2.10.4 Acquisition of Physical Infrastructure:

Rent/Lease or Buy?

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The responsibility of a contracting authority is to ensure bvfm and in the case of making physical infrastructure available for the general public then it is important to consider, not only the purchasing (acquiring) of property but also options of renting/leasing. From the beneficiaries/ users perspective the point of view of legal ownership and the financing of the asset is normally of secondary interest. For example, when a local community require a building for child care facilities it is normally of little interest whether the premises of the local kindergarten or hospital are made available by renting, leasing or purchasing the building.

Table 2-34: Renting/leasing vs. purchasing

Option

Advantages for the Contracting Authority

Disadvantages for the Contracting Authority

Purchasing /Owning

- Unlimited right to use, change, reuse, dispose of the asset.

- In general lower total cost even under outside financing

- The contracting authority owns the asset with possible appreciation in value

- The contracting authority can depreciate the equipment (where appropriate or for contracting authorities that pay taxes).

- The equipment appears as an asset on the balance sheet

- It requires higher up-front investment and the contracting authority runs the risk of depleting reserves

-Large expenditure is not available for other projects

- Advances in technology can make the equipment purchased obsolete even before it's paid for.

- Payments are typically higher.

Leasing

- Costs are certain and are known in advance;
- No need to tie up capital in fixed assets;
- Allowances, depreciation and other calculations are not needed, since leasing is concerned only with rentals;
- Leasing provides a medium-term source of capital which may not be available elsewhere;
-  “pay as you earn”

- Deferred decision on purchasing (financing) to a later date is possible

- Contracting authority can be involved in decisions on the features of the asset

- Fixed period (limited risk against obsolescence of the asset)

- No disposal cost

- Limited right to use the asset

- Responsibility for maintenance and running costs

- Potential higher total cost

- It is generally not possible to dispose of the asset before the end of the lease.
- The asset is not owned.
- Funds must be found to pay the lease throughout its duration. 

Renting

- Good for short-term projects, especially when equipment is not likely to become part of your regular operation

- No responsibility for maintenance only running cost

- User is usually NOT involved in decisions on the features of the asset

- Higher total cost

 

Renting provides the highest flexibility for the user and is appropriate for short-term arrangements. The influence on the features of the asset is close to zero (take it or leave it)   Typical assets to be rented out are flats, offices, and accommodation.  If you don’t know how long you will use the asset, go for renting.    

Leasing provides the user with less flexibility than renting but with more freedom than ownership. The user is committed for a well-defined period. After the agreed leasing period all responsibilities fall back to the provider and the user is free to look for new arrangements to use better or more or less assets according to the need either by leasing again or by renting or by purchasing.  Typical assets for leasing are cars, machines, such as photocopiers, medical and IT equipment (mainly equipment with short innovation cycles) but also buildings.  

Purchasing and Owning an asset is usually cheaper than leasing or renting. But owning assets binds the owner much more than renting and leasing. Purchasing is the appropriate option for long-term use.

The following Checklist should be used when deciding to lease, buy or rent.

 

Checklist 2-7: Questions to be asked when deciding to lease, buy or rent

What is the current level of competition with the relevant markets for each option?
What is the available budget?
Does the budget allow for large capital investment or continuous payments over the requirement of the goods, services or infrastructures?
What will the Goods, Services or Infrastructures are used for?
How long will you require the Goods, Services or Infrastructures?
Is the asset likely to appreciate or depreciate in value? (i.e. estimated residual values)
Is the acquisition in an area of high technology and is it likely to become obsolete in a short space of time?
What are the tax and accountancy implications of lease vs. buy?

 


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