Fleet Finance Options
Motor vehicle fleets play a major part in Municipalities achieving service delivery requirements but experience tells us that the current condition and structure of their fleets impedes meeting the required standards. Reasons for this are many but typically include; - insufficient vehicles, excessive age and poor mechanical condition and of course, budgets are limited.
Again from experience, an analysis of mechanical expenditure often reveals that the cost of major mechanical repair and the often associated cost of replacement rentals exceed the cost of a new vehicle. All of which suggests that municipalities should give more consideration to modernising their fleets, where significantly reduced maintenance costs and increased reliability offset the perceived costs of new vehicles.
What then is the process to evaluate the costs and benefits of a modernised fleet?
Firstly undertake a fleet audit to establish age, mechanical condition, roadworthiness, cost of ownership and fit for purpose. This will very quickly identify those vehicles that should be disposed of. What will surprise you is that these vehicles contribute little to good service delivery. Municipal vehicles, despite their age, often achieve good value at auctions and this provides some capital for new vehicles.
Although there are many financing options available to Municipalities it is important that selection is influenced by vehicle type, usage and the available fleet management infrastructure. Available options include:
Outright purchase is obviously dependent upon available Capex budget, but when limited the choice is either high usage vehicles with regular replacement or assets with long replacement cycles. Considering that usage contracts are generally limited to 3 years it would be preferable to use cash resources for vehicles with long replacement cycles such as heavy trucks, yellow and static equipment.
Full Maintenance Lease, a rental package, without ownership, inclusive of maintenance and tyres has great benefits as a fixed cost product. However, it comes with strict condition and usage requirements. FML contracts are time and Kms based and the supplier carries the cost and risk of resale. This potentially exposes the Municipality to significant make good costs and excess Kms charges unless it strictly manages condition and usage, including servicing. Although agreements are generally 3 years, the Municipal environment frequently calls for short term extensions and for this reason it is vital that agreements allow for this need and define terms and conditions. FML is well suited to light vehicles where 3 or 4 years of usage represents a reasonable portion of useful life.
Operating Lease is a rental product, similar in structure and requirements to an FML. It too is time and Kms based but excludes the cost of maintenance. Suppliers of this product are able to provide a managed maintenance service where the actual cost of maintenance, plus a service fee, is paid by the Municipality when it is incurred.
Bank Finance comes in many forms of lease, with or without residual values, and instalment sale. Ownership often drives the selection of this financing method and it comes with greater flexibility to meet the cash flow requirements of the Municipality.
Although the tender process should in theory minimise the cost of financial products, a pre-selection feasibility study will identify bench marks costs and the risks associated with each product. It is important to avoid expensive future risk or downstream costs related to poor condition and usage management.
All finance products with the exception of FML exclude maintenance and tyres. Fleet Leasing companies are able to provide a standalone Managed Maintenance service where their resources and infrastructure are applied to manage actual maintenance expenditure. This service utilises external / dealer workshop facilities and suits Municipalities without internal workshops.