Capital cost of capital trams

There's no reason to envy Edinburgh councillors, as they meet today to decide whether to risk perhaps hundreds of millions of pounds on a project that's already gone careering off the rails.

Damned if they do, and damned if they don't, they're trying to use figures that have a health warning attached.

Much of the data is being handled by them in secrecy. What probably won't be clear from those secret figures, and certainly isn't from the ones in the public domain, is what this means for Lothian Buses, the city's dominant operator owned by the former region's councils.

The figures come with a strong spin by the City of Edinburgh Council leadership that the council should keep on spending - taking the single line from near the airport fully 8.4 miles to the east end of Princes Street and St Andrew's Square.

Stopping 1.4 miles short of the city centre, at Haymarket, is seen as stopping short of being profitable. Continuing further, and ending in Leith, is seen as a bit pricey for limited return, and so it's for another day.

And scrapping the project, leaving Edinburgh's trams running in Croydon? The cost being presented to councillors at today's meeting is up to £750m - that's only £20m short of the preferred St Andrew's Square option.

In council officialese, that gap fails to register as being "materially less expensive".

Land price collapse

So from an original budget of £545m, let's see how the gap can be filled. If the Scottish government sticks to its word, and doesn't give a penny more than the £500m contributed so far, the council has to make the much bigger numbers add up.

When the budget was £545m, the council was going to find £45m. Of that, private developer contributions were expected to donate nearly £27m, because they benefit from increased value of building homes near the line. So far, that part of the fund has yet to reach £7m.

Much of that money was meant to come from those developers benefiting at the Leith end of the line. As they've stopped building, land values have dropped 80%, and the tram plan now goes nowhere near them, there's no chance of getting that money.

The council's capital receipts (selling its own land, for instance) were due to reach £7m, and so far stand at £2m.

Dear prudence

So where does the remaining gap come from? If the price goes up as far as projected, the council admits it could be facing an additional borrowing requirement of £100m to £148m, with an annual loan repayment bill of up to £10.6m.

This, it is explained, could come from "prudential borrowing". You've got to love it when the word "prudence" comes into this financial planning at this stage.

On top of that, capital funding will have to come from "surpluses in the business plan and headroom in the council's long-term financial plan".

What does that mean? And do councillors know what it means?

There are fears from Lothian Buses that the business plan surpluses are to come from profits the buses generate, starving them of investment and forcing up fares. That fear is being voiced by the bus drivers' union, picketing today's council meeting.

And the long-term financial plan means diverting capital from other projects. That's a problem when Edinburgh's population is projected to increase by about 45,000 in the next 20 years.

Cost conscious

A key part of the calculation being presented to councillors depends on benefit-cost ratios, or BCRs - the comparison of costs in the short term with payback over the longer term. For every £1 in costs, you want benefits to be worth more.

The recommended option of continuing along Princes Street to St Andrew's Square is given a ratio of 2.2. That's £2.20 return for every £1 spent.

But if you read the annexe by construction project specialists Atkins, they point out this figure is plain wrong. It should be 1.85 (or £1.85). That's quite a big difference, and it's buried in a footnote to a table in an annexe.

If you read the annexe in detail, it also warns against trusting the BCRs at all, particularly the element that reckons the benefit to other road users (the value to a car driver of having trams entice other drivers out their cars) can be valued over the longer term at at total of £74m.

Sunken treasure

These calculations ignore the so-called "sunk costs", of £469m already spent.

As a rule, judging the value of whether a project should proceed requires the sometimes painful practice of ignoring the fact you've already spent a huge amount of wonga. What matters is the return on what you may yet spend.

The sunk costs are used in the case against abolition. But the fact that the recommended St Andrew's Square option, with all costs included, would deliver 73p of benefits for every pound spent? That's seen as irrelevant.

Cancellation would be £469m in return for... well, what? The jobs that came from digging holes and filling them in again, and the legacy of some state-of-the-art utilities ducting.

Moreover, there are questions about what has been bundled into the costs of abandoning the project. Is it really necessary to spend much reinstating Princes Street? Would the Gogar tram depot really be a complete write-off?

Wouldn't the cost of winding up the management company TIE be a cost that will have to be met anyway? Taking these modifications into account, might the total actually come to substantially less than the estimate for continuing?

On the buses

And that brings me to the body that's taking over from council-owned management company TIE. The report before councillors today assumes that Lothian Buses will have people on the new organisation's board of directors, just as it seems to be assumed that the bus company will provide the collateral and revenue to service this vast increase in the borrowing necessary.

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Former managing director of Lothian Buses Neil Renilson broke his silence on Wednesday to warn that the plan could threaten the survival of this well-liked muncipal bus operator.

His successor, Ian Craig, is taking a very different route.

"This is a matter for the City of Edinburgh councillors to determine," he told me, "and Lothian Buses stands ready to work in accordance with whatever decision is reached regarding the future for the tram project".

He's managing director, so who am I to doubt him? But is it the duty of directors of Lothian Buses to do what the largest shareholder requires, that being City of Edinburgh Council? Or do directors have a duty to act on behalf of lesser shareholders, including West, East and Midlothian councils, and to the bus company as it's currently constituted?

I'm told some of those in Lothian Buses have been asking just that question, and it's far from clear that they have to accept the line Ian Craig is taking.

If they don't accept it, the trams may be without the bus company's financial backing, and the business case would be at risk of collapse.

Ich bin ein Edinburger

For all it matters, I'm not pointing this out and asking these questions because I'm against the trams. As a long-time Edinburger, I hope trams will one day return to the city.

But surely the return of the trams should be based on consideration of clear financial information and all the possible implications.