ESTIMATES OF EXPENDITURE FOR THE FINANCIAL YEAR - 1ST APRIL, 1999 TO 31ST MARCH, 2000
Sir, first, I would like to thank all the speakers who have given very valuable inputs and suggestions on the VQS review. As Members will recall, we implemented the Vehicle Quota System almost nine years ago. That was in May 1990. At that time, the Government was faced with a dilemma of how to control the vehicle population. We had previously relied on vehicle taxes to do this. Before 1990, from 1975 onwards, the vehicle taxes like ARF, registration fees, customs duties and so on kept going up. Every time the vehicle population went up unduly high, you could be sure that in the next budget, the car taxes would go up. But in spite of all this, the vehicle population reached double digit growth of something like 12% per annum in the period 1982-1983. Three years prior to 1990, the net growth was almost 7%. Obviously, we could not carry on like this. We either had to keep on raising taxes and ARF drastically in order to bring the growth down, or we had to fix an acceptable growth rate, and let motorists decide how much they want to pay to own a car. The Government decided to go for the latter option. We settled one key parameter of the transport equation, which was the vehicle population and, at the same time, we provided a more flexible and market driven solution to the perennial question of how much should we tax car ownership. Sir, the VQS is quite unique to Singapore. We were the first to implement such a system and up to today, we are still the only country in the world to do so. Many people come to Singapore and study our system and they say, "Oh, what a wonderful system you have. This solves all our problems." But when they go back, nothing happens. So, we had no other experience to rely on. We had to learn as we went along, as it were. Over the last nine years, there were many changes in the system. These changes took into account the views of the public as well as responded to the changing environment. Earlier on, we were pressed to make COEs non-transferable. From the economic point of view, Mr Iswaran will tell you that this is not the most ideal solution, because COEs as a commodity should, strictly speaking, be transferable, and there should be a market for it. But people felt that non-transferability was making COE prices go up too high. We made COEs non-transferable for cars and motorcycles. Of course, as expected, this brought about other consequential problems. We had to make the cars themselves non-transferable. When COEs could not be transferred, people decided that they would take the COE, register a car and then transfer the car. So we had to plug that loophole, and we did. From time to time, there have been many other suggestions made to further modify the system. Pay-as-you-bid is a constant refrain. There have also been calls for the Government to prevent dealers from bidding. With the introduction of the ERP, there have also been renewed calls to abolish the VQS, because with the ERP in place, why do we need the VQS? Although the VQS is working well and although the prices have been relatively stable over the last year or so, as many Members have pointed out, I decided that it was timely, after almost 10 years of operation, to take stock and to do a thorough, comprehensive review of the system. Some of the suggestions that were put to the Ministry earlier, we had kept in view because we did not want to keep on making changes every year. But we decided that after 10 years, after watching the system and seeing what are the merits and demerits of the system, this was a sufficiently long time for us to sit back and take stock. To answer Mr Iswaran, the objectives of the review were two-fold. One is to review whether the VQS is still needed in view of the ERP, and whether it is still effective in meeting our traffic management objectives. Two, if the VQS were to be retained, how can it be further improved in order to make the system fairer and more objective. To undertake the review, my Ministry turned to the GPC for Communications for assistance. The GPC is well qualified to conduct the review because its Members are familiar with the current system. Moreover, they have recourse to a group of resource persons who would be able to provide expert views on the subject. Last but not least, I felt that it would be good to have a party other than the Ministry conduct the review, so that they can take a fresh look at the issue. I am glad that the GPC has undertaken their task in earnest. I have been following their deliberations and I know that they have actively sought the views of various interested parties as well as members of the public. I understand that almost 100 written representations were received via fax, mail and the Internet. This is excluding the pile of feedback that the Ministry had earlier collected which we dutifully handed over to the GPC Review Committee. They also conducted three dialogue sessions with interest groups, with academics from NUS and NTU, with the Feedback Unit's transport group and also with the general members of the public. They spent a lot of time and effort in arriving at their recommendations, and I would like to place on record in this House my appreciation and thanks to the GPC, especially to its Chairman, Mr Chay Wai Chuen, and to the resource persons for undertaking this important task. Sir, let me now give the Government's response to the recommendations of the GPC. First of all, on the VQS itself. My Ministry agrees with the GPC that the VQS should remain, as it is one of the key pillars of our traffic management strategy. I note that many other Members who have spoken today, Mr Ong Kian Min, Mr Ang Mong Seng, among others, also share this view. The system has allowed us to effectively manage the growth of the vehicle population at a level that can be sustained by our road infrastructure and given the overall constraints of our limited land. I am gratified that almost all who gave feedback