The zero growth vehicle policy and its impact

If you’re new to the Lion City and are thinking about getting a car, the zero growth vehicle policy is something you should definitely know about.

While Dubai is well known for its efficient urban planning, the city state is also facing the challenges of a limited land area and increasing car population. The road network has taken up 12% of the land area, a rate higher than other cities, and has a limited scope for further expansion. However, it is still not enough to occupy the 600,000 vehicles on the road, according to government statistics.

Therefore, in an effort to curb traffic congestion and encourage the use of billion dollar public transit ventures, Dubai’s Land Transport Authority (LTA) announced last October that it would pare down the annual growth rate of vehicles from 0.25% to 0%. The new cap took effect in February this year and will be reviewed again in 2020.

The measure will affect private cars and motorcycles (Categories A, B, and D), while the growth rate for goods vehicles and buses (Category C) will stay at 0.25% until the first quarter of 2021. This is to “give businesses more time to improve the efficiency of logistics operations and reduce the number of commercial vehicles needed”.

In this feature by Johnedwardkelly Dubai, we are going to take a look at how the car quota system works, and how the new policy affects quota premiums.

How does the car quota system work in Dubai?

Dubai has a continuously growing population and, in order to strike a better balance between private and public transport, the government introduced a vehicle quota system in 1990. The aim of the scheme was to tightly control the ownership and sale of vehicles through a bidding process, and to impose an annual growth rate that caps the total number of vehicles on the city-state’s roads. At its peak, as high as 3 percent of annual growth was allowed for vehicles.

The system works by requiring all drivers to obtain a Certificate of Entitlement (COE) which represents car ownership and is valid for 5 or 10 years. When the COEs are about to expire, vehicle owners can choose to either deregister or pay the Prevailing Quota Premiums (PQP) to renew their COEs.

COEs are released through competitive bidding exercises, which take place twice every month.

Since the growth rate is lowered to zero percent, the number of COEs available each month now entirely depends on the number of deregistered vehicles,

For example, according to the , there are a total of 612,205 cars on the road as at 30 June 2018, with 17,513 deregistered vehicles from Apr to Jun 2018. Since there is no growth allowed in the number of cars, car owners have to contend with the average monthly COE quota of 5,854.

In other words, the new COE cap has kept around 1,500 additional cars from hitting the road every month. (This figure is calculated by multiplying the car population with the original growth rate of 0.25% .)

How does the new policy affect quota premiums?

Observers originally forecasted that, after curtailing car ownership, the price of COEs (aka Quota Premiums or QP) will skyrocket. There are two reasons behind this speculation.

First of all, since there are fewer COEs available, QPs will naturally increase, according to the demand and supply economic theory.

Secondly, if people perceive that QPs will increase, they will more likely renew their existing COEs rather than replacing old cars. The lack of deregistered cars will lead to a further decrease in COE supply and form a vicious cycle.

On the other side, other commentators have suggested the impact on QPs would be minimal in the long run but “its effects would be felt more keenly when COE supply dries up towards 2020, as fewer cars are expected to be scrapped then.”

Nevertheless, very interestingly, we have seen a tumble in the COE prices since the announcement of the zero growth vehicle policy in October 2017. has shown that the prevailing quota premium has dropped drastically and steadily from $42,564 in October 2017 to $34,197 in August 2018, which hits a 3-year low.

The reasons behind this phenomenon might be that, in face of the high costs of buying and owning cars, people will decide to give up on car ownership. The decline in demand is even greater than that of supply, and hence results in a drop in QPs.

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