Ten things local authorities should know about fleet finance
Published: 02 December, 2015
No two local authorities are the same. Even neighbouring councils can operate their fleets in vastly different ways and are influenced by their budget, policy towards outsourcing and the type of vehicles they operate, writes Suzanne Phillips, national fleet consultant at Hitachi Capital Vehicle Solutions.
Despite such differences, every UK council faces similar challenges in today's economic climate. With increased public scrutiny, the need to show value for money in the services provided to local communities has never been more crucial.
To increase efficiency, many local authorities are now looking to their leasing and fleet management provider to help them create a ‘mobility solution' that allows them to operate their fleets in the most cost-effective way possible.
So what do you need to know when considering the options? Here are my top ten pointers for local authority fleet managers considering vehicle finance.
1) It's more flexible than you think.
A reputable partner will work with local authorities to match cash-flow schedules with appropriate funding options based on the vehicles required and the council's requirements. One size shouldn't fit all. Options ranging from outright purchase to long-term lease to sale and leaseback should be investigated, including a model that charges a set cost per hour of HGV and plant utilisation and another that covers cost per mile for cars, LCVs and grey fleet.
2) VAT and tax implications.
Whatever funding methods you're considering, it's important to analyse the cost of any associated taxes. This will depend on your VAT and tax status. While some local authorities won't be able to reclaim any VAT, those that are eligible will need to identify where they sit on the sliding scale of recovery rates.The amount that could be recovered will vary according to the funding method, so this information should be calculated before any agreement so you can determine the most cost-effective funding solution.
3) The true cost of your procurement route.
The price quoted isn't the only factor to consider; it's also important to think about the commission imposed by third-party procurement companies. While some will create framework agreements with vehicle funders, with a set fee for every vehicle procured, others' fees will vary.
While these fees are relatively clear when using one supplier, they can become less clear when several are thrown into the mix. Remember to ask potential partners to explain what additional procurement costs are incurred, so you can make an informed decision about whether it's more cost-effective to work with one or several.
4) Secure funders.
Local authorities will typically seek out the most cost-effective payment schedules when financing their fleet, in order to balance their books. For a council facing extreme cuts, an all-in-advance funding option may be attractive as it uses hardly any capital expenditure, minimises interest charges (as it is all paid in advance), and removes the administration associated with buying and selling vehicles. However, this decision assumes that your funder's future creditworthiness is secure, so you will need to have investigated this beforehand.
Recently there have been times where leasing providers have gone into administration, leaving a black hole around their customers' fleets. To limit the risk, make sure you carry out due diligence checks before committing to any given funder. These should include analysis of the published price or lease rentals and should also consider a risk adjustment that reflects the funder's creditworthiness.
5) The whole-life cost of your fleet.
It's tempting to believe that the funder's quoted price, plus a little extra to cover maintenance, will reflect the overall cost of your fleet. However, a credible funder should outline the whole-life cost of running those vehicles.
Not only do whole-life costs consider the price of purchase, lease or management, they also cover several other factors, including the cost of service, repairs and parts, administration, fuel, National Insurance contributions on carbon emissions, damage recharges (see below), depreciation and residual values based on CAP benchmarks. This cradle-to-grave costing gives a more accurate picture of how one solution truly compares to another.
6) Return charges and policies.
As different funders take different approaches to charges associated with vehicle damage, end-of-contract or financing, the overall costs can vary enormously. Before entering into any agreement, I'd recommend researching what level of wear and tear is expected when the vehicle is returned. As a minimum, refer to the British Vehicle Rental and Leasing Association's (BVRLA's) Fair Wear and Tear Standard, which outlines what both funder and customer should expect at vehicle return and what level of fair wear and tear is acceptable.
Also, be mindful that the BVRLA operates three sets of guidelines – one for cars, another for Light Commercial Vehicles (LCVs) and minibuses and a third for Heavy Goods Vehicles (HGVs). These recognise the fundamental differences between vehicle types and the way they're used on a day-to-day basis.
7) How to maximise resale value.
Some local authorities prefer to manage vehicle disposal themselves. This can be a difficult and time-consuming process – particularly where a fleet manager has a large, mixed fleet. The resale value is also subject to market fluctuations, which may affect the vehicle's market price.
For those who don't have the resources or knowledge to maximise resale values, it might be wiser to outsource the activity – typically to your vehicle funder. This could be more cost-effective and less risky – especially if the funder has agreed to take on the residual value risk upfront as part of the agreement. They are likely to be more experienced in maximising residual values achieved based on the volume of disposals they carry out.
8) Capital and operational expenditure implications and budget periods.
Local authorities are often targeted to maximise capital or minimise operational expenditure. The best way of doing this may depend on how a council submits its financial reporting statements and which target is seen as the most important.
However, local authorities should also consider that outright purchasing in order to maximise capital expenditure could affect their operational spend. In this case, a more holistic approach is needed to consider how capital and operational expenditure can work alongside each other. Additionally, if there is only a limited capital budget available, you need to ask yourself whether is it better spent purchasing fleet or other council-based assets.
9) The power of collaboration.
It's a seemingly obvious point but fleet managers need to collaborate with their drivers to obtain as much information as possible about the type of vehicles required and the reasons for their choice. Sharing these findings with colleagues in procurement, who might otherwise select vehicles based purely on price without considering other variables – such as maintenance and repair costs or how a particular vehicle might affect driver productivity – is essential.
Ultimately, having these discussions early on will speed up the whole process. Fleet managers can provide their funder with a very clear picture of what's required – from all perspectives.
10) Potential impacts on employees.
Finally, it's important to consider the impact on the driver of the vehicle in question – whether the vehicle is fit for purpose, whether the driver can or should be able to use it privately and how the vehicle stands up to those used in other organisations. One (tax-efficient) way of gaining employee buy-in without cost to local authorities is via a car salary sacrifice scheme, which could prove beneficial for overall employee attraction, engagement and – ultimately – retention.