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Leasing lures public sector

Date: 01 June 2020

Sean Keywood and Simon Harris investigate how vehicle leasing is becoming increasingly attractive to public sector fleets.

As anyone with experience of the public sector will know, among its aims should be delivering value for money for taxpayers.

For some organisations, especially those in the blue-light sector, with elements of conversion in the vehicles, it makes sense to purchase outright, and use their own workshops for SMR.

However, with a decade of austerity, other areas of the public sector have been more open to leasing vehicles as a means of keeping better control of costs.

Nick Bartley, head of public sector at Alphabet, says: "In the public sector world, across different procurement areas, we have been in a time of austerity, where budgets and finances have been significantly stretched, so leasing provides benefits for public sector organisations, particularly at a time like this, not only with cost savings but also certainty around costs too.

"There are a number of areas really where that comes to. You have got your natural saving on capital expenditure, so by leasing company vehicles the public sector organisation is effectively saving that initial outlay of having to purchase one. Further to that, it is around the discounts as well, so naturally economies of scale, and with a leasing company such as Alphabet we can negotiate pretty strong manufacturer discounts that many public sector organisations would not necessarily benefit from otherwise.

"Fixed cost around maintenance is another key one. Naturally, you can imagine with vehicles in particular over maybe three, four, five years of owning a vehicle those maintenance costs can really ramp up, with a higher risk of maybe an engine blowing or something like that. By leasing, what a public sector organisation is doing is securing that fixed cost from a maintenance perspective on a month by month basis as well.

"And finally purely the ease of administration. Whether we are talking about having to deal with vehicles breaking down, vehicles needing MOTs, tyre replacement, all of those sorts of things, they can take up a lot of time for people to manage internally, and leasing companies like us will deal with that in-life type requirement very easily, in that drivers in a public sector organisation will have one telephone number to call, and they can then be directed to the relevant provider - saving that fleet manager or whoever it is the time that they might otherwise be dealing with that problem."

Bartley says that although purchasing vehicles outright is still popular among public sector fleets, leasing is increasing in take-up, although many still opt out of the other services available as part of a contract hire agreement.

He adds: "Many leasing companies will offer the likes of outsourced fleet management or maybe driver risk management services. In my experience, a lot of public sector organisations think about them and don't necessarily take them.

"They might fully recognise the benefits of leasing generally, but when it comes to other areas that leasing companies can support, they don't necessarily think of that, so I think that is kind of the next step, and probably the biggest opportunity is to look at those areas, obviously once we are past the current public health emergency that we are in."

If public sector organisations feel uncertain about switching funding methods, it is possible to follow a 'blended' arrangement, with part of the fleet retained under one, and the remainder in another.

Danielle Tilley, business development director at Venson Automotive Solutions, says: "Funding needs to work for each individual body. This means the needs of the body are driven by the organisation themselves, not the external provider's ability to fund.

"Venson's approach is to be led by the public sector organisation themselves. We offer fleet management services for outright purchased vehicles and a variety of funding methods (i.e. contract hire, contract purchase, etc) where finance is required.

"This provides reassurance to the customer that they can test various funding models if they wish, without having to commit their entire fleet. It also assists organisations who may have recently merged - for example, housing associations - where procurement funding methods may vary. By creating a blended fleet provision, the public sector body feels more in control."

Many public sector organisations procure vehicles through frameworks, and Crown Commercial Service (CCS) is the largest of these operating in the UK. It is a structure that allows the public sector - around 17,000 separate organisations - to use the power of buying in bulk and help deliver those important savings for the taxpayer.

Many of those organisations use CCS to procure vehicles, and vehicle manufacturers seek inclusion on the framework agreement as a way of securing significant new car volume and the prestige of being trusted to supply the public sector.

Bartley says frameworks such as CCS operate by gaining a commission from any leases they can be part of negotiating.

"A public sector fleet might come to CCS and say 'I am looking to procure 50 LCVs, this is what we do, what do you think we should go for?', and CCS might give them some advice, and offer an online portal.

"CCS also operates what we call call-off contracts, so they run mini-tenders between different providers and things like that. So they help them from a consultancy perspective, but also through the procuring side.

"Another reason public sector fleets will use that is because of the types of commercial benefits that those frameworks also offer, whether that be the likes of their own manufacturer discount that they have negotiated or other conditions that have potentially been agreed within the framework with those leasing companies, whether it be a standard end-of-contract damage waiver or something like that, or an early termination process or calculation that each of those leasing companies will have agreed to.

"So I guess it gives public sector fleets a reassurance as well that they are procuring with a reputable supplier through the framework, but also with some secure conditions and benefits financially as well."

Bartley says between 80 and 90% of Alphabet's public sector customers come through CCS, which gives the company the opportunity to tender for fleets nationwide that they would not otherwise get the opportunity to do business with.

But he, and Venson's Tilley, say their businesses offer products for public sector fleets outside framework agreements.

Tilley adds: "The advantages or disadvantages of procuring through a framework or not can vary enormously depending on a variety of factors. When we talk with the public sector at a pre-tender stage, they are often considering a wide variety of elements in determining the best route to procurement. They are looking at their internal fleet experience alongside whether their procurement department has any experience in Office Journal of the EU (OJEU)-compliant tendering.

"Where they don't, or perhaps they are thin on resources, then frameworks can offer a good solution in compliant tendering with the support of framework staff, as such frameworks have been pre-tendered. However, we also see organisations, either larger or with extensive internal fleet and OJEU experience, where they want complete control and choose to issue their own tenders. This allows them to specify exactly what they want to achieve and any specific T&Cs relevant to their fleet."

From a vehicle manufacturer perspective, there are huge advantages to being an approved CCS supplier, giving them access to a broader customer base.

According to a spokesman for Volvo: "Being on the CCS framework is vital to Volvo Car UK, as many tenders released by the emergency services and local councils are only accessible to manufacturers who are on it. However, it is important to note that we offer discounts to all public sector bodies and charities, regardless of whether or not they use the framework."

Volvo's business sales team sold more than 500 vehicles into the public sector in 2019, and sold orders are up significantly so far in 2020, despite Covid-19 and the temporary closure of Volvo's retail network from mid-March.

The spokesman adds there are further opportunities for manufacturers with advanced programmes for electrifying their vehicles, as the carbon footprints of public sector fleets will be increasingly important, as well as the ability to meet public sector demand for salary sacrifice cars.

"Electrification is a major trend already," he says. "Volvo is currently the only car maker to offer a plug-in hybrid version of every model it sells, while we plan for 50% of the new cars we sell globally by 2025 to be pure electric. Starting with the launch of the XC40 Recharge Pure Electric later this year, Volvo will launch a fully electric car every year for the next five years.

"BIK plays a significant part in salary sacrifice take-up and Volvo's electrified range of vehicles attracts very low BIK charges."

The most successful public sector procurement schemes are those where the organisation has the clearest possible idea of what it needs from the vehicles.

Bartley adds: "I always encourage organisations to be as explicit and clear as possible on their requirements for vehicles. We still often find that organisations are being far too generic in terms of what they are looking for."

He says it can lead to suppliers coming back with slightly different vehicles and a slightly different offer, with the fleet choosing the lowest-priced tender, which might not be the best vehicle for the job. Although he adds that the current health crisis has brought home the importance of public sector organisations in day-to-day life.

"Coronavirus has highlighted recently and brought to everyone's mind that keeping our services in the public sector is hugely important," says Bartley. "It is really just brought to the fore the importance of our public sector fleet organisations and keeping them on the road."