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Trade and Industry Select Committee Inquiry into the Government and MG Rover
MEMORANDUM BY RICHARD BURDEN MP
1. I welcome the opportunity to submit evidence to this inquiry. I have served as MP for Birmingham Northfield since 1992 and been a member of the Rover Task Forces in both 2000 and 2005. I was a member of the Trade and Industry Select Committee between 2001 and 2005.
2. The Longbridge car plant has been at the heart of social and economic activity in my constituency since it was established by Henry Austin in 1905. As local MP I have tried to monitor activity at the plant as closely as possible, and in 2000 I was in regular contact with the Secretary of State and his Department, BMW, unions and other interested parties across a range of issues.
The events of 2000
3. The BMW announcement of 16 March 2000 was sudden and came as a shock. In the period directly prior to this statement there had been concerns about the impact of negative press coverage on sales. However, these concerns were offset against a background of considerable BMW investment at Longbridge. The German company were making a large resource investment in plans to build the new Mini at Longbridge and were active in the process of an application for EU aid. These commitments, and what turned out to be false assurances from BMW at the Geneva Motor Show, meant their decision to change strategy and withdraw from Longbridge was a real bolt from the blue.
4. Whether the Secretary of State was at fault to be caught unawares by BMW's withdrawal was a matter for scrutiny by this Committee during an inquiry published in April 2000[1]. Their conclusions were that the change of gear in BMW's consideration of its future commitment to Rover came at the very end of February 2000 and in the first fortnight of March 2000. They concluded 'it is hard to see how the Secretary of State could have anticipated the decisions of 16 March'.
5. At the time of the announcement BMW had indicated that Land Rover would be sold to Ford and Longbridge taken over by Alchemy Partners. Alchemy held exclusive negotiating rights with BMW and all indications were that their plans would have involved a large and sudden downsizing of the Longbridge workforce.
6. Within 24 hours of the announcement, the Secretary of State visited Longbridge and convened a meeting where the first Rover Task Force was created. During this visit there were initial discussions between Stephen Byers, John Towers and myself about the potential for a viable alternative business plan for Longbridge. These were continued in a private discussion after the meeting at which I was not present. The issue was whether there could be an alternative for Longbridge founded on a sound business-case. If so, it was felt that BMW should take into account such an alternative alongside those plans already under consideration.
7. Efforts to get BMW to consider such an alternative were made both in the local area and at a national level by Trade Unions and Government was supportive of these.
8. However such a scenario never transpired, because Alchemy Partners pulled out of its negotiations with BMW on 28 April. It seems the two parties could not reach agreement on a financial package. From that date the choice was between the closure of the plant or an alternative buyer. In the following fortnight Mr Towers and his Phoenix Consortium commenced negotiations with BMW and a number of potential business models were explored. It is worthy of note that Phoenix had tried but failed to secure production of the new Mini - a product that has become an international success story. An agreement was finally signed between Phoenix and BMW overnight on 08-09 May. The choice had been between Phoenix and closure. The Secretary of State made clear that he wished the negotiations to avoid closure to reach a successful conclusion, and I believe he would have been wrong not to do so.
The Impact of 2000-2005
9. As outlined to me, the Phoenix business strategy for Longbridge fell into two very distinct phases. The initial phase immediately after the takeover set the challenge of bringing stability to the company, buying time for the regional economy and assessing precisely what assets and liabilities had been left by BMW.
10. The second phase of the strategy was to secure the long-term survival of the company by finding a suitable partner. It was very clear there was never any guarantee this would happen and we now know Phoenix failed in this challenge.
11. In this regard there are questions to be asked about whether there was something fundamentally wrong with how Phoenix Venture Holdings structured and managed the business. The Committee will wish to consider whether those issues fall within the remit of this Inquiry. In any event, it is to be hoped that the Inquiry established by the Secretary of State will assist in addressing some of those questions. However, none of that affects the fact that it was reasonable for the Secretary of State to do what he could to help avoid the closure of the plant once Alchemy had pulled out. The fact that no long-term partner for MG Rover was secured does not mean it was not worth trying. Up to 6,000 people at the plant remained in work for five more years than they would otherwise have done and millions of pounds of tax revenues were earned for the Exchequer.
