300bhp/ton
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That looks like a 19j 2.5TD (officially called a Diesel Turbo). They make 89hp stock. They share the same block with the Tdi engines (and the 2.25 engines from the Series). This was the first turbo engine of this type and in its day was a world beater.
They are nice engines, but do not like to be thrashed. Drive them gentle and they run ok. I would guess a cracked piston or similar. I also have a 1989 Ninety out the front now. We replaced a piston last year due to being cracked. Apart from some grunt work it was a cheap fix at about £60 for parts.
With 235/85 or similar tyres they should happily cruise between 55-65mph, but are no speed demon. But are nice to trundle around in. On wide open A roads or dual carriage-ways they do feel under powered, but in the hills when laning and the like, they actually have plenty of grunt and feel quite lively.
As it is this engine, technically this is not s Defender, it would have been branded as a Ninety in words.
What country are you in?
If doing an engine swap, how much do you want to spend?
Will you be doing any repair conversion work yourself?
As said, I have one of these. If you are prepared to do some spannering, it might be a cheap fix. A compression test will give a clue to any compression issues. All you need to do is take the head off and the sump. You'll be able to take a piston and replace. If the bore and shells look good, very little else is needed apart from putting it back together.
£45 for a piston inc rings: https://www.paddockspares.com/etc8670s-piston-assy-with-rings-std-2-5-turbo-diesel.html
If you want better cruising there are a few options.
However I personally believe that the TD would happily pull a 1.2 transfer box as the internal gearbox ratios are shorter than those on a Tdi. It would potentially blunt in gear acceleration, but mean less frequent gear changes when pulling away, so probably similar speeds when pulling out of a junction. But it would give you better cruising ability by 5-10mph.
Older LT-77 + 1.2:1 transfer box gives very similar overall gearing to Tdi+ LT-77/R380 gearbox + 1.4:1 transfer box.
If you do want to go engine swap routes there are lots of options. The easiest swap is a 200Tdi, but you'll still need a few bits. If a Disco engine is used the turbo is in a different place. My brother has this in his Ninety, which is also 1989 vintage and had the 19j previously.
I'd suggest you'd want to budget £1000-1500 if doing the work yourself.
The Tdi is much more stout and tuneable, but is arguably less refined and louder. They also take an age to warm up compared to a 2.5 TD.
Just swapping the engine will not make it better cruising as this will be down to gearing still. The 1.2 transfer box would still be the easiest option.
I've not done a 300tdi swap, I believe there are kits these days. Some say you can get a 300Tdi more easily. I'm not really convinced on this. The additional parts will mean a 300Tdi swap will probably cost the same or more, but is more work to fit. I have nothing against the 300Tdi, but there are no real tangible benefits of them over a 200Tdi in regards to performance or mpg.
There are lots of other engine swap options, from the Rover V8, Td5, BMW M57 and more. But most will require more work and cost. Including maybe a different gearbox, seatbox etc. don't forget about things like exhaust, cooling, rads, intercoolers and the like.
