Maturing countries such as Egypt need to adopt successful financial mechanisms to foster effective infrastructure to support and expand the economy. This moves beyond financing alone, indicating that leasing is the way forward. Awareness of the benefits leasing add to the sector is on the rise in Egypt and stands to be a substantial part of financing the existent oil and gas industry. Ownership of fixed assets in the oil and gas industry is acknowledged as less than desirable; instead outsourcing of services such as company cars (fleet), headquarters, office and IT equipments is considered a preferable means of handling the sector’s infrastructure.
The leasing concept provides a simplified means of elevating the pressures of ownership of assets and offers the option of an owner-lessee agreement where the lessee will be liable for monthly rents without actually carrying the asset cost on its balance sheet. Thus the leasing concept facilitates progression in the Egyptian oil and gas sector and supports further expansion and development that moves past standard financing.
We are currently witnessing the advent of move forward leasing in Egypt, whose legal ramifications fall under the Law no. 95 instated in 1995. A better understanding of the leasing market can be understood from the included table:
Leasing Contracts According to Type of Asset from 2003 – 2009
Source: Ministry of Investment
Leases may be in Egyptian pounds or foreign currencies depending on the corporate requirements. Leasing as a means of financing is not a common practice, but increasing awareness stands to change the financial terrain with an upward spike in leasing in the oil and gas market.
Leasing in itself is defined as a contractual agreement between a lesser (leasing company) and a lessee (customer) that conveys to the lessee the right to use specific property, owned by the lesser for a definite period of time. In return, the lessee agrees to make periodic payments (rentals) to the lesser. The lessee has the option to acquire the assets at the end of the lease in accordance with the agreed terms. In other words, leasing is a financial instrument enabling the utilization of a given fixed asset with the option to own the asset at the end of the lease term. This concept opens a gateway for reform and expansion in the Egyptian market.
Leasing is one of the best financing solutions for the oil and gas sector and elevates the pressures of ownership while companies try to expand and develop. Leasing is widely believed to be the most effective financial tool in addressing a company’s unique requirements as the financial structure can be tailored to the exact company’s budget. It addresses the requirements and financial restrictions each company faces and is suited to both medium and long term financing needs. The sector is responding to a trend of moving headquarters to new communities. This initiative is taking place within the Egyptian community and is aimed at moving from congested areas and towards more suburban and newly developed zones.
The oil and gas sector has been one of the leaders in this shift under the guidance of the Minister of Petroleum and his long-term vision in the expansion of the field within Egypt. The shift could require immense investments in the infrastructure of the newly occupied premises but instead leasing offers a more attractive option. Leasing eliminates the cumbersome investment in the premises and simply exacts a monthly rent, which is part of the expenses of the operations of the company. Accordingly, the money can be utilized in investments in the actual business line and not peripheral operational items, making leasing a viable alternative.
Leasing was introduced to the Egyptian market in the year 1995 and so far the penetration rate is almost 2%. This indicates that there is a high potential for growth in the leasing arena in order to better address the corporate needs of the Egyptian market. Leasing as a financial option fosters a more effective climate for adjustment, expansion and growth in the existent Egyptian oil and gas sector. Leasing is a highly credible financing tool worldwide and thus a functional part of most developed economies. The level of market penetration compared to other financing facilities ranges between 20 – 28%, which is a relatively high degree of prevalence.
General Benefits of Leasing: Leasing mechanism differs from bank facilities and the process of execution is more straightforward and has flexibility to meet the needs of each individual client. Leasing falls under different policies, regulations and legal systems than bank investments and facilitates the financing process.
Leasing offers financial flexibility, and provides the corporate entity the ability to undertake tailor-made financial structuring to achieve the company’s unique financial objectives. It is cash flow friendly, as lease payments can be tailored to the exact needs of the corporate cash flow including step-up or step-down payments, balloon or other tailored structures. Leasing offers the off balance sheet financing option. According to the Egyptian Accounting Standards all lease financings are recorded as off balance sheet items, which have clear advantages to the liability structure and could be an alternative source of finances in times of budget constraints. True leases with residual values have lower monthly lease payments and thus reduce cash outlay and enable more efficient trade-ins or upgrade to newer models.
This compilation of factors stands to be an invaluable asset to the oil and gas sector and heralds a new trend in the financial arena that can facilitate both expansion and reform while changing the face of corporate finance in the industry. Leasing is established in Egypt and has unlimited potential to take hold and become the mechanism for the future in financing oil and gas companies as they make their way forward in the Egyptian market.
Distribution of Types of Assets that is leased from 2003 – 2009 (EGP Million)