INTRODUCTION

  1.  The DTI welcomes the Committee's inquiry into the Government and MG Rover and recognises the valuable contribution its Eighth Report, Session 1999-2000, (HC 643) made in clarifying the circumstances which led up to BMW's decision to sell Rover. As this report covered in depth the events leading up to, and immediately following BMW's decision in 2000 to sell the Rover Group, we have not covered these events in detail in this memorandum. We have, however, referred to them briefly in order to place into context events leading to, and following the collapse of MG Rover in 2005. This, together with DTI's response to these events, is the main focus of this memorandum.

  2.  The story of MG Rover Group and DTI's relationship with the company should be seen in the context of the performance of the UK automotive sector as a whole, and the Government's strategy for manufacturing industry and the automotive sector in particular. That is the purpose of the first section of this memorandum.

THE UK AUTOMOTIVE SECTOR AND CO-OPERATION BETWEEN INDUSTRY AND GOVERNMENT

  3.  The Committee looked at the UK Automotive Industry in its Eighth Report of Session 2003-04 (HC 129). The Report acknowledged that the UK is still a competitive place to make vehicles, but, regardless of this, individual plants may still close. The Government Response agreed with the Committee's objective analysis of a sector that has successfully embraced the challenges and opportunities of globalisation and not only survived but also thrived. This continues to be the case with significant success stories in what is overall a difficult international market.

THE UK AUTOMOTIVE SECTOR

  4. Aston Martin, BMW, Land Rover, Toyota and Vauxhall have achieved record car output for 2005. Vauxhall have also reported record output from their van factory in Luton. The UK produces 9% of Europe's output and is fourth in Europe behind Germany, France and Spain. The UK produces 3% of global output.[20] Nissan at Sunderland, Toyota (Burnaston) and Honda (Swindon) are all among the 10 most productive car plants in Europe.[21] The UK continues to attract and retain inward investment—for instance, Honda has recently launched the new Civic which is made in Swindon and BMW is transferring engine production for the next-generation MINI to Hams Hall in the West Midlands, from Brazil. The sector also needs to be adaptable—visible, for instance, in the transformation of Ford's Dagenham facility from vehicle manufacturing to a global centre of diesel engine excellence, with the result that Ford now sources 25% of its global engine requirements from the UK. Against this background, MG Rover's collapse can be seen as the result of a specific set of circumstances to do with that company, rather than reflecting a wider malaise.

  5.  The challenges the sector faces remain intense. Competition from lower cost economies requires relentless pursuit of quality, cost and delivery improvement, ever leaner manufacturing processes and improved skills levels, and the policy imperative to enhance environmental and safety performance still further must be delivered in ways that do not threaten the UK's competitive position. As the following section explains, Government is working closely with the industry to help it address these challenges and build on its established strengths.

CO-OPERATION BETWEEN INDUSTRY AND GOVERNMENT

  6.  DTI's purpose is to create the conditions for business success, and help the UK respond to the challenge of globalisation. DTI believes that manufacturing is an integral part of the future UK economy and fundamental to the UK's success as a high technology, high added value economy competing in the global marketplace. However, we are seeing an extraordinary economic shift, with rapid growth and development across the globe, in particular in China and India, and burgeoning competition in the world marketplace. In response to these challenges, DTI published in 2002 the Government's Manufacturing Strategy, which set out an approach for competing on the basis of innovative, high value, high quality products—and less on cost. The Strategy identified seven pillars to help build a vibrant, knowledge-intensive, high-skilled manufacturing base: macroeconomic stability; investment; science and innovation; world-class best practices; skills development; strong infrastructure; and the right market framework.

  7.  In 2004, DTI reviewed the Strategy with industry stakeholders and drew up a Manufacturing Action Plan setting out priority areas for action by Government, industry, trade unions, Regional Development Agencies and others to ensure the future success of UK Manufacturing. It established a Manufacturing Forum, which is putting in place a range of activities across skills, public procurement, and the image of manufacturing, that will help the sector to compete more effectively.

