A new company to be set up to run Edinburgh’s trams would have no financial incentive to maximise revenues under proposed arrangements, council chiefs have admitted.
Councillors will tomorrow debate plans for the council to take full financial responsibility for running the tram line.
Under the proposals, a new holding company – likely to be known as Lothian Transport Ltd (TopCo) – will be put in place to hold the council’s 91 per cent stake in Lothian Buses, while a tram company (Tramco) will be formed and wholly owned by the council.
But a report by officials says that the arrangement would give Lothian Buses no financial incentive to run a profitable, efficient service.
Council papers reveal “the council will bear the financial risk” if revenues are lower than “set out in the business case”.
That outcome threatens to leave taxpayers needing to foot another soaring bill, outside of the project’s estimated £776 million budget, if running costs outpace the revenue expected from passengers when the line opens next year.
A senior transport industry source, who expects the network to struggle, said: “In effect, the council carries the risk both upside and downside – the reality is there will almost certainly be no upside.”
With focus shifting from construction of the network to its operation, we can also reveal how councillors are set to debate:
• Whether Lothian Buses, or another authority, should share some of the financial burden;
• The number of publicly-accountable politicians that should be on an operating board;
• Ways to cut the risk of losing millions of pounds if passengers stay away from the network;
• Whether thousands of extra parking spaces are needed at Edinburgh Airport for tram users.
Under the complex operating plan, TopCo would oversee the running of Lothian Buses and Edinburgh Trams, while Tramco would be responsible for collecting revenue and paying for the light rail system’s maintenance costs.
A ten per cent management fee out of tram earnings would be paid to Tramco by the council in a move that could cost up to £250,000 a year.
Tramco, rather than the council, would also be given the powers to set fares, although the authority would be consulted.
The council report on the detail acknowledges: “It has been agreed that Tramco will receive a fixed fee as operator and that financial risk will effectively remain with the council.
“The disadvantage of this fixed fee arrangement is that there is no financial incentive for the tram operator to maximise revenues beyond those which are required to ensure their fee can be met.”
The council first nominated Lothian Buses as its preferred operator two years ago – a move that has now left the authority in a tenuous negotiating position and one which could see the bus company get a wish to have no elected members on the board of Tramco granted.
Green transport spokesman Councillor Nigel Bagshaw said: “This report is a work in progress, with the main aim being to draw in the expertise of one of the UK’s most successful public transport operators, Lothian Buses, while still protecting the bus network while the tram takes its first steps.
“That is what the public would want to see, I believe. But it also has the effect of putting the burden of risk wholly on the council, which is why councillors must insist on proper representation on the company structure being set up.”
While Conservative transport spokeswoman Joanna Mowat said there were serious concerns about the financial implications.
She said: “We have spotted that the risk is all on the council and also there’s various ways that the council can be held hostage to fortune in it and we just want to explore those issues a bit further.”
Bus industry insiders have claimed that having Lothian Buses operate the contract is of benefit to the city transport network.
Rivals could have included Stagecoach, which operates the Sheffield Supertram, National Express, which runs the Birmingham Metro, and First, which operates the Croydon Tramlink – and bid for Edinburgh Trams in 2004. Any of these operators could have tendered to run the network.
However, they would have been eligible for large premiums to cover any losses, and would have been offering a service in direct competition with Lothian Buses.
A transport industry expert said it is clear where the chips were going to fall. He said: “Lothian Buses aren’t a completely free agent, and the council leant on them to take this on. If Lothian Buses run Edinburgh Trams, however, it means they will run complimentary to the buses, rather than in opposition.
“If First, Stagecoach or National Express had run the trams they might have used it to get as many passengers off Lothian Buses and increase revenue as much as they could. In effect there would have been a bus/tram war, so it makes sense for Lothian to run it.
“From the agreement it’s clear that Lothian Buses will be paid a certain amount to run the tram network – say, as an example, Lothian got £6m from the council to run the system.
“Empty trams could run all day and Lothian would still get its £6m and the council are out of pocket.
“If the tram is a roaring success, as unlikely as that may be, and makes £7m, Lothian still gets its £6m and the council would take the £1m.”
