FINANCE: Product Leasing Increases Chances of Reuse

Rebekah A. Hall Associate Editor

Consumers outgrow their computers like children outgrow shoes — every so often you need a bigger size.

In the past decade, the demand for cutting-edge technology and convenience has resulted in a global marketplace that is flooded with obsolete computer junk. This junk, however, contains toxic components, causing some people to ask manufacturers to take responsibility for their product's full lifecycle.

The feasibility of returning old products to manufacturers recently was analyzed by the New York city-based Inform, a nonprofit environmental research organization that investigates ways to reduce municipal and commercial waste streams.

In its report, “Leasing: A Step Toward Producer Responsibility,” the researchers discussed product leasing as a strategy to close material loops — where waste from one application can be used as a material source for another — resulting in a cyclical rather than linear material-use pattern.

As part of the report, several companies were profiled, including Xerox, Stamford, Conn.; Pitney Bowes, Stamford, Conn; Compaq, Houston; Dell, Austin, Texas; Gateway, San Diego; and IBM, Armonk, N.Y. Examining these companies helped researchers identify under what conditions leasing programs encourage manufacturers to redesign products to extend their life and close materials loops.

Leasing products results in several advantages, such as generating an end-of-life awareness among manufacturers, according to the study. For example, leasing has led Xerox to redesign its products so that the company can maximize asset recovery through increased reuse, remanufacturing and recycling.

According to the report, equipment that is returned to manufacturers at a lease's end generally is more likely to be used efficiently and managed responsibly. As opposed to direct sales, leasing keeps the equipment in a commercial channel, which will possibly extend its service life.

This is particularly true for products such as computers whose value rapidly depreciates over time. While old personal computers often are stored in attics after being replaced, businesses are more likely to refurbish computers for resale, sell them for spare parts or send them to a recycler.

However, product leasing is limited in some ways. Not all agreements encourage less wasteful product design, reuse, remanufacturing and recycling incentives. For example, a problem occurs when a contract fails to ensure that equipment is returned at the end of the lease term.

Of the two major types of leases — operating and capital — only operating leases increase the likelihood that the manufacturer will retain ownership of and responsibility for a product. However, even with operating ases, ownership retention depends on which company acts as the lessor and how the equipment is handled at the lease term's end.

Operating leases can create “leakage” in the ownership and responsibility loop if the manufacturer sells to an independent leasing company; the lessee purchases the product at the end of the lease term; or the lessor sells the product on the secondary market. In each instance, the materials loop that returns products to the producer is broken, and leasing as a resource conservation strategy is compromised.

Even leases that successfully close the ownership and responsibility loop rarely include recycling targets, definitions of what counts as recycling or reporting requirements, all of which are commonly delineated in mandatory extended producer responsibility (EPR) programs. This means that once producers take products back, they can send them to disposal facilities and are likely to do so when it's the cheapest option.

The report also discusses the differences in EPR programs in the United States, Europe and Asia. For example, many countries in Europe and Asia have passed EPR legislation to mandate end-of-life responsibilities while such legislative efforts in the United States have met with industry resistance. Currently, no federal take-back legislation exists in this country, although voluntary programs have been developed.

The report notes that mandated EPR programs developed in Europe set targets regardless of the economics. Governments require producers to take back their products when consumers discard them, manage them as an internalized expense and meet specified recycling targets. By internalizing waste management costs, the report says, mandated EPR policies provide companies with economic incentives to design products that are less wasteful and more recyclable.

The United States is unique among industrialized countries in not having a national EPR policy. However, the researchers say voluntary leasing limitations make it difficult to achieve comparable results to the EPR legislation adopted by European and Asian countries. Also, a computer leasing system is not likely to achieve the 70 percent to 90 percent recycling rates that Europe is planning to require this year.

Even in the absence of federal EPR legislation, researchers say that U.S. industry and government can take measures to increase leasing as a viable step toward producer responsibility and to close materials loops.

For example, a leasing strategy could be supported by policies that improve the economics of material recovery. Specifically, voluntary leasing programs would receive a boost if government and corporate purchasing guidelines encouraged leasing and stipulated end-of-life product management. Also, agencies and companies could specify that computer contracts provide leases that guarantee returned equipment will not be disposed of in an incinerator, landfill or waste-to-energy facility.

U.S. government guidelines have created obstacles for remanufactured equipment purchasing, the report says. For example, 26 states currently restrict buying office equipment with reprocessed parts, which discourages increased reuse, remanufacturing and recycling, and is inconsistent with a closed-loop materials policy.

Unlike mandatory EPR initiatives, economics drives product leasing as a way to conserve resources. Economic incentives such as implementing landfill surcharges and eliminating virgin materials subsidies would encourage reuse, remanufacturing and recycling.

As leasing increasingly replaces direct sales, industry and government have the opportunity to selectively support leases that return products to manufacturers.

“Leasing: A Step Toward Producer Responsibility” is available at www.informinc.org. For questions about leasing, EPR, or for a copy of the report, call Inform at (212) 361-2400, ext. 250. To read additional financing articles, visit www.wasteage.com.