COE system's rocky 23-year ride

This story was first published in The Straits Times on Aug 27, 2013

IN ITS 23-year history, Singapore's certificate of entitlement (COE) system has been accused of many things: being ineffectual, revenue-making, inflation-driving and prone to wild, cyclical price fluctuations.

The noble aim of the scheme was to curb vehicle population growth via auctioned ownership permits.

But it has spawned a not-so-noble phenomenon in recent years - that it is inequitable and favours the rich.

It began four years ago, when Mercedes-Benz introduced a 1.6-litre C-class sedan.

Today, nearly half of cars registered using COE Category A (up to 1,600cc) are premium or luxury brands, with Mercedes and BMW garnering the lion's share.

This fuelled criticisms - which were aired in Parliament - that mass market consumers have increasingly been nudged out.

There is merit to the observation, since the presence of such brands in this category had been negligible before 2009.

For sure, the unhappiness - precipitated from a conversation that has evolved from "I want a car" 15 to 20 years ago to "I need a car" today - is difficult to quell.

For starters, can a price-based system ever be equitable?

The simple answer is "yes". The very fact that COEs are split into different categories shows policymakers had wanted a measure of equity in the system.

And one could argue that there was more equity before four car categories were merged to become two in 1999.

The Government is looking to address this, by re-examining the way COEs are categorised and allocated. It took the first step early this year when it changed the way supply of COEs in the Open category - which technically can be used for any vehicle type but ends up being used mainly for bigger cars - is formulated.

Open COE supply is now made up of 15 per cent of COEs from each of the other four categories - down from 25 per cent previously. The percentage is expected to go down farther.

Then in June, the Land Transport Authority (LTA) launched a survey which sought what people thought, among other things, about the COE categorisation method and whether a surcharge should be applied for multiple car ownership.

Not surprisingly, moving from the current engine capacity to a car value-based categorisation got the most votes (nearly half of 3,900 respondents).

Likewise, nearly 80 per cent thought a surcharge should apply to individuals or households with more than one car.

It would be foolish of course, for the Government to change policies based solely on populist demands.

Likewise, to dismiss the survey results entirely would be to ignore a possible collective wisdom that academics may find hard to substantiate with statistical tests or cost-benefit analyses.

Certainly, there are pros and cons to tweaking the quota system this way or that. A value-based categorisation is fairest, but there are concerns that a car's open-market value (OMV) may fluctuate - placing a model in one category one month and in another the next.

There are also fears that such a system might "encourage" importers to underdeclare values - a scourge the authorities have yet to fully eradicate.

Likewise, an engine power- based categorisation may not restore equity in the system. This is because it will be easy to detune an engine, and re- tune it upwards after registration.

Also, diesel models have relatively low horsepower (but high torque), and all the premium and luxury makes are big on diesel.

The solution might be to form a matrix that takes into account a car's engine size, power output and OMV. But it will surely be harder to administer than today's.

A surcharge on subsequent cars poses challenges, too.

As with most price-based tools, it merely raises the barrier to entry - not bar entry.

And since other parts of the vehicle taxation system are already progressive (the tiered Additional Registration Fee, for instance), will an additional surcharge be seen as anti-wealth?

An absolute - and perhaps non-monetary - restriction on the number of cars a person or household can own will be a hard policy to sell. And probably harder to enforce. But that would not be good reason to reject it - if it is indeed the right thing to do.

Of course, arriving at such a conclusion is never easy when there are so many stakeholders with opposing interests.

In that respect, a car ownership control - which the COE system essentially is - can never be quite perfect. It can nevertheless be more equitable than it is today.

And perhaps for too long now, Singapore has relied too heavily on principles of economic efficiency in its approach to tackling problems.

Alas, the most efficient methods are not always the fairest.

This story was first published in The Straits Times on Aug 27, 2013

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