in pursuit of the prize must be 
clear and consistently employed. That--an important 
consideration in thinking about setting out the rules is what 
constitutes the timing in pursuit of the prize, who will be 
eligible to participate, and when is new participation cut off. 
What will be the rules for the transfer of the ultimate 
technology at the end of the pursuit of this prize, and who 
will have the rights to that will be an important part of the 
incentives provided by the prize. And finally, the prize payoff 
must be assured, which will, in fact, in this context, largely 
depend on the budgetary treatment.
    Now that budgetary treatment in the end will depend on how 
Congress chooses to write any such legislation. And the two 
examples that exist at the moment, I believe, show some of the 
outer boundaries of the possibilities. The DARPA prize that was 
mentioned earlier is financed out of annual appropriations. In 
2004, when it was not awarded, the $1 million was reprogrammed 
and used for other purposes. The $1 million was not large, 
relative to the overall budget, and was relatively assured in 
the eyes of the competitors. Larger prizes might not be 
suitable in that circumstance because of the possibility that a 
large prize would be subject to rescinding or reprogramming. In 
those circumstances, what NASA has requested in this--for the 
Centennial Challenges, is an authorization of appropriation of 
now-year money. Money that will be available in whatever year 
in which the prize might be awarded, it would be subject to 
appropriation, but once appropriated, that budget authority 
would remain present until the prize was used and would provide 
some assurance to competitors that the resources would 
ultimately be there upon completion of the technological 
objective.
    Those are the four major points in the testimony. They are 
reflective, I think, of the issues that have been surfaced by 
the panel members before me. We look forward to answering your 
questions.
    [The prepared statement of Dr. Holtz-Eakin follows:]

               Prepared Statement of Douglas Holtz-Eakin

    Mr. Chairman, Congressman Lampson, and Members of the Subcommittee, 
thank you for this opportunity to present the Congressional Budget 
Office's views on the basic economics and budgetary treatment of cash 
prizes, or inducement prizes, like those that would be included in the 
Administration's Centennial Challenge prize program proposed in the 
2005 budget for the National Aeronautics and Space Administration 
(NASA). In my remarks today, I would like to make four points:

          In some circumstances, inducement prizes are an 
        effective means of acquiring technologies that the government 
        deems desirable but that are unlikely to be provided by private 
        markets. But there is no free lunch. Innovators and researchers 
        must be paid for what they do. Inducement prizes have to be 
        very large if the objectives sought are risky and expensive.

          Prizes can be most useful when the government seeks 
        participation in research efforts by people or firms that might 
        not participate in the traditional procurement process. 
        Contests offer the advantage of lowering the barriers to entry 
        typically posed by the government's procurement procedures.

          The rules and structure of contests can make a 
        difference in the level of effort put forth by participants and 
        in the payoff to the government.

          Inducement prizes entitle successful competitors to a 
        future payment. To fulfill that type of commitment, the 
        sponsoring agency needs to have sufficient budget authority to 
        cover the potential payment before offering the prize. As a 
        general rule, money needs to be appropriated up front for the 
        full cost of the prize.

No Free Lunch

    An inducement prize is one among many means that the government can 
use to spur the development of innovative technologies. Like direct 
production, contracting for specific systems, and research grants, cash 
prizes have characteristics that make them a more or less effective way 
to do business depending on the circumstances. But prize competitions 
do not change the underlying factors that determine risks and rewards. 
An individual or business choosing to participate in a government-
sponsored contest will address those risks and their cost in deciding 
whether to enter and, once entered, in deciding how much effort to 
undertake. Large and expensive technical risks will require large 
prizes if they are to induce effort.
    Charles Lindberg won a $25,000 prize when he succeeded in flying 
from New York City to Paris in 1927. Inflated to 2005 dollars, that 
prize amounts to a little over $260,000--a very small amount measured 
against the scale of NASA's major programs. Advocates suggest that 
inducement prizes are more likely than traditional contracting to 
produce revolutionary technical changes that reduce costs because they 
bring new players and new ideas to the playing field. That may be the 
case, but the point remains that the large scale of the projects that 
dominate NASA's programs--for example, the Crew Exploration Vehicle is 
currently estimated to require development expenditures of over $12 
billion (in 2005 dollars)--would probably require prizes of the same 
order magnitude as the current cost estimates, if they were to produce 
the desired results.
    Prizes are not new; there are examples from the United States and 
abroad currently in effect and stretching back to the 18th century.\1\ 
Before Lindberg won his prize, Glenn Curtis won prizes of $2,500 in 
1908 and $10,000 in 1909 for achieving a set of firsts in wheeled 
takeoffs and flight distances.\2\ In the early 1700s, the British 
Parliament offered a substantial prize to the developer of a means to 
gauge longitude at sea. As this Subcommittee is well aware, the 
privately funded Ansari X-Prize offers $10 million to the first team 
able to fly a vehicle carrying one person, but capable of carrying 
three, to an altitude of 62 miles above the Earth and return safely, 
twice within a 14-day period. And in 2004, the Defense Advanced 
Research Projects Agency's (DARPA's) Grand Challenge offered a prize to 
the first developer of a robotic rover capable of completing a 
challenging desert obstacle course.\3\ Although no contestant succeeded 
this year, the competition will again be run in October 2005.
---------------------------------------------------------------------------
    \1\ See Steering Committee for the Workshop to Assess the Potential 
for Promoting Technological Advance Through Government-Sponsored 
Inducement Prizes in Engineering and Science, Concerning Federally 
Sponsored Inducement Prizes in Engineering and Science (Washington, 
D.C.: National Academy of Engineering, November 1999), Appendix A.
    \2\ U.S. Centennial of Flight Commission, ``Glenn H. Curtiss,'' 
available at www.centennialofflight.gov/essay/ Explorers--Record--
Setters--and--Daredevils/Curtiss/EX3.htm.
    \3\ The DARPA Grand Challenge is described at www.darpa.mil/
grandchallenge.
---------------------------------------------------------------------------

Prizes and Participation

    What is different about prizes, and what advantages may they offer? 
Experience from both the Ansari X- and DARPA prize contests suggests 
that inducement prizes will draw untraditional participants and ideas 
that the usual contracting procedures will not. Thus, the prize 
mechanism may be most valuable when the government is seeking to 
achieve a specified objective but has little idea of how to do so, and 
therefore wants to encourage a wide variety of approaches.
    Probably the main reason that prize competitions induce wider 
participation than other lures the government can use is that they 
impose few contracting and accounting requirements. Such requirements 
pose significant barriers to entry by newcomers, especially small 
firms, in traditional competitions for government contracts.
    A second factor that might play a role in inducing wider 
participation is the prestige associated with winning an open 
competition. Relatively unknown entrants might find a well-publicized 
competition more attractive than an equivalent procurement contract if 
winning would provide a larger boost to their credibility in the 
marketplace. They might also value the resulting prestige more than 
established firms would and therefore be more inclined to participate.

Rules and Structure

    The rules and structure of a contest matter and are likely to be 
critical to the government's getting its money's worth for the prize 
offered. My testimony touches on only a few of the major points from 
the substantial body of literature on the subject.
    Most important, the contest's rules must be adhered to. Awarding a 
prize for performance that falls short of the designated finish line 
establishes a precedent that contestants may use in future competitions 
to claim rewards for less than complete success. To successfully make 
repeated use of contests, the government must establish a reputation 
for following the rules that it establishes.
    Clarity in the rules is also essential. Unclear or unenforceable 
rules are an invitation to conflict, and the government will bear a 
cost of adjudication when disputes arise. Conflicts over rules in the 
Federal Communications Commission's auctions of licenses to use the 
radio spectrum and in its Pioneer's Preference policy (which granted 
spectrum license rights to the developers of innovative technologies or 
approaches to using the radio spectrum) are relevant illustrations. In 
both cases, unclear rules led to prolonged and expensive legal disputes 
between the government and private parties.
    A cash award contest could be structured as a tournament or race, 
each of which offers advantages and disadvantages. A tournament, which 
specifies an objective and a time limit, guarantees an award to the 
party that has made the most progress toward meeting the objective. It 
encourages participation--parties with substantial uncertainty may 
enter on the basis of partial insights--but can impose high costs on 
the government for evaluating many participants' relative progress 
toward the goal. In contrast, a race specifies a goal and may or may 
not specify a time period, but an award is made only if a party 
achieves the goal. Participation may be less than if partial success is 
rewarded, but the government pays only for meeting the specified 
objective and is likely to incur lower evaluation costs because 
unequivocal success is more easily judged than progress toward the 
goal.
    Rules governing entry and elimination, if the contest has phases, 
are also important. A competitor for a cash prize makes decisions about 
whether to enter and how much effort to expend mindful of the odds both 
of achieving the goal and of achieving it before competitors do. More 
entrants worsen the odds of being first and lead to decreased effort. 
Fewer entrants, however, may deny the government the benefits of 
capturing a wide array of novel approaches--one of the main reasons for 
choosing a contest over other forms of acquisition.
    The designers of a government-sponsored contest face the problem of 
structuring the competition so that rewards are sufficient to offer a 
good prospect of success but take account of the subsequent benefits of 
spreading technological innovation to the larger economy. A competition 
that limits the patent rights of a successful winner will attract fewer 
entrants and less effort but at the same time allow for the rapid 
diffusion of technology. In some cases, offering a larger prize to 
attract more entrants and greater effort in exchange for intellectual 
property rights may make sense for the government.
    In many circumstances, cash awards may be outstanding for a number 
of years. For example, the $10 million Ansari X-Prize was first offered 
in 1996. To provide the same inducement today, the prize would have to 
have grown to over $12 million. Government-sponsored competitions could 
maintain a constant level of real incentives by indexing the value of 
prizes to the rate of inflation. Also, in the interest of matching 
rewards and effort, contest rules could specify increasing rewards at 
the government's discretion. For example, DARPA is increasing its 
challenge award from the $1 million offered in 2004, when no competitor 
completed the course, to $2 million for the 2005 race. Elimination 
rounds could also be used to intensify the competitive effort. As the 
number of competitors decreases, their improved prospects of finishing 
first increase the expected value of the prize and prompt greater 
effort.

Financing and Federal Budgetary Treatment

    Policy-makers have several alternatives for the financing of prize 
money. To best encourage successful competition for advancement in 
space travel and exploration, however, the government would have to 
make clear that the funds to reward the winners were available and were 
not contingent on future legislative actions. That approach would mean 
providing the budget authority up front--appropriated by the Congress 
and accounted for in the federal budget. Were funds to be appropriated 
later, a degree of uncertainty would probably limit participation.
    Practices in the private sector also suggest that a sponsor may 
tailor its financing to the nature of the prize. For example, 
recipients of performance awards like the Nobel Prize have no fixed 
expectation of receiving the prize, so the sponsor has no obligation to 
fund a specific number or size of awards. In contrast, individuals or 
businesses vying for an inducement prize are opting to compete on the 
basis of a promise of a specified payment. As a result, the sponsor 
must guarantee that it will be able to pay the amount promised at the 
time promised. The Ansari X-Prize Foundation is being funded by private 
donations, but the amount and timing of the payment are backed by an 
insurance policy, making it clear to competitors that the funds will be 
there for a successful entrant.
    Most existing federal prizes are used to recognize past 
performance--for instance, the Malcolm Baldrige National Quality Award 
and the Vannevar Bush award for public service activities in science 
and technology. Such awards typically are in the form of medals and 
other non-cash compensation, but agencies still need funding to cover 
the cost of the prizes and the programs. Such programs are funded by 
annual appropriations, so the level of funding can fluctuate from year 
to year depending on federal priorities.
    DARPA's 2004 competition illustrates the approach of appropriating 
the full cost up front. The budget authority for the $1 million prize 
was included as part of the agency's $2.8 billion appropriation for 
2004. When DARPA announced the competition, it reserved the $1 million 
needed to cover the potential payment. Once the competition ended 
without a winner, DARPA released those funds and was able to use the 
money for other authorized purposes. Had there been a winner, the 
agency would have incurred an outlay when it paid the prize.
    Very large cash prizes may require additional measures to secure a 
future federal payment. Given the amount and short time horizon of the 
DARPA prize, competitors may be confident that the agency will be able 
to pay the $1 million. Competitors may have less confidence, however, 
if the promise to pay extends several years into the future, especially 
if the prize represents a much larger share of an agency's budget. 
Funds appropriated for a payment that is in the future but have yet to 
be obligated can be rescinded or otherwise limited by subsequent 
legislative action, especially if federal policies toward the program's 
objectives change.
    Proponents of prizes valued at hundreds of millions or billions of 
dollars must consider ways to balance contestants' need for assurance 
about the funding with the cost of ensuring payment. As mentioned, the 
sponsors of the X-Prize purchased an insurance policy to guarantee the 
prize money. Alternatively, federal funds could be put in a private 
escrow account, but such a transaction would involve making the 
payment--that is, a budget outlay--at the time the money was put in the 
escrow fund; if there was no winner, unclaimed funds would be returned 
to the government, but that receipt would not occur until after the 
competition was over.
    The budgetary impact of any award program ultimately depends on 
policy-makers' choices about the terms. Specifying the amounts 
authorized to be appropriated is the key element of Congressional 
control, but other terms are important as well. NASA has requested 
authority for a permanent award program, not a pilot program. 
Individual awards would be limited to $10 million (although the 
Administrator or his or her designee could increase that sum), and any 
appropriated funds would be available indefinitely (as so-called no-
year money). That approach would give the agency latitude in setting 
the duration of competitions without risk that the authority would 
lapse, and it would allow the agency to reuse any unclaimed (and 
therefore unobligated) funds for other competitions.

                               Discussion

    Chairman Rohrabacher. Well, thank you very much. And that 
was a very good summary, I might add, so I appreciate that.
    We have--Ms. Jackson Lee has joined us. Thank you very 
much.
    We now will go into some questions and answers. And I--
first a little bit about--I think the risk issue has been 
pretty well addressed by the testimony. And there--you know, 
two points of view on how much risk--you let us know that 
Charles Lindbergh and, as you mentioned in your testimony, 
there were people dying before Charles Lindbergh took off, and 
he took off anyway. And the question is was that a good thing 
that Charles Lindbergh took off and ended up flying across the 
Atlantic and accomplished his mission. I think it was historic. 
I think it did something for the spirit of the American people. 
And it was a risk. There was no doubt about that to the people 
that died beforehand. But did that do great things for America 
and for the world? I think it did.
    If anyone disagrees with that, I--please feel free to jump 
in. We don't want to attack the memory of Charles Lindbergh 
here. Okay. All right.
    I think all--what we hear also is this--the testimony about 
hybrid rockets and how the fact that they were ignored by the 
establishment. There is no doubt that this idea about awards 
and prizes is an idea that is trying to get around the fact 
that our establishment seems to be stuck in a morass. And is--
and the established institutions in our society that are 
supposed to be leading us on technologically and upward into 
space are not working. It is not happening that way. There is 
too much--and whether it is private sector or public sector, 
there is too--the bureaucracy and politics that has developed 
over the years like slag on a rocket nozzle is keeping us down. 
And it is preventing us from taking advantage of ideas that are 
already here. How long did you say the hybrid rocket has been 
around? Which--was it Bob who mentioned that?
    Mr. Walker. Yeah. I--the Amroc technology goes back into 
the '60's, I think. I am not exactly certain of that, but I 
think Amroc--it was the '60's or the '70's when they first came 
up with the concept that is today being used in the hybrid 
rockets that Space Dev is building.
    Chairman Rohrabacher. So we need to make sure that we have 
a system that will--in much--be able to reach out and be able 
to use these new technologies, which are now being cut off. Let 
me ask about how we see the--and by the way, there is a mention 
of duplication of effort as--might be a cost in this. Yes, 
there is a--you know, there is analysis that can have a down 
side to everything, but I know that we were up against a system 
that eliminated all of the duplication of competition. We were 
up against that system for 50 years. And by the end of that 50 
years, that system couldn't produce toilet paper. And I 
remember going into stores in communist countries, and they had 
eliminated all of the competition in toothpaste, for example. 
You go into a communist store and it said ``toothpaste.'' And 
that is all it had, ``toothpaste.'' It didn't have ``gleam'' or 
didn't have these various, you know, ``all bright'' or whatever 
kind of toothpaste. You go into a store now, we have got 
toothpaste of every kind and variety you could imagine. But 
what struck me about the toothpaste in communist countries is 
it was awful. It was really bad. And yeah, there is some 
duplication when you have competition, but I have a feeling 
that it actually is worth it. And that is just a thought.

