Rethinking the Buy vs. Lease Decision

Abstract

In years past, the DoD has considered leasing major equipment from defense industry firms in order to acquire needed capability quickly and without the upfront expense. A number of studies have analyzed the costs and benefits of leasing (as opposed to purchasing) specific military equipment (e.g., Engin, 1989; Lebo & Scott, 2009). Some of these lease arrangements, such as the Navy's long-term lease of tanker ships between 1983 and 2011, proved to be cost effective, or at least cost neutral, depending on the evaluation criteria used (Haslam, Koenig, & Mitchell, 2004; Miguel, Shank, & Summers, 2005). Nevertheless, the ensuing congressional backlash led to the passage of new regulations in the early 1980s, including the submission of a detailed justification for lease versus purchase, which has effectively restricted the use of long-term leases. Support for leasing major equipment continues to decline. Recently, for example, the Coast Guard considered leasing polar icebreakers to supplement its two-ship fleet, one of which has exceeded its 30-year service life (GAO, 2011). In the end, Stephen L. Caldwell, Director of Homeland Security and Justice, noted that the lack of existing vessels capable of meeting Coast Guard requirements limited the availability of leasing options. He also stated that an initial cost-benefit analysis of one type of available leasing option suggested that it may ultimately be more costly to the Coast Guard over the 30-year icebreaker lifespan (O'Rourke, 2012, p. 30). Note, however, that there are good reasons to lease (rather than purchase) equipment in certain circumstances, even if leasing is not the most cost-efficient acquisition strategy. For instance, when funds are unavailable to purchase mission-critical equipment, leasing enables immediate access to assets and spreads outlays over the life of the lease. Leasing may also be appropriate in instances where the need for an asset is short-term or indeterminate. Finally, in exigent circumstances, leasing commercial equipment to bolster military capability may be preferable to initiating the often-lengthy acquisition process for developing military systems. However, newer legislation, passed in 2008, restricts shortterm leasing. 10 U.S.C. 2401(as amended in 2008), authorizes the military departments to lease equipment (e.g., vessels, aircraft, or combat vehicles) for a period greater than two years, but less than five years, only if a cost analysis (that meets OMB Circular A-94 criteria), determines that a contract to lease is the more cost-effective option.