Key fact

Riyadh plans to create 1.12 million jobs for nationals by 2014

Source: MEED

Riyadh’s bold relaunch of its Saudisation programme this year has forced the kingdom’s difficult unemployment problem onto the corporate business agenda.

Expatriates are anxious about the likely impact of the new regulations, which are designed to increase the number of Saudi nationals currently working in the private sector from less than 10 per cent.

Policymakers are now taking a much harder line. Labour Minister Adel Fakieh has already hinted the Nitaqat programme could wipe out firms that fail to bring enough locals onto the payroll. The programme rates companies by their recruitment of nationals according to a colour-coded scheme into excellent, red, yellow and green. 

This sacrifice is seen as necessary to achieve a far more ambitious goal. Riyadh plans to create 1.12 million jobs for nationals by 2014, equivalent to 92 per cent of all new jobs created, as set out in the current national development plan.

Unemployment concern in Saudi Arabia

The urgency is dictated by statistics that reveal the private sector has actually regressed in its deployment of local talent. The booming economy in the 2000s succeeded in hiring more expats than young nationals to satisfy the employment needs of a rapidly growing services sector.

The private sector has perpetuated the kingdom’s unemployment problem rather than alleviating it. Some 6.21 million of a total 6.89 million private sector employees in 2009 – or nine out of every 10 – were non-Saudis, up almost 30 per cent from 2006.

Under Nitaqat, each category of firm – graded according to size – will have its own set of rules designed to increase the percentage of local employees, policed by 1,000 new labour inspectors hired to monitor compliance.

Once the grace period elapses, severe penalties could be levelled on violators. The state will impose a six-year cap on residency visas for expatriate workers if their employers fail to meet the stated quotas. Accompanying the stick is a slightly less conspicuous carrot. Nitaqat’s offer of a more dynamic methodology for applying quotas is aimed at incentivising firms to develop local talent in their ranks. And those that do most will be suitably rewarded, according to the details of the new Saudisation programme unveiled on 11 June.

This time … they are linking Saudisation numbers with visas and that is rather new for the system

John Sfakianakis, Banque Saudi Fransi

Companies that failed to hire nationals under the previous regime will be offered incentives to hire nationals and invest in training. Whereas the previous Saudisation quota system required all sectors to have a blanket nationalisation rate of 30 per cent, the new system applies 205 categories of quotas that vary based on the line of work and size of the company. Those achieving more than 30 per cent nationalisation would be reclassified as ‘excellent’ or ‘green’ and would enjoy greater privileges in sponsoring non-locals and obtaining new visas electronically.

Nitaqat applies another strategy to foster best practice. The sizeable expatriate community will be afforded far greater mobility under the new system, with ‘green’ companies entitled to recruit foreign workers freely from the ‘yellow’ and ‘red’ categories and transfer their sponsorship visas without their current employer’s consent.

“The one thing that is very different this time is that they are linking Saudisation numbers with visas and that is rather new for the system,” says John Sfakianakis, chief economist at the local Banque Saudi Fransi.

Flexible job market

Fostering a far more flexible expatriate labour force will require firms to think more carefully about employing non-Saudi nationals. It also makes experienced expatriate workers the big winners of the new scheme, by encouraging companies to do more to recruit nationals in order to stand a better chance of hiring the best foreigners too. This linkage may prove to be scheme’s genius.

“Taking a positive view, one might say that the new regulations provide a more nuanced approach to the current Saudisation policy, by distinguishing between companies in terms of size and activity in a more standardised way,” says James Reeve, economist at local investment house Samba Group.

The penalties for not meeting Saudisation targets are clearly onerous, says Reeve. But they might force private companies to invest more in training and raise wages, which would clearly be positive. 

On the other hand, there is clear potential for small firms to suffer, given that the marginal cost of hiring a national will be higher for them than for a larger firm. If they fail to meet the targets, the penalties might be enough to send them out of business. “This is potentially a major concern, since SMEs [small and medium enterprises] are the backbone of all successful economies,” says Reeve. “They are in fact the main driver of employment growth in the kingdom, albeit of non-Saudi employment growth.”

Foreign businesses active in the Saudi private sector are clearly anxious about the impact. A sense of panic has taken root, not helped by alarmist press coverage indicating that small firms may go out of business or will all be forced to hire at least one national.

Counter productive policy

One expatriate business leader, speaking on condition of anonymity, told MEED that the Nitaqat strategy appears to be contradictory. “It represents weak policy coordination at the leadership level; one initiative to invigorate the economy, a second to expand local employment opportunities, but little forethought towards how the two may conflict,” he says.

