Certificate of Entitlement

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[pic] FIN3119 RISK AND INSURANCE CERTIFICATE OF ENTITLEMENT (COE) Kim Bit Na |NT080276X | |Ko Sung Kwon |NT080023L | |Lee Han-wei |U054363X | |Lee Jung Min |NT080657J | |Li Rong Yan |U054362L | |Lim Yi Ning |U064324X | |Lim Su Ming Jesselyn |U064833X | |Loo Yan Ling Joyce |U064698L | Content Page 1. Introduction2 2. Certificate of Entitlement (COE)2 2. 1 COE’s Origins2 2. 2 COE’s Open Bidding System3 2. 3 COE’s Determinants3 2. 4 COE Prices4 3. Advantages of COE4 3. 1 Greener Environment5 3. 2 Reduced Traffic Accidents5 3. 3 Revenue5 3. 4 COE Open Bidding System6 3. 4. 1 Greater Transparency6 3. 4. 2 Eliminate Fluctuations in COE Price6 3. 4. 3 Stability in Vehicle Price and Shorter Waiting Period6 3. 4. 4 Secure System7 4. Disadvantages of COE7 4. 1 High COE Prices 7 4. 2 Problems with Biding System8 5. Recommendations8 5. 1 Usage of Electronic Road Pricing (ERP)8 5. 2More incentives for people to take public transport8 5. 3“Leave Your Car at Home” Day9 . 4Encourage Car-pooling9 5. 5Lower Prices by Increasing the Vehicle Quota9 5. 6 Give Subsidies to Lower Income Groups10 5. 7 “Price Discrimination”10 6. Conclusion11 Appendix13 1. Introduction Demand for cars ownerships will continue to grow among Singaporean because of convenience, flexibility, and social status. Car ownerships have been viewed as a necessity of middle and upper-middle income lifestyle. The proportion of people with aspirations to own cars is likely to grow over time, as education level rises and people start to benchmark their lifestyle options against global standards. Singapore is unique and different from other cities. Car ownership rates in Singapore will always be limited by the fundamental fact that Singaporean does not have a hinterland where they can use their cars outside the city. Hence, there is a need to adopt different approaches in managing the demand for cars and road usage. This brought about the implementation of various traffic management strategies; of which, the Certificate of Entitlement (COE), is one of the key pillars of Singapore’s traffic management strategy. This report seeks to understand and evaluate the COE system; and to recommend solutions to improve any ineffectiveness presented in the system. 2. Certificate of Entitlement (COE) 1. COE’s Origins Singapore is a small country with limited space. In order to prevent huge traffic jams, the Government implemented the Vehicle Quota System (VQS). VQS is a system controlled by the Certificate of Entitlement (COE), which aims to control the growth of cars population at 3% annually in order to reduce road congestion. To register a vehicle, would-be owners participate in an open bidding exercise for a COE- the right to own a vehicle. COEs are valid for eight years from the date of registration for taxis, and ten years for other vehicles. There are five categories of COE; the non-transferable categories consist of: • Category A : Cars (1,600cc and below) & taxis • Category B : Cars (1,601cc and above) • Category D : Motorcycles While the transferable categories consist of: • Category C : Goods Vehicles and Buses Category E : Open Category (for any vehicle types) 2. COE’s Open Bidding System The Open Bidding System for Certificates of Entitlement (COE) allows would-be car owners to submit bids for a COE, monitor the Current COE Price and revise the reserve price for their bid from the comfort of their home, office or even while on the go. The COE Open Bidding System is designed to be a simple and easy to use system. It provides would-be owners with real-time information during the bidding exercise so that they can check the current COE price and use it as a reference when submitting or revising their bid. 3. COE’s Determinants Two bidding exercises are being carried out each month where the Government will announce the quota for each of the five individual categories. The quota is based on the road conditions and amount of cars permanently taken off the road in that month; by scrapping, exporting or otherwise. First-time COEs are purchased for a 10-year period, after which car owners may decide to bid for a new COE to keep their vehicles on the road. The renewal can be either 10 years, or 5 years. The difference between the two is that a 10-year COE may be renewed at the end of that term, whereas a 5-year COE may not be renewed. In other words, the vehicle must be permanently taken off the road at the end of those 5 years. 4. COE Prices In mid 2006, COE prices were approximately $900 for motorcycles, $10,000 for small/medium cars and taxis, $11,000 for large cars, $6,000 for goods vehicles and buses and $11,000 for the open category. In the mid- 1990s, the COE prices peaked at around $3,600 for motorcycles, $43,000 for small/medium cars, $66,500 for large cars, $36,000 for goods vehicles and $105,000 for the open category. [i] The vehicle quota premium to register a new car varies from bid to bid. It is dependable on the demand and supply which is influenced by external events such as higher ERP charges, rising inflation, poor economic outlook and increased oil prices. If the amount of people who want to buy a new vehicle is higher than the amount of COEs available in that month, there is a chance that prices of the COE may soar; vise visa. Nevertheless, bidders are only required to pay the lowest successful bid price for their COE; not their individual bid price. 