The plant, at Hams Hill in north Warwickshire, will receive pounds 40m-pounds 45m in government support and will safeguard 1,500 jobs at BMW's Rover subsidiary and 5,000 more in the component supply industry.
Output from the plant, which is being built on the site of an old power station, will be 500,000 engines a year split evenly between BMW and Rover cars.
The breakthrough in the aid negotiations came on Thursday night after the BMW chairman, Berndt Pieschetsrieder, flew into London for a final round of talks with Ian Lang, President of the Board of Trade.
Mr Lang agreed to increase the amount of regional selective assistance on offer to pounds 22.5m. A similar amount is being provided in the form of training grants and infrastructure funding from English Partnerships.
The level of support compares with the pounds 61m in grants that Ford received to build a new Jaguar car plant in Coventry. The Department of Trade and Industry initially agreed to provide pounds 48m in regional selective assistance, subsequently cut to pounds 40m by the European Commission. Mr Lang said, however, that he did not anticipate any objections from Brussels to this latest aid package.
Austria, where BMW already has a number of engine plants, had indicated that it would provide up to pounds 80m in aid but Dr Walter Hasselkus, Rover's chief executive, said Britain had won BMW's vote on technical, commercial and cost grounds.
He denied that BMW had threatened to take the project elsewhere if the Government failed to provide a specific amount of support, but he said negotiations had been "hard-headed" throughout.
"We are not a charity organisation or a Sunday school. We had to get the best that could be granted. What we asked for, expected and got was a fair deal. It was not horsetrading."
The new engine plant forms part of BMW's plan to invest pounds 3bn in Rover by the turn of the century and completely overhaul its model range. The German car maker has given the green light for Rover to develop a new Mini for the next century, which will be produced in volumes of up to 200,000 a year and a new small Land Rover will appear next year.
The plant will produce 1.6 to 2 litre petrol engines for the replacement models for the Rover 600 and 800 ranges and also for BMW models.
Rover's existing engine plant at Longbridge in Birmingham, which produces 340,000 A series and K series engines a year, will be scaled back a workers and production are shifted to the new plant. But Dr Hasselkus said Rover would continue to build engines at Longbridge in the longer term.
BMW's plan is to raise Rover's production from 500,000 cars and Land Rovers a year now to 750,000 by the turn of the century.
The engine for the new Mini will come from a plant that BMW is to build in partnership with Chrysler in South America, probably in Brazil.
The 85-acre site at Hams Hill was owned by the electricity generator PowerGen.
Design work on the building and site preparation will begin immediately.
BMW's investment in the West Midlands follows expansion plans by Nissan at Sunderland and Vauxhall at Ellesmere Port in the last few months and is a further vote of confidence in the British car industry.
Mr Lang said: "It is a vitally important strategic investment and one which confirms the important role of the UK in the motor industry."
Unions and local councils also welcomed the investment. Tony Woodley, national secretary of the Transport and General Workers said it was "great news for the UK and for the future of manufacturing in the West Midlands". But he called on BMW to name which replacement models would be built at Longbridge.
Councillor Martin Brooks, of Birmingham City Council, said the engine plant would add to the region's status.
Car makers will increasingly have to shift their sights towards Eastern Europe as growth in the traditionally lucrative Western markets heads towards saturation point, a survey said yesterday. The research, from the IFO economic institute, predicts that European car ownership will grow by an average of 1.8 per cent a year until 2005, increasing the number of cars on the roads from 168.5 million to 205 million. The growth rate in East Europe will average 4.3 per cent, West Europe by just 1.6 per cent.Reuse content