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Operating loss The operator of Britain's most successful privately funded tram system could change every few years as more extensions are added. David Hayward reports from Manchester. Photos by Len Gr

An office overlooking Manchester's Piccadilly Gardens is the nerve centre for Britain's first and most successful modern-day tram system. Here, crucial contractual decisions are being taken that could set the course for all future privately funded light rail transport.

So successful is Manchester's Metrolink that there is a queue of extensions waiting to be added to the current, partially street-running, 31km line.

Construction of the first, a 7km route to Salford Quays and Eccles, has just started. Tenders for the second, a 23km extension to Oldham and Rochdale, could be on offer before December. Four more are being considered, with planning permission already granted for an extension to Manchester Airport.

But the key decisions now needed are not so much over the private/public funding split for each £100M extension package, but how and by whom the new lines will be operated.

At the moment it looks as though the successful bidder to design, build, operate and maintain (DBOM) any of the new extensions will win the prize of operating everything that has been built already.

Original operator GMA - a consortium of Amec, Mowlem and GEC - was thrown out last May when the contract for the Eccles extension was awarded. Altram, a consortium comprising Laing, Italian train manufacturer Ansaldo operator Serco and venture capital company 3i, is to build the new extension as well as taking over the existing network.

Although GMA had by all accounts made an excellent job of building and running the initial city centre line, its failure to win construction and operation of the first extension to Eccles resulted in summary dismissal.

Nine years ago GMA completed construction of the £150M line from Bury and Altrincham which in passenger revenue terms has so far exceeded all operating expectations. Annual passenger carrying figures of near 14M are currently 17% higher than original estimates; the system is approaching capacity during peak hours and is turning in around £5M operating profit a year.

The reason for terminating GMA's concession is that there can only be one operator for a fully integrated tram system and the consortium offering the lowest price should - all else being equal - be awarded the concession.

As a result, competitive tendering for each new extension could mean a change of operator four more times, as further contracts are awarded. This would be disruptive to everyone, especially the public, as well as being twice as costly. Compensation must be paid to the dismissed operator, while bidders for future extensions could increase their bids to account for the risk of sudden contract termination.

On the other hand, public procurement rules are likely to bring pressure for 'best value' through competitive tendering every time a new extension is considered. This is the dilemma facing the occupant of that Piccadilly office, Geoff Inskip and his financial team.

'If we were only building one more extension I would simply go for DBOM again,' says Inskip, finance director for Metrolink owner, Greater Manchester Passenger Transport Executive. 'But with hopefully several more, future operation is a very complex financial issue and we need to consider a range of options to ensure that the public gets best value all round.'

European Union procurement rules pretty well exclude anything but open tendering for an extension's design and construction; although the client has more leeway over awarding the 15 year operating concession.

If Inskip decides to continue with DBOM again, he could have to throw out the latest operator Altram as early as winter 2001, just 20 months after it starts operating the combined main and current extension network.

Alternatively, he could negotiate direct with Altram to add the Rochdale line to its existing operating contract. Another option would be a framework deal including the right to run all future extensions. Or he could permanently split off the operating side, independent of who wins the design and build contracts.

Inskip is not yet revealing a favoured option, although it is no surprise which Altram would prefer.

'Clearly we would like to continue operating the lot and argue that direct negotiation with us would be the least disruptive way forward, removing from the client the risk of interface problems with changing operators,' says Altram managing director Martin Garrett. 'Our only concern would be any rule forbidding the future operating group from also tendering for the line's design and construction.'

Garrett's fear is that competition could be distorted if a contract for the future operation of the Rochdale extension - the next in the programme - involved splitting operation from track construction. If, for example, Serco won the operation contract, it could have an influence over the choice of builder. Other bidders might think it unfair to be competing against Laing and Ansaldo under this scenario.

Negotiation for future extensions is allowed for in Altram's contract for the Eccles extension which was awarded last May. Construction of this £130M extension - which winds through the office dockland developments of Salford Quays on both segregated and street running tracks - is just getting under way (see box).

If a future DBOM contract for the Rochdale line sees Altram lose its operating concession, its financial compensation will be based on either annual profit times the number of years left in the operating concession, or money owed to its banks, whichever is the greater figure.

The contract forbids this happening before December 2001 to allow a fair estimate of profits to be gauged. But if Altram is removed soon after that, compensation could be around £70M and Garrett stresses he has allowed for this possibility in his financial plan.

When planning the Eccles extension, the client started direct negotiations with GMA to also take over the new line. But, says Inskip, their offer was 'very disappointing' and discussions ended.

When the full DBOM contract for the extension went out to invited tender, Altram was 'firm winner' to second placed GMA. And just to add to its misery, GMA's compensation was only £7.5M compared to the £70M figure that Altram might now expect.

Though it had lost 10 more years of potentially very profitable operation, the loser's compensation formula was based not on profits but on GMA's original £5M private funding contribution to the project.

Altram's input is very different, with the private consortium putting up around £78M of the overall £130M project cost. The £52M balance is split between GMPTE, central government and the EU.

However, most of the public sector contribution covers land acquisition, advance services diversions and other enabling contracts. Altram asked for, and receives, only £8.6M from GMPTE.

Altram's own financing reflects the considerable 'comfort blanket' of inheriting from the start not only a profitable first line with its own financial momentum, but also considerable optimism for the success of the second. This confidence encouraged £73M bank loans arranged by Bank of America and 3i, with consortium equity of just £580,000.

The equity is topped up with £3M subordinated debt which will be recovered only after the bank loans have been serviced. Altram's projections suggest that the project will start making a steady profit in 2003 when revenues will consistently start to outstrip debt repayments and interest.

That confidence may be dented, though not destroyed, if Altram's operating concession is cut short. Inskip's all important contract decisions are expected 'soon', though his hoped for timetable of seeking tenders for the Rochdale line late this year is totally dependant on government approval.

This contract, likely to need up to 60% public cash injection, is - along with so many other similar projects - on hold pending publication of Whitehall's integrated transport white paper this spring.

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