Extension rentals can pay off in financing RCV operations

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

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.”