Who should switch to off-peak cars?

One enhancement to the scheme to consider is the scrap rebate
Christopher Tan, Straits Times 9 Sep 09;

CHANGES to make the off-peak car (OPC) scheme more attractive for motorists to switch to a red plate have been widely reported, but one aspect of the scheme has escaped attention thus far.

The focus has been on the cash rebates, more unrestricted usage and new e-licences. What many have missed is this: an owner who converts his normal-use car to an OPC will continue to enjoy the full scrap rebate when he eventually scraps the vehicle.

This will not be the case for someone who goes for a red plate from day one. The scrap rebate in this instance would often be smaller.

This clause is a strong incentive for motorists who do not need to drive all day to consider switching to a red plate.

For their sacrifice, most will be paid $1,100 every six months, and will be granted a road tax discount of $500 a year.

That works out to be around $225 for each month they keep their cars off the road during peak hours. Or about $10.50 a day, excluding the unrestricted usage on weekends, public holidays as well as on the eve of five major public holidays.

If merely 10 per cent of car owners convert, the annual payout will amount to $1.1 billion - not a meagre sum.

The question that arises here is why the individual compensation ($10.50 a day) is not commensurate with the $20-a-day permit OPC owners need to buy if they want to drive outside the restricted hours.

The scheme cannot be so generous that OPC drivers find it worth their while to buy a $20 permit every weekday. If that were the case, there would be no difference between an OPC and a normal use car. And road congestion would not improve one bit.

From another angle, the reworked OPC incentive works like reverse road pricing. Just as motorists who take up road space during peak hours pay ERP charges to do so, those who confine their driving to between 7pm and 7am during weekdays are duly compensated.

The adequacy of the compensation depends on how much someone has spent on a car. Obviously, the pricier the ride, the less attractive the scheme.

Those who bought cars during the COE doldrums six to nine months ago would not get to enjoy the full compensation if they convert, either.

This is because the six-monthly compensation that someone who converts gets is tied to the tax break which OPC buyers get on their cars' COE and registration fee.

The tax break is capped at $17,000. If a car's COE is very low, say $2,000, and the car is a budget car from China, the registration fee and COE amount may not come up to $17,000.

On the other hand, if COE premiums climb back up to $30,000 or $40,000, the OPC monetary incentive also becomes pale in comparison.

A noteworthy point here is that someone who converts his normal-use car to a red plate gets $2,200 in cash a year. But the tax break accorded to someone who buys an OPC from the showroom works out to be $1,700 a year (if the vehicle is kept for 10 years).

The revised scheme will nevertheless be a boon to a cohort of car owners who bought their cars in the last three to four years. Many of them would have taken out huge loans to buy their car.

This is because car prices have been sliding in recent years. So many of those who bought new cars would not have got enough on their trade-ins to redeem their previous car loans.

Hence the proliferation of cashback schemes that financial institutions dangled. They are meant to help such consumers pay up their previous loan before starting on a fresh one for the next car.

Obviously, such car owners are now geared to the hilt. Even though used-car prices have begun to recover in line with rising COE prices, many will continue to be saddled with hefty monthly instalments.

Faced with thinner or no bonuses, pay cuts and the prospect of redundancy, these monthly instalments are daunting, especially in the face of other financial commitments.

These people cannot sell their cars. If they do, they risk being sizeably out of pocket.

Late last year, some finance houses had to put off repossessing cars of customers who had technically defaulted on their loans. The repo yards were filled to the brim.

So instead of repossessing a car from someone who missed instalment payments for three months, the lender says: 'It's okay, just pay us one month.'

The new OPC scheme will also be beneficial to car owners who need to leave the country for an extended period - say an overseas assignment of between six and 18 months. Converting to a red plate would save such a car owner plenty.

When they return, they can switch back to a normal plate. Of course there will be a $100 'administration fee', as well as another $100 or so for the red number plates.

With the announced enhancements, interest in OPCs has heightened. The Land Transport Authority (LTA) says it has been receiving inquiries from the public. Since the news broke on Aug 29, daily inquiries have numbered around 190 - more than six times the 30 a day before the announcement was made.

Motor traders say they have also been getting more inquiries, but actual bookings have not grown.

This is probably because the main benefits of the revision kick in only next January, four months away.