                         Organization of Prizes

    About how we would organize this idea of prizes, what 
structure we would use if we accept that it is an idea--a good 
idea. If, in the end, the downside is looked at the upside and 
we all--and we come to a consensus in our society that it is a 
good thing to move forward on this idea, where will we put it 
and who will make the determinations? A lot of these questions 
have been talked about today. Let me ask, is it a better idea 
to create a separate foundation? Can this be done within NASA? 
The Chair would personally suggest that it might be a good idea 
to establish something like the National Endowment for Space 
Technology and Innovation, something like that, which would put 
a group of people outside of the current structure in a 
position to offer the prizes, oversee the prizes, and to make 
sure that they were paid. But that is just an idea. Maybe if we 
go down the panel of how you would see the--can it work within 
NASA? And if it can't, what is the best alternative?
    Rear Admiral Steidle. Sir, I thank you, sir. I, of course, 
from the perspective of where I am, feel that it is in the 
right place, sir, right where it is now, and that--and for this 
reason.
    Chairman Rohrabacher. I thought you might say the Navy 
would be the best place to put it. But----
    Rear Admiral Steidle. Yes, sir, a year ago, I would have 
said that. Yes, sir. But what has to be done is the focal point 
of these particular challenges. There needs to be a focal point 
on where are we headed with this, what are the requirements, 
what are the particular aspects that we hope to achieve and the 
expectations. The President's Vision right now gives us those 
particular directions and focus and vision around which we can 
place the Centennial Challenge Program. It also gives us a 
scope in the programs that we have from our traditional 
procurement processes and RFPs and RFIs through small business 
innovative research into technical transfer programs to another 
aspect called Centennial Challenges. So I think if it was put 
somewhere else other than this, you must have, I think, some 
sort of a link back to the visions and the expectations that 
you need. And for that reason, I think where it is right now, 
focused on the Exploration Vision that the President provided, 
it is a perfect addition.
    Chairman Rohrabacher. We are going to be watching the 
Centennial Challenge and how it works and note its successes 
and failures. And you will be a good guide for us. Thank you 
very much.
    Mr. Walker.
    Mr. Walker. Mr. Chairman, I think that the testimony from 
the CBO may have given you a guideline here. It seems to me 
that it is entirely appropriate that the--NASA would have some 
discreet kinds of technology that it would utilize prizes for 
and that they would be for fairly nominal sums inside an 
appropriation cycle that everybody understood it--what was 
manageable. But if you want to go for a really big prize, the 
kind of thing that I was talking about, you may want to reach 
outside NASA. I mean, if you are going for a $100 million prize 
or a $200 million prize, something along those lines, you may 
want to have a separate foundation that you charter and you may 
put some government money into it or you may provide the kinds 
of tax incentives that would allow that chartered foundation to 
raise the money. But that may be a more appropriate mechanism 
if you go for a very big kind of concept.
    Chairman Rohrabacher. Perhaps even having a tax credit----
    Mr. Walker. A tax credit might be another way of doing it 
to assure that someone with a large amount of wealth that wants 
to be intimately involved with such a program would have the 
ability to get in it.
    Chairman Rohrabacher. Right.
    Dr. Diamandis. Mr. Chairman, I would like to go on the 
record to say----
    Chairman Rohrabacher. You need to push a button on that. 
Okay.
    Dr. Diamandis. Thank you. I would like to go on the record 
to say I don't think there is a need to charter any kind of a 
new organization or foundation. Organizations, like my 
organization, X-Prize Foundation as a private foundation, would 
be thrilled to work in partnership with NASA. In fact, our very 
existence has been to pull together the global expertise to 
manage and run prizes, I would say, on an efficiency that is 
not seen elsewhere. One of the things that a private foundation 
can do in managing it is be innovative, such as go take NASA 
funds. Of course, the rules need to be set in concert. The 
objectives need to be set in concert with NASA. NASA is the 
customer--or the American people are the customer through 
NASA's eyes and vision. But a private, outside foundation can 
do things such as go and match that money from outside private 
corporate money, make deals with media companies to bring media 
attention and their capital. I think it is not unlikely that 
NASA money could be matched 4:1 with outside capitol, so a $10 
million prize becomes a $40 million prize. And you have a level 
of, also, independence that I think is critical to getting 
teams to compete.
    I promised to read an e-mail here from Burt Rutan today, 
because he was unable to come out. So I will read this. I agree 
with some of what he says, not necessarily all of it, but I am 
going to read it nonetheless. It says, and this is with all due 
respect to NASA, and Burt is sometimes outspoken, so my 
apologies in advance. It says, ``The Congress must direct NASA 
to conduct the prizes in the only way that they can work, to 
allow innovation and provide an atmosphere that will result in 
breakthroughs. That was done by Kremer and Orteig and X-Prize, 
i.e., the dollars were offered and guaranteed, but the offer 
had nothing to do with how the applicant approached the problem 
and had nothing to do with what risks the applicant should 
take. In fact, there should be no information passed until the 
applicant is ready to fly for the record. The DARPA $1 million 
prize for robotic vehicles was not run correctly. DARPA spent 
$6 million to monitor the applicants, six times the prize 
amount, and DARPA's work all tended to dissuade innovation. I 
have no faith that NASA knows how to run a technology prize. 
They must be directed by Congress to do it right.'' I do know 
that, you know, we have a 10:1 ratio in the other way in terms 
of the amount of money we spend to run the prize on an annual 
basis versus the prize amount. And we have been able to go out 
and attract a lot of innovators and benefactors, which I think 
could also be done to leverage NASA's dollars.
    Chairman Rohrabacher. Let us note that I think it was Mr. 
Rutan that said that this--his project cost, what, $20 million 
to come thus far, and he said that had this been done totally 
within NASA, that it would be--that would have been paying for 
the blueprints.
    Mr. Walker. Mr. Chairman, what he has said is it cost at 
least $20 million.
    Chairman Rohrabacher. At least 20 million? So I would 
suggest that this is a very low estimate on the part of Mr. 
Rutan that if it had gone through NASA it would have been--the 
blueprints would have been more like $50 million and to 
complete the project, it would have been a $500 million 
project. $500 million for what was done in the private sector 
for $20 million. Now people can disagree with that, but I think 
that that is not totally--that is not an outlandish thing to 
guess on my part.
    Finally, the last two witnesses on how we should structure 
it, and then we will do Ms. Jackson Lee.
    Dr. Macauley. Mr. Chairman, you suggested a National 
Endowment for Space Technology and Investment--Space Technology 
Investment. And I have a problem with that, because the acronym 
is NESTI, and I think we should do better than that, so let us 
go back to the drawing board on the name. But I think it is 
absolutely essential that the money and the administration and 
the rules and the judging be outside of NASA for a number of 
reasons. One is, as I indicated in my testimony, I think 
eligibility needs to extend to the talent we have at NASA 
centers and FFRDCs. The only way to avoid a conflict of 
interest there is to decouple the administration, judging, et 
cetera from NASA.
    Secondly, I can already see the kinds of administrative 
legally and regulatory required burden that is going to be put 
on a NASA-administered prize. And to whatever extent we can 
decouple it through a quasi-private/public instrument or a 
colleague of mine suggested, because we already have a 
government relationship with them, the Smithsonian Institution, 
but it has its own set of problems. But also, our community is 
so insular; we talk with ourselves and among ourselves. And we 
have got to engage the Vanderbilts and the Carnegies that are 
the titans of other than space industry. And we can do that if 
we have them work on this as part of a Board of Directors for 
this prize. Our space community talks to itself. We are too 
insular. We have got to reach out and engage the titans of our 
industry and other industries. And that is--a nice vehicle to 
do it is to have them to be involved in this prize situation.
    Chairman Rohrabacher. Thank you. Let us note that we have 
people--the space industry and this X-Prize actually reaching 
out to titans of other industries, other entrepreneurs, people 
who were in the dot-com industry and the--and in the Internet. 
And there are people with huge resources there that are very 
interested in this arena. And that is what this private 
alternative has actually mobilized.
    Mr. Holtz-Eakin and then Ms. Jackson Lee.
    Dr. Holtz-Eakin. Well, statutes preclude me from making 
specific recommendations, so I won't offer up the CBO as the 
location for this, but I will suggest that there are two kinds 
of considerations that would offer--enter into the decision. 
The first is what institution is best suited to pick the 
objectives for such prizes. The formal research literature on 
the use of prizes suggests that they are most effective in 
situations that are characterized by great uncertainty about 
how to literally get from point A to point B and not situations 
in which the risks are level of effort, management, or 
financial risks, the costs come in higher than you expected. So 
finding those kinds of situations and using prizes for them is 
really the threshold question. What are we trying to do?
    The next consideration would be which institution is best 
suited to create the certainty in the rules, not changing the 
rules in the middle of the game, and in the payoffs and the 
final ownership of the technologies. And those are the things 
that should decide it, not the labels on government versus non-
government.
    Chairman Rohrabacher. Okay. Well, thank you very much.
    Ms. Jackson Lee, thank you for giving the Chair a little 
extra time.
    Ms. Jackson Lee. Thank you, Mr. Chairman. Thank you very 
much, Mr. Chairman.
    And it is a pleasure to be able to have the distinguished 
former Chairman of this distinguished Committee before us. And 
we thank you for the work you have done during your tenure here 
in Congress and certainly the commitment that you continue to 
have in the business of science in America. When you were 
Chairman, and I still continue to say, but we have moved into a 
new century, and isn't that terrible to be able to say. That 
will be good for your book. But I have said always that science 
is the--then the work of the 21st Century. I will continue to 
say that science does create opportunities for this century and 
centuries to come. So this is an important hearing from the 
perspective of, I think what Dr. Holtz-Eakin just mentioned. 
It--this hearing speaks to the question of getting from A to B 
with a great deal of uncertainty or the issue would be one of, 
at this point, so problematic that we didn't even know what we 
were discussing. So you are sort of reaching far into the 
unknown is what I think you are suggesting that prizes might be 
the best for.
    Mr. Chairman, you know that I have been, hopefully, a 
passionate advocate for space exploration and certainly space 
and aeronautics and certainly the cutting-edge research. And so 
this hearing is important for that reason. I don't think I have 
a particular stake, at this point, in whether it is government 
or private, but I do wish to raise some issues. And I ask 
unanimous consent, Mr. Chairman, for my entire statement to be 
put into the record at this time.
    Chairman Rohrabacher. Certainly, with no objection.
    Ms. Jackson Lee. Thank you.
    [The prepared statement of Ms. Jackson Lee follows:]

        Prepared Statement of Representative Sheila Jackson Lee

    Thank you for calling what promises to be a provocative hearing. 
Contests and prizes seem to be a clever way of encouraging development 
of space technologies. It will be interesting to explore how this 
mechanism can be used to supplement our nation's space program.
    However, Mr. Chairman I must question the choice of this subject 
for a hearing, at this moment in time. Just last year, we lost the 
Space Shuttle Columbia and her seven brave crew members. We got a tough 
report from Admiral Gehman and the CAIB, giving a laundry list of 
changes that need to be made at NASA to improve safety in the future. I 
have been pushing for a NASA safety hearing for six-months now, to find 
out what changes are being made and whether legislative action is 
necessary.
    The CAIB reported that NASA's management practices and safety 
``culture'' were partially to blame for the Shuttle disaster. 
Obviously, the same management and culture were responsible for 
developing the International Space Station. I have been expressing my 
concern for nine-months that the ISS may have its own hidden O-ring or 
falling-foam problem. Over the past six months, we have seen failing 
gyros, broken exercise equipment, faulty space suits, air quality 
monitoring devices, and our astronauts heard a crunching sound that is 
yet to be explained. We have not fully reinforced the ISS to shield it 
from micrometeoroids, and the small crew and grounding of the Shuttle 
may make it difficult to deal with other challenges in the future. It 
seems that having a hearing to talk about ISS safety issues could be 
fruitful.
    I know other Members of this committee have been concerned for 
years about accounting and cost-overruns at NASA. As we are considering 
a bold new mission at NASA, it seems that delving into some of these 
financial matters might be prudent.
    There are so many pressing issues at NASA. I am curious why we are 
discussing prizes today. Perhaps the latest activity surrounding the X-
Prize has made this hearing more press-worthy, but I can't say that the 
hearing is particularly timely. These prizes have been around for 
centuries, and we don't have a legislative proposal before us to 
consider.
    Mr. Chairman, you know I am a passionate advocate for space 
exploration and enjoy discussing ways to get our industries to lead in 
the field, and the American people more engaged in such noble pursuits. 
I just wish that as this Congress comes to a close, we can focus some 
of the Committee's energies on the truly pressing issues that face NASA 
and our space mission.
    On today's subject, I would also like to note: prizes may well be 
an exciting and valuable tool to spark innovation in our space 
industry. However, there is no such thing as a free lunch, or free 
launch, I should say. There will be trade-offs: perhaps we will 
sacrifice the rights to royalty-free use of the technology later; 
perhaps we will lose the ability to monitor progress in the field; 
perhaps our universities and non-profit institutions will be cut out of 
the program; perhaps safety will suffer. I look forward to discussing 
the benefits and possible pitfalls of prizes and contests.
    Thank you.

