Leasing vs Purchasing

The following report outlines the case for leasing. It was specifically commissioned for schools but much of it is relevant to business and government sector concerns.

The Case for Leasing
by Laurence Zwimpfer

1. The purchase of equipment that becomes obsolete in less than three years simply does not make strategic or economic sense. If schools purchase computer equipment, they are stuck with it and must continue to make use of it, often well beyond its useful life. Many schools have faced this situation, especially when they have taken out a bank loan to fund the acquisition. It is not unusual to find strong pressures on the school to replace the equipment well before the bank loan is paid back.
   
   
2. The effective interest rate obtained though computer leasing is typically less than can be obtained from banks.
   
   
3. The rental arrangement is classified as "Operating lease" and is acceptable to the Ministry. Straight bank loans to purchase equipment are classified as "Finance leases" and require special approvals from the Ministry and the Minister, especially if the level of annual repayment exceeds 10 percent of the operating grant.
   
   
4. Under "outright purchase" or "lease to purchase" schemes, schools still face the need to commit to expenditure, even when the equipment is paid off.
   
   
5. Schools are not the same as businesses and are not required to provide a return on assets. School boards must ensure income and expenditure are in equilibrium. They are not in the business of investing in assets and trying to deploy those assets to make a profit. Therefore, there is little point in schools acquiring assets (especially ones that depreciate so fast).
   
   
6. Outright purchase is generally not an option. Few (if any) schools have enough funds available to purchase computer equipment in any quantity, yet under the lease scheme many can afford the annual payments (at approximately 40 percent of the total capital value). This provides a high degree of leverage and enables schools to proceed much more quickly in implementing information technologies. Many schools have a lot of catching up to do and, educationally, cannot afford to delay.
   
   
7. Schools have new choices after three years. Typical operating leases run for three years; at the end of this time, schools have the option of returning the equipment and leasing more up-to-date equipment, or they can negotiate a new lease agreement at a substantially reduced annual cost.
   
   
8. IT equipment costs become an operating expense. Capital purchases are typically debated as part of each annual budget cycle, and computer equipment must compete with other priorities; as an operating expense this debate only takes place every three years, allowing Boards to take a longer term view.

Laurence Zwimpfer is a member of ITAG (the Ministry for Information Technology's Advisory Group), a board member at Wellington Girls' College and co-author of the Impact 2001 Report Learning With IT'.

Reproduced by permission

TUANZ Volume 8 - Number 8 - September 1998