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Leasing supplement

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Added 8th September 2016 12:11 PM

The set-up of Government, for instance, offers one of the perfect scenarios where there is a lot of economic argument for leasing.

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If the Government embraced leasing, it would save the funds it wastes on its vehicles

The set-up of Government, for instance, offers one of the perfect scenarios where there is a lot of economic argument for leasing.

Leasing enhances govt efficiency

By Joseph Kiiza Ndiho

The primary role of government is provision of public services to its citizens. Provision of this service, if well facilitated, does not need to be by the Government itself. The need for an efficient government, therefore, calls for active public-private sector engagements to ensure this service provision is achieved. Leasing is one of the perfect areas of engagement that the Government can use to maximise synergies with the private sector. There is no bravery in killing a dead lion as much as there is no prestige in owning an asset without value. 

Movable assets

Financing of a movable asset like a car over a period of time only to finish the payments and retain a depreciated asset simply beats basic economic sense. By any definition, a lot of moveable property accrue substantial maintenance costs in addition to the depreciation and should be rightly regarded as liabilities.

These are better off owned by someone else unless they form part of your core business. So should the Government buy or lease, which is the better option? With proper perspective, it is a piece of cake to decide.

The Government transport services are important in facilitating movement of personnel as well as materials and equipment required in the course of delivery of public services. At present, individual ministries, departments and related agencies procure and manage their own vehicle fleet and transport services to facilitate public service delivery.

This mode of delivery has often been accompanied by increasing costs of transport services without commensurate improvements in service delivery in other aspects of public services. According to a Uganda Debt Network report, in the 2005/06 financial year, there were at least 8,090 government vehicles on Uganda’s roads, on which the Government spent sh29b on fuel. It added: “The size of the fleet and cost of maintenance was higher, since the cost excludes motorcycles at the national and local Government levels”.

According to the report, the Government also spent sh18b on purchasing new vehicles, bringing the total expenditure to sh76b in the same financial year. In the 2006/07 financial year, the report said the fuel bill was sh24b, while that for vehicle maintenance stood at sh68b. In the 2009/10 financial year, the Government expenditure on vehicle maintenance escalated to over sh100b, the NGO said.

Data from the finance ministry indicates that the Government spends about sh100b annually on vehicle repairs and another sh125b on purchase of vehicles. According to this report, this was among the reasons why supplementary expenditure has gone up over the years.

“This seems to give credence to the unwavering demand for public funds every financial year, through supplementary budget. For instance, a supplementary request of sh6b by State House in April 2013 was for vehicle maintenance,” the report said.

Cost effectiveness

The Government should consider reviewing the manner in which official transport and services are provided to ensure efficiency and cost effectiveness. As part of this review and efforts to deal with the challenges of providing official government transport and equipment services, the Government should slowly embrace the leasing option.

With a particular set of circumstances, deciding whether to lease or buy is an easy choice. The set-up of the Government, for instance, offers one of the perfect scenarios where there is a lot of economic argument for leasing.

The political arm of the Government operates on a leasing concept of some sort in which every five years the electorate renews or terminates their mandate. It should be remembered that governments operate using budgets. But these budgets are mere numbers of intent if the revenue arm of the Government does not collect taxes to meet the intended expenditures.

Capital purchase

Purchases under capital expenditures, even when budgeted for, if done at once, cause serious strains on the liquidity of any establishment; even as big as the Government. If the budgeted amount for purchasing these items is instead changed to leasing, there is little deposit paid and the periodic repayments can be adjusted to fit into the Government liquidity cycle.

It is where the greatest benefit that accrues to a government that leases also lies. Assuming for instance the Government with the increasing wave of crime and terrorism risks decided to prioritise Police patrols, rapid Police response services for reported crimes, heightened the Police ambulance services and strengthening the fire response department of the Police.

In this scenario, the Government decides to increase the fleet of vehicles, motorcycles, ambulances and fire engines used by the Police to effectively deliver this service. To effectively achieve this, and as an attempt to estimate, each district would need to be allocated a fire engine, about five patrol pickups, at least two ambulances, over 30 motor cycles and a few saloon cars.

