Project designed to bring fibre connections to every home in hamlet of Dean is to miss out on government funding

Nestled around the remnants of a medieval stone cross, the hamlet of Dean in the heart of the Cotswolds can hardly be said to have entered the digital age. But there is at least one house that boasts a modern, superfast internet connection. The prime minister's constituency home has a line leased by the Home Office from BT.

His neighbours make do with the grindingly slow copper broadband network, and now their hopes of an upgrade have been dashed. Despite behind-the-scenes support from David Cameron and the more overt backing of his culture secretary, Maria Miller, a project designed to bring fibre connections to every home in Dean, and a total of 1,300 premises in west Oxfordshire, is to miss out on government funding.

Cotswolds Broadband was one of four projects championed by Miller that could have brought a total of 14,000 remote homes and offices online starting next year, but now look set to be denied public funding. They were some of the dozens of local broadband initiatives bidding for a share of the £20m rural community broadband fund (RCBF). Launched two years ago with the aim of bringing superfast service to 70,000 remote homes and businesses, the taxpayer-funded scheme was trumpeted as a means of countering economic decline in villages.

The RCBF is to be wound down in March next year with just a fraction of the money spent. So far only three projects – claiming less than £1m in total – have been approved, and these will connect just 2,500 homes. Frustrated at the lack of progress, spurned communities are now in open rebellion. Many blame their failure on BT.

Red tape, complex rules drawn up by civil servants and a reluctance on the part of councils to hand work to companies other than BT have left numerous projects unable to secure money from the scheme, which is operated by the Department for Environment, Food and Rural Affairs.

"The money is there but the officials have made it impossible to spend," said Steve Adamson, whose Trailway project in Dorset would have connected 4,500 premises but will not receive funds, despite making the shortlist. "The RCBF is dead. The officials running it got so tied up in their own process it was impossible to deliver. This has happened because of the incompetence and ineptitude in central government."

A few projects are still under consideration, but those close to the process say most of the money will go unspent, and £10m of RCBF cash originally granted by the European Union may have to be returned to Brussels.

A Defra spokesperson said: "Several applications are currently under the consideration and more are expected to be successful. We want to ensure that people in rural communities are better connected."

After a damning report this year from the national auditor on the rural broadband process, Miller invited six community projects to Whitehall in July, in a widely publicised meeting designed to show government support. She then wrote to councils urging them to consider the projects.

Her department has bent over backwards to remove hurdles. It has offered to pay the administrative costs of redrawing wider county contracts with BT to make room for the community initiatives, and to pay BT to build in these areas should the local projects fail to proceed to contract.

But five months later it is clear that Miller's efforts will have little impact. Of the six she met – Cotswolds Broadband, Northmoor and Noke in Oxfordshire, Trailways in Dorset, South Hams Broadband in Devon and B4RN in Lancashire – it is likely that only two will go ahead: Northmoor, serving 520 homes, and Noke, whose network will be built by BT and covers just 65 premises.

"It's extraordinary that we've ended up in a situation like this," said Malcolm Corbett, a broadband campaigner who heads the Independent Networks Co-operative. "These rural communities are going to get left behind. Broadband in rural areas is extremely important for economic activity because many people work from home or from small offices."

Of the three projects that have so far secured RCBF money, the largest is Rothbury in Northumberland. Its £460,000 of funding is going to BT, which won the contract to carry out the work. The money will bring superfast broadband to 1,500 homes. Tove has been approved for a network reaching 450 homes, and Fell End in Cumbria was a pilot initiative covering just 29 homes.

In Lancashire, farmers are venting their fury at BT, with landowners in the village of Dolphinholme barring its workers from their land. Local residents have invested in B4RN, which has already started building its own network using private money. By the new year, its fibre-optic cables will reach 400 homes.

RCBF money would have helped extend the build from 1,400 premises to 3,200. Now B4RN has learned that BT, using taxpayer funds from Lancashire county council, is laying its own cables in Dolphinholme. "It's a pointless exercise," said the B4RN project head, Barry Forde. "They are just playing games. What we object to is the community putting the time effort and money in and then having BT subsidised by the taxpayer to come and compete with us."

B4RN applied for RCBF money, but Forde is not optimistic. "Our bid is in. We can't see any reason why they would not award us the money, but there is a tremendous amount of power behind the BT lobby."

In order to secure RCBF funds, community projects must have a cast-iron guarantee from their council that BT will not use public money to also build in their area. This is because under RCBF and European rules, no one community can benefit from two networks both paid for by the taxpayer.

The BT rural money comes from a much larger pot, the £530m fund known as BDUK, operated by civil servants in the Department for Culture, Media and Sport. BDUK's remit is to bring superfast broadband to more than 90% of premises by 2017. The RCBF is there to provide help to the 10% that BDUK will leave out.

A DCMS spokesman said: "As part of our broadband rollout we are continuing to work closely with a wide range of community projects and with county councils to ensure that more and more homes and businesses will benefit from superfast broadband. Of course, we are keen to support those RCBF projects which comply with EU state aid rules and which bring in private sector funds to maximise value for money."

The BDUK money is being awarded on a county basis, meaning 44 councils are competing to get BT to their area – and may be afraid of falling to the back of the queue. "We heard that BT have been putting pressure on county councils not to change their agreed plans or they would risk slipped timescales," said Hugo Pickering, who leads the Cotswolds project.

An email from the chief executive of Oxfordsire CC refusing backing for his scheme makes it clear that delays are a concern. "Whilst the council is always keen to support local business initiatives, we have to ensure that the council's financial position is secured and that there is no impact on the very public timeline and coverage commitments that we have announced," it said.

A BT spokesman said: "Community groups can ask their local council if their area sits within the scope of their BDUK plans or not. It is for councils to provide that information rather than BT. If an area is and the council wish for it to be excluded, that will inevitably require some remodelling if BT is to meet its commercial commitments under the contract."

Campaigners are concerned because many rural projects claimed to offer better value for money than BT. The taxpayer is funding an average of 73% of BT's rural build costs, and the company's network is bringing fibre only to street cabinets, with the ageing copper lines relied on to carry the signal to homes.

A number of projects, including Trailways and Cotswolds Broadband, had offered to build future-proof, all-fibre networks at a third of the cost claimed from the public purse. "The shame is that those projects were an opportunity to get better value for money than we are getting in the main programme with BT in deeply rural areas," Corbett said.