Subsidies of up to £70 million (#88.88 million) by 2005 may be required to keep rural post offices open, the Government has been told.

A crucial report on the sustainable development of An Post's rural network, long a political hot potato, is believed to say it cannot break even without State aid.

The report by an industrial relations specialist, Mr Phil Flynn, is also thought to say a number of large post offices on the network could shortly experience financial and staffing crises. Smaller sub-post offices were previously assumed to be under the most severe pressure.

The entire post office business has very poor profit margins and An Post has claimed EU regulations presented "legal difficulties" in cross-subsidising the rural network from elsewhere in the group.

Yet any closures would be considered a political time bomb by the Government because post offices are seen as crucial to the social fabric of rural parts of the State.

Mr Flynn's report is also thought to state that An Post will be unable to secure investment from an international strategic partner until uncertainty about the rural network is resolved. Such investment - most likely from Deutsche Post or the Dutch operator TNT Post Groep - is seen as crucial to An Post's survival as the European industry consolidates.

Mr Flynn was commissioned by the Minister for Public Enterprise, Ms O'Rourke, to chair "urgent talks" last year between An Post and the Irish Postmasters' Union on the network's future.

Ms O'Rourke's spokeswoman yesterday said she was studying the report and would bring it to Cabinet as an aidememoire within a fortnight.

It is thought unlikely, however, that any decision on a subsidy would be taken by the Government for some months.

The expenditure required would depend on An Post's ability to increase its revenues from the network and cut costs.

Mr Flynn's report is believed to state that a £10 million subsidy would be needed to keep rural post offices open in 2002.

In this worst case scenario, that would rise to about £15 million in 2003; to about £20 million in 2004; and to about £25 million in 2005.

The question of a subsidy is said to be the subject of talks at a working group whose members include An Post figures and officials at the Department of Finance and the Department of Public Enterprise. That group is examining a separate report on An Post by PricewaterhouseCoopers and the process is at a "sensitive" stage, according to informed sources.

A Department of Finance spokeswoman said it would not discuss the expenditure required to subsidise the network. When it was suggested that up to £70 million might be needed in 2002-2005, she said "any figure of that nature would be of concern for the Department".

Ms O'Rourke has ruled out closure on several occasions. She told the Dail last June that the Government would need to look at the position - "and put its money where its mouth is".

An Post implies it cannot sustain the rural post offices. The group's chief executive, Mr John Hynes, has often said that half its 1,911 outlets generate 95 per cent of post office revenues.

Its post offices made a £10,000 profit in 1999 on revenues of £78.9 million.

In addition, key contracts to provide Social Welfare payment and collect the RTE licence fee may be put to tender.

It is thought the Social Welfare contract was worth £35 million to An Post in 1999. However, such revenues are thought to have fallen since the boom began, because fewer people are receiving benefits.

In addition, the arrangement is an ad-hoc one because a US firm, Transaction National Services, has challenged in the European courts, the Government's failure to put the contract to tender. An Post signed a new contract with the Department of Arts, Heritage, Gaeltacht and the Islands to collect the RTE licence fee last January. That contract is believed to have been worth about £6.7 million to An Post last year.

The company claims it has always met its collection targets for this contract, although RTE's current submission for a licence fee increase makes it clear the broadcaster is unhappy with the service. The contract should be put to tender, RTE says.

Mr Flynn's report is believed to say the State should pay more for the services An Post supplies and use the network for more purposes.