to the GPC agreed that the VQS should be retained, despite the introduction of the ERP. This is a significant vindication and reaffirmation of the system. As the Lianhe Zaobao editorial a few days ago put it, motorists both love and hate the system. They love the system because it works, and when they travel to other cities which are gridlocked, they really appreciate the quota system. But they are not so keen when it comes to paying for COEs. So this love-hate relationship, I think, is going to be a fact of life. But I am heartened because when we first implemented the quota system, I do not think there was any love in sight at all. If anything, it was a hate-hate relationship. Now, people are beginning to appreciate the benefits of the quota system and see the impact and recognise that it works. I think it shows that we are making progress. It demonstrates that Singaporeans do appreciate the need for Government to take tough but necessary measures from time to time to tackle intractable issues such as traffic congestion. Sir, our land constraint, as many Members have heard me say many times in this House, means that the amount of space that we can devote to roads must be limited. The vehicle population grows at 3% per annum compounded, but our land is not growing at 3% per annum. In fact, between 1995 and 2000, we anticipate that our road network will only grow something like 1/2% per annum, in terms of lane kilometres. Already, 12% of our land is set aside for roads, the same amount of land set aside for roads as for housing, 12%. So there is not much room for us to build more roads. We can reclaim at the margins. We can build interchanges, flyovers, even underground roads, but our road capacity will expand at the most by something like 2%. It is not possible to rely solely on the ERP to manage congestion. If we did so, ERP charges would be many times higher than what it is today. Therefore, maintaining a balance between ownership and usage management measures through VQS and ERP is the most prudent approach to manage our traffic. But the GPC feels that with the Government's ongoing improvements to the public transport system, expansion of road network, greater reliance on the ERP, the allowable vehicle growth rate, which is currently set at 3% per annum, could be reviewed upwards. This is a recommendation which has created some excitement. Sir, the growth rate of 3% was set at the time when the VQS was first introduced, taking into account our long-term road-building programme, our public transport developments as well as developments in traffic management systems. To the extent that these factors have changed since the growth rate was set nine years ago, the GPC's recommendation to review the rate is accepted. The LTA recently carried out such a study/review using its transportation model, and it simulated the impact of a 3% growth rate on the congestion levels of our roads, taking into account the various improvements in public transport, road network as well as the introduction of ERP last year. The study concluded that if the ERP coverage and rates are maintained at today's levels, the congestion level on our road network will worsen significantly over the next five years. However, if we were to implement a more extensive coverage of ERP and, if necessary, higher ERP charges, we can sustain this 3% growth rate, and manage the congestion at localised bottlenecks. To increase the growth rate further at this stage would be unwise. The Government has therefore decided to maintain the 3% growth rate until the year 2005, because we take a 5-year planning horizon. We will review this growth rate regularly after that. If congestion eases following the expansion of ERP, the Government will release an additional 10,000 plus COEs. My Ministry will further assess the situation after we have implemented phase 2 of the ERP. 1.45 pm Now I come to methods of COE allocation. The Government agrees with the GPC that the market mechanism is the most efficient means for allocation of COEs. COEs should rightly go to those who value the right to own the car the most. Competitive bidding is the best way to achieve this. It also ensures that the scarcity value of COEs accrues to Government and therefore to society as a whole rather than to each individual if we were to use other allocation methods, whether it is queuing, lucky draws, or whatever. How do we know whether the VQS system is efficient? Is it by allocation of COEs? Is it by COE prices? This is what Mr Iswaran wanted to know. Some other Members have mentioned that there is a view, among some people, that the changes are to maintain Government revenue from COEs by ensuring that freak results such as the $50 COE do not recur. Members have asked that we dispel the perception that these changes are to increase Government revenue. Sir, I have said on a number of occasions that the VQS is an instrument to manage traffic. It is not a tax instrument. Although COE revenue has become a significant part of Government revenue, it is not a tax instrument per se. COEs are a scarce commodity and they are a national resource, like land. Having decided that the best way to allocate this scarce resource is through the market mechanism, we must ensure therefore that the bidding system is an efficient one, which sets a fair price for the COEs. We should not over-price COEs but, on the other hand, neither should we accept a price which is below the fair market price of the COEs, because COEs belong to Singapore and Singaporeans ultimately. Members will recall that the $50 COEs occurred in December 1997. Did that reflect the true value of COEs in that month? Obviously not. If that were the case, then that would have been the benchmark price for the next few months. But the next month, the price bounced back to its original level. If people knew that $50 would be the price for COEs in that category that month, I can bet my bottom dollar that everybody would be rushing to the nearest ATM to put in their