Borders council's lender sued for "alleged fraud and interest rigging"

by EWAN LAMB

A bank used by Scottish Borders Council to secure a controversial £6 million LOBO loan more than a decade ago is being sued by 14 other local authorities who claim the 'rip-off' loans were fraudulent as interest rates may have been rigged to manipulate charges to the borrowers.

Councils throughout Scotland and England arranged long term LOBO loans (Lender Option Borrower Option) between 2001 and 2010 from a selection of lenders including Barclays and the Belgian bank Dexia.

Now a High Court action has been raised by a group of authorities including the councils at Leeds, Bristol, Nottingham, Sheffield and Greater Manchester. The claimants are alleging that the loans they took out between 2004 and 2010 should be rescinded with fees returned. They also want compensation for damages.

Court papers seen by a Sunday newspaper accuse Barclays of “deceit and/or fraudulent misrepresentation” as its bankers were secretly rigging Libor, which was “integral” to the rate at which LOBO loans had to be paid back.

Libor is the interest rate at which banks offer to lend funds to one another in the international market. In 2016, three former Barclays traders were convicted of conspiring to fraudulently manipulate the global benchmark rate.

It was in May 2005 that officials at Scottish Borders Council (SBC) acting on advice from Butlers' Treasury Consultancy. agreed a £6 million LOBO loan from Barclays with repayment of the principal sum due by June 2065. The original interest rate of 2.87% went up to 4.4% in 2009. In 2016 the fair value of the loan was estimated to be £10.644 million.

LOBO loans were attractive to councils as they often offered interest rates below that of central government’s Public Works Loan Board although they allowed lenders to change rates at set times in the future. Refusing to pay updated interest rates would mean councils are forced to pay back the loan in full.

This form of credit certainly proved popular with SBC, the council setting up a total of eleven LOBOs with a total value of £43 million. The true value of all eleven is now in excess of £70 million, according to figures supplied to a Freedom of Information requester two years ago.

A spokesman for the campaign group Debt Resistance UK, said: 'Having campaigned for councils to file fraud cases against the banks since 2014, we are thrilled these local authorities have finally stepped in to protect local taxpayers by filing fraud claims against banks which brought our economy to the brink. Ten years after the crash it is councils which are now facing bankruptcy to pay for the bankers bailouts.

'We are aware that 240 councils have rip-off LOBO loans. We're now calling on the other 226 councils with LOBO loans to file legal action against Barclays, RBS, Dexia, ICAP, Tullet Prebon and CAPITA."

No fewer than six of SBC's loans are with Dexia Bank. In 2004 and 2005 the authority borrowed £24 million in total from the Brussels-based bank.

In 2011 Dexia was the subject of a massive £3.4 billion bail-out by the Belgian Government after it encountered serious liquidity problems. It then became known as Belfius Bank. More recently there have been stories in the press and media linking the financial institution with revelations in the so-called Paradise Papers with allegations of money laundering and tax evasion.

Research by Unite the Union in 2016 on the state of debt in Scottish local government concluded that the equivalent of 26% of SBC's council tax income was used to service outstanding debts. The total collected from council taxpayers was £46.1 million with £11.806 million being swallowed up by interest and capital repayments on loans.

Barclays has so far declined to comment on the High Court action by 14 of its local government clients.

Code of conduct or secrecy charter?

DOUG COLLIE on yet another measure to keep sensitive local government information from public view

In a land where members of the public have been regularly frustrated in their attempts to prise potentially embarrassing material from the 'top secret' files held by their local council, it was often a tip off to a trusted and reliable journalist by a 'friendly' councillor which managed to tear the odd veil of secrecy to shreds.

But now any elected member of Scotland's 32 local authorities who might be thinking of passing a confidential document to his local paper or contemplating an off-the-record chat with her local radio station might think twice before spilling the beans.

A revised Code of Conduct for Scottish councillors warns that they must respect the confidentiality of any information classified as private which might be given to them during the course of their work.

This rejigged secrecy clause in the code almost certainly means that any snippet of information deemed to be confidential by a local government officer or a fellow member must not be passed on to anyone.