    Ms. Jackson Lee. As I have said, I appreciate this hearing, 
because I think it is important, because I think dreamers in 
America and inventors are part of what the American psyche is 
all about. And I would acknowledge to Dr. Macauley that I would 
in the issue of space prize is the progeny of a George 
Washington Carver could also be included and also as we seek to 
include and encourage more young women to get into math and 
science and certainly more Hispanics and African Americans and 
other minorities to do so as well.
    So there lies my angst and my concern as we talk about 
prizes. Let me raise several points, and I would hope that my 
colleagues would welcome the dialogue.
    First of all, as it relates to the government, let us not 
play cheap all ability to research and to discover. I think we 
have pinpointed the Internet to the Pentagon, some lowly 
government bureaucrats who--that they might be called, and 
others who pinpointed that beginning. And we appreciate very 
much their leadership on that issue. So we know that we have 
the ability to discover and to find great challenges or great 
resolve to the problems of America.
    But I also raise the point of this hearing in that we have 
a number of other important issues that I think would be 
welcomed before the Science Committee, and I just want to share 
this with my colleagues. We still have to finish out the 
Columbia Accident Investigation Board's recommendation. The 
Gehman Report is extremely important. I have been a strong and 
long advocate of International Space Station's safety. And each 
day, we hear of matters that draw us to making sure that we 
have that hearing. We must as well fix cost overruns and 
accounting problems, and we also need to address the Aldridge 
Commission's recommendations.
    I hope that, as we look at this exciting opportunity for 
prizes, we are not failing to address questions that will allow 
us to go into space safely. I think risk taking is something 
that Americans have always done. That is why we are the kind of 
Nation that we are. But, in fact, I think we must be concerned 
about safety, and I am still looking forward, Mr. Chairman, and 
you have agreed, and I must compliment you on that, that a 
safety hearing on both responding to the Gehman Report, but 
more importantly, the International Space Station is extremely 
important. I would love to have a prize dealing with how we 
make that entity safe to the extent that we feel very 
comfortable with it. And I know, again, that when you go into 
space it is a risk.
    But let me pose these questions. And let me start with Dr. 
Holtz-Eakin on two aspects of your points that you made. And I 
would appreciate your response. First of all, you said the 
prizes do have their place. They are certainly useful for 
individuals who don't have a stomach for the procurement 
process and clearly want to be able to move more quickly than 
we would allow them to go. But how would you propose to score? 
How would CBO score prizes, and, for example, with the $20 
million requested for prizes in NASA, which we have already 
discovered may be a little too low, budget--be counted against 
the fiscal year 2005 budget or would it be counted against the 
year in which the prize is awarded? Would the way the rules are 
written for the prize affect the way it would be scored? And 
you sort of mentioned partly that, but if I could get a more 
enunciated position.
    Let me also suggest that we have a number of programs that 
are going on, the Small Business Innovative Research Program, 
the SBIR program, which is described as a highly competitive, 
three-phase award system, which provides qualified small 
business concerns with the opportunities to propose innovative 
ideas that meet the specific research and development needs of 
the Federal Government. SBIR, in particular, seems to have 
goals similar to NASA's proposed Centennial Challenge Prize 
Program. What do you see as the relative strengths and 
weaknesses? Can we utilize those? Are we being duplicative when 
we talk about these huge and large prizes?
    Finally, let me say I am concerned with small businesses, 
minority-owned businesses. And as I look at the think tanks, I 
would be interested to know whether those folks are even 
included. As I tussle with the NASA procurement system, let me 
say that I am not very happy with what NASA has done. Johnson 
happens to be in my Congressional area or region. I still get 
calls often from small businesses and minority-owned businesses 
that they just can't break through, and their product is 
competitive. So we talk about prizes, although I know that is 
to reward people for their innovativeness in their research. Do 
we have any way to ensure that it is encompassing and open to 
everyone and give everyone an opportunity to be able to 
participate in a new scientific breakthrough?

                      Budget Treatment for Prizes

    With that, I would yield to Dr. Holtz-Eakin on those two 
specific questions on your $20 million, and that seems like a 
small amount, but also any other side existing programs that 
might be useful in this effort.
    Dr. Holtz-Eakin. The budgetary treatment will be driven by 
the legislation as written, but the broad principle is that the 
budget should reflect the cost or the commitment that has been 
made of the taxpayers' money. And so in the specific case of 
the NASA request, as we understand it, there would be 
authorization of the appropriation of monies, $20 million, and 
that appropriation would be now-year money, so there would be a 
commitment of budget authority of $20 million that would last 
in principle and perpetuity that would allow NASA to award the 
prize. That would be a budget authority. It would be scored in 
the year in which it was award, 2005 say. When the monies are 
finally paid, in the event of a winner of the prize, then it 
would show up as an outlay in the federal budget, so there 
would be a large time difference between the budget authority 
being granted and the outlay being recorded on the budget.
    There are lots of other possibilities, depending on the 
degree of certainty with which the funds are actually 
committed. If there was just a single-year appropriation with 
no ability to carry it from year to year, then there would be 
budget authority and, perhaps, no outlay in that year and it 
would disappear and be rescinded, and perhaps, reprogrammed. So 
it really will depend on how it is structured.
    With regard to the SBIR, I don't know enough right now to 
give you a good answer. We would be happy to work with you on 
that and get back and look at comparisons.
    Ms. Jackson Lee. If I may, Mr. Chairman, for Dr. Macauley 
and Dr. Diamandis.
    Dr. Diamandis. Diamandis.

                          Prizes and Diversity

    Ms. Jackson Lee. Thank you for correcting me.
    Tell me about this concept of the prize and how it would be 
encompassing and take into account my concerns for the emerging 
populations of scientists and engineers and innovative 
thinkers? Science is not very diverse right now, frankly. And 
all I can see is the private prize, which again would be self-
contained, dominated by people who are already in the field, 
and if you will, excluding by being a very select and exclusive 
club, leaving out thousands of my constituents.
    Dr. Macauley. I did point out that the prizes are probably 
not going to address that kind of objective. And therefore, we 
need to think carefully about the other tools we have that 
might do that, whether it is, you know, instances in our 
contracting or peer-reviewed research that require diversity 
and require reaching out to all of these various groups. So it 
is a societal goal that needs to be taken into account. It is 
something that was not part of the early history of prizes in 
this country, so it is new territory to figure out how, from a 
public policy view, we accommodate those kinds of objectives. 
It is--this is new territory, and it is history in the making. 
And when we look back to try to learn lessons learned on that 
particular dimension, we don't have a lot to draw from.
    Dr. Diamandis. Actually, I thank you, Ms. Jackson Lee, for 
asking the question, because it allows me to bring up a point, 
which is it is exactly the opposite from what your presumption 
may be. Of the 27 teams going for the $27 million Ansari X-
Prize, none of them, other than Scaled Composites, are 
traditional contractors. In fact, all of them are small groups, 
groups out of universities. One is a woman-owned business and 
with a woman pilot. And they come--a diversity. They come out 
of the dot-com world. They come out of retired NASA employees. 
They come out of, literally, college kids who came together to 
make this dream happen.
    So it is--by putting up the prize, it actually flattens the 
playing field, so the large, traditional players, who can only 
have the ability to go--have the contracting capability and 
understand government game, can apply. In fact, we--this 
encourages the non-traditional, smaller groups to get involved, 
the ones with the ideas that are really innovative that would 
never see the traditional light of day.
    Rear Admiral Steidle. I wonder if you would allow me just 
to comment on that. In a set up of workshops that we just 
conducted here in Washington, we used the small and minority 
business programs at NASA to do the advertising for those 
particular workshops, and it was reflected in the over 200 
responses and corporations that participated in our workshop 
just for Centennial Challenges. The Small Business Innovative 
Research and the university research programs, as well as 
technology transfer programs, are also in my directorate for--
across NASA wide. I just went out--we just went out with a 
solicitation on the 7th of July. We--for small business, next 
phase, and we expect 2,600 responses. That is the indication 
from the notification of intent that we have. We are trying to 
change the way we do business. For instance, on some of our 
broad agency announcements, we are going to put it up on 
WEBCAST, because we know there are a lot of individuals and a 
lot of businesses that don't have access to Federal Biz-Ops and 
things of that nature. So we are trying to do things 
differently and make sure we expand that horizon. And the 
Centennial Challenges will be another tool that will allow us 
to do that and incorporate other assets.
    Ms. Jackson Lee. Mr. Chairman, you have been very kind and, 
with your indulgence, I didn't know if Chairman Walker wanted 
to jump in.
    Mr. Walker. The only thing--the only comment I would make 
along these lines is that I think that any time you can expand 
opportunities, you do, in fact, reach out to people who are 
entrepreneurial, regardless of background. And the advantage of 
prizes is that this is an opening of opportunities that have 
never existed before in the space arena. We have tended to be 
very myopic in how we have done space over the years, and this 
does allow us to have a much broader horizon and, I think, will 
inspire many more people to take the opportunity to become 
involved in the space enterprise.
    Ms. Jackson Lee. Mr. Chairman, thank you for your 
indulgence. I knew if I asked the question, I would get some 
good answers, and----
    Chairman Rohrabacher. I think you got very provocative. It 
was a provocative question and good answers and the Chairman 
would note that before the era of ``big government''----
    Ms. Jackson Lee. Yes.
    Chairman Rohrabacher [continuing]. Black Americans made 
enormous contributions in the field of technology. And I think 
Black America now is just coming to the realization of this 
heritage that they have got. And I--not just George Washington 
Carver. We are talking about people who--for example, you have 
got a guy who invented the way that we make shoes that made it 
possible for our--for us to have shoes. I mean, the bottom line 
people before this guy came along, and I don't--I can't 
pronounce his name. It was--but anyway, this fellow made it 
possible for people to have two pairs of shoes, for Pete's 
sake. And it was due to a very complicated invention, as well 
as, of course--I mean, we are doing things like ``The Real 
McCoy,'' that whole thing. People think it is an American 
expression from, you know, Kentucky or something. It is 
actually a fellow named McCoy who was a Black American who 
produced an important piece of technology that permitted us to 
have safe engines for railroads. And so I think we don't have 
anything to worry about there. I think that we don't need ``big 
government'' to ensure that there is going to be opportunity. 
We need opportunity to make sure that we don't need ``big 
government.''
    Ms. Jackson Lee. Well, I thank you. I just want the 
thinkers out here to know that they need to reach out to those 
colleges and places where those individuals are.
    Chairman Rohrabacher. Sure.
    Ms. Jackson Lee. Thank you.
    Chairman Rohrabacher. Okay.
    Mr. Forbes. We have 15 minutes. I think we can get a few 
more questions before we break and maybe----

                                 Safety

    Mr. Forbes. Thank you, Mr. Chairman, and I, too, thank you 
for having this hearing and thank all of you. It is exciting to 
listen to what we can do when we combine the private sector 
with the public sector whether we are building spaceships or 
whether we are building naval ships. And one of the things that 
I hear as the number one request, I guess, from the applicants 
is, ``We want as little monitoring as possible and let us 
alone. Let us just do what we do best and that is create this 
product.'' And sometimes that is the difference between the $20 
million price tag and the $500 million price tag that we add so 
many other things on to it, that by the time we get finished, 
it costs $500 million instead of $20 million. But in a perfect 
environment, we could say, ``Okay. We are just going to let the 
applicants go.'' But we don't always live in a perfect 
environment. There are two big components that we look at, 
especially in this committee. One of them is what we have heard 
mentioned earlier with the safety component. And the second 
one, and we have heard this eluded to as well, when we spend 
dollars on the space program, one of the things that compels me 
to do that more and more is not just the spin-off technology we 
get, but also the magnet that serves to attract math and 
science students across the country, which I just think is a 
huge goal for the dollars that we spend.
    And so I would throw out two questions to you. First as to 
the safety aspect, where does the pendulum swing as far as any 
monitoring we have to do with the applicants, specifically 
since this could be a government-sponsored prize, at least in 
some part? What liability do we have to the applicants, and how 
much monitoring do we have to do there? And secondly, what, if 
any, monitoring do we do to the applicants to make sure that 
these dollars are reaching out as much as possible to serve as 
that magnet to draw more and more math and science students to 
the field? I still think it is a huge vulnerability for the 
country. So I would throw that out to the panelists.
    Rear Admiral Steidle. I will start off with that, sir. 
First of all, we have designed and Dr. Diamandis has helped us 
significantly. And it wasn't known here. I don't think I 
mentioned that, but he has helped us design this particular 
program. And with the lessons learned that he has put his in, 
he has helped us with the Centennial Challenges, so we are 
headed down in that particular direction very similar to what 
he has done.
    From a safety aspect, we have to define the expectations 
and what is to be expected and get out of the way, do not 
provide the technical solutions and technical processes and 
things. If we knew those things, we wouldn't need a prize in 
the first place. So the government has to move away from that. 
But we can provide our ranges and the FAA can possibly be there 
for that particular event when the prize is demonstrated. And I 
believe that is what the X-Prize is doing as well. And I think 
that is very, very appropriate. We plan to market, as best that 
we possibly can, through workshops, through WEBCAST, through 
websites to get a full, across-the-board participation from 
some large prizes down to smaller prizes and ones in the 
middle. So it is incumbent upon us to define those workshops 
and then spread the word on that.
    Mr. Walker. In my view on this, I mean, there are certain 
things that you are going to do to protect the public, 
obviously. You are not going to let Burt Rutan take off from 
the mall in Washington, DC. You are going to make certain that 
you have things that are in place to protect the public in 
these things. But where you have to allow the risk is if Bob 
Walker wants to get in Burt Rutan's craft and go flying, you 
ought not be preventing that. You ought to make certain that 
you have the kind of mechanisms that permit people to take a 
substantial amount of risk, as long as it is their own risk. So 
I think that is a real question.
    I happen to believe that, with regard to math and science, 
the very fact that you are out doing exciting things will, in 
fact, inspire a lot of math and science enthusiasm. When the 
Aldridge Commission was meeting, one of the people who 
testified before the Aldridge Commission was the head of DARPA, 
Tony Tether. And he made a statement in the course of his 
testimony that said that the thing that caused the excitement 
about space in the 1960's was we all wanted to go. Well, if you 
do a prize program that gives everybody the sense that we are 
back in that era where we all might have a chance to go, Peter 
referenced this in his testimony, that will do more to inspire 
enthusiasm in math and science than nearly any other thing we 
could do.
    Dr. Diamandis. I appreciate Admiral Steidle's--referencing 
the work that we did with NASA. We are very proud of that. And 
in fact, safety is something which we believe can come out of 
existing rules and regulations. And we require teams to abide 
by all local, regional, and federal rules. So in the case of 
the FAA, that means they have to get a launch license and get 
proper insurance. But we don't try and create a new set of 
safety rules for them. These people are working within 
technologies and areas that are existing. And the concern is, 
again, I think, that the Centennial Challenge, as in any 
government prize, is the focus needs to be on the rule-making 
in the beginning. They have to be very clear and then allow 
them to go in a variety of different directions. Again, 
remember that you don't want to preclude those pesky bicycle 
mechanics from Dayton, Ohio from going and strapping on wings. 
You know. The solution is going to come out of very out-of-the-
way locations if we really want those breakthroughs. So we 
can't confuse safety with risk too much.
    On the education side, I think there are fundamental prizes 
that can be created that really have amazing implications for 
science and math. I will give you one example. I remember that 
much of the Mars data that we have collected over the years 
lays fallow. Only 10 percent ever gets looked at. Imagine, if 
you would, if you had prizes for kids to say put all of that 
data online and then prizes each year for the person who finds 
the most interesting discovery. I think you would have kids 
going back after high school, instead of watching TV, they 
would be mining the Internet looking for new discoveries on 
Martian data or Jovian data to win $10,000 which would put them 
through college. There are very fascinating things you can do.
    Mr. Forbes. Thank you, Mr. Chairman.
    Chairman Rohrabacher. Mr. Udall. And it is the intent of 
the Chairman, we have about eight minutes now before the vote, 
and Mr. Udall will have his questions and then we will probably 
adjourn.

