Ministries in fresh row over tank deal

Treasury wants to let overseas contractors bid for fighting vehicles contract worth up to £6bn

BAE Systems is embroiled in another row between the Ministry of Defence and the Treasury over a multibillion pound order for a new generation of tanks, less than a week after the resolution of the stand-off over the £800m Hawk jets contract.

But the battle over the Future Rapid Effect System (FRES) is set to dwarf the Hawk row, involving as it does the procurement of up to 2,000 new generation tanks from 2007 at a cost of between £2bn and £6bn. The MoD is believed to be keen to appoint BAE and Alvis, owner of Alvis Vickers, as joint prime contractors on FRES, but the Treasury has intervened to argue in favour of an open auction that could enable American defence contractors to bid.

With the Treasury keen to screw down costs, the issues mirror those in the Hawk row which was resolved last Wednesday with a victory for the embattled Defence Secretary, Geoff Hoon. The Government decided to forgo a full bidding process in favour of awarding BAE the contract to build up to 48 training jets.

FRES is designed to bring the Army a new generation of light- and medium-armoured vehicles which are small enough to be transported into battle by air, replacing the Saxon and Spartan machines used in Iraq. It will also deliver the first tanks to use internet-type technology to enable rapid communication across the fleet.

BAE and Alvis have seen the deadline for a decision on FRES slip from the start of this year to July, and now to the autumn. And an insider said yesterday: "The timetable has already slipped so much, we are not really even expecting it soon. The trouble is, with an in-service date already set in stone, it is going to be increasingly difficult if they want vehicles designed from scratch."

Alvis, which bought the Vickers business from Rolls-Royce last year at a cost of £16m, has already set up a special development team in Telford to work on FRES, and boasted in its most recent trading update that the company is well placed to take a leading role in the project. The company would only say yesterday that the conduct of the procurement process was a matter for the MoD.

BAE Systems, meanwhile, is seen as edging closer to a deal on the sale of £1bn of Hawk jets to India, in one of the defence industry's longest-awaited contracts. The decision to cut short the procurement process in the UK last week has confirmed in the Indian government's mind that the ageing Hawk jet is not set to become obsolete, according to weekend reports.

The Indian contract for new training jets has been the subject of intense lobbying by the British Government, and talks have been ongoing since the mid-Nineties.