3. Advantages of COE: COE is a necessary evil to the car buying process in Singapore, for it is designed to control the number of vehicles allowed on the roads. It is an integrated part of the Vehicle Quota System (VQS) that has been introduced to control the rapid growth of cars population in Singapore. It helps to control the growth of vehicle population at a rate that is sustainable by Singapore's road infrastructure within its land constraint. It has helped eased road congestion by reducing vehicle population growth by nearly half; from 6 percent to 3 percent. ii] Transport Minister, Raymond Lim, has noted that if the quota system had not been introduced, the vehicle population would have grown to 1. 4 million by 2006, instead of the 800,000 recorded that year. [iii] Apart from being the key pillar in Singapore’s traffic management strategies,[iv] the other advantages of COE consist of: 1. Greener Environment From Appendix 1: Table 1. 1, the negative correlation between reduction in density of CO and the constant density of Ozone since the year 2002 shows no relationship between the air pollution and the vehicle population. This relationship can be relate to the development in technology since vehicle companies are pressured by the government and environmental groups to produce environmental friendly vehicles. However, if the vehicle population goes beyond the level of technological development, air pollution problem will still exist. Therefore, reduced congestion has indirectly benefited the environment. Singapore has been able to remain its good air quality with the Pollutant Standards Index (PSI) in the “good” range for 95% of the days and in the ‘moderate’ range for 5% of the days in 2007. [v] Singapore’s good ambient air quality is one of its competitive advantages in attracting visitors, investments and talents. 2. Reduced Traffic Accidents Appendix 2: Figure 2. 1 depicts the correlation of vehicle population and accident rate for the past 10 years. There have not been any great differences in each year. However, focusing on the trend, it can be observed that, Singapore government has only been able to reduce the accident rate from 3. 09 per 10,000 vehicles to 2. 32 till year 2005; the accident rate has raise since then. A positive correlation has been observed between the vehicle population and the accident rates in. The population of vehicles is one of the contributing factors for traffic accidents. With more cars on the road, more traffic accidents are likely to happen. This enforces the necessity of COE to control the growth of vehicles. 3. Revenue COE has also been a source of income for the government. As can be seen from Appendix 3, $1,805,138,000 has been collected from the bidding for COE in 2007; which is reverted to the Singapore government’s national treasury. This has contributed to a large portion to Singapore governments total tax revenue. The government is able to maintain a balanced trade budget without the need to employ debt financing; enabling Singapore’s economy to enjoy steady growth. 4. COE Open Bidding System 1. Greater Transparency The COE Open Bidding System provides greater degree of transparency to the bidding exercise by offering bidders better access to information on the prevailing bidding situation during the bidding process. A bidder may at anytime during the bidding exercise check on the current COE price in relation to his reserve price. He may then opt out of the bidding exercise once the current COE price exceeds his reserve price. He may also revise his reserve price upwards and continue with the bidding. The system also provides privacy to bidders. The system will not disclose and only allow the bidder to review his/her own reserve price. Furthermore, it will also automatically adjust the bidder’s bid price until the reserve price is reached; thereby bidders are able to delegate the monitoring of reserve price to the system. 2. Eliminate Fluctuations in COE Price The reserve price may only be revised upwards but not downwards. This prevents bidders from submitting initial bids that are higher than what they would be prepared to pay for a COE. Coupled with the nontransferable egulation on new COEs to prevent speculation that has been resulted from the trading in open market for transferable COEs; the probability of wild swings in the current COE prices during the bidding exercise has been eliminated. 3. Stability in Vehicle Price and Shorter Waiting Period The previous 50 percent of the bid price up front has been abolished. Instead, bidders are only required to pay a fixed bid deposit which remains unchanged at $200 for Category D (motorcycles) and $10,000 for all other vehicle categories no matter what the reserve price is. [vi] This is useful as it leads to fewer fluctuations in the prices of COEs from bid exercise to bid exercise, and thus, more certainty and stability in the prices of vehicles. Moreover, the system opens two tender exercises per month, interested parties no longer have to wait as long as before to participate in the bidding exercise. 3. 4. 4 Secure System Last but most importantly, the COE Open Bidding System is secure. Stratech Systems, the local technology firm that designed and developed the system, has reported that none of the hacking attempts ever got past the first line of defense. [vii] 3. Disadvantages of COE: 4. 