James Russell is Head of Sector?s Advisory Services division and is an Asset Finance specialist with over 15 years? experience in providing asset finance advice to the public sector.
The recent Panorama programme on schools leasing entitled ?Reading, Writing and Rip-offs? will not have gone unnoticed by the majority of subscribers reading this article and those working in local authorities.? A significant number of authorities have, like Sector, been contacted by worried schools concerned over signing any further lease agreements.
Some educational establishments are clearly unsophisticated buyers of financial services, which is exactly what a lease is and it is understandable that when a radio programme followed by a sister TV production highlights the dangers around leasing, or any other matter, an area where a significant number of individuals have little knowledge or training in, then panic, rightly or wrongly, will set in.
There?s no denying that the types of lease deal covered in the Panorama programme are in existence but, I?d question just how prevalent they are.? Over the last 10 years working with schools I have only ever come across two transactions that would come close to those highlighted in the programme, one of which happened to be with LTM (one of the suppliers featured in the programme).
I would say that the real concern is that, ignoring the horror stories, the majority of leases that schools sign with equipment suppliers are not transparent in terms of their real costs, are expensive and, in accounting terms, are finance leases (which many schools are not made aware of).
Equipment suppliers selling to both the private sector and public sector, be it schools or local authorities, will always use leasing as a way to aid sales, because it allows the purchaser to spread the cost of the purchase and also generates very healthy fees to the companies involved.? However, before the decision to use finance is made, everyone, be it in personal life or at work, should undertake an appraisal of the total life cost of each funding option.
Typically speaking schools will have four options available to them: cash purchase, use of a grant, internal loan from the local authority or leasing.? Looking over the four options and from speaking with a number of schools, I think we all appreciate that in the current economic climate, the majority of schools will favour leasing, as their access to other funding resources is restricted.? This is especially true for larger cost items such as minibuses and IT suites.
So whether leasing is the most cost effective solution or not, to some schools it may be necessary that it is used to fund the acquisition of the required assets. If leasing has to be used therefore, it is imperative that schools not only obtain competitive funding rates, but also, that the lease document they sign is as fair to them as possible and doesn?t favour the funder.
The key issue is whether schools would be better to source finance from equipment suppliers or from specialist leasing companies? ?A good analogy I like to use is, would you purchase a new IT suite from say Barclays or Lloyds Bank and obtain the finance from PC World? Probably not I?m guessing. So why, therefore, do so many organisations, schools included, purchase finance from a company that specialises in selling IT or copiers? I appreciate it?s an easy option because it?s possible to sort out the purchase of the equipment and finance in one go with one supplier, but for a small amount of extra work, evidence shows that it is clearly worth speaking to specialist leasing providers who offer lower funding rates.
There are a number of leasing providers in the market that specialise in leasing to the public sector and as a result, they understand that returns need to be modest and underlying credit is effectively sovereign state. Furthermore, now more than ever, more leasing companies are skewing their portfolio towards this sector to improve the average credit position of their portfolios, which effectively means rates are lower and documentation fairer as competition increases.
It would be a daunting task to ask anyone to go out, identify a number of leasing providers, then ask for leasing quotes and evaluate the responses.? If this was the only way to access the market then I would agree, it?s hard work.
There are however established firms offering leasing advice that have the expertise and available resource to assist schools or support local authorities to implement a better way for their schools to use leasing.? In addition to this, there are OJEU tendered frameworks which schools can access for the procurement of leasing and these are an excellent way to achieve best value. However, schools should be aware that the finance offered by suppliers on frameworks such as the GPS framework has not been tendered separately, and as a result may not deliver best value.
So the message I?d like to leave you with is that leasing, when arranged properly and for the right reasons, can deliver excellent value and it is not difficult to achieve this when working with the right people. Schools in my opinion, should not purchase finance from equipment suppliers and if this approach was adopted by schools and promoted by all local authorities, then there would be significantly fewer horror stories for the press to focus on in the future.
Source: http://www.room151.co.uk/funding/schools-leasing-lessons-to-be-learned/
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