  8.  DTI's Automotive Unit is responsible for managing Government's relationship with the automotive industry and working with the sector to enhance its competitiveness. Relationship managers are assigned to the major firms in the industry and the Unit regularly engages stakeholders collectively on policy and regulation issues via its VIPER (Vehicle Industry Policy and European Regulation) group and on issues affecting the retail motor trade in particular via the Retail Motor Strategy Group. MG Rover was one of the companies to which a relationship manager was assigned and in addition to company-specific matters, MG Rover staff were engaged in discussions on a number of regulatory issues, such as the End of Life Vehicles Directive, and on environmental projects.

  9.   The recommendations of the Automotive Innovation and Growth Team (AIGT) have been a particular focus of the Unit's recent work. The AIGT brought together industry, government and other stakeholders to assess the competitiveness of the sector and recommend actions to help it face future challenges.[22] The Government committed £45 million to the AIGT's principal initiatives, all of which have now been implemented.

  10.  Automotive businesses are, of course, also able to access assistance that DTI makes available to industry more generally in line with its objectives to improve business performance and strengthen regional economies. The principal financial scheme in England is Selective Financial Investment in England (SFIE) which is designed specifically to increase productivity, sustainable growth and skills and to safeguard employment. Its application is limited to Assisted Areas of Great Britain where regional aid may be granted under Community Law. Much of the UK automotive industry is located in such areas and since 1990 Ministers have approved some £330 million of grants for the automotive sector.

  11.  The importance of the automotive sector in particular parts of the country has also led to the establishment of some major regionally based support programmes notably the Accelerate programmes in the West Midlands and Wales. DTI works with regional bodies to ensure that regional and national initiatives complement one another so that companies know where to go for support.

  12.  In the period from May 2000 to April 2005 the MG Rover received a limited amount of direct public support—in total some £5 million—as part of wider schemes for the automotive sector and West Midlands region.

GOVERNMENT AND MG ROVER

2000-04

  13.  BMW's decision to sell to the Phoenix Consortium on 9 May 2000 was welcomed by Ministers and all parts of the House during the debate on the day as well as by Rover workers as it was the best and only solution available at the time that would result in a large number of jobs and in volume car production being maintained to the benefit of the West Midlands economy. Negotiations with Alchemy had broken down and the alternative was closure of the plant. However, we were aware that MG Rover had limited cash reserves and would need a partner to fund investment in new models and thus secure the business's long-term future.

  14.  As is the case with all other UK vehicle manufacturers, immediately following the sale of Rover to the Phoenix Consortium in 2000 we appointed a Relationship Manager to build relationships with the company and ensure an effective flow of information with DTI. The company did initially engage at senior level, although the directors were reluctant to share detailed information on their business plans and status of negotiations with potential partners. During 2002 and 2003 the relationship was led by the company's head of PR and communications rather than senior management, although individual directors did maintain contact. From 2004 onwards contact with senior management once again became more frequent.

  15.  During this period we were made aware of discussions between MG Rover and a number of potential partners and closely monitored progress of ultimately unsuccessful attempts to conclude deals with the Chinese company China Brilliance Automotive (2001-03) and the Malaysian company Proton (2002-04). Discussions with the Indian company TATA resulted in a limited agreement rather than a full partnership. Support was offered to the company's pursuit of all partnerships, but their willingness to accept varied from case to case—for instance, MG Rover received extensive assistance from UK Trade and Investment for the ultimately unsuccessful attempt to acquire a former Daewoo plant in Poland (2000-04), but offers of assistance regarding the TATA deal were declined. Reasonably regular dialogue at working level also led to some specific issues being taken up on the company's behalf, for example, MG Rover's concerns regarding the implications of the End of Life Vehicles Directive and their desire for a higher profile for their products in public sector purchasing decisions.

