On the COE and the current overreaction

I refer to Mr Leong Sze Hian’s article “COE may stall economic recovery”

It is one thing to argue that the current transportation policy is flawed. It is quite another to argue that it will choke off the recovery.

Frankly, not only does the article commit several factual errors, I find it poorly thought out, self-contradictory and thus shoddily written.

Firstly, he assumes that the Ministry of Transport gains from this whole fiasco by an increase in COE revenue, when some rough calculation from the data in his article would show this to be false. Since there are 40% less COEs out in the market, leading to a price increase  ranging from  26.1% to 11%, simple arithmetic would show that the total revenue would at best be at 76% of its previous level. And judging from the fact that some dealers have recorded a 90% fall in sales (again, as per the article), this is far too optimistic.

Further research from the 2010 budget (pdf) supports our rough estimate. We see that government collection of additional registration fees (i.e. COEs) are estimated to fall by nearly a third to $683 M. So no, the government is hurting itself via cutting COE supply.

Why is this the case? In the language of economics, cars are price elastic goods. Simply put, while most want to have a car, when push comes to shove, a car is not a necessity. Also, given the already substantial cost of a car, potential car buyers will take notice of its cost and can thus defer purchases (or skip buying one totally).

The combined effect is that an percentage decrease in COEs released (and thus a fall in the number of cars bought) will lead to a less than proportionate increase in the number of cars bought, causing revenue to drop. So, COE price increases will not necessarily lead to greater COE revenue.

Mr Leong Sze Hian then moves to the heart of his argument. He fears for the economic recovery for two reasons:

• Rising COE prices could stoke inflation

While the point does have some merit, as some firms will increase their prices to break even, the overall effect is likely to be muted. For one, COEs for most purposes can be regarded as one-off costs (You only pay for it when you buy a new vehicle) and thus their effect on the bottomline of firms is likely to be shortlived. Furthermore, transport costs typically form a small proportion of a company’s total costs and thus firms may absorb these costs instead of potentially losing customers to competitors.

However, Mr Leong Sze Hian’s fear of a continually soaring COE price creating further price increases is completely farfetched (and in fact refuted by the data in his article). While some may indeed buy COEs now before they expire in order to avert more price hikes, the vast majority would simply stop purchasing cars, halting this vicious cycle dead in its tracks.

And where do I obtain the confidence that this will be the case? From the fact that some dealers have seen a 90% fall in sales, merely 2 paragraphs before his point!

• Rising COE prices could hurt our global competitiveness

As stated above, transport costs are less significant compared to labour and capital costs. Also, the greatest determinant of  the competitiveness of our exports is our exchange rate, which has a far greater capability of shaping the cost of our goods in the eyes of foreigners. Compare this to the COE price increases, whose one-off impact will be  further diluted and spread out over the millions of units our firms will export in a single year, causing the resulting price hike to be minimal.

Then he makes an interesting statement :

“The solution to controlling the growth of the vehicle population need not necessarily be higher car prices and costs.”

Sounds true, until you actually try to think about it. Fact is, there is no direct way to control the demand for cars without higher car prices/costs, save for imposing a total ban on new cars on the road (which I am quite sure the writer does not want to see) The government can indirectly reduce its growth by significant improvements to the public transport infrastructure, but in a land where only 52% (pdf) take public transport despite all the punitive taxes associated with owning a car, the required improvements must be nothing short of revolutionary to successfully convince substantial numbers of drivers to ditch their cars.

I fail to see how a price spike that seems likely to abate soon (given the significant falls in demand among car dealers) and only affects those buying a new car (for now) will have such significant repercussions, to the point of choking off the economic recovery. Not only is the article more fiction than fact, it contains basic errors and flawed claims that could have been easily checked by reading through the article.

Furthermore, he fails to see the intent of the COE policy. Scarce mention is given to the serious congestion issues that plague our roads, which needs to be addressed.

The government thinks that the solution to the problem is via cutting COE quotas. On this aspect, I think many can agree with me that this is is not the best solution.

It is thus up to us to provide a sound and logical refutation of the policy, and come up with an better alternative. Scare stories and poorly researched arguments do no benefit to our case.

So what should our argument be? Here is my take.

We must first take note of the importance of a car in our country (afterall, it is in our 5Cs) But, at some point we will have to choose between our desire to keep cars affordable and the aftereffects of congestion.

What is congestion caused by? In most circumstances, it is due to the usage of cars at inappropriate times, not due to the act of owning a car. It thus makes sense to shift the focus of our taxation regime away from discouraging people from owning cars, and instead focusing on penalizing the cause of congestion. In a nutshell, I would suggest scrapping the COE altogether, but raise ERP charges and fuel taxes so as to discourage excessive driving.

In addition, we need to make public transport more popular, by not only increasing its coverage, but also its capacity. In particular, existing MRT lines are often heavily congested during peak hours. Thus,  this should be the immediate focus, especially given our growing population, which will strain the existing MRT network further.

Quite a few will not be pleased at my suggestion of increasing ERP and fuel taxes. But if the opposition wants to govern, it needs to recognise that there are no free lunches in this world.

Politics is not just a game where everyone screams and wails and get nothing done without any consequences. This is serious business that affects the lives of 5 million people. And while we engage in our rants and complaints against the ruling party, things continue to deteriorate.

How can you expect the citizens to trust your management when you cant even make coherent arguments that border upon populism? Indeed, how do you expect to govern?

It is plainly obvious that there are a lot of things broken in our country. I fail to see why is there a need to infuriate and incite when pure reasoning is more than sufficient to reveal the flaws in our system. The politics of anger may be powerful, but it is also corrosive and destructive.

What we need is an opposition that looks forward, one that can give remedies for our current and future problems.

Now is the time to show whether we are serious about our politics. We can choose to be keyboard warriors ranting and raving while the nation sinks, or we can choose to start offering an alternative to our broken politics.

So what do you think?