NameStudent ID

S Naresh NehvinS9113672D

Lu DaG0912138U

Shruti SaravanakumarS9373597H

Kevin Soh You LingS8711094Z

G5 Introductory Economics ReportCOE Prices - The Effect on societyCourse Instructor: Prof Vishrut RanaDate of Submission: 14 November 2014

Introduction

Honda, Toyota, Mitsubishi, Mazda, Nissan, Subaru, Kia, Hyundai, Volkswagen, Audi, Bayerische Motoren Werke (BMW), Mercedes-Benz; these are some of the many popular vehicle brands on the busy roads of Singapore. Due to the limited land area of 718 square km1, the Singapore Government has been continually implementing policies to regulate both vehicle ownership and usage. One of these includes the Certificate of Entitlement (COE) that crowned Singapore to become one of the most expensive places in the world to own a motor vehicle2. This report aims to analyse how the introduction of COE has tackled Singapores road congestion problem and its related issues by limiting vehicle ownership and its effectiveness in regulating vehicle population in Singapore.

Certificate Of Entitlement

A COE represents the right to vehicle ownership and usage of Singapores road space for a period of 10 years through a competitive bidding process. It is regulated by a Vehicle Quota System (VQS) and is further broken down into 5 categories in accordance to their engine capacity, as depicted in Table 1.

COE was introduced in 1990 when the systems and policies at the time were ineffective. Back in the late 1960s, the Government attempted to control vehicle ownership through the introduction of an Additional Registration Fee3 (ARF), which was calculated based on a percentage of the Open Market Value4 (OMV) of the vehicle.

ARF was introduced in 1968 and was initially set at 15% of a vehicles OMV. It then grew exponentially to 25% in 1972, 55% in 1974, 100% in 1975, and finally 175% in 1983. Currently, the ARF is charged based on a tiered rate, with a tax of 100% for the first $20,000, 140% for the subsequent $30,000, and 180% for the remaining OMV of the vehicle, if any.

Previously, ARF provided price certainty but not quantity certainty. On the other hand, COE now provides quantity certainty but not price certainty to consumers. The introduction of COE cooled down the rising ARF prices as COE took over as the primary means of regulating vehicle population. The quota for COE released into the market is determined by the Land Transport Authority (LTA) through the VQS based on the number of vehicles deregistered, accounting for a percentage of allowable growth in vehicle population, and other adjustments such as changes in taxi population, past-over projections or cancelled COEs; while the price is solely determined by the market.

COE CategoryCOE Obtained (After February 2014)

ACars with engine capacity up to 1600cc and maximum power output up to 97kW (130bhp)

BCars with engine capacity above 1600cc or maximum power output above 97kW (130bhp)

CGoods vehicles and buses

DMotorcycles

EOpen (for any kind of vehicle)

Table 1: Vehicle COE Category5

COE Competitive Bidding System

Given the lack of success in relying on rising ARF levels to curb vehicle ownership, COE was implemented and agents who wanted to purchase a vehicle must first obtain a COE through the bidding process.During the bidding process, agents submit their bids online, known as the reserve price, to outbid each other for a COE. The COE open bidding system begins at $1 and will automatically revise the bid upwards at an increment of $1, until the reserve price is reached. At this point, an agent is out of the running unless he revises his reserve price upwards. At the closure of the bidding exercise, the agents whose bids are above or equal to the Current COE Price (CCP) will receive the certificate. The COE quota available for each COE category limits the number of successful agents. The CCP is the price of the highest unsuccessful bid plus $1, henceforth known as the Quota Premium which is the cost that all successful agents must incur. Assuming that there are 5 agents with a COE quota of 3 for that category, Table 2 will illustrate how the COE bidding system functions.

S/NReserve PriceBid StatusRemarks

1$50,000SuccessfulOnly the first 3 bidders will be successful. The COE Price or Quota Premium will be $25,001. The 4th and 5th bidder will be unsuccessful, as the number of successful bids would exceed the COE quota of 3.

