Extension rentals can pay off in financing RCV operations

Capita Leasing Services advises the public sector in obtaining best value leasing and asset finance facilities. A wholly owned subsidiary of Capita Group, a public services organisation with a market capitalisation of £3.2 billion, Capita Leasing Services provides advice to over 200 public and private sector clients and states that it annually helps authorities finance assets in the region of £200 million. The company, which aims to develop its public sector business, focussing specifically on its existing strong presence within local government, describes its role in the sector and puts the case for extension rentals.

Through its extensive knowledge of the local authority market and its lessor database, Capita Leasing Services says it can analyse the most efficient funding options available to the public sector, always seeking to strike a balance between cost and quality of service.

"To maintain a sound local authority leasing business means we have to provide accurate information and objective, impartial advice," says Geoff Kontzle, Director of Capita Leasing Services.

"It is essential that local authorities really do receive what they think they are getting. No matter how operating lease regulations may change, it is up to the lease intermediaries and lessors to achieve a fair balance between cost and service."

Extension rentals
One aspect of leasing which is particularly relevant to refuse collection vehicles is the issue of extension rentals, an area which can appear bewilderingly complex to authorities relatively new to leasing.

Before setting up a lease on a vehicle, it is imperative that local authorities examine the associated costs of extending that lease - and weigh up these extension costs against what can appear a seemingly cheaper rental over a shorter but unrealistic primary period.

"It is easier to think in terms of two types of lease: aggressively priced leases which focus on cost and pragmatic leases which are more focused on usage and the life cycle of the asset," says Geoff Kontzle.

For aggressive leases, which on the face of it seem cheaper, their premise is rooted in an ideal world in which the vehicle is returned five years to the day it is leased from and returned to the exact requirement of the lessor.

For those who take a more practical view, it is appreciated the vehicle may need to be leased for a longer term. The lease may appear more expensive but over the longer term it could be more cost effective because it will be more in line with asset's life and usage.

Leases are normally calculated across a primary period which takes into account a residual value for the vehicle. It is important that the residual value meets the projected usage of the vehicle rather than simply a prescribed financial formula.

"It is all about knowing what you plan to do with the vehicle or asset, how it will be used, what replacement/upgrade policy is in place," states Geoff Kontzle. "It is to the local authority's advantage to keep track of the vehicle, maintain it and have a proper leasing policy, linked to pricing.

"Remember, that an initial low primary lease is not always best value if a vehicle is going to be kept beyond its primary period."

Checklist

  • Understand what the asset you are funding is going to be used for
  • Understand the life cycle of the asset
  • Match the lease not just to a financial budget of, for example five years, but also to its realistic use
  • Check the balance between financial benefits of an operating lease against the whole life benefits of a finance lease or full payout lease
  • Ask your lease advisor to run an IRR analysis - this tests the Internal Rate of Return of the transaction
  • If it becomes likely the equipment will be kept beyond the primary period of the lease, seek an early discussion with your advisor/broker to obtain their views on future rental
  • Don't leave it until the end of the lease to discuss an extension
  • Remember, extension rentals should be, and are, negotiable, if discussed early enough
  • Keep your assets in good condition, in line with projected usage
  • Case study
    Capita Leasing cites an example where refuse collection vehicles (RCVs) are front line choices for operating leases.

    Richmond upon Thames Council is gradually changing all its RCVs over to operating lease - and currently has around 15 vehicles obtained via this route.

    The council has been working with Capita Leasing Services since 1995 when its transport section decided it needed to replace a proportion of its refuse collection vehicles.

    "Generally, we try to ensure that the lease period covers much of the expected useful life of the vehicle. We then spread the expenditure to match," says Malcolm Smith from Richmond's Capital Finance Section.

    Gary Harvey, Capita Leasing's Account Manager for Richmond upon Thames, says that operating leasing can reduce a council's exposure to risk and mean it will not have assets on its books, which it no longer requires.

    "Local authority transport and finance divisions are now far less wary of leasing," he says. "The market is evolving and leases themselves are becoming more sophisticated and flexible."



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