Section 6

Alternative ways of
procuring assets

6.1 Introduction

Public sector organisations may procure the assets required to provide the services they are responsible for, without incurring capital expenditure, through:

• ■renting and operating leases
• ■public–private partnerships and outsourcing.

The strategy for using these alternative options, and how they are to be funded, should be included in the capital strategy, so that there is an integrated approach to capital planning.

6.2 Renting and operating leases

In some cases it may be better value for money for an organisation to rent or lease an asset rather than owning it.

A lease is an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time. Certain types of lease, known as operating leases, are akin to renting. Where an asset is rented or leased under an operating lease, the public sector organisation does not incur capital expenditure.

International Accounting Standard 17 Leases defines a finance lease as ‘a lease that transfers substantially all the risks and rewards incidental to ownership of an asset’ and an operating lease as ‘a lease other than a finance lease’. UK local authorities are required to treat finance leases as if they were borrowing and this means that they come within the capital financing regime. The payments under operating leases, however, are treated as revenue expenditure; this enables local authorities to have use of the relevant assets without incurring capital expenditure. Operating leases are commonly used for vehicles, photocopiers, computer hardware and other types of equipment, and for land and buildings that are required for a relatively short period. Further guidance on leases for UK local authorities can be found in the Practitioners’ Guide to Capital Finance in Local Government (CIPFA, 2012).

While the rules about finance leases and operating leases may not be the same for other public sector organisations as they are for local authorities in the UK, the distinction between de facto ownership and de facto renting has wider relevance in that it highlights the point that ownership is not the only means of having the use of assets.

The following table sets out the advantages and disadvantages of operating leases; the same principles apply to renting.

The decision to rent or use operating leases for particular assets rather than owning them should be based on value for money considerations. However, it is unlikely to be cost-effective for an organisation to carry out a separate option appraisal for every asset to inform this decision; a more sensible approach is to look at categories of asset, such as photocopiers, and carry out reviews periodically and/or when there is a significant change that might affect the decision. Where an option appraisal is carried out, net present value analysis is an appropriate technique given the different timing of payments under the different options.

The asset strategy should set the overall policy on renting assets and using operating leases. This might simply say that these options will be considered on a case-by-case basis. If, on the other hand, it is known that one option is best for a particular type of asset, then the policy may be more specific; it could, for example, state a presumption in favour of using operating leases for street cleaning machines.

6.3 Public–private partnerships and outsourcing

Public–private partnerships (PPPs) and outsourcing can be used to secure investment in public assets.

PPPs is a broad term for various arrangements in which the public sector organisation has a longer and more intensive relationship with a private sector supplier than it does under traditional contracts. It includes PFI contracts, local asset backed vehicles (LABVs) and strategic partnering. Outsourcing may be carried out under either a traditional services contract or a strategic partnering arrangement.

Both PPPs and outsourcing arrangements tend to be long term and therefore often involve some element of capital investment by the private sector partner in assets that it uses to provide the services under the contract. The need for investment in assets may be the main reason for entering into the arrangement, or it may be incidental to a service-led objective.

The public sector organisation will not usually need to find capital funding to cover the capital investment under these arrangements, even if the assets transfer to it at the end of the contract. However, it should make prudent financial provision for any long-term liabilities incurred.

6.4 Impact on revenue budgets

Most types of capital funding have an impact on revenue budgets. This is also the case for alternative ways of procuring assets, as the following table shows.

In considering how much capital investment they can afford, public sector organisations should estimate the overall impact on future revenue budgets and exercise prudence. The same applies to alternative ways of procuring assets.