It is expected the works will cost up to £3m
Work has begun on Loch Promenade in preparation of extending the Douglas Bay Horse Tramway back to the Sea Terminal.
The Department of Infrastructure said: "Considerable analysis and development work has been undertaken since the department established a project team in July.
"Work being undertaken on Loch Promenade this week will allow the department to finalise a tender exercise, which is scheduled to be launched early next year."
The government said it expects the first passengers are anticipated to use the new section during the 2028 summer season.
The DoI told Manx Radio earlier this year that a tender process is being developed prior to launch early next year.
It is expected the works will cost up to £3m.
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