12. In regards to 'phase one', the evidence shows the five years bought for the region allowed it to make preparations that significantly reduced the shock of the collapse when it came in 2005. The potential job losses from closure at Longbridge in 2000 were calculated at around 30,000 and some have estimated even more. By the time of closure last year the worst-case scenario was 13,000 jobs lost. The likely impact now looks to be of the order of 9,000 jobs.[2]
13. During this intervening period companies in the supply chain have received important help from programmes like Accelerate, to improve skills and processes as well as to diversify. This and similar work has kept company closures and job losses to a minimum. The recent National Audit Office Report[3] documented that in 2000, 161 companies in the UK had been dependent on MG Rover for over 20 per cent of their sales - by 2005 this had dropped to 74. Analysis by the current Rover Taskforce in March 2006 estimated that eleven supply chain companies have closed in the wake of the 2005 collapse - far fewer than anticipated.
The events of 2005
14. In 2004 it was clear that Phoenix were fully engaged in the search for a suitable partner. In March 2004 Phoenix Directors John Towers and Peter Beale appeared before this Select Committee and outlined their hopes of a joint venture in China. By November 2004 Phoenix were briefing on specific plans for a deal with Shanghai Automotive Industry Corporation (SAIC) and, we now know, had already signed a deal selling intellectual property rights to the Chinese company.
15. According to Phoenix, the SAIC negotiations were progressing well, but as 2005 dawned speculation mounted as to why there had been no conclusion.
16. In the period directly building up to March 2005 discussions took place between Phoenix and the Government about the possibility of financial support. From the discussions I had with Ministers, I am in no doubt that they wanted to assist the Company in taking forward its proposed deal with SAIC. On 01 April 2005 the Government confirmed that it was prepared to make a bridging loan available.
17. The Government offer on the bridging loan was very clear. They would provide a £100m bridging loan but only if strict conditions were met. The most significant of these being that the loan had something to bridge to, i.e. that there was a reasonable prospect of a commercial deal with SAIC. Any bridging loan would also need to take account of EU state aid rules. My opinion is that the offer of a bridging loan was consistent with policy objectives.
18. Equally I have no doubt that - as stated in the recent National Audit Office report - the agreement from HM Customs and Excise to defer payments of the majority of the company's VAT payments due from the end of November 2004 reflected a genuine concern to help the company survive whilst negotiations with SAIC were continuing; and buy time to help facilitate a situation whereby the survival of the company could allow tax already owed by the company to be recouped as well as thousand of jobs saved.
19. The Government was right to do what it could to help MG Rover conclude their negotiations with Shanghai successfully. If they had failed to provide that support the probability is that the company, whose fortunes were intertwined with the prospects of the UK manufacturing base, would have collapsed earlier. This would have entailed millions of pounds of tax revenues still being lost and thousands of people thrown out of work without necessarily the immediate assistance that the Taskforce was able to provide by April 2005.
20. There has been criticism of Government's decision to make public its offer of support but I believe this had the objective of reinforcing state commitment to the company at a crucial time in the negotiations.
21. The question then is why did the negotiations stall? From discussions I had with representatives of SAIC, it is my understanding that the deal foundered on doubts in Shanghai about the financial stability of MG Rover. Whether this was the case and if so what precisely these doubts concerned will I hope be provided by the official report of the inspectors following up the work of the Financial Reporting Review Panel.
22. By the first week of April 2005, protracted negotiations in Shanghai had still not reached a conclusion and this provoked an unprecedented level of press and business speculation about the financial difficulties of MG Rover and the Shanghai deal itself. Throughout that week information on the likely conclusion of negotiations was constantly changing. At some points it seemed a successful deal might be reached. However on Thursday 07 April SAIC indicated that the prospects of the deal being negotiated between Phoenix and SAIC had ended. This removed the possibility of the bridging loan being paid. On the same day a number of suppliers had stopped sending their products to MG Rover and the position became critical.
23. Following a telephone conversation with John Towers in Shanghai, the Secretary of State chaired a press conference with the General Secretary of the TGWU that evening. This provided an update on the situation including the news that an administrator was to be called in by the company and that the Government would both be working with all parties to try to secure the future of car making at Longbridge, and that it would also be creating a Task Force and support package to help deal with the impact of the possible closure of the plant. The announcement that evening ensured employees and their families were kept informed of events that affected their livelihoods as soon as possible. It should be noted that press speculation was already rife.
Events subsequent to 08 April 2005
24. MG Rover went into administration on 08 April and the Secretary of State and her Department acted quickly and decisively. They followed a dual-track response - on the one hand they began work on the recovery package and on the other hand they pursued any possibility of a deal still being made with Shanghai.
