The Government has rejected An Post's demands to subvent its post office network, but accepted the business is no longer viable in its current form.

An Post's chief executive, Mr John Hynes, was informed yesterday of the Cabinet's decision to adopt the conclusions of an Inter-Departmental working group studying the financial crisis on the network.

That group said An Post's demand for a subvention was not a long-term solution and said monies from the company's reserves of £167 million (€212 million) should be used in the short term to fund the network.

Mr Hynes has described that solution as the equivalent of "putting the furniture in the fire".

In a statement, the company said its board would meet to discuss the Government's decision.

The Inter-Departmental group suggested changing the system used to pay post offices. It suggested offering post masters a once-off severance payment to become free agents "empowered to adopt the business to meet consumer demand". The business will be transferred to other retailers if the post masters decline the option.

According to An Post, both its rural and urban post offices are facing steep losses this year after losing money in 2000 for the first time in many years. About 100 post offices of the 1,900 on the network are currently closed because An Post cannot find staff to conduct the business.

The Inter-Departmental group was advised that An Post's projections of cumulated losses of £79.2 million by 2005 were "robust" and it said a package of reforms was required.

Yet the group added that there was "an element of selffulfilling prophecy" about the projections because the company's strategy underlined a "lack of a long-term commercial commitment" to the full network.

Ministers also agreed to grant An Post £10 million to absorb a 12.5 per cent pay increase for postmasters, which will be backdated to the beginning of the year.

Some postmasters earn as little as £4,500, less than the minimum wage introduced by the Government.

The Inter-Departmental group's recommendation that the post offices move from a fixed cost "retainer" model to an agency system was accepted by the Government.

This means some of the 100 offices owned by An Post will be transferred to a third party agency, which would operate the postal business in addition to other businesses.

The impact on the 1,800 subpost offices which are operated on a "retainer" basis will be starker.

According to the group, An Post could develop a network of agents paid on a "fee-per-item" basis.

If it proves "impossible" to carry out the business on an agency basis, "Government service outlets" will be developed with local authorities and other public bodies.

Of the agency structure, the Inter-Departmental group said: "In the first instance it would be expected that the present post office operation would be offered to the agency. If they declined then it would be offered to a shop or suitable premises in the immediate locality."

The group said the pay-per-transaction system would increase the level of incentive to the agents. It said this was restricted by the "regressive nature of the scale payment system" because rates per transaction reduce as levels increase.

"An agency approach allows An Post to develop postal services and payment services as commercial propositions to be offered on an agency basis to a range of retailers and other business operations in rural and urban Ireland."