2$40,000Successful

3$30,000Successful

4$25,000Unsuccessful

5$20,000Unsuccessful

Table 2: Sample of COE Bidding System

COE Over The Years

From 2003, we have experienced many events that have affected economies around the world. As such, consumer trends have also altered accordingly. In this section, we will study how consumer preferences have changed and the reasons for them.

Figure 1: CAT A & B COE Prices and Quota 2003 2013

The above diagram depicts the COE Quota, represented as the supply curve, and the Bids Received, represented as the demand curve. Understanding the interaction between these roles from an economic standpoint is crucial, as it will further explain how the market responds to changes6. The difference in classification between Category (CAT) A and B vehicles is that the former qualifies vehicles with an engine capacity of 1600 CC or less while the latter permits vehicles with an engine capacity exceeding 1600 CC7.

Between the years 2003 to 2007, mass-made cars dominated the market share in terms of cars on the road. Toyota, the leader, increased its share from 22.7% to 28.35% while Mercedes Benz, the most sold European brand, lost its momentum by dropping from 8.29% to 4.84%8 in the same period. This movement helps to explain the reason in exponential rise of Bids Received in CAT A and the gentler growth in CAT B.

The rapid decrease from 2007 can be better understood with historical data. From 1990 to 2007, the Allowable Growth Rate of vehicles was fixed at 3% per annum and the Compound Annual Growth Rate of vehicle growth rate was 2.7%, which was within the recommended limit.

However, the roads were getting more congested because of the road capacity growth of 0.5%. This meant that while the cars were growing in population, the roads were not expanding as quickly to accommodate the increasing number of vehicles. Thus, the Allowable Growth Rate dropped from 3% to 1.5%9 from 2009 and was reviewed in 2011. This policy then caused the COE Quota to decrease. In addition, in 2008, the economic recession discouraged agents from bidding for COE as they sought for substitutes and more economic options.

Due to the effects of the recession, many companies faced cash flow problems. Thus the LTA provided a temporary relief of reducing the minimum bid deposit from $10,000 to $5,00010. While this move was mainly intended to help businesses cope with the crisis, it is natural that the agents were still not incentivised to purchase a COE, thus the further decrease in Bids Received.

Finally, between 2010 and 2013, the market saw a steadier decrease. In a review, the LTA adapted a quarterly review system instead of annually to better predict the changes of the market and this would allow for less drastic movements in the market. Also, the Allowable Growth Rate was decreased from 1.5% to 1% from August 2012 and then a further reduction to 0.5% from February 201311. This was to allow the roads to grow at the same rate as the vehicles on the road.

Efficiency Of COE

In 2013, the LTA conducted a discussion on the COE system with some 3,900 members of public, industry representatives and academics12. The general consensus was that there was a recognised need for a robust Vehicle Management System. However, one problem that was raised was road congestion and the rising COE prices. In response, the LTA brought down the growth rate to 0.5% in an effort to cope with road congestion.

In line with the rising prices of oil, European car manufacturers also started to limit the engine capacity13 of their cars and this correlates to the cars falling into the mass-made car bracket of CAT A. Agents who consider the more expensive European cars tend to have a larger incomes and so have a higher willingness to pay for COE, which drives prices up.

Academics and Experts on Auction Theory were thus consulted and they concluded that the current COE system, as an auction-based system, is largely based on the agents Willingness to Pay and does not encourage aggressive bidding.

In addition, very few bids are above the final COE price, and this suggests that agents monitor the prices closely. As such, the system is sound.

Effects Of COE On The EconomyThe policies governing COE and the demand for cars guide the supply and demand for the market. In addition, the cost of COE is largely based on the agents willigness to pay.

Figure 1: Demand and Supply Graph from Societys Perspective

In Figure 2, the equilibrium price and quantity are met at P1 and Q1 respectively, before the COE premium is accounted on the price of the vehicle. From a societal standpoint, when the number of cars on the road increases, it will cause pollution and conjestion related problems, known as negative externalities.