25. The Chinese company clearly no longer wished to pursue a deal with Phoenix but they pointedly did not close the door completely on a possible link-up with MG Rover's Longbridge plant - though the prospects of such a deal were remote. In this situation the Government, in my view was entirely justified in making a £6.5m loan available to keep Longbridge a going concern for one week to explore this possibility. There were thousands of jobs at stake and the Government would have been rightly attacked if the chance of securing such a deal had been lost because it had been unwilling to do what it could to facilitate it.
26. The most ludicrous accusation on this matter has been that Government knew the company could not be saved and used the £6.5 loan as a political ploy by Labour to win votes at the election. The loan was made available for one week only from 10 April. The general election was early May and I do not understand how pushing the date of the company's collapse one week closer to polling day could be to Labour's advantage.
27. Regrettably there was no appetite for a purchase and on 15 April SAIC in Shanghai informed the administrators they were not willing to acquire either the whole or parts of the MGR or Powertrain businesses.
The effectiveness to date of the recovery package and Task Force for the Rover workforce
28. The immediate response to the collapse was swift and used experience from the original Task Force set up in 2000 to maximise the effectiveness of the recovery package.
29. Between 2000 and 2005 I had expressed concerns to Advantage West Midlands about the pace and scale of diversification and regeneration efforts in the area around the Longbridge plant. I am pleased, therefore that the 2005 Task Force Final Report emphasises the need to focus better attention on South West Birmingham where the community impact of the Longbridge failure is most-highly concentrated and the need to develop immediate jobs in the area most challenging. The recent news of Nanjing Automobile Corporation's plans to restart car production at Longbridge is of course welcome - but the wider challenge is about building a local economy no longer reliant on a single company or industry.
30. A full impact analysis can be found in the final report of the Task Force[4] and I will not repeat this here. On the whole the work so far has had a very positive impact in lessening the effect of the closure for the thousands of employees, supply chain companies and other communities connected to Longbridge.
31. Less than one year on though real challenges still remain. Four thousand former MG Rover employees are back in jobs at the time of writing and it is important to ensure that the new intensive personalised Employment Support Package is effective and that we continue to recognise the significance of there still being 1,800 without employment.
32. A high concentration of unemployment and other serious problems must be tackled in the area immediately around the Longbridge plant. An estimated 1,100 ex-Rover workers live within three miles of the plant and between February and October 2005 the unemployment rate in Northfield rose from 5.5% to 7.5%, male unemployment from 7.8% to 10.8%. These workers have been less used to travelling significant distances to work and contain a higher proportion of the less skilled former MG Rover workers. So their ability to find alternative employment is often less than other groups of former employees. Their path back to sustainable employment will depend on the ability of the South West Birmingham area to improve skills and aspirations.
33. To enable this, physical regeneration in the area and developments on the Longbridge site need to be closely-linked to the development of human capital in the area. If the Longbridge area's long-term problems of low skills, low aspirations and low entrepreneurship rates are not tackled in this way then future problems will soon dwarf any achievements made in the last year. Advantage West Midlands and the developers, St Modwens are, making a large investment in the redevelopment of the Longbridge site. AWM must take responsibility for ensuring that they and other agencies take the necessary measures to exploit human capital.
34. With the Task Force itself now having reached the end of its allotted lifespan I believe there remains a role for a body to check how progress is being made by the individual agencies and the Executive Sub Group to take forward out the recommendations of the Task Force. One suggestion could be that the Task Force itself could reconvene after, say, six months and then one year later to review progress. It is also important that there should be clarity in the reporting and accountability arrangements of the agencies and Executive Sub Group as custodian of the Task Force's recommendations. It is also important that the work of the Task Force is reflected in the Regional Economic Strategy and associated strategies such as those on transport.
35. Despite the events at Longbridge, the automotive industry remains an important part of the UK manufacturing sector and a major employer in the West Midlands. UK automotive firms are leaders in global best practice in many areas of high-value manufacturing and the UK is home to a world-leading performance engineering and motorsport industry. It is important that Government remains active in promoting an approach to the automotive industry that is able to meet the challenges of the 21st century. As part of the West Midlands Automotive Strategy, a £9.6m 'Phase 2' longer-term supplier support programme was outlined in the final Taskforce report of March 2006 with the aim of strengthening the automotive sector in the region.
Richard Burden MP March 2006 [1] Eighth Report from the Trade and Industry Select Committee: BMW, Rover and Longbridge: Session 1999-2000: HC 383." [2] Economic Impact Assessment Final Report by Regeneris Consulting, November 2005 [3] Report by the Comptroller and Auditor General, HC 961 session 2005-06, 10 March 2006 [4] 'The Work Goes On' published 07 March 2006 |