This would exclude the more urbanised areas, which require a heavier presence of such units to effectively patrol. Considering the fact that there are about 113 districts in Uganda, the Police would need over 1,000 patrol pick-up trucks, over 150 fire engines, over 300 saloon cars and over 5,000 motor cycles to begin to boast about the ability to provide the requisite policing service.

For these units to effectively deliver such a service, they would need to be brand new and free of the mechanical defects associated with used vehicles. If translated into numerical terms, the Police department would probably need about sh200b just to purchase these units without factoring in the cost of running and maintaining them, which according to current the Government usage habits can easily be 50% of the purchase price, which would be another sh100b.

Perfect alternative

Alternatively, however, if the Government leased these units, it would set aside approximately sh80b per annum in the national budget for three consecutive years or about sh70b for four consecutive years.

The difference here is that the sh80b budgeted for would include the cost of maintaining and servicing these vehicles and would include their comprehensive insurance for the three-year period.

In effect, the Police would still have acquired these units and would be certain that all repairs and maintenance costs owing to responsible usage are taken care of and in the event of accidents, the insurance companies would set in to replace the units back to a usable state.

At the end of the lease period (three or four years), the Police would not be stuck with the depreciated vehicles, but would return them to the leasing companies and opt for newer model vehicles or if some vehicles are still sound, the Police could opt for an extended lease period of say one year at close to 50% of the initial cost, which is lower.

The above scenario illustrates that the Government would have to part with sh200b to acquire such units and spend sh100b servicing and maintaining them, which is a total of about sh300b in one year.

The next years would only include service and maintenance and even if it was left at 50%, the Government would still pay out over sh100b and at the end of three years, the Government expenditure would be about sh500b on purchasing and maintaining these vehicles. The comparison with about sh80b per year on leasing, translates to about sh240b after three years, hence saving over sh260b in the three-year period.

There is a tendency to argue that since the initial cost of the vehicles was sh200b and the Government has ended up spending sh240b in three years of leasing, it has more than purchased the units and still does not own them, thus making leasing very expensive.

This argument, however, falls flat by the first analysis, which shows a saving of sh260b and obviously supported by the time value of money concept. The fact that the Government has not spent the sh200b upfront to buy the vehicles and paid another sh100b maintaining them but rather only paid sh80b to lease them annually means that it has scored heavily on financial resources management and of course heightened service provision in the policing and provision of adequate security services.

More importantly, the sh220b, which is the difference between the leasing cost of sh80b and the anticipated sh300b in the first year of operation, can be deployed into provision of services to other public sector needs.

Health sector model

To provide better medical services, the Government decided to equip the national and regional referral hospitals with medical diagnostic equipment that include MRI scans, CT scans and all other sets of equipment, which are either not the latest or have not been properly maintained and serviced due to a number of reasons that usually hinge around budgetary constraints.

If for illustration purposes, a full set of such equipment costs over $1.5m (sh5b), it would mean that the Government would have to allocate over $20m (sh7b) to purchase and install them at all the 12 regional referral and three national referral hospitals.

If the Government attempted to include all the district hospitals, which are over 39, the cost would go to over $90m in purchases alone. The cost of maintaining such high-end equipment would be about 10%-30% of the purchase price annually.

If, however, the Government entered into a partnership with a leasing solutions provider, it would get a comprehensive package, which includes insurance, service and maintenance of such equipment as recommended by the manufacturers, which would ensure time and efficient delivery of the intended service.

Operational costs

What the Government would only worry about would be the daily operational costs in comparison to a car where the Government would only worry about the cost of fuel. This efficiency could be easily achieved by using about 20%- 30% of the actual purchase cost annually and is spread over four to five years, which would be good financial resources management.

The beauty about this model is that the hospitals will not be stuck with those machines for their lifetime because after the lease periods, say five years, new and latest machinery would-be ordered on a fresh lease.

