ICT Leasing...

Information and Communications Technology (ICT) leasing has be-come a very
important tool to hedge against technological obsolescence in the global IT
marketplace. Manufacturers (Captive Leasing Companies), banks and third-party
(independent) lessors all offer leasing services, but not all leasing services
are created equally. In the Indian context, much of ICT leasing services are on
a hire-purchase arrangement.

The equipment costs are typically paid out at greater than or equal to
acquisition cost (with a 10% or greater down payment) plus applicable taxes and
interest. Also, depreciation is usually to remain on the balance sheet of the
lessee.

Need for Operating Lease

An operating lease provides for the lessee to account for an ICT acquisition
off-balance sheet. This allows for the ability to match technology lifecycle to
budgetary lifecycle. In addition, there are inherent flexibilities built into
the structure that allow for a lessee to upgrade any time throughout the term at
market competitive pricing. This maximizes the potential credit available for
early termination of existing equipment and allows for competitive pressure on
the vendors for the replacement equipment. Leasing directly with the
manufacturer can somewhat limit the use of competitively priced upgrades, but
manufacturers will usually take the largest equity (equity is defined as the
lessor investment in the anticipated residual value) position in their own
equipment. However, it's important to note that the competitive key to the
operating lease structure is re-marketing.

Re-marketing

Worldwide, a significant secondary market for used ICT equipment has
developed. This re-marketing industry (re-marketing is defined as refurbishment
and resale of used technology) began in the 1970s and 1980s in the US for
mainframe computers and continues today for almost all types of technology with
a chip. Refurbished medical and radiological equipment, PCs, telecommunications
and even back-up generators are available, to name a few. A lessor with a keen
sense of the secondary market can maximize the credit available for early
termination/upgrade against remaining lease obligation. Current generation-N
technology then becomes tomorrow's N-1 supply for the user that may not
require all of the bells and whistles of leading edge. N-1 then becomes tomorrow's
N-2 for users in the SOHO or third-tier technology market. Refurbished
computers, which once could be re-marketed 12 or more times, can be re-marketed
2-3 times due to software obsolescence today.

Refurbished systems can then be typically put on manufacturers/resellers
maintenance agreements or self maintained through the use of a depot or spares
(additional units purchased with used equipment for a fraction of original
cost).

Re-marketing is therefore a crucial part in determining the lessor's
viability and economic competitiveness.

Costs

Operating lease (OL) payments will typically be much lower than a hire
purchase or financing arrangement-off set by the lessor equity investment. Under
the OL structure, the title for equipment is held by the lessor and the
equipment therefore needs to be returned to the lessor at the end of the lease
or extended or purchased for Fair Market Value. If equipment is expected to be
in use for 48 months or more without upgrades (for the first buyer), than the
economics of an operating lease may not be as competitive as the pure financing
arrangement. But if the user is of the opinion that the technology will need to
be upgraded in the first 36 months of use, than the operating lease may be the
right tool to hedge against obsolescence.

Refresh Structures

Many lessors offer "refresh structures" that allow for guaranteed
upgrades at predetermined times throughout the lease. Make sure there is a way
to negotiate both the cost of new equipment and the residual/equity investment
to be made on the new acquisition. If not properly worded in the contractual
arrangement the lessee could pay list price and full pay out on the new
equipment.

In conclusion, operating leases are not a new concept in India or any part of
the world. But the development of a secondary/refurbished market and the
explosive growth of the ICT marketplace in India are making it a more viable
alternative to purchase or hire purchase and crossing your fingers with the
hopes that you will not have to go back for more capital.

Kirk Morabito, president,
Allan-Kirk Group