The deal yesterday in which banks transferred their bill payment business to An Post will not save its post office services.

Technically insolvent, almost bankrupt and increasingly difficult to staff, the business faces fundamental difficulties that cannot be resolved by the addition of one new revenue stream.

The company is understood to have budgeted for a £10 million (€12.7 million) loss at the post offices this year. In contrast, the annual revenue from the business abandoned by the banks will be £1 million.

Even more stark is the medium-term loss projected for the post offices. The latest estimate - compiled by the industrial relations consultant, Mr Phil Flynn - suggests they may lose more than £80 million by 2005. This assumes that the post offices carry on as they are without closing any outlets or finding significant new income.

While political sensitivity has surrounded doubt about the viability of the rural offices for almost a decade, a report by Mr Flynn published this month said larger urban outlets would be hit hardest as the losses mount. Mr Flynn was engaged last year by the Minister for Public Enterprise, Ms O'Rourke, to examine opportunities for the sustainable development of the An Post network.

Its problems are clear. Revenues are declining and the company is understood to accept that the volume growth seen in recent years is over.

In addition, low salaries paid to postmasters and high rents and property prices mean that An Post faces growing difficulties keeping its larger offices open.

Three Dublin offices have closed temporarily; another six face closure soon; and An Post officials are manning three more to avoid closure.

Yesterday's deal will add 5-7 million payment transactions each year to the bottom line. As compared with the existing payment business, this is significant - An Post currently manages 16 million payment transactions each year.

The deal means that most over-the-counter payment transactions previously managed by the banks in the Irish Payment Service Organisation will be transferred to An Post. Ulster Bank will continue to offer such services. But AIB and Bank of Ireland, which were represented at a briefing yesterday, will not.

Companies which receive payment as part of the programme will pay the post offices - no charge will be levied on customers.

Banks will continue to offer electronic payments services such as direct debit, but customers of the largest groups will have to migrate to the post offices if they want to pay telephone, television, gas and other domestic bills over the counter.

An Post has submitted a tender to provide payment services for ESB customers but it has no arrangement with the power company. Only customers of AIB, which has an agreement with the ESB, will be able to use the post offices to pay electricity bills.

The deal is linked to the closure by the State's largest banks of certain rural outlets. AIB said it had closed 41 branches in 1997-2000, some through mergers. Bank of Ireland wants to reduce its network to 250 from 315 by the end of 2002 and has already closed more than 30.

The Taoiseach, Mr Ahern, said the Government wanted the post office network to remain in place. There would be no "closure" of the network. This is also the view of Ms O'Rourke.

While Mr Flynn said the "only real option" for financing An Post's losses was for the State to pay a subvention, Ms O'Rourke last week proposed the banks pay millions of pounds in subventions to keep the post offices open.

At a briefing yesterday morning, the chief executive of Bank of Ireland's retail division, Mr John Collins, said the sector had "no insight into any specific proposition" by the Minister. He declined to comment further.

However, senior banking sources have cast doubt over the possibility of banks justifying any such subsidy to the public sector to shareholders - or to former bank staff laid off due to the closures.

Ms O'Rourke said her suggestion would be put to an inter-Departmental committee examining options for post offices.

That committee is likely to seek means of enhancing An Post's revenue from existing State business and adding to it.

It will also discuss the possibility of a State subvention, as recommended by Mr Flynn. In this respect, Ms O'Rourke has spoken in the past of the State "putting its money where its mouth is" when citing her desire to support the post office network.

Still, those with knowledge of the scene speak of "ferocious opposition" by officials within the Department of Finance to the concept of long-term support for an ailing State business.

Ms O'Rourke accepted it was "quite correct" to say the post offices would not be saved by the latest arrangement.

The company's monopoly on postal services will be eroded as EU's deregulation of the industry continues, so an alliance is seen as a crucial means of protecting An Post's business - if only by embracing a potential competitor as partner.