At first sight, bidding for the right to run the loss-making Docklands Light Railway in east London would seem guaranteed to give company directors sleepless nights and make shareholders decide to take their money elsewhere.
Yet last week 10 groups, including the Central London Bus Company and a management buy-out team, expressed an interest in running the DLR.
The clearest indication that this was not just foolish optimism was that those interested included Stagecoach, Britain's largest bus operator, whose founders, the brother-and-sister partnership of Ann Gloag and Brian Souter, have a reputation for ruthless hard-headedness. Earlier this month they were awarded the contract to run passenger services on South West Trains, one of the first former British Rail franchises to be awarded.
This interest comes despite the fact that this year the DLR is expected to make an operating loss of pounds 14m on revenues of pounds 9m, which, although an improvement of pounds 1.4m on 1994-95, would hardly seem to be the sort of performance to excite the private sector.
The light railway system connecting Docklands and parts of the East End to the City will not break even until 2003 at the earliest and may lose many passengers to the Tube on the opening of the Jubilee Line extension scheduled for March 1998.
The first factor encouraging interest from the private sector is that the DLR, although it has some way to go before it wins the affection of its regular passengers, has substantially improved its reliability and has extended its services to late evenings and weekends during the past two years.
This year there have been two derailments and a number of delays to services, which some employees blamed on cuts in maintenance staff, but many of the faults in the driverless, automatic system run by computers have now been ironed out.
Rufus Barnes, secretary of the London Regional Passengers Committee which represent public-transport users, said: "It has certainly improved and they have got to grips with the major problems of reliability. We have received very few complaints about the DLR this year, although that is not to say that there are not problems from time to time.
"The problem was that it was built on a shoestring and, having been built that way, proposals were in place to build extensions to it before it was even opened. The computer system that operated it really was not up to the extensions that were made to it."
Michael Schabas, a transport consultant, said: "It has improved enormously but it has still got some way to go. London Transport, who ran it originally, did not realise what they were getting into."
The cost of the DLR has been 10 times the pounds 77m spent on building the original, limited service. Since then the Government has thrown money at the project which has now cost pounds 800m.
In 1992, almost five years after it opened, the DLR was transferred from London Transport to the control of the London Docklands Development Corporation. The following year Brown and Root Projects were appointed as "prime contractors" responsible for completing the upgrading of the DLR and improving its reliability and were given strict targets with payment related to results.
As services have improved and more companies have taken offices in the Canary Wharf development, daily passenger numbers have doubled to about 50,000. But many of these users will defect to the underground system when the Jubilee Line extension is finished, connecting the Wharf with central London.
This means that the success of privatisation will be heavily linked to that of the proposed extension of the DLR south of the Thames to Greenwich and Lewisham. The argument is that passengers lost to the tube will be replaced by tourists and south London commuters.
The contract to build the pounds 130m three-mile extension under the river will be awarded in February. Originally the whole project, due to be completed in 1999, was to be privately financed but in August the Government agreed to put up pounds 50m of public money.
However, even if the Lewi-sham extension is a success and the DLR's performance continues to improve, privatisation is still a gamble which will only be viable because the Government will subsidise the private operator until the service breaks even.
Would-be operators will have to submit estimates of the subsidy they will require, keeping them low enough to win the contract and high enough to be able to run the service at a profit. Under their contract they will not be able to cut services drastically and so staff redundancies and some fare increases may be hard to avoid.Reuse content