“Best Value” set to boost private sector role in financing equipment for LA market.

How do you put a ceiling on machinery whole-life costs and achieve best value? asks a the in-house finance arm of a leading equipment manufacturer with wide experience of the local authority and waste markets and in the finance of all makes of construction and industrial plant and equipment.

Nowadays everyone focuses on costs and if they can’t drive them down the next best solution is to make sure they don’t go up. It is therefore no wonder that there has been, and continues to be, a drive for efficiency and cost savings within the local authority sector. The introduction of Best Value will increase this emphasis on efficiency and cost control. For the management, keeping a handle on costs – and the planning required to achieve it – is likely to become even more important. To quote Local Government Minister Hilary Armstrong “Best Value will affect all corners of local government, and the planning required to deliver it should start now”.

JCB 436 Wastemaster

Easier said then done – but the policy of “Best Value” is obviously high on the said Local Government Minister’s priority list and already 37 projects from local and police authorities have been selected to formally pilot Best Value. Can the Private Sector help? – the answer is undoubtedly yes, especially when the Minister is quoted as saying “I am also keen to encourage what we might call “Partnership Networks” between local authorities and the private sector. Networks which are designed to develop best practice in the way local authorities work with the private sector.” The Minister has taken steps to provide a much freer environment for local authorities and the private sector to work out together what is the best way to deliver high quality and competitive services.

Past regulations inhibited this type of relationship so the Government has commissioned a review to determine how the Private Finance Initiative and other public/private partnerships might be developed more effectively.

It has already been recognised that some types of PFI contract should fall outside the capital finance regulations.

However, the regulations already existed to allow the use of privately funded Operating Lease and Contract Hire packages. These have the advantage of officially falling outside capital expenditure restrictions whilst having to pass scrutiny under Value For Money and Risk Transfer tests. The costs of these packages are much lower than you might think because you only pay for a proportion of the original capital cost – the unpaid portion is the future residual value that the finance company must find when it sells the machinery at the end of the contract. There are various accountancy regulations that determine what the minimum unpaid proportion of the original capital cost should be in order to qualify as an off balance sheet operating lease or contract hire agreement. The Treasury has adopted these same rules as one of the measures of risk transfer and Best Value. Hence, contract hire can represent the ultimate risk-free method of acquiring, running and maintaining plant, putting a ceiling on your costs and leaving your capital budgets intact.

It sounds straightforward but contract hire is different because it is more than just a fixed cost acquisition, maintenance and disposal service. It is a comprehensive package that covers the entire spectrum of plant operations, underwriting defined operating risks for a fixed cost so you can say goodbye to unexpected bills. Servicing, mechanical repairs, breakdowns, insurance and even relief machines become one agreed budgetary expense with any risk on overspend being borne by the supplier. The most important feature is the built-in flexibility of the total package, allowing you to select those benefits and services which most suit your needs.

Finding a supplier who can offer such a package and who is willing to enter the sort of “Partnership Network” that the Government is keen to promote needs careful consideration.

How do you pick a finance company that has a good track record in dealing with local authorities and knows enough about the machinery being financed to predict its value in three to five years time? JCB Finance Ltd is one such company whose lendings to the local authority sector alone have amounted to over £30 million in the past few years.

The waste management sector occupies a similarly important position within JCB Finances overall £230 million plus annual turnover. As the in-house finance company of JCB since 1969, the company has an enviable understanding of the market and the machinery and is able to finance other non-competitive makes of equipment.

So if you are a manager trying to “negotiate” with your finance colleagues for your departments latest capital acquisition – a different approach might work wonders. Show them the right type of leasing or contract hire package and you might find your application has a smoother ride.

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