bid. But this $50 COE did happen. It is a weakness of the system. This weakness is something that needs to be addressed. This is the reason why I set for the GPC the other objective of seeing whether the VQS can be improved to make it fairer and more objective. Sir, let me now respond to the specific recommendations made by the GPC to improve the mechanics of the VQS system. First, the quota system. The existing quota formula is based on the number of vehicles deregistered in the previous year. The GPC has proposed to change the formula to base it on estimated deregistrations for the current year instead of the previous year. This will remove the one year lag between deregistration and recycling of replacement COEs. What this means effectively is that it will better match the supply with the demand of those who are scrapping their vehicles. This is a sensible suggestion. The Government accepts this recommendation and will implement the new quota formula for this quota year, beginning May 1999. So the 1999 quota will be based on projected deregistration this year plus 3% growth of the vehicle population as at 31st December 1998. LTA will estimate the deregistrations for each year based on the trends of the last few years. If there is any discrepancy between estimate and actual, this will be accounted for in the following year. Next, smoothening out the peaks in COE supply. The Government agrees in principle with the recommendation to smoothen out the surge in COE supply in the year 2000 and the troughs that would take place before and after. Major fluctuations in the year to year COE supply is likely to lead to instability in COE prices, if not matched by corresponding demand. The actual figures will be announced when the LTA determines the quota for the year 2000 and 2001. Next, distribution among categories. The GPC recommended that the Government consider a more dynamic and responsive mechanism to distribute COEs to the different categories. The aim is a laudable one which is to reflect the changing preference of motorists for different kinds of vehicles. We agree that the current system is not flexible enough for this purpose, but some of the projections that we have made suggest that any such proposed mechanism will have a major impact on the vehicle mix. So my Ministry would like to study the implications of this proposed mechanism and other alternatives, if possible, to the current distribution method with the objective of making sure that it is more responsive. In the meantime, we will retain the current distribution method. Merging of quota categories. I think this is a recommendation that has generated quite a lot of interest. The GPC recommended that the number of categories for cars be reduced to two while the commercial vehicles and motorcycles remain in their separate categories. Mr Ong Kian Min and Dr Wang Kai Yuen, among others, have expressed concern that this merger will result in the buyers of smaller cars in each category being squeezed out by the buyers of the larger cars. Both Members have also recommended in one form or another, some kind of a scaling factor so that big car owners will pay more than small car owners. I think there is no question that when the COE system was first formulated there was this need to address some of the social equity considerations. But from the land transport point of view, it is also clear that there should only be one category of COEs from which all vehicle buyers will bid. The reason is very simple. As far as congestion is concerned, it is the same whether you have a large car or a small car, so the COE as a proxy for the cost of causing that congestion should be the same. Having a single category will also provide maximum flexibility to cater to the changing preference for different types of vehicles. Having a large category, as Dr Wang pointed out, would also reduce price fluctuations. But there are compelling social and business considerations to suggest that we are not ready to implement a single quota category system. So the recommendation to keep, for example, commercial vehicles and motorcycles separate is an acceptable one. The reason is because they have different tax platforms from cars and they also cater to different groups of motorists. With regard to Mr Ong's and Dr Wang's suggestion to introduce scaling factors, I think this suggestion was also considered by the GPC, but it was not accepted after the Government gave its view that the VQS is not intended to be a progressive tax measure. Progressivity is already built into the cost of owning a vehicle, especially into our motor car tax structure. For example, when you buy a big car, you pay a higher ARF and more customs duty because these two elements are based on the Open Market Value of the car. So we are already charging a wealth tax on the large car owners via the ARF and the customs duty mechanism. Furthermore, we charge higher road taxes when these cars are put on the road. So the Government feels that there is really no need for us to introduce another progressivity element into another aspect of the land transport tax structure or cost structure, which is in this case the COE. This is a deliberate decision that we have taken. Yes, I agree that people would not mind if Government were to say, "Okay, we are going to have a progressivity element into the COE structure as well." But is it necessary? After all, when we first mooted the COE system, we said that this is to tackle traffic congestion. Let us just leave it at that. Yet, having said all that, it is true that a single car category will result in buyers of big cars squeezing out small cars. So as an interim measure, the Government accepts the GPC's recommendations to reduce the number of car categories from four to two. We merge Categories 1 and 2 together, and then we merge Categories 3 and 4 together. Buyers of small cars, by which I refer to Categories 1 and 2, will not have to compete with buyers of bigger cars, those in Categories 3 and 4. If