Doncaster Council has £39m worth of private loans described as 'worrying' by experts

The private loans, often referred to as LOBOs, (lender option, borrower option) is a long-term finance package provided by banks, brokerages and intermediary firms to be paid back between 40 and 70 years.

The loans, which were mostly taken out prior to the financial crisis, provided councils with a 'cheap source of financing with low teaser rates' compared with the Government-run Public Works Loan Board financing available to them.

The interest rate is initially fixed, but unlike PWLB loans, private banks have the option to propose or impose - on pre-determined future dates such as every five years - a new fixed rate.

The borrower (the council) has the 'option to either accept the new rate or repay the entire loan - forcing to pay a 'breakage penalty' in return.

But Doncaster fares much better than South Yorkshire neighbours Sheffield who have more than £200 million in LOBO loans.

Sean Kemp, senior lecturer in banking and financial management at Sheffield Hallam University, said councils like Doncaster are now paying a 'high price' for previous financial decisions.

"Doncaster Council's decision to use LOBO loans is particularly worrying given their high interest rate," he said,

"These were initially a cheap source of financing with low teaser rates.

"Given that the PWLB loans were essentially from the government there is greater scrutiny of spending and the ability to repay this may not have been as rigorous at the commercial lenders such as RBS and Barclays.

"These LOBO loans are incredibly complex as it requires the buyer of such products ‘the council’ to be able to compare the risks and rewards. It is unlikely any of the councils would have been able to predict accurately these future costs of these loans compared with a standard loan arrangement.

"Councils around the country are now paying a high price for their decisions 10 years ago. Ultimately we the tax payer will bear the brunt of those costs while receiving less in terms of council services."

Steve Mawson, chief financial officer, said: “Doncaster Council has used the LOBO facility to arrange long term funding at lower rates than were available through the Public Works Loan Board at the time, generating long term savings as a result.

“Many local authorities use these types of loans as part of their overall borrowing portfolio. The council constantly monitors interest rate forecasts and we would take appropriate action to ensure that the forecast costs provide value for money.”