A guide to contract hire and leasing

You don’t need to be a fly on the wall of the Cabinet Office to know that the public sector faces some serious budget cuts over the next four or five years. Some departments and agencies will be hit harder than others, but it is fair to say that cost-cutting will be high up the agenda for them all.
    
Public sector fleet managers will be tasked with delivering the same levels of service with smaller budgets. They could do a lot worse than taking a few tips from their counterparts in the private sector, many of whom have become used to working in severe cost-reduction mode in recent years.
    
One of the best routes to cutting costs is to buy in fleet services, by leasing vehicles and getting outside specialists to run them for you. This approach has been taken by many private sector companies over the last 10 years, and the range of fleet services on offer has grown.

Modern providers
As well as the traditional contract hire deal where a leasing company provides finance and takes responsibility for servicing and maintaining it, modern providers will also offer services including roadside assistance, relief vehicles, daily vehicle rental and accident management. They can also provide driver services, helping people to book MOTs and repairs, arrange tyre and windscreen replacements and even order their next car.

Many will provide expert consultancy advice to help organisations to meet their fleet duty of care requirements (vehicle audits, driving licence checks, etc) or environmental targets. However, up to now, the public sector has been more reluctant to consider outsourcing their fleet finance or management.

Early adopters
Nottinghamshire Police Service took this step a number of years ago, entering into a 25-year whole-of-life vehicle procurement, service and maintenance contract with fleet services provider Venson.  
    
“The decision to outsource our fleet to Venson was definitely the right move,” says Lucas Ortega, head of procurement at Nottingham Police, which has a 500-strong vehicle fleet that includes police cars, covert operation and specialist vans, traffic scooters, horseboxes and a mobile police station.
    
“We are now able to offer our police drivers good service, much better availability and the assurance that their vehicles should always be fit for purpose. Working with a specialist fleet management provider has moved us much closer to our best value targets.”
    
A large number of public sector fleets are still run in-house, but this could well be about to change, especially if leasing and fleet management companies can deliver the 10-20 per cent cost savings they have been able to deliver their private sector clients.
    
In the past, these potential cost savings have been hampered by some other barriers, says Stuart Walker, brand director Automotive Leasing, the public sector division of international leasing company LeasePlan.
    
“The cost and hassle factor involved with outsourcing their fleets has been a major turn-off for public sector organisations. As well as taking a lot of time, the average large scale tender costs a public sector organisation around £20-30,000.”

Frameworks
Thankfully, government procurement experts have been hard at work over the past few years to make it easier and more cost-effective for government bodies to buy-in external services. The Office of Government Commerce (OGC) has set up ‘frameworks’ around different fleet services, including fleet management, fleet consultancy, contract hire (for cars and commercial vehicles) and daily rental (cars and commercial vehicles).
    
“These frameworks help public sector organisations to save money on tendering and still get a very good price from centrally negotiated agreements,” says Walker.
    
Typically these deals last three to four years, they include pre-agreed terms and conditions and have six to eight pre-vetted suppliers listed.

By simplifying the procurement of fleet services, the government has also made it easier for leasing and fleet management companies to enter the market.
    
With an estimated public sector fleet of over 100,000 vehicles and an estimated annual budget of more than £600m, it is obvious why British Vehicle Rental and Leasing Association members see this as a key growth market.
    
As well as being under pressure to cut costs, central government departments and agencies also have to reduce emissions, in the form of ‘SOGE’ targets. These goals for Sustainable Operations on the Government Estate were announced by the Prime Minister in 2006 and have set a target for reducing road vehicle emissions by 15 per cent by 2010/11, relative to 2005/6 levels.
    
So far, things are going very well. The latest OGC report on the SOGE targets said that departments had produced a 17 per cent reduction in road transport emissions as of 2008/9 and were on target to produce an overall reduction of 23.7 per cent by 2010/11. It said that a large portion of these reductions had been achieved by reducing unnecessary business travel and cracking down on grey fleet use by getting employees into rental or lease cars. The case for this is clear – lease vehicles (average age around 18 months) are safer, more reliable, more fuel-efficient and less polluting than the grey fleet (average age over six years).

The grey fleet challenge
The grey fleet, where employees use their own vehicles for work purposes, is one of the greatest challenges facing public sector fleet managers at the moment. Grey fleet drivers do an estimated 1.4 billion miles a year at an average of 40-50p per mile.
    