Any individual 'leaking' this private stuff and thereby breaching the code could face a five year ban from public life if caught and 'convicted'. Other sanctions include periods of suspension from council duties.

Here's what sections 3.16 and 3.17 of the newly issued code says about maintaining a wall of silence:

"Confidentiality Requirements 3.16 Council proceedings and printed material are generally open to the public. This should be the basis on which you normally work but there may be times when you will be required to treat discussions, documents or other information relating to or held by the Council in a confidential manner, in which case you must observe such requirements for confidentiality.

"3.17 You will often receive information of a private nature which is not yet public or which perhaps would not be intended to be public. You must always respect and comply with the requirement to keep such information private, including information deemed to be confidential by statute. Legislation gives you certain rights to obtain information not otherwise available to the public and you are entitled to exercise these rights where the information is necessary to carry out Council duties. 

"Such information is, however, for your use as a councillor and must not be disclosed or in any way used for personal or party political advantage or in such a way as to discredit the Council. This will also apply in instances where you hold the personal view that such information should be publicly available."

It would seem from this catch all regulation that there will be little point in locally based journalists inviting councillors out for a pint or a bite of lunch in hopes of a story. And, of course, the reporters' expenses claims will be diminshed too.

One former councillor told us: "I know from experience that far too much information and far too many reports are kept under wraps while far too many meetings take place in private.

"This new code will only make matters worse, and it is to be hoped efforts will be made to ensure knowledge of interest to council taxpayers isn't stifled even if it shows a council in a bad light. As it stands these clauses in the code amount to a virtual gagging order".

Freedom of Information has helped to lift the lid on a number of topics which councils would rather have kept as skeletons in their cupboards. But far too often documents have been censored to protect the identity of those public servants guilty of costly cock-ups.

The last thing the local government service requires is yet another weapon to protect it from public scrutiny. But will there be "code breakers" out there willing to take a chance?

Local MPs well above average...with expenses' claims

EXCLUSIVE by DOUGLAS SHEPHERD

The four Conservative MPs who represent constituencies across the south of Scotland and north Northumberland between them claimed more than £237,000 in costs and allowances last year, each of them surpassing the average figure paid to all 650 members of the House of Commons by a wide margin, according to an unofficial expenses website.

And while remoteness from London might be cited as a reason for the four's sizeable expenses bills on top of their £77,379 salaries there are various examples of MPs representing areas much further north who claimed considerably less.

The official expenses statistics for 2017/18 published at the weekend by IPSA (Independent Parliamentary Standards Authority) are different from those posted on the website www.mpsexpenses.info. It estimates a total sum of £26.267 million having been paid out by the Parliamentary authorities covering a total of 144,844 items claimed for. That produces an average claim per MP of £40,410 in respect of items including travel, accommodation and office costs.

Both sets of statistics show the four sitting MPs in Scottish Borders, Dumfries & Galloway and the northern half of Northumberland received considerably more than the quoted average. Here are the local statistics, first the IPSA sums with the 'unofficial' figures in brackets:

Alister Jack, Dumfries & Galloway £67,350 (£68,337); David Mundell, Dumfriesshire, Clydesdale & Tweeddale £57,330 (£58,338); John Lamont, Roxburgh, Berwickshire & Selkirk £57,727 (£58,148)  and Anne-Marie Trevelyan, Berwick-on-Tweed  £54,972 (£56,989). Mr Jack and Mr Lamont were newly elected in June 2017 which means their claims were made over a 10 month period rather than a full financial year. It means each of them submitted claims worth in excess of £1,000 per week.

The difference between the quartet's allowances and the standard figure for all Tory MPs is also substantial, according to the mpsexpenses.info calculations. The party's average expenses claim for each member amounted to £32,219, it says..

Not Just Sheep & Rugby examined the IPSA statistics for a number of Conservatives representing seats far further away from Westminster than the Border country. We found that Ross Thomson (Aberdeen South) claimed £48,717 while Douglas Ross (Moray) chalked up £50,459, Bill Grant (Ayr, Carrick & Cumnock) £33,144, David Duguid (Banff & Buchan £49,416, and Paul Masterton (East Renfrewshire) £46,809.

