Tuesday, March 16, 2010

New COE Allocation Formula, No Prediction Needed

Transport Minister Raymond Lim announced on March 11 that the change in the formula for COE allocation to address the perennial mismatch of supply and demand.  The new formula will result in a "BIG drop in COEs ahead" (The Straits Times, March 12).  The change will eliminate the forecast (prediction) of vehicles to be deregistered over 12 months.

In any new system, there is a stabilization period required before the anticipated objective is met.  The question is how long will it take before we see only mild fluctuation in the COE Quota Premium.  I believe that panic-buying may occur in the near term so we will see erratic result before the dealers price their cars within a reasonable range as the buyers' tolerance is determined.

The current bidding mechanism is that all successful bidders pay the lowest winning bids.  I am of the opinion that the "Pay What You Bid" method is likely to result in the following:
1. LTA will collect more from the same pool of COEs since the top bidders may pay much more for their COEs (but they can afford to) and thus, more funds can be allocated into improving the road system to accommodate the growing vehicle population.
2. The rate of increasing bids will be slower as bidders (usually the dealers) are careful not to over-bid to protect their profit margin.  However, LTA may need to work with their IT service provider to ensure that the system will not crash due to the overwhelming changes at the close of the bidding exercise.

This may be an ideal time to tweak the bidding system.  Perhaps LTA should also be transparent to release data showing the proportion coming from dealers versus individual bidders.  If the true intention of the system is to have individual buyer first secure a Certificate of Entitlement before signing on the dotted line at the dealer, then the current bidding system seems to make it easy for dealers to bid on buyers' behalf and thus, may allow them to artificially control the market forces by including COE Quota Premium into car price.

Finally, I also hereby announced that I will no longer predict the COE Quota Premium at each bidding exercise, reason being that if a group of elite public service analysts cannot predict the deregistration of vehicles, I alone do not have sufficient skill and information to predict the bidding outcome 8-) and should just write about motoring in Singapore.

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