In defence of leasing: Here are the correct numbers

Some of the ambulances to be leased for the Kenya Prisons Service

Some of the ambulances to be leased for the Kenya Prisons Service on March 1, 2016. 

Photo credit: File | Nation Media Group

In this second instalment in defence of leasing, I examine the leasing costs versus the correct comparator, the opportunity cost of not having the asset.

But first, I demonstrate that the lifetime cost of owning and operating the asset is the same for the leasing company, person or government.

Suppose you buy a Toyota double cabin pick-up for Sh5 million (the true cost is higher). Assume further that you will operate it for five years, at 40,000 kilometres per year. The lifetime costs stack up in the following manner.

At current interest rates, you will pay Sh2.1 million for the five years. I’m not borrowing, you are thinking.

Well, you still have to account for this, since that is what your money would earn you if, instead of buying the double cab, you parked it in a treasury bond! Second, you will pay Sh1.25 million in comprehensive insurance – that is five percent or Sh250,000 per year.

Third, you will pay for regular service, major service, repairs and maintenance. In the first you change oil, in the second you replace oil, air filters, tires and so on. When you get a dent, you repair it.

After every 50,000 kilometers you probably replace shocks, tie rod ends and so on. That is maintenance.

These will cost you as follows: Sh26,000 for minor service, a little over Sh1 million for five years. Major service twice a year for five years will run you Sh1.3 million.

Let’s assume you will only perform maintenance twice in the five years and suffer a dent only once in for Sh150,000. The total lifetime cost of owning and operating this double cab for the five years is Sh11.61 million, excluding the driver’s salary and fuel.

Since you cannot skip service or maintenance because you own the vehicle, this amount is the same regardless of whose name is on the log book.

Even when you own the vehicle, you will pay this amount! Adding a 20 percent margin for the leasing company plus taxes brings the total cost to Sh14 million.

It is erroneous to compare these lifetime costs and purchase price (Sh14 million vs Sh5 million), a beginner’s mistake.

But the biggest expense is actually the opportunity cost. What is the opportunity cost of a county executive committee member (CEC) not having transport? What is the opportunity cost of a hospital not having an ambulance?

We could estimate the opportunity cost of an idle CEC as the salary we pay him or her to sit In the office unable to work for lack of transport. At Sh404,000 a month, that will totals Sh24 million for five years.

The second example is more complicated. Can you put a value to life? Morally you cannot. Life is valuable beyond measure. However, you could, like the courts do, consider expected lifetime earnings.

A thirty-year working life at per capital income of Sh280,000 yields Sh8.4 million per person. Assume the ambulance saves one person per year for the five years. Without it, the total foregone earnings will be about Sh42 million.

The correct comparison is between the leasing company margin and taxes (Sh2.3 million) versus the cost of paying an idle CEC for five years (Sh24 million). You could also compare with the foregone earnings in the no ambulance case.

In both examples, there is no contest. Leasing is the clear winner.

So why is leasing so misunderstood? One explanation might be the rise of alternative facts. It used to be that there is one objective truth. But in these times of populist right wing political rhetoric, truth is often treated as an inconvenience.


@NdirituMuriithi is an economist

Welcome!

You're all set to enjoy unlimited Prime content.