Wednesday 11 September 2013

COE system tweaked to factor in engine power from February 2014; LTA decides against implementing the Pay-As-You-Bid (PAYB) auction system

Change moves luxury cars out of Category A into Category B to make quota system more equitable
By Christopher Tan, The Straits Times, 10 Sep 2013

FROM next February, Mercedes and BMW will exit entirely from a certificate of entitlement (COE) category originally intended for mass-market car buyers and sellers.

In a move to re-introduce a measure of equity into the 23-year-old quota system, Transport Minister Lui Tuck Yew said yesterday that cars belonging to Category A must not have more than 130bhp of engine power.

This new criterion will be applied on top of the existing one that caps engine displacement at 1,600cc. Cars with more than 130bhp or an engine exceeding 1,600cc will fall into Category B.

The Government will not introduce a multiple-car ownership surcharge, citing difficulty in implementing it effectively, and the fact that it penalises those from multi-generation households.

Yesterday's announcement arose from a four-month review of the system. The change in criteria will affect a selection of mostly turbocharged models that are almost exclusively European. These makes include Volvo, Volkswagen and Mini.

But they will also affect a few budget cars, such as Proton's Preve and Exora, and Suzuki Swift Sport - 1.6-litre cars now in Category A with more than 130bhp.

With the change, more than 90 per cent of cars remaining in Category A will have an open market value of less than $20,000.

Mr Lui said the change should better separate mass-market cars from luxury cars, but added that the Land Transport Authority (LTA) should re-examine the format regularly to ensure its relevance. "What we do know is that motor traders will also respond," the minister said. "They will bring in different models, they will look at the criteria that we have introduced and see how they can work around the system."

Asked if the change will lower Category A premiums, which ended at $77,304 - higher than Category B - at the latest tender exercise last week, Mr Lui said "it is very hard to predict exactly how premiums will move".

"My suggestion is that those who are really in no hurry to buy a car... you may wish to wait for a while to see what the response and the reaction is going to be."

Motor traders expect COE prices for Category A to stay firm or even rise, as the market clears the stock of affected models before the change takes effect in February.

But over the longer term, Motor Traders Association president Glenn Tan said the change "will lead to stabilisation".

"Cat A prices will fall and Cat B prices will rise," he said.

Mr Cheah Kim Teck, chief executive of Cycle & Carriage's automotive business, is not sure the social equity objective will be met. His firm sells Mercedes, among other brands.

"Mercedes and BMW are out... but the (Mercedes) A-class and (BMW) 1-series are mass-market cars in Europe," he said.

"Audi will have a field day," he added, pointing to several Audi models that remain in Category A.

Observers were disappointed that none of the other proposed changes to the system - such as having bidders pay the amount they bid and having a multiple-car ownership surcharge - was adopted.

Citing academics proficient in auction theories, the LTA said a pay-as-you-bid system will not lead to lower premiums. But National University of Singapore transport researcher Lee Der Horng said traditional auction theories do not apply to COE.

"A COE is not a desired good, but a means to a desired good," he said, adding that he believes prices will fall with pay-as-you-bid.

Motorist Lee Kok Meng said: "Given the limited number of COEs, if you want to spread car ownership around, you should have a surcharge for subsequent cars." The 56-year-old retiree acknowledged that it would be difficult to enforce such a surcharge, "but that should not be the reason for not adopting such a measure".

A surcharge on multiple-car owners won't work: Experts
By Royston Sim, The Straits Times, 11 Sep 2013

LEVYING a surcharge on owners of several vehicles would not only be hard to implement but it also probably would not make it easier for people who need a car to get one, said observers yesterday.

National University of Singapore (NUS) transport researcher Lee Der Horng noted that only about 7 per cent of motorists have more than one car.

He added that a surcharge was unlikely to affect the rich - "at the end, it would really hit the middle-income, those who have two cars for family purposes".

But the measure was ruled out when it announced changes to the certificate of entitlement (COE) system on Monday. It said it was concerned over how effective such a levy would be and how it might impact larger households.

The LTA also noted that the tiered Additional Registration Fee and higher road taxes for premium car buyers already addressed social equity in car ownership.

Law professor and Nominated MP Eugene Tan said it was unclear that a surcharge would "contribute significantly to more reasonable COE prices".

A surcharge with loopholes could raise public anger when people see others getting around it, he said. Still, those who feel owners of multiple cars should pay more will be disappointed. "There will still be a sense of unfairness."

