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The view from Issue No. 3 Winter, 2002 Leasing: the View from the NHS How does the NHS Purchasing and Supply Agency get the most from leasing companies? The Agency’s Purchasing Executive, Faye Robinson, talks tactics. LEASING IS AN EXCELLENT METHOD OF FINANCING essential medical equipment. No, that’s not just the opinion of the leasing companies - who, after all, would say that, wouldn’t they? In fact, it happens to be the opinion of no less an authority than Faye Robinson, the woman who works on your behalf to get the best deal from the leasing companies. Faye’s attitude to private sector companies is quite simply that “companies are there to make a profit. But profit is healthy.” Like many others in the NHS, she is seeking to get the best from the private sector for the benefit of the public sector she has served for over 14 years. She acknowledges the gap between the two sectors but is seeking to bridge it. Each side can benefit eachother, so it makes sense - for the procurement staff, the financial staff and for the leasing companies - to work together. It’s, common sense, really, not revolutionary at all, especially given the government’s stance on such matters. contract that needs management. The same principles apply whether it’s a lease contract or a contract for heart valves.” But why lease? Why not buy? Just why is the NHS itself using its precious resources on encouraging Trusts to finance equipment through leasing? Faye The objective of the NHS Purchasing and Supply Agency, which Leasing is increasingly playing a major regularly hears this was established in 2000, is to modernise procurement and to role in many pathology departments. argument and is used be“ a centre of expertise”. As Purchasing to countering it. “It is, she says, “a fact of life Executive, Faye’s role is to “educate” NHS A lease contract is just that, in the NHS, there is capital funding iis purchasers - that’s her word - about is “a good way alternative methods of funding. Refer to another contract that scarce.” Furthermore, leasing The practical, of acquiring new equipment.” PASA about that tender on your desk and needs management. The then, takes precedence over the idealogical. you will be asked to take a different view same principles apply Faye, who is a purchasing specialist, has seen to the one you might expect. Instead, you many changes in her time with the NHS will be encouraged, for example, not to whether it’s a lease starting as a management trainee, she was a look for the cheapest finance solution, but contract or a contract for purchasing manager and account manager at the one offering “total value”. There are hospitals across the country for a number of pitfalls awaiting those who do not study heart valves.” years before assuming her current position. the terms of the contract, and it is on The £500 million worth of equipment currently leased - an these that PASA will focus on your behalf. Some companies are impressive sum by any measurement - could be just the start, more commercial than others - again, PASA can advise. because both the PSA and the government recognise not just How best, then, to avoid the more unsavoury aspects of leasing the scale of the problem but the need to find a flexible, workable and, to put it simply, get the best out of them? Any company solution. “Increasingly,” says Faye, “leasing will be part of an that does not want to use standard terms should be more closely overall procurement strategy, not a last resort.” She is working scrutinised - and so should its documentation. “Go for the closely with a number of leading finance companies, often bottom line on equipment where there’s a good planning seeking their advice at the beginning of projects, to ensure the mechanism,” counsels Faye “but remember it’s not all about best possible outcome for the NHS. And, ultimately, that’s bottom line cost - it’s also about the whole life cost.” something that can only benefit us all. “People treat leases as different,” adds Faye, “but leases are no different to any other contract. A lease contract is just another “ Next issue: the View from the Trusts Frequently asked questions 1 Why did NHS Trusts start leasing? The introduction of the Government’s Private Finance Initiative (PFI) in May 1993 opened up the NHS Market to private sector funds, including leasing. As capital money becomes scarce and in greater demand, leasing offers a flexible and viable solution to the problem of asset acquisition for the NHS. 2. What is a lease? about leasing finance lease but the rentals the lessee pays do not fully cover the cost of the asset to the lessor; therefore, the lessor is left with an investment (or residual value) in the asset at the end of the lease. At this point, the lessee can return the asset to the lessor or negotiate extension rentals. A lease is a contract or agreement between a lessor (owner) and the lessee (user) for the hire of a specific asset. The lessor retains ownership of the asset but conveys the right to the use of the asset to the lessee for an agreed period of time in return for the payment of specified rentals. 3. Are there different types of lease? Yes, there are three types of lease. a. Finance lease (also known as capital lease) - this lease type is a contract where the lessee agrees to pay the lease rentals (which carry VAT at the current rate of 17.5%) in respect of using the asset, over an agreed period of time. The rentals will pay back the cost of the asset, the cost of borrowing and a profit. Once the finance lease primary period has ended, the lessor will have no investment in the asset and, if the lessee wishes to continue to use the asset, they may do so for payment of peppercorn or secondary rentals. These rentals are usually paid once a year and are of nominal value. At the end of the lease, the lessee can sell the asset as agent of the lessor, keep up to 99% of the sale proceeds and use them as a refund of rentals. Operating lease - this lease type is similar to a ? c. 4. 19. Lease purchase or hire purchase - this lease type is a contract for the hire of an assets, which includes an option for the hirer (lessee) to purchase at the end of the term. There is no secondary term. The hirer must pay all the VAT at the commencement of the contract, but there is no VAT charged on the rentals. Can NHS Trusts use all three types of lease? Yes, but it is only the operating lease, which passes the NHS value for money and 90% Rule test. The other two options would be considered as capital funding because the asset would have to be shown on the balance sheet of the Trust. What are the features and benefits of operating leasing to lessees? * * * * * * * * Fixed rentals No risk of asset obsolescence for the lessee Flexible repayments Improved cash flow Simple accounting Flexible usage No disposal issues Access to up to date technology b. What’s happened to the CitiCapital logo? We have a brand new logo and a brand new look, which visually reinforces that we are part of the Citigroup family. We are changing fast, with new services and offices in Europe. Our commitment to you, though, and our high level of service, remain entirely unchanged. Your CitiCapital contacts If you require more information about CitiCapital’s range of services, please contact the following - both will be pleased to help you. Jonathan Evans, Business Development Manager, Medical Mandy Howell, Development Manager CitiCapital is part of Citigroup, among the top three of the world’s leasing and finance businesses. Since 1995 we have offered medical leasing facilities to NHS Trusts throughout the UK and have a specialist account team dedicated to the medical sector. Don’t forget to visit our website at www.citicapital.citigroup.com Citicorp Vendor Finance (Europe) Ltd Registered in England No. 3088213 Registered Office: Edward Hyde Building, 38 Clarendon Road, Watford, Herts WD17 1SZ Tel: 01923 810500 Fax: 01923 810518 www.citicapital.citigroup.com CITICAPITAL IS THE TRADING NAME OF CITICORP VENDOR FINANCE (EUROPE) LTD