Plans to replace G4S as the provider of new high-tech electronic tags for offenders have collapsed after the Ministry of Justice terminated a contract with the British company Steatite.

Dominic Raab, justice minister, said developing bespoke tags has been “challenging” and that it would be “more appropriate” to buy off-the-shelf technology that is already available.

It said it would end its £23m contract with Steatite, a small Aim-listed company which was developing the GPS tag, and will instead invite bids for companies to supply proven devices already on the market.

The move is the latest twist in a long-running saga over the electronic monitoring of offenders.

Capita won the contract — worth £400m over six years — in 2014 after G4S and Serco were referred to the Serious Fraud Office for overbilling the government, including charging for offenders who were back in prison or dead.

But the contract to supply the new generation of GPS satellite tags was run separately and has so far failed to deliver, forcing the government to rely on tags supplied by G4S and Serco anyway. Serco said its contract was due to end in March.

G4S now supplies 18,000 tags for offenders in the UK, and is the only company to provide the government with more sophisticated GPS tags, which are used to track potential terrorists.

It is widely expected to bid for the new GPS contracts when they are put out to tender, highlighting the difficulty faced by the government as it attempts to break the stranglehold that the biggest suppliers have on the public-sector market.

England and Wales are the second biggest users of electronic tagging behind the US, using them on more than 116,000 offenders annually. Reform, the think-tank, argues the tags could be used more extensively to cut prison costs and encourage rehabilitation.

It argues that prison places are nearly five to six times more expensive than tagging, costing £73 per prisoner a day compared with the new GPS tags, which will cost £8-£16 a day. It also points to US research indicating that the use of tags could reduce reoffending rates.

Prime minister David Cameron, in his recent speech addressing justice secretary Michael Gove’s prison overhaul programme, appeared to have effectively endorsed this approach, announcing that “major new pilots will begin on satellite tracking later this year, and we will have this technology rolled out right across the country before the end of the parliament”.

Charlotte Pickles, senior research director at Reform, welcomed the decision. “Essentially Michael Gove has torn up the plan and focused on how you cut reoffending. Tagging should play a central role in that.”

The decision also marks the latest in a string of U-turns since Michael Gove replaced Mr Grayling, including scrapping the contentious criminal courts charge, ditching plans for “secure colleges” and terminating a £5.9m bid to run prison training services in Saudi Arabia.

The commissioning of a new generation of GPS satellite tags to monitor offenders has been mired in controversy since the process began in 2011. Then a host of potential providers — including Buddi, a small technology provider — dropped out of the contest complaining that the MoJ required the companies to hand over the intellectual property rights as well as making frequent changes to the specifications.

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