The savings from the would be cost would then be used to cater for the routine operational requirements of such equipment and there would obviously be a surplus, which can be channeled into providing other health-related services or even boosting the remuneration of health workers to attract them to stay in public hospitals.

This same model can be used to make available ambulance services at all such hospitals and health centres where the Government is certain that there will not be any laxity in the service and maintenance since it will have negotiated a comprehensive package that includes service, maintenance and insurance of the same.

 overnment can acquire expensive medical equipment through leasing and avoid wasteful expenditure Government can acquire expensive medical equipment through leasing and avoid wasteful expenditure

 

Ipads for MPs

This leasing principle can be used to support the Government’s interconnectivity and digitisation process at all levels where leasing of ICT equipment such as computers, servers and other required equipment can be undertaken.

The Government would easily achieve this end without straining its budget on planning for direct purchases but rather go into a leasing arrangement where such equipment are supplied, serviced and maintained while the Government employees only use them without the worry about the after sales and service headache.

Parliament, for instance did not need to outrightly purchase iPads for MPs, but could have leased them with a comprehensive package of insurance and service at a certain agreed cost annually.

At the moment, if an iPad is lost, there is no compensation and should any service issues arise, either the MP or Parliament has to dig again into its coffers to pay up. Most importantly, the model of iPad purchased will be outdated in the next two to three years and they will have no choice but to be stuck with the gadgets, a problem that would have easily been sorted out by a leasing solution. The next set of MPs will also demand for iPads and the cycle of purchasing will continue.

Leasing picture

The Government can also consider leasing vehicles instead of paying out sh150m to MPs every five years. The the Government could easily allocate a budget to lease these units for a five-year period while the MPs are in office and perhaps offer the MPs an option to purchase the vehicles at the end of the period.

Government agencies such as Kampala Capital City Authority (KCCA) and other local Governments in the need to improve service provision can easily take advantage of leasing to acquire garbage trucks, road construction and maintenance units and even ordinary motor vehicles to aid their operations.

Heavy vehicle and equipment user agents such as Uganda National Roads Authority, Uganda Revenue Authority (URA) and National Medical Stores that rely on vehicles to deliver their service should consider adopting such leasing solutions. National Water and Sewerage Corporation and URA seem to have taken a leaf although the agencies can extend their leasing scope to non-vehicle related equipment.

Lessons from Kenya

The Kenyan government, having understood the benefits that leasing comes with, have embraced the concept and have so far began with acquisition of 2,700 Police vehicles and some helicopters in a bid to improve service provision in the area of security.

In the 2014-2015 budget, Kenya allocated an equivalent of over sh194b to service the lease rentals for the acquired vehicles and aircraft. The direct benefits are visible to the population with an increased policing service and to the Police force with the availability of vehicles that are fully maintained and serviced and also comprehensively insured.

This is beginning to create a certain discipline in the force, knowing that the vehicles have a fleet management and tracking system installed to monitor their movements, thus eliminating abuse of the vehicles, not mentioning the benefit of management of associated vehicle running costs.

As the Government moves towards investing in productive sectors of the economy, efficient allocation of financial resources will play a big role in achieving the development agenda set out. It is, therefore, imperative that wherever efficiencies can be achieved they are pursued in a bid to free financial resources that can be invested or re allocated to the provision of the much needed social services, which would directly benefit the population.

The case for leasing, therefore, should be its ability to help the Government free some resources for reinvestment while providing the needed vehicles and equipment required for the functionality of “facilitating” provision of services.

A decision by the Government to lease will directly spur the growth of the financial services industry, which will provide the financing for the acquisition of such vehicles and equipment. This is an indirect way of the Government borrowing from the private sector, which in comparison to the direct borrowing through selling of the Government paper is more likely to grow the lending book in the commercial banks.

The associated growth in industries such as the Insurance industry, the car tracking services, vehicle maintenance and repair services and fuel supply will all serve to contribute to the Government coffers through tax.

Leasing is simpler with dfcu

 

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