The cost of owning a car to society, thus, equates to the private cost borned by the agent in addition to the cost created by externalities and hence is greater than the cost incurred by the sole agent who purchases the vehicle. Therefore, the supply curve from societys perspective, shown in the figure above, is higher than the private cost in the supply cuve. From an economic standpoint, the supply and demand curves should be maintained at market equlibrium, Point A. But if the social supply curve is added, it shifts the supply curve left and thus the price increases to P2 and it is greater than the agents willingness to pay, which is P1. This will result in a negative deadweight loss. Therefore, from the standpiont of society as a whole, the equlibirum should be maintained at Point B. To achieve the new optimal point, the Government implemented the COE policy.

COE can also alter consumers incentives in using their cars. Many policies affect the costs or benefits that people face and, therefore, alter their behavior14. A study suggests that agents actually drive more when the COE price rises15. According to LTAs regulations, a newly registered vehicle, if de-registered within the first 2 years, will only qualify for 80% rebate of the COE premium. As such, it can be derived that a newly purchased vehicle has a sunk cost that amounts to 20% of the COE. Similarly, the maximum ARF rebate within the first 2 years is 75% and hence 25% of the ARF becomes sunk cost.

In August 2011, the OMV of a new Toyota Camry was priced at $22,504, ARF at 100% of OMV, and COE Premium at $70,890. This meant that the sunk cost of the Camry was $19,804. Yet, a year after the price of the COE had increased to $90,501, the study calculated the total sunk cost had increased by 20% to $23,726. The study also showed that the elasticity of monthly mileage with respect to sunk cost of buying a new car is 0.345, which translates to agents driving 0.345% more kilometers each month when the sunk cost of buying a new car was raised by 1%. Thus, each agent drove 6.9% more kilometers per month in 2012 as compared to 1 year ago as the sunk cost increased by 20%. Therefore, although the COE policy does aim to reduce the number of cars on the road, agents have increased their usage of vehicles.

Measures To Enhance Effectiveness Of COE

Changing Mindsets LTA plans to invest heavily to make public transportation more appealing. The rate at which land area is growing is outpaced by the car population growth and therefore the Government is trying to change peoples mindsets in order to reduce their dependency on car ownership.

In line with reducing the growing dependency on private transportation, the Singapore Government has been expanding the public transport system to better facilitate travelling for customers. Public transportation is expected to increase in price to cope with the expansion of the transport system. However, in comparison with owning cars it is still a much more economical option.

The ancillary effects, things like a good public transportation system and people being receptive to change limit car-ownership. Beyond expanding physical capacity of the network, an added emphasis is placed on improving experiences and changing behaviours of public transport users, in order to incentivise more people to make the switch away from private transport.

The 2013 Land Transport and Mangagement Plan (LTMP)18 aims to achieve this by changing the mindset shift away from car usage by highlighting the social costs of driving.

LTA officials have highlighted that each motorist imposes a cost upon other motorists on society, and emphasised a global trend towards cutting car dependency. In comparison to expensive car ownership, public transport has been pitched by the LTA as the more environmentally-responsible, resource-efficient option. SMRT has aimed to achieve this through its Lets clear the air and Go Green with SMRT campaigns and advertising, amongst other efforts. Making public transport more attractive - 7:45 am MRT train ridesTo make public transport more attractive, the LTA is focusing on improving the capacity and reliability of train and bus services. In addition, the LTA implemented the free transit programme in 201319. This effort has seen an encouraging success as nearly 7% of riders shifted out of the peak commute, according to officials, with the peak-off peak ratio falling closer to 2:1. Moreover, it was also reported that even more people might have taken advantage of the free fares if they could have; about two thirds of non-participants said they did not have flexible work schedules that permitted early arrivals. This measure has shown some promise in attracting more commuters to make public transport their preferred mode of transport.Car-Free ZoneSingapore recently started the car free zone initiative by making a 660m stretch of road from shopping centers ION Orchard to Ngee Ann City inaccessible for cars on the first Saturday of every month from October20. Accompanying the 2013 LTMP is the move to reclaim public space by making different areas and streets car-free/ car-less. For instance, the Kallang Bugis district has been designated as a pilot residential district for car-free initiatives. LTA and Urban Redevelopment Authority also implemented a programme to close off selected streets such as Club Street and Haji Lane on weekends to further facilitate this programme.This new measure has the potential to ease traffic congestion as it reduces the number of cars on the roads. This measure is also a gateway that opens up future possibilities of more car free zones which will then discourage people from driving altogether and eventually cut down car usage.Promoting A Cycling Culture Singapore wants to promote the cycling culture by emphasising the active mobility lifestyle. In response to an increasing population of amateur and recreational cyclists, LTA is making the cycling culture more viable through the development of Park Connector networks (PCN). The Ministry of National Development aims to promote cycling with its National Cycling Plan. It envisions a cycling network of 700km by 2030, including intra town and inter town networks21. In addition, about 3,000 bike stands have been added to MRT stations so that people can cycle to the MRT and then take the train to reach their destination. Due to Singapores land constraint, cycling will be a good way to fully utilise the land space and it is also an economically viable option.

