Saudi Arabia’s Nitaqat programme to employ more nationals is generally viewed in one of two ways: either as an onerous and crudely implemented burden on the private sector or a genuine attempt to address the declining participation of Saudis in the non-government workforce.

The proportion of Saudi nationals working in the private sector dropped from 17 per cent to just 10 per cent over the decade leading up to 2010. A year ago, the government introduced the Nitaqat scheme, a colour-coded system rewarding companies for good behaviour and punishing those that fail to recruit sufficient nationals. It is too early to fully gauge how effective the scheme has been in boosting the percentage of Saudis in employment, replacing some of the 8 million expatriate workers in the kingdom, and tackling the 40 per cent unemployment rate for those aged 20-24. But early indications suggest a mixed picture.

King Abdullah bin Abdulaziz al-Saud dispatched an upbeat cable to Labour Minister Adel al-Fakih in early June, congratulating him on the nearly 250,000 Saudis who have been employed through Nitaqat. According to the Labour Ministry, 195,000 Saudi men and 51,000 women have found jobs.

The scheme applies to public sector companies too, and leading state-owned corporates say they are on course to meet their targets. Saudi Arabian Mining Company (Maaden), which employs about 800 staff, says it has reached 63 per cent, placing it firmly in the ‘green’ category.

Expensive implementation of employment programmes

The programme can be costly, though. Some companies have made stock market disclosures that suggest the increased training requirements of hiring new staff are hitting their bottom line. One large, Jeddah-based Saudi firm estimates the cost of implementing Nitaqat over the next 10 years at about SR1bn ($267m).

Few are prepared to go public with their anxieties about Nitaqat, but a senior Western business representative in Saudi Arabia says he hears frequent complaints that companies hiring Saudis are encountering too many with a poor work ethic. Employers also face issues unique to the kingdom, such as men needing to leave work and collect their children from school, since women are not allowed to drive.

Although the construction industry only has to reach a 31 per cent Saudisation target to achieve an ‘excellent’ rating, it has become tougher to bring in large numbers of foreign workers, making projects harder to implement.  

“Nitaqat represents an effort to introduce more incentives for companies to employ Saudis and in that sense it is an improvement on what went before,” says James Reeve, an economist at the local Samba Financial Group. “The reason you are hearing more complaints is probably because the system is being enforced with greater vigour.”

Despite the grievances, there is a widespread acknowledgement that the demographics of the kingdom’s workforce are unsustainable and that at some point Saudis need to start entering the private sector. With a national population increasing by about 500,000 a year, the Labour Ministry needs to create job opportunities in a country where nearly 30 per cent of the population is aged under 15.

“Although some companies are not happy with the restrictions Nitaqat brings, most accept why it needs to be done and respect the fact that it’s not a blanket system and is graduated across companies of different sizes and across sectors,” says Paul Gamble, head of research at Riyadh-based Jadwa Investment. 

Nitaqat survey

The most comprehensive view so far of the programme’s impact comes from Nitaqat in the Spotlight, a survey of expatriate business leaders conducted by the UK’s Hay Group, released in May 2012.

It found expatriates are largely supportive of the programme, but the biggest barrier to its success is a misalignment of the skills and competencies that Saudi nationals possess, compared with those most sought by the commercial sector.

Private sector organisations are worried about the possibility of the Nitaqat programme having a negative impact on overall company performance. In the survey, 62 per cent of respondents said Saudisation will not enhance the performance of their organisation. “Expats overwhelmingly view the Nitaqat programme positively in terms of helping them and their organisations achieve Saudisation,” says Chance Wilson, general manger of the Hay Group in Saudi Arabia. “About 60 per cent think Nitaqat provides useful guidance and a level playing field to meeting Saudisation thresholds.”

But more work may be needed to properly align Nitaqat’s incentives with the Saudi economy. For example, says Reeve, unemployment benefit is higher than the average wage in the private sector, which will drive up salaries. “Potential foreign investors will weigh the benefits of investing in Saudi Arabia – cheap energy, a good location, improving infrastructure and low taxes – against the costs associated with a scheme that discourages reliance on cheap foreign labour,” he says. 

From the start, one of the biggest challenges with Nitaqat has been the Saudi salary structure. “You are getting many Saudis who come in and take a job for SR4,000-5,000 a month and then leave soon after because someone else has offered them SR5,500,” says the Western business representative. “A lot of young Saudis are thinking about their jobs and not their careers.”

Hay Group found pressure on organisations to achieve their Saudisation target is partly reflected in the fact that nationals are paid 13 per cent more than the market average for wages. For private sector organisations, this is proving a challenge as they strive to compete with public sector packages, while remaining commercially competitive.

The Hay Group survey found foreign companies resent having to shoulder the burden of Saudisation while they are in direct competition with the public sector.

Rising salary expectations remain a big concern. Saudi nationals are in higher demand than they were five years ago, making the kingdom an employees’ market, especially for those with good qualifications and experience. The Hay Group’s salary report for 2011 found that salaries rose an average of 4.4 per cent last year and are forecast to increase by a similar amount in 2012.

Managing expectations is critical. “At an organisational level, it comes back to some of the expectations of students coming into the workforce, many whom would like to walk into a management job,” says Wilson. That’s the challenge employers face.”

Training provisions in Saudi Arabia

One year on, companies in the kingdom are devising strategies to cope with Nitaqat. Some are building training provisions into their contracts. By offering to train Saudis who then take up work places, companies can get funding from the state-backed Human Resource Development Fund (HRDF), which will pay half the salaries of Saudi employees. This also has the benefit of putting more Saudi names on the payroll. “The political benefit is that it makes you look good and helps you win the contract,” says one Saudi-based source.

Another approach is attracting more Western-educated Saudis, who tend to boast better skill sets than those who studied at domestic universities.

Despite reservations about Nitaqat, firms have to accept it. “The Saudi government is looking [to create] 6 million new jobs for Saudi nationals by 2030,” says Wilson. “That’s an ambition, not an overnight solution. There are going to be challenges that firms will face to align themselves with the Saudisation policy.”

A greater dialogue between stakeholders, making better use of expatriates as part of the solution and forging stronger links between educational institutes and the workforce could help the Nitaqat programme meet its goals.

The early pain felt by firms coping with Saudisation may prove a price worth paying if the long-term gain – a stronger economy in which better educated and motivated nationals are able to play a significant role – is to be realised.