           Public vs. Private Prizes and Return on Investment

    Mr. Udall. Thank you, Mr. Chairman.
    I want to thank the panel. This has been fascinating and a 
really exciting topic. I was going to try and finish in time to 
leave Dr. Burgess a minute or two, but he seems to need to get 
to the Floor.
    I was wondering, and the entire panel maybe wants to think 
about this, but if NASA were to go ahead and offer this 
significant--or have the option of offering these significant 
prize monies for a series of projects yet to be determined, 
would that perhaps dry up the private sector's interest in 
additional prize-based competitions? And that also--what is the 
ROI, the return on investment, for the people who have offered 
this prize? Is there a return on investment they determined? Is 
it a psychic return? Is it a ``Let us create excitement''? Or 
is there actually a financial return that the organizers of 
this anticipate?
    Dr. Diamandis. I--to answer your first question, I think 
that, quite frankly, private industry would love to work with 
NASA to amplify. The more prizes, the more money, the better, 
especially if they are an organized fashion building toward 
larger and larger goals, as Mr. Walker suggested. So I think it 
would not dry it up at all. I think, in fact, it may be the 
role of private industry to help take on more of the risk that 
the government might not be able to in more audacious prizes.
    The return is clearly psychic return and making their 
personal dreams come true. We have, on our board, a number of 
billionaires and multi-millionaires who have given us the funds 
to make this happen. I give, as an example, that the America's 
Cup each year, the average team on the America's Cup spends $60 
million to $80 million per ship and for a zero cash prize. When 
Larry Ellison backs his vehicle, it is ego money. A prize 
basically credentials something as being worth doing. That is 
where--the more money, the more worth it is doing in the eyes 
of the public. And then it attracts two flavors of money. It 
attracts ego money and sponsorship money. There are $20 billion 
a year spent each year in sponsorship, which goes to car racing 
and football and baseball and so forth. None of it goes toward 
building rockets, at least not until recently. So before, if 
you wanted to build a rocket, if Burt Rutan--he would have to 
go and prove a marketplace, prove a return on investment for 
that. Now, by putting up a prize, he doesn't have to have an 
ROI. He can say, ``Paul Allen, do you want to be known for 
history--historical purposes,'' yet again? Or in our case, we 
are in negotiations with other sponsors now. A lot of people, 
the Chairman of HP, who was on the Aldridge Commission report, 
came up to me after the presentation and said, ``HP wants to be 
involved in the X-Prize in supporting the next follow-on 
activities. How can we get''--it is great. It will bring 
corporate America into the picture and allow us to have that 
fun and bring that excitement back to the public.
    Mr. Udall. Anybody else on the panel want to comment on 
that particular question?
    I know Bob Walker and I think, you know, that must mean 
that people writing $10 million checks, that is like a Member 
of Congress writing a $10 personal check. You know, they just 
dash off that $10 million check----
    Mr. Walker. But, no, I would just echo what Peter just told 
you. I mean, I think that it is clear that there are people 
who, for reasons of personal satisfaction, of being a part of 
history, are prepared to make large investments if they think 
that it is a worthwhile activity. And the more of a of 
worthwhile activity that you can put on this, and a prize does 
that, the more likely you are to attract that kind of 
investment into the marketplace.
    Mr. Udall. Similar to many other, and this isn't charity, 
per se, but charitable impulses we all have that the feelings 
you have about having supported something worthwhile with a 
mission that is beyond your own self interest is exciting.
    Talk a little bit about the companies involved competing 
for the prize. Now what kind of return on investment are they 
looking for? Is it publicity? Is it actual opening of markets? 
How do you read that, Dr. Diamandis?
    Dr. Diamandis. Yes, thank you, sir.
    I have been told by at least half of the teams out there 
that the X-Prize allowed them to take risks and do things they 
could not do before. When they went out after money to support 
their efforts, their dreams of private space flight, they were 
laughed at before. When the X-Prize--we had the support of NASA 
at our inception, 20 astronauts, the FAA. When we kicked off 
the X-Prize on May 18 of '96, we brought the government, 
private sector, the Lindbergh family all together and 
credentialed this idea and made it possible for these teams now 
to go out and go after it. Their long-term goal is a billion-
dollar marketplace. Their long-term goal is to be the first 
Canadian, Argentinean, Romanian private launch into--or 
American, of course, private launch into space. So it is the 
history books married with the billion-dollar marketplace. What 
the X-Prize has done is said, ``Hey, this is not silly. This is 
doable. This is worth going after.'' And so that is the--we are 
sort of a seed current, if you would.
    Mr. Udall. I see my time has expired. If I would, I would 
like to ask unanimous consent to ask further questions of the 
panel, and particularly just pursue how we keep the 
relationship between the researchers at the university and the 
non-profit sector engaged in the basic research we are doing as 
we also put these prizes forth.
    So I want to thank the Chairman and thank the panel.
    Chairman Rohrabacher. Thank you very much.
    And let me apologize personally to my fellow colleagues 
that myself and Sheila Jackson Lee took extra time in our 
questions and answers in the beginning and that time could have 
been used for other colleagues who--one of whom didn't get a 
chance to ask questions at all. And so, in the future, even the 
Chairman should understand that by not sticking to that five 
minutes, we are cutting other people off. And the Chairman will 
try harder next time. But this is, of course, a very--been a 
fascinating hearing.
    And I want to thank the panelists for testifying today. And 
each one of you made a major contribution to our understanding 
of this issue.
    If there is no objection, the record will remain open for 
additional statements and questions, as we just mentioned, from 
members of the panel. And we would hope that those questions 
would be given within--and answers would be given quickly back, 
but within two weeks. So without objection, so ordered.
    And I now, again, thank you personally for your 
participation. And let us look to the future. And you have 
given us a lot of food for thought, but a lot of enthusiasm, 
and that is what it takes to build a better world. Thank you 
very much. The hearing is now adjourned.
    [Whereupon, at 11:38 a.m., the Subcommittee was adjourned.]

                               Appendix:

                              ----------                              


                   Answers to Post-Hearing Questions

Responses by Rear Admiral Craig E. Steidle, USN (Ret.), Associate 
        Administrator for Exploration Systems, National Aeronautics and 
        Space Administration (NASA)

Questions submitted by Chairman Dana Rohrabacher

Q1.  Please describe how NASA plans to address the following issues 
related to conducting a program of prizes:

Q1a.  How will issues of liability be treated? Will the Federal 
Government assume any legal risks associated with private companies 
competing for a prize?

A1a. NASA is seeking specific legislative authority in the Agency's FY 
2005 authorization bill which was submitted to the Congress on March 
19, 2003. This proposed authority would allow NASA to conduct contests 
for larger prizes, similar to the authority recently obtained by DARPA. 
Section 323 of the authorization bill is entitled, ``Authority for 
Competitive Prize Award Program to Encourage Development of Advanced 
Space and Aeronautical Technologies.'' Section 323 would require 
potential prize recipients to assume liability for all associated 
risks.
    NASA will also require all prize competitors to register. As part 
of the registration process, competitors will be required to sign 
waivers and disclaimers consistent with Section 323 described above.
    Competitions requiring flight demonstrations will be regulated by 
the FAA, which will ensure public health and safety. These requirements 
will be published in the Challenge rules, and competitors will be 
required to adhere to those rules in order to fly.

Q1b.  How will issues of intellectual property (IP) be treated? Will 
the IP rights for the technologies of a winning prize reside with the 
government, or with the prize winner?

A1b. The assignment or licensing of intellectual property rights will 
be specific to the rules of each prize competition.
    When Challenges seek to encourage the development of private sector 
capabilities that NASA or other users can purchase in the future, most 
or all intellectual property ownership rights will remain with the 
competitors and no licenses will be required to be granted to the 
Federal Government.
    When Challenges are aimed at developing novel innovations that NASA 
can incorporate in government systems, NASA will require the 
competitors, in the rules of the competition, to grant NASA a license 
to use those innovations (e.g., inventions and trade secrets) in NASA 
applications. Rights to use inventions and trade secrets in non-NASA 
applications will remain with the competitors.

Q1c.  Why will NASA centers, FFRDCs, and federal employees not be 
allowed to compete for prizes?

A1c. NASA assumes as the baseline for all Centennial Challenge 
competitions that federal employees, including FFRDC employees, will be 
ineligible for competition. This means that all Centennial Challenges 
will be open to teams composed of members of industry, academia, non-
profit organizations, students, and unaffiliated individuals (or any 
combination thereof).
    There are several reasons for establishing this baseline. They 
include:

         Program Goals and Effectiveness--A key goal of Centennial 
        Challenges is to leverage new sources of innovation. NASA has 
        multiple, existing mechanisms for tapping federal R&D talent.

         Conflicts of Interest--Where federal employees are involved in 
        the development or review of the rules for a particular prize 
        competition or involved in the administration or judging of a 
        competition, there is the potential for real or perceived 
        conflicts-of-interest. Where federal organizations are involved 
        in both competing for Challenges and in the formulation or 
        administration of the same Challenges, potentially expensive 
        and burdensome ``firewalls'' between the Challenge formulators, 
        reviewers, and judges and the Challenge competitors would have 
        to be erected. These would likely pose a large and unreasonable 
        overhead burden to Centennial Challenges.

         Fairness and Accountability--All competitors will be required 
        to use their own resources to compete in a Challenge. They will 
        not be allowed to use taxpayer funds they are receiving for 
        other work, through contracts or grants, to compete in a 
        Challenge. By their very nature, federal employees and 
        facilities cannot meet this criterion--they are fully funded 
        (or almost completely funded in the case of some FFRDCs) by the 
        taxpayer. Although theoretically a federal employee could 
        contribute to a team during their non-work hours, ensuring the 
        accountability of these federal employees would represent a 
        large and unreasonable overhead burden to Centennial 
        Challenges.
          Unless transparently, fairly, and equitably distributed, the 
        use of federal capabilities by winning teams could also open 
        Centennial Challenges to charges by the losing teams that the 
        winning team had unfair access to federal capabilities.

         Prize Award--If a federal organization won a Challenge, it is 
        not clear how the purse would be awarded. Claims could be made 
        that the team members, their federal organization, and/or the 
        Treasury should all receive the purse.

    This baseline can and will be examined on a case-by-case basis 
during the development of rules for individual Challenges. Where access 
to federal expertise or facilities is deemed critical to winning a 
particular Challenge competition, it will be the responsibility of the 
Centennial Challenges Manager to work with the relevant federal 
organizations to make their capabilities available to competing teams 
on a transparent, fair, and equitable basis.

Q2.  In his testimony, Dr. Diamandis said that the goal of a prize is 
not to develop technology to put directly into use in the space 
program, but rather to develop new ways of thinking--``to invent the 
transistor, not to perfect the process leading to a Pentium Chip.'' But 
presumably NASA must run its programs using mature technology.

Q2a.  How does NASA plan to take a winning idea and turn it into a 
mature technology that the space program can use?

A2a. Centennial Challenges will include prize competitions that span 
the spectrum of technology development, from operational space 
missions, to atmospheric flight demonstrations, to ground 
demonstrations of major subsystems, to component-level technology 
breakthroughs.
    Examples of candidate Challenges for operational space missions 
include competitions for: a lunar robotic soft lander, a micro re-entry 
vehicle, an orbital aero-assist demonstration, and a solar sail.
    Examples of candidate Challenges for atmospheric flight 
demonstrations include competitions for: advances in general aviation, 
an autonomous unmanned aerial vehicle for cargo transport, a long 
duration unmanned aerial vehicle, and a hybrid airship.
    Examples of candidate Challenges for ground demonstrations of major 
subsystems include: a precision planetary descent and landing system, 
an autonomous drilling system, a telerobotic construction system, a 
robotic Earth analog sample return system, and a human lunar all-
terrain vehicle.
    Examples of candidate Challenges for component-level technology 
breakthroughs include competitions for: a mobile power storage 
breakthrough, a radiation shielding breakthrough, advances in 
deployable telescope technology, an advanced astronaut glove, advances 
in lunar resource processing techniques, advances in beamed power 
technology, and advances in materials.
    In all cases, relevant users of the capability to be demonstrated 
in a Challenge will have a role in the development of the winning 
criteria and rules for that Challenge. By design, all Challenges will 
be structured so that the resulting capability is ready for the next 
level of technology maturation.

Q2b.  Does NASA plan to offer contracts to the winners of a prize, such 
as to develop his or her idea further to meet NASA's specifications? Or 
would such a job more likely fall to one of the major aerospace 
contractors?

A2b. Winning a prize does not mean that someone will receive a 
contract. However, NASA may develop requirements based on information 
and ideas obtained from prize competitions that may be used to develop 
future solicitations. Any such Request for Proposals would comply with 
the requirements of the Competition in Contracting Act (CICA).

Q3.  To what degree does NASA plan to depend solely on prizes for the 
development of technologies that are essential to exploration, such as 
technologies that would be required for either long-duration space 
flight or extended human missions to the Moon?

A3. There are no plans within NASA to depend on prizes for the 
development of immediate need ``critical path'' technologies that are 
essential to exploration.
    Centennial Challenges is part of a portfolio of technology 
investments that support the Vision for Space Exploration and ongoing 
NASA missions. Prize competitions are a small part of that portfolio 
that allow NASA to tap new sources of innovation and generate technical 
solutions that would go unexplored in standard procurement processes. 
Centennial Challenges complements, but does not replace, standard 
technology development mechanisms.

Q4.  Dr. Macauley testified that prizes have been offered successfully 
in the past to develop incremental technologies, but that was before 
government began to invest so heavily in R&D.

Q4a.  Is it better for NASA to offer both large and small prizes, or 
should it focus only on larger prizes? Would the cost of judging and 
otherwise administering small purse prizes outweigh the value of the 
prize itself and make such prizes not worthwhile?

A4a. NASA has many pathways for incremental technology development, 
including contracts, grants, and in-house development. Prize 
competitions should complement, not replicate, these existing 
procurement tools. Prizes should be focused on competitions that can 
produce advances and innovations that would otherwise go unexplored in 
standard technology development processes.
    ``Incremental technology'' development does not necessarily equate 
with either a ``small prize'' or a ``large prize.'' Small prizes, if 
focused on breakthroughs in component-level technologies, can provide 
revolutionary advances. Therefore, even if the cost of judging and 
administering a small purse prize exceeds the dollar value of the 
prize, the value of the technological breakthrough to NASA may clearly 
justify the expenditure. An example of such a revolutionary innovation 
is the marine chronometer, which was developed to win the 18th century 
British Longitude Prize. Likewise, large prize purses for major 
subsystem ground demonstrations, atmospheric flight demonstrations, or 
operational space missions could, if not properly structured, result 
only in incremental advances.
    Through Centennial Challenges, we intend to invest in both smaller 
prizes focused on component-level technology breakthroughs as well as 
larger prizes for major subsystem demonstrations, atmospheric flight 
demonstrations, and operational space missions that push innovation 
across a range of technologies. The response to question 2a) above 
covers each of these categories in detail.
    The key to producing innovation in any prize competition is to 
define the winning criteria for the competition in a way that forces 
competitors to develop and demonstrate innovative capabilities to win 
the prize. For example, if NASA offered a prize competition for a soft 
lunar robotic landing where the winning criteria and purse size were 
very similar to the requirements and costs of NASA's lunar Surveyor 
landers from the 1960s, we could expect relatively few innovations from 
competitors for that prize. However, if NASA offered a substantially 
smaller purse and required that the competitors also access another 
area of the lunar surface via penetrator, rover, reusable lander, or 
second lander, the competitors would have to develop new, innovative, 
and less costly approaches to lunar surface landings and access that 
are true breakthroughs over existing capabilities.