The consultant added: “In reality this is probably not a good deal, but it’s the only deal in town, because First, Stagecoach and National Express would have demanded a huge premium because there is no track record and a legacy of mismanagement.”
Details of the operating structure were released as the council said it was in discussions with Edinburgh Airport over plans to build extra parking and a “gateway” for tram users at Ingliston.
Council chiefs previously knocked back plans for a 30 per cent rise in spaces – from 8200 to 10,700 – at the airport last year, citing traffic concerns at the time. The gateway would extend from the terminal building to the airport tram stop in a bid to integrate travel services.
Last orders for pub hit by Shandwick Place works
A POPULAR pub has closed as a result of the ongoing tram works, adding to a growing list of businesses affected by the project.
Au Bar, right, on Shandwick Place has filed a notice of insolvency ahead of a creditors meeting which is set to take place in Glasgow next Thursday.
Shandwick Place has been subject to on-off disruption for a four-year period.
A staff member, who declined to be named, said: “It’s fair to say that the closure is probably directly linked to the trams.”
It becomes the latest in a list of businesses to suffer.
In early 2012, the sweet shop Sugacane closed, blaming the ongoing disruption for ruining business.
Tram chiefs took over the store, on the former site of Black and Lizars opticians, but later reversed their decision after widespread criticism at the proposed move.
In November 2010, the Hudson Hotel was put up for sale amid claims it was losing £200,000 because of the works.
The hotel, including the Bacaro nightclub and Hudson Bar, was placed on the market for offers over £4.45 million less than four years after it was completed at a cost of £7m. In the schedule for the sale, agents Jones Lang LaSalle revealed the business’s income dropped from £1.6m in 2008 to £1.4m due to traffic disruption.
In early 2010, the Evening News revealed how three stores within 50ft of each other on William Street all closed after a huge drop in footfall.
Local traders claimed the works have transformed the West End into a “ghost town”.
It hasn’t all been doom and gloom, however.
In November, we revealed how Sainsbury’s has opened a new flagship store at Shandwick Place BECAUSE of the trams.
The supermarket giant snapped up the former Habitat building next to a planned tram stop, believing the store will be popular because of the additional footfall the electric carriers will bring when they begin running in 2014.
‘Sensible, not sexy rail’
A TOP rail consultant has urged authorities not to be seduced by the prospect of a high-speed rail link to Edinburgh at the expense of more critical transport upgrades.
David Spaven, the former chairman of sustainable transport campaign group Transform Scotland, said the billions needed to extend the controversial HS2 project north of the Border could be better spent elsewhere.
His stance is in contrast to widespread demands for the line to stretch into Scotland rather than ending in Manchester and Leeds.
Widespread Edinburgh support for high-speed rail, backed by the council, has come despite the city’s debacle with its high-cost trams system.
The trams network has so far cost £700 million to build and is still at least a year away from completion.
Mr Spaven, who worked as a British Rail manager for 18 years, said: “For quite a long time I’ve been a sceptic about high-speed rail. I think it’s a dangerous distraction from focusing on what we need to do to improve our existing network.
“There’s lots that needs to be done in terms of electrification, making it easy to move more freight on rail and opening new lines.
“I think there’s a danger that people get seduced by the sexiness of high-speed rail at the expense of more mundane, but more important improvements to what we’ve already got.”
Scottish Transport Minister Keith Brown has called on Westminster to set a “concrete timetable” for extending the high-speed rail link to the north.
However, Mr Spaven said electrification of the rail network servicing Edinburgh was a far greater priority.
He said: “Only about 25 per cent of the Scottish rail network is electric. Electric haulage gives you flexibility in terms of power sources, it makes you less dependent on oil and we all know that there’s a lot of uncertainty about where oil prices are going to go, but it’ll certainly be upwards.”
The campaigner said he would support expanding the Capital’s maligned trams network in spite of the scheme’s budget blowout.
He said: “If you go to mainland Europe, cities the size of Edinburgh – they have got trams and they’ve got big tram networks.
“Now this project hasn’t been well managed and it’s tragic that it’s only one route, but we have to start somewhere. I’d like to see the trams network extended, so it benefits directly a majority of people who live in the city.”