Edinburgh's tram extension: Call for new business case to show how finances add up

Dividends from Lothian Buses totalling £18 million due to help finance Edinburgh's tram extension won't materialise, councillors have been told.

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But the gap in the budget for the £205m project be will more than made up for by lower borrowing costs, council finance chiefs have said.

However, there is growing concern about the impact which Covid and an increase in people working from home could have on the revenue expected from fares once the new stretch of tramline from York Place to Newhaven opens.

Dividends from Lothian Buses totalling £18 million due to help finance Edinburgh's tram extension won't materialise, councillors have been told.

And Tories are calling for a revised business case, showing how the finances now stack up.

Head of finance Hugh Dunn told the council's finance committee that Lothian Buses was not expected to produce any dividend for the next five years.

The agreed business case for the tram extension relied on an extraordinary dividend of £2m a year for ten years, of which one year had been paid. That would leave an £18m shortfall, said Mr Dunn.

But he added: “That shortage in dividend for the tram business case has been picked up by reduced borrowing costs. We’ve been able to borrow at a rate substantially below what was assumed in the business case and that counters the reduction in the extraordinary dividend.

"The business case assumed an interest rate of over four per cent and we've been able to borrow at around two and a third, so you've got a saving of almost two per cent on £200m over 30 years, which will more than compensate for the loss of the £18m.”

But Mr Dunn said officials were now looking at the projected income from fares once the tram extension was up and running.

“I think the key thing in the business case going forward is actually fare income. That's the biggest risk just now – the fare box you'll get from the tram with people continuing to work from home.

"Saying that, the tram extension doesn't open until around June 2023 and things might move between now and then, but that's an area of risk we’re aware of and looking at just now.”

Mr Dunn stressed that the project remained within budget and on time.

Tory finance spokesman Andrew Johnston said a revised business case was needed to show how the extension now stacked up.

"I think it would be for the benefit of all councillors who have to scrutinise the tram extension to have a revised business case setting out what’s happening with the dividend but also what’s happening with reduced borrowing costs and the new risk with Covid, and I presume the huge increase in materials costs which must be affecting construction.”

Committee convener Rob Munn said Councillor Johnston had made some “good points” and he would discuss them with officials.

Afterwards, Councillor Johnston claimed the business case for the extension had been “fundamentally flawed”.

He said: "If the original business case had been realistic we would be £18m better off today because they would have got the £18m from Lothian Buses and they would have had the benefit of reduced borrowing – and boy, could we do with £18m to spend on capital elsewhere.”

Read more: Edinburgh' s tram extension: Leith Walk faces longer closure after project hits problems

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