MFP Settlement Staff Report 2
December 20, 2001
Total Lease Costs Compared with Debenturing of Computer Equipment
To highlight the total costs of the computer leasing program as compared to the original Council approval and to the cost of debenturing.
Financial Implications and Impact Statement
There are no financial implications of this report.
Council will be considering the computer leasing contract at its special meeting on December 20, 2001. This report is intended to assist that discussion by providing extrapolations for other financing options as they existed in 1999 and to compare these to the existing MFP lease terms.
Council, in approving the MFP computer leasing contract at its July 27, 28, 29 and 30, 1999 meeting, had before it a report from the Chief Financial Officer and Treasurer, and Executive Director, Information Technology entitled “Leasing of Computer Equipment and Software Information Technology Products and Services”. Within that report was a comparative analysis of the total costs of leasing hardware and software as compared with the City’s cost of funds from debenturing.
This report presents an updated analysis of the July 1999 figures in light of the changes to the lease rates since that time and due to higher volumes of equipment and software leased.
Table 1 shows a comparison of the original comparative costs considered by Council in 1999 and the lease costs based on the original $43 million worth of equipment and software leased based on the lease rates as they existed in October, 1999, i.e. after expiry of the original 90 day rates contained in the MFP proposal. The “3 year asset life” column represents the total cost assuming that the City replaced all of the leased equipment and software at the end of 3 years, either through a lease renewal or sale of old equipment and purchase of new equipment. Debenturing was for a 3 year term. The column “5 year asset life” represents the total carrying cost over 5 years of either debenturing with a 5 year term, or exercising the purchase option under the lease arrangements at the end of the 3rd year and keeping the equipment for two more years.
Table 1. Comparative Analysis of Original $43 million Worth of Equipment and Software – Total Cost over Term of Financing ($million)
|3 Year Asset Life||Note||5 Year Asset Life||Note||Difference|
|A. Original Analysis Considered by Council in July 1999:||Debenture Financed||46.3||1||51.4||2||5.1 due to longer debenture term|
|MFP Lease Proposal||41.1||3||46.9||4||5.8 due to purchase option exercised|
|B. Revised per October 1999 Rates||MFP Lease Extrapolated||42.3||5||48.2||6||5.9 due to purchase option exercised|
|Vendor “A”||45.6||7||49.0||3.4 due to purchase option exercised|
- 3 year debenture – assumes that equipment is sold at the end of 3rd year and proceeds are netted against cost
- 5 year debenture – assumes that equipment has no residual value at end of 5th year
- 3 year lease – assumes that purchase option at end of the 3 year term is not exercised, i.e. equipment returned to MFP
- 3 year lease with purchase option exercised at end of year 3 and equipment held for additional 2 years
- Hypothetical scenario – calculated on basis of MFP October 1999 lease with no purchase option exercised
- Hypothetical scenario – calculated on MFP October 1999 lease rates with purchase option exercised at end of 3 years on hardware only since software has no residual value after 3 years
- Sample vendor rate escalated to October, 1999
As Table 1 shows, were the original interest rates quoted in the RFP achieved, then the lease option was cheaper than the City borrowing the funds and taking full ownership of the equipment. The extrapolated actual lease payments on the original $43 million worth of equipment and software based on the October, 1999 rates exceeded the RFP cost (with the purchase option exercised) by $1.3 million ($48.2 million compared with $46.9 million). The table also shows that the total actual cost of the lease on the $43 million worth of equipment and software was less expensive than had the City financed the purchases with debentures. In other words, while the financial benefit was reduced between the quoted and the extrapolated actual costs, it was still at a lower overall cost than had the City borrowed the funds. Finally, the analysis shows that the next lowest bidder’s price adjusted to October, 1999 rates was marginally lower than the debenture cost, but higher than the extrapolated MFP cost.
If the information in Table 1 is factored up to take into account the $80.5 million worth of equipment and software currently leased with the following are the total costs:
Table 2. Total Cost of Financing on $80.5 million of Equipment and Software – Total Cost over 5 Year Term ($million)
|Actual MFP Lease||101.8||8|
Notes: 8. Includes all payments, including restructured leases.
This analysis shows that debenture financing would have been $5.9 million lower over a 5 year period than the actual total MFP costs.
The original report on computer leasing considered by Council in July of 1999 considered a comparative cost of leasing versus debenture financing. Had the originally quoted RFP rates and those in existence in the first rate schedule executed in October, 1999 for the original $43 million worth of equipment and software been achieved, then Council’s decision to lease would have been financially beneficial to the City. Because actual lease rates starting in 2000 were in excess of the quoted rates, the lease costs have exceeded the costs that would have been borne using debenture financing.