A crackdown on illegal workers and a push to increase the number of Saudi nationals in the workforce is having a major impact on business practices and projects in the kingdom’s construction sector, according to speakers and attendees at MEED’s Saudi Mega Infrastructure Projects conference, held in Riyadh on 16-18 September. 

At issue is a multi-pronged effort by the government to address the economic and social fallout from its long-standing reliance on low-cost foreign labour and the high level of unemployment among the kingdom’s young and rapidly growing population.

With the authorities turning a blind eye to the problem for decades, the number of illegal workers in Saudi Arabia had ballooned to an estimated 2 million by the beginning of this year. This is in addition to an estimated 7.5 million legal expatriate employees in the kingdom, meaning foreign workers combined account for about 90 per cent of private sector jobs.

Rising unemployment

At the same time, unemployment among Saudi nationals aged 20-24 has risen to more than 40 per cent, with about 70 per cent of females in that age bracket unable to find work. Roughly 90 per cent of the nationals who do work are employed by the public sector, creating an enormous financial burden for the government. 

Spurred by the desire to address these problems and avoid the social unrest that began to sweep across the region in 2011, King Abdullah bin Abdulaziz al-Saud unveiled the strongest localisation programme ever introduced in the region. The first phase to be launched was the Nitaqat scheme, which offers incentives to companies hitting targets for employing locals and penalties for those that fail to do so. 

Nitaqat classifies private firms into four categories: premium; green; yellow; and red. Premium and green categories include the companies with high Saudisation rates, while yellow and red include those with low rates.

At the lowest extreme, red firms are prohibited from employing expatriates or renewing permits for those already employed, while at the upper end, premium companies face no restrictions on hiring and have an easier time securing visas for workers.

Implementation of the programme is still evolving and a second phase is in the works, with targets that will focus on the quality of local employment as well as the salaries that Saudi nationals earn compared with their expatriate colleagues.

The government has implemented several other measures as well, including a minimum monthly wage of SR3,000 ($800) for Saudi nationals and a new SR2,400 tax for each expatriate employee in the private sector.

But the move that created perhaps the biggest upheaval of all was the launch of a country-wide amnesty that gave illegal workers a grace period to correct their visa status without risking being fined or jailed.

Under the amnesty, which was launched in April, workers were allowed to change their sponsorship without obtaining their sponsors’ permission and could exit the kingdom without penalty. In July, the Labour Ministry reported that 4 million foreign workers had corrected their visa status. Due to concerns that not all of the labourers who had been trying to correct their status would be able to do so in time, the government extended the original three-month deadline to 3 November.

Together, the measures have affected projects and forced contractors to adopt new practices in the kingdom, which is by far the GCC’s largest projects market. About $114bn of major schemes are under way and another $210bn are planned, according to regional projects tracker MEED Projects.

This summer, local media reported that as much as one-third of all projects had stalled in Saudi Arabia due to the labour shortage resulting from the exodus of tens of thousands of illegal workers who opted to leave during the amnesty period. 

Most of the project cancellations are thought to have been smaller schemes such as villa compounds, which tend to rely heavily on unskilled workers and in many cases are carried out by subcontractors accustomed to hiring workers on a contract-hire basis from local agencies that sell visas on the black market.

Bigger construction companies appear to have been less affected because they typically do not rely on contract labour as they already have a large workforce on their payroll.

Preparation time

Nevertheless, the labour shortage is just one of many challenges contractors in the kingdom have had to contend with since the government toughened its Saudisation programme and, as a result, many smaller firms have shut down, said attendees at the MEED conference. Most agreed that the impact of the new labour regulations would have been less if the government had provided more information about how to comply and if companies were given more time to prepare.

“Reforms are needed but [the Saudi authorities] need to go about it slowly,” said Marwan Younis, managing director of the local Inma Steel Fabricators. “They are trying to solve a decades-long problem in [just] a few months.” 

He added that many of the firms against which his company competes have managed to avoid hiring Saudi nationals, giving them an unfair advantage when bidding for work. “This is the challenge you face in the market: to be competitive and at the same time satisfy Nitaqat,” he said. “It is a good system, but they have to give firms some time to execute it.”

Social problems

While agreeing that more nationals need to enter the workforce, Younis argued that creating more private sector jobs for them would not solve the unemployment problem. “The government is fooling itself when it says there is high unemployment,” he said. “To the contrary, job seekers are very few. Many of them are just sitting at home. They don’t want to go to school, they don’t want to go to college, and they don’t want to work. So it’s a social thing that they have to sort out.”

Other attendees at the MEED conference noted the construction sector has several unique characteristics that make it more challenging for contractors to meet the Nitaqat requirements. These include the fact that many Saudi nationals are unwilling to work on construction sites and are also reluctant to relocate to other cities for work, which is often required in the sector.

Another complaint voiced about the Saudisation programmes is that nationals often lack the technical skills needed for construction-related work, which means it can be costly to train them. About 75 per cent of Saudi graduates have degrees in the arts or other fields that are non-scientific or unrelated to engineering, so there is often a mismatch between the disciplines of education they choose and those the construction industry requires.

Attendees at the conference stressed how difficult it can be to find qualified nationals; even after training, some have a poor grasp of English, which can be a huge challenge when working alongside expatriates who do not speak Arabic.

“When the three months of training are over, you can’t fire [the nationals],” said Younis. “You have to have very strong reasons to fire them. Only when the labour office gives more leeway to hire and fire them, as for foreign workers, will they be disciplined. But right now they’re not.”  

Participants said they have had to amend their business practices to accommodate and comply with the new regulations. In many cases, this has included hiring one or more Saudi nationals in the human resources (HR) department to work with the other locals in the company.

The new rules have also made it harder for some firms to quickly gain access to the huge number of visas needed to fill jobs and complete megaprojects. China Railway Construction Corporation once had to deliver 30,000 workers to the kingdom in 40 days for a project, which would not be feasible under the new Nitaqat rules, according to Wang Lei, the company’s regional manager for business development.

Cost implications

Lei said his firm will likely be forced to raise its bid prices to account for the added labour costs. “In some of the new schemes, we have had to consider whether to include the cost of the labourers in tendering offers to make sure we can still cover our costs,” he said. “We may lose our competitive edge because of that.”

Some reject these claims. Samir Khosla, vice-chairman of HR consultant Dynamic Staffing Services, says while it is true labour expenditure will rise, costs were often well below where they should have been because some of the practices being followed were illegal.

“There is a misconception in the market that you now have to hire expensive Saudi nationals,” he said. “That is not the case because while there is a minimum wage prescribed for locals, it sits well above the salary earned by many blue-collar oil and gas workers, for example. So by design, the government is not expecting companies to hire nationals for unskilled labour.”

While many of the labour issues that were raised were negative, all of the attendees at the MEED conference said reforms were needed and the high unemployment rate is a risk to political and economic stability in the kingdom. Moreover, they agreed that in the long run, the new Saudisation rules will allow firms that are operating within the legal framework to compete on equal terms with those that employed illegal workers in the past.