Q4b.  How should it be decided whether prizes or contracts/grants are 
the appropriate tool for stimulating innovation for small, discrete 
technologies (such as the development of an improved astronaut glove)?

A4b. Prize plans must be coordinated with NASA's overall approach to 
advancing the Agency's mission goals. Other mechanisms include 
contract, grants, cooperative agreements, and Space Act agreements. 
NASA will regularly examine and update our planning for Centennial 
Challenges based on the procurement plans of other Agency programs. 
NASA will comply with all applicable statutes and regulations regarding 
the use of procurement contracts, including 31 USC 6303, which requires 
agencies to use a procurement contract if the ``principal purpose'' of 
the agreement is to acquire property or services for the direct benefit 
or use of the U.S. Government.
    Identifying strong candidate Challenges involves other important 
criteria beyond the applicability of a prize competition to the 
technology or capability in question. Specifically, we are applying six 
base criteria when examining the suitability and relative strengths of 
candidate Challenges.

         The Simpler, the Better--We are seeking Challenges with 
        winning criteria that are objective, transparent, simple, and 
        unbiased. Challenges that require complex rules, expensive 
        testing and verification, or and/or qualitative judging are 
        less desirable.

         Relevance to NASA Programs--We are seeking Challenges where 
        the capabilities that would be developed and demonstrated in 
        the course of the competitions have strong relevance to 
        programs in one or more NASA Mission Directorates.

         Right Level of Difficulty--We are seeking Challenges where 
        there are multiple pathways to developing the desired 
        capability and where it would be hard to decide which pathway 
        is the right one through a standard contract or grant selection 
        process. Challenges that are too easy or impossible to achieve 
        are not desirable.

         Follow-On Opportunities--Historically, the most successful 
        prize competitions are those that are aligned with some future 
        economic opportunity for the competitors. All other things 
        being equal, Challenges that will produce a capability that can 
        be applied to a future NASA program, another aerospace market, 
        or that have synergy with Earth-based applications are more 
        desirable.

         Competitor and Sponsor Interest--Interest from potential 
        competitors and/or from potential sponsors of the competing 
        teams is a strong indicator that a particular prize competition 
        is good candidate and properly constructed. Interest from 
        potential co-sponsors of the prize purse itself (i.e., other 
        organizations in the government, industry, and academia with 
        R&D interests coincident with NASA's) is another strong 
        indicator.

         Public Excitement--Historically, the most successful prize 
        competitions produce excitement among the public, media, and 
        educators that, in turn, incentivize competitors and sponsors 
        to compete to earn their share of the fame associated with 
        winning the prize. Challenges with greater potential to 
        generate public excitement are more desirable.

    No one Challenge will meet all of these criteria perfectly. 
However, NASA is using these criteria to cull the best candidate 
Challenges from the hundreds of ideas that have been generated 
internally and externally for future Centennial Challenge competitions. 
We intend to carefully develop the rules for each of our prize 
competitions using inputs from a variety of sources, including: 
Requests for Information (RFIs) to potential competitors, internal and 
external independent expert review boards, and inputs from workshops 
and other public venues. In fact, inputs from over 200 participants on 
over 30 candidate prize competitions from our first annual Centennial 
Challenges Workshop are available on the Internet at 
www.centennialchallenges.nasa.gov.
    It is important to note that we have received more viable Challenge 
candidates than we will have the resources to pursue. At the end of the 
process, the Centennial Challenges Manager, in consultation with senior 
NASA management, must make judgments regarding the relative importance, 
attractiveness, and timing of candidate Challenges to achieve a 
relevant, strong and balanced prize competition program that can be 
implemented within available resources.
    It is also important to note that NASA may want to pursue 
Challenges that overlap with but complement other procurements. For 
example, we are examining a candidate Challenge for a soft lunar 
robotic landing, which would complement our Lunar Exploration Program 
with entrepreneurial missions demonstrating innovative approaches to 
lunar surface access and exploration that might not otherwise be 
pursued.

Q5.  How would a prize contest differ from NASA releasing a request for 
information (RFI), such as what was done for a Hubble robotic servicing 
mission? How should the decision be made as to whether a particular 
objective is better suited to a prize competition or to more 
traditional approaches? Would the largest difference between the two 
methods be the lead-time required for the development of a technology 
through a prize contest as compared to that of the traditional route?

A5. In the case of the Hubble robotic servicing mission, an RFI was 
used to obtain information from the private sector on what capabilities 
are present in the market place. A request for information (RFI) seeks 
information that the Government does not have that may be used by the 
Government to establish requirements or other aspects of a follow-on 
procurement, such as a Request for Proposals (RFP). An RFI may lead to 
a contract when the Agency requires an immediate need critical path 
technology, as was the case with the Hubble Robotic servicing 
capability.
    A prize competition is a promise to deliver an award to a team or 
individual for the demonstration of a desired capability consistent 
with the competition rules. A prize competition does not inquire about 
existing capabilities present in the market place. Rather, a prize 
competition provides incentives for the creation of new capabilities.
    Although a prize competition could lead to the development of a 
given capability in a shorter amount of time as compared to a standard 
procurement, that is not guaranteed and therefore is not a factor in 
deciding whether to pursue a prize competition versus a standard 
procurement. Two significant advantages of a prize competition are 
that: 1) NASA only pays once the desired capability has been 
demonstrated, instead of paying for a proposal that may or may not 
result in the desired capability; and 2) all competitors are allowed to 
compete until the very end of the contest, which allows innovative 
approaches to be explored that would otherwise not be pursued in a 
standard procurement. NASA established Centennial Challenges not to 
achieve greater efficiencies in the procurement or development process 
(although that may happen). NASA established Centennial Challenges as a 
tool for tapping new sources of innovation and generating technical 
solutions that would go unexplored in standard procurement processes.

Questions submitted by Representative Nick Lampson

Q1.  Who owns the intellectual property for developments achieved in 
the prize program?

A1. The assignment or licensing of intellectual property rights will be 
specific to the rules of each prize competition.
    When Challenges seek to encourage the development, of private 
sector capabilities that NASA or other users can purchase in the 
future, most or all-intellectual property ownership rights will remain 
with the competitors and no licenses will be required to be granted to 
the Federal Government.
    When Challenges are aimed at developing novel innovations that NASA 
can incorporate in government systems, NASA will require the 
competitors, in the rules of the competition, to grant NASA a license 
to use those innovations (e.g., inventions and trade secrets) in NASA 
applications. Rights to use inventions and trade secrets in non-NASA 
applications will remain with the competitors.

Q2.  What criteria will you use to determine which technologies to 
leave to prize contestants and which to develop through more 
traditional methods, such as contracts?

A2. Prize plans must be coordinated with NASA's overall approach to 
advancing the Agency's mission and goals. Other mechanisms include 
contract, grants, cooperative agreements and Space Act agreements. NASA 
will use procurement contracts if the ``principal purpose'' of the 
agreement is to acquire property or services for the direct benefit or 
use of the U.S. Government. A prize competition is used where NASA 
wants to stimulate new ideas from external sources in the private 
sector and incentivize multiple competitors. Prize competitions will 
not be used when the Agency has an immediate need for a critical path 
technology essential to exploration.
    Identifying strong candidate Challenges involves other important 
criteria beyond the applicability of a prize competition to the 
technology or capability in question. Specifically, we are applying six 
base criteria when examining the suitability and relative strengths of 
candidate Challenges.

         The Simpler, the Better--We are seeking Challenges with 
        winning criteria that are objective, transparent, simple, and 
        unbiased. Challenges that require complex rules, expensive 
        testing and verification, or and/or qualitative judging are 
        less desirable.

         Relevance to NASA Programs--We are seeking Challenges where 
        the capabilities that would be developed and demonstrated in 
        the course of the competitions have strong relevance to 
        programs in one or more NASA Mission Directorates.

         Right Level of Difficulty--We are seeking Challenges where 
        there are multiple pathways to developing the desired 
        capability and where it would be hard to decide which pathway 
        is the right one through a standard contract or grant selection 
        process. Challenges that are too easy or impossible to achieve 
        are not desirable.

         Follow-On Opportunities--Historically, the most successful 
        prize competitions are those that are aligned with some future 
        economic opportunity for the competitors. All other things 
        being equal, Challenges that produce a capability that can be 
        applied to a future NASA program, another aerospace market, or 
        that have synergy with Earth-based applications are more 
        desirable.

         Competitor and Sponsor Interest--Interest from potential 
        competitors and/or from potential sponsors of the competing 
        teams is a strong indicator that a particular prize competition 
        is good candidate and properly constructed. Interest from 
        potential co-sponsors of the prize purse itself (i.e., other 
        organizations in the government, industry, and academia with 
        R&D interests coincident with NASA's) is another strong 
        indicator.

         Public Excitement--Historically, the most successful prize 
        competitions produce excitement among the public, media, and 
        educators that, in turn, incentivize competitors and sponsors 
        to compete to earn their share of the fame associated with 
        winning the prize. Challenges with greater potential to 
        generate public excitement are more desirable.

    No one Challenge will meet all of these criteria perfectly. 
However, NASA is using these criteria to cull the best candidate 
Challenges from the hundreds of ideas that have been generated 
internally and externally for future Centennial Challenge competitions. 
We intend to carefully develop the rules for each of our prize 
competitions using inputs from a variety of sources, including: 
Requests for Information (RFIs) to potential competitors, internal and 
external independent expert review boards, and inputs from workshops 
and other public venues. In fact, inputs from over 200 participants on 
over 30 candidate prize competitions from our first annual Centennial 
Challenges Workshop are available on the Internet at 
www.centennialchallenges.nasa.gov.
    It is important to note that we have received more viable Challenge 
candidates than we will have the resources to pursue. At the end of the 
process, the Centennial Challenges Manager, in consultation with senior 
NASA management, must make judgments regarding the relative importance, 
attractiveness, and timing of candidate Challenges to achieve a 
relevant, strong and balanced prize competition program that can be 
implemented within available resources.
    It is also important to note that NASA may want to pursue 
Challenges that overlap with but complement other procurements. For 
example, we are examining a candidate Challenge for a soft lunar 
robotic landing, which would complement our Lunar Exploration Program 
with entrepreneurial missions demonstrating innovative approaches to 
lunar surface access and exploration that might not otherwise be 
pursued.

Q3.  What specific results does NASA expect to achieve with the prizes 
contemplated in the FY 2005 budget request? What metrics have been 
established to determine if the goals are accomplished?

A3. If NASA gets the requested legislative authority, NASA plans to 
initiate at least four, and up to eight, new prize competitions in FY 
2005. These candidate Challenges include competitions for: advances in 
deployable telescope technology, a mobile power storage breakthrough, a 
radiation shielding breakthrough, an advanced astronaut glove, advances 
in lunar resource processing techniques, a precision planetary descent 
and landing system, and an autonomous unmanned aerial vehicle for cargo 
transport.
    NASA also plans to announce three annual Challenges in FY 2005. 
These candidate Challenges include competitions for advances in power 
beaming, materials, and general aviation. NASA will also initiate a 
parallel outreach program that conducts small prize competitions to 
encourage primary and secondary students to pursue careers in science, 
technology, engineering, and mathematics.
    Over the long-term, NASA plans to track and report on the funding 
leveraged by Centennial Challenges. Historically, competitors for a 
prize competition collectively spend at least several times the value 
of the prize purse in pursuit of the prize. On average, we should meet 
this historical performance. NASA will also track funding leveraged 
where it co-sponsors a prize competition with another NASA program or 
external organization (i.e., other organizations in the government, 
industry, and academia with R&D interests coincident with NASA's).
    Over the long-term, NASA will track and report on the innovations 
and capabilities created through Centennial Challenge competitions as 
well as any competitions that we find to provide useful lessons for us. 
Although these qualitative assessments will be more anecdotal in 
nature, the lessons learned will be important to the development of 
future Challenges.

Questions submitted by Representative Mark Udall

Q1.  NASA's Centennial Challenge prize program is aimed at developing 
technologies needed for NASA's exploration initiative.

A1. It is important to note that while the focus of Centennial 
Challenges is on supporting the Exploration Systems Mission 
Directorate, NASA does intend to pursue prize competitions that support 
other mission areas, including the Science Directorate and the 
Aeronautics Directorate.

Q1a.  What happens if either no one is interested in competing for the 
prize or no one comes up with a winning approach? What will NASA do? 
When will NASA make a decision on whether or not to suspend a 
particular prize approach?

A1a. The rules for all prize competitions conducted under Centennial 
Challenges will include two expiration dates.
    The first expiration date will allow NASA to end a prize 
competition if an adequate number of competitors have not registered by 
that date. For example, if we judge that at least two competing teams 
are needed to ensure a strong competitive field for a particular 
Challenge, but only one team has registered at the end of the first 
year of the competition, NASA would reserve the right to end the 
competition at the end of the first year.
    The second expiration date will allow NASA to end a prize 
competition if no competitor has achieved the winning criteria within 
the time allowed for the competition. For example, if we offered a 
prize for a soft lunar robotic landing within five years, but no team 
had successfully placed a lander on the surface of the Moon at the end 
of five years, NASA would end the competition at the end of the fifth 
year.
    These expiration dates will ensure that NASA has the flexibility to 
recover from a defective set of competition rules and redirect prize 
funding towards a new competition. However, it is our intention to 
never have to exercise these expiration dates. We intend to carefully 
develop the rules for each of our prize competitions using inputs from 
a variety of sources, including: requests for information (RFIs) to 
potential competitors, internal and external independent expert review 
boards, and inputs from workshops and other public venues. In fact, 
inputs from over 200 participants on over 30 candidate prize 
competitions from our first annual Centennial Challenges Workshop are 
available on the Internet at www.centennialchallenges.nasa.gov.

Q2.  What do you consider the biggest impediments to carrying out a 
successful prize program?

