The final blunders that drove Rover to the scrapheap

Workers leave MG Rover's Longbridge plant in Birmingham, central England, after the last British-owned car-maker went into administration. Picture / Reuters

Their faces told the story. As Patricia Hewitt, the Secretary of State for Trade and Industry, and Tony Woodley, general secretary of the Transport and General Workers' Union, sat down to an emergency press conference on Thursday night, exhausted from 16 days of trying to stave off the inevitable, they needn't have uttered a word.

The assembled press knew that it was the end of the road for MG Rover. A day later the last British-owned car-maker went into administration, after a rescue deal with Chinese car-maker SAIC collapsed.

Ministers are now anxiously calculating the impact of the closure on the general election, particularly in vulnerable Labour seats in the West Midlands. The industry minister Jacqui Smith, for instance, now knows that she will have a fight on her hands to hold onto her 2,484 majority in Redditch.

A picture of disarray is now emerging over the Government's handling of the Rover affair in the weeks before its collapse. Under fire from opposition parties, the Government is at pains to insist that it did everything it could to rescue the Longbridge plant.

But The Independent on Sunday has learnt of a series of government blunders in the handing of the affair.

News of the deal between MG Rover and SAIC first broke in The Independent in November when John Towers, chairman of the MG Rover's parent company Phoenix Venture Holdings, revealed that he was in negotiations with SAIC over a £1bn deal.

At the time there was little reason to question the deal, with talk of planned new models and bold predictions that agreements could be signed in early 2005.

But the cracks started to emerge in January. Directors of MG Rover secretly contacted the Department of Trade and Industry (DTI) to say that the Chinese were getting nervous and the deal needed help.

The DTI, with the Treasury, came up with a proposal to allow MG Rover to defer up to £40m of VAT payments in an attempt to sweeten the deal with SAIC. The DTI thought this was enough and stated that it was "confident" that it would go ahead, even though it was emerging that SAIC was planning to make 2,000 of the 6500 Longbridge workers redundant.

To underline the Government's support for the deal, the Chancellor took time out of a four-day trip to China in late February to meet Ma Kai, the minister for the National Development Reform Commission, which had to approve the deal. By then, though, the deal was looking shaky.

The Chinese media reported that the Beijing government was divided on whether to allow the state-owned SAIC to buy MG Rover. Over at the DTI there were no such worries.

"There was supreme confidence that the deal would be done," said one insider. "They seem to have badly misread the situation."

By the middle of March the Government woke up to the fact that the deal was in grave danger. SAIC had discovered serious financial liabilities within MG Rover, and Phoenix directors issued a distress call to the DTI.

Patricia Hewitt dispatched a team of officials to Shanghai in an attempt to rescue the deal. Their response was swift but flawed. The DTI offered MG Rover a six-month £100m loan which was designed to prevent the company from going bust before it could sign a deal with SAIC.

But in a series of letters to the DTI sent in late March and early April SAIC made it clear that this was not enough. The Chinese had plans to develop new MG Rover models - but it would take two years before the cars would hit the showrooms.

SAIC needed a guarantee that MG Rover would remain solvent until 2007. Despite this the DTI ploughed on with its plans for a six-month loan. This was beginning to anger the Chinese.

"The loan was largely irrelevant, because it did not provide the guarantees SAIC wanted," said a source close to the negotiations.

"SAIC made their position perfectly clear, but this fell on deaf ears."

The DTI insists that there was nothing more it could do, because under European state aid rules loans to companies must be repaid within six months.

However, it is understood that advisers to SAIC raised the prospect of the Government offering MG Rover a so-called "restructuring loan" which may have prevented it from getting caught by the EU law.

The DTI never took this idea seriously, said a well-placed source. It was early April now and the Government was publicly insisting that it was doing all it could to secure the deal. Privately, the Government had pressed the panic button.

It had realised that there was a real chance of MG Rover going bust during the general election period and officials hit the phones to find a buyer. Predictably, SAIC pulled out of talks with Rover last week, and even a 25-minute call between Tony Blair and the Chinese premier couldn't rescue the situation.

After the confusion on Thursday, when Ms Hewitt incorrectly announced the company had called in the receivers, MG Rover finally went into administration on Friday afternoon.

Sensing a political storm brewing over the affair, Mr Blair flew straight from the funeral of Pope John Paul II to Birmingham, where he claimed that there was sill a chance of a deal with SAIC.

And on Friday night Ms Hewitt sent letters to SAIC and the Chinese government saying that the Government's door was still open to any deal.

But this was desperate stuff. MG Rover is in administration, which means that anyone is free to make an offer for the company's assets. SAIC may well want to buy part of MG Rover. But it will cherry-pick the best bits - probably its research and design facilities. This will mean nothing for the vast majority of the 6500 Longbridge workers who now face redundancy.

- INDEPENDENT