Reducing Costs Through the Transport SA s Passenger/Light Commercial Motor Vehicle fleet

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2 ... \ \ ", CABINET COVER SHEET vv",,\w-..~ 2"116/ TITLE: 2. MINISTER: 3. PURPOSE: 4. RESOURCES REQUIRED FOR IMPLEMENTATION: COSTS: This financial year Next financial year Subsequent years Source of funds Purchase and replacement of Transport SA s passenger/light commercial motor vehicle fleet. Hon Kevin Foley Deputy Premier Treasurer Minister for Industry, Investment and Trade To seek Cabinet approval for Fleet SA, in conjunction with the Department of Treasury and Finance to negotiate with AH Plant to the value of $7.0 million for the purchase of passengerflight commercial vehicles leased by Transport SA in the 2001/2002 financial year. To seek Cabinet approval for the final negotiated purchase price to be agreed by the Treasurer and the Minister for Administrative Services in consultation with the Minister for Transport. To seek Cabinet approval for the Minister for Administrative Services to enter into a contract with AH Plant for the purchase of vehicles to a value of $7 million. To seek Cabinet approval for Transport SA to terminate the current agreement with AH Plant for the provision of passenger/light commercial fleet management. Capital funds up to $7.0 million. Capital funds up to $4.0 million for replacement costs. Not applicable. No funds have been allocated within the budget. Nil impact on Fleet SA resour es to provide fleet management.

3 RELATIONSHIP TO GOVERNMENT POLICY: 6. CONSULTATION: 7. IMPACT STATEMENT: 8. URGENCY: 9. RECOMMENDATIONS: There is a government mandate that all government passenger/light commercial motor vehicles, except for the current Transport SA vehicles under the AH Plant arrangement, are to be sourced through Fleet SA. Department of Treasury and Finance and Transport SA. FAMILY - The submission has no impact on families. ENVIRONMENTAL - The submission results in no overall environmental impact. REGIONAL - Nil REGULATORY - Nil SMALL BUSINESS - Nil EMPLOYEE - Nil SOCIAL JUSTICE - Nil Approval required by 30 June It is recommended that Cabinet:- Approve Fleet SA, in conjunction with the Department of Treasury and Finance, to negotiate with AH Plant to the value of $7.0 million for the Minister for Administrative Services to purchase the passengerllight commercial vehicles leased by Transport SA in the 2001/2002 financial year. Approve that the final negotiated purchase price is to be agreed by the Treasurer and the Minister for Administrative Services in consultation with the Minister for Transport. Approve the Minister for Administrative Services enter into a contract with AH Plant for the purchase of vehicles to a value of $7 million.

4 i (~~~ -/"" (I 1.. ::.- /...J ( \ f -"-, i V ):-., ~ ~..,-./ ~ i C) - 3- Hon Kevin Foley MP Deputy Premier Treasurer Minister for Industry, Investment and Trade Date: 27/ )6 \ tf1.- Approve Transport SA terminating the current agreement with AH Plant for the provision of passenger/light commercial fleet management.

5 MINUTES forming ENCLOSURE to: T&F02/064CS TO: PREMIER FOR CABINET RE: PURCHASE AND REPLACEMENT OF TRANSPORT SA S PASSENGER! LIGHT COMMERCIAL MOTOR VEHICLE FLEET. 1. PROPOSAL 1.1 To seek Cabinet approval for Fleet SA, in conjunction with the Department of Treasury and Finance to negotiate with AH Plant to the value of $7.0 million for the purchase of passenger/light commercial vehicles leased by Transport SA in the 2001/2002 financial year. 1.2 To seek Cabinet approval for the final negotiated purchase price to be agreed by the Treasurer and the Minister for Administrative Services in consultation with the Minister for Transport. 1.3 To seek Cabinet approval for the Minister for Administrative Services to enter into a contract with AH Plant for the purchase of vehicles to a value of $7 million. 1.3 To seek Cabinet approval for Transport SA to terminate the current agreement with AH Plant for the provision of passenger/light commercial fleet management. 2. BACKGROUND 2.1 Government mandated the centralisation of the management of the light commercial motor vehicle fleet to Fleet SA in Transport SA vehicles were excluded at the time. The Transport SA heavy fleet was to be sold and leased back, and Transport SA believed that Government could gain a more favourable deal if their light vehicles were packaged with the heavy fleet. 2.2 AH Plant was awarded a contract for the sale and lease back of Transport SA s light vehicle!s and heavy fleet in AH Plant no longer considers the leasing of passenger/light commercial motor vehicles as core business and wish to relinquish that part of the plant hire business. The current contract between AH Plant and the Commissioner of Highways expired in May 2002 and some interim arrangements have been negotiated.