April 2004—April 2005

  16.  At the beginning of 2004, then Secretary of State, Patricia Hewitt commissioned a joint report from DTI's Industrial Development and Automotive Units on MG Rover and its prospects. The resulting report concluded, correctly as it was to prove, that the company's need to conclude a commercial partnership was becoming urgent, with a risk that it might run out of cash as early as Autumn 2004. The Secretary of State concluded, however, that low-key contingency planning should be commenced on how to mitigate the impact of a possible closure of Longbridge on the local economy and community. It was also seen as important to convince the senior management of MG Rover that they should engage more closely with the objective of providing practical assistance in finding a strategic partner.

SUPPORT FOR THE SAIC DEAL

  17.  On 16 June 2004, MG Rover contacted DTI to say that they had signed an agreement with SAIC to fund the development of new models for the MG and Rover brands. The company initially told us that it had learnt a great deal about dealing with the Chinese from its earlier attempts to partner with China Brilliance and declined offers of assistance from DTI (for instance, that the Secretary of State might raise the issue in a planned visit to China). However, following the announcement of further details of the SAIC agreement in October 2004, the company concluded that there might be benefit in accepting diplomatic support for its negotiations, and the Secretary of State duly wrote to China's NDRC (National Development and Reform Commission who evaluate applications for approval by the Chinese Government) on 23 November 2004 expressing support for the deal.

  18.  In December 2004 a further review of MG Rover's financial position concluded MG Rover would run out of cash in Spring 2005 unless the deal with SAIC could be completed. In response, a more detailed influencing plan in support of the deal was put into effect, the main focus of which was on stepping up the intensity of supportive Ministerial contacts. As a result, the Prime Minister wrote on 30 November 2004 to the Chinese Premier Wen Jiabao supporting the collaboration and requesting early approval of the deal, the Deputy Prime Minister raised the deal with Premier Wen Jiabao during his December 2004 visit to China, Lord Sainsbury raised the matter in a meeting with the SAIC President, Hu Maoyuan, on a visit to China on 19 January 2005, the Foreign Secretary requested Premier Wen Jiabao's support during his meeting with Foreign Minister Li on 21January 2005, the Chancellor of the Exchequer stressed the Government's support for the deal in a meeting with NDRC Minister Ma Kai in February 2005 and the Secretary of State wrote again on 18 and 30 March 2005 to the NDRC and to the Shanghai Local Government on 1 April 2005.

  19.  Throughout these negotiations, we naturally sought evidence of SAIC's position and the progress of their due diligence. On 14 January 2005, officials met representatives of the substantial SAIC delegation which was on site throughout December 2004 and part of January 2005. Their clear assumption was that the deal would proceed and the main topic of discussion was the UK Government's reaction to the likely need for restructuring at Longbridge and the shift of component purchasing to China. The SAIC delegation appeared familiar with MG Rover's cash position and explained that they had sought to ease this by making cash payments in advance of the deal. Accordingly, £30 million had been paid the previous day in respect of IPR on the Rover 25 model. A payment of £37 million the previous year had secured the rights to other Rover models and the K-series engine. Additional amounts would be payable on completion of the deal, expected to be at the end of March.

CONTINGENCY PLANNING FOR REQUEST FOR BRIDGING LOAN

  20.  The seriousness of MG Rover's cash position was compounded in early 2005 by increasing signals that the conclusion of the SAIC deal may be delayed. Negotiations with SAIC were taking longer than anticipated, and the complexity of the proposed transaction was increased by the Chinese Government's desire to see Nanjing Automobile Corporation included in part of the deal. The company initially revised its target for the conclusion and approval of the deal to end-March 2005, but there were increasing indications that even this might be optimistic.

  21.  Given the extreme tightness of the company's cash position, the risk of its running out of funds before the SAIC deal could be completed was clearly increasing. As a result, the Secretary of State and other Ministers ensured that contingency planning for the possibility of the company's failure now proceeded to a more detailed level (paragraphs 30-32 below). From the end of January 2005 the Department began to make detailed plans for the handling of a request from the company for exceptional financial assistance. Ministers decided that there could be no question of providing funds to prop up the company in the absence of a deal with SAIC, but there could in principle be a policy case and legal grounds (under EU rules on Rescue Aid) for a bridging loan should the tie-up with SAIC be agreed between the parties but its consummation delayed pending Chinese Government approval. In collaboration with other Government Departments, DTI therefore prepared, in early February 2005, detailed criteria that would have to be fulfilled in order for a bridging loan to be satisfied. In addition to the requirement that the deal should be completed subject only to Chinese Government approval, key features of the criteria (attached at annex A)[23] included a requirement that the loan be repaid on completion of the transaction, that it would attract a commercial rate of interest, and that the PVH Directors would make a substantial personal contribution to it. External legal and accounting advisers (Slaughter & May and KPMG) were put on notice to advise on the legal and commercial aspects of a potential loan agreement.