A2. The single largest hurdle to an effective Centennial Challenges 
program is obtaining specific legislative authority to conduct 
competitions with large prize purses over multiple years. Without this 
authority, NASA's use of prize competitions will be severely limited 
and sub-optimized.
    The number and type of prize competitions that NASA could pursue 
would be greatly decreased without this authority. Most of the 
candidate prize competitions we are considering for FY 2005 and beyond 
would require prize purses in the million-dollar range and above to 
attract a strong field of competitors. Most of these prizes will also 
require multiple years of competition before a winner emerges. (For 
reference, the ongoing X-PRIZE competition was started in 1996--a nine-
year competition with a $10 million purse, which was won on October 4, 
2004.) Examples of candidate prize competitions requiring this 
authority include full space missions, such as competitions for: a 
lunar robotic soft lander, a micro re-entry vehicle, an orbital aero-
assist demonstration, and a solar sail demonstration. Examples also 
include atmospheric flight demonstrations, major subsystem 
demonstrations, and component-level technology breakthroughs, such as 
competitions for: a mobile power storage breakthrough, a radiation 
shielding breakthrough, a precision planetary descent and landing 
system, an autonomous drilling system, a telerobotic construction 
system, a robotic Earth analog sample return system, a human lunar all-
terrain vehicle, and a long duration unmanned aerial vehicle. With 
specific authority to conduct competitions with large prize purses and 
to treat prize purse funding as no-year funding, as was provided in 
2002, NASA will be able to pursue a robust Centennial Challenges. Since 
FY 2001, in anticipation of enactment of prize authority, NASA's annual 
appropriations acts have included an administrative provision stating: 
``Funds for announced prizes otherwise authorized shall remain 
available, without fiscal year limitation, until the prize is claimed 
or the offer is withdrawn.''

                   Answers to Post-Hearing Questions

Responses by the Hon. Robert S. Walker, Chairman, Wexler & Walker 
        Public Policy Associates

Questions submitted by Chairman Dana Rohrabacher

Q1.  If NASA were to establish a program of prizes, how should issues 
of liability be treated? Should the Federal Government assume any legal 
risks associated with private companies competing for a prize? Would 
your answer be different if an outside entity (such as a private 
foundation or an endowment) was in charge of designing, administering 
and judging prize contests, rather than NASA?

A1. Given the level of risk that must be assumed and that prize 
competitors would be willing to take, I do not believe the Federal 
Government should assume liability responsibility. Given the open-ended 
nature of prize competition, there would be an opportunity for 
fraudulent claims if such legal risks were assumed.
    While I do not pretend to be an expert of how the X-Prize 
Competition has handled the issue of liability, clearly the use of an 
outside entity to sponsor the government's prize competition could use 
a similar approach.

Q2.  If NASA were to establish a program of prizes, how should issues 
of intellectual property (IP) be treated? Should the IP rights for the 
technologies of a winning prize reside with the government, or with the 
prize winner? If with the prize winner, what rights, if any, should the 
government retain? Should the prize winners ever be required to share 
IP that NASA would need? Would your answer be different if an outside 
entity was in charge of prize contests?

A2. Part of the reason why possible prize competitors find such 
programs appealing is their ability to capitalize on their work even if 
they do not when or even if the prize money does not cover their actual 
expenses. Therefore, it is vital that intellectual property remain with 
the competitors, including the winner. NASA should have the ability to 
draw upon the expertise and technology based upon the inside knowledge 
gained with the prize program, but should properly pay for any 
technology actually included in NASA projects.

Q3.  If NASA or another federal entity was in charge of running a 
program of prize contests, should the Federal Government be allowed to 
receive private funds in addition to federally appropriated funds? If 
so, what conflicts of interest might arise and how could they be 
prevented? Conversely, if a private foundation or outside entity was in 
charge of running such a program, should the Federal Government be 
allowed to contract with or provide funds to this entity?

A3. Multiplier money is very desirable whether the program is sponsored 
directly by NASA or by an outside entity. My preference would be to 
create an outside entity that clearly would be able to accept non-
federal dollars, but would also be able to utilize appropriated money. 
Such an outside entity, probably a foundation, would avoid the conflict 
of interest issues.

Q4.  What are the advantages and disadvantages for having either an 
outside private entity or a federal entity other than NASA in charge of 
running a program of prize contests, rather than NASA itself? What 
would the proper balance be between NASA's role and the outside 
entity's role in the designing, administering and judging of prize 
contests? Should NASA have any role in these areas?

A4. I would favor creating an outside entity, preferably a tax-free 
foundation, to administer any large prize program. For small prizes, 
aimed at limited technology development, it may be appropriate for NASA 
to directly offer prizes aimed at specific needs, but in general I 
believe a prize foundation is the best policy route. The advantages I 
see for the outside prize entity are as follows:

        1.  Eliminate most conflict of interest problems

        2.  Would be able to take both public and private money

        3.  Could be subjected to NASA oversight

        4.  Could accept risks not normally open to government 
        agencies.

Q5.  Should NASA centers, FFRDCs and federal employees be allowed to 
compete for prizes?

A5. Prize competition should be for non-federal personnel. In other 
words, I do not believe the centers, as presently constituted, should 
be included in prize competition. However, if the center transformed to 
FFRDCs, employees of the FFRDCs should be eligible for prize awards.

Q6.  What recommendations do you have to minimize the possibility that 
the judging of a prize contest is not biased towards a particular 
solution? Do you believe NASA should or should not participate in the 
judging of such contests?

A6. The possibility of having prize awards dependent on judging 
decisions should be minimized as much as possible. The best way to 
accomplish this is to set prize criteria based upon clear objectives 
and with a specific time limit. No real judging is necessary if the 
winner is the first to meet the specified objectives within the 
timeframe indicated.

Q7.  In his testimony, Dr. Diamandis said that the goal of a prize is 
not to develop technology to put directly into use in the space 
program, but rather to develop new ways of thinking--``to invent the 
transistor, not to perfect the process leading to a Pentium Chip.'' But 
presumably NASA must run its programs using mature technology.

Q7a.  How could NASA take a winning idea and turn it into a mature 
technology that the space program can use?

Q7b.  Should NASA offer contracts to the winners of a prize, such as to 
develop his or her idea further to meet NASA's specifications? Or 
should such a job more likely fall to one of the major aerospace 
contractors?

A7a,b. Prizes are not meant to produce mature technologies. They 
produce unique ideas for addressing real goals. Therefore, NASA must 
see the outcome of prize competition as a variety of ways to address a 
specific goal with one winner, but multiple future choices. The winner 
should expect no more than to collect the prize--no guarantee of a 
future contract. But NASA should look upon the contest as a learning 
experience, which allows it to infuse new thinking into its more 
traditional contracting process.

Q8.  What should NASA provide in order to attract participants to a 
prize contest? Should the winner of a prize contest expect to have a 
future business relationship with NASA? Should there be a guaranteed 
government contract for the winner of a prize, such as the delivery of 
cargo into orbit or to ISS? Is it necessary that there be some evidence 
of a future market for prizes to be effective?

A8. Prizes are not inherently a mechanism for developing contract 
relationships. Winners and participants in the contest should expect no 
more than the ability to retain the intellectual property they have 
created. On the other hand, NASA should no be precluded from forming a 
business relationship with prize contenders if they have something 
specific to offer to ongoing NASA efforts.

Q9.  Dr. Macauley testified that prizes have been offered successfully 
in the past to develop incremental technologies, but that was before 
government began to invest so heavily in R&D.

Q9a.  Is it better for NASA to offer both large and small prizes, or 
should it focus only on larger prizes? Would the cost of judging and 
otherwise administering small purse prizes outweigh the value of the 
prize itself and make such prizes not worthwhile?

Q9b.  How should it be decided whether prizes or contracts/grants are 
the appropriate tool for stimulating innovation for small, discrete 
technologies (such as the development of an improved astronaut glove)?

A9a,b. While I am not opposed to the concept of small prizes for 
incremental technology development, I am concerned that the fairly 
precise nature of such prizes might end up looking more like a contract 
than a prize. I am more interested in large prizes with the potential 
for significant technology backwash that will be valuable even if no 
one actually wins the prize. For example, the annou8ncement of a 
specific date for manned spacecraft race around the Moon with a 
substantial monetary prize could inspire the type of technology 
competition that would revolutionize the industry.

Q10.  To what degree should NASA plan to depend solely on prizes for 
the development of technologies that are essential to exploration, such 
as technologies that would be required for either long-duration space 
flight or extended human missions to the Moon?

A10. The prizes NASA offers should seek to encourage development of 
technologies that fit the agencies exploration goals. But rather than 
specifying the technologies NASA believes are relevant, the prizes 
should be broad enough to allow substantial innovation. Prizes should 
not be the sole approach to technology development but rather the high-
risk component that creates unique technology pathways.

Q11.  How would a prize contest differ from NASA releasing a request 
for information (RFI), such as what was done for a Hubble robotic 
servicing mission? How should the decision be made as to whether a 
particular objective is better suited to a prize competition or to more 
traditional approaches? Would the largest difference between the two 
methods be the lead-time required for the development of a technology 
through a prize contest as compared to that of the traditional route?

A11. RFI's tend to be a means of pinging the traditional NASA 
contractor and supply chain. Prizes are a way of getting 
entrepreneurial involvement, which does not want to be encumbered by 
federal rules and regulations. By putting time limits in the prize 
criteria, NASA should be able to encourage some early adopter activity 
that will benefit the whole of the space exploration programs, and come 
from the inventors, developers and financiers not normally involved in 
NASA procurement.

Questions submitted by Representative Nick Lampson

Q1.  The Aldridge Commission report stated, ``Given the complexity and 
challenges of the new vision, the Commission suggests that a more 
substantial prize might be appropriate to accelerate the development of 
enabling technologies. As an example of a particularly challenging 
prize concept, $100 million to $1 billion could be offered to the first 
organization to place humans on the Moon and sustain them for a fixed 
period before they return to Earth.''

Q1a.  How would such a prize work in practice, for example, should $1 
billion be put in a special account and the rest of NASA's budget for 
human exploration of the Moon be cut be an equivalent amount or even 
eliminated entirely?

Q1b.  Given that small unmanned spacecraft missions currently cost a 
$100 million or more, how credible is it to believe that any 
organization could carry off a human lunar mission for $100 million--or 
even $1 billion?

Q1c.  By logical extension, should Congress consider curtailing the 
funding for the President's space exploration initiative and instead 
just put $500 million to $1 billion in a prize fund annually over the 
next decade as a prize for the first organization to land humans on 
Mars and return them safely?

A1a,b,c. The question of how to specifically designate money to the 
prize account was one that the Commission felt was better left to the 
Congress to determine. My personal view is that the creation of a 
foundation capable of receiving appropriated money would be the way to 
go. For large prizes the appropriations into the account could take 
place over several years and would not have to impact ongoing NASA 
programs in any substantial way. For NASA, the advantage would be that 
for modest investments on appropriated money for prize activity, 
technology development worth substantially more could be undertaken.
    Another potential approach would be to appropriate money only once 
the prize criteria had been met. Clearly, this would involve a good 
faith commitment, but if no one achieved prize success, no money would 
have to be allocated. Meantime, the Nation would still benefit from the 
technology development in pursuit of the prize even with an 
unsuccessful outcome.
    The Commission found that the value of the prize has little or no 
relationship to the amounts that will be spent in pursuit of it, 
providing that the goal is significant. Aviation prizes in the past and 
the X-Prize experience show a willingness to pursue big goals for the 
glory of the victory. Estimates range from between $100-$400 million 
spent in pursuit of the X-Prize. Burt Rutan will almost certainly have 
spent at least three times what the X-Prize is worth in his effort. 
Therefore, the prize is a device to encourage activity and the thought 
of the Commission was that the first $1 billion dollar prize in history 
might just get considerable attention and substantial activity even 
toward a goal as big and expensive as a lunar mission.
    Prizes should not be seen as a replacement of regularized NASA 
mission planning and execution. Instead, prizes are a means to achieve 
unique innovation with risks far larger than NASA is capable of taking. 
Curtailing NASA funding in lieu of prize competition would handicap the 
agency in favor of a total risk approach to space exploration. Prudence 
calls for a combined approach that accepts the risks inherent in prize 
competition but also preserves the inherent scientific and 
technological assets that NASA embodies

Question submitted by Representative Mark Udall

Q1.  What do you consider to be the biggest impediments to carrying out 
a successful prize program?

A1. The biggest impediment to a prize program will be the reluctance to 
accept the substantial risks that must accompany the pursuit of prizes. 
Competitors are unlikely to fit the profile of typical NASA 
contractors, nor are they likely to want to be burdened by volumes of 
federal rules and regulations. In order for prizes to work, they must 
remain relatively unencumbered by standard government practices and 
therefore are likely to be technologically risky.
    While financial risk should be mitigated by offering payment only 
upon success, the fact that government money is encouraging high-risk 
activity could become controversial.
    The other problem I see is finding and appropriate funding 
mechanism. Since prizes do not easily fit inside the typical 
appropriations cycle, unique policies will have to be developed that 
assume appropriate budgetary restraints but also assure the 
availability of prize money when success is achieved.

                   Answers to Post-Hearing Questions

Responses by Dr. Peter H. Diamandis, Chairman and CEO, X-Prize 
        Foundation

Questions submitted by Chairman Dana Rohrabacher

Q1.  If NASA were to establish a program of prizes, how should issues 
of liability be treated? Should the Federal Government assume any legal 
risks associated with private companies competing for a prize? Would 
your answer be different if an outside entity (such as a private 
foundation or an endowment) was in charge of designing, administering 
and judging prize contests, rather than NASA?

A1. The government should not be accepting any additional liability 
risks. The existing FAA, DOT, and DOC licensing methods should be used 
where appropriate. The X-PRIZE Foundation utilizes liability release 
forms that must be signed by each team. The use of an outside 
administrative organization, like the X-PRIZE Foundation, could help to 
appropriately shield the government.

Q2.  If NASA were to establish a program of prizes, how should issues 
of intellectual property (IP) be treated? Should the IP rights for the 
technologies of a winning prize reside with the government, or with the 
prize winner? If with the prize winner, what rights, if any, should the 
government retain? Should the prize winners ever be required to share 
IP that NASA would need? Would your answer be different if an outside 
entity was in charge of prize contests?

A2. The government should not claim any intellectual property rights 
from any of the teams. The teams need to be provided with the greatest 
impetus to commercialize their IP and inter-revenue generating 
business. At most, the government should request that prize winner 
agree to license the technology through NASA or the DOD. If agreed 
upon, this license should be issued at its best commercial rate.

Q3.  If NASA or another federal entity was in charge of running a 
program of prize contests, should the Federal Government be allowed to 
receive private funds in addition to federally appropriated funds? If 
so, what conflicts of interest might arise and how could they be 
prevented? Conversely, if a private foundation or outside entity was in 
charge of running such a program, should the Federal Government be 
allowed to contract with or provide funds to this entity?

A3. The idea of obtaining private funds to supplement a government 
prize purse is extremely important. The best way to accomplish this is 
to allow an outside private entity, such as the X-PRIZE Foundation or 
its equivalent, to run the competition and solicit sponsors that would 
co-fund a prize jointly with the government. A private entity with 
expertise in this area would be far more effective than the government 
in leveraging sponsor dollars.

Q4.  What are the advantages and disadvantages for having either an 
outside private entity or a federal entity other than NASA in charge of 
running a program of prize contests, rather than NASA itself? What 
would the proper balance be between NASA's role and the outside 
entity's role in the designing, administering and judging of prize 
contests? Should NASA have any role in these areas?

