Maintaining investment in new technology

Having modern technology doesn’t guarantee high quality public services. But it often helps. And having to make do with unreliable, inefficient or outdated technology is often a false economy that leads to higher costs and poorer services. But with public authorities facing increasingly challenging financial pressures, maintaining investment in new technology may appear just too difficult.
   
A key reason for this is that often it is assumed that new technology has to be purchased outright. Many private sector organisations would consider using asset finance whenever they need new assets. Asset finance means renting equipment through a leasing agreement. For public authorities leasing technology from the private sector is often seen as too expensive or too difficult. But it’s becoming easier for public authorities to get good value from leasing, which means making a proper comparison between purchase and lease is more important than ever.

Bridging the difference
The most likely reason for assuming that technology has to be purchased is that, traditionally, the government is able to borrow money at a better rate than the private sector.     
   
Today however there is less difference between the interest rates following the recent increase in the cost of funds available to authorities from the Public Works Loan Board authorities pay for use of government money and the rates charged by asset finance companies. This reflects the low risk for finance companies that fund public sector equipment. Following the recent increase in the cost of funds available to authorities from the Public Works Loan Board, interest rates charged by leasing companies are now competitive with the costs of public funds.
   
Assessing the affordability of asset finance isn’t just about the headline interest rate. By comparing the total costs and risks of buying, maintaining and replacing equipment, proper comparison between owning and leasing can be made.

Risidual value risk
In the private sector lenders can take the risk that equipment might not be needed after a few years. In industry jargon, this is called the residual value risk. With technology changing so rapidly it makes sense not to be tied to a piece of equipment until the end of its life. Equally there are real benefits in not having to deal with the sale and disposal of equipment, which can be time-consuming and costly. It’s often better to leave this to asset management experts.

Accounting confusion

Recently the introduction of new accounting rules for asset finance has caused a lot of confusion. When it’s accounted for one way, the only cost of leasing is the rental payments. Accounted for another way, there are other charges to consider called depreciation and capital charges. You will be relieved to hear that the details belong in ‘Accounting Standards Bulletin’ and not in ‘Government Technology’.        

Finance teams are now up to speed on the new rules and should be able to advise on what charges need to be considered. Remember, however, that the accounting jargon only affects how the technology is paid for, not the decision on whether purchase or lease is the lowest cost.
   
The FLA is campaigning for simpler accounting rules to make it easier for public authorities to keep their technology up to date. The accounting regulators are planning changes to the rules that should help public authorities by removing the need to treat different leases in different ways. But until the rules are simplified our advice is to ask for help from your in-house experts.

The right leasing agreement
A successful leasing agreement needs more than a good legal agreement. Users need to be confident that they will be treated fairly and responsibly by their leasing company. The Finance & Leasing Association’s (FLA) Business Finance Code of Practice helps to achieve and maintain the standards and essential level of trust between public authorities and our members.
   
FLA members can also  help also help their customers to achieve good practice in leasing For example, it’s important to check that the lease period is no more than the period for which the equipment is likely to be needed. Customers should consider what happens at the end of the rental period, and what it would cost to carry on using the equipment if it is still needed or even to buy it. The FLA has a checklist for customers  on its website, together with full details of the commitments that our members make when supplying to the public sector.
   
As financial pressures grow on public authorities, investing in technology becomes more rather than less important, because service efficiency improvements are so often technology-enabled.
   
Leasing is about making smarter use of limited resources, keeping options open by having the flexibility to change equipment after a few years, facilitating efficiency improvements and better services. In today’s economy and at a time when technology is moving so fast, leasing new equipment is more likely than ever to be a cost effective option.

For more information
Web: www.fla.org.uk

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