News

IT equipment in schools: to lease or not to lease?



Access to high-quality IT equipment is not equal in schools. If you’re part of an academy chain, you’re likely to be able to get a good deal and buy what you want. Single schools, meanwhile, are often locked into complex and expensive leasing deals. In the third of her series focusing on technology in schools, Jess Staufenberg looks at the high cost of providing students with the latest digital equipment

As school leaders strive to provide students with the most up-to-date digital equipment, how they purchase it becomes increasingly important.

Schools really only have two options: buy it outright – for all their hundreds of students – or lease it, which means renting over a period of time with payments spread out. The latter typically spreads the cost across three annual payments that amount to more than the original capital cost of the equipment. Schools can also pay a bit more to keep the equipment at the end. Or a bit more again to have it updated and to continue “renting” it.

Leasing arrangements are not always straightforward. Some arrangements hit the national headlines in 2012 when a BBC investigation discovered at least 169 schools had been substantially overcharged for IT equipment and left with debts of up to £1.9 million. Ten headteachers lost their jobs as a consequence.

Large multi-academy chains are able to get flexible pricing

Despite the scandal, and subsequent lobbying for leasing rules to change, the old arrangements continued in most schools though they have two crucial cards up their sleeves. First, they have the cash flow to purchase expensive equipment outright. Second, schools do not lease if they have the leverage to bargain for a good purchase deal. Large, multi-academy chains or federations are increasingly able to get flexible pricing, which makes buying top-quality IT equipment outright possible. Single schools, however, are “forced” to lease.

There’s a second hurdle for small schools. Only “operating leases” are legally available. The alternative, a “finance lease”, which experts say is better value, is forbidden by the Department for Education.

Daniel Moynihan, chief executive of the Harris Federation, which runs 37 academies across London, said he would never consider leasing. Partly because of the BBC “horror stories”; partly because he doesn’t need to.

“We have never leased. One of the things about being a group of schools is you can drive economies of scale. We are able to aggregate PC orders and usually get a better price.”

The federation also has nine accountants looking after three schools each, says Sir Daniel. It is an arrangement that saves money on a single professional attached to each individual school. “The schools are getting high quality financial management, but they’re also saving the cost of a bursar – they’re saving tens of thousands of pounds.”

With this kind of driving for deals, with ideological support from government and financial backing from private sponsors, large multi-academy chains are the successful players in obtaining IT equipment at good value and having the peace of mind of owning it.

Leasing for single schools, meanwhile, may be cheaper in the short run but more expensive in the long term with an extra charge for the benefit of staggering rent payments. But there is the advantage of easily upgrading to the latest model.

This advantage is overplayed, says Sir Daniel: “We’ve never encountered a leasing deal where they’ve said, we’ll update your PC. You have to take out a new lease to get the update.”

The British Educational Suppliers Association (BESA) agrees. Director general Caroline Wright says leases used by schools are typically complex and pricey. For example, damaged laptops could be charged for at the end of the lease term but sometimes a clause says they have to be returned in the original packaging.

Caroline Wright
Caroline Wright

“There are things like you have to return it in the condition you got it, like keeping it in a box. Now, who keeps a box for five years?” says Ms Wright. “It’s all that kind of stuff schools have to think about that makes it difficult.”

Primary schools can be more at risk as they are less able to employ bursars, but it is really the restriction on leasing types that causes the greatest issue, according to BESA.

The average secondary school takes out a £60,000 “operating lease” each year, and a primary school £15,000. Were they to use a “finance lease”, where money is borrowed to pay for the equipment in stages for less than the capital cost of the item, these schools would save about £400 per lease. This works out as £8 million across the system, says Ms Wright.

“My concern is that departments such as the Treasury are trying to save so much money that something like £8 million is small beer.”

Academies and local authority schools cannot use finance leases because they “represent borrowing”, according to DfE guidelines.

A response from the department said: “While ?finance leases are a form of commercial borrowing, operating leases are not and are used? to ensure value for money and to protect public sector finances as per the 2002 Education Act.”

But the Act does not say that borrowing is illegal. It simply says schools can buy on credit only if they have the express permission of the secretary of state. This rule was recently reiterated in the Academies Financial Handbook: “Trusts must obtain EFA’s prior approval for the following leasing transactions: taking up a finance lease on any class of asset for any duration from another party (borrowing) […]”

Simon Goldie, head of asset finance at trade body the Finance and Leasing Association (FLA), says that if a school has something they will use for a fairly lengthy time, a finance lease will work much better “but at the moment they are certainly not encouraged to do it. The DfE seems to claim that there is a rule that it can’t be done, but we’ve never been able to identify that rule. I think it’s a habit that’s developed over time.”

Schools Week invited the department to explain the laws underpinning this prohibition but the query went unanswered.

It’s unlikely that finance leases are the only answer, but having to lease equipment disadvantages schools whose budgets are already tight.

Stuart Beck is assistant headteacher and finance director at a school in London that leases all its IT equipment. By the end of the year Beck, like many other school leaders, expects the school to use all its budget reserves of £500,000 and be out of pocket by £1.2 million by 2019 due to increasing costs and flat budgets.

The school currently spends 1 per cent of its budget, or about £40,000 a year, on leasing commitments. Looking ahead for the first time at running on a deficit budget, he is verging on desperate.

Stuart Beck
Stuart Beck

“What happens when we do run out of money as an academy? We can’t borrow,” he says. “And if we can’t borrow and our cash flow is showing that by September 2016 we are into a negative cash balance, do we shut our doors?”

