Fresh push for Saudization

In order to reduce the tenacious high youth unemployment among nationals in the Kingdom, the Saudi Arabian government has made it clear that Saudization, the integration of Saudi nationals in private companies across all sectors, will continue, in order to achieve the objective of the reform plan Saudi Vision 2030.

But the question experts are asking is this: can the Kingdom at the same time lure talents from abroad without creating frictions at offices, sales counters, laboratories and factories?

According to the Saudi Vision 2030 strategic plan, the Kingdom aims to reduce unemployment to seven percent from the current 11.6 percent as soon as -possible. Earlier this year, Mufrej Al-Haqabani, the Minister of Labor and Social Development, told Arab News the government would take all measures, “whether job creation, job substitution or even, if required, increasing the Saudization target,” in order to get Saudi nationals back to work, making his position clear.

“Balanced Nitaqat” 

Nitaqat (Arabic for “ranges”) is the new buzzword. The Saudi Ministry of Labor first launched it in 2011, with the result that nearly 100,000 Indian expatriates left their jobs in the Kingdom by October 2013. But while the past scheme was based on increasing the pure percentage of employees who are Saudi citizens, a newly launched scheme is not
purely quantitative.

The new Nitaqat will “end expats’ dominance” and “address the challenges of the labor market”, Saudi Gazette reported on last month, citing the resolutions of the Ministry of Labor and Social Development.

Similar to a frequent-flyer loyalty scheme, the old Nitaqat scheme classified the country’s private firms into four categories: premium, green, yellow and red. Firms with high Saudization rates were labeled premium and green, while yellow and red stood for corporations with a low Saudization percentage. While micro entities with less than ten staff were exempted, these firms still had to hire at least one local employee.

The new program, which the government labeled “Balanced Nitaqat” (the third modification in five years), does not only take into account the number of Saudi nationals working in a firm, but also the level of salaries paid to Saudis, the years of service of Saudis, their positions within the company’s hierarchy and the number of women on the payroll. The new scheme promises to generate up to 1.3 million jobs for natives.

“Youth unemployment in the region is one of the key demographic challenges we face in the region,” Badr Jafar, the CEO of Sharjah-headquartered Crescent Enterprises and president of Crescent Petroleum, told TRENDS. “So we have to make sure that Saudi Arabia’s own indigenous population is creative and is employed, and adds value and creates further opportunities for peers and their friends and neighbors.”

Women to the fore

The gender aspect is of strategic nature and in line with the Vision 2030, which states that female participation in the labor force shall be increased to 30 percent from the current 22 percent. Firms will receive points under the new chapter and will be given incentives to increase their stance on Saudization or penalties if they do not comply with the new rules.

The old scheme succeeded in bringing young, jobless Saudis back to work in the retail and even the hospitality sector, but the middle and upper management remained mostly in the hands of Arab expats, criticized renowned Saudi journalist Sabria Jawhar. “Let women work!” she wrote in her column for Arab News back in December 2013.

Nearly 60 percent of today’s Saudi graduates are women, giving employers a deep pool of untapped Saudi talent, she explained. Jawhar added that real change in the labor market in favor of nationals could only be achieved through a change in mindset.

“In order tap into that talent, private businesses must work with the government to loosen those patriarchal shackles that prevent women from working and help employers recover from the shock of losing their expat -workforce,” she said.

The gender dilemma demonstrates that even “Balanced Nitaqat” will be an uphill struggle for the government, private firms and for the Saudi Arabian society as a whole. Because women do not get driving permits in the Kingdom, Jawhar says: “Expat drivers often manage their work timings the way they want and not in the way to serve female employees
or entrepreneurs.”

High costs

The cost of Balanced Nitaqat is another factor. According to online news publisher and global intelligence company Stratfor: “Saudi employees are far costlier than their foreign peers, in terms of salary as well as efficiency, and past Saudization efforts have been largely unsuccessful. As such, the old Nitaqat scheme only worked as long as oil prices remained high and the country generated budget surpluses.”

Then there is the Saudi path toward becoming a country embracing non-oil businesses and the digital age. At the same time, the Gulf region’s biggest oil exporter plans to increase the share of non-oil exports in non-oil GDP to 50 percent from the current 16 percent.

Asked if Saudization and expansion of the non-oil sector do not contradict each other as the private sector will also need foreign talent, Dr Nasser Saidi, a leading Dubai economist and founder and president of Nasser Saidi & Associates, replied, “I think Saudization and job growth in the non-oil sector go together. The imagination that there are a limited number of jobs is wrong, in my view.”

He added: “We need to think of education, growth and new activities, and how we can innovate. For both of that, I think, you need Saudi nationals and expatriates to work together.”

