Merger between British Aerospace plc and the Marconi Electronic Systems business of the General Electric Company plc: Request for variation

No. 0117/99

Undertakings given by British Aerospace plc (subsequently re-named BAE SYSTEMS PLC) to the Secretary of State for Trade and Industry on 28 March 2000

Advice given to Secretary of State 20 September 2005

On 28 March 2000, the then Secretary of State for Trade and Industry, Steven Byers, announced that he had accepted undertakings (the Undertakings) in lieu of reference to the Competition Commission under section 75G of the Fair Trading Act 1973 (the Act) from British Aerospace plc (subsequently re-named BAE SYSTEMS plc (BAES)) to remedy competition and other public interest concerns arising from the acquisition by BAES of Marconi Electronic Systems (MES). The Undertakings include measures to safeguard competition at prime contractor and subcontract level and to address national security concerns.

The Undertakings include a requirement to appoint an independent Compliance Officer (CO) to facilitate and oversee compliance with the Undertakings. The first CO was appointed in September 2000 and his 5 year contract is shortly due to expire. BAES has requested that the Undertakings be varied to enable this contract to be extended for a short period since: (a) it has been unable to identify and appoint a suitable replacement CO; (b) it is seeking a formal review, on the basis of a change of circumstances, of the whole of the remaining Undertakings (to which the OFT is minded to agree in principle) and it would be beneficial to be able to make use of the current CO's experience and knowledge during that review; and (c) the review itself should consider the continuing need for an independent CO given the changes to the scale and scope of the matters covered by the Undertakings as well as, in some cases, the Undertakings themselves since they were given and the other changes that BAES is seeking in (b) above. The OFT considers that, in the circumstances and for the present purposes of the proposed variation to the Undertakings governing the CO's appointment, factors (b) and (c) amount to an appropriate 'change of circumstances' for the purposes of section 75J(a) of the Act (which is the relevant provision by virtue of the Enterprise Act 2002, Schedule 24, paragraph 13(1)).

The OFT recommends that you should consent to such a variation. A variation instrument is attached and has been signed by BAES (although this does not of course fetter your discretion as to whether you decide to accept the variation). If you are minded to consent to the variation, you should indicate your acceptance of the variation by 30 September at the latest so that BAES are not in breach of the current Undertakings on the expiry of the existing CO's contract.

BACKGROUND

Since acceptance of the Undertakings a number of changes have taken place which have had an impact on the scale and scope of the matters covered by the Undertakings as well as, in some cases, the Undertakings themselves. The following is a summary of the key areas, which we shall address in further detail in a separate submission to you in due course in the context of a proposed review of the entire suite of Undertakings:

Undertaking 3

This applied to a UK / US jointly funded competition to design a ground-based reconnaissance vehicle. The purpose of the undertaking was to address the competition concerns arising from the fact that BAES and MES were members of competing teams bidding for this same contract. The UK and US governments subsequently decided not to proceed with the programme and the undertaking became redundant. BAES was formally released from this undertaking on 10 January 2002.

Undertakings 2, 4 and 5

These undertakings concerned the competitive programmes for: Joint Strike Fighter; Skynet 5 and associated satellite communications programmes; and the Astute Training Programme respectively. As with undertaking 3, the purpose of these undertakings was to address the competition concerns arising from the fact that BAES and MES were members of competing teams bidding for the same contracts. The competitive programmes covered by these undertakings have now been decided and these undertakings (apart from the information retention provisions) are no longer in effect.

Undertaking 8

This required the former MES Avionics Business to be vested in a separate subsidiary of BAES, with its own management and published accounts, and to be available to all potential prime contractors (including BAES) on fair, reasonable and non-discriminatory terms. BAES has now disposed of its majority interest in the Avionics Business and we shall be dealing with this issue in a separate submission in due course.

