The Government has renewed a contract with Eircom worth up to €60 million a year for the supply of fixed telephone and internet to the public sector.

The contract renewal is a significant boost for Eircom, which has been lobbying hard to have the contract extended rather than have it put out to tender.

But the decision by the Government was criticised last night by others in the telecoms industry who are keen to begin offering telecoms services to the State.

Under the deal, Eircom provides a virtual private network (VPN) for all Government departments and more than 150 State agencies.

This means that the Republic's biggest fixed-line telecoms firm supplies almost all the public sector with voice and internet services. The rationale for the single Government contract 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 former minister for communications, Mr Ahern, and the chairman of the Oireachtas Joint Committee on Communications, Mr Noel O'Flynn, have in the past called for Government telecoms purchasing to be used to promote greater competition in the market.

There has also been criticism of the current VPN contract because it makes no use of the Government's own telecoms infrastructure, which is costing more than €170 million to build.

The Department of Communications is building State-owned fibre optic networks in regional towns because it believes that Eircom is not investing enough in its national telecoms network.

Yesterday, Iarla Flynn, the chairman of the ALTO, a lobby group representing alternative operators, criticised the decision made by the Department of Finance.

"The Government is missing out on a great opportunity to shop around and get a much better deal," he said.

The Department of Finance confirmed last night that it had agreed the one-year renewal of the VPN deal with Eircom. It said that it had introduced new terms and conditions into the deal which would help promote greater competition among operators. However, no detail was given on these particular contract changes or the final contract value, which is estimated to be worth up to €60 million by telecoms sources.

Eircom would not comment on the renewal of the VPN deal.