According to Deputy Minister of Labor and Social Development Ahmed Al-Humaidan, the new scheme addresses exactly the challenges the Saudi labor market faces. These are “high unemployment, strong dominance of expats in important positions, low productivity, low percentage of women’s participation and mismatching of educational outputs with labor market needs,” Al-Humaidan told Arab News.

“You have to choose the balance. Whenever you start to choose the best people to ensure that you have successful foundations for business, you need to span the pool,” said Jafar. “Saudization has become an urgent imperative. This is, I think, is partially fueling these necessary measures, which the government is taking to make sure that its citizens are at the forefront of economic growth.”

“I think the idea that Saudization is a trade-off in relation to economic growth and diversification is wrong,” added Saidi.

One flexible aspect “Balanced Nitaqat” provides is that private firms can borrow employees from public entities on the basis of a labor contract. Also, Stratfor pointed out on a positive note: “The initiative appears to be under the sole purview of the Ministry of Labor and Social Development, a model that has proved successful in earlier Saudization drives.”

Saudization is also a sector-specific issue. For the mobile telecom retail sector, the Saudi Labor Ministry aims to replace 100 percent of expat workers with locals. According to Indian daily Mathrubumi, many Non-Resident Indians or NRIs from the southern federal state of Kerala have already left the Kingdom since this regulation came into force
in September.

No turning back

Further, the Fourth Industrial Revolution, the Internet of things that embraces every aspect of production, services and daily life, provides more chances than challenges to get locals and foreign talents together, Aongus Hegarty, president of the EMEA region at Dell EMC, told TRENDS.

“We know that the low oil price obviously has an impact on the economy in Saudi Arabia,” he said. “But again, as president of the region at Dell EMC, I have seen in the past five years how innovative these regions are in relation to digital transformation.” He urged firms and employees not to be afraid of new digital trends, but to regard them as a chance. “New technology makes companies more efficient and more competitive, and this is what the region needs to expand to new markets and create new growth.” The Irish tech expert said Dell EMC was “very excited” about the Saudi Vision 2030 “as it supports the digital transformation of enterprises across a wider set of industries.”

Jafar said that Saudi Arabia’s demographic status quo is not the Kingdom’s Achilles heel, but its strength. “One of the strengths of the Saudi population is the diversity of its population. Leveraging the strength of that diversity is the strength of Gulf states like Saudi Arabia, regardless of oil prices,” he said. Not surprisingly, the question of whether or not Saudization schemes are conflicting with the aforementioned objectives is widely discussed among economists and C-level executives.

Another trade-off could be the fact that waning oil revenues leave public companies with fewer options to lure (and to keep) qualified Saudi nationals with attractive salary packages. However, the Saudi government has made it clear that the times of “platinum packages” for the Kingdom’s nationals are over.

In late September, Saudi King Salman bin Abdulaziz took a bold decision by cutting the salaries for ministers and state employees by 20 percent and for members of the Shura council (the consultative plenum) by 15 percent. This salary cut has more than a financial impact: it sends the psychological message to the public and private sector that all levels of the society have to accept sacrifices.

Nevertheless, the fact that oil prices are currently trading at roughly $50 per barrel – well below Saudi Arabia’s fiscal break-even, which, according to the IMF, will fall to $66.70 per barrel in 2016 from $94.80 per barrel last year – leaves little room for complacency. The IMF expects -economic growth to slow own to 1.1 percent this year.

According to Dr Fahd Al-Turki, the chief economist and head of research at Jadwa Investment, Riyadh, in real terms, the Saudi economy was 1.4 percent larger in the second quarter of 2016 than it was in the same quarter of 2015, but “year-on-year growth continued to slow for the fourth consecutive quarter, mainly owing to a deceleration in annual GDP growth for both the oil sector and the non-oil private sector.”

For Simon Williams, HSBC’s chief economist, CEEMEA (Central & Eastern Europe, Middle East and Africa), the Saudi Vision 2030 is a necessity. Without meaningful reform, he said in his analysis, Saudi Arabia – from vision to reality, “we believe Saudi Arabia is likely to face another protracted cycle of stagnation and decay (…)”. According to Williams, the repercussions for the national economy would be much more severe than in the 1970s and early 1980s when the oil boom went bust, “given that the Kingdom’s population is now twice as large as it was when the last boom went sore.”

“As you grow, you need to fill out the space. As you diversify, you need also to fill out a variety of space,” added Saidi. “This you do by employing local citizens as well as foreigners.”

The message is clear: the labor market is not an isolated segment but an interrelated piece in the greater Saudi economic jigsaw. Without new sources of revenues, public sectors won’t be able to hire natives. If the government fails to expand the private sector, foreign direct investment will not be channeled into competitive or even disruptive companies, which can serve as incubators for local and foreign talent alike.

The key directive of the Vision 2030, said Williams, is to increase non-oil government revenues from the current SAR163 billion to SAR1 trillion by 2030. This, he explained, can only be achieved “through revenue stream, subsidy reduction and job creation.”