Tram bosses pay £5.8m a year in loan interest

The city's troubled tram works ran massively over budget. Picture: Ian Rutherford
The city's troubled tram works ran massively over budget. Picture: Ian Rutherford
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THE city is forking out nearly £16,000 a day to cover interest fees on the loan deals signed to deliver the tram project, the News can reveal.

It means the Capital is being saddled with a £5.8 million annual bill to pay off the interest on borrowing for the £776m network before making any dent reimbursing actual loans.

The cost of the interest payments was estimated at £7.7 million a year in the business case for the trams - which would eat up almost the entire £7.9 million it hopes to raise in initial annual income.

But favourable interest rates since 2011 have brought that figure down by almost £2 million in the current year.

City finance leaders insist the instalments – which form part of a £231m agreed loan to meet the spiralling costs of the project – have been accounted for in its annual budget.

While huge loans like this are common in major infrastructure projects, especially in the initial stages, experts have questioned how well the city could cope with such payments in the longterm if the tram doesn’t attract enough paying passengers.

Almost half a million journeys were taken within the first month of the trams going live on May 31 – averaging 90,000 trips a week in May.

Around 4.5 million passengers are estimated to use the service in the first year creating income of £7.9m.

But with bosses so far refusing to reveal how many passengers are concessionary fares – such as pensioners who travel free – question marks hang over how much cash the network is actually generating.

Fears have been raised the project will become “a millstone around the city’s neck” for many decades to come unless the line can generate enough income to start paying off the huge loan.

Green transport spokesman Councillor Nigel Bagshaw branded the tram debacle an “unholy mess”.

“It’s a very uncomfortable situation we are in but all we can do is see how the revenue works and look very closely at the suggestions for extending the line and see if it would make it more, or less, viable over time.

“Obviously a lot of people aren’t happy with the situation as it is and I appreciate that with the preface that we should never have been in this position in the first place. That said, we are where we are.

“For there to be public confidence, we have to have certainty before we move ahead because the history of it has been so appalling.”

The daily interest costs, revealed under Freedom of Information legislation, lay bare the true financial impact of a budget-bursting project that arrived three years late.

The debt forms part of the city’s prudential borrowing legacy – a consolidated loans fund used to finance major infrastructure work such as flood prevention or the proposed revamp of Meadowbank Stadium.

Profits from council services are invested into repaying interest on loans for major projects a lump sum every March 31. But critics argue this diverts investment from vital services such as Edinburgh’s school estate.

A council spokeswoman said the tram business case would mean contributions towards project costs would take place by its fourth year of operation, and increase year on year.

She said: “In order to help finance a number of major capital projects, the council borrows money through prudential borrowing.

“The figures included within the FOI response are based on the prudent interest rate assumptions set out in the 2011 business case.

“In actual fact, due to the council’s Treasury Strategy, all of the council’s external borrowing undertaken since 2011 has been at a significantly lower rate than that assumed in the business case.

Total interest costs to the council in the current year for the additional capital expenditure of £231m actually equate to around £5.8m.”

Long-time tram critic John Carson, a former senior transport civil engineer, said the network should to be sold to private investors to ease the burden on the taxpayer for years to come.

“It is a huge black hole that they just keep pouring money down with interest payments like this,” he said. “There is no end in sight.

“Other projects like Sheffield sold the trams when they got to this stage, and that’s what Edinburgh should do.”

Alison Bourne, who led a petition against the tram project that was submitted to the City Chambers and Holyrood, said money was being wasted on a transport network no-one wanted.

She said: “If you were to tot up the interest payments, the capital payments, the concessionary fares and the 
loss in revenue to the bus 
company, the maintenance to the vehicles, then it is costing the council a vast sum when they’re facing £120m cuts to services [over the next four years].

“We have schools that are crumbling, meanwhile they will merrily pay out thousands and thousands a day for the trams.”

Edinburgh’s trams will run at an operating loss over the next 15 years, according to the council’s financial projections.

The council expects to receive £51m in payments and dividends during this time but will have to pay out £85m in maintenance and refurbishment costs.

Councillor Jeremy Balfour, a former leader of Edinburgh Conservatives, said the public had a right to be concerned should huge interest repayments continue “indefinitely” but said he didn’t think the city would “be in this situation forever”.

“We hope to get capital payments down and decrease interest payments,” he said. “Economic leader Cllr Frank Ross has raised the prospect of the tram being extended further and that has to be considered seriously.”

A public inquiry was announced by the First Minister in June to investigate what went wrong with a project reputed to have cost more than the space rocket to the moon.

Chaired by Lord Andrew Hardie, the probe will examine flaws in the delivery of the tram line – including contract disputes that led to a breakdown in relations with contractor Bilfinger Berger – to attribute blame and learn lessons for future infrastructure projects.

ANALYSIS

By Prof Richard Kerley, Professor of management at Queen Margaret University

The interest rate on the loan is pretty typical of major council projects so doesn’t surprise me. Councils don’t go out and borrow £231 million like we borrow £10,000 to buy a car.

When there are opportunities to borrow, they will put that into a huge pool of borrowing and use that to do a variety of things – the trams project was one of them.

I don’t know that there was ever any projection that the capital cost of the trams would ever be paid off. That would be like saying: “We’ve paid for all the railways and all the bridges.” They are just there and we use them.

In the longer term there is clearly a worry about the repayment of this large capital sum. We don’t know how the actual rider-ship on the tram is going to pan out as we have not had a typical period. The only figures we have are the projected figures for the year. We’ve had the first enthusiasm of large numbers of people going on the tram, then we were into the summer lull, then the Festival so we will have to wait for a good period of time to see what the actual revenues are.

The longer-term worry, not for this council, but for the council in the thick end of 20 years, will be how do we repay this money?

This will have to be predicated on the basis that fares will rise and that will begin to yield more money to put towards repayment. We need to see what the comparative ride on the tram looks like when we’ve had a full year, without a full year it is very hard to say exactly what is happening now and likely for the future.