By Christopher Tan, The Straits Times, 2 Aug 2012
IS THE Government mixing up two separate objectives in its latest move to remove taxi bids from Category A of certificates of entitlement (COEs) - long the staple of buyers of bread-and-butter cars?
Or is it trying to kill two birds with one stone?
In an announcement with few details last week, Transport Minister Lui Tuck Yew said that taxi companies will no longer have to compete with mainstream car buyers for COEs. Instead, their certificates will be drawn from the Open Category, currently the domain of big-car buyers.
As a concession, cab operators will not have to pay Open Category prices, but a three-month average of Category A prices. The latter are usually 10 per cent to 50 per cent lower than the former.
Exactly how many COEs will be drawn from the Open Category for taxis will hinge on how available the cabs are to commuters.
Despite having one of the highest number of cabs per 1,000 residents among developed cities, Singapore, it seems, remains one of the hardest places for someone to get a cab.
First, it aims to remove an upward pressure on Category A premiums by taking taxis out of this category. This will have a profound effect on the affordability of cars, as well as on Singapore's worrying inflation rate.
Category A accounts for more than half of all COEs that car buyers bid for.
Second, it is putting the onus of ensuring taxi availability on the cab companies. If they want more COEs to expand their fleets, they will have to meet this service standard somehow.
Seems like a neat cure-all solution. But is it?
Let's examine the issues at hand. Singapore has 5.2 cabs per 1,000 residents, compared with 3.3 in London, 2.6 in Hong Kong and 1.5 in New York.
Since the Government liberalised the taxi industry in 2003, the cab population has ballooned by nearly 40 per cent to more than 27,000 last year. Yet, commuters constantly gripe that hailing a cab is a chore.
Taxi ridership grew merely 16 per cent from 2003 to last year.
It is clear that cab companies currently have no direct incentive to improve taxi availability. Their primary objective is to collect rental from hirers (cabbies), with as big a fleet as they can muster.
So, pegging an operator's expansion to taxi availability is ingenious, no?
But this is what could well happen: Taxi companies will come out to support the Government's initiative, but their efforts to raise taxi availability will fizzle out.
Taxi availability (or the lack of it) is largely a function of the current business model and fare structure. Driving a cab is not a career choice for most people. For many drivers, it is often the last resort.
Another cohort is made up of drivers who are not "career cabbies". It is estimated that up to one-third of cabbies today are folks like retirees or small business owners, who will ply the streets just long enough to cover their daily rental, and use their cabs as their personal transport for the rest of the day.
Cabbies will naturally drive when the yield is highest. Thus they will drive when and where surcharges apply. They will also wait for call bookings.
As long as this status quo remains, it will be hard for taxi availability to improve.
In fact, taxi companies will, in all likelihood, rush to expand their fleets before the new rules kick in in 2014.
The authorities could of course mandate a minimum mileage a cabby has to clock a day. But this will have an environmental cost, with no guarantee that the extra mileage will be "occupied mileage". In other words, cabbies may be forced to cruise empty.
The second issue at hand is COE premium spikes. While the current Category A price spiral is fuelled by taxi bids, the underlying cause is a record supply shortage.
If the COE supply had not plunged to less than a third of what it was just four years ago, the influence of taxi bids would not have been so strong.
What accounts for the supply shortage has been well documented. The COE system suffers from a feast-and-famine supply phenomenon that the authorities have long ignored. Until now.
But instead of a bold overhaul of the 22-year-old system to improve equity, we are going to see yet another tweak. The latest one, to remove taxi bids from Category A, will remove further upward pressure on premiums, but it is unlikely to send premiums to saner levels.
This is because Category A COE supply for the current six-month period is nearly 40 per cent lower than that of the last six months.
So, even without bids from taxi companies - which account for around 25 per cent to 30 per cent of total bids - COEs in this segment will probably remain firm.
What car buyers and sellers have been clamouring for is a more stable and predictable supply pattern: one that does not see premiums at $5,000 in one year and $90,000 in another.
Mr Lui has said that he is likely to "save" some certificates during the next bonanza period from 2014 to 2018 for future years.
But how many? And how will the "saved" COEs be dispersed later?
Even before clarity dawns upon those issues, we now have yet another uncertainty: how the supply of Open Category COEs will be affected by taxi bids post-2014.
It is admirable that the Government admits things are not working as well as they should, and is looking to fix the system.
But linking taxi availability to COE availability may only complicate matters further.
