The European Commission has told the government it must act to update the compensation system to Bus Éireann for the school transportation scheme.

An investigation began in 2007 on foot of complaints by a group representing private bus operators here, which claimed it amounted to state aid.

The Commission has found that the original scheme was based on an agreement dating from 1975 - which pre-dated the opening of the sector to competition.

And although it wants changes to be made, it is not asking the state to recover the aid granted.

Bus Éireann is welcoming the decision.

In a statement, the company says "Bus Éireann welcome the decision of the European Commission to end their investigation into the operation of CIE bus services across Ireland, and in particular, the finding that current funding arrangements constitute existing aid which pre-dated the opening of the EU bus sector to competition in 1995."

"We are pleased to note that the Commission also consider the School Transport Scheme to be a beneficiary of existing aid as it is based on a 1975 agreement, that also pre-dates the opening of the sector to competition."

"We note the Commission’s decision that this must now be brought into line with present rules governing the EU Single Market, and we look forward to assisting the State in their dialogue with the Commission about this matter. We await the non-confidential version of the decision which be published in the Official Journal of the EU," it added.