The Government will renew its exclusive internet and data contract with Eircom for a further year in a move that will disappoint industry rivals.

The data contract, which is worth up to €30 million a year to Eircom, enables all public bodies and Government departments to sign up for internet services from Eircom at a fixed price.

The rationale for the single Government contract, which is known as a virtual private network (VPN), is to aggregate demand for services to ensure that the State gets a cheap price. But the contract, which was first signed in May 2002, has been heavily criticised by a rival and some politicians for undermining competition in the telecoms market.

The Minister for Communications, Mr Ahern, and the chairman of the Oireachtas Joint Committee on Communications, Marine and Natural Resources, Mr Noel O'Flynn, have both called for Government telecoms purchasing to be used to promote greater competition.

Industry rivals believe the Eircom deal has damaged the ability of competitors to establish a foothold in the Republic and begin to build out alternative networks.

Since the fixed data contract was signed with Eircom in 2002, several of its biggest rivals have withdrawn from the domestic market and cut back investment.

This has forced the State to invest in telecoms networks and begin building a series of fibre optic rings in about 60 regional towns and cities in the Republic.

The Department of Finance recently reviewed the State's 2002 VPN data contract, held by Eircom for fixed services and Vodafone for mobile services.

The Irish Times has learned that the Department has decided to renew its fixed line data contract with Eircom for a further 12 months. This is by far the largest portion of the VPN deal, which connects all Government departments and a range of public and State bodies to the internet.

Information gathered from a range of Dáil questions tabled in December 2002 by Green TD Mr Eamon Ryan shows that most Government departments use Eircom exclusively for fixed telecoms data and voice services.

However, the review has concluded that the mobile portion of the VPN data contract, which is worth a few million euros per year, should now be cancelled.

This means that O2 Ireland and Meteor will now be able to tender against Vodafone for any new mobile data business required by State departments.

It is understood that the existing fixed-line data contract with Eircom will be reviewed next year as part of a wider review of all State telecoms procurement. This review will include the Government VPN deal for voice services, which is currently estimated to be worth up to €100 million every year.

Eircom and Vodafone currently hold this contract, which contributes substantially to their annual revenues. State business is considered particularly valuable because the Government does not default on debts owed to private firms.

Eircom and Vodafone will face a tough battle to hold on to the entire VPN contract next year due to the rollout of new State networks, which can be used by rivals to supply regional areas.

Esat, Chorus, Smart Telecom, Energis, Meteor, NTL and several other firms are likely to compete for the business, if the State decides to put it out to tender.