Also, a Bikeshop cycling study tour led by renowned Danish architect22 and urban designer Jan Gehl was held where they observed and discussed challenges and strategies for bicycling at Ang Mo Kio Town in Singapore.

The report also included several ideas to make cities more walkable, bikeable and people-friendly. Some of these include keeping motorised traffic slow in high-pedestrian areas, making street-level crossings a priority, and making walking and cycling paths comfortable and attractive23. Through these measures Singapore aims to reduce car dependency and encourage more people to opt to cycle.

However, the effectiveness of this measure is still inconclusive because cycling is not considered an official mode of transport in Singapore and thus very little statistics can be drawn.

Satellite based ERP systemSingapore is planning to implement a new electronic pricing system (ERP) initiative using Global Navigation Satellite System (GNSS) by 2020s24. Critics of the current ERP system argue that the current ERP system has not been very effective in controlling traffic congestion. On the other hand, this measure will be effective and it is equitable because motorists will be charged according to the distance they travel. This measure could prove to be effective because motorists will pay only for the stretch of taxed roads they use under the new system. It will be a more efficient way of easing congestion, as drivers are more likely to change their travel patterns.

Transport economist Walter Theseira25 said the system should ideally be able to learn a motorists regular route and calculate how much he could expect to pay that day. This would be effective because it will explicitly highlight the cost of driving to the motorist on a day-to-day basis. This would then be an effective deterrent to car ownership when the motorist calculates the accumulated cost of driving and would discourage travelling in place of taking private transportation. As a newly proposed measure, the effectiveness cannot yet be concluded. Concluding Remarks

Essentially, even though COE has been a good system in controlling car ownership in Singapore the high COE prices has not deterred or shifted people away from car usage. Cars are seen as a status symbol and are desired by many Singaporeans.

Therefore more needs to be done to make people more receptive to using public transport as the preferred mode of transport. This can be achieved through the above mentioned policies which will supplement the COE system and will reduce car dependency in the long run thereby leading to a more efficient allocation of the Governments resources.

References

1. Population & Land Area. (2014, November 7). Retrieved October 31, 2014, from http://www.singstat.gov.sg/statistics/latest_data.html#14

2. Naidu-Ghelani, R. (2013, March 5). World's Most Expensive Car Market Just Got Pricier. Retrieved October 31, 2014, from http://www.cnbc.com/id/100525565#

3. New Cars Jammed Up As LTA Reviews Approval Process. (2014, June 1). Retrieved October 31, 2014, from http://www.straitstimes.com/lifestyle/motoring/story/new-cars-jammed-lta-reviews-approval-process-20140601

4. Tax Structure for Cars. (2014, April 17). Retrieved October 31, 2014, from http://www.lta.gov.sg/content/ltaweb/en/roads-and-motoring/owning-a-vehicle/costs-of-owning-a-vehicle/tax-structure-for-cars.html

5. Overview of Vehicle Quota System. (2014, January 15). Retrieved October 31, 2014, from http://www.lta.gov.sg/content/ltaweb/en/roads-and-motoring/owning-a-vehicle/vehicle-quota-system/overview-of-vehicle-quota-system.html

