A deal between Esat and CIE that allowed the construction of a telecoms network on its railway system was approved by CIE directors even though it breached their own procurement policy.

That agreement in June 1997 with the company controlled by the businessman, Mr Denis O'Brien, is now the subject of an Oireachtas inquiry. It heard at a preliminary meeting this week that the deal was intended to be a boon for the State-owned transport group. The opposite proved true.

Construction of the Esat system, which is complete, was linked to delays on a parallel signalling project designed to improve safety on the rail network.

The projected cost of the signalling system, which is still incomplete, has risen to £50 million (#63.5 million) from £14 million.

That cost over-run prompted the Oireachtas Joint Committee on Public Enterprise and Transport to establish an investigation by a specially convened subcommittee. But Iarnrod Eireann's links with Esat now appear to be at the heart of the inquiry.

The arrangement between Iarnrod Eireann and Mr O'Brien's company was agreed the year after its part-owned subsidiary, Esat Digifone, secured the State's second mobile phone licence.

The circumstances of that award, when Mr Michael Lowry was minister for transport, energy and communications, are being investigated by the Moriarty tribunal. Questions about the transfer of a lucrative asset to a private company from the State are the focus of Mr Justice Moriarty's attentions.

Similar issues are at stake in the subcommittee's inquiry into the signalling system. The right of access to Iarnrod Eireann's rail line was a State asset, which proved very valuable when transferred to Esat.

Chaired by Mr Sean Doherty TD, who was minister for justice in the early 1980s when Mr Charles Haughey was Taoiseach, the inquiry wants to discover how this came about.

In an opening statement last Wednesday, Mr Doherty said a "significant proportion" of the $1.22 billion (#1.4 billion) valuation on Esat's non-mobile business sold to British Telecom in January 2000 was attributable to its system on the railway. "Without such a network the value of Esat might have been materially diminished."

Mr Doherty relied on a report produced for CIE last year by PricewaterhouseCoopers to outline a set of inter-locking relationships behind the two projects.

At the root of the affair was CIE's desire to replace an ageing, mechanical signalling system on lesser used parts of its railway. The development of a more modern system had been postponed since the 1980s because the group could not afford the investment.

As the first National Development Plan (1994-1999) progressed, however, it emerged that outside money might be available for such a system through the EU Cohesion Fund. EU support was agreed on the basis that the system was completed by the end of 1999.

CIE prepared to develop the project in 1997. At that stage, the group's sole intention was to upgrade its signalling. Exploitation of its system for telecoms purposes was not planned.

Mr Doherty noted in his statement that a consultant, Mr Leslie Buckley, had produced a cost-saving plan for CIE in 1996. That plan sought savings of £30 million with £6 million coming from procurement activities.

Thus the procurement of the mini-CTC (central traffic control) system was the first occasion since 1984 that CIE sought to employ a contractor rather than use its own direct labour.

Two companies who made a joint bid were selected in 1994 to construct the mini-CTC system: Modern Networks Ltd was based in Dublin; Sasib was an Italian-owned frim. Sasib was acquired by the French group Astom in 1998. Yet the award to MNL and Sasib did not seem likely at the outset. An expression of interest from MNL was one of six rejected in the initial phase of the project because it did not have the expertise required. Only after its score in an Iarnrod Eireann grading system was increased did the MNL tender proceed.

The company, controlled by Mr Jay Murray, was then known as Murray Telecommunications Group. (In fact, MNL went into examinership claiming non-payment of £2 million it was owed because of the signalling project made it unviable).

An Iarnrod Eireann and CIE non-executive director in 1997, Mr Patrick Lynch, was appointed director and chairman of MNL in 1999 after his departure from the State transport group. When appointed to MNL, he was chairman of FAS, the State training and jobs authority.

The PricewaterhouseCoopers report, opened to the inquiry by Mr Doherty, said: "Some concerns arise over the increase in the rating of Murray Telecommunications which qualified it to submit a tender despite evidence that it did not have a requisite expertise. We have not been able to obtain an explanation for this increase."

PricewaterhouseCoopers also revealed that CIE engineers believed Sasib was not up to the job. The company had little experience of both the Irish rail system and the British one, which is similar. Concerns were also expressed about the extent of MNL's rail experience.

Despite this, CIE awarded the contract to MNL and Sasib. Citing such concerns, PricewaterhouseCoopers said critical information necessary to enable the Iarnrod Eireann board to consider the issues and make an informed decision was excluded from board papers.

It added that the contract was "so unspecific in the context of Iarnrod Eireann's needs as to be no more than a general statement of intent between the parties". The format "failed to meet any of Iarnrod Eireann's procurement objectives".

The contract was worth £14 million at the outset, though the consultants said this was not a realistic target. There may have been an attempt to "shoe-horn" the investment in accordance with the funding available from the EU, about £13 million.

