Finding the right funding

When the government needs to invest in new equipment or other assets, it tends to go for one of two extremes. It either enters into a deep, long-term relationship with the private sector through the Private Finance Initiative (PFI) or a Public Private Partnership (PPP), or it tends to go it alone.
There really isn’t any need for this dichotomy of approaches. Through leasing the government can work with the private sector when investing in most types of assets. So why does the government often choose to work with the private sector on some of its largest investments, but less often on smaller ones?

Providing public services

PFI/PPPs can help the public sector when making large-scale investments in providing public services. In a PFI arrangement assets are built, owned and maintained by the private sector operator. The operator also uses the assets to provide a service to the public sector or general public. In a PPP the public sector owns part of the assets and may have more involvement in how the assets are used to provide services. Over 500 PFI/PPP projects are in operation, with another 200 in the pipeline.
Forming working relationships with the private sector through PPP/PFI doesn’t guarantee success. The key question, according to the National Audit Office (NAO), is whether the PPP/PFI can deliver something better than could have been obtained through a different procurement route. Despite some failures, which tend to attract a lot of publicity, the NAO has found many examples of successes.

Leasing as an alternative
Most investments by the government are on a scale too limited to make it attractive as a PFI/PPP arrangement. However, while a deep, long-term relationship with the private sector might not be appropriate, leasing can offer a more suitable alternative. The public sector rents the equipment from a leasing company, typically for up to five years. It then either returns the equipment at the end of the rental period, or extends the period of the rental.
Leasing is already used in the public sector, particularly for vehicles and medical equipment. The Office of Government Commerce agreement operates a pan-government framework for the lease of cars and car-derived vans, which it estimates is worth up to £270 million over a three-year period.
The NHS Purchasing and Supply Agency has a national framework for operating leases, which is intended to help NHS bodies to procure leases more cost efficiently and effectively. The NHS spends in the region of £500 million a year on operating leases, covering a diverse range of medical and support equipment.

Why lease?
Private sector leasing companies may be able to buy equipment for less than a local authority or central government department. The leasing company will often offer asset service and repair, which takes the headache away from those delivering public services. Leased assets can simply be handed back at the end of the agreed period, allowing new equipment to be leased. Finally, at the end of the lease, private sector leasing companies are also experts in selling equipment into second hand markets.
Taken together, these benefits mean that by working with the private sector through leasing the public sector might be able to reduce the cost and increase the quality of public services.
Despite these potential benefits, however, most local and central government equipment is bought outright rather than leased. Of course, for some equipment, purchasing may deliver better value than leasing. But too often, leasing is given scant consideration by decision-makers. Consequently the best-value deals are missed.

Comparing costs
In most cases it can be argued that the cost of the government’s borrowing is less than that of leasing companies. However, it doesn’t necessarily follow that cheaper funds automatically makes purchasing more attractive than leasing. Only by comparing the total costs of equipment purchase, operation, and disposal can a proper comparison be made. The situation has changed in recent months with the blurring of boundaries between the government and the major banks, which are also many of the largest leasing companies.
Any type of partnership between the public and private sector requires a degree of trust between both parties. In leasing, an important way of achieving that trust is to use a leasing provider that is signed up to the Finance and Leasing Association’s (FLA) Business Finance Code of practice.
FLA members will ensure that customers are well informed before they enter into a new agreement, so that the full costs are clear. They will ensure that agreements are appropriate for the type of assets being financed. This means, for example, that they won’t offer a seven year lease on equipment that is unlikely to be useful for more than five years. FLA members are required to have effective procedures for handling complaints. The FLA also operates conciliation and mediation schemes for business finance agreements, although these are very rarely needed.
Just as in PPP/PFIs, the key question for leasing is whether it can deliver something better than could have been obtained through a different procurement route. In many cases, the answer is that it can. When it comes to investment in equipment, whether in the largest deals or smaller ones, it’s not always necessary to go it alone.

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