The State should retain ownership of the forestry company Coillte, its management said yesterday in an initial response to a report by Government consultants who said the company was at too early a stage in its development to be floated.

Coillte has reported a 15 per cent rise in pre-tax profits to £17.81 million (€22.6 million) last year from £15.44 million in 1998, although its chief executive Mr Martin Lowery said the "single most important issue" facing the company was the need for increased capacity in the saw-milling industry.

Turnover rose by 7.5 per cent to £88.6 million (€112.5 million) in 1999 from £82.5 million. The results reflected a profit of £530,000 from its 35 per cent share in the Waterford-based wood products company Louisiana Pacific.

The company added that the European Commission had indicated Coillte was ineligible for EU premiums in the Agenda 2000 programme and said this would have "serious implications" for its afforestation programme.

"The company would no longer be in a position to purchase land for afforestation in competition with farmers or other private landowners who are considered eligible for premiums," it said.

The premiums enable landowners to offset losses from transferring the use of land to forestry, which is unprofitable before trees mature.

Mr Lowery insisted that Coillte was still attempting to have the premiums reinstated but the company's current strategy was to restock its own harvested areas and work in partnership with farmers to develop new forestry. Coillte warned that the gap between potential production and sales was 200,000 cubic metres last year. This would grow to 700,000 cubic metres in the next five years if new capacity was not added. This was because the company's sawlog potential was expected to increase by 50 per cent as forests planted in the 1950 and 1960s matured. While Coillte was encouraged by proposed investments in increased capacity by a Co Fermanagh company, Balcas, and a Galway firm, Murray's, Mr Lowery called for "strategic action" to fill the gap in supply.

Mr Lowery rejected suggestions by the Government's consultants, AIB Capital Markets and Merrill Lynch, that Coillte's relationship with the saw-milling industry was characterised by a lack of trust. "I wouldn't characterise it as a bad relationship, but we would always argue over the price," he said.

The consultants wrote that current relationship between the sawmilling industry and Coillte was an "obstacle" to the industry's development.

Asked whether the company was concerned by the consultants' finding that it had failed, despite the boom in the construction industry, to increase its market share, Mr Lowery said it was "disappointed". anaiste, Ms Harney, had blocked Coillte's proposed takeover of Balcas in 1998 on competition grounds, but added: "There's a need for the industry to develop regardless ... We're satisfied that if the industry doesn't do it we'll need to do it ourselves." The company's chairman, Mr Ray MacSharry said the company was still evaluating the consultants' report.