Wednesday, 1 July 2015

Weaning Singaporeans off their cars

There was this article on the Straits Times about how to wean Singaporeans off their cars.

It was not a very good article. It was basically suggesting that Singapore introduces Trams... because "Trams are the number one means of public transport in Leipzig."

Anytime you read something that is basically gushing over something that works very well in some setting and suggests it be adopted by SG without considering the factors why it works very well over there... you have a dumb article.

Extract from the online comment:
Trams? Old tech. And like the MRT, if a tram breaks down, the next one cannot move because they are on the same track. I've seen this in Melbourne.
Trams need either powerlines or tracks or both. It means fixed infrastructures and that means inflexible application. Trams are old tech. Quaint, but may not be relevant or appropriate to Singapore..
The "Trams" of the future will be driverless/ autonomous "trams" that do not need to run on tracks. This gives them greater flexibility in application and deployment.
Subsequently, in a flurry of for and against letters to the forum page, writer after writer wrote in defence and attack of the proposal to "wean" Singaporeans off cars.

One suggestion was to provide carrots - like discount on road tax.

Behavioural Economics have found that Loss Aversion works better than Incentives. Therefore carrots don't work as well as sticks. And I am not even sure if the suggestion was a carrot.

And of course you have to address the issue of COE.

The COE premium imposes a high cost upfront. Then another artifact of Behavioural Economics emerges - the Sunk Cost Fallacy. You instinctively understand this fallacy: "If I have paid $80,000 to own a car, I might as well use it. For every KM I travel, the per KM costs falls. If I drive 1000 km in 10 years, that works out toe $80 per km. If I drive 80,000 km in ten years, that works out to just $1 a km. The more I drive the cheaper it is!"

So when the ERP was implemented, drivers used the sunk cost fallacy to justify using their cars - I've already spent $80k, what's $2 more?

Did i say "you instinctively understand this fallacy"? I meant, you  probably fall to this logical fallacy as well. This is not a failure of character. It is a common fallacy.

The problem is that the COE as a HUGE sunk costs "incentivizes" drivers (thru the sunk cost fallacy) to drive more, instead of less.

The (obvious) solution is to stagger out the COE Premium payment.

The proposed staggered COE premium would work like this:

  1. Bid for the COE as per normal.
  2. Successful Bidders will then pay just 10% of the COE premium to register their car. e.g. If the COE premium is $100,000, you just pay $10,000 in order to register your car. (Savings!)
  3. You are now allowed to drive your car up to 500 km per month.
  4. If you drive more than 500km in a month, but less than 1000km, you will pay 1% of COE (top-up COE) for the "privilege".
  5. And if you drive more than 1000 km (but less than 1500km) for any given month, you will be further charged 1% for every 100km (or part thereof) in excess of 1000km, up to 1500 km.
  6. And so on. a) 1501 - 2000 km, 2% per 100km; b) 2001 to 2500 km, 3% per 100 km. etc.

[Note: this model can be varied. A more severe schedule could have the owner pay 1% per 100 km between 501 and 1000 km, 2% per 100 km between 1001 and 1500 km. 3%... and so on. 1500km a month would costs 15% of the COE a month more. A gentler schedule would be 1% more for the 2nd 500 km, 2% for the 3rd, 3% for the 4th and so on. 1500 km would mean only 3% of COE a month. Or 36% of COE per year. Over 10 years, the owner would have paid 360%+10% (down payment).]

How does this overcome the "sunk cost fallacy"?

It immediately reduces the sunk costs by 90% (only 10% "down payment"), and makes every decision to drive pass a threshold a costly and conscious decision. It is not "drive as much as you want" (like a buffet), but "pay as you go".

Great! I have just thought of a way for people to save money.

Not necessarily.

If you have a car, how much do you use it (in terms of km driven) in a month. Five hundred km a month? More? less?

Singapore drivers drive about 19,000 km per year. Or more than 1500 km per month. Compared to UK drivers (10,900 km) and Australian (15,000 km a year). Singaporeans in a small city state almost beat the US (21,600 km a year).

So if Singaporeans drive like they normally do - 1500 km a month, they would have to pay an additional 6% of the COE premium they bid. 1% for the 501 - 1000 km, and 1% per 100 km after that up to 1500 km.

[Note: 1500 km a month = 50 km per day on average. To keep to 500 km a month, drivers have to limit their vehicular use to less than 20 km a day (about 17 km a day).]

In a year, they would be paying 72% of the COE, and in 10 years, 720% more on top of the 10% downpayment they paid.

[Which is REALLY high!]

One reason to start high is the shock effect. At registration, the car owner would have paid 10% of the COE. For 10 years of use. One month later, he would have to pay 6%. For just one month of use! The car owner may continue his usual driving habits for the first month, get the COE top-up bill shock for the month, and then (maybe) moderate his driving in the following months?

Well, that is the hope.

But okay, if the initial COE downpayment is only 10%, there is a lower sunk costs and so maybe a lower "sunk cost fallacy" effect. SG drivers may not drive so much. Perhaps less than 1000 km per month or about 12000 km a year, a 30% drop from 19,000 km. Possible?

If so, they will pay 12% more (1% a month) a year in COE premium or 120% over 10 years. Plus the initial 10% paid as down payment, for a total of 130% of the COE.

If the govt is concerned about losing a goose that lays the golden egg, this scheme would actually polish the golden egg. COE premiums are now the 4th largest source of revenue for the government, providing $6.1b. Assuming all else being equal, the COE scheme would now provide (over 10 years) 30% or more revenue, while potentially being better at keeping car usage down.

But first there will be an initial hit of a 90% reduction in revenue (from the 10% down payment).

There may be some top-up COE from over-driving the cars, so it may not be a 90% reduction in the first year. A conservative estimate would be a 50% decrease in the first year.

First, as potential buyers start to realise that they only need to pay 10% of the COE, they may bid the COE higher.

Say currently, the COE is about $60k. With the new down payment, car buyers just need to pay $6000 on registration. But they were prepared to pay $60k.

Now they won't mind bidding put to $100k,  because they would only pay $10k on registration which is 1/6th of the previous COE. So instead of $6k, 10% would be $10k so it would not be a 90% cut to the revenue for the government. Maybe only 85% cut. ( I realise at this point, most readers would have lost interest. But it is an important revenue source for the government and with planned budget deficit, choking off a revenue stream is a serious consideration.)

Second, it will take a while for drivers to change their habits. So if they are used to driving 1500 km a month, they may still do so, and incur 6% COE top-up in the first few months. If everyone drove 1500km in the first month, that would be 6% of the new COE ($100K, which may be closer to 10% of the old COE - $60K).

If it takes a few months for drivers to learn new habits and reduce their driving, or even if they reduce their driving it is still between 501 and 1000 km, there would still be COE top-up, and the cut in revenue could be about 50% only.

So while there is some loss of revenue to the government, and there is some savings to the car owners, it is overall a compromise. Which may make this more palatable for all.

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