17 September 2003

LEASING DEALS BY GOVERNMENT AGENCIES STILL OF CONCERN

Leasing arrangements in the WA public sector remain a concern to Auditor General Des Pearson some four years after he criticised government agencies over a lack of financial rigour in evaluating whether to lease or buy their assets.

Though acknowledging that significant improvements have been made to address some of the concerns raised in 1999, his report “Balancing Act: The Leasing of Government Assets”, tabled in Parliament today, finds that “… a long-term view of the costs, risks and benefits of leasing is still not being taken.”

And whilst recognising that leasing can be a beneficial and cost-effective procurement option for agencies when the right assets are leased for the right reasons, Mr Pearson warns that “…the lack of comprehensive lease versus buy analyses means that some leases will cost more over the life of an asset than had the asset been bought.”

Of greater concern though, he says, is that many lease versus buy analyses appear contrived to justify decisions to lease, an inappropriate response to ongoing budget and debt restraint.

A further adverse effect of inadequately informed leasing decisions is that without strong asset management practices agencies do not know whether they are surrendering assets well before the end of their useful life, and in such periods of budget and debt restraint this does not make economic sense.

“Inadequately informed decisions to lease will cost millions of dollars more in the end and ultimately further constrain funds available for the delivery of services to the public,” Mr Pearson states.

With the current push toward procurement reform, it was appropriate to also improve the rigour and transparency of lease versus buy decision-making.

Mr Pearson’s examination scrutinised 85 lease contracts valued at $92.7 million at a sample of five agencies (Department of Education, Department of Justice, Department of Planning and Infrastructure, Police Service, and Central TAFE).

Key findings included:

• Significant additional costs resulted from leasing decisions that did not take full account of the nature of the asset and its importance to the agencies. For example:
  • The Department of Justice leased the purpose-built Fremantle Justice Centre without quantifying the intended benefits of leasing so as to justify paying around $3.6 million (or 25%) more than a government-funded option to buy.
  • $17.6million was paid this year to terminate the lease of the Police Service’s CADCOM communication system to save up to $8.2million and avoid the “serious cost risk” of having to purchase the system after six years.

• Two of the five sampled agencies did not conduct lease versus buy analyses to support their decisions to lease, and consequently do not know whether a premium is being paid for leasing and whether it represents value for money.

• Unsound estimates used by agencies when conducting lease versus buy analyses meant it was not always possible to conclude whether value for money had been achieved from leasing.

• Actions taken by agencies on expiry of leases often negated the intended benefits from leasing and resulted in additional costs. For example, excessive amounts were paid for assets bought out at the end of lease terms and in many cases, this meant that agencies had effectively paid twice for the same assets.

Ends/.

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