The loss of the Department of Social Welfare's business could cost An Post €50 million a year in revenue, damaging a fledgling recovery at the State company.

The proposal, part of a review of how welfare payments are paid, signalled last month, is to be discussed by the Minister for Social Welfare, Séamus Brennan, and the Minister for Communications, Noel Dempsey, early next week. Mr Dempsey is the Minister responsible for the company.

At present, An Post provides access to welfare payments for the majority of the 1.5 million recipients, but Mr Brennan wants to review the "effectiveness of the existing systems". In addition, the legality of the current arrangement, whereby An Post delivers social welfare payments is being challenged in the European courts by a competitor.

This has caused concern among post office staff and unions, who worry that An Post could suffer a significant drop in revenue if the Government switches entirely to electronic funds transfer (EFT).

If this decision was taken, then all welfare payments would be made through bank or building society accounts. However, Mr Brennan has ruled this out, but has maintained that people collecting unemployment assistance or pension entitlements should have a choice of payment method.

But yesterday An Post expressed its concern about any reduction in the amount of business it has with Mr Brennan's department. The company reported an operating loss of almost €43 million for 2003, its most recent set of accounts.

"The social welfare contract is an important part of our revenues and we are anxious to do whatever we can to preserve that service," said a company spokesman. "But we are also prepared to participate fully with the Minister's review and understand his desire to see the most efficient and effective systems put in place" he added.

The company will report a small surplus for 2004 at the end of the month, but this is mainly because it has declined to pay staff the terms of Sustaining Progress.

The Labour Court is expected to issue a crucial finding on reform in the collection and delivery division of the company next month. The company is looking for over 1,500 redundancies overall, and believes its cost base is still too high.

An Post's revenues have stayed relatively strong over recent years, despite its problems at an operating level. Despite this, the loss of the social welfare business would be a severe blow. The National Treasury Management Agency (NTMA), which sells its savings products through the An Post network, is currently looking for a steep reduction in the annual fees it pays An Post.

Growth in An Post's mail division has also slowed in recent years, and last year the company was forced to close its parcel and courier business, SDS. It is also seeking a price rise from the regulator ComReg.

The Government has no official contract with An Post for the provision of social welfare payments, because the allocation of the contract was challenged under EU law.

Several private companies believe any contract between the Department of Social Welfare and Family Affairs should be put out to tender.