Dr Lee felt that the social equity issue could be addressed by allocating more COEs to Category A when the new criteria for mass- market cars kick in next year.

Transport economist Michael Li from the Nanyang Business School said academics had struggled to find good reasons to impose a surcharge during focus- group discussions on the issue.

He said the second and subsequent cars are typically used by family members during off-peak periods and so do not contribute much to congestion.

"A levy would create additional social cost... there's administrative and enforcement costs. And people can find ways to bypass these restrictions," added Dr Li.

NUS sociologist Tan Ern Ser said a multiple-ownership surcharge "sounds good, but only on paper". It can be easily circumvented, he noted.

One way to address the issue of car ownership is to enhance public transport, making it convenient and inexpensive to travel without a car.

"We should think of better ways to reduce heavy vehicle traffic on roads and human traffic on buses, and make using public transport a breeze," he added.

Current COE system ‘does not lead to aggressive bidding’
By Sumita D/O Sreedharan, TODAY, 10 Sep 2013

In the last three months, more than nine in 10 successful bids for car Certificates of Entitlement (COEs) fell within 10 per cent of the closing premiums — a statistic that refuted a belief held by some that the current open bidding system has fuelled aggressive bidding, said Transport Minister Lui Tuck Yew yesterday.

The Land Transport Authority (LTA) had received suggestions during its public consultation exercise on implementing a pay-as-you-bid system, with some respondents expressing the belief that such a system may result in more conservative bidding and, therefore, lower COE prices.

Mr Lui, who noted auction theory experts had warned that such a system may not necessarily lead to lower prices, pointed out that prices are ultimately driven by demand from car buyers. Under the current system, bids are revised upward incrementally and bidders can monitor the bidding and revise their bids upwards if they wish, he said.

“There are no incentives for them to overbid, beyond what they are willing to pay,” he added. Thus, the LTA will not implement a pay-as-you-bid system.

Another suggestion that gained traction during the public consultation, but was not taken up eventually, was the call to ban motor dealers from COE bidding. Some felt motor dealers were driving up COE premiums.

Mr Lui, however, said dealers have little incentive to overbid for COEs as it would erode their profit margins. He also said dealers had to get the buyers to agree first to the recommended COE price in the proposed package, before they try to secure the COE and thus could bid for their own COEs if they thought the price was too high.

Furthermore, Mr Lui noted that respondents surveyed by the LTA in February preferred having dealers bid for the COE on their behalf, including arranging for the necessary financing, administrative and related services.

The Government would re-look these suggestions from time to time, as part of its regular COE policy reviews, the Transport Minister said.

Imposing a surcharge on multiple car ownership was a popular suggestion during the online surveys, but those who supported such a call eventually found no agreement on how it should be designed during subsequent in-depth discussions.

There are also loopholes which would allow individuals to circumvent the policy such as registering the second car in the name of a relative, or under a different household, and such a loophole would make the policy “unenforceable”, Mr Lui said. Instead, the Government would rely on measures outside of the COE system, such as tiered vehicle taxes, to enhance social equity in car ownership, he added.

COE premiums: What will happen next?
Prices could spiral upwards first as sellers rush to clear affected cars
By Christopher Tan, The Straits Times, 10 Sep 2013

COME February, cars qualifying for Category A - long the staple of car buyers and where the bulk of car certificates of entitlement (COEs) resides - must not just have engines of less than 1,600cc in displacement.

The immediate impact of this re-categorisation exercise will be a COE premium spiral, as sellers rush to clear existing stocks of vehicles that will be affected.

And the change is likely to immediately drive up premiums not only in Category A, but also in the other categories. There may be a rush for Category B certificates in the next few months, as buyers become worried that Category B will become more crowded after February with a deluge of models moving over from Category A.

The premium for Open Category, which can technically be used for any vehicle type but in reality is used mainly for bigger cars, may also rise for the same reason.

As car COE premiums surge, there may in turn be some migration from the car categories to commercial vehicles, which are not governed by loan restrictions announced seven months ago.

The higher the Category A prices go, the harder it will be for buyers to stomach the loan curbs. Hence, the alternative of driving a van or truck will become more attractive (as seen in the early 2000s).

Any migration to commercial vehicle COEs, no matter how small, will be bad for business. Already, small enterprises are reeling from record premium after record premium in the commercial category.