  22.  The company formally requested a bridging loan facility, with a ceiling of £125 million, at a meeting with DTI officials on 21 February 2005. The company said that although they still hoped to conclude the deal before the end of March 2005, they required a facility to allow for the contingency of further delay. Conscious of the need to ensure MG Rover did not consider a Government bridging loan as anything other than a very last resort, and aware of the possibility of a further pre-payment for intellectual property rights (for the MG Brand), the Department's initial response was that MG Rover and SAIC should look to finance any short-fall from within their own resources. DTI maintained its position for the following few weeks that additional finance should be sought from sources other than Government.

  23.  In early March 2005, it became clear, however, that further SAIC prepayments were not going to be forthcoming, and the company submitted a written request for a loan facility on 14 March 2005. Given the company's increasingly parlous cash position, and the need for time, if a loan were to be given, to carry out necessary prior due diligence, the Department's response was to write on 17 March 2005 setting out the prepared criteria in full. On the same day, KPMG were sent into Longbridge to look at the financial position in detail. This was the first occasion that it was possible for the Department to see the reality of the company's financial position, despite previous efforts to get the company to provide more information.

  24.  A key focus of the Department's efforts from this point onwards was the need to obtain satisfaction as to whether the criteria it had set out would be met. On 23 March 2005 the Department wrote to SAIC and PVH in an attempt to get further clarity on the status of the negotiations between them and to signal that the Department would try and reach a decision on the loan by 1 April 2005. In response, on 29 March 2005, SAIC set out what they considered were the obstacles to the completion of the deal, particularly the risk that an insolvency within two years of those elements of PVH that were to remain outside the new joint venture might leave the new JV bearing substantial liabilities (in particular relating to pensions and redundancy payments). In the light of the clear seriousness of the situation and the urgent need to gain a clear understanding as to whether the deal would be completed, the Secretary of State sent two senior officials to Shanghai to discuss progress with SAIC and PVH Directors direct.

  25.  In discussions and written exchanges over the following few days, SAIC continued to stress the commercial opportunities they saw in the proposed deal, but also their substantial concerns about proceeding in the absence of greater comfort on the solvency of the residual PVH business. SAIC did not at any point state explicitly that they did not intend to proceed with the deal, and PVH Directors continued to express confidence that it would be concluded imminently. However, Rothschilds, SAIC's advisers, reported to the Department on 5 April 2005 that SAIC had taken a firm decision not to go ahead with the deal. Ministers wanted to check this information, given the continuing contradictory signals, in particular from the PVH Directors, and over the next two days intensive efforts therefore made to clarify the position. But by the afternoon of 7 April 2005 it was clear that SAIC had indeed decided not to go ahead with the joint venture deal that they had been negotiating with MG Rover.

  26.  Without the prospect of the joint venture deal with SAIC there was no possibility of the Department providing a bridging loan. In addition some suppliers had ceased to provide parts which stopped production at Longbridge. In this situation the Rover Directors had no choice but to call in the administrators. They took this decision at about 8.30 pm on 7 April and having done so John Towers rang the Secretary of State to confirm the situation. It was subsequently agreed that both the company and the Department would make statements to the media so that employees were informed as quickly as possible.

