When we think of leasing and equipment financing we think of the private sector, with companies using lease strategies as an effective overall alternative financing strategy.
However many municipal, provincial and federal government entities employ equipment financing for a number of different reasons.
Many times municipalities finance in this method to avoid statutory debt obligations. The federal and provincial governments lease millions of dollars of computer technology every year. In many cases they could purchase the equipment outright through funding but they opt to lease due to the ability to avoid obsolescence and to allow uses to upgrade to newer generations of technology.
Naturally as all government entities are under scrutiny for spending these sectors look for alternative means to finance within their budgets. Getting additional approval from voters is often difficult in challenging economic times.
Using our computer and technology financing example we see that government agencies avoid risk of obsolescence and in fact transfer those risks to the lessor. We would point out that often the lessor is in fact the manufacturer, as these firms often have large captive finance companies. It is then incumbent on the lessor to realize some sort of return on the asset when it is returned by the government entity.
We all know that certain processes within the government sector work ‘ slowly ‘ – so disposing and documenting unused technology assets is clearly a function no government department wants to take on .
Another prime area of focus for government is budget timing. In many government environments leasing per se is not considered as ‘debt ‘- it is viewed within the context of an operating expense. Therefore lease payments are expensed as they are paid, rather than using up the entire capital cost of the equipment in the current budget period.
Savvy business people know there are two types of equipment financing leases, capital, and operating. Governments tend to opt for operating leases as they are not deemed to own the equipment – they are only using it. Government entities tend to place strong importance on estimating the useful life of the equipment they are financing. Government financial personnel spend a considerable amount of time in estimating lease payments through various future fiscal periods, as budgets change. Ultimately cost is matched to actual use and performance of the asset that is financing.
In summary, we have explored two key reasons for all levels of government to consider leasing – those being budgets and technological obsolescence of certain assets – i.e. computers. Other reasons for effective use of leasing as a finance strategy for government will be explored in a future article.