Grant aid from the British government for the two sportscar projects aiming to relaunch MG and Smart next year will have to be kept below GBP3m on each to stop the EU having the final say on the projects, writes Julian Rendell.

This relatively low level of aid — today's equivalent of EUR5m — is a limit peculiar to the auto industry, which the EU considers suffers from over-capacity and therefore not needing as much help as other industries.

Privately, officials at the DTI which administers the grant system fear that such a low level of assistance might give Nanjing an excuse to pull out of Longbridge, if its plan to re-launch MG TF production hits a snag.
 
"The problem is that the Chinese are used to their governments building factories and handing them over for free. But it just doesn't work like that here," says a source.

Nanjing president Yu Jianwei made a pointed reference to government aid at a press conference on the eve of the British motor show.

Project Kimber, which is negotiating with DaimlerChrysler to buy the Smart roadster and coupe, has already chosen Wales as the site of its factory on the basis of Regional Selective Assistance.

But the DTI, like its equivalent in the Welsh Assembly, the Department for Enterprise, Innovation and Networks, has to comply with tightly-worded EU state aid rules.

The "M4-corridor" area of South Wales is considered a Tier 1 area eligible for more grant aid than the Tier 2 Longbridge area, but both are subject to an upper limit of EUR5m, before the EU gets the final say - a process that increases political scrutiny and slows the approval process.

Both NAC-MG and Project Kimber are likely to be classified as small and medium enterprises (SME) for the purposes of grant aid. That means they will employ less than 250, have turnover less than GBP50m and be worth less than GBP43m.

The level of assistance is further decided according to the economic health of the region, so Project Kimber gets more help by choosing a Tier 1 region.

According to the EU formula, Kimber will be eligible for up to GBP141,000 of aid for every GBP1m invested, while NAC-MG can expect GBP69,000 for every GBP1m.

To stay below the EU scrutiny threshold, Project Kimber will need to limit its investment to below GBP21m, and NAC-MG below GBP43m.
 
That's because maximum grant aid is 47% in a Tier 1 and 23% in a Tier 2. These percentages are then further reduced by 30%, a peculiarity unique to the auto industry.

Investment eligible for the grants includes buildings, production line machinery, computers, intellectual property and professional fees. New or secondhand equipment is allowed.

For directors of both projects, a further complication is on the horizon in January 2007 when a new five-year grant regime comes into force.
 
This is a response to the EU needing to re-allocate funds to the new accession countries in eastern Europe, so the UK is having to reduce the share of its population included in grant regions from 31% to 24%.

Regions rated Tier 1 — including the Welsh area chosen by Project Kimber — are largely unchanged, but the Tier 2 regions, Longbridge included, are still out for consultation.

From 2007, Tier 1 areas will be eligible for just 40% maximum grants (down from 47%) while Tier 2s will rise to 25% (up from 23%). At the same time a new category will be created, by splitting small and medium enterprises into small and medium, small companies having 12 employees or less.

Fortunately for Project Kimber it shouldn't be affected by these changes, because it has already agreed "a significant conditional 'in principle offer'" from the Welsh Assembly.

However, the future for Nanjing could be brighter because it could gain around GBP6,000 (from GBP69,000 to GBP75,000) for each GBP1m invested, providing Longbridge retains its Tier 2 status.

Julian Rendell