THE ADMINISTRATION

  27.  The administrators, PricewaterhouseCoopers (PwC), took over the day-to-day management of MG Rover and responsibility for negotiating the sale of the company or parts of the business. Although they did market MG Rover widely, given the extent of SAIC's previous interest PWC's immediate priority was to pursue the prospect of a sale of assets as a going concern with SAIC. To assist with this the Secretary of State wrote to SAIC and Prime Minister wrote to Premier Wen Jiabao on 8 April 2005 to offer SAIC assistance in contacting the administrators. The Chinese Ambassador, Zha Peixin, was asked, on 11 April 2005, to immediately notify the Government of any willingness by SAIC to continue negotiating for MG Rover or parts of the business.

  28. On Saturday 9 April 2005, PwC made clear to the Department that unless funds were injected into the business it would be necessary for them to declare immediate large-scale redundancies. Although PwC had discussions with the Unions and PVH Directors to see whether either of them were in a position to make some cash injection into the business, it swiftly became clear that unless the Government was able to step-in the chance of a going concern sale would be lost. Ministers weighed up the risks and benefits of a loan. On the one hand it was certain that, without a loan the company would collapse and any possibility of a sale as a going concern, in whole or in part, to SAIC or any other buyers, would be lost. Equally the workforce would inevitably be made redundant before the administrators had been able to make the necessary arrangements. On the other hand, a loan for a brief period would allow PwC to see whether any of those who had expressed an interest in buying the business were serious potential buyers, while making arrangements to handle redundancies if need be. Ministers also considered if no sale was effected whether the loan might not be repaid. On 10 April 2005, the Secretary of State announced DTI's willingness to make a £6.5 million loan to meet MG Rover's operating costs (mainly wages) for a week to enable options to be pursued quickly for the sale of the company as a going concern and enable the position of the workforce to be resolved in an orderly manner. PwC have subsequently returned £1.3 million of the loan.

  29.  Over the following week, much urgent work was done by the administrators and the Department to obtain clarity regarding SAIC's intentions and explore any other possibilities for a swift going concern sale. However, on 15 April 2005 the Secretary of State received a letter from SAIC making it clear that they were not willing to purchase the whole or part of the MG Rover business as a going-concern basis. In the absence of any credible offers at the time, PwC concluded that the company could not recommence car production and they therefore issued redundancy notices over the next two days to a large majority of the workforce. Over the next few months, PwC received several expressions of interest and had contacted and met most of the potential bidders for MG Rover in order to ascertain their seriousness of their plans for the company and the workforce. In July 2005, PwC announced the sale of the car and engine production assets of MG Rover, including plant, machinery, tooling and stock to Nanjing. Nanjing have relocated the Powertrain engine plant and a number of production lines to China, but have always maintained their commitment to recommencement of manufacture in the UK. The company recently signed a long-term lease on the South Works section of Longbridge, with the declared intention of starting low volume production of the MG sports car in the UK in 2007.

CONTINGENCY PLANNING FOR MG ROVER'S COLLAPSE: SUPPORT FOR THE WORKERS, COMMUNITY, SUPPLIERS AND DEALERS

  30.  Initial low-key planning for the contingency of MG Rover's collapse had begun in April 2004. From December 2004 onwards, these efforts were stepped up working on three scenarios, with the Department co-ordinating work with HM Treasury, Advantage West Midlands, Jobcentre Plus and the Learning and Skills Council. The scenarios were the company's prospects of finding a long-term partner; the company could collapse; and they might seek financial support. A planning group with representatives from all these bodies began to meet on a fortnightly basis in January 2005.

  The outputs of this work were, for the first and second scenarios, outline packages of £150 million support for workers and supplier companies and, for the third, detailed criteria that would have to be satisfied in order for a loan to be justified with regard to value for money, propriety and legality.

  31.  Work on the support package drew heavily on the expertise of AWM and other local agencies in running the programmes funded from the money made available to the 2000 Rover Task Force (RTF). In addition to short-term assistance for suppliers while production of certain models was interrupted, the RTF had put in place long-term programmes to modernise the automotive supply base, diversify the local economy and accelerate economic regeneration in three specific areas of the region. These had delivered significant economic benefits and had contributed to the increased resilience of the region's supply base, which in 2000 had been heavily reliant on the Rover Group.[24]

  32.  The output of this planning work was the package of support totalling over £150 million, to be overseen by the MG Rover Task Force, announced by Patricia Hewitt on 15 April 2005. Up to £50 million was made available for training for workers made redundant at MG Rover and its suppliers. Over £40 million was provided to cover redundancy payments and protective awards for Longbridge workers. £41.6 million was made available for MG Rover suppliers. £24 million was provided for other purposes agreed by the MG Rover Task Force including a loan fund to help otherwise viable businesses affected by the MG Rover's collapse.

