ONE of Britain’s wealthiest investment groups has been sounded out about providing a major loan that would take Edinburgh’s trams to Leith.
Henderson Global Investors (HGI) – the firm behind the almost £1 billion St James Quarter development – has been approached by city chiefs to help bankroll the tram line as far as Newhaven.
It is understood the global firm, which boasts £70bn worth of assets, could offer a lower rate of borrowing compared to a typical repayment plan and is mulling over the proposal.
Around £3.2 million will be set aside each year to cover the start up costs of the current tramline – and also anticipated losses.
It is thought extending the tracks to Leith is the project’s best hope for turning an annual profit with finance chiefs keen to repay loans on a successful tram line, rather than continuing to subsidise a loss-making network.
HGI could be open to the loan deal – estimated at around £80m – with Leith, one of the most densely populated city suburbs, seen as a huge potential market for the shopping complex.
The council is currently saddled with tram repayments of £15.3m per year as part of a 30-year payment plan borrowed at a rate of 5.1 per cent.
A £231m rescue loan was signed in 2011 to help bankroll the curtailed 8.7-mile line from the airport to York Place.
It means the city is paying out £228m in interest under the terms of the loan – tipping the £776m tram budget over the £1bn mark.
A source close to the talks said there were “benefits for both sides in such a deal”.
They said: “It makes no sense for the council to subsidise a tram route when the money could be better spent securing and paying for a more profitable route. For the developer having a tram line down Leith Walk has always been a key feature to the success of the development.
“At present the city has a largely commercial route to the airport, this would create a more profitable residential route.”
HGI was unavailable to comment.
The proposed agreement between HGI and the local authority is expected to be a straight loan deal rather than a partnership or investment – the council would be left to oversee construction and operation of the line.
Momentum has been building to expand the line to Leith despite warnings from Transport Minister Keith Brown that there would be no more Scottish Government funds for any further phases of the tram route.
In March, the News told how city leaders were eyeing European cash to finance the move to Leith, where much of the preparatory work for the trams was carried out before soaring costs forced the abandonment of that stretch.
Politicians have also trumpted the case including SNP members Councillor Adam McVey and Edinburgh Central MSP Marco Biagi whose party previously opposed the tram line.
The council has also unveiled £1m of “tram proofing” improvement works along Leith Walk that would pave the way for an extension.
Sources have estimated the cost of taking the trams the extra 2.85 miles to Newhaven at £80m.
A lot of the materials needed – such as tracks and vehicles – have already been bought and are being stored at sites around the city.
Rails, sleepers and other infrastructure have also already been purchased and lie stockpiled at the Gogar depot and other locations while the main bulk of utilities have already been moved.
It is understood some underground pipe work on Leith Walk still has to be completed but the bulk of the loan would centre on construction of the line.
Advances in engineering means the track-laying process to Leith could be significantly cheaper than the airport to York Place line.
The council already owns the trams needed for an extension – there are 27 in the fleet and only 12 can travel along the current line at one time.
City transport convener Councillor Lesley Hinds confirmed a proposal could be contained within a committee report by the end of the year.
She said: “We have always said the next stage would be to finish off the line. We have got the rails and the trams to go down to Newhaven, but for this to go ahead, we need public support and we also need resources.”
John Carson, a former head of maintenance at Network Rail and vocal critic of the tram project, said the network should be given time to bed in before being extended and dismissed predictions of a £80m price tag as “pie in the sky”.
He said: “I would take the view that the current line needs to be left to bed for a few years before coming back and considering any extension.
“There is no guarantee that the Leith section would be a success so to go and waste more on the project before getting a firm view of the current line’s viability would be crazy.
“There’s also the added issue of just who would build it. I very much doubt there would be a long line of contractors looking to get involved after what has gone on before.”
Meanwhile, Bob Downie, chief executive of the Royal Yacht Britannia, Leith’s biggest tourist attraction, welcomed news of the talks.
He said: “I have always advocated that the profit-making tram route from Newhaven to the city centre should have been built first, so to learn that the city council is now seeing the wisdom in using the bus profits, initially earmarked to subsidise a loss-making route, to help fund a profit-making route makes perfect sense, and I hope it comes to fruition.”
Council budget takes another blow
THE city council’s revenue budget has taken a £21.4 million hit over the last three years as a result of the cost of paying off loans taken out to cover the £231m tram funding gap.
Announced back in October 2011 in a bid to rescue the scheme, the figure is much higher than the £4.8m a year revenue impact that councillors were expecting.
The worst hit comes this year – 2014/15 – the first of it being in operation, the impact on the council will be £8.4m.
This comes following a £5.3m cost in 2012/13 and £7.7m in 2013/14.
At the time, council chiefs said the reason for the figures being higher is that the £4.8m figure was an average over 30 years but passenger income is not available in the early years to offset the overall cost of repayments.
Transport for Edinburgh – including Lothian Buses – is expected to make a profit from year one but the tram is not expected to be profitable in the first three years. Alastair Maclean, director of corporate governance for the council, said at the time: “These costs will average out over the longer term.”
ANALYSIS By Graham Birse Director of the Edinburgh Institute at Napier University
This is a quite a creative piece of thinking in regards the council and you can see how both sides would view it positively.
It would be a good business deal for Henderson’s if it matures, as they would tap into Leith and beyond which is right on their doorstep while the council get a profitable line at a acost they would possibly have been paying anyway.
Traditionally, funding such as this is covered in the planning stage under Section 78 agreements where a surcharge is levied against developers. This model of local authorities obtaining loans from private firms has been quite big in the US.
It’s interesting that the Scottish Government have provided money to the council to finance the St James Quarter while at the same time declaring not another penny for trams. Everyone knows that for the tram line to be profitable it must go to Leith so I don’t think it would be too unreasonable for the council to go back to the Scottish Government to request funds for an extension.
It all hinges on the viability of the current line and how successfully it beds in. In terms of the people of Edinburgh I feel the tram project needs to prove itself before they would entertain any
possible extensions to it.