This article first appeared in The Edge Financial Daily, on February 4, 2016.

KUALA LUMPUR: Smaller construction firms are at the risk of business closure following the sudden rise in foreign workers’ levy this month, said the Master Builders Association Malaysia (MBAM).

MBAM vice-president Tan Sri AK Nathan said many builders are already surviving on single-digit razor-thin margins and the levy hike will crush their earnings.

“The levy hike will translate into about [a] 2% increase in overall costs. This could cause some contractors’ profit to fold as we are usually [seeing] single-digit [margins]. As a result, smaller construction companies that are struggling to keep up with costs will close down [eventually],” said Nathan.

He does not rule out the possibility of cost overruns and delays in project delivery due to a lack of manpower.

MBAM deputy president Foo Chek Lee concurred, and added that the construction industry will be impacted not just by the levy hike for construction workers, but also the levy hike for workers in other sectors, like manufacturing (up 100%) and services (up 35%).

“This is because the industry has 130 sub-sectors, including manufacturing and services, which will pass the additional cost to us. Ultimately, we will pass the additional cost to end users or purchasers,” he added. Foo said there should always be continuous dialogue with the industry and stakeholders before such drastic decisions are made.

“The better solution for the government to generate revenue is to legalise illegal foreign workers with the previous [levy] rate of RM1,250. This will generate more revenue and will not burden the business community, which is still struggling to adjust [to] the impact of the goods and services tax, higher construction costs and the weak ringgit,” he added.

As such, MBAM deems the levy hike a “short-term measure that results in long-term problems” and urged the government to withdraw its decision.

Nathan and Foo were speaking at a joint press conference by MBAM, the Guild of Bumiputera Contractors, the Malay Contractors Association of Malaysia and the Malaysian Indian Contractors Association.

The Real Estate and Housing Developers’ Association Malaysia (Rehda) also urged the government to reconsider the steep levy increase, saying the hike will have a negative impact on the country’s affordable housing agenda.

“We are deeply concerned [as] such [a] steep increase would not only negatively impact business operations, but ultimately the cost of increase would be passed down to consumers, thereby hampering the affordable housing agenda,” said its president Datuk Seri Fateh Iskandar Mohamed Mansor. Rehda, in appealing to the government to review the new levy position, is also seeking an urgent discussion with Putrajaya to find an amicable solution to the issue.