Economic downturn highlights the upside of renting

The advantages of renting rather than buying power equipment have been magnified during the current global financial crisis, says Diogenes Paoli Neto of Aggreko South America.

A brief scan of any recent newspaper, magazine, journal, blog or podcast will reveal that there is only one subject on the minds of the media and the public: the current economic crisis and the varying effects it is having around the world.

Tools for the job: the current financial turmoil is making power rentals an attractive option for companies that want to better utilise their working capital and ensure it is not tied up in large capital purchases

Type the word ‘economy’ into a Google news search and you’ll quickly be directed to related searches such as ‘recession’, ‘inflation’ and ‘unemployment’.

Scholars, journalists, political pundits and bloggers have all put forth their opinions on the subject, a myriad of arguments and discussions giving explanations of how the crisis has been allowed to occur, who is to blame and what impact it is having upon companies, industries and individuals.

Although the arguments as to what exact combination of factors precipitated the economic crisis will be under discussion for years to come, the impact of these factors on the economy are far less debatable. Lack of liquidity, reduced cash flow and inability to finance are problems facing companies of all sizes and in all industries around the world. In addition, many companies are facing general uncertainty in the market, with many projects being put on hold or cancelled. These factors are causing many businesses to re-evaluate their purchasing policies and to look at the benefits of using rental providers, particularly when it comes to heavy equipment and machinery.

Lack of liquidity

For many companies, the sudden lack of liquidity in the market initially came as something of a shock after years of readily available funding and loans.

Now, several years into the economic crisis, financing of major projects is still a challenge for many organisations, particularly those operating in regions which have been hardest hit by banking scandals.

A temporary power station was set up in Patagonia to combat power cuts following a volcanic eruption.

For those firms which require large equipment, whether for projects or to run their production facilities, this lack of available funds creates two fundamental problems.

First, can the company justify a large down-payment which will further reduce their capital base? And second, is the company able to find a bank that is willing to finance the large down-payment on terms which are not exorbitant?

The recession has revealed a large shift in the way that companies manage their books; whereas previously many were happy to continue following the advice of market economists urging them to leverage their assists wherever possible, the approach today is for cost-cutting and the reduction of large capital expenditures wherever possible.

In order to do this, many companies are choosing to rent rather than purchase equipment, especially when it comes to large equipment such as power stations. In recent years, with the economy booming and industry growing, one of the most common reasons for a company choosing a power rentals energy solution has been timing. During an economic upturn, the lead-time for the purchase of generation equipment can be anywhere up to two years, meaning that companies which need power urgently will find a rental option highly attractive, due to the ‘fast-track’ aspect of rentals.

However, the current financial turmoil is encouraging companies to consider rental for different reasons, such as how to better utilise working capital and to ensure that it is not tied up in large capital purchases for items such as power plants.

The advantages of renting power are also strong in an economic downturn: renting power generation equipment eliminates the need for capital expenditure on equipment. It incurs no large down payments or interest costs and preserves borrowing capacity. In addition, power rental guarantees fixed and regular payment schedules over an agreed term with options to extend the rental period if required, which improves cash flow and allows for more accurate budgeting.

“Renting power generation equipment eliminates the need for capital expenditure on equipment and incurs no large downpayments or interest”

When making the decision between purchasing and renting equipment, it is important for a company to evaluate the decision in light of the many hidden costs that are incurred when equipment is purchased; insurance is one item which is often overlooked by companies seeking to purchase large equipment.

In addition, for equipment such as generators, there are many spare parts and ancillary items that need to be bought regularly to ensure that the equipment is able to operate. Not only do items such as spare parts need to be purchased, but they also require storage space to house them. With a rental solution, all spares and ancillary items are the provision of the rental provider, enabling the customer to budget more effectively.

Refuelling is an additional cost which is often forgotten when the decision is made to buy equipment. Refuelling one generator is a time-consuming task; a project site with 30 to 40 generators on it will require the contractor to purchase trucks and staff simply for refuelling. Therefore, the use of a rental specialist which includes refuelling in the rental package can be an attractive option for customers.

Another factor in the rental versus purchase argument that becomes even more prominent in an economic downturn is the element of human capital. All major equipment purchases will require a company to staff the new equipment, either by allocating existing manpower to the project, or by hiring new employees.

If a company does not have employees available with the technical knowledge to run the equipment, they may be forced to hire new staff, however, hiring freezes across the board are often the norm in an economic downturn. This means that the use of a company which provides turnkey rental services can be invaluable to a company which requires equipment but simply doe not have the skilled and experienced staff to operate it.