In constituencies close to the four seats highlighted there were a number of examples of MPs claiming considerably less than their counterparts in southern Scotland and north Northumberland.

Ian Lavery, the Labour member for Wansbeck around the town of Morpeth collected £46,817 over the full 12 months. His Labour colleague Danielle Rowley (Midlothian), also elected last June, was paid £48,550.

Meanwhile John Stevenson, the Conservative MP for Carlisle, received £46,227 while fellow Tory Rory Stewart (Penrith & the Border) claimed £35,432.

A number of Conservatives had extremely low claims. They included Jacob Rees-Mogg (North east Somerset) £1,043; Michael Fallon (Sevenoaks) £1,828, and Simon Burns (Chelmsford) £2,545.

Before becoming a MP at the 2017 General Election Mr Lamont served as a member of the Scottish Parliament (MSP) where he regularly featured in local news stories concerning allowances claims by MSPs serving South of Scotland voters. The sums paid on an annual basis to Mr Lamont tended to be considerably higher than those received by his 'neighbours'.

In 2016/17 - Mr Lamont's final full year as a MSP - he claimed £34,209 for 436 items. The 2017/18 sum of £57,727 relating to his work at Westminster was for over 460 items.

Multi-million pounds Tweed angling industry facing crisis

by DOUG COLLIE

The recent dry and extremely hot spell of weather is the latest negative issue to blight the beleaguered owners of world famous salmon angling beats on the River Tweed where five poor seasons in succession have already had a devastating impact.

Fishing for salmon has reached a virtual standstill this month as water levels drop and temperatures soar to unusual heights.

Angling activity on the main river and its tributaries has been estimated to be worth in excess of 20 million pounds per year to the economy of the Scottish Borders, supporting up to 500 jobs for ghillies, boatmen, and in the tourist sector.

The negative effects of the current heatwave have been outlined on the Tweedbeats website by Andrew Douglas Home who is an angling proprieter at Coldstream on the lower river.

His post on the Tweedbeats blog explains "After yet another boiling week Tweed salmon fishing has all but ceased. The river is at or even below, summer level and the afternoon water temperatures here at Coldstream are consistently in the mid 70sF".

Apparently only 27 salmon and five sea trout were caught last week bringing the seasonal total so far to 1,030 salmon and 254 sea trout.

Mr Douglas Home writes: "At a time when salmon numbers in Scotland are low anyway, it is a pretty disastrous situation for everyone connected with the salmon fishing industry; for fishermen and women for spoling their annual Scottish fishing holidays; ghillies and boatmen for having endless poor, even blank fishing weeks to endure; proprietors for now (most probably) having a fifth poor fishing year in a row; and tackle shops, hotels, restaurants, B&Bs, self catering accommodation, petrol stations...you name it...because they are financially much worse off, some in vulnerable, often remote rural communities".

He finishes by asking 'Is it a crisis? Well if not it is not far from it'.

The prime beats on Tweed can command rents of up to 4,000 pounds a week with affluent anglers willing to pay that much if guaranteed top class sport. Studies suggest that during a 'good' season 53,000 rod days are let on the river.

However, there were reports last year that a considerable number of days and weeks on stretches of the river remained unlet leaving some proprietors with no income for those 'unfished' periods. Only 6,577 salmon were caught by rod and line in 2017, even less than the 'poor' catch of 7,680 the previous year.

For decades it has been claimed the North-east Drift Net Fishery, off the Northumberland coast, has been responsible for the interception of tens of thousands of salmon heading for Scottish rivers, including the Tweed.

The coastal fishery has been gradually scaling down in recent years, and is due to be phased out altogether. Newly available figures show that in 2017 the 11 remaining drift net licence holders together with 47 so-called T & J nets took 9,157 salmon, well down on the total of 18,824 the previous year.

In one season alone - that of 1981 - this form of net fishing accounted for no fewer than 69,113 fish.

The grey seal colony on the Farne Islands off the north Northumberland coast - predators who are accused of preying on salmon stocks - are also blamed for the poor fortunes of Tweed anglers. And flocks of cormorants are said to be taking large numbers of juvenile fish from the river system.

