Tuesday, 7 July 2015

LOBOs - or how Cornwall council taxpayers are footing the bill for expensive borrowing

Cornwall Council taxpayers are footing the bill for expensive borrowing according to a Channel 4 investigation. Most of the borrowing dates back to the former county and district days and has been inherited by Cornwall Council. However there is at least one deal which was done by the former Conservative administration in 2011.

The sort of borrowing being talked about is known as a LOBO - which stands for Lender Option/Borrower Option - although this is a bit of a misnomer as the contract is heavily weighted in favour of the bank. And because such lending is over hugely long periods - often 50-60 years - significant changes in interest rates can mean the deal turns into a very bad one for the council and council taxpayers. So when the Bank of England's base rate moved from about 4% to less than 1% and lending rates also dropped significantly, it meant that borrowing at 7% or more suddenly looks like a pretty raw deal.

During my time as finance portfolio holder I was, of course, aware of the LOBOs and the various other investments and loans connected with the council. Cornwall Council inherited a large number of loans both in and out - mainly from the old county council, but also from the districts. There were also decisions made during the first Conservative administration and a massive deal done in 2011 to borrow £40m.

Tory councillor, and former leader, Fiona Ferguson is making a lot of noise about this issue at the moment. It's curious that Fiona does not mention that she herself was the finance portfolio holder for a time and that she appears to have done nothing during her term of office about LOBOs or anything else.

Many councils appear to have made investments and take on debt at a time when interest rates were significantly higher. Cornwall lent money to a number of councils at rates that seem now to be quite extraordinary. South Lanarkshire is paying somewhere north of 10% to Cornwall Council in a deal which is very beneficial for taxpayers here, but not so profitable for those in Scotland. As with the Icelandic bank investments, it was not just authorities in Cornwall who were taking on large scale and long term debts at interest rates that now appear to be very high.

My principle concern during my time as finance portfolio holder was to manage down the net debt. It was never as easy as simply writing off investments against borrowings as all had set maturity dates and there are huge penalties for early settlement. However, I set officers the task of trying to reduce the overall net debt through decisions when call dates came in (ie dates when settlements could be made without penalty) and to look at any early settlements that would have been worth the penalty. At a time when the council needed liquidity to be able to manage the on-going cuts to our budgets, it seemed to me important that we were not tying up large sums to finance borrowings. Council debts and investments are constantly changing and officers were able to make some changes which I believe have been beneficial.

Four times per year the cabinet member for finance is held to account by members on the issue of investment strategy either at cabinet meetings or full council and I was regularly asked by members why we did not take advantage of current low interest rates to borrow much more. Some suggested this money be used for paying off existing debt. My reply was always that we would consider it if we could, but the terms being offered by the banks were never favourable. They would have involved further LOBOs with the ability of the bank to raise interest rates to our detriment. And the 0.5% or similar low rate was only ever available for very short term borrowings which would not have helped at all. However, if officers had come across a means of re-financing which cut payments and did not come with any additional risk then I would, of course, have considered it.


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