6. Lim, H. (2014, August 27). COE Prices Determined By Market Forces. Retrieved October 31, 2014.

7. New Criteria For Category A Cars. (2013, September 9). Retrieved October 31, 2014, from http://www.lta.gov.sg/apps/news/page.aspx?c=2&id=45d40072-7231-4c5b-94c3-b6af9dd7a783

8. Total Car Population By Make. (2014, January 12). Retrieved October 31, 2014, from http://www.lta.gov.sg/content/dam/ltaweb/corp/PublicationsResearch/files/FactsandFigures/MVP01-6_Cars_by_make.pdf

9. Lim, G. (2008, October 21). Vehicle Growth Rate Will Be Reduced. Retrieved October 31, 2014, from http://www.lta.gov.sg/apps/news/page.aspx?c=3&id=79

10. 50% Reduction In COE Bid Deposit For Categories A, B, C And E. (2009, April 25). Retrieved October 31, 2014, from http://www.lta.gov.sg/apps/news/page.aspx?c=2&id=2179

11. LTA Implements Measures To Ease Transition To Lower Vehicle Growth Rate. (2012, May 30). Retrieved October 31, 2014, from http://www.lta.gov.sg/apps/news/page.aspx?c=2&id=663mv5b9pg26p9byxa29rx48g4xloxcs1ol07u0fpdt25gh3dj

12. Broad Findings From Public Consultation On COE And Car Ownership Framework: Mixed Views On How The COE System Should Be Improved. (2013, August 26). Retrieved October 31, 2014, from http://www.lta.gov.sg/apps/news/page.aspx?c=2&id=c1e26fd7-efb9-4e60-a02e-f2f9ca8537a1

13. Tuttle, B. (2012, April 23). Size Matters: Now Automakers Brag About How Small Their Engines Are | TIME.com. Retrieved November 1, 2014, from http://business.time.com/2012/04/23/size-matters-now-automakers-brag-about-how-small-their-engines-are/

14. Mankiw, N. (2012). Introduction. In Principles of economics (6th ed., p. 7). Fort Worth, TX: Dryden Press.

15. Png, I. (2012, August 2). People drive more when COE price rise. Retrieved November 10, 2014, from http://www.fas.nus.edu.sg/ecs/scape/doc/COE-st-2aug-pA30.pdf

16. Land Transport Master Plan 2013. (2013, October 31). Retrieved November 1, 2014, from http://www.lta.gov.sg/content/dam/ltaweb/corp/PublicationsResearch/files/ReportNewsletter/LTMP2013Report.pdf

17. Jaffe, E. (2014, July 25). Singapore's Early Morning Free Transit Program Has Been a Huge Success. Retrieved November 1, 2014, from http://www.citylab.com/cityfixer/2014/07/singapores-early-morning-free-transit-program-has-been-a-huge-success/374909/

18. Chow, J. (2014, September 25). Part of Orchard Road to go car-free at selected times. Retrieved November 1, 2014, from http://www.straitstimes.com/news/singapore/more-singapore-stories/story/part-orchard-road-go-car-free-selected-times-20140925

19. Integrating Cycling with Public Transport. (2014, September 24). Retrieved November 1, 2014, from http://www.lta.gov.sg/content/ltaweb/en/green-transport/integrating-cycling-with-public-transport.html

20. Shah, V. (2014, June 6). How to promote cycling culture in hot and humid Singapore: Study. Retrieved November 1, 2014, from http://www.eco-business.com/videos/how-promote-cycling-culture-hot-humid-Singapore/

21. Active Mobility in Singapore - Walking and cycling in the tropics. (2014). In Creating Healthy Places through Active Mobility. Centre for Liveable Cities.

22. Ismail, S. (2014, October 1). LTA issues tender for satellite-based ERP system; distance-based pricing a possibility. Retrieved November 1, 2014, from http://www.channelnewsasia.com/news/singapore/lta-issues-tender-for/1391798.html

23. Singapore Transit to Develop GNSS Road-Pricing System. (2014, October 1). Retrieved November 1, 2014, from http://gpsworld.com/singapore-transit-to-develop-gnss-road-pricing-system/

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