Two years after Bradford's education system was condemned as a failure, services are improving but still "unsatisfactory", Ofsted inspectors ruled today.

But, crucially, the schools' watchdog believes the new set-up is now on the right track and - unlike the old regime - is capable of pulling the district out of the mire.

In 2000, Ofsted said Bradford Council was "very poor" overall and a miserable failure to pupils in one of the most damning reports given to any local education authority.

The scandal forced the privatisation of the LEA - now run by private firm Serco, trading as Education Bradford, which started a £360 million ten-year contract in 2001.

Today's report of Ofsted's re-inspection acknowledges better systems are now in place at the centre but the effects have yet to be felt in schools, according to the inspectors, who identified 12 areas as "unsatisfactory" and another four as "poor".

The report says hard-pressed schools "paid the price" in extra disruption after the Council "seriously over-stretched itself" in the huge schools reorganisation and building programme. It also criticises the authority for wrongly predicting pupil numbers, making further school closures likely.

Council chiefs welcomed the report, saying it showed Bradford was moving in the right direction.

"This should give everyone in the district hope," said Ian Stewart, chief executive of Bradford Council. "We still have a lot of work to do and no-one is complacent. Schools have responded to the changes magnificently."

Mark Pattison, managing director of Education Bradford, said: "We welcome this report as it is a useful external check for us. There are many positives, in particular the acknowledgement of recent good progress and the capacity for further improvements."

David Mallen, who as head of the Education Policy Partnership is independent of Education Bradford and the Council, said: "It's a very fair and balanced report.

"In essence, it's saying the basic problems are now sorted but the impact on Bradford children's education has still to be felt. And that's right. We must now ensure we deliver on our promise to make Bradford schools as good as any in the country."

Ofsted was critical of the time it has taken to make changes, saying the quality of support to schools suffered during the period of upheaval while Education Bradford was set up. In recent months it has detected "rapid improvement", however.

Areas still rated unsatisfactory include the crucial LEA role of supporting and challenging schools; teacher recruitment; planning for special needs pupils; planning for school places; behaviour support; support for children in care and strategies to combat racism.

The authority's performance was "poor" in the management of the Excellence in Cities initiative, support to help pupils in ICT, its strategy for school buildings and provision for youngsters taught at home, in hospital or in units for excluded children.

Despite the wake-up call of the riots in July 2001, "strategies to combat racism" are still listed as a weakness - after being highlighted as a weakness in the previous report too.

Mr Mallen said: "I take very seriously the criticism that we need to develop better strategies to tackle racism. A priority must be to improve the dialogue with members of the minority communities with a view to strengthening the support we can give each other."

Gareth Dawkins, head teacher at Challenge College and convenor for the Bradford Upper School Heads' association, said school leaders had faith in Education Bradford. "What we had before was an absolute debacle. It's true there was a decrease in support for schools in the interim period and they could have moved with greater speed, but we have had consultation."

Education minister David Miliband said: "Satisfactory progress has been made since the last inspection, accelerating in recent months. There have been many improvements from a very low baseline, and I particularly welcome Ofsted's judgement that, while overall performance is not yet satisfactory, there is highly satisfactory capacity for further improvement."

Ian Murch, of the Bradford branch of the National Union of Teachers, which opposed the privatisation of the LEA, said: "They have been very slow in getting things going."

Read the full report in our schools section