NameStudent ID

S Naresh NehvinS9113672D

Lu DaG0912138U

Shruti SaravanakumarS9373597H

Kevin Soh You LingS8711094Z

G5 Introductory Economics ReportCourse Instructor: Prof Vishrut RanaDate of Submission: 14 November 2014

13

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 implemented policies to restrain both vehicle ownership and usage one of which is the Certificate of Entitlement (COE) that crowned Singapore to become one of the most expensive places in the world to own a vehicle2. This report aims to analyse how the introduction of COE tackles Singapores road congestion 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 Singapore government realised that the systems and policies in place that regulated the number of vehicles on the roads were ineffective. Back in the late 1960s, Singapore first attempted to restrain 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 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. Today, Singapores ARF is implemented through 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 did not give 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 has taken over as the primary means of regulating vehicle population. The number of COE released into the market is determined by 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, bidders submit their bids online, known as 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 where a bidder is out of the running for a COE unless he revises his reserve price upwards. At the closure of the bidding exercise, the bidders whose bids are above or equal to the Current COE Price (CCP) will receive a COE. The number of successful bidders is limited by the COEs available for each COE category. The CCP is the price of the highest unsuccessful bid plus $1, henceforth known as Quota Premiums after bidding closure, and all successful bidders in the vehicle category will pay the same Quota Premium for that category.Assuming that there are 5 bidders, with only 3 COE quotas for that category, Table 2 illustrates how the COE open bidding system works.

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 to 2013, we have experienced many events that have affected economies around the world. As such, consumer trends have also altered accordingly. In this report, we will study how consumer preferences have changed 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 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. 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 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.

Due to the effects of the recession, many companies faced cash flow problems and 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 both COE Quota and Bids received.

Finally, between 2010 and 2013, the market saw a steadier decrease. In a review, the Land Transport Authority (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 have 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 income 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 Economy

The COE quota and price are affected by many different factors in our daily life, such as governments policy, economics depression and gasoline price. In turn, the COE policy also brings a lot of influence on our life in economic sense.

Figure 2: ??? (Lu Da, please name)

Firstly, the social welfare which is also known as the sum of consumer and producer surplus, can be affected by COE policy. Consumers willingness to pay and the cost of products form the demand and supply curve, and the intersection between demand and supply curve is the equilibrium point. According to Figure 1, the equilibrium price and quantity are P1 and Q1 respectively, before the COE premium is accounted onto the price of the vehicle. According to the law of demand, when the price of a normal good increases, the quantity demanded decreases. Therefore, after the COE premium is added, the quantity demanded is reduced to Q2 as the final price increases to P2. The original revenue of producers before accounting for COE premium is P1 times Q1, which are the orange and green coloured areas. However, after the quantity demanded reduces to Q2 while the car price remains as P1, the producers revenue reduces to area B.

The blue area A is the total amount of COE premium the government receives from consumers. For consumers, those who value the car between the original car price and the price after accounting for the COE premium cannot get the car due to the COE premium. Hence, the consumer surplus is reduced by area D. As the competitive market is only efficient at the equilibrium point, the COE policy can be seen to make the car market inefficient.

In addition, COE policy can alter consumers incentives in using their cars. As quoted from the textbook, Many policies change the costs or benefits that people face and, therefore, alter their behavior. (Mankiw, 2012 P7) A study form DR. Ivan Png, who is a Distinguished Professor in NUS now, shows that people actually drive more when COE price rises (Png, 2012). In according to LTAs regulation, 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 suck 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 Aug2011, the OMV of a new Camry was priced at $22,504, ARF at 100% of OMV, and COE Premium at $70,890. This meant that the sunk cost of a new Camry is $19,804. Yet, a year after the COE increased to $90,501. With the assumption of similar OMV and ARF prices, Doctor Png calculated the total sunk cost to have increased by 20% to become $23,726. His study also shows that the elasticity of monthly mileage with respect to sunk cost of buying a new car is 0.345, which means that people will drive 0.345% more kilometers each month when the sunk cost of buying a new car is raised by 1% (Png, 2012). So, each person drives 6.9% more kilometers per month in 2012 as compared to 1 year ago as the suck cost increased by 20%. Therefore, although the COE policy does reduce the number of cars on the road, it also increases the usage of vehicles. This increases in the monthly usage of cars offsets the positive effects COE policy achieved to some extent.

