£7m more cuts on the way to pay tram debt

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Nearly £7 million more of cuts to council services will have to happen in the early years of the tram project than first expected in order to pay off the loan used to rescue the scheme.

It emerged today that the city council’s revenue budget will take a £21.4m hit in the next three years as a result of the cost of paying off loans taken out to cover a £231m funding gap.

The figure is much higher than the £4.8m a year revenue impact that councillors were told to expect as a result of borrowing to take the project to St Andrew Square.

Opposition councillors said the figures were “staggering” and went against what they had been told when they decided to take out the massive loan.

The worst hit will come in the first year of the tram being in operation – 2014/15 – when the impact on the council will be £8.4m.

There will also be a £5.3m cost in 2012/13 and £7.7m in 2013/14.

Council chiefs say the reason for the figures now 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.

Councillor Lesley Hinds, transport spokeswoman for the Labour group on the council, said: “I think these figures are pretty staggering. Our interpretation of why we should not go to St Andrew Square was because of the cost of borrowing and at the time they said it would be £4.8m a year to pay off that debt.

“Now it looks like it will cost the council another half million next year, £3m the next year and £3.5m the year after that.

“I am almost speechless that only now are we being told that, even when the tram is up and running, it will still be £3.5m a year more than anticipated.”

The council will have to pay £15.3m a year over 30 years to cover the money it borrowed to plug the £231m funding gap to rescue the project.

Initial council reports said that the repayments would be made through four funding sources: leasing the tram assets to Lothian Buses, profits from council arms-length firm Transport Edinburgh Limited, which owns the trams, loan “headroom” created from existing historical repayments coming to an end and money already earmarked for infrastructure improvements – which left £4.8m to be picked up through the council’s revenue budget.

TEL – 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.

Councillor Jeremy Balfour, leader of the Conservatives on the council, said: “I was always concerned about the impact it will have on the revenue budget and clearly the council will have to pay more up front until the tram makes a profit.

“We do not know if that will be in two years, three years or beyond that. That is money that could go to frontline services that is now being diverted.”

Alastair Maclean, director of corporate governance for the council, said: “As explained to councillors in recent briefings and reports, the annual funding requirements for the project will be higher in the period prior to the tram becoming operational due to construction costs and the fact that the line will not be producing revenues. These costs will average out over the longer term.”