RISING costs together with a possible squeeze on revenue as competition increases are the financial challenges facing

Bob Collins, the incoming director general of RTE. In the interviews and assessments for the top executive post at the Irish State broadcasting organisation, great emphasis was laid on candidates' plans in three areas: creative developments, costs and organisational management.

After three interviews Mr Collins has been appointed out of a final field of four as the man to take RTE through to the next century.

He will have to deal with an operating environment which is set to change in coming years. In the television market there is the expected loss of its position as the State's only national television station when new arrival TV3 starts to broadcast. In the radio market there is the imminent arrival of a new national radio station, Radio Ireland.

Already RTE is beginning to feel the chill wind of intensifying competition. The proliferation of cable and satellite television channels has driven up the market price of bought-in programmes. These programmes account for about 50 per cent of RTE's output. With more broadcasters competing to cover their events, sports bodies in particular have been able to drive up the cost of access to games.

Results for 1996 have not yet been released. But RTE is expected to report a loss on broadcasting of about £7 million largely because of the increase in of bought-in programmes and extended broadcasting hours.

The arrival of TV3 should help to maintain upward pressure on programme prices as well as adding more competition in the market for viewers and for advertising revenue. RTE currently claims about 60 per cent of the national television audience during prime-time viewing, competing for viewers with British channels and cable and satellite systems.

In addition to changes caused by the arrival of more competitors in the marketplace, RTE's own costs are set to rise. One significant pressure on costs is its commitment to provide one hour of programming per day for Teilifis Na Gaeilge. Expected to cost £5.5 million in a full year, this cost has to be met out of operating revenue.

Other cost pressures will arise from the need to upgrade the analogue transmission system which is expected to cost about £50 million, plans to develop Tara TV in Britain and investments in programme making.

RTE's annual report for 1995 - the latest figures available - show a surplus or pre-tax profit for the year of £14.85 million. While this profit could be taken as showing a healthy state of affairs at RTE, a breakdown of the figure shows a more precarious position.

The 1995 profit figure was boosted by a £10.1 million once-off gain from the sale of RTE's 15 per cent stake in Cablelink. When this once-off boost to profits is stripped out, RTE's surplus falls to a more modest £4.795 million. To get at the core profits generated from its operations, net interest income and investment income of £3.48 million should be stripped out.

This leaves a profit of £1.314 million from operations - broadcasting and non-broadcasting activities such as the RTE Guide, programme sales and merchandising. However, a further breakdown of the results shows these non-broadcasting activities generated profits of £3.667 million.

This means that broadcasting lost money in 1995 - a deficit of £2.35 million was recorded. Revenue was £134.1 million. Ordinary costs were £130.7 million. But when most of the exceptional redundancy and pension costs of £5.88 million were allocated to the broadcasting budget, total costs exceeded revenue by £2.35 million. Some 38 per cent of broadcasting revenue came from licence fees while 59 per cent came from advertising.

Non-broadcasting activities, were highly profitable for RTE in 1995 generating profits of £3.7 million on revenue of £17.5 million, a margin of 21 per cent. RTE Commercial Enterprises, which was set up to tap revenue from sources other than advertising and licence fees, has been very successful.

RTE has not yet produced results for 1996, but there are indications that it has not been an easy year for broadcasting while profits from non-broadcasting activities rose again.

Overall RTE is expected to show a surplus of about £1 million, with a profit of about £5 million on non-broadcasting activities offsetting some of the £7 million loss on broadcasting.

Riverdance was a strong contributor to non-broadcasting profits last year. The overall loss of £2 million on operations was offset by interest and investment income of about £2 million and, dividends of about £1 million from Radio Tara.

Flat television advertising in the early months of the year caused concern at RTE while newspaper and outdoor advertising powered ahead. RTE's advertising revenue is understood to have been below budget targets in the first three months of the year. But market sources said a recovery in the second half will see revenue "broadly on target" for the full year.

On an ongoing basis, advertising industry sources expect some, increased competition for share of spending on television advertising. But, because of a shortage of radio time in the market, the arrival of Radio Ireland is expected to increase overall spending on radio advertising rather than reduce RTE's share. Annual spending on radio advertising is currently running at about £36 million.

In a positive move for revenue, RTE got its first increase in licence fees since 1986. The September increase will not have had much impact on 1996 figures. But it will add about £8 million to revenue in a full year and will help to offset the costs associated with Telefis Na Gaelige.

"These are challenging times for broadcasters, especially as the experiences of previous decades offer few guidelines on how to stride into the future," says the RTE 1995 Annual Report. The major challenge for the broadcaster is to maintain sound finances and "remain the preferred choice of a majority of Irish viewers and listeners", it now falls to the director general designate, Mr Collins, to meet these requirements.