When the dust eventually settles in the next quota year beginning in February, Category A COE prices should, however, return to saner levels. But it may not necessarily be solely because of the re-categorisation exercise.

Category A prices may well fall because the supply of COEs - which has been shrinking annually since 2007 - will start growing from next year. Early projections are for a supply expansion of 20-30 per cent for car COEs.

With that prospect looming, car buyers and sellers should rightfully temper their bids in the next nine tenders before February.

But history has shown that COE bidders do not have much propensity for restraint.

To complicate things further, this supply expansion may not be as significant as expected. The Government has said it may flatten the feast-and-famine COE supply pattern, and Transport Minister Lui Tuck Yew has hinted that he favours "saving" some certificates due in the 2015-2017 boom period for the "dry" period between 2019 and 2022.

So, until the exact method and measure are announced, there will be some uncertainty. And buyers tend to put their bets on any semblance of short-term certainty.

Motor traders will, no doubt, take full advantage of the dislike of uncertainty to sell as many cars as they can in the current year.

In the end, however, what matters to the Government is how successful this COE reclassification exercise will be. That, you would think, will be measured by how much "cheaper" Category A premiums become in relation to Category B prices. Ideally, Category A premiums should drop from the current levels. But with the Singapore buyer's traditional dislike of uncertainty, that gap may well widen as a result of an increase in Category B prices.

There are other side effects of the policy that are worth flagging.

The engine output criterion will trigger a change in the model line-up and cars with non-turbo engines could proliferate. Luxury and premium brands may introduce more diesel models that typically have low horsepower but high torque levels. Motorists could buy such low-powered models, and simply tune them up with a few keystrokes of a computer.

In another scenario, Singapore could end up with a population of less efficient cars. For instance, the COE change could tip buyers towards a 1.6-litre 122bhp Japanese sedan producing 164g/km of carbon dioxide, versus a German turbocharged equivalent with 138g/km of carbon dioxide.

But if this means the well-off do not compete with those of lesser means, the gain may be worth the pain.

Top supplier of car parts concerned over new COE criterion for Cat A
By Woo Sian Boon, TODAY, 11 Sep 2013

In a rare move, one of the world’s leading suppliers of automotive components, Robert Bosch (South East Asia), has voiced its concerns about the Land Transport Authority’s (LTA) move to layer on engine power capacity in the classification of small cars for the Certificate of Entitlement system.

Asking the LTA to “reconsider” the new criterion for Category A cars, the company outlined two “unfavourable outcomes” from the tweak, which was announced on Monday and will be implemented in February.

First, manufacturers and dealers will bring into the market cars with “outdated technologies”, which are less fuel-efficient and will emit more carbon dioxide.

“This is a regressive step towards meeting the Singapore Government’s target of lowering overall carbon emissions by 11 per cent (potentially 16 per cent) by 2020,” Bosch said in a statement.

Second, it argued, manufacturers may try to meet the new 97 kilowatts criterion for cars with engine capacities of 1,600cc by curbing engine power output to pass pre-registration inspection tests. This could be done by encoding a limiter within the engine control unit of the vehicle.

Said Bosch: “This limitation can be easily removed after the vehicle leaves the showroom and is not easily detected during mandatory vehicular checks.”

It added: “Introduction of engine power into the COE system favours old technologies and is detrimental to the quality of life for Singaporeans, as it does not achieve a reduction in emission levels.”

Speaking to TODAY, Mr Klaus Landhaeusser, Bosch’s Regional Head, External Affairs and Governmental Relations (South-east Asia), added that the new regulations may lead to more car owners choosing to illegally modify their cars by leveraging on technology to circumvent the limiter placed in the vehicles.

While there are already laws in place against such illegal modifications, Mr Landhaeusser said tracking the horsepower of a car requires a chassis dynamometer, which regular vehicle inspection companies do not have as engine power inspections are not required in regular vehicle checks.

He said: “This is a very expensive machine and … it is only available in workshops which do the tuning themselves.” Bringing in the chassis dynamo systems will add costs to inspection companies, he added.

When asked why Bosch is concerned about the criterion, Mr Landhaeusser said: “We are developing systems for all car manufacturers, whether it is new or old technologies. We also have a very strong lead when it comes to saving the environment.”

In response, the LTA reiterated that it will be implementing “pre-registration safeguards through its vehicle type approval process”. The authority said it will not approve car models which have maximum power output specification that is lower than the same models approved previously, or what has been declared in other markets.

