A major breakthrough has been achieved in negotiations on the 14.9 per cent employee share option scheme (ESOP) at Telecom Eireann. It is now expected that the capitalisation of the employees contributions to the company pension fund will finance a large part of the purchase price.

The breakthrough was achieved after intensive talks with the Telecom Eireann unions at the Department of Transport, Energy and Communications yesterday. Both sides are committed to concluding negotiations by the end of the month. The general secretary of the Communications Workers Union (CWU), Mr Con Scallon, said afterwards that, while he expected negotiations to be tough, he believed a formula could be agreed which would provide the company with the ability to achieve speedy transformation, while securing his members a real voice in its future.

Until now the Department has been insisting that unions will only receive 5 per cent of Telecom Eireann in return for agreeing to changes that will save the company £110 million a year in operating costs. These changes are outlined in the Telecom Partnership Agreement concluded last April. It has never been implemented because of the outstanding dispute over the employee share option scheme.

To obtain the other 9.9 per cent, the Department has been insisting that employees would have to pay cash to the Exchequer. It is understood that it has now agreed that two vital elements in the cost savings package sought from the unions will be set against the cost of acquiring the additional 9.9 per cent.

These are the abolition of existing bonus schemes, worth around £10 million a year in savings to the company and a commitment by employees to contribute 5.3 per cent of salaries to the pension scheme. At present, the pension scheme is non-contributory. This is estimated to be worth at least another £10 million a year.

Depending on how these savings to the company are capitalised, they could be worth anything up to £180 million. This should cover the cost of acquiring 9.9 per cent of Telecom Eireann.

However, both sides still have to agree the actual value of the savings and an overall valuation on a 14.9 per cent stake in the company. Provision is being made in the outline memorandum of agreement, approved yesterday, for independent valuations to be undertaken, if necessary.

Mr Scallon refused to be drawn on the details of the memorandum last night. However, he said: "Provided a fair price and fair valuation of both Telecom Eireann and the total employee investment contained in the Partnership Agreement is agreed, the union coalition will recommend the speedy implementation of both the change element and the financial investments contained in that agreement."

Late last year the Minister for Public Enterprise, Ms O'Rourke, indicated that the Government had agreed "in principle" to the sale of 14.9 per cent of the company to the unions. However, it is only over the past couple of weeks that a formula to break the deadlock has started to emerge.