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HomesingaporeWhy do COEs last for only 10 years and could extending this...

Why do COEs last for only 10 years and could extending this bring down prices?

SINGAPORE: For many motorists, the decision to deregister their car near or at the end of its 10-year Certificate of Entitlement (COE) validity period is a no-brainer.

But with soaring premiums, the choice to part ways with a trusty ride, not least one that has been well-maintained, is not so clear cut. Some choose to extend their COE beyond the initial decade, Acting Minister for Transport Chee Hong Tat acknowledged on Monday (Nov 6) in parliament.

Such behaviour, however, is a largely individual decision, said Mr Chee in response to a parliamentary question about whether high COE prices would result in fewer cars being deregistered.

From “a system’s point of view”, most people do not extend their COE as their road tax will be higher beyond the 10-year COE lifespan. They instead deregister their cars – regardless of COE prices.

With prices unlikely to come down anytime soon, some solutions have been put forth to cool the heated market or alleviate the pressures of owning a car. This includes bringing forward quota from peak years, which has increased COE supply over the last six months, even though the trade-off means more cars on the road in the short term before they are deregistered.

CNA looks at the rationale behind the 10-year COE validity period and whether adjusting the duration could temper eye-watering premiums.

Related:

How the COE system went from managing rapid vehicle growth to hitting record premiums

ORIGINS OF 10-YEAR COE LIFESPAN

The government decided to fix COE lifespan at 10 years, as it would be “an appropriate time” and “in line with our existing limit for Preferential Additional Registration Fee (PARF) rebate”, said former Minister for Communications and Information Dr Yeo Ning Hong in 1990.

The PARF rebate, based on the COE premium that the owner has paid for 10 years, is given when a car is deregistered before it hits the 10-year mark. The younger the vehicle, the more PARF rebate owners get.

In comparison, “an entitlement in perpetuity” will give owners the right to own a vehicle indefinitely, meaning COE premiums and price of vehicles for first-time buyers will rise sharply over the years. The vehicle would become “an investment” and that is “obviously undesirable”, Dr Yeo had said in a ministerial statement on the Land Transport Policy.

On the other hand, allowing vehicle owners to renew their COEs “for any number of years (that) they choose” will favour existing vehicle owners over those who wish to buy a new vehicle, said then Transport Minister Khaw Boon Wan in 2016.

A balance needs to be struck between the two groups, he said in a written parliamentary answer, noting that allowing owners such flexibility in COE extension could give rise to “more uncertainty over the demand and supply of COEs” and introduce “more volatility” to prices.

Nonetheless, the COE policy gave vehicle owners greater flexibility when it was changed in 1992 to allow owners to renew their COEs for another five years instead of 10.

WHY THE NEED TO REGULATE VEHICLE AGE

Analysts who spoke to CNA could not speak to the significance of the COE’s 10-year lifespan, as opposed to a shorter or longer duration.

But one transport economist noted that it is common for governments to “effectively regulate the economic lifespan of vehicles”. 

These regulations are “usually motivated by a combination of safety, efficiency and emissions concerns”, said the associate professor at the Singapore University of Social Sciences, Walter Theseira.

Owners have no reason to scrap an old car “as long as their maintenance is practical”, he acknowledged. But this leads to the overall vehicle fleet being “older, less safe, less efficient and less clean than it could be” and causes “some harm to society”.

Related:

'A 33-year-old system has to be tweaked': Analysts on why the COE system needs a review

When will COE prices go down? Not for another year, experts say

That said, any decision to adjust the 10-year benchmark first requires an understanding why the figure was deemed to be “approximately correct, given the factors for vehicle turnover”, added Assoc Prof Theseira.

“Even if it was about right when the COE system was introduced, that was more than 30 years ago. It is clear that vehicle durability and technology have changed considerably since then,” he said.