“This will serve as a deterrent against anyone who tries to tune down the maximum power output of his car to qualify for Cat A,” it added.

TODAY understands that the LTA has also brought in chassis dynamometers for the inspection of vehicle engine power.

On car manufacturers bringing in models which are less environmentally-friendly, the LTA said carbon emissions are already accounted for under the Carbon Emissions-based Vehicle Scheme.

“Carbon emissions and fuel efficiency are not good proxies for the value of a car, and could end up penalising mass-market models,” said an LTA spokesperson. The authority also emphasised that it will “review the criteria every few years and consider if adjustments are necessary”.

Dealers TODAY spoke to felt that most owners will not choose to illegally modify their cars.

Singapore Vehicle Traders Association Honorary Secretary Raymond Tang said: “Most car buyers usually go for luxury or continental cars just for the brand name and the status that comes with it. They are usually not so concerned about engine power.”

Motor Traders Association President Glenn Tan also pointed to liability problems of illegally modifying cars. “If they do that, they void the entire warranty of the vehicle because they are forcing it to work outside the operating perimeters of the vehicle,” he said.

“Also, there is an insurance and product liability problem. If you tune it outside of what is promulgated, the insurance can choose not to cover your vehicle. If you kill somebody, there is criminal liability.

“Whoever tunes it illegally, be it the dealers or the consumers, they will have some hand in criminal liability and they have to bear this in mind as well,” Mr Tan added.

Luxury car dealers look for ways to clear stock
One agent planning discounts of up to $20,000 for 1.6-litre cars
By Jermyn Chow, The Straits Times, 11 Sep 2013

SOME luxury car dealers are gearing up to lure buyers to their showrooms, beginning this weekend, in a bid to clear stocks of vehicles that will be reclassified as premium models from next February.

The move follows changes in the certificate of entitlement (COE) system, announced on Monday, in which a car's engine power will be included as a new criterion. Cars with over 130bhp or an engine exceeding 1,600cc will fall into Category B.

Dealers planning to go on a sales drive include Volvo agent Wearnes Automotive, which is looking to sell models like the S60 and S80. These currently belong to Category A - which caps engine displacement at 1,600cc - but will be re-classified under Category B next year.

Mr Victor Kwan, managing director at Wearnes Automotive, said the dealership will start clearing its 1.6-litre engine cars with "aggressive pricing".

Mr Kwan said the S60, which is usually sold at about $159,999 including COE, is likely to be discounted by up to $20,000. Mr Kwan is aiming to sell up to 30 cars every weekend over the next three months, before prices of these cars go up after reclassification. "It is like the last chance for people to be able to buy Category A luxury cars," he said.

Volkswagen, which will have seven models reclassified under Category B, said nearly half of its prospective customers are likely to pay higher prices for the popular Golf models come February.

While it plans to ramp up sales, it will confirm its prices or whether to give discounts later.

Volkswagen spokesman Colin Yong said that his company is likely to revise its line-up of cars, possibly bringing in more diesel models that have low horsepower but high torque levels.

The new engine output criterion is seen as a response to growing concern that luxury cars are crowding out mass-market cars in the small-car category.

Although a clutch of luxury models will be moving over from Category A to B next February, the agent for mass-market car brand Honda said it is "too early to be rejoicing". For instance, the Category A premium was $77,304 during the latest tender exercise last week - higher than for Category B, it pointed out.

Honda agent Kah Motor's general manager Nicholas Wong said: "If people are rational and don't rush to buy cars now, then we might be able see prices stabilising."

The change in COE criteria arose from a four-month review of the system. The Land Transport Authority rejected other proposed changes to the system, such as using a car's Open Market Value to re-categorise cars, having bidders pay the amount they bid and having a multiple-car ownership surcharge.

When asked if he was optimistic that the measures would bring down COE premiums, Transport Minister Lui Tuck Yew said on Monday that the new COE system is "certainly an improvement over what we have today".

Transport analyst Lee Der Horng said that other than giving out more COEs to stabilise demand, there is little the Government can do.

"If Category A COE prices still hover at $80,000 or $90,000 in the years (to come), it means people are willing to pay to own a car and other cooling measures will not make a difference."

Bring fairness back to the COE system
By Christopher Tan, The Straits Times, 12 Sep 2013

MOST people will agree that vehicle population control is necessary for a small, land-scarce country like Singapore.

