Telecommunications: Intelsat Privatization and the Implementation
of the ORBIT Act (13-SEP-04, GAO-04-891).			 
                                                                 
In 2000, the Congress passed the Open-market Reorganization for  
the Betterment of International Telecommunications Act (ORBIT	 
Act) to help promote a more competitive global satellite services
market. The ORBIT Act called for the full privatization of	 
INTELSAT, a former intergovernmental organization that provided  
international satellite services. GAO agreed to provide federal  
officials' and stakeholders' views on (1) whether the		 
privatization steps required by the ORBIT Act have been 	 
implemented and whether there were potential inconsistencies	 
between ORBIT Act requirements and U.S. obligations made in	 
international trade agreements; (2) whether access by global	 
satellite companies to non-U.S. markets has improved since the	 
enactment of the ORBIT Act and, if so, to what is this generally 
attributed; and (3) if any market access problems remain, what	 
role does the Federal Communications Commission (FCC) have in	 
addressing those problems under the ORBIT Act.			 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-04-891 					        
    ACCNO:   A12314						        
  TITLE:     Telecommunications: Intelsat Privatization and the       
Implementation of the ORBIT Act 				 
     DATE:   09/13/2004 
  SUBJECT:   Communication satellites				 
	     International agreements				 
	     International organizations			 
	     International trade				 
	     Telecommunication					 
	     Telecommunication industry 			 
	     Privatization					 
	     International relations				 
	     Trade agreements					 

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GAO-04-891

                 United States Government Accountability Office

                     GAO Report to Congressional Requesters

September 2004

TELECOMMUNICATIONS

         Intelsat Privatization and the Implementation of the ORBIT Act

                                       a

GAO-04-891

Highlights of GAO-04-891, a report to congressional requesters

In 2000, the Congress passed the Open-market Reorganization for the
Betterment of International Telecommunications Act (ORBIT Act) to help
promote a more competitive global satellite services market. The ORBIT Act
called for the full privatization of INTELSAT, a former intergovernmental
organization that provided international satellite services. GAO agreed to
provide federal officials' and stakeholders' views on (1) whether the
privatization steps required by the ORBIT Act have been implemented and
whether there were potential inconsistencies between ORBIT Act
requirements and U.S. obligations made in international trade agreements;
(2) whether access by global satellite companies to non-U.S. markets has
improved since the enactment of the ORBIT Act and, if so, to what is this
generally attributed; and (3) if any market access problems remain, what
role does the Federal Communications Commission (FCC) have in addressing
those problems under the ORBIT Act.

www.gao.gov/cgi-bin/getrpt?GAO-04-891.

To view the full product, including the scope and methodology, click on
the link above. For more information, contact Mark Goldstein at (202)
512-2834 or [email protected].

September 2004

TELECOMMUNICATIONS

Intelsat Privatization and the Implementation of the ORBIT Act

Most of INTELSAT's privatization steps have taken place and a variety of
stakeholders told us that implementation of the ORBIT Act was not
inconsistent with the commitments that the United States made in
international trade agreements. In July 2001, INTELSAT transferred its
satellite and financial assets to a private company. FCC determined that
this and other actions satisfied the ORBIT Act requirements for INTELSAT's
privatization but noted that the company must hold an initial public
offering (IPO) of securities by a required date. The current deadline for
the IPO is June 30, 2005. Because Intelsat has not completed the IPO, some
satellite companies assert that privatization is not fully complete. Some
parties have pointed out that there was a possibility that implementation
of the ORBIT Act could have given rise to action arguably inconsistent
with commitments that the United States made in international trade
agreements. However, we were told that actual implementation avoided such
outcomes and no disputes arose.

Most stakeholders and experts that GAO spoke with believe that access to
non-U.S. satellite markets has improved, but few attribute this
improvement to the ORBIT Act. These stakeholders and experts said that
global trade agreements, such as the WTO's basic telecommunications
commitments, and the global trend towards privatization of
telecommunications companies have improved access in non-U.S. markets.
Several stakeholders and experts told GAO that improvements in market
access were already underway when the Congress passed the ORBIT Act and
that the act has complemented ongoing trends towards more open satellite
markets.

Some satellite companies report continuing market access problems, but
there are disagreements regarding whether FCC should investigate and
resolve these problems. Some satellite companies that GAO spoke with
report problems with access to non-U.S. satellite markets, which they
attribute to countries with policies that favor domestic and regional
satellite companies, countries exercising control over content,
bureaucratic processes in various countries, and long-term business
relationships between INTELSAT and various telecommunications companies.
Most companies GAO spoke with report that Intelsat does not take active
steps to acquire preferential or exclusive market access, and Intelsat
itself stated that it does not seek nor, if offered, would accept
preferential market access. Finally, some companies suggest that FCC
should take a more proactive role in investigating market access problems,
rather than assuming an adjudicative role. FCC said that evidence provided
to the agency has not been sufficient to warrant action and also suggested
that trade disputes are more appropriately addressed by the United States
Trade Representative.

We provided a draft of this report to four government agencies and five
private companies for review and comment. Their comments are summarized in
the letter of this report.

