Two experts examine suggestions to improve certificate of entitlement framework and share their insights
Ensuring a less bumpy ride on COE system Prof Chu Sing Fat says the carbon emissions-based rebate may have contributed to distributors making higher bids for certificates of entitlement -- PHOTO: COURTESY OF CHU SING FAT

CERTIFICATE of entitlement (COE) prices for cars have soared to close to $100,000 in recent months. The last time they reached such levels was back in 1994, when the $100,000 mark was breached. The gap in COE premiums for small and large cars is narrowing, and these trends have fuelled calls for the 23-year-old COE system to be reviewed.

MPs also sought assurances in Parliament this month to control the runaway prices. One asked for COEs to be grouped based on a car's open-market value (OMV) instead of its engine capacity, others for more help for first-time car buyers and small businesses.

Associate Professor Anthony Chin of the National University of Singapore's Economics Department and Associate Professor of Business Analytics Chu Sing Fat of the NUS Business School give their take on the COE system.

  • How has the COE system performed? What can be reviewed?

Prof Chu: The main shortcoming is the insidious linkage between premiums, deregistrations and quota. Low premiums motivate a high number of deregistrations which in turn translate into high COE quotas and thereby reasonable premiums, and vice versa. The linkage is akin to a roller-coaster ride. The main issue is to mitigate quota and premium volatilities.

Prof Chin: Markets are driven by the willingness and ability to pay and if you reduce the supply of any commodity, it can only push up prices. It's an issue of scarcity and market forces. Any review will have to focus on the bidding mechanism and the utilisation of the revenues.

  • What are your suggestions to keep a lid on runaway prices and improve social equity?

Prof Chu: (In) my analytical research on the quota versus premium relationships since 2002 in Categories A, B and E, premiums shoot up dramatically once COE quota is below about 600, 500 and 400 (respectively) in each biweekly auction. With, say, 18,000 COEs in the February to July 2013 window compared with about 10,500 under the current formula, that should lead to some reprieve on the premium front.

My proposal is to supply a minimum of 18,000 COEs every six months in Categories A, B and E and to make corresponding deductions when deregistrations and thereby COE quotas become more plentiful.

The number of cars may be about 2 per cent above "target", say, by 2014, but with eventual deductions, the car population will get back to "target" by 2015. Such a "smoothing" mechanism is commonly used to manage manpower (and) foreign exchange to attain medium- to long-term targets.

Another insight from my research is the feasibility of cutting COE tenure to eight years, as 55 per cent of cars have been deregistered at about that age since 1992.

With a lower COE tenure, (the) boom-and-bust cycle will moderate in length of time and financial impact. One measure by itself may not suffice but rather a mix like the two proposed above.

Prof Chin: No policy is without unintended consequences. The "trick" is to moderate its negative impact... When the supply of COEs fell, the alternative (good public transport) for car users was not there. It's a case of policy not being coordinated. Frequent breakdowns have (also) made public transport not reliable.

How about categorising COEs to power output or open market value, instead of engine size, because for environmental reasons, premium makes are pushing out cars of smaller engine capacity and, with fatter profit margins, they can outbid smaller, budget cars in Category A?

Prof Chu: The categorisation of cars has delivered on its social equity objective. Of late, more luxury models are available in Category A. It appears to be a trend. The carbon (emissions-based) rebate may also have contributed to distributors bidding higher for COE. They should definitely be taken into account in a review.

Based on a sample of about 5,300 used cars with engine size at or above 1,600cc (Category B) for sale between October 2011 and August 2012, the correlation between engine size and OMV was 0.7 - very positively aligned. It would not matter whether COE is based on engine size or OMV.

For another sample of about 3,500 used cars with engine size below 1,600cc (Category A) in the same period, the correlation is almost zero. This lack of relationship between engine size and OMV implies that shifting to OMV criteria may have unpredictable or unintended consequences. Better be careful on this idea.

My data set does not include the recent "luxury" models qualifying for Category A. My feeling though is these models constitute a small percentage of cars in Category A and the near-zero correlation between engine size and OMV should more or less stay.

Prof Chin: Any changes to car values will still have to contend with the ability-to-pay element and the harsh allocative realities of the market. What we need is a change in attitude that efficient, reliable, comprehensive public transport is climate-change friendly. Incentivisation or creative nudges might just do the trick.

Land transport already occupies 12 per cent of land. Traffic speeds have fallen in various parts of the road network. The wider or big picture demands we look beyond the desire (versus the need) to own and use cars, (to) the environment and lost productivity due to traffic congestion.

Perhaps we should (have) a really comprehensive integrated transport system and land use. Underground roads are also a possibility given the scarcity of land. The cost may not be so prohibitively high, given the cost of land above ground in future.

  • Why not restrict COE bids to buyers, as motor traders bid aggressively to meet sales targets and pass the cost to consumers?

Prof Chu: The alternative view is distributors are more informed since they collect orders and can therefore bid better than un-informed individuals.

Prof Chin: This will end up in higher transactions costs for the bidders (buyers) and motor traders can still mark up their prices.

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