A CONTROVERSIAL merger of Edinburgh's main bus company with the city council firm responsible for building the tram network is set to be shelved indefinitely.
Council chiefs are expected to perform a U-turn by admitting there is no need to bring Lothian Buses and TIE under the umbrella of a new outfit.
And it is understood the troubled tram company, which is locked in a bitter dispute with its main contractors, will be wound up and its staff transferred to the bus operator, under the latest plans to bring trams back to Edinburgh.
In a major blow to TIE's chief executive, Richard Jeffrey, the council is expected to cancel plans to create a new company, Transport Edinburgh Limited (TEL), of which Mr Jeffrey was expected to take the helm.
The move will guarantee the independence of Lothian Buses until a full review of who will run the trams is carried out - heading off the prospect of industrial action from bus drivers.
But The Scotsman understands the most likely option is for "Edinburgh Trams" to come under the wing of Lothian Buses, with the council left in charge of attempts to secure funding for further tram routes.
However, there are still concerns that the profits of Lothian Buses will have to be used to bail out the tram project, which is facing a funding gap of more than 100 million and a delay of at least two years.
This is despite the bus company's new chairman, Ron Hewitt, telling insisting this month that the firm would not be damaged by the integration of buses and trams.
Although more details of the latest business case for the scaled-back first phase of the trams - which is not expected to be profitable for at least three years - are expected to be released today, the full impact on the profits of the bus company is being kept secret.
Councillors are also set to be denied the chance to pull the plug on the contract to build the tram network, despite fears a dispute with the consortium led by German-firm Bilfinger Berger is set to drag on indefinitely.
It was thought next week's full council meeting would have been D-day for the project.
Senior council official have privately warned that the city cannot afford to tear up its deal with the consortium while there is a chance of the two sides reaching an amicable agreement.
One source close to the project said: "The tram is a long way from getting up and running. There is no need to create a company like TEL at the moment, and it's doubtful whether there ever will be now.
"There is only going to be half a line, and only if the funding gap can be bridged.It makes no sense to create a new company, with all the set-up and staffing costs that will involve, when it could easily come under the wing of Lothian Buses."
Another insider said: "There is a lot of sensitivity over whether Lothian Buses should remain independent or not.
"Shelving the idea of merging it with TIE should head off a lot of criticism that the whole future of the bus company is being put into doubt.
"However, the big question marks are over how the funding gap over the tram scheme is going to be bridged and what impact the tram will have on the profitability of Lothian Buses."
Gordon Mackenzie, the council's transport leader, said: "A lot has changed since it was first proposed that TEL would be set up, including the number of tram lines. It is only right that we review options for the future.
"Tie was always going to be the project delivery vehicle, but obviously work is going to carry on for another two years."