Buy or hire - which is best?

Published:  05 January, 2012

SFS managing director, Bob Sweetland, provides some insight into the question of buy or hire. He says the private and public sectors can work together to continue to deliver efficient, high quality front-line services despite diminishing budgets.

When a local authority is considering its options regarding the financing of a new fleet of municipal vehicles purchasing with the aid of prudential borrowing can, at first, appear to be the more cost effective option. However, calculate the “whole life” costs of buying a vehicle and keeping it on the road, and a different conclusion may be reached.

Contract hire offers a number of advantages over outright purchase, especially against the current backdrop of low interest rates (fixed for the duration of the hire period), which means there are good deals to be had.

However, first a word of warning. The contract hire sector has seen its fair share of providers collapsing due to financial instability, leaving some councils in the precarious position of having vehicles “re-possessed” by third party finance companies. I cannot stress enough the significance of carrying out proper due diligence to ensure that a hire provider is sufficiently financially stable to be able to tender.

Look at the long-term picture and councils need to consider three main areas when considering whether to buy or hire. Firstly there is the cost of buying. Can a local authority buy as cheaply as a contract hire provider? Contract hire companies buy large numbers of vehicles year in year out, putting them in a strong position to negotiate preferential prices with manufacturers. In turn these savings are passed on to customers through more competitive contract terms.

Specialist municipal vehicles such as refuse and recycling collection vehicles are bespoke assets built to match the specifications of a particular authority. A fleet has to be fit for purpose, taking into account the amount of waste to be collected, specific recycling collections and the geography of the area. Add to this other external influences such as health and safety standards, fuel saving, the green agenda and emissions reduction targets, and choosing the right spec of vehicle is crucial. This is an area where outside expertise comes in and, if involved early enough in the process, hire companies can work with manufacturers and suppliers to find the right vehicles and make any adaptations, as well as specify the correct ancillary equipment such as CCTV, reversing aids and fuel saving technology.

Next, the maintenance of a fleet of vehicles – a resource absorbing activity that is not a core local authority function but a necessary evil to facilitate the provision of a service. By outsourcing this function councils can save money and improve the efficiency of their operations, particularly if they choose to opt for full outsourcing.

Sub-contracting a workshop back to the authority can work very successfully but, if given free rein to manage a workshop facility, there are more opportunities to add value and make a difference. Current staff can be retained under TUPE and we can invest in training and development. Similarly we can invest in equipment and call in support from existing infrastructure and facilities. For example a network of mobile engineers that can be called upon during peak periods and supplying replacement vehicles from our in-house fleet.

Buying a vehicle is only the tip of the iceberg and a huge amount of time, staffing and financial resources are needed to maintain a fleet and keep up to date with continually changing regulations regarding health and safety, carbon emissions and vehicle operator protocols.

Other benefits for outsourcing workshop operations include additional revenue streams and cost-savings by either sharing facilities with neighbouring authorities or by offering workshop services to third parties.

By way of example, the SFS Northampton workshop caters for a number of authorities so the costs are spread over a number of fleets, resulting in more cost effective, value for money services all round.

However, such economies of scale are only possible where authorities are willing to be open and recognise that by joining forces they are greater than the sum of their parts. Despite obvious synergies and common interests between some authorities, working together is not always deemed feasible or workable. Still, as the era of austerity continues such authorities may need to re-visit these opportunities to work together and consolidate their support functions, or risk diminishing their ability to deliver front-line services.

Finally, the ultimate part of the process of calculating the “whole life cost” of a vehicle is its disposal. The typical life-span of a refuse vehicle, given the demands of its operation, is around seven years, and the residual value of a vehicle is factored in at the outset of a contract. Maximising the residual value of vehicles requires specialist knowledge and expertise, and can deliver significant savings over the contract lifetime.

Where unrealistic residual values have been quoted, for the sake of cheaper rentals, at the end of the contract authorities can find themselves at the mercy of residual guarantors demanding charges for vehicle damages, which outweigh the value of the vehicle.

The financial stability of the hire provider, and their ability to carry some or all of this residual value risk, is an important factor in futureproofing authorities against such occurences. Authorities need to properly evaluate the stability of hire companies before awarding tenders.

All too often, long-term contracts are awarded to companies with weak balance sheets that are not likely to survive the full duration of the contract. I've even come across companies in administration that are still included on tender lists!

There are huge opportunities for the private and public sector to put their heads together and find innovative solutions for delivering high quality services for less. Hire companies need to add value to hire contracts by offering cost effective support services that lift the burden of fleet maintenance from authorities, and leave them free to focus on delivering crucial front-line services.

When done as a partnership arrangement contract hire should result in reduced risk for authorities, improved efficiency, cost savings, greater value for money and improved services to end users.

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