Coping with rising cost

The rising cost of living has become a major concern among the rakyat. Globally, other countries too face similar challenges posed by rising prices. Our Government, in its effort to decrease its debt and fiscal deficit, has made the unpopular move to rationalise its subsidy programme.

Understandably, Malaysians complain that things are becoming more expensive. Prices will rise further once the Goods and Services Tax (GST) comes into force in April 2015.

There will be challenging times ahead and the need to adjust.

The local property industry has not been spared such economic difficulties. Issues like over-regulation, labour shortage, rising cost of building materials and doing business, which have been plaguing the industry remain and have all inevitably led to higher property prices.

Besides these challenges, there are capital contribution and compliance costs that developers have to bear when developing a project.

Capital contribution is payment made by developers in the form of upfront fees and charges imposed by utility providers for the provision of water, sewerage, electricity and telecommunication services.

Developers are forced to comply and “contribute” to ensure that the services are made available to home buyers upon the completion of their housing projects. While they try to equip the houses with all these facilities for the home buyers, it should be noted that most of these utility providers are private-sector conglomerates which benefit from these projects through the subscription of services by home buyers. These companies do not necessarily provide the infrastructure and capital expenditure at their own cost, but instead, pass on the cost to the developers who are required to pay capital contribution charges for upstream infrastructure works. This practice is inequitable as the burden for provision of such costly infrastructure should be borne by the utility companies.

In the latest development of capital contribution to utility providers, Telekom Malaysia (TM) has introduced a Smart Partnership programme to provide telecommunications infrastructure for new projects. With this, developers need to pay capital contributions ranging from an average of RM2,500 to RM4,000 per house to secure the provision of telecommunication services by TM. This contribution fee is in addition to other existing costs of providing infrastructure such as trunking, cabling, etc.

Although it claims to be “voluntary”, we have been alerted by member developers that there have been cases whereby approvals at the One Stop Centre (OSC) level have been rejected for failing to ensure the availability of telecommunication services as a result of not subscribing to the programme. This has placed the industry in a quandary as it is deemed a pre-requisite for the Development Order (DO) approval by some local authorities. Such a requirement is counter-productive to the nation’s agenda of reducing cost of doing business and making home ownership affordable for the rakyat.

Some of the capital contribution charges are based on the selling price and are not reflective of the actual costs incurred in providing these services. Compliance cost is becoming a common practice for local planning authorities and other relevant agencies to require increasingly greater compliance and more specifications on the part of developers without taking into account any cost benefit analysis of these requirements or the financial impact on a project.

The total contribution cost added with compliance cost could make up a significant portion of the development cost. In a survey conducted by the Real Estate and Housing Developers’ Association Malaysia (Rehda) Institute in 2012, total contributions and compliance cost could be as high as 25% of the total Gross Development Value (GDV) for a landed and mixed development.

It is timely that a review of the practice of compliance and contribution costs payable to utility companies be done. In the future, cost benefit and financial impact analysis should be made prerequisites to any increase in regulatory compliance including the surrender of land and the provision of amenities imposed on the industry. While some of these costs are crucial to ensure the sustainability of projects, it should be borne by the relevant service providers and not conveniently be passed on to home buyers upfront via imposing such costs through the developers.

Utility companies should revise their processes so that their capital outlays can be recovered via tariffs based on consumption or through Federal funding from general taxation to ensure better efficiency and transparency. Home buyers should not be burdened by having to pay such upfront costs which are included in the selling price of the property together with the additional tariffs and deposits required.

>> Datuk Seri Michael Yam is the president of Rehda Malaysia. For feedback, email: - StarProperty

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