Writing the history of leasing, Jeffrey Taylor says it is corporate America’s biggest external source of equipment finance, bigger than bank loans, bonds, stocks, commercial mortgages and the fastest growing form of business investment.
Taylor goes on to say that US companies lease everything from printing presses to power plants, hay balers to helicopters, office copiers to offshore drilling rigs, telecom equipment to large-scale computer networks. And it has been with them from the yore.
“Leasing first appeared in the United States in the 1700s, to finance the use of horse-drawn wagons. By the mid-1800s, railroad tycoons, battling to extend their private railroads across the country, required tremendous amounts of new capital. Most banks, however, considered railroad financing risky and refused to lend to the emerging transportation industry. Locomotives, cars and other railroad equipment had to be financed using new and creative methods – the forerunners of the equipment lease,” Taylor writes.
The leasing concept gained currency in the Kenyan market in mid 2000. It was, however, not until 2010, when Uhuru Kenyatta, now President, was minister for Finance that government ever looked to embrace leasing as a means to fix the dilapidated transport in the national security department.
In the 2010/2011 financial year, Uhuru ordered the procurement of 1000 vehicles through leasing for the national security. It never went past the tender stage. It was not until after Uhuru Kenyatta became President in 2013 that the process was revived. Fresh tendering was called and the bidding process was concluded successfully. The Kenya National Police Service got its first fleet of leased 1000 vehicles, the first one in Kenya’s history in 2014. There was to be an addition 1000 others early this year. Leasing, experts say, works better for government than even private entities.
If, say, government were to purchase through acquisition the 1000 vehicles, they would have gotten 300 vehicles for the value of 1000. Roughly, the difference is between 60% and 70% depending on the type and the complexity of the equipment in leasing. Governments tend not to borrow; they buy with the money available, which does not work well for massive acquisitions.
The other advantage is that leasing solves the perennial government problem of getting stuck with expensive vehicles or equipment that lie idle or get misused. Issues of maintenance of government vehicles have been completely solved through the wet operational lease structure. At the end of the lease, government get to return the vehicles to the leasing companies and get into a new contract that delivers another set of new vehicles. This increases efficiency in government operations even as it saves money.
“The biggest challenge that we have had in transport is maintenance,” says National Treasury Cabinet Secretary Henry Rotich. “When a vehicle is taken for service, there is no service delivery. But in this leasing arrangement, there is no time we will be out of operation because when a vehicle goes for service, the leasing company provides another to fill the gap.”
The government can spend even three times the leasing cost for simple repairs yet most of the vehicles would end up being parked because of the inability to service them well.
The government’s entry has excited leasing in the country, pushing it to a Sh100 billion industry. Now businesses relating to leasing are coming up, roping in banks, lawyers and insurance companies.
The problem with government leasing is corruption, but more so the ignorance on the side of the mandarins, of the complexities involved in leasing. In the first lease of the 1000 vehicles for the police, for instance, government awarded the whole tender to one bidder, to the surprise, even of the winner of the tender. Even more surprising was the fact the sole winner of the open tender was a dealer, not even a leasing company. The best practice would have been to split the tender, given its huge demand for capital, among various bidders looking into the specifications of the tender. Besides, car dealers are not best positioned in leasing business.
The dealer that won the tender had to invite all leasing companies involved in the bidding, both local and international, to help on delivering on the tender, the issues being mainly about capital and lease structuring. Ironically, that incident has created a working relationship among motor vehicle dealers and even between the dealers and the leasing companies.
Government also seems to be learning in the process because in the second batch of 1000 more vehicles that was done this year, it split the tender among various motor vehicle dealers, who in the end roped in leasing companies.
Leasing experts, however, argue that government spends more on leases with dealers rather than leasing companies. Government tend to shy away from leasing companies since with the dealers, they can see tangible deliverables in terms of vehicles, what they do not see with the companies. Leasing however, is a capital investment business and the fact that leasing companies only shuffle papers to deliver vehicles should not make government to develop cold feet towards the companies. Between the two, leasing companies offer more value for money on leases than dealers who stand to lose nothing because in the end, they will still sell the vehicles to the leasing companies who in the end will deliver to government.
The dealers’ core business is selling and after sales service. Leasing is a very different market in terms of raising capital and there is a customer service aspect to it, which cannot be accommodated by the dealers. Leasing companies set up fleet teams and alternative service centres to maintain their customers. Dealers, for instance, do not manufacture tires, shocks, or windscreens. When a leasee goes to a dealer, say, for tyres, the dealer will charge double yet he will only run next door, say to Pirelli and outsource. Leasing companies build synergies with other suppliers including for shocks, windscreens, things that dealers do not have, at no extra costs.
With a standard pricing, agreed interest rates for the cost of money for carrying the equipment and salvage value, government should not shy away from the leasing companies. The dealers stand to lose nothing because in the end, the leasing companies will buy from the dealers. No relationships are compromised.
Leasing experts predict it is a trend that will be around for a little while. Just like the leasing companies in mid 2000s when they learned the ropes with time, with clients offering a helping hand, government is learning. Expensive as it may be, it is healthy. With time they will master the ropes and will be able to make the right choices with value for money in mind.
Unscrupulous leasers, in some cases, have taken advantage of the situation to milk government and parastatals dry, especially hiding in the complexities of the dry and wet models of operating leasing. This is what might have happened with the Kenya Airport Authority’s five buses for Sh10 million a month that President Uhuru Kenyatta has decried. Those in the know say at the very most, the lease should not cost beyond Sh2 million a month, even if it is a wet lease that comes complete with insurance, maintenance, tracking and operators.
