Tram network ‘wouldn’t have been able to survive’ without support from Government

BUT TRAMLINK BOSS SAYS £20M LOSSES ARE NOT BECAUSE OF PANDEMIC – AND ARE STILL ‘IN LINE WITH EXPECTATIONS’

It is really important to underline that it is our shareholders that take that hit, not the city council. TIM Hesketh

The boss of one of the companies behind Nottingham’s tram network explains the financial situation to JOSEPH LOCKER – and what would happen in the worst-case scenario for the future of services

TRAMLINK Nottingham Limited, one of three companies behind the tram network which deals with its finances, recently published its latest accounts on the Companies House website.

It confirmed a 23.4% fall in underlying operational turnover in the 12 months to March 31, 2021, as it fell from £63.7m to £48.8m.

This gap was mitigated by Covid emergency grants issued by the Department for Transport to maintain essential services. The grants totalled £18.5m.

Accounts revealed the total losses sat around £21.4 million as of March 2021.

Tim Hesketh, chief executive of Tramlink, said that the losses this year were not simply the result of Covid, because the Government filled the gap with grants, but insisted they were in line with expectations.

“The accounts are reflective of the worst period of the pandemic,” he says, adding the revenue from fares dropped, at the worst point, to just

5% of pre-pandemic levels.

This has “slowly recovered” but is still only around 65% to 70% of what it was before.

“If it was not for Government support we would have fallen over,” Mr Hesketh says. “We wouldn’t have been able to survive.”

Government grants have “filled the gap”, meaning the financial results this year were “never going to be better” than where they were in 2019/20. “It doesn’t matter how hard we push, the more we close the gap the less they give us,” Mr Hesketh said. “It would be very easy to say we’ve not moved, but actually we’ve done a lot, we’ve had a really positive, successful year, given where we were in the Covid situation. “It’s also really important to stress that the £20m losses are not because of Covid. We are not going to sit here and say Covid has given us a bad year and that’s why our losses are what they are. We are not ashamed of our losses because these are what we have projected to make.”

In 2011 Tramlink Nottingham signed a contract, before the network was built, and finances were based on what it could afford. Revenue comes from two sources; an annual amount paid by Nottingham City Council and cash from fares, and together these support borrowing.

If revenue had exceeded the forecast, Tramlink’s shareholders would have made “a higher than expected return”.

However, the actual revenue is below what was predicted.

But Mr Hesketh emphasised a common misconception is that this impacts on Nottingham City Council and the taxpayer, but this is not the case.

“It is really important to underline that it is our shareholders that take that hit, not the city council,” he said.

“That’s one of the first misconceptions that we want to try and put to bed. If revenue expectations from fares was £20m per year, if that drops to £19m then the impact is on the shareholders.

“If it goes up to £21m per year, principally, the benefit is also for our shareholders. But there is also a revenue sharing mechanism that if we exceed targets then the council will also get a benefit.

“But the reality is we are never going to get that. Consistently since

day one we have struggled to meet those targets and so the returns that our shareholders were hoping to make haven’t actually manifested themselves, but at no point has this been an impact on the city council.”

So how, then, does Tramlink keep the shareholders happy?

“The project runs until 2034 and the bank loans are all paid off in 2030,” Mr Hesketh says.

“From 2030 to 2034 that revenue then starts paying off the loans from the shareholders, so if they walk away now they write off what they will be getting at the end of the project. They entered into the project knowing that the majority of their returns will be between 2030 to 2034. It is a long-term view. All of our shareholders are long-term investors and most of them were involved in the development and operation of the project.”

Mr Hesketh also added two of the shareholders were investment funds and therefore many knew such losses would be expected.

One is Meridiam, a French investor which specialises in sustainable and long-term transport, and the other is Aberdeen Asset Management, which invests in sustainable developments and infrastructure.

“The £20m losses are simply reflective of the way the project was set up,” Mr Hesketh says.

“They had possibly hoped to have done better... but they are still in-line with expectations.”

There have been some positives, he added. Student passes have proven a big success with 40% more being sold this year than any other year before Covid.

The passes start at £200 per year, roughly 60p per day, and all of these were issued through the Netgo app.

Out of the 60,000 to 70,000 students in the city, 20,000 of them purchased a pass.

But what does the future now look like and what happens if the worstcase scenario happens?

“In 2011 we had a view of what our revenue over the next 23 years was going to be and that’s not materialised to the extent we hoped,” Mr Hesketh says. “The world changed overnight. What will be the new normal? Is it going to be £20m, or is it going to be £19 or £18m? That’s the unknown.”

He said the network was, however, doing better than the most pessimistic predictions and company finances were in the process of being restructured to reflect a post-covid world.

“Like every business we have to balance our income with our costs, and if the costs outweigh our income then our future is bleak, so we financed our project in 2011, not long after the financial crisis, when the cost of borrowing was very high, so we are currently exploring with our lenders ways to renegotiate the cost of that debt,” he added.

“If the bottom fell out of what we did, if Tramlink disappeared in a puff of insolvent smoke, essentially the city council would take over the running of the trams, with support from the Department of Transport, paying some compensation to the banks.

“Our shareholders don’t get their money back, but the banks have to.

“But it is not on the cards, it is not an immediate concern.”