Labour to face row over £7bn tax 'farce'

The Government is heading for another row over its relationship with the private sector after it emerged that the competition for a £7bn technology contract with the Inland Revenue could descend into farce, with just one serious bidder competing for it.

The Revenue will shortly put out tender documents asking for bids to run its two massive computer systems, one running the tax system, the other national insurance.

These are currently operated by EDS, the Texan technology firm, and Accenture, the consultants which formerly employed Patricia Hewitt, the Trade and Industry Secretary.

The current contracts – which have been worth around £2.6bn – run out in 2004. The Revenue wants a combined deal to run both systems under a programme called Aspire.

Nick Montagu, Revenue chairman, has said the new contract will be worth £300m to £400m a year and will run for 10 years, with the potential to be renewed for another eight years.

Officially this means the contract's value would be up to £7.2bn. However, based on past experience, this would be an underestimate. The existing EDS deal was supposed to be worth £1.2bn, but the Revenue has ended up paying £2.2bn to the Texan firm.

EDS and Accenture are in talks about making a joint bid. If they do join forces, computer industry rivals believe they will be a "shoe-in" for the contract.

This is exactly what the National Audit Office and the House of Commons Public Accounts Committee warned would happen in a report on the contracts in 2000.

At the time, Mr Montagu vowed that EDS's dominant relationship with the Revenue was "manageable" and that there would be proper competition for the new contract.

To that end, the Revenue is now considering paying the costs of rival companies such as IBM, Compaq and Cap Gemini Ernst & Young to persuade them to make rival bids. This could be an open-ended and potentially expensive commitment, running into tens of millions of pounds. IBM has indicated that making a serious bid would take two years of work and could cost up to £10m.

On top of this, the Revenue may have other costs if it changes from EDS and Accenture. For example, Accenture owns the intellectual property rights to the software used in the national insurance system – known as NIRS2. It is entitled to a payment of £13m should someone else take over the running of the system.

A spokesman for the Revenue told The Independent on Sunday: "We have listened and responded to the suppliers' concerns about a level playing field.

"For example, we have announced that the UK government will meet the unique costs of transition should we change strategic partners."

Neither Accenture nor EDS would say who they were talking to about making a bid for the contract, though both have indicated they are going to make a bid.

"We will be going for it," said an Accenture spokesman, "and we are locked in talks with potential partners."

A rival firm said it would be insane not to join forces. "It is as simple as this: if you make a joint bid, you are almost assured of winning. Why risk it?"