Name Student ID

S Naresh Nehvin S9113672D

Lu Da G0912138U

Shruti Saravanakumar S9373597H

Kevin Soh You Ling S8711094Z

G5 Introductory Economics Report

Course Instructor: Prof Vishrut Rana

Date 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 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 Singapore’s 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 Singapore’s 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, Singapore’s 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.

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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

Category

COE 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)

C Goods vehicles and buses

D Motorcycles

E Open (for any kind of vehicle)

Table 1: Vehicle COE Category 5

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

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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/N Reserve Price Bid Status Remarks

1 $50,000 Successful Only 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 $40,000 Successful

3 $30,000 Successful

4 $25,000 Unsuccessful

5 $20,000 Unsuccessful

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.

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20130

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

CAT A Quota (Supply) CAT B Quota (Supply)CAT A Bids Received (Demand) CAT B Bids Received (Demand)

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

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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

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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 government’s policy, economics depression and gasoline price. In turn, the COE

policy also brings a lot of influence on our life in economic sense.

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Figure 2 Demand and supply diagram in social perspective

Firstly, COE policy is closely related to the supply and demand in the car sales

market. Consumers’ willingness to pay and the cost of products form the demand and

supply curves, and the intersection between demand and supply curves is the

equilibrium point. According to Figure 2, the equilibrium price and quantity are P1

and Q1 respectively, before the COE premium is accounted onto the price of the

vehicle. As we all know, when the number of cars on the road increases, it will cause

more pollution and conjestion problem. These problems are known as externalities.

Therefore, the cost of owning a car for the whole society, which equals to is the

private cost plus externalities cost, is greater that the cost for individuals. Hence, the

supply curve in social perspective, which is shown in re colour in Fighre 2, is higher

than the private supply cuver. In the market perspective, the supply and demand

should be maintained in the market equlibrium A. But if the social supply curve is

added, the price becomes P2 and it will be greater than people’s willingness to pay,

which is P1. This will result in a negative deadweight lost. Therefore, from the

standpiont of society as a whole, the equlibirum should be maintained at point B. to

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achieve the new optimal point, Singapore government implemnted the COE police. It

results in the increasing of car price and decreasing of number of cars on the road.

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 LTA’s 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.

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 Singapore’s

future growth because currently roads already account for about 12 percent 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 people’s mindsets in

order to reduce peoples’ dependency on car ownership.

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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 limit 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 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 “Let’s 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 seems more

like a soft approach that makes people more receptive to the idea of reducing car

dependency.

Making public transport more attractive - 7:45 am MRT train rides

To make public transport more attractive, the LTA is focusing on improving the

capacity and reliability of train and bus services. In additon it 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

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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 Zone

Singapore 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 potential to ease traffic congestion as it reduces the number of

cars on the roads. This measure is also a getway 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 throught the building of Park Connector

networks (PCN). The ministry of national development aims to promote cycling

culture with its National Cycling Plan 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.

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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 people’s mindset away from car dependency.

Satellite based ERP system

Singapore 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. This 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 percent 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.

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Nanyang Technological University transport economist Walter Theseira25 said the

system should ideally be able to learn a motorist’s 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.

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References

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