10.08.10
To lease or not to lease?
For trusts with little capital, leasing offers a way of acquiring new technology to improve both patient care and outcomes, reports Richard Mackillican
The next few years are going to stretch many trusts to the very limits of their spending capacity, as they strive to deliver better care for less.
This has means that trusts must become more innovative in the way in which they use their funds to acquire equipment, with one of the options available being the leasing of such equipment.
“The leasing of equipment can be good for trusts who do not have the cash available to buy the equipment they need.” Explained Dr Renata Towlson, Senior Procurement Manager at Nottingham University Hospitals NHS Trust
“For example my own trust is in the middle of acquiring a Da Vinci robot. Given the huge cost, we are looking to acquiring the robot through a leasing agreement.”
By leasing equipment, it is possible for trusts to enjoy the benefits of having new equipment, whilst avoiding some of the problems associated with a straight procurement; for example, some leasing agreements allow for an upgrade of that equipment after a certain period of time, allowing the trusts involved offering patients treatments using the very latest technology.
Despite the benefits which certain leasing agreements offer, it is very important that trust receive the very best advice on how to arrange their leasing agreements, as there are different types of lease available.
“There are essentially two types of leases: operating and finance. I would advice an operating lease, which is generally good value for the Trust because the asset is off balance sheet and the Trust will not incur Capital Charges, which are 3.5% per annum of the depreciating value of the asset. A Finance Lease on the other hand is on balance sheet, capital charges are incurred and it is also treated as a form of borrowing. There are a number of aspects that differentiate between an operating lease and a finance lease, but the main is a transfer of risk. In an operating lease the leasing company takes into consideration his view of the value of the equipment on expiry of the lease when calculating the rentals. This is called ‘residual value risk’. He may for example, according to our lease advisor, typically assume equipment is worth 20% of its cost price at the end of a 5-year term, and therefore the Trust would effectively repay 80% of cost (plus the lessor’s interest charge) over 5 years. However if on expiry the equipment is returned to the lessor, he has the problem of selling it for at least 20% of cost in order to make any profit. If the equipment has become obsolete and he makes a loss, that’s his problem, not the Trust’s. The risk of obsolescence has been transferred from the Trust to the lessor. With both kinds of lease the lessor remains owner of the equipment and would require it to be returned on expiry of the contract and I would argue this is also an advantage.”
As with any financial agreement, a trust will have to go through quite a lengthy process to deliberate which lease agreement will offer them the best value, but according to Renata, that hard work will be worth it.
“It can take along time to reach an agreement, but it is worth going through that process to get the right lease for your trust.”
Other trusts have also had positive experiences with leasing, with David Melbourne, chief finance officer at Birmingham Children's Hospital NHS Foundation Trust, saying: “We ask NHS Supply Chain to undertake a mini competition against the framework contract – they then advise us of the offers received and the Trust decides on the preferred supplier.
“There is a cash flow benefit involved in leasing equipment for the Trust - PDC dividend gain from leasing, unlike capital purchases. It provides a certainty of cash flow as there are fixed payments made over the life of the lease term. It also conserves working capital.”
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