Contents

  Letter

Results in Brief

Background

Most INTELSAT Privatization Steps Have Taken Place and
Stakeholders Stated That Implementation of the ORBIT Act Was
Not Inconsistent with U.S. Obligations in International Trade
Agreements

Stakeholders Attribute Recent Improvements in Market Access to
Global Trade Agreements and Privatization Trends, Rather Than
the ORBIT Act

Some Companies Say That Market Access Challenges Remain and
Suggest More FCC Action under the ORBIT Act to Address These
Issues

Agency Comments

Industry Comments

1 2 5

8

13

13 17 17

  Appendixes

Appendix I: Discussion of Comments from SES Americom 20

Appendix II: Comments from the Department of Commerce 21

Table Table 1:	Former Signatory and Nonsignatory Ownership of Intelsat,
Ltd., as of Privatization in July 2001 and May 2004

Contents

Abbreviations

EC European Commission
EU European Union
FCC Federal Communications Commission
GATS General Agreement on Trade in Services
IPO Initial public offering
ITSO International Telecommunications Satellite Organization
NTIA National Telecommunications and Information Administration
ORBIT Act Open-market Reorganization for the Betterment of

International Telecommunications Act SEC Securities and Exchange
Commission USTR United States Trade Representative WTO World Trade
Organization

This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
its entirety without further permission from GAO. However, because this
work may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this material
separately.

A

United States Government Accountability Office Washington, D.C. 20548

September 13, 2004

Congressional Requesters:

INTELSAT was created as an intergovernmental organization designed to
bring satellite services-such as international telephone calls and relay
of television signals internationally-to countries around the world.1 As
an operator of an international network of communications satellites,
INTELSAT was capitalized and controlled primarily by the designated
signatories2 of the governments that entered into the agreement to form
INTELSAT. Due to its intergovernmental nature, INTELSAT benefited from
many privileges that privately owned companies do not enjoy. During the
1990s, there was considerable criticism from new commercial satellite
companies focused on the difficulty of competing against a company with
the advantages that flowed from INTELSAT's intergovernmental status. At
about the same time, decision-makers within INTELSAT began to believe that
its intergovernmental structure led to a slow decision-making process that
did not enable INTELSAT to be sufficiently nimble in the increasingly
dynamic global communications marketplace.

In 2000, the Congress passed the Open-market Reorganization for the
Betterment of International Telecommunications Act3 (ORBIT Act) to help
promote a more competitive global satellite communication services market.
The ORBIT Act called for the full privatization of INTELSAT and imposed
certain criteria on the nature of INTELSAT's privatization. You asked us
to provide information related to the implementation of the ORBIT Act and
the status of market access for global satellite companies in countries
around the world. Specifically, this report provides federal officials'
and stakeholders' views on (1) whether the privatization steps required by
the ORBIT Act have been implemented and whether there were potential
inconsistencies between ORBIT Act requirements and U.S.

1The impetus for the creation of Intelsat was enactment of the
Communications Satellite Act of 1962, which chartered Comsat Corporation
and, from 1964 until 1971, fostered the development of interim Intelsat
agreements and operations. A formal Intelsat agreement, with annexes, and
the Intelsat operating agreement, were agreed to in Washington, D.C., on
August 20, 1971, and entered fully into force on February 12, 1973.

2Each country designated a company-typically a government-owned telephone
provider- to be the country's signatory to Intelsat. The signatories
provided investment dollars to Intelsat, which operated a fleet of
satellites on their behalf.

3Pub. L. 106-180, 114 Stat. 48 (2000).

obligations made in international trade agreements; (2) whether access by
global satellite companies to non-U.S. markets has improved since the
enactment of the ORBIT Act and, if so, to what is this generally
attributed; and (3) if any market access problems remain, what role does
the Federal Communications Commission (FCC) have in addressing those
problems under the ORBIT Act. In addition, you asked us to provide
information related to the tax status of INTELSAT prior to privatization
as well as the current tax treatment of multinational corporations. As we
agreed, we are issuing a separate report to you on these tax issues.

To respond to the three objectives of this report, we conducted
semistructured interviews with a variety of industry participants. We
interviewed five satellite service providers and six scholars and
attorneys who specialize in the regulatory and market access issues
related to satellite communications. We selected scholars and attorneys
based on their recently published articles or speeches on competition in
the satellite services market. We also interviewed officials from FCC; the
United States Trade Representative (USTR); the Department of State; the
National Telecommunications and Information Administration (NTIA); and the
International Telecommunications Satellite Organization, an
intergovernmental entity formed when INTELSAT privatized that works to
ensure that satellite service is available to countries that might not
otherwise have access to such services. We also reviewed key documents,
including relevant provisions of the Communications Satellite and ORBIT
acts, and other relevant documents obtained from FCC, USTR, and NTIA about
the ORBIT Act and related concerns about market access in non-U.S.
markets. Using FCC's Electronic Comment Filing System, we searched for
filings on market access concerns and checked for any other such
complaints filed with the agency. We also searched for any complaints on
market access issues that might be filed with USTR and NTIA. We did not
verify the reliability of these complaint data because these issues were
not material to the primary focus of this report.

We conducted our review from February through June 2004 in accordance with
generally accepted government auditing standards.

Results in Brief	Two months before INTELSAT's privatization in 2001, FCC
determined that the privatization would be in accordance with the ORBIT
Act; in addition, we were told that the implementation of the act was not
inconsistent with the commitments that the United States made in
international trade agreements. Based on its determination, FCC granted
licenses that

authorized a U.S. subsidiary of Intelsat,4 Ltd.-the newly privatized
company-to provide services within the United States, but conditioned that
licensing on the company holding an initial public offering (IPO) of
securities, as required under the ORBIT Act, by a required date.5 Although
most of the officials of competitive satellite companies and experts that
we interviewed agree with FCC's finding that INTELSAT privatized according
to the requirements of the ORBIT Act, some of them also believe that the
privatization will not be fully complete until the IPO is held. On August
16, 2004, Intelsat, Ltd. announced that its Board of Directors approved
the sale of the company to a consortium of four private investors.
According to an Intelsat official, this transaction, if approved, would
eliminate former signatories' ownership in Intelsat. Additionally, some
parties have pointed out that there was a possibility that implementation
of the ORBIT Act could have given rise to action arguably inconsistent
with commitments that the United States made in international trade
agreements. However, we were told that actual implementation avoided such
outcomes and no disputes arose.