BAES request for review

BAES has requested that the OFT reviews the Undertakings accepted on 28 March 2000 and considers appropriate action. If the Undertakings are no longer appropriate by reason of any change of circumstances, BAES can be released from them or the Undertakings can be varied or superseded.  BAES has particular concerns over the continued relevance of undertaking 8 (mentioned above) and undertaking 6. Undertaking 6 relates to MES shipyards and requires the shipyards to be vested in a separate subsidiary of BAES, with its own management and published accounts, and to be available to all potential prime contractors (including BAES) on fair, reasonable and non-discriminatory terms. The OFT is minded to agree this request for a review and will shortly begin the formal process of review.

Undertaking 1 - Compliance Officer

Undertaking 1 required BAE SYSTEMS to appoint a CO to facilitate and oversee compliance with the Undertakings and report to the Ministry of Defence (MoD) and the Office of Fair Trading (OFT) on compliance. This is an important role in terms of the implementation and compliance with the Undertakings and it was considered particularly crucial when the Undertakings were accepted in view of their breadth and depth.

The current CO's term of appointment is due to expire on 30 September 2005. Since early spring of this year BAES has been examining the options with regard to recruiting a new CO. While certain individuals have been identified as possible candidates none has stood out as satisfying all the requirements necessary for the position. BAES state that finding an external candidate with the right qualifications and qualities for the post is not an easy or quick task with the previous recruitment round involving the review of over a hundred potential candidates. BAES is now in the position that the current CO's term is due to expire and there is no prospect that a replacement could be put in post by 1 October 2005.

In order to deal with the situation outlined above, BAES requested to the OFT that undertaking 1 is varied to enable the CO's term of appointment to be extended by a period of eight months. The OFT issued an invitation to comment (ITC) on this proposal on 6 September 2005. No comments were received in response to the ITC. The MoD has also been consulted and has confirmed that it does not have any objections to the extension.

Noting the limited time now available to appoint a new CO, the OFT is minded to agree to this extension, if you were to agree to the requested variation to the Undertakings. The OFT also considers that given the impending overall review of the Undertakings, there are clear benefits in having the existing experienced CO in place when carrying out such a wide ranging review.

To effect this change, the Undertakings will need to be revised. The necessary changes to the Undertakings are as follows:

Undertaking 1.8

The current undertaking provides that the appointment of a Compliance Officer shall be for a non-extendable term of five years. In order to permit the current (and any as yet unforeseen future) requirement, the undertaking will need to be amended so as to permit an extension but only in exceptional circumstances and with the prior written consent of the OFT.

There is a further amendment to provide that such consent shall not be unreasonably withheld in order to be consistent with the formulation of this principle elsewhere in the undertakings.

Undertaking 1.9

The proposed addition of a reference to any extension under 1.8 is a consequential change arising from the above.

Undertaking 1.11

The proposed addition of a reference to the prior written consent of the OFT is a consequential change arising from the above.

Undertaking 16.8

The proposed addition of a reference to any variations is a consequential change arising from the above.

Undertaking 17.4

The change to the definition of the DGFT will be required as a consequence of section 2 of the Enterprise Act 2002, which provides that it is only references to the DGFT in instruments or documents made prior to 1 April 2003 that are deemed to be references on or after that date to the OFT. 

BAES agrees to the revisions to the Undertakings and in order to avoid delay, has signed the variation instrument in the form attached in the appendix.  At the present time, following acceptance of the variation, the OFT is considering consenting to the extension of the CO's term of appointment until 31 May 2006.

CONCLUSIONS
 
Given the limited time now available to appoint a new CO and the impending review of the Undertakings - for which access to the current CO's experience and knowledge of the Undertakings would be beneficial - the OFT supports BAES's request to vary the Undertakings to enable the current post-holder's term of office to be extended. This request is also supported by the MoD which has been consulted on this matter.  No objections have been received to this proposal. Following discussions with OFT officials, BAES has now signed the attached variation to the Undertakings. The OFT recommends that you accept this variation.

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