Minister for Transport Martin Cullen is finalising proposals for a powerful new bus regulator in Dublin in a bid to break the impasse within Government on a financial package for new buses for Dublin Bus and Bus Éireann.
Under the proposals being drawn up by the Department of Transport, Dublin Bus could eventually lose existing routes if it fails to provide adequate services on them.
The proposals are expected to be brought to Cabinet in the coming weeks alongside plans to provide funding for 100 new buses for Dublin Bus and 160 for Bus Éireann.
The issue of bus reform is seen as the first major test of the Coalition's cohesiveness since Minister for Justice Michael McDowell became Tánaiste this week.
The PDs and Fianna Fáil have been deadlocked on bus reform since before the summer.
The PDs have been insisting that any additional investment must be accompanied by reform of the bus market to allow for competition.
However, Mr Cullen has been seeking to ring-fence existing Dublin Bus routes from competition to allay bus union fears about job losses.
Last month, in a bid to avert a bus strike, he told unions that he would bring proposals to Cabinet within weeks for funding for an extra 100 Dublin Bus vehicles and 160 Bus Éireann coaches.
This will now be accompanied by proposals for bus regulation and commitments for competition on new routes.
Discussions between the PDs and Mr Cullen's officials have been ongoing for a number of weeks and have centred on whether the regulatory proposals will be sufficient to guarantee that Dublin Bus operates competitively.
Under the proposals being finalised by Mr Cullen, Dublin Bus will be required by the regulator to reach specific standards on a bus route. If it fails, the new regulator will have the power to remove its licence for that route.
However, these powers will be phased in and the right to remove routes will not come into force for five years.
Other new powers being examined for the regulator include the right to set fares and to stipulate the frequency of services on specific routes.
The proposals will also include plans to set aside new routes for private operators to a quota of up to 15 per cent of existing routes.
After this quota is reached, additional routes will be open to tender from both Dublin Bus and private operators.
This is significantly different to the initial demands from the PDs, which were originally seeking to adhere to an earlier Government decision that 25 per cent of existing routes be set aside for private operators.