Most will also agree that the vehicle quota system - which requires motorists to bid for and secure certificates of entitlement (COE) before they can own a vehicle - has worked fairly well in that respect since implementation in 1990. At the same time, it has generated an estimated $50 billion in additional tax revenue over the years.

But the 23-year-old system can certainly be improved.

This week, the Land Transport Authority (LTA) and Ministry of Transport (MOT) introduced engine power as an additional criterion to engine size, to group cars into their COE categories in a more equitable way.

Alas, it won't be very effective.

A far better way to ensure equity is to categorise cars according to their values.

But first of all, does social equity have a place in a system that essentially accords one access to a car based on one's ability to pay?

It does. The quota system was originally designed with an element of equity. There were four car categories in the past: Cat 1 (up to 1,000cc); Cat 2 (1,001 to 1,600cc); Cat 3 (1,601 to 2,000cc) and Cat 4 (above 2,000cc). Engine sizes were a proxy for car values. In 1999, they were distilled into two: Cat A (cars up to 1,600cc); and Cat B (cars above 1,600cc). The move was made to "improve liquidity" and minimise "price distortions".

But as a result, a measure of equity went out the window, as budget car buyers had to compete with buyers of costlier cars. Buyers of family carriers (such as MPVs) had to compete with buyers of Porsches and Ferraris.

The situation worsened five years ago when Mercedes launched a 1.6-litre C-class, followed by sub-1,600cc models from Audi, BMW and Volvo.

These pricier cars began to nudge mass market cars such as Toyotas, Nissans, Hondas and Hyundais out as buyers of the latter could not keep up with bids from those who could afford the pricier brands.

Today, premium and luxury brands account for 70 per cent of Cat A cars sold - up from less than 1 per cent five years ago.

After four months of deliberation and consultation, the LTA and MOT decided to apply an engine power cap to inject some equity back into Cat A. Cars in this COE category must not only meet the 1,600cc cap, but also not produce more than 130bhp of power.

On the surface, this makes sense, as premium and luxury cars tend to have more powerful (largely turbocharged) engines. And with the change, some 90 per cent of cars remaining in Cat A will have an open-market value (OMV, or approximate cost price) of less than $20,000.

But just as engine capacity has become irrelevant as a proxy for a car's value, the power cap will soon lose its bite.

Mercedes and BMW (and most other European makes) already have engines that produce less than 130bhp. These are mostly manual transmission models, which are not popular here. But it won't be long before manufacturers make automatic versions. Industry watchers expect the first to arrive within nine months.

What will the authorities do then? Lower the power limit? If so, budget cars will be affected as well. Already, the 130bhp cap - which kicks in in February - will move some mass market Cat A models to Cat B. They include cars from Proton, Suzuki, Citroen, Ford, Hyundai, Opel, Peugeot, Skoda and Volkswagen.

Using a power criterion is thus simplistic and ineffectual.

If the idea is to categorise cars according to their values, why not use values to begin with? Why use proxies?

Cars already have an OMV assessed by Singapore Customs. It is calculated based on a vehicle's cost price, freight, insurance and all other charges incidental to the sale and delivery of the car from country of manufacture to Singapore. The LTA and MOT argue that OMVs are prone to fluctuations, and thus are not a suitable measure.

It is a difficult argument to follow. First, OMV for a particular model does not fluctuate wildly unless there is a regional or global financial crisis. Second, averages can be used to pare down whatever little variations there are. We can use three-, six-, nine-, 12- or even 24-month averages of OMV.

Or the authorities could remove the foreign exchange element in OMV for this COE categorisation exercise. This would be similar to international accounting standards which allow companies to restate their financials before and after taking into account forex gains or losses.

Or perhaps OMV should be redefined, for instance by streamlining elements that have little to do with a car's intrinsic value. Car dealers and manufacturers have been coming up with inventive ways to minimise their OMV for decades now - despite stiff penalties for under-declaration. The trend has taken a new turn with manufacturers setting up offices here to do their own importation, and the lifting of a ban on imported used cars.

Fixing the COE conundrum thus begins with fixing OMV.

Admittedly, it is far more difficult than drawing an arbitrary line across engine sizes or outputs. And it requires inter-ministerial cooperation, which often slows things down considerably. But it will be a worthwhile exercise, given that the entire vehicular taxation system hinges on OMV.

Fixing it will pave the way for equity - not only for buyers, but sellers too. In fact, with a robust value-based system, we could have one COE category, with premiums pegged to the OMV of each car.


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