EFFECTIVENESS OF ROVER RECOVERY PACKAGE AND TASK FORCE

  33.  The contingency planning that had been taking place since April 2004, and more intensively since January 2005, allowed a rapid and effective response to be mounted. The MG Rover Task Force has provided invaluable leadership in coordinating the many agencies and delivery organisations involved. The MG Rover Task Force has given a full account of its activities in its report The Work Goes On. The report, published on 7 March 2006, also sets out the important continuing work to assist those former MG Rover workers who have not yet found new jobs and to revitalise the local community. Some of the key actions taken are set out below.

HELP FOR PEOPLE MADE REDUNDANT

  34.  Agencies on the ground expanded their capacity to meet the immediate large increase in demand for advice and services from both the 5,300 people who had been made redundant from MG Rover and from companies in the supply chain. Some examples of the efforts that were made include:

—    The Redundancy Payments Directorate of the Insolvency Service was able to process the majority of claims for statutory redundancy pay and social security benefits quickly and payment made within two days of applications being received.[25]

—    Jobcentre Plus made available a range of information and services, including advice on CVs and job interviews which is not usually provided until a person has been unemployed for six months.

—    The Learning and Skills Council sourced and developed some 150 different training courses.

  35.  As a result of the actions taken by Jobcentre Plus and the Learning and Skills Council, by the middle of February 2005, over 63% of people made redundant from the collapse of MG Rover have found new jobs and over 10% are booked on or have started training. Some are being helped to start their own companies.

HELP FOR MG ROVER SUPPLIERS AND RETAILERS

  36.  MG Rover collapsed owing its UK based trade creditors £102 million. Support was made quickly available to those affected and it included the £41.6 million support package and loan fund mentioned earlier. Companies in the supply chain were provided with immediate support for wage costs, consultancy advice on business planning and restructuring and medium-term assistance with diversification and business improvement. The Wage Support Scheme alone has helped 170 companies to save 1,300 jobs. In addition, HM Revenue and Customs considered, on a case-by-case basis, VAT deferral for companies which had remained viable companies after MG Rover's closure and has allowed over 100 companies to defer tax payments worth nearly £12 million.

CONCLUSION

  37.  The Government did all it could to support MG Rover in its pursuit of a strategic partnership that could have secured the company's long-term future. When the efforts of all concerned sadly proved fruitless, the collapse of the company was a devastating blow for those working for the company, its suppliers and dealers and their families, and for the local community more widely. However, the Government considers that the effective contingency planning for that eventuality, and the impressive response since by Advantage West Midlands, Job Centre Plus, the Learning and Skills Council and others has significantly mitigated the impact of the collapse on the local economy. More remains to be done, of course, and the Government will continue to provide support—for instance, a continuing package totalling more than £6 million to help local companies diversify and innovate.

21   Source WMRC European Automotive Productivity Index 2003: productivity measured in terms of vehicles per person. Back

22   The AIGT was covered in Trade and Industry Committee Eighth Report Session 2003-04; see also http://www.autoindustry.co.uk/automotive-unit/aigt Back

23   Not printed here. Printed as Appendix 6 to the NAO Report. Back

24   In 2000, 161 companies in the UK were dependent on Rover for over 20% of their sales. By 2005, this had dropped to 74, of which 57 were in the West Midlands. An estimated 22,000 people in the West Midlands were dependent on Longbridge in 2000 compared to 12,000 in 2005. Back

25   The normal targets of Redundancy Payments Directorate of the Insolvency Service are to pay 70% of claims within three weeks and 92% within six weeks. Back