MOST savings of almost £30 million a year will have to be made at CIE if the company is to fund the investment programme needed to secure its survival. This is the stark message that the company's chief executive Mr Michael McDonnell is now trying to sell to the unions representing the state transport company's 11,500 employees.

The search for the savings, which amount to a reduction in group operating costs of almost 10 per cent, has already begun in earnest. The management consultant, Mr Bernard Somers has been asked to revisit his earlier study on Bus Eireann and identify specific measures to reduce the bus company's overheads by more than £7 million.

Another well known consultant, Mr Leslie Buckley, has been charged with a similar task at Iarnrod Eireann, where recurrent savings of at least £10 million are needed.

Dublin Bus, the third string to CIE's bow, has undertaken a wide ranging internal review aimed at reducing its cost by at least £7 million.

The attack on CIE's costs follows a decision by the CIE board to adopt an investment orientated strategy that has been proposed by Mr McDonnell. A former assistant secretary at the Department of Transport, Energy and Communications Mr McDonnell was appointed last May. He is proposing that the new investment will he funded out of cash flow rather than borrowings and the cost cuts are needed to bridge the gap between future cash flow projections and future investment needs.

All elements of the cost base, including staffing levels, are up for review. However, CIE's senior management believes that only small reductions in the workforce are likely to follow. Any reductions are more likely to be sought from middle management rather than front line staff. This is because Mr McDonnell is understood to favour a strategy based on growing the group's business to better utilise its existing human resources, rather than incur the huge costs involved in a redundancy scheme.

The other areas in which Mr McDonnell is seeking to make savings include reducing overtime, introducing more effective procurement policies and better control of stocks such as engineering spares. One key area that is being looked at is achieving greater utilisation of the groups buses and trains. "It is traditional asset sweating," explained one CIE source.

Although large scale redundancies are unlikely to become an issue, selling the recommendations that arise out of the review will be a major challenge for McDonnell.

CIE is unlikely to adopt the tactic followed by the ESB, which drew up a comprehensive plan and then put it to the workforce. Instead CIE would prefer to implement the changes in piecemeal fashion, with the full co operation of the unions. As a first step towards winning union support, Mr McDonnell has given them access to CIE's books.

However, the first indications are not very encouraging for management. The National Bus and Railworkers' Union dismissed the first consultant's report on Bus Eireann, which was presented to them last December. The report sought cuts in the wages bill of £7.5 million and an industrial peace agreement.

But Mr McDonnell is hopeful that the unions will accept his argument that the future of their members' jobs can only be secured if there is sufficient investment made to allow CIE to compete with the private sector. The unions will probably have little trouble seeing the obvious logic of this, but may baulk at the second plank of McDonnell's strategy. This is that the investment must be financed out of cash flow and this can only be done if substantial cost savings are made.

Some of the savings will be made at group level rather than through the three operating companies. A number of issues, including costs, are being addressed by Mr McDonnell and the new group management team he has built since taking over last year. These include the depreciation policy adopted by the three subsidiaries and its impact on profits. Bus Eireann currently depreciates its buses over 16 years, which is at odds with standard practise in the private sector. The use of information technology also has to be addressed on a group wide basis.

McDonnell's strategy for CIE does not foresee the end of the massive State subvention to the company, which came to more than £100 million in 1994. However, CIE is seeking to have the subsidy put on a more transparent and long term footing.

The subsidy, currently running at around £100 million a year, is divided three ways. It covers the cost of borrowings taken on by CIE to fund the construction of the DART urban rail system and also the cost of providing uneconomic services for social reasons. The third area is maintenance of the railway infrastructure and the bus and train fleets.

CIE is seeking to have the whole area of uneconomic services regularised through agreeing a fixed term public service contract with the Government. In this way, it will be clear what CIE is being paid and what service it is giving in return. The advantage for CIE will be that its forward planning will be made much simpler since it will know how much money it is due to receive in any given year. At present the subsidy is negotiated each year with the Government.

Much of the ground work for the contract based approach has been done and the first elements are due to be put in place in 1997 and will run for a three year period.

The Minister for Transport, Energy and Communications, Mr Lowry has indicated he is in favour of linking CIE's subsidies to performance. The contracts and CIE's performance of them will be assessed by a third party. At present the Department is leaning towards the use of private sector consultants rather than establishing a regulatory body.

The proposal's currently being considered should result in a more efficient and accountable use of the annual subvention. But they are unlikely to lead to any major reductions in its size. A continued subsidy from the Government to meet the cost of maintaining the rail network and pay for uneconomic services is envisaged by McDonnell.

Such ongoing subsidisation is a feature of many small European countries, where the size and demographics of the population make railways fundamentally uneconomic. CIE may get better, but it looks set to remain the biggest drain on the tax payers pocket in the semi state sector.