CERTIFICATE OF ENTITLEMENT FOR SMALL CARS

Mr Inderjit Singh asked the Minister for Communications and Information Technology whether he will consider introducing Certificate of Entitlement (COE) for small cars with engine capacity of less than 1,000 cubic centimetres instead of grouping such cars with the COE of bigger cars and in this way making small cars more affordable for those with lower income.

Dr John Chen Seow Phun (for the Minister for Communications and Information Technology): Mr Speaker, Sir, the COE categories for small and medium sized cars were merged into one category, Category A, in April this year, after a review of the Vehicle Quota System by the Government Parliamentary Committee (GPC) for Communications, led by the GPC Chairman, Mr Chay Wai Chuen. The GPC had noted that the COE quota for the small cars was becoming too small, and that a separate COE quota for small cars did not necessarily result in lower COE premiums for small cars compared to other COE categories. In fact, Category 1 premiums had at times been similar to or more than Category 2 premiums. It therefore recommended the merger of the COEs for small and medium sized cars to form a larger quota to bring about more stable COE prices. At the same time, car buyers will have greater flexibility in deciding on their choice of car models if the COE category covers a broader range of cars.

The GPC is correct. Merging Category 1 and Category 2 into Category A would result in a more efficient market without necessarily raising the COE premiums for small cars. A car buyer with a Category A COE will have a greater choice of car models to choose from. He may decide to buy a smaller car or a bigger one, according to his budget. To cite an example, in 1998 during the economic downturn, many car buyers, having an Open Category COE, decided to buy a small or medium sized car - 41% used the Open COE to register Category 1 and Category 2 cars, instead of large and luxury cars. This is the advantage of collapsing COE categories, as car buyers benefit from having a wider choice over how to use their COEs to purchase cars according to their affordability.

Fundamentally, COE premiums are dependent on the demand for cars. This in turn depends on the state of the economy and expectations of future growth. The economic recovery and lower financing costs have helped to increase the purchasing power of consumers, and this has led to a higher demand for cars. This has resulted in a rise in COE prices, despite the 58% increase in the number of COEs from last year to this year. With the recent economic recovery, COE for this month has bunched around $43,000 and $44,000 for the Category A, Category B and the Open Category, despite the existence of the different categories.

Mr Chng Hee Kok: By the Minister's argument, there seems to be a compelling case to collapse both categories of cars from A and B to even one single category.

Dr John Chen Seow Phun: Sir, there is no plan at the moment to do that, but if the Member feels that we should do it, let him write a proposal to the Ministry and we will consider it.

Mr Chng Hee Kok: Mr Speaker, Sir, in fact, I mentioned during the Budget discussion that I support a single category for all cars.

Dr John Chen Seow Phun: All right, we will take that into consideration the next time when we review the Vehicle Quota System.

Mr S. Iswaran (West Coast): Would the Minister elaborate, since the introduction of Category A, what proportion of the COE entitlements have been used for cars of 1,000 cc or less? And how does that compare with the allocation under Category 1 previously?

Dr John Chen Seow Phun: The Member has asked for some figures. As far as I know, the number of small cars registered has dropped. This was because of the competition between the small car dealers and the big car dealers. That is why the new policy is correct. Under the old policy, the small car dealers were in a way protected. With this change in policy, I have received feedback from the small car dealers that they now have to compete with the big cars, because the big cars are not necessarily more expensive than small cars. In fact, data have shown that some of the big cars are cheaper than the small cars. Because of greater competition, I think the motorists benefit. To answer the Member's question, there is, in fact, a reduction in the registration of small cars but that is due to the keener competition between the dealers.

Assoc. Prof. Chin Tet Yung (Sembawang): Given the collapsing of the categories into Category A and that more people now buy bigger cars, would it not be true to say that it would not really be consistent with the energy conservation policy in Singapore?

Dr John Chen Seow Phun: As I said, it depends on competition. So if the small car suppliers and manufacturers can come out with better and cheaper cars, I am sure the buyer will take a close look. As for energy conservation, I do not think that is a problem because nowadays cars are very efficient and the difference is not much between the small cars and those above 1,000 cc.

Mr Iswaran: If I understand the Minister correctly, he is saying that the number of small cars registered has declined because of the inability of the small car dealers to compete but, on average, if competition is on the basis of price, then one would argue that that should not be the case. Could the Minister elaborate what in practice, other than price, have affected the ability of small car dealers to compete in the sale of cars in the market?