A4. There are numerous advantages to allowing an outside private entity 
to run the competition. These include:

        A)  The competition would be viewed as being judged more fairly 
        if the government was not running it. An outside party would 
        not be biased to any preconceived technology solutions. This 
        will result in more teams joining the competition.

        B)  An outside private entity can more aggressively market the 
        competition through co-promotions with sponsors, television 
        programming and public relation campaigns. NASA is limited by 
        law on its ability to promote itself and its programs.

        C)  A private entity, like the X-PRIZE Foundation, which is 
        already administrating prize programs, could significantly 
        benefit from economies of scale in using its pre-existing skill 
        set. This includes experiences and/or skills in the following 
        arenas: public relations; team/participant management; judging 
        panel selection and procedures; rules development; web and 
        television marketing; sponsorship solicitation, etc. These 
        could all be applied to promote and develop the government 
        prizes as well as existing prizes.

Q5.  Should NASA Centers, FFRDCs and federal employees be allowed to 
compete for prizes?

A5. Yes. They should be allowed to compete for the prizes. However, 
they should neither be using government funds nor be restricted by 
government rules and regulations. The whole concept of the prize is to 
allow non-traditional solutions to be achieved at a low cost. The 
employees of an FFRDC should be allowed to form teams and compete, but 
they should be privately funded.

Q6.  What recommendations do you have to minimize the possibility that 
the judging of a prize contest is not biased towards a particular 
solution? Do you believe NASA should or should not participate in the 
judging of such contests?

A6. The best way to prevent a bias towards a particular solution is 
twofold:

        1)  Set clearly defined rules that state the end goal without 
        inclusion of any bias towards a particular technology solution.

        2)  Design the managing and judging entity to be independent of 
        the government.

    I think it is appropriate to have one judge from NASA on the 
judging panel, but it is paramount that the judges be comprised of a 
mix of individuals from private industry or universities. Potential 
judges should also be selected from experts in the appropriate 
technology arena.

Q7.  In your testimony, you said that the goal of prize is not to 
develop technology to put directly into use in the space program, but 
rather to develop new ways of thinking--``to invent the transistor, not 
to perfect the process leading to a Pentium Chip.'' But presumably NASA 
must run its programs using mature technology.

Q7a.  How could NASA take a winning idea and turn it into mature 
technology that the space program can use?

A7a. The way that NASA can turn a winning idea into mature technology 
is to set the prize rules to meet that specific objective. For example, 
instead of a challenge involving a lunar rover that might be tested on 
Earth, establish a prize that requires a lunar rover to be tested on 
the Moon. Require it to be tested to the extent that NASA needs it. The 
challenge could be something like, ``Go 10 miles in two days,'' for 
example. Allow the end result of the prize to demonstrate the 
functionality of the technology. A good example of this is Burt Rutan's 
demonstration of hybrid rockets as human-rated propulsion systems.

Q7b.  Should NASA offer contracts to the winners of a prize, such as to 
develop his or her idea further to meet NASA's specifications? Or 
should such a job more likely fall to one of the major aerospace 
contractors?

A7b. NASA should offer the prize winners either a contract to provide 
the technology or an offer to license it from them for development by 
an existing contractor. That decision should rest with the prize 
winner. After all, they have just demonstrated the technology that NASA 
would like to make use of. Why not give them an opportunity to do it 
again and continue to learn? The alternative of turning it over to 
larger prime contractors would only result in higher cost; it is also 
likely that they will not have as much experience as the prize winner 
themselves.

Q8.  What should NASA provide in order to attract participants to a 
prize contest? Should the winner of a prize contest expect to have a 
future business relationship with NASA? Should there be a guaranteed 
government contract for the winner of the prize, such as the delivery 
of cargo into orbit or to ISS? Is it necessary that there be some 
evidence of a future market for prizes to be effective?

A8. Many of the teams that would compete for NASA prizes, quite 
frankly, would not want to do business with the government. They are 
pursuing the prize for two reasons: 1) the cash prize and 2) the 
publicity. Also, they most likely view it as an opportunity to 
demonstrate the technology for personal business reasons. The best 
thing that NASA could offer would be a substantial cash prize and very 
high visibility. The contract or option to license the technology is 
important, but I think secondary to the first two. NASA must allow the 
team to retain all the intellectual property. This would be a non-
starter if NASA tried to take ownership of any of the technology.

Q9.  Dr. Macauley testified that prizes have been offered successfully 
in the past to develop incremental technologies, but that was before 
government began to invest so heavily in R&D.

Q9a.  Is it better for NASA to offer both large and small prizes, or 
should it focus only on larger prizes? Would the cost of judging and 
otherwise administering small purse prizes outweigh the value of the 
prize itself and make such prizes not worthwhile?

A9a. As the X-PRIZE Foundation recommended in its study to NASA in 
2003, it is our belief that NASA should offer a full range of prizes. 
These should include, at any one time, two to three grand prizes for 
such things as private flight to orbit, robots landing on the Moon, or 
asteroid sample return missions. There should be a full spectrum of 
prizes funneling down to the high school level. For example, students 
could do mining research based on Mars Lander data stored on computer 
archives. The goal here should be to get entrepreneurs and 
entrepreneurially minded companies to begin looking at prizes as a way 
to both supplement their income and create excitement and publicity for 
the space arena.

Q9b.  How should it be decided whether prizes or contracts/grants are 
the appropriate tool for stimulating innovation for small, discrete 
technologies (such as the development of an improved astronaut glove)?

A9b. Not all technology challenges make good prizes. A technology 
challenge that make a good prize must have a human story involved with 
it. Heroic challenges and even the potential for failure intrigues the 
public. The topic must be of interest to the television-minded audience 
and the media world. Therefore, a challenge must be created in the 
context of a human feat. For example, an improved astronaut glove used 
while participating in a competitive sport or the use of teams 
competing against each other using these gloves to accomplish certain 
objectives. Regardless of the actual technology challenge being 
presented, the human factor must be incorporated to attract human 
attention.

Q10.  To what degree should NASA plan to depend solely on prizes for 
the development of technologies that are essential to exploration, such 
as technologies that would be required for either long-duration space 
flight or extended human missions to the Moon?

A10. NASA needs to take dual courses with regards to critical 
technology.
    It is completely reasonable that NASA should always continue to 
utilize a prime contractor for its mission critical technologies. 
However, for each of these technology areas that are most expensive and 
lacking innovation, it is appropriate for NASA to set aside some 
percentage (five or ten percent of the budget) for prizes. If, for 
example, a new landing technology to land on the Moon is required, 
rather than just contract with Boeing, NASA should initiate a Lunar 
Landing Prize with specific mission parameters. This would allow 
certain companies that could never compete against Boeing, in the 
contractual sense, to gain an opportunity at proving new ideas.

Q11.  How would a prize contest differ from NASA releasing a request 
for information (RFI), such as what was done for a Hubble robotic 
servicing mission? How should the decision be made as to whether a 
particular objective is better suited to a prize competition or to more 
traditional approaches? Would the largest difference between the two 
methods be the lead-time required for the development of a technology 
through a prize contest as compared to that of the traditional route?

A11. This is perhaps the most important element. The difference between 
a prize and an RFI lies in the fact that in a prize, NASA does not get 
to judge which approach makes sense or which approach has the best 
technology. It simply judges who completed the task first successfully. 
The existing mature bureaucracy in NASA (and I say that in the kindest 
way) will prejudge which technology is too risky and what is most 
likely to work. Contracts will be awarded to the latter. NASA would 
never have allowed for The Spirit of St. Louis or SpaceShipOne with 
that type of selection process.
    The most important thing NASA can do here is to set a very clear 
and concise set of rules independent of technology and then to judge 
who does it first. Providing the largest cash prize possible will serve 
to motivate the most number of creative approaches to engage the 
challenge.
    Regarding what should be attacked as an RFI versus a prize: Prizes 
are most suited to fit those concepts which have very complex and 
multi-variable solutions. Good prize candidates are also those that 
have the opportunity for media, publicity, heroism, and a follow on 
line of business once the technology has been proven. RFIs can be used 
for soliciting solutions for known problems or known technologies where 
a price capability is sought that is well within the state of practice.

Question submitted by Representative Mark Udall

Q1.  What do you consider to be the biggest impediments to carrying out 
a successful prize program?

A1. NASA needs to provide cash, use of its name and logo, and allowance 
for a flexible entrepreneurial approach that might seem contrary to 
NASA's existing way of doing business. There needs to exist an 
opportunity for Nike, Apple and Virgin Atlantic to exploit a prize 
competition. Reality television shows should be generated that captures 
the minds and hearts of 50 million Americans. This blatant 
commercialism will make the difference between a prize program being 
stagnant, boring and nonfunctional to one that will capture the 
attention of nine-year-old kids and media CEOs across the country, if 
not the world.

                   Answers to Post-Hearing Questions

Responses by Dr. Molly K. Macauley, Senior Fellow, Resources for the 
        Future

Questions submitted by Chairman Dana Rohrabacher

Q1.  If NASA were to establish a program of prizes, how should issues 
of liability be treated? Should the Federal Government assume any legal 
risks associated with private companies competing for a prize? Would 
your answer be different if an outside entity (such as a private 
foundation or an endowment) was in charge of designing, administering 
and judging prize contests, rather than NASA?

A1. The issue of liability is indeed important and because (unlike the 
X-Prize), a NASA-sponsored prize involves both (1) government as 
sponsor and potential user and (2) the private sector or others (maybe 
government labs, for instance) as competitors, liability rules probably 
need to be developed by a mix of government and private sector 
attorneys. Models are probably available as used for other government 
contracting or peer-reviewed research awards. Liability of course has 
many aspects. For instance, there is liability for safety, performance, 
and property right infringement, and among these categories, concerns 
such as safety liability during development of the innovation 
(presumably this would rest with the inventor) or safety liability 
during use (presumably this would rest with the government when it 
makes use of the invention, or with other parties when they are making 
use of the invention). From an economics perspective, the assignment of 
liability can add cost to the competitor or add cost to the taxpayer, 
and the assignment confers different incentives for bearing risk. I'd 
be happy to work with any legal teams who become involved in designing 
liability guidelines.

Q2.  If NASA were to establish a program of prizes, how should issues 
of intellectual property (IP) be treated? Should the IP rights for the 
technologies of a winning prize reside with the government, or with the 
prize winner? If with the prize winner, what rights, if any, should the 
government retain? Should the prize winners ever be required to share 
IP that NASA would need? Would your answer be different if an outside 
entity was in charge of prize contests?

A2. As the case with liability addressed in question (1) above, issues 
of IP also bring with them differences in ``who bears the cost'' and in 
incentives created for competitors and the government. Perhaps a 
workable solution is for IP to rest with the inventor, and the 
government or other customers use the invention under a fee-for-use or 
royalty payment. In other words, the prize money itself is a one-time 
award made to the winner for success, and any subsequent use by 
government or other customers requires a fee. The fee could be a one-
time payment if the invention is a one-shot process or product, or it 
could be a per-use fee for a product or service with multiple uses.

Q3.  If NASA or another federal entity was in charge of running a 
program of prize contests, should the Federal Government be allowed to 
receive private funds in addition to federally appropriated funds? If 
so, what conflicts of interest might arise and how could they be 
prevented? Conversely, if a private foundation or outside entity was in 
charge of running such a program, should the Federal Government be 
allowed to contract with or provide funds to this entity?

A3. There are examples of successful public-private cooperation in 
other development activities--for instance, in some (but not all) urban 
redevelopment projects, or in the early days of the Communications 
Satellite Corporation, which was a quasi-private sector entity. Perhaps 
a useful rule of thumb is to garner as much private sector involvement 
as possible, in funding as well as in administration of the prize. This 
rule would enable the government to act strictly as customer during the 
competition and once the prize is awarded.

Q4.  What are the advantages and disadvantages for having either an 
outside private entity or a federal entity other than NASA in charge of 
running a program of prize contests, rather than NASA itself? What 
would the proper balance be between NASA's role and the outside 
entity's role in the designing, administering and judging of prize 
contests? Should NASA have any role in these areas?

A4. As suggested in the answer to question (3) above, making as much 
use of the private sector as possible probably best maintains the 
spirit and, as important, the desirable incentive structure of the 
prize, in order to bring out as many new ideas as possible, 
unencumbered by too much administration or restrictions. NASA must play 
a role, since the agency is spending taxpayers' money, but that role 
can be limited to specifying the goal of the prize, the prize amount, 
and the time limits on the competition; providing the prize money; and 
judging the competition (again, since the agency is responsible for 
managing taxpayers' money).

Q5.  Should NASA centers, FFRDCs and federal employees be allowed to 
compete for prizes?

A5. A significant amount of creative, entrepreneurial talent resides at 
the centers, FFRDCs, and among federal employees. For this reason, a 
prize designed to find the ``best and brightest'' competitors should 
have as few restrictions on participation as possible.

Q6.  What recommendations do you have to minimize the possibility that 
the judging of a prize contest is not biased towards a particular 
solution? Do you believe NASA should or should not participate in the 
judging of such contests?

A6. As noted in question (4), since NASA is serving as steward of 
taxpayers' money, the agency needs to play a role in judging. If there 
is a concern about possible bias in judging, competitors will need to 
take this into account in their decisions to compete. In all fairness, 
even the private sector can bring bias to judging.

Q7.  In his testimony, Dr. Diamandis said that the goal of a prize is 
not to develop technology to put directly into use in the space 
program, but rather to develop new ways of thinking--``to invent the 
transistor, not to perfect the process leading to a Pentium Chip.'' But 
presumably NASA must run its programs using mature technology.

Q7a.  How could NASA take a winning idea and turn it into a mature 
technology that the space program can use?

A7a. It seems that both process technology (say, a new algorithm) and 
product technology is required for furthering space exploration, and 
since the history of prizes suggests an interest on the part of 
competitors in competing for both ``basic'' research development as 
well as product development, perhaps prizes should not be limited to 
only ``mature'' technology.

Q7b.  Should NASA offer contracts to the winners of a prize, such as to 
develop his or her idea further to meet NASA's specifications? Or 
should such a job more likely fall to one of the major aerospace 
contractors?

A7b. The contracting mechanism that is used after a successful 
competition probably doesn't matter for the integrity of the prize.

Q8.  What should NASA provide in order to attract participants to a 
prize contest? Should the winner of a prize contest expect to have a 
future business relationship with NASA? Should there be a guaranteed 
government contract for the winner of a prize, such as the delivery of 
cargo into orbit or to ISS? Is it necessary that there be some evidence 
of a future market for prizes to be effective?

A8. The history of prizes suggests that none of these provisions 
matters except for the prize itself (the award money).

Q9.  You testified that prizes have been offered successfully in the 
past to develop incremental technologies, but that was before 
government began to invest so heavily in R&D.

Q9a.  Is it better for NASA to offer both large and small prizes, or 
should it focus only on larger prizes? Would the cost of judging and 
otherwise administering small purse prizes outweigh the value of the 
prize itself and make such prizes not worthwhile?