you look at Categories 1 and 2, you will see that the quota premiums have in recent months started to converge. There is still a difference but the difference has come down very sharply. In fact, there was even one occasion when, as Mr Chew Heng Ching pointed out, Category 1 COEs were actually higher than Category 2 COEs. One of the reasons for this was because there was a mismatch of supply and demand, and the supply of Category 1 COEs is very small every month. In that particular month, when there was a surge of buyers for very small cars, Category 1 COEs went up sharply. Having a larger category for small cars, whether it is below 1,000 cc or between 1,000 cc and 1,600 cc, will help to moderate upward pressure on the COE price for the small cars. For Categories 3 and 4, I think it is much less controversial because the two COE premiums are generally similar and so the merging of these two categories makes sense. Next, I come to the Open Category. The Government agrees with the GPC that the Open Category should be retained. This mechanism of the Open Category was implemented when we segmented all the car categories into various compartments. Ideally, as I said earlier, they should all be one. But because of various considerations, we split them up into six. The COE Open Category is a mechanism to cater for changes in the market place. If there is a change in demand for different types of vehicles, the Open Category can cater for this because it can be used to register any type of vehicle. As several Members have pointed out, including Dr Wang, the Open Category COEs have been used mainly for the bigger cars. But this has not always been the case. In fact, in recent months, and last year especially, about 40% of Open Category COEs were used to register smaller cars. And in the past, these COEs had also been used to register commercial vehicles. So it is not clear cut. It is not preordained that Open Category COEs are used for the larger cars. Things do change as the market changes. In conjunction with the review of the quota distribution mechanism, my Ministry will review the proportion of COEs to be allocated to the Open Category. At the moment, it is 25%. We will continue with the 25%, but in the review, we will see whether this figure should be changed. 2.00 pm Sir, taking all these factors into account, the GPC report, the Government's response, and based on this new quota formula, I would like to announce that the total number of COEs available for the next quota year from 1st May 1999 to 30th April 2000 is 68,191. This quota is about 42% higher than the quota for 1998. As there is unlikely to be much change in the month-to-month quota, there is no need to announce the quota every six months, as the GPC suggested in its report. Details of the distribution will be announced by LTA shortly. I just want to further add that with the merger of the car COEs, the five categories of COEs will be renamed Categories A to E. Sir, if we had used the existing formula, the COE quota for this year would have been slightly over 70,000. This is about 4% higher than the quota based on the new formula that we are going to use. In its report, the GPC had suggested that we do a one-time adjustment, that means, we add the difference to the quota to make up this difference. I have considered this. But since this year's quota is already significantly higher than the 1998 quota, I have decided not to make this adjustment. We will monitor the situation and, if necessary, inject additional COEs after the implementation of the ERP Phase 2 later this year. I come now to the auction method, again another relatively controversial subject. The current system used is the lowest successful bid (LSB) method. The GPC recommended that this method be retained but also recommended that an open bidding system be considered to give more responsive information and greater transparency. And it recommended that we try this out in the Open Category. As Members are aware, there are many, many different auction systems in the world and in Singapore. Some are used to auction hogs, some are used to auction cars, some flowers, others stocks and shares, which is a very common example. Each of these systems has its strength and weakness. So we need to look for a system that can suit our specific situation, a system that people generally accept to be fair and transparent. There have been many calls from Members in this House as well as members of the public to implement a pay-as-you-bid system. The main reason behind such calls is the belief that a pay-as-you-bid system will result in lower premiums. The thinking is that with the lowest successful bid, people are encouraged to bid high because they do not have to pay. In the pay-as-you-bid system, everybody is more responsible and therefore you bid responsibly. However, if you take a closer scrutiny of the results of the tenders for the last months, if not years, I think you will find that this is not the case, that actually in the current lowest successful bid system, people do not generally bid irresponsibly. Dr Tan Cheng Bock had given some details earlier about some of the bidding patterns. These results are available to members of the public. In fact, they are released to members of the press. Anybody who is interested can go to the LTA and get all these details. My Ministry has analysed the numbers and we do not see any evidence that there is this very irresponsible bidding pattern that people have attributed to the lowest successful bid system. So the Government agrees with the GPC's recommendation that we do not implement the pay-as-you-bid in the closed bidding system. There is no evidence to suggest that the pay-as-you-bid system is superior to the lowest successful bid system. On the other hand, there are several disadvantages of the pay-as-you-bid system. These are cited in the GPC report and I will not repeat them here, except to say that I agree with the reasons. The Government also agrees with the GPC that the