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Merger between British Aerospace plc (now BAE SYSTEMS plc) and the Marconi Electrical Systems (MES) business of the General Electric Company plc

No. 0117/99

A Report under section 125(4) Fair Trading Act 1973 on the advice of the Director General of Fair Trading, given on 18 December 2001, to the Secretary of State for Trade and Industry under section 75G(1) of the Act.
 

Undertakings given pursuant to section 75G(1) of The Fair Trading Act 1973

In this submission I advise under section 75J of the Fair Trading Act 1973 (the Act) on the request by BAE SYSTEMS plc (BAE SYSTEMS) to be released from undertaking 3 of the undertakings which it gave on 28 March 2000. BAE SYSTEMS contend that by reason of a change of circumstances this particular undertaking is no longer appropriate.

I have considered BAE SYSTEMS's request in consultation with the relevant UK and US government departments. I have also obtained a Special Report from the Compliance Officer on compliance by BAE SYSTEMS with undertaking 3. In conclusion, I am satisfied that, since the competitive phase of the programme covered by this undertaking is now effectively at an end and representatives of the UK and US governments have stated that they will not proceed with future phases of this programme, undertaking 3 is no longer appropriate. I therefore recommend that BAE SYSTEMS should be released from undertaking 3.

Background

Undertaking 3, of the undertakings given on 28 March 2000, applied to the UK/US jointly funded competition to design a ground-based reconnaissance vehicle. This is referred to in the UK as 'Tactical Reconnaissance Armoured Combat Equipment Requirement' (TRACER) and in the US as 'Future Scout and Cavalry System' (FSCS). Two contracts were awarded for this competition: one to SIKA International Limited (SIKA), a 50:50 joint venture between subsidiaries of BAE SYSTEMS and Lockheed Martin Corporation; and the second to MES. MES entered into collaboration with Alvis Vehicles Limited, Raytheon Company and United Defense LP (collectively known as LANCER).

Three project phases were identified for the programme: Project Definition (PD) phase (referred to Advanced Technical Demonstration (ADT) in the US): Full Development (FD) phase (referred to as Engineering Manufacturing Development (EMD) in the US); and Initial Production phase (so called in both the UK and US). It was envisaged that at the conclusion of the first phase there would be competitive downselect based upon each Team's PD/ADT phase. It was intended that the two governments would then jointly select the winning bid and award the contract for the next project phase.

The purpose of undertaking 3, therefore, was to address the competition concerns arising from the fact that BAE SYSTEMS and MES were members of competing teams bidding for the same contract. The undertaking sought to establish separate operational and financial control between the competing Teams (SIKA and LANCER); a pre-agreed maximum spend; and the erection and maintenance of 'firewalls' restricting the flow of Program Information both between the competing Teams and also between the Teams and the senior management of BAE SYSTEMS. The undertaking also required that BAE SYSTEMS preserve and maintain all records relating to the SIKA and LANCER Teams for a period of 6 years following the execution of the contract for the EMD/FD phase.

Given the nature of the programme competition, the wording of undertaking 3 provided that it would remain in force – subject to the preserving of records - only until the competitive downselect, that is the execution of the contract for the EMD/FD phase of the programme.

Programme changes

Representatives of the UK and US governments have recently informed the two competing Teams that following a review of the future of the programme, and in the light of emerging and changing national requirements of both nations, it had been decided not to proceed with future phases of the programme beyond the end of the current PD/ATD phase. As a result, the competition element of the current phase of the programme should be considered at an end.

Assessment

Since a contract for the EMD/FD phase of the TRACER/FSCS programme will not now be awarded, the termination provision within undertaking 3 will never be triggered. The undertaking provides (at 3.25) that BAE SYSTEMS shall notify me of any changes to the TRACER/FSCS programme that might impact on the application of this undertaking. BAE SYSTEMS has made such notification, contending that it should now be released from all the obligations arising from undertaking 3.

Having consulted with and been advised by the relevant UK/US government departments and having obtained a Special Report from the Compliance Officer on compliance by BAE SYSTEMS with undertaking 3, the OFT is satisfied that the competitive phase of the TRACER/FSCS programme is now effectively at an end and there will be no future phases of this programme. There is, therefore, no need to retain the protections and separation required by undertaking 3. Since the execution of the EMD/FD contract will not now take place and there will be no future phases of this programme there is, in my view, no need to continue the requirement in the undertaking to preserve Team records.

Recommendation

I therefore recommend that BAE SYSTEMS should be released from undertaking 3.


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