A9a. NASA might consider experimenting with a variety of sizes of 
prizes--the overarching objective might simply be to provide an 
incentive for creative approaches to a variety of NASA requirements. A 
couple of disadvantages of prizes are that they don't provide up-front 
money, so competitors are limited in the cash flow or need to find 
financial backers, and that if a prize is not awarded, NASA has ``lost 
time'' during the duration of the prize competition. However, an 
unawarded prize may mean that the technology is simply not ready, and 
wouldn't be ready even if NASA had funded the technology development by 
means of traditional contracts or research awards. Prizes don't 
necessarily remedy the inherent uncertainty of innovation.

Q9b.  How should it be decided whether prizes or contracts/grants are 
the appropriate tool for stimulating innovation for small, discrete 
technologies (such as the development of an improved astronaut glove)?

A9b. The history of prizes suggests that prizes may be useful for all 
kinds of innovation--so, NASA can experiment with prizes, with the 
caveats noted in the answer to question (9), above.

Q10.  To what degree should NASA plan to depend solely on prizes for 
the development of technologies that are essential to exploration, such 
as technologies that would be required for either long-duration space 
flight or extended human missions to the Moon?

A10. See answer to question (9), above. Prizes don't provide initial 
cash to inventors, and prizes don't guarantee innovation. For critical 
technologies, NASA may need to provide cash up-front--and even then, 
success isn't guaranteed.

Q11.  How would a prize contest differ from NASA releasing a request 
for information (RFI), such as what was done for a Hubble robotic 
servicing mission? How should the decision be made as to whether a 
particular objective is better suited to a prize competition or to more 
traditional approaches? Would the largest difference between the two 
methods be the lead-time required for the development of a technology 
through a prize contest as compared to that of the traditional route?

A11. As I understand it, an RFI doesn't imply funding, whereas a prize 
does promise an award if the competition is successful. Perhaps I 
misunderstand the RFI process. As noted in answers to previous 
questions, prizes might be offered for a wide range of types of 
innovation--discrete products, new processes, etc.

Questions submitted by Representative Mark Udall

Q1.  An area of focus for NASA's proposed prize program is seeking 
``revolutionary advances in fundamental technologies.'' On the one 
hand, a prize program might attract innovators who haven't 
traditionally been involved in NASA R&D activities. On the other hand, 
a prize program might wind up eliminating the participation of 
researchers from universities or other not-for-profit associations, who 
typically are dependent on ongoing research grants to support 
themselves and their graduate students' research activities.

Q1a.  Are you concerned that an R&D approach built on prizes could 
potentially limit the opportunities for university researchers?

A1a. Prizes have the disadvantage of not providing up-front cash for an 
inventor. A university researcher may find this less of a disadvantage 
than a private-sector entrepreneur not affiliated with a university, if 
the university researcher can do the research for the prize as part of 
research covered by university overhead or teaching allocations.

Q2.  What factors other than the size of the prize are likely to 
attract potential investors to participate in an inducement prize 
offering? For example, is winning the prize sufficient (because of the 
publicity involved) or must there be a market for the product that 
results from the competition?

A2. The history of prizes suggests that the prize alone is sufficient. 
The challenging decision is how much to offer as the prize--presumably, 
the amount reflects the value of the potential innovation to NASA.

Q3.  What do you consider to be the biggest impediments to carrying out 
a successful prize program?

A3. Perhaps the biggest impediment is figuring out how large to make 
the prize (the amount of prize money). The calculation involves 
figuring out how much the innovation ``means'' to NASA--and such 
valuation questions are always challenging.

                   Answers to Post-Hearing Questions

Responses by Dr. Douglas Holtz-Eakin, Director, Congressional Budget 
        Office

Questions submitted by Chairman Dana Rohrabacher

Q1.  If NASA were to establish a program of prizes, how should issues 
of liability be treated? Should the Federal Government assume any legal 
risks associated with private companies competing for a prize? Would 
your answer be different if an outside entity (such as a private 
foundation or an endowment) was in charge of designing, administering 
and judging prize contests, rather than NASA?

A1. General and sector-specific health and safety regulation, the 
criminal code, and the civil tort system all provide private firms with 
incentives to take care in their activities. In this context, the 
activities of prize competitors, whether overseen by the government, an 
outside agent acting on the government's behalf, or a private entity, 
would be unlikely to merit extraordinary treatment with regard to 
liability. The activities that propose the greatest risk, those 
associated with space launch, are already the subject of direct federal 
regulation and licensing.

Q2.  If NASA were to establish a program of prizes, how should issues 
of intellectual property (IP) be treated? Should the IP rights for the 
technologies of a winning prize reside with the government, or with the 
prize winner? If with the prize winner, what rights, if any, should the 
government retain? Should the prize winners ever be required to share 
IP that NASA would need? Would your answer be different if an outside 
entity was in charge of prize contests?

A2. A prize competition intends to call forth effort to achieve program 
goals. In that context, whether National Aeronautics and Space 
Administration (NASA) or an outside entity were conducting a prize 
competition, the question of how intellectual property rights are 
treated is a question about how risks and rewards are divided between 
the government and prize seekers. One approach applied to rights 
created under government contracts is for the government to obtain a 
royalty-free license for use of those rights necessary for governmental 
purposes and for the contractor to retain the rights for other uses. An 
array of other arrangements are also possible. Broadly speaking and 
with all other rewards held constant, if more of the intellectual 
property rights to inventions or innovations made in the pursuit of a 
government-sponsored prize remain with the successful contestant, then 
contestants' incentive to expend effort is increased. If the government 
lays claim to more of the intellectual property rights, then the 
contestants' incentive to expend effort is less.

Q3.  If NASA or another federal entity was in charge of running a 
program of prize contests, should the Federal Government be allowed to 
receive private funds in addition to federally appropriated funds? If 
so, what conflicts of interest might arise and how could they be 
prevented? Conversely, if a private foundation or outside entity was in 
charge of running such a program, should the Federal Government be 
allowed to contract with or provide funds to this entity?

A3. There is no reason why federal and private funds should not be 
commingled when a voluntary agreement can be reached between the 
government and the private sector. Conflicts of interest arise out 
specific facts to which a complex set of both federal laws and agency 
practices apply. It is not possible to comment on how such conflicts 
might be avoided in a NASA-sponsored prize competition without a 
specific set of facts outlining the details of an arrangement between 
NASA and a participating private entity.

Q4.  What are the advantages and disadvantages for having either an 
outside private entity or a federal entity other than NASA in charge of 
running a program of prize contests, rather than NASA itself? What 
would the proper balance be between NASA's role and the outside 
entity's role in the designing, administering and judging of prize 
contests? Should NASA have any role in these areas?

A4. CBO is aware of no particular advantage or disadvantage inherent to 
the choice between the government or a private entity to run a prize 
competition. Any difference likely would derive from different 
objectives and rules.

Q5.  Should NASA centers, FFRDCs and federal employees be allowed to 
compete for prizes?

A5. Permitting NASA centers and other federal employees or federally 
funded research and development centers (FFRDCs) to participate in 
government-sponsored prize competitions likely will affect the 
incentives of both would-be private and governmental participants. 
Private participants would likely be discouraged by the addition of 
more competitors and any perception that a government entrant would 
enjoy an edge in both resources and evaluation in a close finish. Were 
governmental entities permitted to compete, they would also be subject 
to an incentive effect, perhaps a positive one. Some people have long 
advocated forcing government agencies to compete with private entities 
in the provision of specific services as a way to both improve the 
performance of government and reduce the cost of government-provided 
goods or services.

Q6.  In his testimony, Dr. Diamandis said that the goal of a prize is 
not to develop technology to put directly into use in the space 
program, but rather to develop new ways of thinking--``to invent the 
transistor, not to perfect the process leading to a Pentium Chip.'' But 
presumably NASA must run its programs using mature technology.

Q6a.  How could NASA take a winning idea and turn it into a mature 
technology that the space program can use?

Q6b.  Should NASA offer contracts to the winners of a prize, such as to 
develop his or her idea further to meet NASA's specifications? Or 
should such a job more likely fall to one of the major aerospace 
contractors?

A6a,b. Inserting new technology into NASA's enterprise depends very 
much on the specifics of NASA's programs and the technologies that they 
require. This problem is separate from the origins of the technology. 
As is the case with intellectual property, the prospect (or lack 
thereof) of future government contracts to develop an innovations will 
have an incentive effect on prize competitors.

Q7.  What should NASA provide in order to attract participants to a 
prize contest? Should the winner of a prize contest expect to have a 
future business relationship with NASA? Should there be a guaranteed 
government contract for the winner of a prize, such as the delivery of 
cargo into orbit or to ISS? Is it necessary that there be some evidence 
of a future market for prizes to be effective?

A7. The simplest answer is cash. Although the government may offer 
rewards in a variety of forms--future business, development contracts, 
and favorable intellectual property rights--each of those forms has an 
equivalent cash value. The larger that cash value is, the stronger the 
incentive effect of the prize contest.

Q8.  Dr. Macauley testified that prizes have been offered successfully 
in the past to develop incremental technologies, but that was before 
government began to invest so heavily in R&D.

Q8a.  Is it better for NASA to offer both large and small prizes, or 
should it focus only on larger prizes? Would the cost of judging and 
otherwise administering small purse prizes outweigh the value of the 
prize itself and make such prizes not worthwhile?

Q8b.  How should it be decided whether prizes or contracts/grants are 
the appropriate tool for stimulating innovation for small, discrete 
technologies (such as the development of an improved astronaut glove)?

A8a,b. CBO reviewed Dr. Macauley's testimony with interest. Her 
research shows that recent experience with using prizes as a means to 
induce innovation is very limited. In that context, prudence might 
suggest a limited and experimental use of prizes to see how they work 
in the current configuration of governmental, academic, and private 
entities involved in meeting NASA's demand for new technologies. 
Regarding the size of prizes, it must be recognized that achieving 
large, technically complex objectives will require commensurately large 
awards. Consistent with an overarching principle of contest design, 
prizes are likely to be most effective when the objective of the 
contest can be clearly established and success can be observed in 
black-and-white terms (for instance, crossing the finish line first) 
rather than in shades of grey (for example, subjective evaluation of 
technical merit.)

Q9.  To what degree should NASA plan to depend solely on prizes for the 
development of technologies that are essential to exploration, such as 
technologies that would be required for either long-duration space 
flight or extended human missions to the Moon?

A9. Our limited recent experience with prize contests suggests 
experimentation should precede broad use. In that context, NASA's 
objectives might be better achieved by using traditional contracting to 
develop technologies essential to its major missions.

Q10.  How would a prize contest differ from NASA releasing a request 
for information (RFI), such as what was done for a Hubble robotic 
servicing mission? How should the decision be made as to whether a 
particular objective is better suited to a prize competition or to more 
traditional approaches? Would the largest difference between the two 
methods be the lead-time required for the development of a technology 
through a prize contest as compared to that of the traditional route?

A10. In issuing a request for information for the Hubble robotic 
servicing mission NASA took the first step in what is likely to be a 
traditional procurement of the goods and services necessary to 
accomplish the mission. An RFI is intended to solicit ideas and 
interest from the private sector and a precursor to a request for 
proposal or bid and, ultimately, a competitive award (a sole-source 
award may be an alternative in some circumstances). NASA's interest in 
or acceptance of the ideas or concepts submitted in response to an RFI 
provides the participants no immediate reward.
    Continuing with the Hubble servicing example, a prize contest that 
made awards for actual performance would of course leap over an RFI and 
all of the other intermediate steps, but require the government to 
accept risks that it might not be prudent to take. The prize money 
might be to too little or too much, the best solution may require joint 
action with the government, or a wide open competition could 
conceivably lead to attempts to service the Hubble that damaged the 
instrument. A contest that made awards for the ``best'' idea(s) is an 
alternative but has the problem of making an award based on very 
subjective evaluation in the presence of incomplete information.
    Concerning lead times, the basics of the technologies required to 
accomplish a mission rather than the form of acquisition are likely to 
drive those spans.

Questions submitted by Representative Nick Lampson

Q1.  What methods other than prizes or contests do you believe would be 
useful in stimulating investment in new technologies--whether space-
related or not?

A1. The success of the United States economy in producing and 
developing technical innovations is well established. That success is 
built on a foundation of intellectual property rights and allowing 
private markets allocate resources. When government ventures into 
private markets, policy-makers must be keenly aware of how a wide array 
of actions, including direct spending for goods and services, tax 
policy, income transfer programs and regulation, affect the innovative 
process that has contributed so much to our standard of living. At the 
most basic level, the best method to stimulate investment in new 
technology is to allow market processes to work, intervene only when 
absolutely necessary, and even then to be aware of the unintended 
consequences that are often associated with government's attempt to 
improve market outcomes.

Q2.  Typically the Federal Government seeks a royalty-free license to 
use any technology developed with federal funds.

Q2a.  Would it be appropriate to require royalty-free licenses to the 
government as part of a NASA prize competition?

Q2b.  Would a royalty-free license requirement affect the size of the 
prize that would have to be offered?

Q2c.  If the government didn't require royalty-free licenses, how would 
that affect the relative benefit to the government of prizes versus 
contracts or grants?

A2a,b,c. Whether the government enjoys a royalty-free license to use 
the technology developed in a government sponsored prize competition is 
a question of how risks and rewards are divided between the government 
and prize seekers. If the government agrees to pay license fees to use 
inventions or innovations made in the pursuit of a government sponsored 
prize, contestants' incentive to expend effort is increased. If the 
government stipulates that it will not pay such fees, contestants' 
incentive to expend effort is less.

Questions submitted by Representative Mark Udall

Q1.  NASA already has several existing means of attracting innovative 
R&D approaches. These include performance-based contracts, grants, and 
acceptance of unsolicited proposals. In addition, NASA participates in 
the Small Business Innovative Research (SBIR) program, which is 
described as a ``highly competitive three phase award system which 
provides qualified small business concerns with opportunities to 
propose innovative ideas that meet the specific research and 
development needs of the Federal Government.'' SBIR in particular seems 
to have goals similar to NASA's proposed Centennial Challenge prize 
program.

Q1a.  What do you see as the relative strengths and weaknesses of each 
of the approaches (grants, unsolicited proposals, performance-based 
contracts, SBIR, and prizes) in encouraging innovative technologies?

Q1b.  How much emphasis should NASA give to prizes versus these 
existing approaches?

A1a,b. CBO has not undertaken a detailed review of the Small Business 
Innovative Research (SBIR) program, which is within the National 
Aeronautics and Space Administration (NASA). Broadly speaking, however, 
it seems that the SBIR intends for NASA to have more involvement with 
contractors than would likely be the case for a prize competition and, 
unlike a prize competition open to all comers, is restricted to small 
businesses only. That the most effective prize competitions are open is 
a defining characteristic of the prize approach to encouraging 
innovation. That suggests that where objectives like increasing small 
business or minority participation in NASA's program are sought, prize 
competitions are less effective than other alternatives.

Q2.  What do you consider to be the biggest impediments to carrying out 
a successful prize program?

A2. A successful competition must have a very clear and unambiguous 
finish line and clear and well-thought-out rules. As I indicated in my 
testimony, failure to have either diminishes the prospect of a 
successful contest.
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