Fleet managers looking to reduce the capital required to fund a plant replacement program should consider leasing as an alternative to an outright purchase. Lease payments are funded through operations as a direct cost to departments.
There are two types of operating lease available to fund plant: a fully maintained operating lease or one without maintenance. Operational leases are similar to a finance lease with the exception that the risk of loss on sale is borne by the finance lease company and no capital is reported for the council’s assets.
A fully maintained operating lease includes all servicing costs within the total cost of the lease payments. The finance company or supplier takes the risk on the residual value of the item and the buyer therefore pays for the risk.
The choice of whether to take a fully maintained operating lease or a non-maintenance lease will depend on the ability of the maintenance service provider – whether it internal or external – to maintain the vehicle to the manufacturer’s requirements.
Generally, an operating lease is used for fleet investments that are short-term; typically five years or less. Longer-term items, such as a grader, would require a further lease term unless the utilisation was very high.
All leases are tied to a period of ownership and budgeted utilisation for the vehicle. Unless the vehicle obtains the target utilisation within the period of ownership, the council will suffer a lost opportunity with unused utilisation. Conversely the organisation stands to attract additional costs if the budget utilisation is exceeded.
At the end of the lease term, the lessee will have four alternatives:
- upgrade or replace the equipment with a new item of plant/vehicle;
- extend the rental period;
- return the plant/vehicle with no further payments required (conditions apply); or
- purchase the plant/vehicle at a market price.
The downside of a lease is that incorrectly managed leases can be expensive. The organisation is locked into a fixed period of replacement and, if utilisation reduces, the costs of the lease continues at the same level, resulting in increased charge out rates to the user. In the opposite respect, if utilisation increases the lessor will have provisioned for a lease top-up fee that may be reasonably expensive.
To lease or to buy?
A fully maintained operating lease can provide a competitive alternative to ownership, provided the utilisation of the item is predictable. If utilisation is not predictable there is potential for cost penalties where utilisation exceeds the agreement or in the case of underutilisation, unnecessary overpayment.
A fully maintained operating lease for light vehicles presents greater challenges because of the potential for changing roles of the vehicle users and the risk of penalties for exceeding the agreed maximum mileage. Strict monitoring is required.
High capital cost and known utilisation items, such as road sweepers, graders, loaders etc, are most suited for leasing. The recommended practice when calling tenders for leasing items of heavy plant/vehicles is to require tenderers to include the purchase price for the item to enable a comparison of leasing versus buying.
The decision on whether to lease or buy should be based on a whole of life cost comparison. The IPWEA online tools can be used to calculate whole of life costs and make the apples with apples comparison.
For more information visit
www.ipwea.org.au/fleet