The Egyptian government has cancelled plans to use the UK's Government Gateway system to upgrade its IT systems.

Egypt would have been the first customer to result from a deal between the UK government and Microsoft to resell the technology used to build the Gateway.

The UK was set to receive a 24 per cent royalty for its intellectual property rights, and it would have been the first time that Whitehall had gained revenue from an IT project.

Such rights on government projects were previously retained by the supplier, which could then resell the technology as it saw fit.

The Office of the eEnvoy told vnunet.com that the deal with Egypt will not go ahead, and that the Egyptian authorities will instead build their own system.

"We can confirm that the Government Gateway replication agreement with Egypt will not be progressed. Following an initial pilot phase, the Egyptian government decided to develop a customised solution in-house," said a spokeswoman.

However, she explained that there is a deal with another country in the pipeline.

"We continue to be in discussions with a number of governments, many of [which] are piloting the Gateway, and will announce details of a newly signed agreement in the near future," said the spokeswoman.

The Gateway is at the heart of plans to put all UK public services online by 2005. It will allow citizens and businesses to interact with government departments over the internet.

When the deal with Microsoft was signed, the government announced that it expected to make a "substantial return" on the £15.6m cost of developing the Gateway.