Motoring rescue effort steps up a gear

The Government's £5m loan to LDV is its first direct help for the ailing motor sector. Is this a new policy?, asks Sarah Arnott

LDV pushed its deadline for filing for administration out by a week yesterday after a £5m bridging loan from the Government bought time for Malaysia's Weststar to rustle up the cash to buy the teetering van maker.

But tentative good news for LDV and its 850 Birmingham staff was not echoed elsewhere in the battered car sector and talks between the Government and Jaguar Land Rover (JLR) hover on the brink of collapse.

The car industry has been calling for government aid since sales first dropped off a cliff last autumn. Since then, the situation has worsened. The traditionally big month of March saw nearly 138,000 – or 30.5 per cent – fewer new cars hit the streets, while production was down by more than half as manufacturers try to realign supply with such meagre demand. But while the Government has put together a £2.3bn Automotive Assistance Package (AAP) of loan guarantees, and agreed to part-fund a £2,000 scrappage incentive, it has staunchly refused to use any taxpayers' money directly. Until now.

LDV itself has made several cries for help. In February, the company admitted it was "literally running out of cash" and asked for a £30m loan. The Government said no. A subsequent management buyout plan pursued by Erik Eberhardson, the former chairman of Gaz, LDV's Russian parent company, also floundered. Mr Eberhardson said he needed a £5m loan to keep LDV afloat while negotiating a deal with foreign investors including Mahindra and Mahindra, the Indian vehicle group. Again, the answer was no.

Having not produced a single vehicle since before Christmas, LDV finally filed for administration last week. But yesterday's deadline was extended on the strength of the Government's 11th-hour loan and the Malaysian takeover it will facilitate.

There are still hurdles to jump before LDV is safe. A spokesman for the company said yesterday: "Whilst a sale has been agreed, it will take another few weeks to be completed and the loan from the Government is to enable the business to continue operating whilst this process takes place. This is clearly a significant development for LDV and a major step towards an exciting new future but there are still major steps to be competed over the next few weeks."

It is also a major step for the Government. Given his politically sensitive links with Oleg Deripaska, the Russian billionaire who controls Gaz, Lord Mandelson has played no official role in discussions about LDV. But the Business Secretary was, nonetheless, unequivocal yesterday that there was no chance of the loan being extended, and that taxpayers' money could only be used when a credible private sector buyer, able to provide long-term support, was waiting in the wings. "We have made clear that, unless and until there was the serious prospect of a new owner prepared to take on responsibility for the company, there was no role for Government," Lord Mandelson told a CBI conference in London. "Are we going to respond to every request? No."

Unluckily for JLR, it seems to be on the list of the undeserving. Before Christmas, the UK luxury car maker was already pitching for £1bn in loan guarantees to obviate difficulties securing funding from the UK's credit crunch-struck banks. But the Government said that Tata Motors, the vast Indian conglomerate which bought the British marques for more than £1bn in March last year, was responsible for its subsidiary's finances.

Discussions have continued ever since, but appear to be heading for an unproductive climax. Since the launch of the scheme in January, JLR's focus has been on accessing funding via the Government's AAP, which stipulates that loans are to be for the purposes of research into green technologies.

The package includes guarantees for up to £1.3bn from the European Investment Bank, and another £1bn from "other sources" such as high street banks.

JLR is not the only car maker looking to the EIB. Nissan has got the go-ahead for €400m (£353m), although the company is considered sufficiently sound that the bank is not asking for a state guarantee. And Vauxhall, whose parent GM Europe is currently subject to a takeover proposal from Fiat, is after £750,000.

But JLR's plans are the biggest. It has put in bids for £340m from the EIB and another £450m from Lloyds and RBS. Lord Mandelson is widely held to support government guarantees for JLR, and the Prime Minister was ambivalent on the general issue in Parliament yesterday. "We are in regular touch with every one of the major car companies in Britain," Gordon Brown said. "Where we have had requests, we're prepared to consider and take action that is necessary."

But the Treasury is taking a harder line, and after weeks of wrangling the final offer put to JLR at the end of last week included conditions that sources close to the discussions describe as "impossible".

Sources say that the Government will only back £175m of the EIB package, 15 per cent of which must be paid to the Government immediately, and the loan will be underwritten for only six months rather than the original three years. Tata Motors, which has already agreed to put up an extra £100m, must also find several times that amount. Furthermore, the Government is both to choose a chairman for the board and have another permanent seat. "JLR has been told these are the final terms and it can either take them or leave them," the source said.

The Government has a strong case. Its caution can be applauded for the respect it shows for taxpayers' money. Equally, the appointment of board members to ensure the contingent liabilities is not outlandish prudence. But if it is too risk averse, the Government risks aping the very credit market conditions the assistance scheme was supposed to compensate for. Garel Rhys, at Cardiff Business School's Centre for Automotive Business Research, said: "If the Government doesn't help JLR, then it is not clear who on earth the AAP is for, because it is the biggest of the UK's car manufacturers and the most British of companies, even if it is owned by an Indian group."

JLR's decision on whether to accept the Government's onerous terms is expected within weeks. If the company turns down the offer, the whole AAP will be undermined.

"If JLR walks away the credibility of the scheme will be damaged and the Government's supposed conversion to the importance of manufacturing will join the other policies branded as nothing but spin," Professor Rhys said. "It will do nothing for the standing of the Government, it will make investors wary of coming into the UK, and it will mean major action from JLR to reduce its cost base."

The row over JLR's future was an ironic backdrop to yesterday's publication of a 20-year vision for the motor industry by the New Automotive Innovation and Growth Team (NAIGT), an industry-led project at the Department for Business. The central recommendations of the year-long study are for the creation of a joint industry/government Automotive Council and for a strong focus on the development of low- carbon vehicles and the concomitant infrastructure.