The high cost of motoring in Singapore

Business Horizons, March-April, 1994 by Rex S. Toh

When buying a car in the United States, all we need to do is choose a model, complete some forms, and sign a check. We are then given the keys to the car and simply drive off - usually with a full tank of gasoline.

In Singapore, when buying a new car, one has to decide well in advance when and where to drive, what size car to purchase, and whether it should carry a private or corporate license plate. Then one bids for the license to own a car, waits for the results of the auction, and, if successful, pays upwards of $60,000 for a sub-compact! And ten years later, one probably has to undergo the same gut-wrenching experience all over again. How did this come about?

Singapore is an island city-state, 250 square miles in area, strategically located at the crossroads of commerce and tourism at the southern tip of the Malaysian Peninsula. With 2.7 million people, it has a very high population density of 11,000 persons per square mile, compared with only 70 per square mile in the United States. Singapore enjoys the second highest standard of living in Asia (after Japan), with an export-oriented economy that is growing at a robust rate of 8.8 percent a year.

From a transportation perspective, this economic success has not come without a price. Because the country is hot and humid, the demand for air-conditioned private transportation is high and very income-elastic: a 1 percent increase in household income results in a 2 percent increase in the number of privately owned cars. Because of the rapid rise in incomes, Singapore today has about 300,000 cars (roughly 95 percent of them privately owned) and 600,000 motor vehicles, resulting in a high linear density of about 320 motor vehicles per mile of road, compared with only 44 in the United States.

The problem of traffic congestion in Singapore is especially acute in the central business district. By 1975, during the morning and evening rush hours, traffic crawled at an average speed of only 12 miles per hour, prompting authorities to discourage the entry of cars into the city center by instituting an area-wide system of tolls.

The Area Licensing Scheme

Singapore's world-famous Area Licensing Scheme (ALS) was implemented in June 1975. It defined a restricted zone (RZ) of slightly more than two square miles in the city center, with 22 vehicular entry. points (now expanded to 33) at its boundaries.

The ALS has gone through many changes over the years. Today, all motor vehicles, except those in the exempt categories - that is, public-owned buses running scheduled routes as well as police, military, and emergency vehicles - must display a decal to gain entry into the RZ during the hours of restriction (7:30-10:15 a.m. Monday through Saturday and 4:30-6:30 p.m. Monday through Friday, except public holidays). The daily ALS fee (good for multiple entries) is $1.80 for individual cars and trucks, $3.60 for company-registered cars, and $0.60 for motorcycles. The fine for not buying and displaying a valid decal upon entering the RZ during restricted period is around $40 today.

As a result of the implementation of the ALS, several traffic patterns have emerged. Affected motorists have shifted their trips to just before and after the restricted hours to avoid paying the fee. In addition, morning and evening

peak hour traffic has been diverted to new "escape corridors" that bypass the RZ. It is surprising to note that whereas the demand for car ownership is very income-elastic, the demand for car usage is very price-elastic.

The dramatic reduction of motor vehicular traffic within the RZ during the supposed "peak hours" has resulted in average speeds of 22 miles per hour, compared to only 6 or 7 in New York and 11 in London. An expatriate living in Singapore was reported to have remarked, "It's unbelievable. I have never seen a city with a traffic level like this during the peak hours. It's like being in an English village on a Sunday afternoon" (Sunday Times 1989). Ironically, Singaporeans today are required to pay a fee to drive on underused roads during supposedly "peak hours."

Electronic Road Pricing

Singapore is planning to implement an Electronic Road Pricing (ERP) system to replace the ALS by 1996. All motor vehicles will be installed with "smart" debit cards containing microchips. Whenever a vehicle passes through a control point, a presence detector buried under the road surface will activate an antenna that will emit a microwave beam to deduct a set amount from the debit card. When a reader on the card indicates that the remaining monetary value is close to "empty," the card can be topped up at banks or even at gas stations. When a beam detects no card or a depleted card, a camera will record the vehicle's back license plate and transmit it to the Control Center for enforcement purposes.

The government favors the ERP concept for several reasons. First, tolls can be made to vary according to the number of entries, the amount of time spent within the RZ, and the distance traveled. Second, fees can be set according to the anticipated level of congestion. For instance, the highest tolls can be imposed during the peak periods of 8:00-9:30 a.m. and 4:30-6:00 p.m., with declining shoulder prices commensurate with declining traffic density. Third, different tolls can be imposed over different areas, again depending on the levels of congestion. In technical terms, one would operate in a first-best world of Pareto optimality, in which each vehicle will be required to pay a toll equal to the amount of "external diseconomy" it creates at a certain time and place, thus forcing the motorist to internalize this cost.