Just two years after the government privatised Telecom ╔ireann with the promise of a bright new future for telecommunications, the State is getting back into the market to offset a major slump in the communications industry.

In order to enable regional broadband investment under the National Development Plan, the Department for Public Enterprise will fund public bodies that want to build telecoms infrastructure.

The Government will supply 90 per cent of the funding for successful projects, while public bodies such as local authorities will supply the remaining 10 per cent.

At least €20 million (£15.75 million) is available under the first phase, applications for which are due by October 19th, but the Government will increase this funding if there is a lot of interest from the public sector.

The Irish Times has learned that several local and regional authorities, including councils in Mayo, Roscommon, Donegal and Galway, will submit applications.

One hundred per cent funding of telecoms projects with public money represents a change of heart for this Government, which is best remembered for its privatisation of Eircom in 1999. It has been forced to intervene because of a serious downturn in the private telecoms market and its own faltering decentralisation policy, which could undermine a central plank of Government.

The conundrum for Government is that telecoms firms won't invest in network infrastructure outside Dublin, but companies won't locate in the regions without a decent telecoms network.

"Lack of bandwidth (networks that can carry large amounts of internet traffic) is a major problem in Mayo," according to county secretary Mr John Condon. Mayo County Council is one of several public bodies that plan to apply for funding under the scheme in order to provide adequate infrastructure to encourage firms to locate in the county.

According to Mr Condon, one firm, Cedar Data, which the council persuaded to set up in Castlebar recently, has already begun to complain about lack of bandwidth in the region.

"We want to see that this infrastructure is in the county so operators can offer industry and individuals the type of telecoms services they need," says Mr Condon. "If you just leave it to market forces, it won't happen."

This was dramatically illustrated this year when several telecoms firms pulled out of a similar State-subsidised scheme to build broadband infrastructure in the regions. Eircom's decision to pull out of a €37 million project to deliver digital subscriber line technology to the border, western and midlands regions was the final straw for the Government, according to informed sources.

It was also a major blow to IDA Ireland's plan to market regional locations for high-tech investment.

"The Government no longer has any direct means of influencing the telecoms market since the sell-off of Eircom," says Mr Harry McDermott, director of Mason Communications. "This has resulted in a disjoint with the Government's regional and spatial strategy, in that Government wants to redistribute population - but one of the key elements of infrastructure is now lacking and beyond Government control."

Eircom's threat to withdraw its i-stream high-speed internet service if the telecoms regulator intervenes in pricing - as she did this week - illustrates the dangers of relying on a private firm to supply telecoms.

Mr Alfie Kane, chief executive of Eircom, recently said Eircom would take a hard-nosed pragmatic view of where it should direct investments. Clearly, the firm's plans do not include building unprofitable infrastructure in rural areas simply to meet the Government's visions of the Republic as an e-hub and an information society.

According to Mr McDermott, the Government's plan is an innovative response to a difficult situation.

"It is probably the only means to make it (regional deployment of telecoms networks) happen in the current environment," he says. "The problem is that telecoms operators are owned by bigger players, often heavily indebted organisations. The problem is also particularly acute in Ireland because of our low population densities."

Britain, Belgium and France all have higher population densities, and so it's more economical to roll out nationwide networks, says Mr McDermott. "Ireland has more in common with Norway and Sweden," he says.

In fact, the Government's new strategy to fully fund the building of telecoms infrastructure by public bodies is similar to a scheme in Sweden.

During the liberalisation of the Swedish telecoms industry in 1994, the city of Stockholm and other local councils installed extensive fibre optic networks. A telecoms body, Stokab, was set up by the council to lay the fibre. However, it leaves provision of services and the development of new services to private operators.

Similarly, the competition for Government funding in the Republic stipulates that public bodies must not offer services, but rather lease out infrastructure to firms. This should encourage competition among operators.

"We're not giving any one of the operators an exclusive run, so people will have the benefits of competition," says Mr Condon.

And although Mayo's plans would not make a financial return capable of attracting private firms, Mr Condon believes it will make a return over a longer period.

"If we lease it out over 10 years and we get 1 per cent per year, in 10 years we'll have made the money back," Mr Condon says.

Similarly, Mr Fergal Reidy, community and enterprise development officer at Donegal County Council, believes its proposal will be viable. "The issue in Donegal is more drastic because of the rural dispersal of people. We don't have the economies of scale to make private deployment of telecoms viable. . . but we would look to ensure value for money," he says.

But local authorities that have little experience of telecoms face a challenge, according to experts.

"There is a real risk of 'stranded assets', where local authorities decide to gear up for it, put in the infrastructure and then nobody wants to use it," according to Mason's Mr McDermott. "They'll probably have to engage with the telecoms operators to make sure they will offer services to customers."The deadline for funding applications is October 19th.

The Government will hope its new, publicly funded scheme will be more successful than the Eircom adventure.