MoD fires warning shot at Air Tanker

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Defence Secretary Geoff Hoon has given a consortium selected for a £13bn project to build a fleet of RAF refuelling aircraft just three months to improve its offer or face losing the contract.

In a letter sent last week to the Air Tanker consortium, headed by European defence group EADS, the Ministry of Defence warns that unless the Government can reach agreement with Air Tanker, it may abandon the Private Finance Initiative project. It says the consortium would not be able to claim back the costs of putting together its bid.

Because the project has been planned for nearly six years, a well-placed source estimated Air Tanker's costs were more than £10m. The source said the letter had "raised a few eyebrows" at Air Tanker, but "focused minds".

Last week, Air Tanker beat off a bid from a consortium headed by BAE Systems and Boeing to build the aircraft. But the MoD is not satisfied with the Air Tanker proposals and has asked the consortium for a revised offer. A source from the discussions said the sticking points were price and who is liable if the project runs into difficulties.

Neither the MoD nor Air Tanker was prepared to comment on the letter. But an MoD spokeswoman said: "There are a number of important issues to be resolved with Air Tanker."