Friday, 4 January 2013

COE: Time for a tune-up?

Soaring COE prices today are driven by a constricted supply of certificates. But it is also partly because of rich car buyers who trade in five-year-old cars for new ones, crowding out other buyers. How about making people pay more for a second car? It is time to consider this and other ways to improve the quota system.
By Christopher Tan, The Straits Times, 3 Jan 2013

STRATOSPHERIC certificate of entitlement (COE) prices have been a talking point for much of 2012, and are likely to continue to hog many cocktail conversations into the new year.

But even as consumers roll their eyes at the rocketing prices, they are partly to blame.

If every car owner had kept his vehicle for 10 years, premiums are unlikely to be where they are today - $82,000 (for cars up to 1,600cc) and $95,000 (for those above 1,600cc).

According to estimates based on statistics collated by the Land Transport Authority (LTA), about 8,000 cars were between nine and 10 years of age last year.

COEs available to car buyers last year were around 27,000 (including the open category) - clearly sufficient for all those who needed to replace cars approaching 10.

The quota would probably have been sufficient even if we factored in a percentage of owners with cars older than 10 years who might have wanted to buy a new vehicle, as well as fresh demand from first-time buyers.

But it was not to be. Apparently, there are still car owners who feel they have to change their ride by say, the fifth or sixth year. This is supported by evidence from used vehicle traders: that the majority of their stock are cars between five and seven years old.

According to LTA data, there were about 300,000 cars between four and seven years old as of last year. Even if 10 per cent of their owners had decided to switch to a new car, the demand would have outstripped 2012's COE supply.

And clearly, that is what has happened. Now, if these folks had exercised some restraint (and common sense), car COE prices would have been saner.

One could argue that the price hike respite, from restraint, would have been temporary. Because as more people kept their cars longer, there would be fewer vehicles scrapped - a major determinant of COE supply.

But at least, demand for and supply of COEs would be better matched. Today, any semblance of a balance is skewed by folks who trade in their five or six-year-old car for a new one.

The new car requires a new COE. The older car is re-sold here, and does not translate to a fresh COE.

While restraint is key, it is not a virtue - nor a necessity - for many. According to reports, there are as many as 150,000 millionaire households in Singapore (wealth excluding homes).

Assuming that half of these households have merely two cars each, which are traded in for new ones every five years, it would translate to an annual demand for 30,000 COEs.

That's more than the sum total of last year's annual COEs of 27,000 available for all car buyers.

No wonder some "ordinary" car buyers have been calling for the COE system to incorporate a needs-based formula similar to the allocation of public housing, where first-timers are given priority.

In fact, Member of Parliament Seah Kian Peng (Marine Parade) suggested in 2011 that each family be limited to one car, and that the COE for subsequent cars be priced substantially higher.

The idea was rejected. Then-Transport Minister Raymond Lim said the quota system "should not be further burdened with having to prejudge which families deserve how many cars".

Granted, a needs-based criterion could prove to be unwieldy. But it should not be dismissed out of hand to preserve the cold efficiency of the COE system.

Even if we accept the argument that a quota system is the best way Singapore can control its vehicle population growth - which is in itself debatable - it does no harm in giving it a thorough review after 22 years.

And that includes taking into consideration the many suggestions made over the years, especially those that can potentially make the system more socially equitable or encourage a more sustainable consumer behaviour.

Examples include a pay-as-you-bid format that discourages desperate bidding; or categorising cars according to emission or power output instead of engine size.

This is more socially and environmentally sound, as many luxury makes have small engines now. One new idea: restrict each household to one COE every 10 years.

Some of these steps might result in lower Government revenue, but they leave untouched the the ultimate goal of a quota system - keeping a lid on car numbers. If nothing else, a review might assure those who miss a chance to own a car due to high COE prices that alternative options had been considered.


Ways to curb COE prices

LIKE high property prices, high vehicle prices have a knock-on effect on the economy. Costs are never borne solely by immediate buyers, but trickle down to consumers at large.

The Government can control vehicle population growth without contributing to the cost spiral.

Here are a few suggestions - some old, others new - on how to keep a lid on runaway certificate of entitlement (COE) premiums:
- Instituting a pay-as-you-bid format. Currently, successful bidders pay the price set by the lowest successful bidder. This is believed to encourage irresponsible bidding from desperate parties who are bent on securing a certificate and who know full well that they will pay less than what they bid. The Government says the pay-as-you-bid model could actually lead to higher overall premiums, citing studies done on various auction formats. But the only way to know for sure is to carry out a trial.
- Categorising cars according to emission or power output instead of engine size.
This is environmentally sound and more equitable socially. Today, luxury brands such as Mercedes-Benz and BMW offer models with engines below 1.6 litres. Such models compete with budget cars from makes such as Toyota and Hyundai.

But since the luxury brands command higher prices, their retailers have far fatter profit margins to bid for COEs.

This may be one factor why Category A COEs (for cars up to 1,600cc) have risen to record levels.
- Restricting COE bidding to buyers. Motor companies tend to bid aggressively to meet sales targets, and ultimately pass the cost on to consumers.
If individual car buyers do their own bidding, they are likely to exercise more caution and restraint. While individuals have always been allowed to bid on their own, not many do so because motor firms tend to sell cars at higher prices to buyers with their own COEs. One way to curb excessive bidding by traders is to restrict bidding to genuine buyers.
- Restricting each household to one COE every 10 years. Additional COEs can be had at multiples of a successful bid price.
This is socially equitable as it makes those with the means pay more. It is also likely to lead to softer COE prices on the whole, as those bidding for "extra" certificates bear in mind the surcharges they have to bear. It is estimated that more than 100,000 households own more than one car.
- Move to a ballot system. This serves the purpose of controlling vehicle population but generates no revenue for the Government. COE revenue averages $2 billion a year. It is also undesirable as it leaves the right to car ownership to pure chance.
- Revert to a closed bidding system. The current open bidding system fans competition as bidders can see when they are outbidden. In addition to this, allow bids to be revised downwards during a tender.
- Replacing upfront taxes such as Additional Registration Fee and excise duty with a tax pegged to the retail price of the vehicle.
This not only addresses an age-old problem of motor companies under-declaring the cost price of their cars, but is more equitable as taxes are determined by the actual on-the-road cost of a vehicle, including COE. It will invariably lead to more subdued bidding.
- Determining a COE's lifespan by a vehicle's clocked mileage instead of the number of years.
This move - possible with modern technologies such as satellite tracking - will encourage judicious consumption of road space.

There will be less congestion, thus allowing the Government to release more COEs.
- Doing away with a quota system and reverting to a regime of high taxation on vehicles.
This allows for a more "natural" vehicle population control. The COE system has inadvertently prevented the car market from crashing during economic slowdowns. Car sales remained robust even in 1998 (Asian financial crisis), 2003-2004 (Sars outbreak and recession) and 2008-2009 (global financial meltdown) because many people sought to scrap their cars well before 10 years to buy new ones.

Thus, Singapore's average car population growth in the 20 years since COE was introduced has been higher than the two decades prior to it.


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