He warns it is at odds with and poorly coordinated with parallel initiatives to place the kingdom as a regional hub, citing King Abdullah Financial District in Riyadh and the new Jeddah airport as examples. 

Despite the attempts at greater differentiation in categorising Saudisation levels, the concern is the government is tackling the problem with a rather crude implement and not offering enough in compensation.

“The approach that better balances the interests of local job seekers and foreign employers would be to seek solutions that make it attractive to foreign companies to hire Saudis,” says the foreign business leader. “These could include education opportunities and reform, more English at an earlier age in the schools, and less protectionism towards Saudi employees in the workplace.” 

Quota regimes also have the potential to deter foreign direct investment, which is an important potential source of employment growth and technology transfer.

Ultimately, the key to Nitaqat’s success lies not in the fine print but in the interpretation. Many of the shortcomings of the previous strategy were down to failures of implementation.

“It’s very important that these initiatives are coordinated with the private sector,” says Sfakianakis.

“The private sector must guide the trainers and ensure training suits the needs of the private sector. Training can’t be done in a vacuum without consideration of what the needs of the private sector are.”

As important as shifting the goalposts on Saudisation is that the government undertakes efforts to change mindsets, for example by ending the blanket reassurance that locals will always find employment in the public sector.

“The government must signal to society that it will not be the employer of last resort, and at a time when the government is recruiting new employees, this isn’t easy,” says Sfakianakis.

Equally, maintaining an open-door immigration policy may not be conducive to fixing the disparity between recruitment of expatriate workers and nationals in the private sector.

If all Nitaqat ends up doing is creating a sellers’ market for the best expatriate talent, it will have failed in its mission of turning the local population into the main recruiting ground for the kingdom’s most dynamic businesses.

If the government can give the Saudisation programme a greater focus on education and training and implement the strategy in a suitably business-friendly manner, it should at least put the kingdom on the right track to redress its chronic labour market imbalance.

“Ultimately, there is no substitute for better education and training if creating jobs for nationals is the priority,” says Reeve. 

Nitaqat – what it means

Companies are characterised as excellent, green, yellow and red, according to their rates of Saudisation

Excellent: Companies deemed excellent or green will enjoy greater privileges in sponsoring non-Saudis and obtaining new visas electronically. This includes transferring sponsorship with change of profession and free of any requirement to spend at least two years with the original employer. They will have a one-year grace period to retain full sponsorship privileges should any government licenses or certificates expire.

Green: Entities in compliance with the rules qualify for a range of incentives, including visas for foreign workers; one replacement visa for every two exit-only visas; freedom to change expatriate workers’ professional designations; free recruitment of expats from ‘red’ and ‘yellow’ employers.

Yellow: Entities out of compliance with Saudisation requirements are designated yellow and are given nine months from June 11 to improve their nationalisation rates. Yellow companies will be barred from transferring non-Saudi visas to their sponsorship; submitting new visa applications; transferring expatriate workers to their sponsorship; changing their workers’ profession; or retaining expatriate workers seeking to transfer their services to green or excellent companies.

Red: Companies not in compliance with Saudisation requirements are designated as red and given six months to improve. They will be deprived of the facility to change workers’ professions, transfer expatriate workers’ services, denied new, replacement or seasonal visas, opening files for new enterprises at labour offices and renewing work permits. They lose control over expatriate workers, giving them the right to leave.

The kingdom’s unemployment crisis

Saudi Arabia boasts the unenviable record of having the Gulf’s second highest youth unemployment rate, after Iraq. In 2009, some 27.4 per cent of Saudis under the age of 30 were without work, including 39.3 per cent of those aged 20-24.

According to Banque Saudi Fransi’s June report on the new Saudisation strategy, in the 1990s, the ratio of expatriates to the total population remained relatively stable, fluctuating at slightly above or below 27 per cent. But in the past five years this shifted noticeably as recruitment of expatriates intensified during the 2004-08 economic boom. Since 2004, the ratio of non-Saudis to the total population rose sharply, reaching 31 per cent of the 27.6 million people living in the country at the end of 2010. Today, almost one in every three Saudi residents is a foreigner.

Many of the new jobs created during the boom years went to foreigners rather than to nationals. In 2009, almost 674,000 new jobs were created in the private sector and another 42,189 in the public sector. Yet that year, unemployment among Saudi nationals rose to 10.5 per cent, from 9.8 per cent in 2008.  

With unemployment benefits being paid to Saudi nationals for the first time this year, it is expected that official unemployment figures could increase as more individuals register their status.