1. High COE Prices Due to the presence of COE, the price of car in Singapore is higher than any other country. From the result of latest COE bidding, person who buys a new car need to pay additional S$12,500 to the price car. Latest Premium Quota (August 2008 1st Open Bidding) Category |Current Premium Quota | |A (1600cc and below, taxi) |S$12,501 | |B (1601cc and above) |S$12,889 | |C (Goods Vehicle and Bus) |S$12,589 | |D (Motorcycles) |S$1,413 | |E (Open) |S$14,101 | This system creates some problems related to the money itself. For the people with low-income buying a car can be harder with COE. Though the public transportation system is well organized in Singapore, having a car contributes a lot to the family’s welfare. So the high price of car can make low-income people to have a feeling of relative deprivation. 4. 2. Problem in Bidding System The Singapore government launched the open bidding system for COE in April 1st, 2002. In the system, bidders can see the rate live. And it provides rich people more chance to win the COE, since they can afford higher bidding price. So the system makes low income people to get COE harder. 4. Recommendations: 1. Usage of Electronic Road Pricing (ERP) One of the main reasons for COE to be designed is to control the number of vehicles allowed on the roads, so as to ease road congestion and reduce traffic accidents. Other than charging vehicle ownership to control congestion, the focus can be also shifted to charging for road usage. The Electronic Road Pricing (ERP) system is a good practice to smooth traffic on the road. 2. More Incentives for People to Take Public Transport COE has helped to improve the traffic situation on the road to a certain extend. However, due to the high cost of COE, a lot of lower income people who own vehicles or intend to buy a vehicle are unhappy with the COE system, whereas, people with high income are nearly indifference with COE as they are still able to afford the COE cost. Therefore, the effect of COE to smooth traffic is mainly weight on people from lower income group. To reduce traffic congestion, government can give more incentives for people to take public transport, such as giving transport rebates to households that do not own cars. Besides, more routes should be covered by public transport at day and night, so everywhere can be easily reached at anytime without hassle. Moreover, the frequency of the transport should not be too long. In this way, people would be more willing to take the public transport instead of owning cars themselves. 3. “Leave Your Car at Home” Day The government should also encourage car owners to take public transport. To do so, campaigns might be organized. For instance, the government could set some days of the week/month to be the “Leave your car at home” Day. It can also simulate what Beijing government is doing to smooth traffic on the road during Olympic Game period. Beijing government instituted a driving ban that based on license plate numbers, only certain cars were allowed to be on the road on certain weekdays. Praiseworthily, the effect was remarkable. This is something Singapore government can learn from. 4. Encourage Car-pooling Sometimes one household can own a few vehicles. Government could encourage car-pooling within one family or among friends. In this way people can share cars instead of everyone owning a car. This would reduce the number of vehicles on the roads as well. 5. Lower Prices by Increasing the Vehicle Quota Due to the vehicle quota set by the government, the bidding price can be very high. A lot of people from lower income group could not bid the COE at their affordable price, and they lose out to the higher income group at the end. As a result, the majority of vehicle owners are people from high income group. This may even cause people from low income group to be unhappy with high income group. COE holds back lower income group of people who may really need a car from owning a car. Some of these people may need to take on high loans and some of young couples may even postpone their marriage or having a baby to own a car. All these social problems are unhealthy to a society. To have a balance between different income groups of people to own cars, government could increase the vehicle quota to a certain limit. So on one hand the competition in bidding for COE would not be too fierce, and this in turn would lower the bidding price. On the other hand, government still has control over the number of vehicles on the road. 6. Give Subsidies to Lower Income Groups To ease the tension between different groups of people, subsidies from government could be provided to lower income group. For instance, government could reduce car ownership taxes and charges or reduce tax burden and upfront ownership costs for lower income group. All this measures could be serving as a kind of relief to lower income group who still need to own a car. 7. “Price Discrimination” The implementation of COE is much effective to reduce the number of cars on the road own by lower income group. In order to have the same effect on the higher income group, perhaps, the government could separate these two groups of people by putting them in the different bidding system according to their income level. So that the percentage of vehicles own by different income groups could be controlled by setting vehicle quota for different bidding groups. 