As with all problems, it is better to go right to the root cause for a permanent fix. In both cases, the root causes are not unknown.
But, to reiterate, taxi driving has to be made more attractive as a career choice; cabbies need to be incentivised to pick up more fares as and when they appear, rather than face disincentives if they don't meet a quota.
Next, the vehicle quota system should contribute to a more sustainable vehicle population growth pattern, with as little social, economic and political cost as possible.
If it is unable to do that, a complete rethink is probably the thing to do.
People drive more when COE prices rise
By Ivan Png, Published The Straits Times, 2 Aug 2012
The COE system has been in place for more than 20 years and yet the roads are still so crowded. Has it really been effective in controlling congestion?
LIKE many other cities, Singapore faces the challenge of managing traffic congestion. Since 1975, the Government has addressed the problem in two ways - pricing road usage and limiting the vehicle population. From 1990, the Government has explicitly limited the number of new car registrations to a monthly quota for Certificates of Entitlement (COEs).
At the last auction, the price of COEs (strictly, the COE quota premium) for large cars reached $90,501. COE prices have not been so high since late 1994. The result has been hand-wringing, howls of complaint and a torrent of letters to The Straits Times.
Quickly moving to assuage public concerns, Minister of Transport Lui Tuck Yew is talking of tweaking the system to moderate the inflation in COE prices. The latest change is to remove taxis from the bidding process for
COEs in the small car category. Instead of bidding, taxis will pay the prevailing quota premium, and the quota will come from the Open category which can be used for any size of cars.
Yet, there seems to be little discussion of the more fundamental issue. Just how effective is the COE system in managing traffic congestion?
The essential problem of traffic congestion is what economists would call a "negative externality". With a fixed quantity of road space, each additional vehicle adds to the demand for the fixed road space, and increases congestion for every other vehicle. But the driver of the additional vehicle considers only his own benefits and costs, and ignores the costs (the externality) on other road users.
Taxing the purchase of new vehicles (through the Additional Registration Fee or ARF) and directly limiting new vehicles (through the COE) are very crude ways of regulating the congestion externality. Just consider people who live and work in suburban areas. They may cause little traffic congestion, yet they must pay the same ARF and COE.
Moreover, in ongoing research, my NUS colleagues, Professor Ho Teck Hua and Dr Sadat Reza, and I have found that the ARF and COE systems have caused new car buyers to drive more. So, policies to reduce congestion were counterproductive to some extent.
Consider, for example, a Toyota Camry. Last August, its Open Market Value (OMV) was $22,504. The ARF (100 per cent of OMV) was $22,504, while the COE was $70,890. Together with various other taxes, the cost of the car before dealer's markup was $122,429.
On registering a new Camry, the owner would incur two losses. The maximum Preferential Additional Registration Fee (PARF) rebate is 75 per cent of the ARF, so the owner would immediately lose 25 per cent or $5,626 on the ARF. The maximum COE rebate is 80 per cent of the COE quota premium, so the owner would immediately lose 20 per cent or $14,178 on the COE. In economic terms, the total sunk cost (related to ARF and COE) would be $19,804.
With the COE quota premium rising to $90,501, the COE-related sunk cost would be $18,100. So, assuming the same OMV and ARF, the total sunk cost would be $23,726, which is an increase of about 20 per cent over the level last August.
In our research, we also analysed service records of one make of cars between 2002 and 2009, and found that car owners who had incurred larger sunk costs increased their driving. The reason seems to be psychological. In their minds, car buyers felt that they must rationalise the larger sunk cost, and so they drove their cars more.
Using the statistical technique of multiple regression (which controlled for other relevant factors including petrol costs and congestion), we estimated that the elasticity of monthly mileage with respect to the sunk costs of buying a new car was 0.345. This elasticity meant that a 1 per cent increase in the sunk cost of buying a new car led the owner to drive 0.345 per cent more kilometres each month.
If we apply this elasticity to the 20 per cent increase in sunk cost due to the recent inflation in COE prices, it implies that car owners would increase driving by 6.9 per cent. This would be bad for traffic, but not quite as bad as having another 6.9 per cent or 41,000 cars on the road - because it would be additional driving, not additional cars.
So, get ready for even more congestion on the roads - during off-peak hours and on weekends. Or higher ERP rates, as the Land Transport Authority adjusts electronic road pricing to manage the congestion. Or both.
The writer is Lim Kim San Professor at the NUS Business School, and professor of economics and information systems at the National University of Singapore, as well as visiting professor, Tuck School of Business, Dartmouth College.
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