Most stakeholders and experts that we spoke with believe that access to
non-U.S. satellite markets has improved, but few attribute this
improvement to the ORBIT Act. These stakeholders and experts said that
global trade agreements, such as the WTO's basic telecommunications
commitments, and the global trend towards privatization of
telecommunications companies have improved access in non-U.S. markets. As
such, most stakeholders and experts that we spoke with believe that
improvements in market access were already underway when the Congress
passed the ORBIT Act and that the act has complemented ongoing trends
towards more open satellite markets.

Although access to markets has improved, some satellite companies have
stated that market access problems still exist and parties disagree about
the extent to which FCC should take action to address these problems. For

4The official name of the intergovernmental organization was INTELSAT-all
capital letters. After privatization, the privatized company is known as
Intelsat. As such, we make this distinction throughout this report.

5The requirement for a public offering is covered in a portion of the act
that deals with the larger matter of Intelsat's conversion to a stock
corporation. The IPO provision requires that Intelsat be incorporated as a
national corporation or similar accepted commercial structure for which an
initial public offering is to be conducted. This is then to result in
shares being listed for trading on one or more major stock exchanges with
transparent and effective securities regulation.

the most part, these problems are attributed to policies of foreign
governments that may have the effect of making entry into their country
costly and time-consuming for some satellite providers. Additionally, some
companies attribute any continuing preference that governments and foreign
telecommunications companies may have for doing business with Intelsat,
Ltd., to the long-standing business relationships that were forged over a
long period of time and to the continued investment that some
international telecommunications companies have had in Intelsat, Ltd.
While some satellite companies believe that FCC should be taking a more
proactive approach toward addressing any remaining market access problems
in non-U.S. markets, FCC has stated that the concerns and complaints about
market access issues it has received have not been of sufficient
specificity to warrant an FCC proceeding. Moreover, FCC has noted that
concerns about market access would generally be more appropriately handled
by USTR. USTR has received no complaints about access problems by
satellite companies in non-U.S. markets in either their annual review of
compliance with telecommunications trade agreements, or in comments
solicited in the context of ongoing WTO services negotiations.

We provided a draft of this report to the Federal Communications
Commission (FCC), the Department of State, the National Telecommunications
and Information Administration (NTIA) of the Department of Commerce, and
the United States Trade Representative (USTR) for their review and
comment. FCC did not provide comments. USTR and the Department of State
provided technical comments that were incorporated into the report. NTIA
also provided technical comments that were incorporated into the report as
appropriate and also sent formal comments in a letter, which appears in
appendix II. In its formal comments, NTIA stated that they generally agree
with the findings of our report and remain interested in developments
regarding Intelsat's further plans to pursue a private equity buyout.

We also invited representatives from five companies to review and comment
on a draft of this report. These companies included: Intelsat, Ltd.;
Lockheed Martin Corporation; PanAmSat Corporation; SES Americom Inc.; and
New Skies Satellite N.V. New Skies and PanAmSat did not provide comments
on the draft report. Both Lockheed Martin and Intelsat provided technical
comments that were incorporated as appropriate. SES Americom provided both
technical comments-which we addressed as appropriate- and substantive
comments that expressed concerns about our

characterization of some of the issues discussed in this report. Their
substantive comments are discussed in appendix I.

Background	The Congress passed the Communications Satellite Act of 1962 to
promote the creation of a global satellite communications system. As a
result of this legislation, the United States joined with 84 other nations
in establishing the International Telecommunications Satellite
Organization-more commonly known as INTELSAT-roughly 10 years later.6 Each
member nation designated a single telecommunications company to represent
its country in the management and financing of INTELSAT. These companies
were called signatories to INTELSAT, and were typically governmentowned
telecommunications companies, such as France Telecom, that provided
satellite communications services as well as other domestic communications
services. Unlike any of the other nations that originally formed INTELSAT,
the United States designated a private company, Comsat Corporation, to
serve as its signatory to INTELSAT.

During the 1970s and early 1980s, INTELSAT was the only wholesale provider
of certain types of global7 satellite communications services such as
international telephone calls and relay of television signals
internationally.8 By the mid-1980s, however, the United States began
encouraging the development of commercial satellite communications systems
that would compete with INTELSAT.9 In 1988, PanAmSat was the first
commercial company to begin launching satellites in an effort to develop a
global satellite system. Within a decade after PanAmSat first entered the
market, INTELSAT faced global satellite competitors. Moreover, intermodal
competition emerged during the 1980s and 1990s as

6By the time Intelsat privatized in 2001, 148 countries had become parties
to the intergovernmental organization.

7Some other satellite companies provided fixed satellite services between
some countries, but INTELSAT was the only provider at that time that could
provide service to all parts of the globe.

8While Intelsat was the only provider at that time of what is called
global fixed satellite services-that is, services provided between fixed
points on land-another global satellite organization that was also formed
based on amendments to the Communications Satellite Act, provided global
maritime satellite communications. This organization is commonly known as
Inmarsat.

9See Presidential Determination Number 85-2 (1984).

fiber optic networks were widely deployed on the ground and underwater to
provide international communications services.