All in all, the various issues outlined above appear to be having an extremely serious impact on a once flourishing Borders industry.

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Multi-million pound investment failed to impress

EXCLUSIVE by EWAN LAMB

Elected members of Scottish Borders Council agreed in 2013 to move more than four million pounds of cash from hundreds of local trusts and charities they administered into a single investment fund with a performance target of LIBOR - the London offered bank rate - plus four percent.

But despite promises that yields from the Newton Real Return Fund [NRRF] "should increase the income of all the entities moving funds out of the council", the fund consistently failed to hit its ambitious targets and produced much lower than expected returns over four years.

The disappointing dividends generated by NRRF prompted the council to spend 15,000 pounds on commissioning accountants KPMG - auditors of both SBC and Newton's at the time the multi-million pound deposit was made - to recommend an alternative investment fund for the cash. As a result all of the money has now been switched to the Kames Capital Diversified Income Fund in a bid to improve the situation.

Newly published annual accounts for the various local trusts including the region's seven Common Good Funds show that 'disinvesting' from Newton - a move approved by the council last December - has cost these seven town funds a total of 101,000 pounds.

The poor performance of investments of Common Good monies - some 2.6 million pounds - has been a bone of contention for many years. Prior to 2013 the money had been earning less than 0.5% in SBC's own loan fund.

It had been thought professional advisers and fund managers would boost the various kitties. So all 32 Borders councillors who are the nominated trustees responsible for the various local funds and bequests will no doubt be hoping Kames Capital comes to the rescue.

The 2013 decision to invest in NRRF, a subsidiary of the Bank of New York Mellon Corporation, meant combining the cash assets of a range of entities under council control and sinking it into a single fund.

As well as the money from the Common Good funds the mass transfer also involved most of the assets from around 290 separate organisations, 112 of them registered charities. A number of these were formed originally to look after money gifted by generous Borders benefactors in the Victorian and Edwardian eras.

This diverse range of trusts include : Anderson Trust “For the poor of Selkirk” - balance in 2013 2,053 pounds; William Forrester’s Bequest “Poor and distressed, Galashiels” 23,493; Mary Allan Bequest “Peebles Senior Citizens”3,981; James Hart Trust Fund “Spinsters – Selkirk” 5,937; Colvins Fund “Poor in parish of Lauder” 4,130; Dunlop Bequest “widows and spinsters – Duns” 93,471; Katherine Veitch Memorial Fund “women of Jedburgh” 17,562; Marion Law Bequest “Aged and Poor in Hawick” 8,533. 

It was also decided to invest a 420,000 pounds bequest made to Scottish Borders Council by the late George Knox, a former town clerk of Galashiels who left instructed that the money should be used for the benefit of elderly people in the town. And a further 155,000 pounds from the William Hill Trust, based in Melrose, also went into the Newton Fund. Mr Hill was another wealthy benefactor who died in 1974, and his trust has already provided many financial contributions for local organisations.

The recommendation made in 2013 to put all of the council's eggs in one investment basket was accompanied by a report which claimed: "The use of the approved Common Good and Trusts Investment Fund should increase the income for all of the entities moving funds from the Councils Loans Funds, where they currently earn less than 0.5%, to the new investment fund, which has a performance target of LIBOR + 4%."

"Since these investments are seen as being for medium and long term holding no significant risk to the financial position of the funds is identified."

The report went on to stress: " There are positive impacts upon the quality of community life and improvements in local amenities. The potential improvement in levels of income through the use of the new investment fund will act to make a number of the funds more sustainable in the future."

Unfortunately things do not appear to have worked out that way. It is believed several stakeholders in the Common Good funds expressed dissatisfaction with the returns on investment which were typically in the 1.8% to 3% range.

A report presented to the Jedburgh Common Good Fund Committee in December 2017 admitted: "The Capital and Investments Manager advised that the Newton Fund had once again delivered a negative return (-0.6% against benchmark of +1.1) in the quarter to 30 September 2017. General hedging against risk within the portfolio had contributed to this negative return and negative returns from corporate and government bonds were also seen.

