The Government has entered talks with An Post to increase the €40 million fee paid to the company to deliver social welfare payments, it is understood.With An Post projecting a €37 million deficit this year, it argues the fee should rise because it has not risen since 1996 and that the contract is loss-making.

In a report yesterday, a Government-appointed group said a "realistic" price should be set for the social welfare service.

The Postal Forum was chaired by industrial relations consultant Mr Phil Flynn with members from An Post and the Irish Postmasters' Union. It is thought to have said the fee increase should be treated in isolation from proceedings against the Government by European Commission over the fact that the social welfare contract was awarded outside a tender process.

The forum said the Government should direct a "significant" amount of State business to the post office network. The Minister for Communications, Marine and Natural Resources, Mr Ahern, said: "This report makes a series of very significant recommendations, which focus on what needs to be achieved so as to improve and expand the service for customers and benefit the company network and its employees and agents."