Dr John Chen Seow Phun: Of course, price is definitely a factor, besides the value that they perceive that they would get. What I am saying is that the buyers now have a greater choice. In the past, when he was eyeing for a Category 2 car, and if he could not get the COE, either he brings up his premium or if he does not want to bring up his premium, but he still wants to own a car, he would be forced to go to Category 1 to bid for the COE and buy a small car. With the merger, this restriction is no longer there. It is up to the individual. He can still buy a small car if he wants to. Or if he feels that he can pay a few more dollars and buy a bigger car, and he feels that gives him greater value, so be it. So my point is that the merger removes this artificial restriction and allows the market to decide what cars they want to buy. From experience, as far as COE premiums are concerned, we do not think that because of the merger, small cars will have to pay a significantly higher premium. Basically, if I want to buy a small car, I could bid for the COE and buy a small car without much increase in price. So that is the position.

Dr S. Vasoo (Tanjong Pagar): Would the Minister of State consider tax rebates for small car owners who bid for the COEs, to ameliorate some of their problems?

Dr John Chen Seow Phun: Why do we give rebates to them? We had already restructured the vehicle tax last year. We had rationalised it, put in a very rational basis for all the tax structure including progressivity. Smaller cars today pay lower road tax compared to bigger cars. So we think that the balance is about right.

Assoc. Prof. Chin Tet Yung: Sir, given that the premiums have risen quite a lot since the economy improves, would the Minister consider a recomputation of the premiums payable on 1,000 cc cars, so that those who cannot afford to buy a new car, be it big or small, pay the lower rate so as to keep their old cars?

Dr John Chen Seow Phun: If the Member is talking about re-validation of their COEs after 10 years, the formula is that they would have to pay the prevailing quota premium which is computed by averaging the last three months of COE premiums. As I said, between the old and new system, we do not think that there is much difference between the COE premium for small cars if we had not merged. So there is no reason why they should have special treatment, because the idea of the PQP is that one should pay the prevailing quota premium; in other words, the quota premium that new car buyers are prepared to pay. That is the objective and principle.

Dr Tan Boon Wan (Ang Mo Kio): The economic consideration is obviously true. But does it mean that the people, who are poorer and who can only afford the small cars, do not deserve to have a say in buying a car?

Dr John Chen Seow Phun: Sir, the whole idea of the COE system is to put in place a rational system where people would be prepared to pay what the market decides. Therefore, under the system, there will always be people who are not able to obtain a COE, because the number of COEs is fixed. The people who cannot afford it, in the end, cannot obtain a COE and they will have to try harder the next time.

Dr Wang Kai Yuen (Bukit Timah): May I ask the Minister, as a result of merger of those categories, how much additional revenue the Government has collected, because small cars are no longer being registered?

Dr John Chen Seow Phun: Mr Speaker, Sir, there are a lot of factors that are changing, economic factors being one. But let me give him a theoretical answer. Assuming that nothing changes, everything remains the same, I would say that the Government actually collects less because our system is a Dutch system where the Government only collects the lowest successful bid from all successful bidders. So if I were to split one category into two categories, you will find that Government actually collects more, because successful bidders in the higher category are paying more than if they were merged into one category.

Dr Wang Kai Yuen: In other words, the Minister is saying that if we merge all the categories into one, the Government would collect less revenue, as I understand it.

Dr John Chen Seow Phun: That is why Mr Chng Hee Kok supported the merger into one category. But let me say that the primary objective of the COE system is not to collect revenue. There is a transport management objective to ensure that there is ownership restraint. That is the basic objective. We then let the market decide what price they are prepared to pay, and at the same time we fulfill our objective of controlling the number of cars, so that our roads would not be clogged up.

Mr Jeyaretnam: It is heartening to hear the Minister of State say that the Certificate of Entitlement was not introduced for the purpose of collecting revenue. May I ask him whether all this that has been in operation, I do not know how many years, has succeeded in any significant level in reducing the cars on the roads?

Dr John Chen Seow Phun: Sir, I do not know what question is that. Cars cannot go on the road if they do not have the COE, and the COE number is fixed.

Mr Jeyaretnam: Your objective is less cars on the roads.

Dr John Chen Seow Phun: Of course.

Mr Jeyaretnam: By how much have you succeeded?

Dr John Chen Seow Phun: No. The objective of the COE system is not to reduce the number of cars on the road. It is to control the growth. That is right. We have fixed the growth of vehicles at 3% per year, and because the number of COE is fixed according to that growth figure, therefore the control is precise.