6 Transport SA, Fleet SA and Treasury and Finance have been discussing alternative strategies to replace the vehicles funded under the AH Plant lease. 3. DISCUSSION 3.1 Currently Transport SA has 424 passenger/light commercial vehicles and are subject to vehicle lease rates from AH Plant which are over $1.0 million per annum above those that would be levied by Fleet SA, without the need for additional resources nor incurring additional operating costs. 3.2 The contract with AH Plant has now lapsed with Transport SA confirming that govemment will not face any penalties for noncontinuance. 3.3 Fleet SA is the mandated fleet manager for government s passenger/light commercial motor vehicle fleet and has the capacity to incorporate the Transport SA vehicle fleet within its current structure. 3.4 Transport SA could return the current vehicles to AH Plant and the government could purchase all new vehicles. This is not a favoured. option because of the logistics of effecting a changeover at one point in time for such a large number of vehicles. Vehicles would also then come due for replacement at a similar time into the future. This would impact on the residual value achieved due to such a large number being sold. Other government vehicles falling due for changeover at the same time would also be impacted. 3.5 The preferred option is for Fleet SA to negotiate with AH Plant for a favourable purchase price for the vehicles, to enable a future orderly changeover program. 3.6 The funding alternatives available to finance Transport SA s vehicles include:- Outright purchase of the vehicles on budget. Purchase of the vehicles via the existing Commonwealth Bank fleet lease facility. Purchase of the vehicles via a replacement operating lease with an external provider 3.7 Recent taxation changes have resulted in the Commonwealth Bank fleet lease facility not being an attractive source of funds. Treasury and Finance is currently reviewing options to exit this arrangement. Therefore, this option is not suitable for the replacement Transport SA vehicles.

7 Based on lower cost of funds to government, a private sector operating lease would offer no financial benefit to government. Therefore, this option is not suitable for replacement Transport SA vehicles. 3.9 The preferred funding option is to purchase the Transport SA vehicles on budget.. Although funding was not initially provided within the budget, under expenditure in provides the opportunity to now fund the vehicles on budget. The purchase of existing vehicles from AH Plant will ensure the majority of the expenditure occurs in the financial year. There will be an impact of $3-4 million on the budget when vehicles are replaced. Terminating the AH Plant lease will result in savings to the budget of over $1 million per annum Savings from terminating the AH Plant arrangement should be returned to the budget and not retained by Transport SA. These savings will, over time, offset the additional capital cost to be incurred in Funds used by Fleet SA to purchase the vehicles will attract an interest cost to be determined by Treasury and Finance. This will ensure accurate costing of the vehicle fleet comparable to external providers Issues have been raised from time to time on Fleet SA pricing relative to external providers. Fleet SA lease rates are impacted by the higher funding cost of the Commonwealth Bank fleet lease facility. Also, Fleet SA lease rates are based on category pricing, which is an average lease rate across a range of vehicles such as Holden, Mitsubishi and Toyota. This approach supports the local car manufacturer Mitsubishi. External provider lease rates are provided for individual makes of cars. The consequences are that a selective comparison of lease rates between Fleet SA and external providers can lead to incorrect impressions. Fleet SA s support of the local manufacturers cannot be guaranteed or controlled with an external provider without impacting on their lease rates The price of the vehicles to be purchased by Fleet SA from AH Plant will be based on a desktop valuation of the vehicle fleet. The valuation established by Fleet SA is based on information provided by Transport SA in relation to vehicle type, age and kilometres. There are some risks to government through purchasing used rather than new vehicles. Fleet SA has identified the main risks as excessive wear and tear, unscheduled maintenance and accidents.. Some of the risks are already carried by Transport SA under the current arrangements with AH Plant, but a risk would remain relating to accidents not processed under AH Plant s insurance arrangements. These risks will be taken into account in negotiating a with AH Plant. purchase price

8 .. - )\ Should negotiations on an acceptable purchase price with AH Plantfail, then alternative strategies to exit the AH Plant arrangement will be submitted to Cabinet. ;; 4. RECOMMENDATIONS It is recommended that Cabinet: 4.1 Approve Fleet SA, in conjunction with the Department of Treasury and Finance, to negotiate with AH Plant to the value of $7.0 million for the Minister for Administrative Services to purchase the passenger/light. commercial vehicles leased by Transport SA in the 2001/2002 financial year. 4.2 Approve that the final negotiated purchase price is to be agreed by the.~ Treasurer and the Minister for Administrative Services in consultation with the Minister for Transport. Kevin Foley MP 4.3 Approve the Minister for Administrative Services entering into a contract with AH Plant for the purchase of vehicles to a value of $7 million. 4.4 Approve Transport SA terminating the current agreement with AH Plant for the provision of passenger/light commercial fleet management. H DEPUTY PREMIER TREASURER MINISTER FOR INDUSTRY, INVESTMENT AND TRADE Date:.v/~:; In Cabinet dl rn 5~ l; 9- LYJ * ~. ~js ---n~j L,.J","~ D ~~~ 2 4 JUN 2002 uprovec... P "