As competition to INTELSAT grew, there was considerable criticism from
commercial satellite companies because they believed that INTELSAT enjoyed
advantages stemming from its intergovernmental status that made it
difficult for other companies to compete in the market. In particular,
these companies noted that INTELSAT enjoyed immunity from legal liability
and was often not taxed in the various countries that it served. By the
mid-1990s, competitors began to argue that for the satellite marketplace
to become fully competitive, INTELSAT would need to be privatized so that
it would operate like any other company and no longer enjoy such
advantages. At about the same time, INTELSAT recognized that privatization
would be best for the company. Decision-makers within INTELSAT noted that
the cumbersome nature of the intergovernmental decision-making process
left the company unable to rapidly respond to changing market conditions.
In 1999, INTELSAT announced its decision to privatize and thus become a
private corporation.10

By the late 1990s, the United States government also decided that it would
be in the interests of consumers and businesses in the United States for
INTELSAT to privatize. The ORBIT Act, enacted in March 2000, was designed
to promote a competitive global satellite communication services market.
It did so primarily by calling for INTELSAT to be fully privatized.11 The
ORBIT Act required, for example, that INTELSAT be transformed into a
privately held, for-profit corporation with a board of directors that
would be largely independent of former INTELSAT signatories. Moreover, the
act required that the newly privatized Intelsat retain no privileges or
other benefits from governments that had previously owned or controlled
it. To ensure that this transformation occurred, the Congress imposed
certain restrictions on the granting of licenses that allow Intelsat to
provide

10Intelsat agreed to leave in place a residual intergovernmental
organization, the International Telecommunications Satellite Organization
(ITSO), which would monitor the performance of Intelsat, Ltd.'s remaining
public service obligations. In particular, after the privatization,
Intelsat, Ltd. was tasked with maintaining global connectivity and
honoring connectivity obligations that had been made by the
intergovernmental INTELSAT to customers in countries that have low per
capita income or that have a relatively low level of telecommunications
facilities per capita and that have a high degree of dependence on
Intelsat for their communication needs.

11The act also pertained to Inmarsat. A discussion of Inmarsat's
privatization is outside the scope of this report.

services within the United States. The Congress coupled the issuance of
licenses granted by FCC to INTELSAT's successful privatization under the
ORBIT Act. That is, FCC was told to consider compliance with provisions of
the ORBIT Act as it made decisions about licensing Intelsat's domestic
operations in the United States. Moreover, FCC was empowered to restrict
any satellite operator's provision of certain new services from the United
States to any country12 that limited market access exclusively to that
satellite operator.13

Market access for satellite firms to non-U.S. markets was also affected by
trade agreements that were negotiated during the 1990s. Specifically, the
establishment of the World Trade Organization (WTO) on January 1, 1995,
with its numerous binding international trade agreements formalized global
efforts to open markets to the trade of services. Since that time, WTO has
become the principal international forum for discussion, negotiation, and
resolution of trade issues. For example, the first global trade agreement
that promotes countries' open and nondiscriminatory market access to
services was the General Agreement on Trade in Services (GATS), which
provides a legal framework for addressing barriers to international trade
and investment in services, and includes specific commitments by member
countries to restrict their use of these barriers. Since adoption of a
basic telecommunications services protocol by the GATS in 1998,
telecommunications trade commitments have also been incorporated into the
WTO rules. Such commitments resulted in member countries agreeing to open
markets to telecommunications services, such as global satellite
communications services.

12This provision was limited to those countries that were not members of
the WTO.

13Additionally, once INTELSAT was privatized under provisions of the ORBIT
Act, Comsat Corporation's role as the U.S. signatory to the Intelsat
Operating Agreement was ended.

  Most INTELSAT Privatization Steps Have Taken Place and Stakeholders Stated
  That Implementation of the ORBIT Act Was Not Inconsistent with U.S.
  Obligations in International Trade Agreements

FCC determined that INTELSAT's July 2001 privatization was in accordance
with the ORBIT Act's requirements and licensed the new private company to
provide services within the United States. FCC's grant of these licenses
was conditioned on Intelsat holding an initial public offering (IPO) of
securities by October 1, 2001. The Congress and FCC have extended this
date three times and the current deadline for the IPO is June 30, 2005.14
Because Intelsat has not yet completed the IPO, some competing satellite
companies have stated that the privatization is not fully complete. Some
parties have pointed out that there was a possibility that implementation
of the ORBIT Act could have given rise to action arguably inconsistent
with commitments that the United States made in international trade
agreements. However, we were told that actual implementation avoided such
outcomes and no disputes arose.

    Most Stakeholders Believe INTELSAT's Privatization Is Consistent with the
    ORBIT Act's Requirements, but the IPO Remains a Final Step

On July 18, 2001, INTELSAT transferred virtually all of its financial
assets and liabilities to a private company called Intelsat, Ltd., a
holding company incorporated in Bermuda. Intelsat, Ltd. has several
subsidiaries, including a U.S.-incorporated indirect subsidiary called
Intelsat, LLC. Upon their execution of privatization, INTELSAT signatories
received shares of Intelsat, Ltd. in proportion to their investment in the
intergovernmental INTELSAT.15 Two months before the privatization, FCC
determined that INTELSAT's privatization plan was consistent with the
requirements of the ORBIT Act16 for a variety of reasons, including the
following.

o 	Intelsat, Ltd.'s Shareholders' Agreement provided sufficient evidence
that the company would conduct an IPO, which would in part satisfy the
act's requirement that Intelsat be an independent commercial entity.

14FCC is authorized to extend the deadline to December 31, 2005, based on
its consideration of relevant factors.

15In addition, some portion of the intergovernmental Intelsat was owned by
nonsignatory- or "investing"-entities, which also received pro rata shares
in the new Intelsat, Ltd.

