The current COE system isn’t functioning too well.
Introduced in 1990 to manage Singapore’s rapidly growing car population, the COE system has evolved over time. However, compared to its initial design, one could argue that there have not been significant changes in its core structure.
Yet, Singapore has undergone a substantial transformation. Today, we have a much larger population, and the way we use point-to-point transportation services has also shifted. The era of hailing taxis on the road has largely been replaced by consumers relying on apps from taxi and private-hire companies for their transportation needs. Those who prefer not to or cannot purchase a car have the option of using car rental services, where they pay on an hourly basis for on-demand bookings.
Instead of accepting the current shortcomings of the COE system, which are contributing to record-high prices and significant volatility (with COE prices fluctuating by more than 20% in a single bidding round), it is important to review certain features of the existing system.
#1 Introduce An Mechanism To Differentiate Personal Cars From Rental/Private Hire Vehicles (PHVs)
The distinction between taxis and regular personal cars in Singapore’s COE system is based on economic considerations. Since August 2012, taxi operators no longer participate in the standard COE bidding process. Instead, they use Category E COEs and pay a prevailing quota premium set by Category A.
One reason for this is that taxi operators own a large fleet of vehicles, and any demand (or lack of) from these operators would significantly skew the demand for COE, thus increasing the volatility of COE prices. Furthermore, taxis are subject to different regulations compared to regular passenger cars. For instance, the statutory lifespan for taxis is capped at 8 years, extendable to 10 years for electric models.
In contrast, rental and private hire vehicles (PHVs) are not bound by such lifespan limitations. This creates a disparity, especially considering that many PHVs are driven as frequently as taxis. Additionally, while taxis cannot be converted and sold as private cars, rental and PHV fleet operators have the flexibility to rent out or sell their vehicles in the used car market.
As a result, operators of car rental companies or PHVs can effectively monetise their fleets in multiple ways, making them more inclined to pay higher COE prices than a regular family using a car for personal use.
To address this imbalance, a new mechanism could be introduced to differentiate personal cars from rental cars and PHVs. For example, an additional flat fee could be added as tax on top of the COE for vehicles intended for commercial use, such as rentals and private hires. This would increase the cost of these vehicles, reflecting their higher usage.
#2 Discontinue Refund For Early COE Deregistration
In the current system, the Land Transport Authority (LTA) refunds the unused portion of the COE when car owners deregister their vehicles before their 10-year COE period ends. For instance, if a car owner pays $140,000 for a COE and then deregisters the car after 5 years, they would be eligible for a $70,000 rebate. Additionally, they would receive a Preferential Additional Registration Fee (PARF) rebate. This rebate amounts to 75% of the Additional Registration Fee (ARF) if a car is deregistered within the first 5 years. Therefore, a car owner who paid a high COE price, such as $140,000, could recoup $70,000 after 5 years, irrespective of the current cost of a new COE. This refund can be used towards purchasing a new car, potentially with a lower COE cost.
Deregistering a 5-year-old vehicle to buy a new car might seem financially imprudent, but it can be economically beneficial if COE prices have significantly decreased. This is because the car owner might incur a lower cost for a new car due to the reduced COE price.
Read Also: How To Calculate The Depreciation And Scrap Value Of A Car In Singapore
Instead, payment for COE should be considered in the same way that the Buyer’s Stamp Duty (BSD) & Additional Buyer’s Stamp Duty (ABSD) are paid for. They are paid in full by the car buyer (not the car dealer) at the point of purchase, allowing the car to be driven in Singapore for the next 10 years. If a car is deregistered early, there should be no COE refund, mirroring the policy where the government does not refund ABSD for the sale of a second property. Exceptions for COE refunds could be considered in special circumstances, such as if the car is completely wrecked.
#3 Individuals Should Purchase Their Own COE
In Singapore’s car industry, dealers typically buy the Certificate of Entitlement (COE) and sell it together with the car. This means you are not just buying the car from the dealer, but instead, you are buying both the car and the COE from the dealer.
This also means that dealers can speculate on COE prices to make profits. Since a COE must typically be registered within 3 to 6 months after a successful bid, if the COE prices rise during this period, dealers can sell the car and COE at a higher price, profiting from the increase. However, the reverse isn’t true. If dealers think that COE prices will decline, there is no incentive for them to bid for COEs unless they already have the order with them.
One way to solve the speculation is simply for individuals to bid for their own COE. Bidding for your own COE is relatively straightforward and not too different from applying for your own T-bills. If car owners obtain their COEs directly, it would more accurately reflect the actual demand for COEs, rather than speculative demand driven by dealers.
Additionally, when car owners buy their COEs on their own, it also has an effect on the financing. Car loans would then be used solely for purchasing the car, not for both the car and the COE. This change would align the financing more closely with the actual price of the car, excluding the COE.
Read Also: History Of The COE, And How It Has Evolved Since 1990
The COE system in Singapore is due for reform, with the government seeking to enhance its alignment with the nation’s current transportation requirements. The goal is to modify the COE system in a way that more fairly addresses the needs and concerns of both individual families and businesses and to deliver a more equitable solution.
Photo by Andreas M on Unsplash
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