Plans to replace outsourcing giants G4S and Serco as suppliers of electronic tagging equipment for offenders have collapsed amid an acrimonious row between the new provider and the Ministry of Justice.

Buddi, a small Aylesbury-based company backed by hedge fund manager Crispin Odey, said it had withdrawn from a multimillion pound deal to provide new GPS electronic tagging equipment after negotiations broke down earlier this week.

The 40-employee company argued that the MoJ has changed the specifications for the product several times and expects it to pick up the bill. It also said that the government expected it to share its intellectual capital with rivals, which would threaten its economic future.

Sara Murray, who set up the business in 2005, said the company had spent around £2m on the bidding process after the government first launched the tender for the new round of electronic monitoring contracts in 2010.

“We’ve been working on this for two years and we still haven’t been paid. They wanted us to develop it, customise it and deliver it. They were issuing more and more detailed specifications around exactly how it should work. To drag us through a two-year bid process without them paying us doesn’t work for any commmerical business.”

Industry experts said that the deal’s collapse underscores the difficulty the coalition faces in trying to ensure that 25 per cent of central government spending goes to smaller business by the end of next year.

Jim Bligh, CBI head of public services, said: “We want to see more small and medium-sized firms winning public services contracts. To make this happen, the government needs to work hard to ensure that contract sizes, incentives and risk profiles work for businesses with smaller balance sheets. These firms are less able to take on significant political and financial risk and this needs to be recognised.”

The dispute comes as the government attempts to break the stranglehold that some of the four biggest suppliers have on the public sector market. G4S, Serco, Atos and Capita have around £6bn of public sector contracts between them.

But G4S and Serco, which had held the tagging contracts for several years, had withdrawn from the race for the next round of electronic monitoring deals after being referred to the Serious Fraud Office for claiming for offenders who were already dead. Capita, who is running the electronic monitoring contracts in the interim, ahead of a longer six-year, £400m deal due to start in the summer, is using technology provided by G4S and Serco.

Four companies – Capita, Astrium, Telefónica and Buddi – were announced as preferred bidders on the new contracts to monitor offenders in August last year. Capita agreed to provide staff and monitoring; Astrium to provide mapping software; Buddi, the ankle bracelets; and Telefónica the sim cards for the bracelets.

An MoJ spokesperson said: “We have been unable to agree on certain technical and commercial aspects of the contract with Buddi to provide tags. We have therefore decided to recompete this element of the contract to ensure we deliver an efficient service that represents best value for hardworking taxpayers while protecting the public.”

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