16FCC's determination on Intelsat's privatization followed public notices
and proceedings as required by the Administrative Procedures Act (5 U.S.C.
section 551, et. seq.) and FCC's published procedures, which are codified
at 47 C.F. R. pt.1. These procedures afforded other interested parties an
opportunity to comment and submit information in response to Intelsat's
FCC filings. FCC considered these materials in reaching its decision.

o 	Intelsat, Ltd. no longer enjoyed the legal privileges or immunities of
the intergovernmental INTELSAT, since it was organized under Bermuda law
and subject to that country's tax and legal liability requirements.

o 	Both Intelsat, Ltd. and Intelsat, LLC are incorporated in countries
that are signatories to the WTO and have laws that secure competition in
telecommunications services.

o 	Intelsat, Ltd. converted into a stock corporation with a fiduciary
board of directors. In particular, FCC said that the boards of directors
of both Intelsat, Ltd. and Intelsat, LLC were subject to the laws of
Bermuda and the United States, respectively, and that the laws of these
countries require boards of directors to have fiduciary obligations to the
company.

o 	Measures taken to ensure that a majority of the members of Intelsat,
Ltd.'s board of directors were not directors, employees, officers,
managers, or representatives of any signatory or former signatory of the
intergovernmental INTELSAT were consistent with the requirements of the
ORBIT Act.

o 	Intelsat, Ltd. and its subsidiaries had only arms-length business
relationships with certain other entities that obtained INTELSAT's
assets.17

In light of these findings, FCC conditionally authorized Intelsat, LLC to
use its U.S. satellite licenses to provide services within the United
States.18 However, FCC conditioned this authorization on Intelsat, Ltd.'s
conducting an IPO of securities as mandated by the ORBIT Act. In December
2003, FCC noted that if Intelsat, Ltd. did not conduct an IPO by the
statutory deadline, the agency would limit or deny Intelsat, LLC's
applications or requests and revoke the previous authorizations granting
Intelsat, LLC the

17These entities include New Skies Satellites N.V., a spin-off company
created approximately 1 year before the privatization of Intelsat which
received some of INTELSAT's satellites, and the International
Telecommunications Satellite Organization, the ongoing intergovernmental
organization responsible for monitoring Intelsat, Ltd.'s continuing
"lifeline" obligations, which received start-up funding from INTELSAT when
it was privatized.

18In its required annual reports to the Congress on the ORBIT Act, FCC has
continued to report that Intelsat has complied with ORBIT Act provisions
to date.

authority to provide satellite services in the United States.19 In March
2004, Intelsat, Ltd. filed a registration statement with the Securities
and Exchange Commission (SEC) indicating its intention to conduct an IPO.
Since that time, however, the Congress further extended the required date
by which the IPO must occur. In May 2004, the Congress extended the IPO
deadline to June 30, 2005, and authorized FCC to further extend that
deadline to December 31, 2005, under certain conditions. In late May 2004,
Intelsat withdrew its filing with SEC regarding its registration to
conduct an IPO.20 On August 16, 2004, Intelsat, Ltd. announced that its
Board of Directors approved the sale of the company to a consortium of
four private investors; the sale requires the approval of shareholders
holding 60 percent of Intelsat's outstanding shares and also regulatory
approval. According to an Intelsat official, this transaction, if
approved, would eliminate former signatories' ownership in Intelsat.

Most companies and experts that we interviewed believe that, to date,
Intelsat's privatization has been in accordance with the ORBIT Act's
requirements, and some of these companies and experts that we interviewed
believe that FCC is fulfilling its duties to ensure that the privatization
is consistent with the act. These parties noted that the ORBIT Act set
forth many requirements for Intelsat and that most of these requirements
have been fulfilled. However, some companies and experts believe that the
IPO is a key element to complete Intelsat's privatization. According to
some parties, the IPO would further dilute signatory ownership in
Intelsat, Ltd. as envisioned by the ORBIT Act, which would reduce any
incentive that former signatories might have to favor Intelsat

19The ORBIT Act initially required the IPO to occur by October 2001, and
gave FCC discretion to extend the IPO deadline to December 31, 2002. That
extension was granted. In October 2002, the Congress extended Intelsat's
IPO deadline to December 31, 2003, and gave FCC authority to further
extend this deadline to June 30, 2004. On December 17, 2003, FCC extended
the deadline for Intelsat's IPO until June 30, 2004. In both cases, FCC
extended the IPO deadline based on its determination that market
conditions were sufficiently negative to warrant an extension. In May
2004, the Congress extended the IPO deadline to June 30, 2005, and
authorized FCC to further extend that deadline to December 31, 2005.

20Inmarsat was also required under the ORBIT Act to hold an IPO of
securities, be listed on a major stock exchange, and have substantial
dilution of former signatory ownership. In a February 2004 letter filed
with FCC, Inmarsat stated that a majority equity interest of its ownership
has been sold to nonsignatory shareholders and that it has made a public
offering of debt securities, which will be traded on the Luxembourg stock
exchange. Inmarsat's letter maintains that these steps are sufficient to
satisfy ORBIT Act requirements regarding the IPO, the listing of
securities on a major stock exchange, and the dilution of ownership by
former signatories to Inmarsat. This matter is pending before FCC.

when selecting a company to provide satellite services. Table 1 compares
Intelsat, Ltd.'s ownership on the day of privatization in 2001 with the
ownership as of May 6, 2004. As indicated in the table, in May 2004, more
than 50 percent of Intelsat, Ltd. was owned by the former signatories to
the intergovernmental INTELSAT; although, as mentioned above, the recently
announced purchase of Intelsat by four private investors, if approved,
would eliminate former signatory ownership in Intelsat, according to an
Intelsat official.