In addition to its concern about the projected escalation in cost, the subcommittee said the departure to MNL of senior Iarnrod Eireann figures linked to the project was "of particular concern." According to PricewaterhouseCoopers, these were: head of procurement, Mr Brian Powell; the project manager/engineer, Mr Bernard Kernan; and a solicitor, Ms Mary Hand. PricewaterhouseCoopers said: "All played very significant roles in the awarding, negotiating and operation of the contract."

Another figure, Mr Pat Judge, also left Iarnrod Eireann to join MNL.

Despite concerns about the safety of the rail network, the development of the signalling project was undermined from the beginning by Iarnrod Eireann's relationship with Esat.

According to Mr Doherty's statement on Wednesday, the Esat project was directly linked to the signalling programme from its inception.

He revealed that MNL's then managing director, Mr Eamonn Daly, had written to CIE on January 23rd, 1997 - one day before its mini-CTC tender was submitted - raising the possibility of installing a cabling system of much greater capacity.

Mr Daly suggested Esat as an "eminently suitable partner". It was, he said, a "once-in-a-lifetime opportunity which might otherwise be lost".

CIE appeared to accept the suggestion. Meetings afterwards were led on the CIE side by its property manager, Mr Jim Gahan, and on the Esat side by its acting chief executive, Mr Leslie Buckley, who had been engaged in the previous year as consultant to CIE.

A deal was struck in May 1997. Mr Buckley and Mr O'Brien acted for Esat; CIE was represented by its then chairman, Mr Brian Joyce; its head of programmes and projects, Dr Ray Byrne; and its then group chief executive, the late Mr Michael McDonnell.

The deal would allow the construction of the Esat network along the rail network at the same time as the signalling system was being laid. As part of the arrangement, Iarnod Eireann was granted control of a small element of the Esat network for its own use.

Though originally conceived as a joint venture, structured 75:25 in favour of Esat, the ultimate arrangement was constructed as three separate agreements: for licensing, maintenance of the network, and its construction.

Esat would pay Iarnrod Eireann a fee for the construction, which subcontracted to MNL. PricewaterhouseCoopers noted that MNL was appointed to do this job without seeking the required minimum of three tenders.

The advantage for Esat was clear. It could develop a landbased network where it was previously dependent on lines leased from Eircom, then Telecom Eireann, the sole owner of such a network in the Republic.

Mr Doherty said a "certain urgency and strategic importance" attached to the project for Esat. "With a very limited number of networks this will, of course, permit the suppliers to control entry into the market, and, accordingly, prices."

Crucially, he added: "In the medium term the network is a very significant asset with a considerable saleable value. This was obviously recognised by the US market in supporting the Esat initial public offering [on the Nasdaq exchange in 1997]. It was also clearly understood by BT in purchasing Esat [for $3.7 billion in early 2000]."

Licence revenues paid to CIE for use of the network by Esat amounted to £1£2 million to date while the maintenance contract was worth £500,000 annually. According to PricewaterhouseCoopers, CIE was unable to invoice Esat for elements of the construction work carried out by MNL because the distinction between work on the signalling and Esat projects was not always clear in its invoices. One attempt by CIE to clarify the position in its internal system foundered when a computer file was accidentally erased.

CIE's side of the bargain involved the effective disposal of a key asset - the right of access to the permanent way, i.e. railway.

While Mr Doherty noted that procurement procedures are intended to apply to disposals, as well as procurement, the normal process was not followed.

He said: "The minutes do not record why the board felt that it was not necessary to comply with group procedures in this case."

Its decision not to enter the normal procurement process was taken despite expressions of interest from two other groups - BT; and a partnership involving US group WorldCom and Irish start-up firm TCL Telecom - which CIE "examined in detail".

Board approval was sought on the basis of a "paper" that ruled out BT and WorldCom/TCL. In addition, work on the Esat network commenced "long before" CIE reached final agreements with Esat and before a Statutory Instrument enabling the transport group to operate in the telecoms market came into force.

THE deal itself had been introduced to the board by Mr McDonnell at a meeting on June 4th, 1997. He said CIE's main interest in the agreement was to secure a "risk-free involvement" which would extract revenue from the railway and to "reduce costs" in the development of the group's own signalling and information.

It soon transpired that the deal was not "risk-free" and costs on the CIE programme actually increased. The project presented immediate difficulty because design work for the mini-CTC was not complete before Esat wanted construction of its network to commence.

The deal did not allow CIE delay the Esat network to suit the needs of its own programme. In consequence, the Esat cable was laid by plough, ahead of the CIE one. Fear of damage to that cable meant CIE could not use a plough to lay its own network. This lead to the insertion of the signalling network by hand, escalating costs. The mini-CTC system remains incomplete. It requires 130 km of cable-laying and connection to stations and level-crossing on the network.

Despite not following the procurement process for the Esat deal, certain CIE directors were expressing reservation about the arrangement as early as December 1997.

The words of one, Ms Tras Honan, had particular resonance. "She wanted it formally recorded in the minutes that she had at all times reservations about this agreement," said the minute read to the inquiry by Mr Doherty. "She added that another of her worries was the possibility of negative publicity in the current environment of tribunals and inquiries."

Prescient indeed.