Further failures in the internet hosting sector are likely over the next few months until the global economy recovers, an IDA Ireland executive warned yesterday.

But Mr Noel Kelly, new business manager for the IDA, said the hosting sector would recover and was crucial to attracting foreign direct investment to the Republic.

Fourteen internet data centres currently operate in the Republic. A further eight facilities have either gone out of business or were not completed, according to Mr Kelly.

Internet hosting firms enable dotcoms and corporates to outsource management of IT systems and Web applications. After more than three years of rapid growth, the sector is undergoing a major shake out.

Mr Kelly was speaking to The Irish Times after a bad week for the hosting sector, which saw two flagship firms, Worldport and Wolfe Group, close their Dublin facilities due to funding problems.

"I don't think anyone could have foreseen the 360-degrees turnaround with everything to do with e-business," said Mr Kelly.

The sector was overplayed and built on wild projections of growth. It attracted companies who saw a market opportunity in the dotcoms growth, he said. Eighteen months ago, every dotcom in the US was saying that they must get into Europe. Now they are looking after their cash and moving towards profit, said Mr Kelly.

"People thought it would take one to two years for strong demand but it's now likely to be five or 10 before we see the kind of demand previously predicted."

There is currently 400,000 square feet of data hosting space available in the market, significantly less than previous projections of one million square feet, according to IDA figures.

The collapse of Cityreach, Worldport and 360 Networks this year has taken about 200,000 square feet of hosting space off the market already. And more failures are likely, according to Mr Kelly.

"Demand is really weak at the minute," he said. "So the people with the big pockets will survive."

Mr Kelly admits the sector in the Republic probably got hyped more than elsewhere because of the Government's strategy of marketing the Republic as an e-business hub.

"The three main locations for data centres in Europe are probably London, Amsterdam and Dublin," he said. "London is still doing reasonably well and Amsterdam probably escaped the worst because it put a stop on building 12 months ago due to the concentration of high-power facilities in the city centre area."

A factor in the downturn here is the reliance on foreign business due to the small scale of the Irish market, he said.

But Mr Kelly believes demand in the hosting industry will grow as companies continue to follow the US trend of outsourcing IT functions to save cash. The trouble is surviving until then, he said.

Most of the current internet hosting facilities were not supported by IDA grants and there is good value to the economy from encouraging this type of infrastructure, according to Mr Kelly.

"If we hadn't got them [internet data centres] it definitely would stop investment," he said. "The software industry over the next five years will move to electronic distribution of products and most will use data centres."