6 Conclusion As we all know, demand for car ownerships is increasing, while the land in Singapore is limited. Therefore, it is obvious that traffic congestion is becoming more severe problem which the most of Singaporeans have to face. For this matter, it is one of the most important areas where the government needs to implement effective scheme. The COE system that the government has come up with has implemented to control the growth of cars population. Taken as a whole, the system is an inevitable and essential scheme in the country. Based on its rationale, this is such an ideal system in Singapore where there is limited space for cars to be used. In fact, it has actually helped to reduce road congestion by reducing vehicle population growth. There are also other advantages; a reduction in traffic helps Singapore preserve greener environment which is supported by Pollutant Standards Index (PSI), and it may also mean that there is less probability of traffic accidents. In view of the government, the system is considerably large income source which may contribute to stable growth of economy in Singapore. However, this is not claimed to be a cure-all traffic management strategy since there are number of pitfalls in the system as we discussed above. The biggest disadvantage of the system is the price of COE. There is considerable number of Singaporean thinks that the cost of owning a car is too expensive due to COE. For those people who really need a car to commute between home and work, cannot afford a car since it is too costly. It is huge burden especially for young Singaporeans who have not established firm financial foundation for their living yet as it adds to their cost of living significantly. As a result, average timing of marriage and first birth for the young generation may be delayed. Moreover, the Open Bidding System for COE which is to add some convenience to the bidding process brings about more discrimination against low income group as there is now more opportunities for the rich bidders by watching the rate live. Another point of view in the system, in terms of downside, is that the ownership of the car does not directly relate to the usage of the car. Thus, the system may not actually control the congestion on roads. In order to control actual traffic on the road directly, one of our recommendation is to increase usage of ERP which involves creating more gantries on the road with higher charges. The system may prevent people from using or owning vehicles but, on the other hand, it may also encourage people to use public transportation. The government should try to improve public transportation, for example, there must be an expansion in MRT net work, more buses must be available during at night, and it may also provide some incentives such as transport rebates to households who do not own cars. It could be more effective scheme with campaigns such as “Leave your car at home” day or car-pooling. Furthermore, in order to balance between different income groups or to reduce discrimination against lower income group, the government could increase the vehicle quota which would cause a lower bidding price. It also can give subsidies to lower income group and set different bidding price to different income groups. Therefore, considering our recommendations, the government should continue to try to conceive more effective and fairer approach to enforce the primary purpose of the scheme. Appendix 1: Table 1. 1: Air Pollution[viii] Appendix 2: Figure 2. 1: Correlation between Vehicle Population and Traffic Accident[ix] Appendix 3: More tax revenue for the government Table3. 1[x] [pic] Table 3. 2:[xi] [pic] From this data, we can approximately calculate the total revenue from this bidding for the year 2007. This table indicates the average price of COE for each category in 2007. To make the calculation simple, we used the price of first bidding only: |? |A |B |C |D |E | |Average($) |14814. 58 |16086. 833 |6666. 4167 |1217. 25 |16481. 75 | This is the registration record for each category in 2007. By multiplying them, we get $1,805,138,000 from the bidding for COE which is reverted to the Singapore government’s national treasury; contributing a large portion to Singapore governments total tax revenue. |? A |B |C |D |E |Total | |2007 |64075 |46331 |11440 |10369 |1316 |133531 | ----------------------- [i] EDM. (2008). Certificate of Entitlement. Retrieved October 8, 2008, from Singapo???????????????????????????????????????????????????? •???????????????????????????????????????????????????????? ›?????????????????????????????????????? ?? ›????????????????????????? re The Encyclopedia: http://www. singapedia. com. sg/entries/c/certificate_of_entitlement. html [ii] Lian, G. C. (2007, December 15). COE: Once unloved, now accepted . Retrieved September 23, 2008, from Asiaone Motoring: http://www. asiaone. com/Motoring/Motorworld/Others/Story/A1Story20080110-44439. html [iii] Ibid [iv] Rahman, M. O. -A. (2006, April 7). Singapore Infopedia. Retrieved September 24, 2008, from National Library Singapore: http://infopedia. nl. sg/articles/SIP_1005_2006-04-07. html [v] National Enviromental Agency. (2007, December). PSI Reading. Retrieved September 23, 2008, from National Environmental Agency: http://app. nea. gov. sg/data/psi/doc%5CRegional_PSI_for_2007. pdf [vi] The Automobile Association of Singapore. (2002, April). Motoring News and Car Reviews. Retrieved September 23, 2008, from The Automobile Association of Singapore: http://www. as. com. sg/features/archive/f04021. htm [vii] Ibid [viii] http://www. singstat. gov. sg/pubn/reference/mdsaug08. pdf [ix] Statistics, S. D. (2007). Statistic. Retrieved September 29, 2008, from Singapore Statistic: http://www. spf. gov. sg/stats/stats_img/traf2--7_chart02. pdf [x] Singapore, LTA. (2008). Bid Results 2005-2008. Retrieved September 29, 2008, from LTA Singapore: http://www. lta. gov. sg/corp_info/doc/COE_Result_2005_2008. pdf [xi] Singapore, LTA. (2008). New Registration of Motor Vehicles by Quota. Retrieved September 29, 2008, from LTA Singapore: http://www. lta. gov. sg/corp_info/doc/MVP02-1%20(New%20Reg%20by%20COE). pdf
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