O2 Airwave, the £2 billion emergency services radio business that is up for sale, is facing a multimillion-pound government fine after delays on a key contract.

The business has received a formal warning about a penalty for missing a deadline on a £350 million contract to provide a new radio system to the fire and rescue service. The warning, from the Department of Communities and Local Government, comes as Telefonica, O2 ’s owner, is seeking approval from the Government to sell Airwave.

Because of the sensitivity of the business, which supplies a secure radio system to the national emergency services, the Government has been given a draft of the sale prospectus before it is sent out to potential bidders. However, the Government is highly unlikely to veto the plans.

It is understood that O2 has already received informal expressions of interest about the business from more than 20 parties including the infrastructure fund of Macquarie, the acquisitive Australian bank.

Airwave, which has more than 150,000 users, including all police forces in England, Scotland and Wales, has 150 separate contracts, including a £2.9 billion, 19-year contract signed with the Home Office in 2000. The increased terrorism threat is expected to result in further demand for such services.

O2 ’s contract with the Government includes a change of control clause, which would theoretically enable it to take away its contracts.

A spokesman for the Department of Communities and Local Government confirmed that the deadline on the fire contract, called Firelink, had been missed. The department was “in a position” to claim for damages and was “considering its options”, he said.

The Firelink contract was awarded to O2 Airwave last March. It seeks to provide a single digital radio system for voice and data transmission for the fire and rescue service across England, but is still in its early stages.

O2 has now been given more time to complete the necessary work, which relates to the delivery of planning and design information. A spokesman said: “We are confident we will meet the extended deadline.”

— The mobile operator O2 is to pull its lucrative contract business out of Phones 4 U, the high-street retailer from April. The move, which follows Vodafone’s decision to switch its contract business from rival Carphone Warehouse and into Phones 4 U, means that only upgrades and prepay sales of O2 phones will be available in Phones 4 U stores.The work will not go to Carphone Warehouse.

Times Recommends

• ‘Lame duck’ fear for FSA as chief quits
• Storm over bailout of EU's most ailing economy
• Northern Rock to drop 100% savings guarantee