Table 1: Former Signatory and Nonsignatory Ownership of Intelsat, Ltd., as
of Privatization in July 2001 and May 2004

Former % Investment % Investment share Companies signatory share in July
2001 in May 2004

Comsat Corporationa Yes 21.8 21.8

           Videsh Sanchar Nigam Ltd. Yes              5.4                 5.4 
                      France Telecom Yes              4.2                 4.2 
                             Telenor Yes              4.1                 4.1 
                     British Telecom Yes              3.8                 3.8 
                           Teleglobe Yes              3.8 Less than 1 percent 
                    Deutsche Telekom Yes              3.4                 3.4 
                      Telecom Italia Yes              2.8   No ownership in   
                                                                         2004 
                            Embratel Yes              2.3   No ownership in   
                                                                         2004 
                  Cable and Wireless  No              2.0                 2.0 
           Intelsat Global Sales and  No  No ownership in                 3.8 
                    Marketing, Ltd.b                 2001 
                Mirror International  No  No ownership in                 2.8 
                                                     2001 
                             Telstra  No Not in top 10 in                 1.7 
                                                     2001 
              Total of top 10 owners                 53.6                53.0 
              Total all other owners                 46.4                47.0 
              Total former signatory                 86.1                76.6 
                           ownership                      
                  Total nonsignatory                 13.9                23.4 
                           ownership                      

Source: GAO analysis of Intelsat data.

aComsat Corporation is now a wholly-owned subsidiary of Lockheed Martin
Corporation, which was never a signatory to INTELSAT. Because Comsat
Corporation, which was a signatory to INTELSAT, still exists as a
corporate entity, we have counted these shares as being owned by a former
signatory.

Some parties believe that because the current parent company to Comsat was
not a signatory, these shares should not be counted as shares of an
ex-signatory. If they were not, the total former signatory ownership share
of Intelsat would fall from 76.6 percent to 54.8 percent.

bThe name for Intelsat Global Sales and Marketing, Ltd. is now Intelsat
(Bermuda) Ltd.

    Stakeholders Note Potential for Inconsistencies between ORBIT Act and
    International Trade Agreements, but Stated That Implementation of the Act
    Was Not Inconsistent with Those Agreements

We were told that there were potential inconsistencies between the ORBIT
Act and obligations the United States made in international trade
agreements. In particular, the ORBIT Act set requirements for INTELSAT's
privatization that, if not met, could have triggered FCC's denial of
licenses that would allow a successor private company to INTELSAT to
provide services in the United States once that company was incorporated
under foreign law. Some stakeholders told us that, had this occurred,
FCC's actions could have been viewed as inconsistent with U.S. obligations
in international trade agreements. In fact, on August 1, 2000, following
the enactment of the ORBIT Act, the European Commission (EC) stated that
the ORBIT Act raised a general concern regarding its compatibility with
the U.S. obligations in the WTO. The EC further emphasized that if the act
was going to be used against European Union (EU) interests, the EU would
consider exercising its rights to file a trade dispute under the WTO.21

While we were told that potential inconsistencies could have arisen,
INTELSAT privatized according to the ORBIT Act removing any need for FCC
to act in a manner that might be inconsistent with U.S. international
trade obligations, and no trade disputes arose. Most stakeholders we spoke
with generally stated that the ORBIT Act's requirements have not
conflicted with international trade agreements during the privatizations
of INTELSAT. Officials from FCC, USTR, the Department of State, as well as
satellite company representatives and experts on telecommunications
issues, told us that INTELSAT privatized according to the act's
requirements. Several stakeholders emphasized that trade disputes had not
arisen because INTELSAT privatized in accordance with the ORBIT Act. As of
June 2004, WTO and USTR documentation showed that no trade complaints had
been filed at the WTO about the ORBIT Act and INTELSAT's privatization.
Finally, several stakeholders noted that the act had the effect of
complementing international trade agreements by seeking to further open
and liberalize trade in international satellite communications services.

21A WTO trade dispute arises when a member country believes another member
country is violating WTO rules-such as by implementing discriminatory
measures regarding market access-and commences an action within the WTO
dispute settlement system.

  Stakeholders Attribute Recent Improvements in Market Access to Global Trade
  Agreements and Privatization Trends, Rather Than the ORBIT Act

According to most stakeholders and experts we spoke with, access to
non-U.S. satellite markets has generally improved during the past decade.
In particular, global satellite companies appear less likely now than they
were in the past to encounter government restraints or business practices
that limit their ability to provide service in non-U.S. markets. All five
satellite companies that we spoke with indicated that access to non-U.S.
satellite markets has generally improved. Additionally, four experts that
we spoke with also told us that market access has generally improved.

Most stakeholders that we spoke with attributed the improved access in
non-U.S. satellite markets to the WTO and global trade agreements and the
trend towards privatization in the global telecommunications industry,
rather than to the ORBIT Act. Five satellite companies and four of the
experts that we spoke with said that agreements negotiated through the
WTO, such as the basic telecommunications commitments, helped improve
access in non-U.S. satellite markets. Additionally, two of the satellite
companies and one expert told us that the trend towards privatization in
the telecommunications industry-such as governments privatizing
statecontrolled telephone companies-has helped improve market access. At
the same time, many stakeholders noted that the ORBIT Act had little to no
impact on improving market access. According to several stakeholders,
market access was already improving when the ORBIT Act was passed. While
some of those we spoke with noted that the ORBIT Act might have
complemented the ongoing trends in improved market access, only one
satellite company we interviewed stated that the act itself improved
market access. This company noted that, by breaking the ownership link
between state-owned or monopoly telecommunications companies and Intelsat,
the ORBIT Act encouraged non-U.S. telecommunications companies to consider
procuring services from competitive satellite companies.