Reducing this reliance on the grey fleet has risen up the agenda as employers become more aware of the duty of care owed to their employees driving at work. Around one in three road accidents involve a vehicle being driven for work. In financial terms this is costing UK industry over £2.5 billion each year, but it is the human cost that is most frightening – around 200 work-related deaths or serious injuries every week.
    
The arrival of new corporate manslaughter legislation and a tighter focus on the application of health and safety regulations has shown that the government is cracking down in this area.
    
The vehicle leasing industry also takes its duty of care to its customers seriously. All BVRLA members are quality assured and operate under a code of conduct. This reassures potential customers that they are dealing with a reputable company that will offer the highest levels of service, backed up by the association’s conciliation service.

Types of leasing
Contract Hire: This is the most popular way of hiring a business vehicle – more than half of all new company cars registered each year are funded this way. A vehicle is leased to an organisation for a set time and specified mileage, in return for an initial fee (usually three months rental) and a subsequent monthly charge. At the end of the contractual period, it is returned to the leasing company.
    
Finance Lease: With a finance lease you choose to pay either the entire cost of the vehicle, including interest charges, over an agreed lease period or opt to pay lower monthly rentals with a final payment based on the anticipated resale value of the vehicle. At the conclusion of the contract you can continue to operate the vehicle for a nominal fee, but you will at no time take ownership of the asset.
    
Hire Purchase: This is a method of financing a purchase with the vehicle becoming the property of the lessee at the end of the period. The monthly payment is determined by the amount of deposit paid, the period of the contract and the sale price of the vehicle.
    
Contract Purchase: The company agrees to buy the vehicle via a series of monthly instalments, covering the cost of the vehicle and an interest element. The monthly fee usually includes a charge for any additional services, such as maintenance. There is usually a final balloon payment, equal to the vehicle’s residual value, after which legal ownership passes to the user. Having gained legal ownership, the new owner can keep the vehicle, sell it on directly, or sell the car back to the finance company for a price agreed at the start of the contract.
    
Employee Contract Purchase: These schemes are designed as a staff benefit for organisations seeking an alternative to the traditional company car. They can also enable employers to set up an employee car scheme for people who do not qualify for a company car or allowance and allow employees to enjoy the benefits of company car ownership without paying company car tax.
    
They fall into two categories:
Personal Car Plans: The employee finances a vehicle for a contract period of their choice, and can take an optional maintenance package and roadside assistance for peace of mind. At the end of the agreement the employee has three options; exchange the car for a new one, purchase the vehicle outright or return it without further cost.

Employee Car Ownership Schemes: This type of scheme is very similar to a personal car plan, except that the employer retains control of the fleet policy, including buying terms, vehicle choice, replacement cycle, maintenance and insurance.

Advantages of leasing
1. Fixed monthly costs: Car leasing is a fixed-cost form of motoring. For a set monthly payment, you get the use of a car for an agreed duration and mileage that suits your organisation. The fee takes into account the car’s price when hired, its forecast mileage during the contract and its estimated residual value at the end. As long as you have not exceeded the agreed contract mileage and the vehicle is in a fair condition, you just return it at the end of the contract, with no further cost. For an extra monthly fee, you can ask your leasing company to take care of nearly every hassle associated with ownership, whether it is maintenance, servicing or replacement vehicles.  

2. No risk: Most cars will lose value from the moment they leave the showroom. In a contract hire deal (the most popular form of vehicle leasing), you return the car to the leasing company at the end of the contract period and it takes on the hassle of selling the car and the risk associated with getting a fair price.

3. Free up capital: Leasing a business car instead of purchasing it means you are not tying up capital in a rapidly depreciating asset. With public sector capital expenditure levels set for a squeeze, leasing can free up more of what is left.

4. Flexibility: Successful organisations are adaptable and leasing provides you with more fleet flexibility. If you are worried about whether you will need a car in the future – for example, because of lay-offs or some other change in circumstances – you can just extend a contract for six months while you wait and see what happens.

5. Purchasing power: While you may have a fleet of three, 10, 50 or even 100 vehicles, leasing companies are used to buying thousands each year. They can negotiate great deals with manufacturers and pass the savings on to you in the form of a very competitive leasing rate.