FIVE MYTHS ABOUT THE COE SYSTEM

SINGAPORE – As prices remain painfully lofty after this week’s auction for COEs (or Certificates Of Entitlement), emotions seem to be running just as high.
 
To recap, the Category A certificate (for cars up to 1.6 litres in engine capacity and up to 97kW in power output) had the decency to trade more or less sideways, dropping $202 to $76,999 at the end of Wednesday’s auction. Every other category, alas, went up in price.
 
Category B certificates (for cars above 1.6 litres in engine size or more powerful than 97kW) climbed $2,106 to $80,710, for starters.
 
Meanwhile the Category E COE (for anything with wheels and an engine) gained $3,000 to settle at $82,000.
 
Would-be commercial vehicle and motorcycle buyers will have wrung their hands, too, at how their relevant COEs also became more expensive, significantly so in both cases. Respectively, those certificates hit $56,302 and $4,001 in price.
 
“I just started a small business with a tight budget and I need a van for delivery,” lamented one commenter on Yahoo! Singapore. “The down payment for the van is more than the cost of setting up my company.” That was one of the few printable quotes, incidentally.
 
While pricey COEs are bound to leave anyone with hopes of owning a car fuming, it might be timely to clarify a few myths about the Quota System, if nothing else to help ensure that any debate on the matter truly addresses the issues at hand.
 
There’s no shortage of misconceptions about the COE market, either. Here are just five:
 
The Government sets high COE prices
Just to be clear, the Land Transport Authority (or LTA) doesn’t set COE prices directly. The Quota System is a simple price mechanism that works on demand and supply. The goal of the Quota System is to limit vehicle sales, so if every new car registered requires a COE, the LTA can control sales directly. If it wants 2,000 new vehicles to be sold every month, it releases 2,000 COEs.
 
The LTA only controls the supply of COEs, and the final price is set by the demand for new vehicles. And demand, say economists, is a function of willingness and ability to pay for something.
 
Today’s COE prices are at a level where, by definition, people are willing and able to pay for them.
 
Car sales are down because COEs are expensive
 
“Thanks to… COE prices rising to ridiculous levels (Certificate FOR the “entitled” more like it), it’s no wonder car sales have dropped by almost 40 percent,” wrote MoneySmart’s Jeff Cuellar in January this year.
 
Yet, it is the other way around. Car sales are down only because the COE supply is down. And of course, it’s this scarcity of COEs that has made them expensive.
 
In economics terms, whenever a normal good becomes more scarce, its price goes up if there’s no corresponding drop in demand.
 
Imagine how expensive an iPhone 5S would be if there were only 1,000 of them in the world. In that scenario, saying that car sales are down because COEs are expensive would be like saying Apple only managed to sell 1,000 of the iPhone 5S because it was so pricey.
 
Expensive COEs always put more money into the LTA’s coffers
 
This week’s COE auction will have netted a tidy sum for the LTA from car buyers, nearly $69.8 million by our reckoning. That’s slightly more on a year-on-year basis, and indeed, revenues from COEs are generally high now, especially when compared to the depths of the market five years ago — $4,890 for a Cat A COE from early March 2009, anyone?
 
Yet, it ain’t necessarily so that pricey COEs automatically mean more money for the LTA. If you go back two years to the first auction of March 2012, you’ll find the LTA raked in more than $88 million from car buyers that week. That’s in spite of the fact that each COE was cheaper than they are now. Category A certificates cost $56,551 apiece, although admittedly, the B and E certificates were very near the $80,000 level that they’re hovering at today.
 
In fact, if you go back one more year to March 2011, the COEs were much cheaper: A, B and E certificates cost $42,600, $61,894 and $62,010 respectively. But that week, the LTA scooped in close to $68.9 million — nearly as much as they collected on Wednesday.
 
It’s probably the case that no one at the LTA complains if COE revenues are high, but at the same time, it’s very likely the case that they don’t specifically try to engineer high prices.
 
Car dealers are responsible for pushing up prices
 
One easy villain to blame for high COE prices is the car dealer, who bids whatever he likes for a certificate (kicking a kitten or two along the way to work) and then passes the cost on to you, right?
 
Actually, car dealers despise high COE prices. That’s because expensive COEs lead to losses.
 
The challenge of being a car dealer here is that you must price your car as a machine-and-COE bundle. Then you collect an order from a customer, and bid for a COE on the customer’s behalf.
 
So imagine if you’re a car dealer and you know your cost for a machine is, say, $40,000. Suppose you aim for a $10,000 profit, and for simplicity’s sake, you think a relevant COE is going to cost $50,000 in two weeks. So you price your car at $100,000 with COE ($40,000 for the car, $10,000 for profit and $50,000 for the COE, remember).
 
A buyer comes along and books it, and you promise to deliver the car for $100,000. Two weeks later, the COE has shot up to $55,000. Oops. But you already sold the car for $100,000. Guess who has to suffer the consequences?
 
In fact, whenever COEs go up, car dealers take a hit from their margins for cars that they’ve already sold. So it’s really in their interest to bid as little as possible.
 
If you look at February’s second COE auction, you’ll see that dealers actually tried hard not to overbid. For Category A, extremely few bids were made that were more than 5 percent higher than the COE price in that auction.
 
Even Category E, which is supposed to be highly speculative, saw very controlled bidding. Nearly 80 percent of the bids there were within 5 percent of the final price, and no one bid more than 10 percent higher than the closing price.
 
Ultimately, it’s ridiculous to blame dealers for pushing up COE prices. If a dealer bids $80,000 for a COE, it’s because he has already sold a car with that sort of COE pricing in mind to a buyer who was perfectly willing to pay that amount.
 
The Quota System is meant to be fair
 
This one is perhaps the toughest idea to swallow, but the COE mechanism is meant to exclude people from owning cars, not to include them. By design, it is meant to price people out of cars and into public transport.
 
Essentially it introduces a market distortion (by artificially limiting supply) that causes prices to rise to a point in which people drop out of the competition for a new car. The problem is not so much that the Quota System makes cars expensive, but that the distortions it introduces are unpalatable. Should a Volkswagen Scirocco 1.4 TSI buyer be forced to compete with a Lamborghini buyer for the same (Category B) certificate? Probably not.
 
But on the whole, complaining that the COE system isn’t inclusive is like saying it isn’t fair that you can’t afford a Rolex. If the Quota System has kept you from buying a new car, unfortunately that is precisely what it was designed to do.
 

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