The Inland Revenue is considering giving millions of pounds to major computer companies to persuade them to bid for a £4bn public private partnership (PPP) contract they stand little chance of winning.
The unprecedented payment to shortlisted suppliers, in return for submitting detailed bids, is under serious consideration because the Revenue wants genuine challengers to the incumbent, EDS, when a 10-year contract to run the nation's tax systems comes up for renewal in 2004.
The deal is being combined with a separate contract for national insurance systems. The total contract is worth up to £4bn over 10 years and more than £6bn over 18 years.
Some suppliers, including IBM, had indicated that they might be unlikely to commit their "high-fee earners" for up to two years, at a cost of between £5m and £10m, to compile a bid for a contract they would have little chance of winning. They said they may bid if their costs are met.
In 2000 the National Audit Office (NAO) and the House of Commons Public Accounts Committee expressed concern about the risk of the Revenue being locked into the contract with EDS. In 1995 when the contract with EDS was worth about £1bn the NAO warned that it could take five years to transfer the Revenue's IT operations back in-house because of the complexity of the task.
A Computer Weekly investigation has discovered that the scale and complexity of EDS' operations have since grown, and the original cost of the contract has risen almost 300% to £2.8bn - £400m more than when MPs expressed concern about the rising costs in April 2000.
Networks of systems that support the working families tax credit, self-assessment, child support, student loans and PAYE are included in EDS's responsibilities.
The Revenue says the risk of lock-in to EDS is "manageable". Its chairman, Nick Montagu, has told MPs, "We will make sure that the competition is not just a token to meet European requirements, but a proper one."
IT suppliers say the only serious rival to EDS was Accenture (formerly Andersen Consulting), which runs the Revenue's national insurance recording system, Nirs2. However, Computer Weekly has discovered that EDS and Accenture are planning a joint bid for the new contract.
Some IT executives believe that such a bid would be unassailable, partly because of the risks to the continuity of service if the nation's tax and national insurance systems are passed to a company with no experience of running both systems.
In a letter, Treasury minister Dawn Primarolo has told her Liberal Democrat counterpart, Matthew Taylor, that there are "certainly risks in changing suppliers" but they can be managed. One risk is that a serious problem during the transition could interrupt the flow of tax and national insurance funds to the exchequer or worse, throw both systems into chaos.
So anxious is the Revenue to have a serious competition that senior officials have been touring the boardrooms of major US IT companies, including CSC and IBM, giving presentations to encourage bids. "It took some time to convince our US directors that a potential client with $6.5bn to spend would be pitching to us," said a UK services company executive.
Taylor said that the new disclosures make a mockery of the open competition process. "There is no possibility in these circumstances that the taxpayer can get best value," he said.
Richard Barrington, director at the Office of the E-Envoy, said the Revenue's contract was the first IT outsourcing deal of its size to come up for renewal. "It is difficult to see how other companies will step into the breach. The whole of government is watching this with interest."
Primarolo's letter to Taylor says the Revenue will not consider funding bid costs in the initial phase of the competition. "However it will review this position as competition progresses," it said.