Jeremy Warner: Treasury calls Tata's bluff over JLR guarantees

Outlook The Government is right to play hardball with Tata Motors over £750m of aid being demanded to support Jaguar Land Rover (JLR). Many of the problems faced by JLR – such as collapsing sales and an absence of credit – are common to the industry as a whole, but some are specific to JLR and its parent company, Tata Motors. Indeed, it can reasonably be argued that Tata is largely the author of its own misfortune. Its acquisition of the much larger JLR two years ago at a price which, even at the time, rivals considered grossly inflated was an act of folly that has ended up endangering the whole company.

Tata's acquisition of JLR was a debt-leveraged transaction similar to those being pursued at the time by the buyout kings of private equity. The acquisition was initially financed through a $3bn bridging loan. A subsequent rights issue by Tata Motors, substantially funded by the company's controlling shareholder, Tata Sons, reduced this loan by $1bn, but the company remains up to its neck in debt, with a fair old slug of it up for renegotiation this year.

Tata claims that the request for guarantees is completely divorced from these separate financial difficulties. But what's to stop the money leaking back to India and in essence helping to finance the flaws in Tata's initial purchase of JLR? That would plainly not be a good use of taxpayers' money.

These are muddy waters, for in many ways Tata has a respectable case. Car makers throughout Europe are getting similar aid from their host governments. Only in Britain does the Government appear so penny-pinching. Tata is looking for government guarantees on £340m of loans from the European Investment Bank and a further £450m from the UK Government-controlled Lloyds Banking Group and Royal Bank of Scotland. So far, ministers have been prepared to sanction guarantees of only £175m of the EIB money, and even then only for six months and in return for a 15 per cent facility fee. What's more, to protect the taxpayer interest the Government wants the right to appoint JLR's chairman and to vet most operational decisions.

This looks like an offer which is designed to be rejected, though the Department for Business Enterprise and Regulatory Reform insists that talks are still ongoing. With thousands of jobs at stake in Labour's political heartlands, not just at JLR but among countless suppliers too, and tens of billions already spent propping up the banks, why is the Government being so tight-fisted?

The simplest explanations are usually the best, and the bottom line is that the public finances are already in such a state that the Treasury won't sanction anything more, however worthy the cause. All over the shop the taps are being turned off. The mandarins are back in control, and ministers are being refused.

Still, it's all a bit rich. There's the Business Secretary, Lord Mandelson, banging on about making Britain a centre of excellence for green technologies and manufacturing, but he's not being allowed to guarantee the EIB loan designed to enable JLR to make the transition to cleaner cars.

The Government's approach amounts to a calculated gamble. Will Tata call in the administrators at JLR if it doesn't get the money? This seems unlikely after so much has already been spent. And if Tata Motors itself goes down the drain by the weight of its "British patient", then there would probably be takers, even in these markets, for an entirely debt-free JLR. Ministers must be clear on one thing at least – the British taxpayer cannot be made to contribute to the costs of Tata's hubristic purchase of JLR.