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Sep 12, 2016 | 09:01 GMT

7 mins read

Taking Another Stab at Saudization

Taking Another Stab at Saudization
(JORDAN PIX/ Getty Images)
Forecast Highlights

  • Saudization, the removal and replacement of foreign workers with Saudis, will remain a highly challenging endeavor, but Saudi Arabia's new scheme will help address the shortcomings of past efforts.
  • Because the Ministry of Labor and Social Development is responsible for implementing the comprehensive new Saudization scheme, it will have a greater chance of succeeding than past attempts governed by disparate strategies from multiple ministries and agencies.
  • Expatriate workers will not be pushed out in substantial numbers, but various retail sectors, particularly those targeted for "complete Saudization," will experience disruptions.

Undaunted by the middling results of past attempts, Saudi Arabia has undertaken a new campaign in its decadeslong project to replace expatriate workers with Saudis, a process known as "Saudization." The latest initiative arrived at its first benchmark during the week of Sept. 5, when the country's telecom retail sector — comprising anything related to the sale or maintenance of cellphones — reached its deadline for achieving "complete Saudization." Many shops did not fare well during the six-month period allotted for the process; some business owners shuttered their operations, while others were fined. As it investigates how successful the sector was in implementing the new regulations in the coming months, the Saudi Ministry of Labor and Social Development will likely uncover many more cases of noncompliance, despite hefty penalties (up to two years' imprisonment and a $365,000 fine). After all, 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.

But facing high youth unemployment levels, a burgeoning population and waning oil revenues, the Saudi government has more reason than ever to push its Saudization scheme forward. Though this initiative, like the ones before it, will probably fall far short of its goal, the government's new plan has some advantages over its predecessors, incorporating lessons learned from their failures.

Try, Try Again

Over the years, the kingdom's government has pursued various Saudization schemes and other types of economic reform, with varying levels of urgency. Interest in following through on these initiatives is inversely proportional to the price of oil. When prices are high and revenues flowing, reform in Saudi Arabia filters slowly through the system; when oil money is tight, it returns to the forefront of Saudi politics with renewed importance. After some talk of the issue in the 1960s and 1970s, the first comprehensive Saudization policy was drawn up in a September 1994 resolution. An August 2002 circular refined the scheme, and an improved version was debated in March and April 2006.

Despite frequent tweaks, each of these variations still failed to account for the differing sizes and needs of companies in one industry versus another, and for Saudi citizens' reluctance to work in certain fields, such as construction. In addition, they did not provide for the training and education necessary to prepare Saudis for the jobs that would become available to them. Moreover, the government had neither a unified plan nor realistic expectations for many of these initiatives. In the mid-2000s, for instance, Riyadh attempted a radical Saudization among travel agencies in the kingdom. At the time, companies in the retail sector, including travel agencies, employed Saudis at an average rate of 11 percent. But in 2004, the government suddenly called for travel agencies to increase the rate to 100 percent as soon as possible (though it did not give a clear deadline). Stakeholders in the sector pushed back against the decree, arguing that it was unrealistic to reach that mark, much less in the nebulous but short time allowed. After nearly 200 travel agencies closed and many agents were arrested, business owners formed a negotiating committee to confront the Ministry of Labor, which acquiesced, instating new deadlines, grace periods and confusing but responsive regulations. The poorly coordinated experiment revealed that the Saudi government did not have a streamlined strategy for dealing with the challenges of Saudization and that the private sector had the power to resist the reforms.

Learning From Past Mistakes

Taking heed of these lessons, the Ministry of Labor and Social Development unveiled a new plan for Saudization in 2011. The scheme, known as the nitaqat (or "categories") system, evaluated companies based on how many nationals they employed and assigned them to a color category accordingly (platinum/blue and green for highly Saudized companies and yellow and red for those lagging behind). The plan worked, at least initially. As of late 2014, just 14 percent of Saudi companies were in the yellow or red categories. When oil prices began to fall around the same time, however, Saudi Arabia's financial situation took a turn for the worse. Today, Saudi Arabia's unemployment stands at 11.6 percent, and in 2015, employment among Saudi citizens grew at its slowest rate in 17 years.

The Saudi government hopes to decrease unemployment to 7 percent this year. To do so, it has launched an updated nitaqat scheme — the third iteration to emerge in five years — as part of a plan to create between 1.1 million and 1.3 million jobs. The fourth and final phase of the scheme, due to roll out by the end of the year, is designed to address the challenges that previous Saudization endeavors have encountered. Unlike past plans, the latest version will provide for greater communication between the labor ministry, the central and regional governments, and the various sectors implementing Saudization — including total Saudization plans in sectors beyond telecom, such as textile manufacturing. The new nitaqat system also promises to consider qualitative issues, such as the ratio of women that companies employ and the sustainability of the jobs they offer, in assessing businesses' performance. Perhaps more important, 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. Overall, the plan's components reveal that Riyadh understands the shortcomings of past Saudization schemes and is putting that knowledge to use.

Residual Challenges

Even so, the government's Saudization plan will face many challenges. For one thing, many of the sectors selected for total Saudization offer low-skill jobs that Saudis typically do not want. Demand for foreign labor will remain high in these sectors, particularly in the construction and service industries, regardless of the new regulations. Furthermore, the government and private sector have historically been out of step with each other, as evidenced by the government's fitful attempts at Saudization throughout the 2000s. During the next drive to employ Saudis en masse, companies may join forces to pressure the Ministry of Labor and Social Development for concessions, as travel agencies did in 2004. Finally, education initiatives in the kingdom are not keeping pace with Saudization targets, and social expectations for women are not changing, either. If the government does not tailor its Saudization plan to fit the country's social mores, it will once again miss the mark.

In many ways, Saudi Arabia's latest plan for increasing its employment rate is a vast improvement over previous iterations, but implementing it will be an uphill battle. Though the new Saudization scheme is aimed at the country's current and pressing problems — diminishing oil revenues, a growing population and rising unemployment — it will require generational shifts to make Saudization a success. 

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