(Lu Da, please change these graphs according to the link.http://www.mas.gov.sg/Monetary-Policy-and-Economics/The-Singapore-Economy/Inflation-Monthly/2014/Consumer-Price-Developments-in-September-2014.aspx)

Figure 3: ??? (Lu Da, please rename)

Figure 4: ??? (Lu Da, please rename)

Last but not least, COE premium also has close relationship with the CPI and inflation rate. As shown in Figure 2, the MAS underlying inflation rate without considering the private road transprt and accommodation cost only raised from 1.6% to 1.7% during April to May (MAS, 2010). But after the cost of private road transport and accommodation is added on , the CPI inflation rate reached 3.2%. Figure 3 shows more detailed information. The weight of accommodation coast is very litte compared to private road and transport cost. And the COE premiumis the main conributor of private road cost. Back to August 2014, according statistic from MAS, the CPI eased to 0.9% from 1.2% in July due to the 2.9 % falling of Private road transport costs last month. In conclusion, the fluctuation of COE price does have relationship with the trend of CPI and inflation rate.

Measures To Enhance Effectiveness Of COE

Changing Mindsets LTA plans to invest more resources to make public transport more attractive so that people rely less on personal car. Reducing car dependency is crucial for Singapores future growth because currently roads already account for about 12% of our land area. The rate at which land area is growing is outpaced by the car population growth and therefore the government is trying to slowly change peoples mindsets in order to reduce peoples 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 sky rocketing COE prices caused by the bidding has only made owning cars more desirable. What really limits car-ownership are the ancillary effects, things like a good public transportation system and people being receptive to change. Beyond expanding physical capacity of the network, added emphasis is placed on improving experiences and changing behaviours of public transport users, in order to persuade 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 then aims to achieve this via its Lets clear the air and Go Green with SMRT campaigns and advertising.

In order to reduce peoples dependency on car ownership, a more concrete approach of changing mindset would be a good measure because changing mindest is a soft approach that makes people more receptive to the idea of reducing car dependency in comparison to enforcing stict rules and regimentationsMaking 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 additon, LTA implemented the free transit programme last year19. This move has been an huge 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 seems to be pretty effective in attracting more commuters to make public transport their preferred mode of transport.Car-Free ZoneSingapore has recently started the car free zone initiative by making 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 URA had also implemented a programme to close off select streets (e.g. Club Street, Haji Lane) on weekends to create lively, car-free pedestrianized zones.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 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 cycling culture more viable through the building of Park Connector networks (PCN). The ministry of national development aims to promote cycling culture with its National Cycling Plan. It envisions a cycling network of 700km by 2030, including intra town and inter town networks21. In addition, about 3000 bike stands are bring added to MRT stations so that people can cycle to the MRT and then take the train to reach their destination. As mentioned above, with as much as 12% of our land space being used for roads 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 10 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 for cycling instead.

However the effectiveness of this measure is inconclusive because cycling is not considered an official mode of transport. In addition, cycling is not as prevalent because Singaporeans are still largely dependent on private cars. Hence the true effectiveness of this measure can only be seen when the government succeeds in changing peoples mindset away from car dependency.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 proportionate to the distance they travel.Government is implementing this new system in the hopes of reducing car usage also, the current ERP gantry system is becoming outdated and the cost of maintaining it has risen by about 80% in the past decade. On the other hand this measure can prove to be effective because motorists could pay only for the stretch of taxed roads they use under the new system. Transport analysts told TODAY it could be a more efficient way to ease congestion, as drivers are more likely to change their travel patterns.

Nanyang Technological University 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 his accumulated cost of driving and he will choose to cut down on car usage.

This measure is extremely new and will only be implemented in year 2020. so the effectiveness of this measure cannot be concluded at the moment. However, it appears that with distance based pricing, this would be an effective deterrent to discourage people from using private cars as their preferred mode of transport.

Overall conclusion?????Guys please add on ^^

Essentially, even though COE has been a good system in reducing car ownership in Singapore the high COE prices has not deterred or shifted people away from car usage. As Kishore Mahubani the dean and professor in the Lee Kuan Yew School of Public Policy has pointed out, cars are seen as a status symbol and its 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

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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. Lu da15. lu da16. lu da17. lu da

18. 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

19. 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/

20. 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

21. 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

22. 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/

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

24. 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

25. 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/