Without express secretary of state permission he cannot make use of a finance lease. Nor is his current IT expenditure extravagant. He is trying to provide only basic computers to 800 students. He has stopped offering teachers their own school laptops.

“If we are to do the best we possibly can for our pupils in a technological age, then obviously we do need to keep our IT equipment up to date,” he says. “We would like to bring in as much of the new technology as we possibly can, but at the moment we’re just talking about the basic computers.”

The indirect answer to schools from the DfE is to join an academy chain, be savvy, and drive better bargains. But for schools unable to find a Harris-style set-up it may be that their pupils are stuck with basic PCs rented out at a deficit while others have their own paid-for iPad.

 



Your thoughts

Leave a Reply

Your email address will not be published. Required fields are marked *

4 Comments

  1. With purchasing decisions moved outside the school and financial officers outside the school it looks as though school autonomy has taken a step backwards. It looks similar to the type of control exerted by Local Authorities before the advent of Local Management of Schools, which was introduced in the 1990s in English Schools.

    So much for the government rhetoric of Academisation giving schools MORE freedom. It looks like the opposite to me.

    What other aspects of local school control are disappearing? My guess is that staff in Academies are probably unwilling to tell us for fear of upsetting their “big controller”. Headteachers are now between a rock and a rock. But it must be good if it saves money. Mustn’t it?

    Strange that we never hear a contrary view. Do all these headteachers enjoy playing second fiddle?

  2. The benefits of Operating Leases are generally quite overstated. For complex pieces of equipment that requires regular services and maintenance (for example a car, or a printing press) they can be quite useful. Modern computer equipment is essentially a commodity purchase – a bit like buying cornflakes. You choose the price you want to pay for the brand you like. You wouldn’t dream of leasing cornflakes.

    To this extent the only reason that schools are entering into operating leases is that they are not permitted to use finance leases, which is a hang-over from treasury over control of debt. It is also the case, whatever anyone might say, that OLs are a very expensive way of purchasing equipment. You are often locked to a specific supplier and you are paying not just a profit margin on the goods, but also a margin to the finance house (often more than one).

    The best way, the very best way to fund computer equipment in schools is to have a plan. Historically, due to protected IT pots of cash that came along from time to time, money was splurged on equipment, leaving a lumpy expenditure profile. You might have no need to replace equipment one year, but the next suddenly you would have to replace everything! It is still the case that many schools have yet to fully internalise the cost of IT equipment in their budgets – it’s still a bit of a distress purchase. So if you have a plan, i.e. “we need to replace 25% of the desktop, 10% of the switching equipment etc each year” and build that into the budget that is always going to be best. Because then you have no financing costs to fund and you can purchase equipment in the market and get the very best prices.

    Harris have got this right. But to be fair to others they have those combined resources that enable them to get it right, and in many cases start-up funding to facilitate having “a plan”.

    What I would like to see is some work done by the DfE with schools to help them get onto a proper footing with regards to their equipment spend and where necessary provide bridging funds to enable this.

    What would also be helpful is if groups like Harris could share their expertise in this area along with sharing their buying power. That would not just benefit the schools they help, but it would benefit them as well.

  3. Really disappointed by your article on this issue. It appears to be picking up the misinformation promoted by the Finance & Leasing Association and BESA and fails to give good guidance to schools how to deal with leasing, which can be a very effective way of acquiring equipment.
    There are three golden rules which need to be followed:
    1) NEVER lease equipment from a dealer who walks through your door unsolicited.
    2) NEVER upgrade equipment during the minimum term of an existing agreement as this just increases your finance costs with nothing to show for it.
    3) Look at a framework agreement negotiated by the Crown Commercial Service. This is an organisation which negotiates at national level and therefore utilises economies of scale. They have framework agreements for IT and copiers and typically have prices for copiers which are ¼ of the cost through a dealer, with low fixed service charges throughout the term of the agreement.

    Please note that the framework agreements are available to every small primary school as well as academies and therefore there is an equal bargaining position. The process is very easy to follow and information is available on the internet. It also meets the procurement guidelines for schools & academies.

    One point we do agree upon is that the DfE is really poor in getting this message out to schools, local authorities and academies. They did put the framework idea into some guidance notes in 2014, but in our view all government funded entities should only be allowed to lease through framework agreements and not be allowed to enter either operating or finance leases otherwise. It would be nice if the asset finance industry also recognised this point.

    The idea that somehow finance leases are better value than operating leases, or vice versa, is nonsense. We know some finance companies have tried to change finance leases to operating leases with exactly the same lack of value to their customers.

    Also all schools should be aware that if they have entered into poor value finance leases they are almost certainly unenforceable, as they lacked the authority to enter into the agreements. Therefore they can stop paying their agreements and it is very unlikely that the finance companies would be willing to take the matter to court. We have already saved schools in excess of £4m on such agreements. However, each school should take advice before taking this action.

    If a school wants accurate advice on this subject then we would be very happy to talk to them without any charge. I am sure Schools Week would be happy to pass on our details.

  4. We are seeing more academies chains coming to us and negotiating on a group deal and it has made us think about how we structure our pricing and customer service.
    Building relationships, selling, and training schools is expensive, so we and I am sure other companies can save cost and pass that on as significant discounts when schools act together as a single unit, be that an academy chain, LA, or just informal partnership.
    There will always be a balance for schools between acting on their own to select exactly the right service and terms for them, and acting in partnership to get a best price but a more one-size fits all solution. There is no one right answer, and we try to cater for both approaches.