"This negative quarterly return had resulted in a 5 year rolling return which was below the 5 year benchmark, which the fund was ultimately measured against (3.6% against benchmark of 4.4%). The fund has delivered below benchmark performance in the last 5 quarters."

Meanwhile the William Hill Trust committee was told a few weeks earlier: "The Council's Investment adviser KPMG was commissioned to evaluate and report on the continued suitability of the Newton Fund going forward. KPMG have concluded this assessment and have indicated there are more attractive options available within the market which would provide improved performance, whilst continuing to provide reasonable rates of income (through dividends) as well as capital preservation."

Then the common good committees were informed earlier this year that as part of the move from Newton to Kames the fee of 15,000 pounds had been incurred for the role of KPMG, the council's pension fund investment adviser, in selecting and recommending Kames Capital as the replacement for Newton.

The Common Good fund accounts for 2017/18 show a net reduction in funds of 289,000 (reduction in 2016/17 was 150,000 pounds) from 13.745 million pounds, including property and land to 13.456 million pounds. The Governance Costs - the sum charged by the council for administering the funds - increased last year from 48,000 pounds to 57,000 pounds. Income from investments was up slightly from 69,000 pounds to 75,000. That represents a 2.8% return on the 2.659 million pounds invested.

The price of failure - 15 million pounds?

EXCLUSIVE by DOUG COLLIE

Scottish Borders Council's failure to develop and deliver a waste treatment plant to deal with the region's annual "output" of 42,000 tonnes of residual rubbish is set to result in an additional bill of up to 15 million pounds over ten years for council taxpayers.

A contract notice published by the authority this week estimates it will cost 50 million pounds to export around 420,000 tonnes of municipal waste - excluding recyclables - during the decade from mid 2019.

The annual cost will be five million pounds, and research and calculations carried out by Not Just Sheep & Rugby show the cost of transporting and treating the residual waste will work out at 119 pounds per tonne. The preferred option is also certain to add to SBC's carbon footprint with a fleet of lorries required to haul the garbage to its final destination.

But figures linked to the proposal to build a Mechanical Biological Treatment (MBT) plant at Easter Langlee, Galashiels, to divert the residual waste from landfill show the cost per tonne would have been just 83 pounds per tonne. The 119 pounds figure now in prospect is some 29.8% higher than the MBT facility costing.

The savings over a year when the two disposal methods are compared is 1.512 million pounds in favour of the MBT which adds up to 15.140 million pounds in ten years.

A confidential report presented to Borders councillors in 2011, which management attempted to keep under wraps, estimated the Galashiels treatment plant would deliver savings of 26 million pounds against the so-called 'do nothing' scenario of continuing to landfill the residual waste.

But as we have reported several times previously, councillors voted in private in 2012 to abandon the MBT-only option in favour of a combined Advanced Thermal Treatment (ATT) plant in a bid to produce power by incinerating the rubbish.

The Deed of Variation which allowed contractors New Earth Solutions to avoid having to stick to the original 2011 deal was to prove disastrous and expensive. The company's ATT system failed to function, their offshore funders could not come up with the extra money, and the complete venture was abandoned in February 2015 with the council and its residents 2.4 million pounds out of pocket for no return.

This week's notice, inviting bids for the 50 million pounds contract, says: The Authority currently manages around 42,000 tonnes of residual waste per annum. The majority of this waste is deposited at Easter Langlee landfill site which is owned and operated by the Authority. A decision was taken not to expand the Easter Langlee landfill site once its current capacity is exhausted (by mid-2019) but instead develop a new Waste Transfer Station in its place.

"This will enable the Authority to comply with the ban on sending biodegradable municipal waste to landfill which comes into effect from 1st January 2021 by exporting waste out of the Borders for treatment and disposal. The Authority reserves the right to take responsibility for haulage for part of the Contract Waste to the Contractors Delivery Site in order to gain benefits through utilising its own Authority Haulage Vehicles. The Authority is looking for a haulage, treatment and disposal solution that provides a reliable and robust means of managing contract waste from mid-2019."