“We also have a much better ability to test and examine factors that do matter, such as efficiency and emissions, and perhaps those should be targeted with older cars instead of encouraging arbitrary turnover.” 

“NOT THAT SIMPLE” TO TWEAK COE DURATION

Observers told CNA in October that as long as COE prices continue climbing, workshops will see more customers wanting their cars to run and look as good as possible.

Choosing to extend their COE after the 10-year mark, however, is another matter.

After all, if the prevailing COE premiums are high, the cost to extend the vehicle’s life beyond the first 10 years would also be “commensurately high”, said Assistant Professor Terence Fan from the Singapore Management University. 

Having more owners keep older cars would also mean fewer new COEs available for bidding, added Asst Prof Fan.

This is in line with the zero-vehicle growth policy, implemented to manage traffic congestion in land-scarce Singapore. The policy means the number of COEs available for bidding is based on the number of deregistered vehicles.

Asked to imagine the impact of extending the COE lifespan across the board from the get-go to address rising premiums, Professor Raymond Ong from the National University of Singapore’s civil and environmental engineering department pointed out the solution is “not going to be that simple”.

He noted that owners will usually need to pay more for maintenance beyond a certain age of the car, calling this the “sweet spot”.

To that end, extending the COE to, say, 15 years doesn’t simply entail multiplying the cost of the existing 10-year COE premium by one-and-a-half times.

This is because, Prof Ong suggested, there haven’t been detailed studies on how the COE validity period affects price.

Moreover, if the increase in prices is due to an increase in demand, then the COE lifespan “should not matter, as long as the total allowed vehicle number in Singapore remains unchanged”, added Asst Prof Fan.

In fact, Assoc Prof Theseira suggested that extending the COE lifespan might actually be a bad idea. The 10-year duration today, he believes, is not too short and “probably too long”.

“It means that the cost of operating a vehicle today is locked in for 10 years, which basically results in huge differences at times in vehicle costs between different owners. The long COE period today also makes adjusting the COE supply cycle extremely difficult,” he explained. 

“What would likely be better for everyone would be more flexible, shorter COEs – where it would be common for most owners or second owners to renew COEs multiple times during the vehicle’s life and where the price would be less volatile between renewals,” he suggested.

A proposal to allow one-year COE renewals in addition to the five- and 10-year renewal options, however, was turned down in a written parliamentary answer in August.

In response to a proposal from MP Joan Pereira (PAP-Tanjong Pagar), Mr Chee, the Acting Minister for Transport, said it may “inadvertently amplify the magnitude of the COE cycles, as vehicle owners may use it to time the market by deregistering their vehicles only when COE prices are low”.

“The COE quota supply may be even scarcer when COE prices are high, exacerbating the COE cycle,” he said.

ADDRESSING SUSTAINABILITY

Holding on to an older vehicle beyond its initial 10 years is not a straightforward solution to sustainability either. This is because there are “two opposing forces”, said Assoc Prof Theseira. 

One camp argues that “vehicles should be turned over for more sustainable models like electric vehicles sooner”, while another posits that such “early scrapping” initiatives only waste the “embedded resources” in existing vehicles.

The issue of sustainability, or the COE policy objective of having a “more rational system of fleet turnover”, could instead be better met by reducing the penalties to keep older cars. For example, extending the PARF rebate system to 15 or even 20 years, he suggested. 

Assoc Prof Theseira also highlighted the possibility of targeting specific issues like safety and emissions through regulations or taxes and having “a more flexible COE permitting system”.

“Instead of facing these very lumpy costs – such as having to pay for five or 10 years of COE renewal at once and lose the PARF rebate – to decide whether to keep an older vehicle in service, it would be ideal if owners faced much more gradual costs,” he said. 

“If COEs were renewed more routinely and frequently and with more predictable costs, that would probably make a more sustainable system of vehicle renewal.” 

Such a move would also balance both public concerns like vehicle condition, safety and emissions, and private costs and sustainability, he noted. 

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