  Some Companies Say That Market Access Challenges Remain and Suggest More FCC
  Action under the ORBIT Act to Address These Issues

Some satellite companies have stated that some market access problems
still exist, which they attribute to foreign government policies that
limit or slow entry. Some of the companies and experts we spoke with
attribute any continuing preference that governments and foreign
telecommunications companies may have for doing business with Intelsat to
the long-standing business relationships that were forged over a period of
time. While some satellite companies believe that FCC should be taking a
more proactive approach toward addressing any remaining market access
problems in non-U.S. markets, FCC has stated that concerns about these
issues provided to them have not been specific enough to warrant an FCC

proceeding. Additionally, FCC has stated that many concerns about market
access issues would be most appropriately filed with USTR. USTR has
received no complaints about access problems by satellite companies in
non-U.S. markets in either their annual review of compliance with
telecommunications trade agreements, or in comments solicited in the
context of ongoing WTO services negotiations.

    Remaining Concerns about Market Access Focus Largely on Foreign Government
    Regulatory Structure

Despite the general view that market access has improved, some satellite
companies and experts expressed concerns that market access issues still
exist. These companies and experts generally attributed any remaining
market access problems to foreign government policies that limit or slow
satellite competitors' access to certain markets. For example:

o 	Some companies and experts we spoke with said that some countries have
policies that favor domestic satellite providers over other satellite
systems and that this can make it difficult for nondomestic companies to
provide services in these countries. For example, we were told that some
countries require satellite contracts to go first to any domestic
satellite providers that can provide the service before other providers
are considered.

o 	Some companies and one expert we spoke with said that because some
countries carefully control and monitor the content that is provided
within their borders, the countries' policies may limit certain satellite
companies' access to their markets.

o 	Several companies and an expert we interviewed said that many countries
have time-consuming or costly approval processes for satellite companies.
In particular, we were told that some countries have bureaucratic
processes for licensing and other necessary business activities that make
it time-consuming and costly for satellite companies to gain access to
these markets.22

22Some of those we spoke with who made this point also noted that the same
countries may have bureaucratic and costly processes for any foreign
company-not just satellite or telecommunications companies-that wants to
do business in their country.

    Some Stakeholders Believe That Legacy Business Relationships also Contribute
    to Market Access Problems

Some stakeholders believe that Intelsat may benefit from legacy business
relationships. For approximately 30 years, INTELSAT was the dominant
provider of global satellite services. Moreover, until 2001, INTELSAT was
an intergovernmental organization, funded and controlled through
signatories-often state-controlled telecommunications companies-of the
member governments. Several stakeholders noted that Intelsat may benefit
from the long-term business relationships that were forged over the
decades, since telecommunications companies in many countries will feel
comfortable continuing to do business with Intelsat as they have for
years. Additionally, two of the satellite companies noted that because
some of these companies have been investors in the privatized Intelsat,
there may be an incentive to favor Intelsat over other satellite
competitors. One global satellite company told us that Intelsat's market
access advantages continue because of inertia-inertia that will only
dissipate with time. Two stakeholders also noted that because
companies-including domestic telecommunications providers as well as
direct customers of satellite services-have plant and equipment as well as
proprietary satellite technology in place to receive satellite services
from Intelsat, it might cost a significant amount of money for companies
to replace equipment in order to use satellite services from a different
satellite provider. These legacy advantages can make it more difficult for
satellite companies to convince telecommunications companies to switch
from Intelsat's service to their service.

However, some other companies have a different view on whether Intelsat
has any preferential or exclusive market access advantages.
Representatives of Intelsat, Ltd. told us that Intelsat seeks market
access on a transparent and nondiscriminatory basis and that Intelsat has
participated with other satellite operators, through various trade
organizations, to lobby governments to open their markets. Representatives
of Intelsat, Ltd. also told us that former signatories of Intelsat own
such small percentages of Intelsat, Ltd. that such ownership interests
would not likely influence market access decisions in countries in which
the government still controls the former signatory. Some companies and
many of the experts that we interviewed told us that, in their view,
Intelsat does not have preferential access to non-U.S. satellite markets.
Further, all five satellite companies as well as several experts that we
spoke with said that they have no knowledge that Intelsat in any way seeks
or accepts exclusive market access arrangements or attempts to block
competitors' access to non-U.S. satellite markets. While Intelsat is the
sole provider of satellite service into certain countries, we were
generally told that traffic into some countries is "thin"-that is, there
is not much traffic,

and therefore there is little revenue potential. In such cases, global
satellite companies other than Intelsat may not be interested in providing
service to these countries. Thus, the lack of competition in some non-U.S.
satellite markets does not necessarily indicate the presence of barriers
to market access for competitive satellite companies.

    Some Satellite Companies and FCC Differ on FCC's Responsibilities under the
    ORBIT Act

Some of the companies we spoke with believe that FCC should take a more
proactive role in improving access for satellite companies in non-U.S.
markets. In particular, some satellite companies and an expert we spoke
with indicated that FCC has not done enough to appropriately implement the
ORBIT Act because, in their view, the ORBIT Act shifted the burden to FCC
to investigate and prevent access issues, rather than solely to adjudicate
concerns brought before it. One satellite company said that section 648 of
the ORBIT Act, which prohibits any satellite operator from acquiring or
enjoying an exclusive arrangement for service to or from the United
States, provides a vehicle for FCC to investigate the status of access for
satellite companies to other countries' markets. If FCC were to find a
violation of section 648, it would have the authority to withdraw or
modify the relevant company's licenses to provide services within the U.S.
market.23 Another satellite company told us that FCC should conduct an
ORBIT Act inquiry under the privatization sections of the act to address
any market access issues that might arise if Intelsat has preferential
market access related to any remaining advantages from its previous
intergovernmental status.