The contract is divided into four lots, namely: Lot 1 - Municipal Residual Waste - Duration in months: 60 There is an option for the parties to agree to extending the Contract on a yearly basis up to a maximum of a further five years subject to the terms within the Conditions of Contract after expiry of the initial term. Lot 2 - Bulky Residual Waste;   Lot 3 - Commercial and Demolition Waste;

Lot 4 - Street Cleansing Waste.

It is understood the option of exporting residual waste out of the Borders by road was dismissed on grounds of cost during a project analysis of various options undertaken in 2009/10. But in the absence of a MBT plant and with an end to landfilling looming large it now appears to be the only game in town.

The financial implications for Borders local government appear likely to run into many millions of pounds thanks to the council's decision to get into a bed with debt-ridden New Earth Solutions and then to pass up the chance to construct a tried and tested form of waste disposal facility to serve the region. The 2.4 million pounds of admitted losses so far may well rocket to more than 17 million pounds ten years from now.

Business World far from ideal

EXCLUSIVE by DOUGLAS SHEPHERD

Self-generating errors and malfunctions following the installation of a new financial system at Scottish Borders Council have resulted in staff being deployed to sort defects while there was a heightened risk of a control failure over the past year, it has been revealed.

Not Just Sheep & Rugby recently reported on the issues and challenges associated with Business World, an integrated Enterprise Resource Planning (ERP) system. It appears the transition from legacy payroll, general ledger and procurement systems to Business World has been far from smooth.

More details about the problems facing SBC staff as a result of the ERP not working properly are included in the council's so-called Annual Governance Statement which forms part of the annual accounts for 2017/18.

A governance review concluded that in 2017/18 the Council continued to demonstrate that the governance arrangements and framework within which it operates are sound and effective, and are consistent with the principles and recommendations of the ‘Framework’.

But Chief Financial Officer David Robertson highlighted one exception in his assurance statement, namely "the ongoing rectification plan to address deficiencies in the Business World ERP system"

He drew attention to "the delayed delivery of outstanding functionality, specified in Solution Design Documents, and intended to deliver significant business benefits which remain outstanding, have impacted upon the full effectiveness of the control environment and heightened risk of a control failure during the year.

"To mitigate this risk, as far as is possible, staff resources have consequently been deployed to sorting defects, performing manual reconciliation processes to address areas where system functionality has not been operating effectively for much of the year e.g. bank reconciliation, and resolving system generated errors. This has required significant manual effort, a series of workarounds, and the procurement of additional consulting time."

Other 'highlights' from the draft accounts nclude:

*Remuneration - SBC chief executive Tracey Logan received total remuneration of 134,726 pounds (previous year 131,099). The payment in 2017/18 included fees as returning officer at elections. Two other members of staff were paid between 105,000 and 109,000 pounds.

A total of 125 members of staff earned 50,000 pounds or more comprising 20 chief officers, 74 teachers and 31 other staff. The overall total was the same as in the previous financial year.

*Exit packages - Five employees took advantage of SBC's early retirement packages at a total cost of 153,699. The largest individual package amounted to 73,233. In the previous year 24 exit packages cost 477,562.

*Payments for loans + Public Private Partnership (PPP) Schools - The council made loan fund repayments of 10.578 million (10.202 million in 2016/17); So far as PPP schools are concerned the amount payable in 2018/19 is given as 8.044 million (liability and service charge) plus 2.766 million (interest) making a total of 10.810 million.

Overall SBC faces total repayments for PPP contracts of 236.25 million plus interest of 47.663 million for a grand total of 283.913 million.

*Management Statement - Conclusion - The operating environment for the Council continues to be very challenging with financial and economic influences such as increasing demands on services, reducing Scottish Government funding, low interest rates and cost pressures from pay and price inflation all affecting the Council’s finances.

The Council, despite these challenges, remains financially sound and well placed to serve the people of the Scottish Borders in the future. As already noted 2017/18 has been a year of significant change within the Council with huge challenges posed by implementation of ERP. The work of staff across the Council in implementing the new system is gratefully acknowledged.