At times it is tempting for companies trying to save money to minimise the number of staff they require for operating the equipment, however, this short-term solution often leads to greater problems in the long run. Heavy equipment such as generators require regular servicing and maintenance in order to ensure that they are operating at peak efficiency; a poorly maintained generator will have greater fuel consumption, higher emissions and may even breakdown entirely, negating any cost benefits that may have come from reducing the number of technicians working on a project site. Through a rental provider, all service and maintenance is included in the rental package, ensuring that the equipment is always running at peak efficiency.

Diogenes Paoli Neto, managing director of Aggreko South America, believes that with the continuing focus on keeping captial available, the option of power rentals will remain an attractive one

Projecting the power demand of projects also becomes a problem for companies in a financial downturn. Purchased generators are often either under or over-utilised since the power needed on a construction site tends to follow a specific pattern of ramping up and then falling away, meaning that a contractor who purchases enough equipment to meet peak demand on site will find that the generators are under utilised and burn fuel less efficiently for most of the project.

The answer to why rental power is an attractive service to construction companies lies in one word: flexibility. Renting power generation equipment allows the contractor to increase or decrease their capacity depending on the demand of their specific projects. Rental equipment capacity can be increased as the power demand on a project increases, ensuring that equipment is always running at maximum efficiency.

Risk management

The recession has seen much construction work come to a grinding halt as projects are re-evaluated for viability. Although most partially completed projects appear to be going ahead, the number of projects in the design phases which have been put on hold is staggering. One of the greatest advantages of the rental option is the cushioning effect this has on companies which are uncertain about the long term future of their projects.

By renting equipment, companies can ensure that they will not be left with equipment which will sit unutilised; if a company renting equipment is told that one of its projects has been put on hold, the financial damage incurred by having purchased large amounts of heavy equipment can be a major blow for a company without large cash reserves. Ultimately, renting equipment means that because ownership lies with the rental company, so too do all risks.

The Future of rental

Analysts are divided as to their opinions of when the economic climate will begin to improve, however, it seems unavoidable that there will be some fundamental changes to the way that people think about investment and financing and to how companies handle their asset management. Cash reserves may very well regain their old popularity; certainly it seems unlikely that companies will be willing to leverage their assets to the degree that has been the norm in the past decade.

With a greater emphasis on keeping capital available and with rental providing benefits such as lowered capital expenditure, flexibility and risk management, the option of renting as opposed to purchasing equipment will likely remain an attractive one even as the global economy eventually strengthens and the world enters another positive growth period.

And although the question, ‘Is it better to buy or to rent?’, will continue to be asked by companies contemplating large equipment purchases, many firms will likely find themselves deciding that during this period of economic uncertainty, ownership may not be worth the hassle.

Diogenes Paoli Neto is managing director of Aggreko South America.

For more information visit www.aggreko.com.

Dash, cash and ash

Aggreko supplied emergency power to the provinces of Rio Negro and Neuquen in Argentina’s Patagonia region following the eruption of the Puyehue volcano in neighboring Chile.

The eruption spread tremendous quantities of volcanic ash across vast areas of both Chile and Argentina, causing major disruptions to infrastructure throughout the region. Faced with a number of failures in electricity supply, Energia Argentina Sociedad Anonima (ENARSA), the state utility company, responded quickly by calling on Aggreko to provide a total package of 12 MW of emergency power to be spread across different locations in Rio Negro and Neuquen provinces.

ENARSA first contacted Aggreko to request emergency power for the cities of Bariloche, Ing Jacobacci and Villa la Angostura, which were the most severely affected by the eruption. In spite of major accessibility issues due to many roads being covered in thick layers of volcanic ash, Aggreko was able to fully commission the first 7 MW of power in Bariloche just 11 days after being contacted by ENARSA. This quick action ensured power was rapidly restored to businesses and over 11 000 households across the region.

Commenting on the project, Diogenes Paoli Neto, managing director of Aggreko South America, said: “With many roads completely covered in ash, the project presented some logistical challenges, but in spite of this, the entire team did a tremendous job in responding to the situation and restoring power to thousands of people in the region. Over the past several years, we have continued to increase our local capacity, which has made our ability to provide large-scale rapid response even more certain.”

Carlos Davidson of ENARSA, said: “Having worked closely with Aggreko since 2007 we knew immediately they could help us in responding to this unprecedented crisis.”

Aggreko demonstrated once again their ability to deliver emergency power solutions across multiple locations, within short turnaround times, under very difficult circumstances. Their rental solutions totally matched our requirements.”

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