OPERATING LEASE

 

Orix Leasing Pakistan are the pioneer

By SHABBIR H. KAZMI
Dec 18 - 24, 2000

Orix Leasing Pakistan Limited (OLP), ever since its commencement of operations in Pakistan, has been engaged in developing new products to cater to the needs of the market. Keeping in line with this tradition, OLP has introduced operating lease in the local market in 1997. OLP was the first leasing company to offer this facility in the country. This arrangement has many advantages for the client. Operating lease has the potential to be an effective tool to enhance profitability and operational efficiency. This also improves the effectiveness of a service provider and/or a manufacturer.

Operating lease is a contract that allows the users to select products that meet their needs from the leasing company's inventory of products. Operating lease differ from the direct financing lease in two ways. First, such a lease is for a short term and is cancelable at any time. Second, the initial cost of item is not substantially recouped by the lessor through lease rentals during the initial lease term. The same asset is leased out to different clients during its usable life. The lessor work to recover the investment and ensure the profitability by ultimately disposing of the asset in the used equipment market.

OLP started its operations in Pakistan in 1986 and has expanded its operations not only in Pakistan but also established three joint ventures outside Pakistan. These are, Oman Orix Leasing Company established in 1994, Orix Leasing Egypt incorporated in 1997 and most recently Saudi Orix Leasing. OLP has also established Orix Investment Bank in Pakistan with the assistance of International Finance Corporation and Asia Finance & Investment Corporation.

Giasuddin Khan, Assistant General Manager of OLP said, "Orix Rentec, a division of Orix Corporation Japan, has become the top company in Japan in the domestic measuring and information related equipment rental segment. It maintains an inventory of more than 300,000 items of electronic equipment. Realizing the fact that the size of pie has not registered any significant increase in Pakistan, OLP decided to utilize Orix's experience in operating lease in Pakistan. The Rentec division was established in 1997 and the business has grown remarkably. At present the total portfolio exceeds Rs 250 million."

Explaining the advantages of operating lease, Khan said, "OLP is responsible for operations, maintenance, insurance and servicing. The user pays only a flat monthly rental and returns the asset to the Company at the end of the lease agreement. As the asset is not completely depreciated and carries higher residual value, rental is lower. While the client uses the equipment, under operating lease, he has the added advantage of facilities such as maintenance, insurance and servicing of the equipment by OLP. Therefore, the client is able to concentrate on its core activities.

Dilating his point, he said, "For example a bottler has to keep a huge fleet of vehicles for the delivery of its product. Firstly, the company has to invest a colossal amount in procuring the vehicles. Then, maintaining the fleet itself is a full time operation. By outsourcing this operation to a third party which has the core business of transport/logistics, the bottler can get rid of this headache. In Pakistan, some manufacturers of consumer products have already outsourced their logistics activities."

Explaining the benefits of operating lease, Khan said, "As the asset is returned to OLP at the end of the contract, the transaction is a pure operating lease. It remains off-balance sheet thus improving the return on assets. No capital budgeting is required. Operating lease allows greater flexibility in terms of utilization of the capital and insulates the business against the risks associated with capital investments. Furthermore, operating lease allows the client complete solution as per user demand, hedge against technological obsolescence and inflation, asset use without investment, better utilization of tax benefits, conservation of credit lines, time to concentrate on core activities."

The current inventory of OLP's assets portfolio consists of power generation equipment, compressors, commercial vehicles, data networking and satellite equipment, motorcars and office products.

The monthly rent consist of many components viz., financial costs, insurance, maintenance and management charges of the asset. The financial component of the monthly rentals of the operating lease becomes low because the residual value of the asset is kept higher.

To ensure the best possible condition of its assets, OLP maintains its assets and have them managed by qualified and technically skilled personnel. These people make sure that the manufacturer's recommended schedule of service is closely being followed. With emphasis on smooth operation of the equipment, operations of the client become more efficient.

BENEFITS OF OPERATING LEASE

Off Balance Sheet Financing

As the asset is returned to ORIX at the end of the contract, the transaction is a pure operating lease, therefore it remains off balance sheet thus improving the return on assets. No capital budgeting is required.

Lower Rentals

As the asset is not completely depreciated therefore it carries higher residual value, which results in lower rentals for the user as the financial costs are significantly reduced.

Value Added Comforts

Operating lease can bundle together various services required with the asset such as maintenance, operation, insurance and replacement of the asset in one value added package.

Customizable

The package can be tailored for the requirements of your organization.

Resource Allocation Flexibility

Operating lease allows your business greater flexibility in terms of utilization of the capital and insulates your business against the risks associated with capital investments.