First published 5 February 2018
Capping off a turbulent week for financial markets in which CAPITA shares collapsed by 50% into crisis territory, Northamptonshire Council Council (advised by CAPITA) issued a section 114 notice last Friday. This means the council cannot set a balanced budget, has exhausted its cash reserves and no new spending decisions can be made until a full council meeting is convened to solve the crisis.
The Royal Bank of Scotland (RBS) is the largest individual bank lender to Northamptonshire County Council (NCC) via LOBO loans totalling £30m. Some of these are ‘inverse floater’ LOBO loans pegged to LIBOR and ISDAfix interest rates. RBS has been proved to rig both.
On BBC Question Time, RBS Chairman Sir Howard Davies labelled PFI a ‘fraud against the people‘ because in his expert opinion “it is always cheaper for Government to borrow than anybody else, and if you are going to hand over the total provision [of public services] to someone whose borrowing costs are higher than yours, what is the advantage of doing that?”
Campaigners at Debt Resistance UK now wonder why banks including RBS came to be involved in more than £15 billion of LOBO loan lending to councils like Newham, Edinburgh, Kent, Cornwall and NCC to fund public services – with banks booking £2billion in up-front, day one profit – if it is always cheaper for councils to borrow via their usual source of funding, the Treasury Public Works Loan Board.
Councils’ financial advisors known as a Treasury Management Advisors – such as CAPITA – may provide part of the answer. On LOBO loans, CAPITA have conceded they received facilitation payments – which they refer to as “commissions” – when local authority LOBO loan brokerage business was referred exclusively to preferred money brokers including Tullet Prebon and ICAP.
CAPITA were named in 2015 C4 Dispatches LOBO loan documentary “How Councils Blow Your Millions“. They were also heavily implicated in the 2008 Icelandic banking crisis, having advised hundreds of local authorities to invest in failed Icelandic banks.
Debt Resistance UK questioned CAPITA CEO Andy Parker regarding kickback/ commission payments at CAPITA’s 2015 AGM [listen here]. In addition, CAPITA submitted evidence to consultation by the Ministry of Justice on the introduction of the 2010 Bribery Act, suggesting CAPITA had concerns regarding the implementation of the Act on its existing business model.
An investigation by the Competition Commission in 2010 into the merger of Butlers (part of ICAP) and Sector (part of CAPITA) found that 50-100% of respective business unit profits were from commission/ facilitation payments from LOBO Loans, which averaged £25,000 payable by a local authority on an typical £10 million LOBO loan.
Debt Resistance UK have been warning for several years that the toxic combination of austerity cuts, lack of scrutiny and independent oversight of council finances, conflicted financial advice from firms like CAPITA and ICAP and growing debt loading would soon lead to financial disaster in town halls.
Now, with the first Section 114 notice in almost two decades being registered at Northamptonshire, they fear it is increasingly clear that local government finances, shredded by austerity are beginning to unravel.
Northamptonshire County Council borrowed £150 million in LOBO bank Loans, including a toxic ‘inverse floater’ LOBO from the bailed out Royal Bank of Scotland, signed in 2010 where the council are currently paying the astonishingly high interest rate of 7.22%. View source.
On Thursday, following the crisis at CAPITA, The Conservative government was forced to concede it had contingency plans in place at Councils like Barnet, where the company runs a large number of essential services, should CAPITA fail.
Commenting for Debt Resistance UK, Joel Benjamin said:
“It appears Northamptonshire County Council has fallen victim to a lethal cocktail of cuts, opaque and poorly run shared-services and outsourcing arrangements, and high interest, risky LOBO borrowing from banks including the bailed out Royal Bank of Scotland.
With Councils now joining struggling outsourcers on the rocks, taxpayers deserve to know what contingencies Government has in place for bankrupt councils.
The only benefactors from the financialisation of town halls are the conflicted advisors (in this case CAPITA) and the financial firms paying their wages. When services collapse and councils fail to set budgets, we will quickly find it is the British taxpayer who assumes these costs, while the auditors KPMG yet again wash their hands of any responsibility for failure.”
In a month in which Carillion has imploded, CAPITA is teetering on the brink and councils look set for join them, it is high time for Government and Treasury to reassure the local government sector that lender of last resort facilities via the Public Works Loan Board will be continued and the failed austerity cuts and the fetishisation of outsourcing will now be halted.”
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Links to further information:
UK Local Authority Debt Audit website: http://lada.debtresistance.uk/
Interactive map of local authority debt: bit.ly/LADAmap
What is a LOBO loan? http://bit.ly/LOBOLoan
LOBO Loans are potentially illegal http://bit.ly/DebtTrap
The conflicts of interest http://bit.ly/LADA3