BT tipped to win pounds 1bn armed forces phone contract

The Government is expected to reveal today that BT has beaten Racal Electronics in a battle to win a pounds 1bn contract to replace the vast private telephone network used by the armed forces.

The announcement, which will be made by the Ministry of Defence in the Commons, would mark another success for BT in the week it announced its pounds 13bn agreement to buy the US long-distance operator MCI.

However, it would represent a severe blow for Racal, which had launched a vigorous campaign attacking the BT bid, arguing it was against the public interest.

The contract is to renew the dedicated telephone and data network which connects UK military bases, known as DFTS, or Defence Fixed Telecommunications System. The outdated network is run by BT.

The MoD has already reduced the annual cost of running the system from pounds 200m to pounds 175m but was seeking further cuts of at least pounds 40m. The other condition was that the web of 51 separate networks should be replaced by a single digital network by 2000.

Racal had formed a consortium called Rampart to bid to build and operate the system with partners Logica and a consultancy firm, WS Atkins. A key element of the Rampart bid was that it would guarantee to employ all 600 existing civilian telecoms staff and take on a further 250 people.

In contrast, BT has kept the details of its bid a close secret, though it is thought it may offer a larger one-off price cut than Racal's with similar total costs over the 10-year life of the contract.

BT yesterday refrained from claiming victory ahead of the official announcement, though its team is thought to be confident of success.

Last night a Racal spokesman declined to forecast the outcome of the bidding process, which has lasted for 18 months. He said: "We are not aware of a decision until it has been announced and we remain totally committed to our solution for DFTS."

Two months ago David Elsbury, Racal's chief executive, stepped up his attack on BT, claiming the two groups were running neck and neck in the race to win the contract. "I believe it is on a knife-edge. There is not a fag paper between us. The difference is political," he had claimed.

Mr Elsbury had said that if BT won the contract it would effectively rule out any further competition in the future. He also pointed out that the annual value of the 10-year deal, at pounds 100m, was "a drop in the ocean" to BT but would represented 10 per cent of Racal's annual sales.

Racal Electronics already runs data networks for 40 Government departments, in addition to operating private phone systems for the Department of Social Security, along with the chemicals group ICI, Norwich Union and WH Smith. It also runs the huge network which links National Lottery terminals.

If the MoD does pick BT as the preferred bidder for DFTS, it would come as Racal seeks to to identify its strategy following the lucrative demerger of the mobile phone company, Vodafone, and its Chubb locks business. Racal has concentrated on managed telephones and data networks and defence electronics products against accusations that it is left withunderperforming assets.