Certain other companies, experts, and FCC told us that nothing to date has
occurred that would require additional FCC actions regarding the
implementation of the ORBIT Act. FCC officials told us that they do not
believe that FCC should undertake investigations of market access concerns
without specific evidence of violations of section 648 of the ORBIT Act.
While some comments filed with FCC in proceedings on Intelsat's licensing
and for FCC's annual report on the ORBIT Act raise concerns about market
access, FCC has stated that these filings amount only to general
allegations and fall short of alleging any specific statutory violation
that would form a basis sufficient to trigger an FCC enforcement action.
Some companies and experts that we spoke with agreed that no

23Section 648 of the ORBIT Act provides that FCC may take actions in the
case of new exclusive agreements for services if FCC finds that the public
interest, convenience, and necessity so requires.

evidence of a market access problem has been put forth that would warrant
an FCC investigation under the ORBIT Act. Even the satellite companies
that complained to FCC in the context of Intelsat's licensing proceedings
told us that they had not made any formal complaints of ORBIT Act
violations or asked FCC to initiate a proceeding on the matter.
Additionally, FCC told us that broad market access concerns are most
appropriately handled by USTR through the WTO. USTR has received no
complaints about access problems by satellite companies in non-U.S.
markets in either their annual review of compliance with
telecommunications trade agreements, or in comments solicited in the
context of ongoing WTO services negotiations.

Agency Comments	We provided a draft of this report to the Federal
Communications Commission (FCC), the Department of State, the National
Telecommunications and Information Administration (NTIA) of the Department
of Commerce, and the United States Trade Representative (USTR) for their
review and comment. FCC did not provide comments. USTR and the Department
of State provided technical comments that were incorporated into the
report. NTIA also provided technical comments that were incorporated into
the report as appropriate and also sent formal comments in a letter, which
appears in appendix II. In its formal comments, NTIA stated that they
generally agree with the findings of our report and remain interested in
developments regarding Intelsat's further plans to pursue a private equity
buyout.

Industry Comments	We also invited representatives from five companies to
review and comment on a draft of this report. These companies included:
Intelsat, Ltd.; Lockheed Martin Corporation; PanAmSat Corporation; SES
Americom Inc.; and New Skies Satellites N.V. New Skies and PanAmSat did
not provide comments on the draft report. Both Lockheed Martin and
Intelsat provided technical comments that we incorporated as appropriate.
SES Americom provided both technical comments-which we addressed as
appropriate- and substantive comments that expressed concerns about our
characterization of some of the issues discussed in this report. The
comments from SES Americom and our response are contained in appendix I.

As agreed with your offices, unless you publicly release its contents
earlier, we plan no further distribution of this report until 15 days
after the date of this letter. At that time, we will provide copies to
interested congressional committees; the Chairman, FCC; and other
interested parties. We will also make copies available to others upon
request. In addition, this report will be available at no charge on the
GAO Web site at http://www.gao.gov. If you have any questions about this
report, please contact me at (202) 512-2834 or [email protected] or Amy
Abramowitz at (202) 512-2834.

Major contributors to this report include Amy Abramowitz, Michael
Clements, Emil Friberg, Bert Japikse, Logan Kleier, Richard Seldin, and
Juan Tapia-Videla.

Mark L. Goldstein Director, Physical Infrastructure Issues

List of Congressional Requesters

The Honorable Ernest "Fritz" Hollings
Ranking Minority Member
Committee on Commerce, Science and Transportation
United States Senate

The Honorable Conrad Burns, Chairman
Subcommittee on Communications
Committee on Commerce, Science and Transportation
United States Senate

The Honorable Joe Barton, Chairman
Committee on Energy and Commerce
House of Representatives

The Honorable Edward J. Markey
Ranking Minority Member
Subcommittee on Telecommunications and the Internet
Committee on Energy and Commerce
House of Representatives

The Honorable W.J. "Billy" Tauzin
House of Representatives

Appendix I

                    Discussion of Comments from SES Americom

SES Americom Inc. provided several comments on the draft report. While
several were minor technical comments, which we incorporated as
appropriate, some of the comments were of a more substantive nature. This
appendix provides a summary of the substantive comments and GAO's response
to those comments.

o 	SES Americom stated that while GAO notes that several companies have
stated that Intelsat's privatization is not complete until the IPO occurs,
GAO fails to note that FCC's International Bureau has also stated this to
be the case.

GAO response: Our discussion of FCC's authorization of licenses for
Intelsat to operate in the U.S. makes clear that FCC provided these
licenses on a conditional basis because the required IPO had yet to occur.

o 	SES Americom states that GAO's discussion of possible preferences
countries and businesses may have for doing business with Intelsat does
not fully explain why this may occur. While SES notes that GAO correctly
attributes possible preferences to long term business relationships
companies/countries may have with Intelsat, SES Americom believes that GAO
should mention that possible preferences also arise because Intelsat's
customers have equipment suitable solely for use with Intelsat satellites.

GAO response: Regarding customer equipment, we mention that companies have
plant and equipment in place to receive service from Intelsat that might
cost a significant amount of money to replace, which we believe adequately
addresses this point.

o 	SES Americom states that GAO should preface our discussion of the
required IPO with the word "equity".

GAO response: The ORBIT Act's requirement for an IPO does not specifically
state "equity IPO," but states that Intelsat must hold an "IPO of
securities." Nevertheless, in the context of Inmarsat's required IPO,
which is also required under the ORBIT Act, FCC is currently reviewing
this very issue-that is, whether the IPO must be an offering of equity
securities. Thus, FCC's decision will determine how this will be
interpreted.

Appendix II

Comments from the Department of Commerce

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