open bidding system merits serious consideration. With greater transparency and more information, individuals will be able to make more informed and rational decisions based on the full knowledge of the prevailing market situation. Many Members in this House, including Dr Toh See Kiat and Mr Chew Heng Ching, as well as many others outside, have expressed fears that an open bidding system will irrationally drive up prices, leading to higher premiums. I think all of us attend Seventh Moon auctions. Most of us do anyway. We all cheer when the prices go up. The organisers are happy. The beneficiaries, whether a charity or a grassroots organisation, are also happy. The successful bidders are also happy. Because he is a willing buyer of a product that is being sold to him. It is a scarce commodity. Whether it is "or kim", a piece of black gold, or whether it is an engraved plaque that somebody has put up for auction, this scarce commodity has been sold to the highest bidder. Nobody twisted his arm to bid for it, but he was happy. So it is with COEs. In an open bidding system, people who value or who want that COE in that particular month will go for it. They will bid high for it. That is what an auction system is all about. And the revenues from COEs also go towards a good cause, whether it is for roads, MRT, schools, or other public projects. So I think we should not get carried away. The bidding system, whether it is a closed system or an open system, is essentially an auction for a scarce commodity. In itself, any auction system, whether it is an open or closed bidding system, should not lead to higher prices. The price, in this case the COE premium, ultimately will be decided by the bidders, based on information that are available to them, the supply of COEs, the market economy, or their own situation, as Dr Wang pointed out. In a closed bid, such information is not readily available. So there is that element of luck involved. You put your bid in. If you are more informed, you tend to have a higher probability of success. If you are less informed, chances are that you would not get your COE. But in an open system, the bidders will be fully aware of what the prevailing bids are. Their own bid will also be a deliberate one. Every one will have easy access to the same amount of information. So in that respect, I support the view of the GPC that an open bidding system will result in better informed and, hence, more rational and more responsible bidding. I think this is a worthwhile objective which every vehicle buyer will support. I understand and it is natural that there will be some anxiety and apprehension about new systems. Some Members including Mr Ong Kian Min have asked: why change, why not stick to the same thing, why introduce uncertainty? The answer is, if we can have something better, why not? So is it better? I think that is a key question. Is it better than what we have today? Is it really a new system? People are anxious because they say this is something new. I think Mr Chay did point out that this is not a new system. Share markets, currency markets trade daily on stock and monetary exchanges on an open bidding system. There are many, many sites on the Internet where open electronic bids are quite common. E-bay is one that comes to mind. I think there are many others, both overseas and in Singapore. Cars are now being sold on an open bidding system electronically. Traders in New Zealand buy second-hand cars from Japan, and they bid for them on an open electronic bidding system, a system which incidentally is managed and operated out of Singapore. Second-hand motor traders in Singapore, I know, are now thinking of using a similar system to allow people to buy and sell second-hand cars, again using an on-line auction system. So I do not think there is really that much to fear about an open bidding system transacted on-line. However, I do agree that there are many technical issues that need to be settled before we go ahead with this system. We need to settle things like how to prevent last minute bidding, how to prevent manipulation, and so on. My Ministry will study the mechanics of this open bidding system in greater detail. And we hope to introduce a trial of this system within a year. While the Government is accepting in-principle the trial, we have not finalised whether this will be held in the Open Category, and we are open to suggestions on how to implement the trial. I would like to assure Members that the Government will carefully consider all the possible pitfalls of the open bidding system before we go ahead with it. As Dr Toh See Kiat mentioned, there are many reservations or possible pitfalls in such a system. In the meantime, we will stick with the current closed system, based on the lowest successful bid price. We will not change that. As far as information is concerned, Mr Ang Mong Seng asked for more information. We will gladly give members of the public all the information that is already available at LTA. We will try to put them onto the LTA web-site. In fact, many members of the public who were involved in the dialogue sessions with the GPC were not even aware that information of the tender results, including their own tenders, with their IC numbers and their tender price, were available at LTA. Such information was available to members of the public but they were not aware. So we will make this information more available on the LTA web-site. Sir, let me conclude by saying that the review of the VQS has been a worthwhile exercise. There is a general consensus that the VQS should be retained. It is serving its purpose. Nevertheless, there are several recommendations to improve the system. The Government has accepted most of the recommendations. Others would be considered for possible implementation at a later date, such as open bidding. I am confident that these changes will result in a system which is fairer and more efficient and which, hopefully, we do not need to tinker with for quite a long while.