EU questions Rover aid

BBC

The European Commission has begun an investigation into a British Government aid package for Rover's troubled Longbridge plant in Birmingham. The Commission wants to investigate whether the deal breaches European Union competition law - which limits the amount of state aid companies can receive.

The move will mean that any money promised to Rover will be put on hold for up to 18 months, and delay the launch of vital new models. The investigation is likely to include inquiries into how serious Rovers' owners BMW were about switching investment to a rival site in Hungary.

Trade and Industry Secretary Stephen Byers maintained the investigation was part of the Commission's "normal procedure" because all cases of state aid had to be considered, but he stressed the need to act quickly. Mr Byers told the BBC last week that there was a "strong case" for government aid to Rover, and he would be pressing the EC for a "speedy resolution" of the investigation.

BMW said that it expected the EU to reach a decision in less than 18 months.

Union warning

The EU is going ahead with its investigation despite a warning from unions that any delay to the £152m package could damage customer confidence in Rover and slow the company's investment programme. Rover's plant, the largest car manufacturing facility in the West Midlands, has been under threat for two years. It employs 14,000 workers, with another 50,000 jobs in the region coming from its suppliers.

Rover's owners, BMW, have been reluctant to invest in modernising the plant unless they could get some help from the UK Government. An aid package was agreed in June, with the government pledging £152m in return for a commitment from BMW to invest £2.5bn.

The hope was that BMW would be able to develop new models to replace Rover's ageing small car range and reverse its decline in sales.

Legal doubts

Doubts about the deal surfaced almost at once. Under EU law, governments are only allowed to give fresh aid to industry if they can prove that the jobs would leave the European Union if they do not provide the help.

At the time BMW had said it was investigating an alternative location for production of Rovers in Hungary. But the European Commission is believed to be sceptical that Hungary was ever a real option for Rover. The news will be a political embarrassment for Trade Secretary Stephen Byers, who fought hard for the deal, and gained assurances from the unions that they would agree to productivity improvements in return.

Now BMW, which struggled for the subsidies, might be tempted to finally give up its attempt to modernise Longbridge after years of losses which have hurt the German company's earnings.