“Campaign group Debt Resistance UK revealed that Dorset County Council and Weymouth and Portland Borough Council have taken out £123m of Lender Option Borrower Option loans (LOBOs) in an effort to reduce their debts.
Dorset County Council took out £95.9m, while Weymouth and Portland Borough Council took £27m at the end of the 2015-16 financial year.
The LOBOs, which were uncovered on Channel 4’s Dispatches documentary series, allow private banks to propose or impose a new fixed rate on a pre-determined future start date.
This means that the borrowing party can either accept the new interest rate or repay the entire loan, paying a ‘breakage penalty’—the fee a client must pay its lender to break from the contract— incurring further costs on the local authority.
Last month the Chartered Institute of Public Finance and Accountancy (CIPFA) urged local councils to review their LOBO loans after auditing firms expressed concern at their impact on local authorities’ accounts. Channel 4’s Dispatches found that over 200 authorities had used the loans, totalling up to £15bn.
Cllr John Whitworth, chair of the Newham Council Scrutiny Committee, labelled the LOBO loans a “fraud on the people,” arguing that many local authorities took out the loans when they were struggling financially during the economic downturn in 2008. He added that the loans became “a very serious handicap” on councils dealing with austerity in later years.
Debt Resistance UK campaigner Joel Benjamin noted: “it is always cheaper for government to borrow than banks, and that PFI and by extension LOBO loans are therefore a fraud.”
Last week a merger between all nine Dorset councils was approved, creating the formation of Christchurch and Poole Council and Dorset Council. The deal is expected to deliver £6m in savings.”