Introduction to find out if saudization is

Introduction              Saudi Arabia is a wealthiestcountry with a large unemployment population. In order to reduce unemployment, the Saudi Government introduced Saudization in the 1970’s. Saudization or Nitaqat system inArabic is a program by the Ministry of Labor that requires companies in SaudiArabia to employ nationals in their work and expand work opportunities forSaudi women and youths. The Saudization objective is toincrease the number of employed Saudis in the private and public sector startedwith the first Saudi Government’s first DP (Development Plan) in 1970 (1970 – 1975). And due to rising unemploymentrate and rapidly growing population in the late 1990’s, the government make itas their priority (Fakeeh, 2009). Presently, the government of Saudi Arabia hascompleted its ninth DP (2010-2014) and is working on its tenth DP (2015 -2019).

The benefits of Saudization are very straightforward. It willsimply bring back the money that would have been remitted to families outsidethe kingdom (9 per cent of GDP or $14 billion in 1999 alone) would then bespent domestically Taecker (2003). In 2005, Labor Minister D. Ghazi Al Gosaibistated that Saudi Arabia will increase the pace of Saudization with nationalemployment strategy is to achieve 100 percent Saudization and expected toemploy 120, 000 Saudi jobs every year in the private sector.

(Trade Arabia, 2005)  The main objective of the research is to find out if Saudization iseffective enough in curving unemployment rate from the current 11. 6 % to 7 % by2030 and identify the critical issues and constraints in fully implementing theSaudization program. In addition, the paper will give the readers the insightand idea on how Saudization works.

This study will be using exploratory methods of a number of studiesand review statistical analysis as well as government statistics in order tosatisfy its main objective. Methodology            The researcherwill review and collate information from credible sources and previous researchstudies that were done before on the same research topic. The primary researchmethod for this study is literature review of similar research. The researcherwill gather the data to finalized, collate, and formulate its conclusion basedresearch provided by the related literature. Statement of the Problem            The research studywill give the readers the insight and idea on how Saudization works, implemented and what is the rate of its success as well as identifies theconstraints in fully implementing Saudization program. More specifically, theresearcher seeks to answer the following questions in order to satisfy thepurpose of this research: 1.     Howis Saudization or Nitaqat system works? 2.

Whatis the role of Saudization or Nitaqat in Vision 2030? 3.     IsSaudization or Nitaqat effective enough in curving unemployment rate of SaudiArabia from the current 11. 6 % to 7% by 2030? LiteratureReview             The focus of this research paper is about theSaudization policies of Saudi Arabia, its impact to labor market. Additionalstudies in the literature focus on quota-based employment policies that areinstituted for the purpose of nationalization of the labor force, especially inthe Gulf Cooperation Council (GCC) countries. These nationalization programsare referred to as Bahrainization in Bahrain, Kuwaitization in Kuwait, Omanization in Oman, Saudization in Saudi Arabia, Qatarization in Qatar, andEmiratization in UAE. How SaudizationWorksNitaqat which means “ bands” or” zones” is designed to provide companies with more attainable targets.

Itimposes sanctions to companies in non-compliance and provides incentives tothose firms in compliance in order to advance the Saudization agenda. TheNitaqat sanctions and incentives have been strictly enforced. Nitaqat programmeasures the nationalization performance of companies by calculating, oversuccessive periods of 13 weeks, a moving average of the percentage of Saudinationals employed by a firm, taking into account the firm’s economic activityand size (Ministry of labor, 2011). Based on the measured nationalizationperformance, companies are grouped into four bands: Excellent (Premium), Green, Yellow, and Red.

Where excellent or premium classified as entities achieving superiornationalization performance with the highest percentage of Saudi employees. Green are the entities achieving good nationalization with good percentage ofSaudi employees. Yellow are the entities achieving below average percentage ofSaudi employees and Red are the entities with poor nationalization performanceby hiring lowest percentage of Saudi employees. Companies in red category are notallowed to apply for new visas and not allowed to renew the existing work visasof heir employees as well as transfer their employees visa to other jobs.

Inaddition, they cannot hire foreign workers from other firms while their foreignemployees are allowed to transfer jobs in premium and green category withouttheir consent. Companies in yellow category canrenew the visas of their foreign employee for six years or more, but they arenot allowed to transfer visa to other jobs and cannot hire foreign workers fromother firms. They are not also permitted to open new facilities and cannotapply for new temporary visas.

As an incentive for meeting the Saudization, they can renew work visas of their expatriates’ employees who have been in theKingdom for less than six years. In addition, they are entitled to one new visafor every two of its foreign workers leaving the country on a final exit visa.            While companies ingreen and premium categories enjoys no sanction and rewards. The companiesunder these categories can renew the existing work visas of their employees andcan apply for new work visas every two months. In addition, these companies areentitled to open profession visa wherein they can change and update theirforeign workers profession whenever possible excluding the jobs allocated forSaudi Nationals.

They can also hire foreign workers from red and yellowcategories with their consent and entitled for six month grace period  for submission of Certificate  of zakat and income tax. While companies ingreen categories are entitled to a six month grace period  in renewal of their expired professionallicense , commercial registration and MOL documents, companies in Premiumcategories is entitled to one year grace period. Al-Asmari (2008) gives some background information on the effortsmade by the Saudi government in developing local manpower and replacing foreignlabor with Saudi nationals through the Saudization program. The study concludesthat more still need to be done in the development of local human resources andin reducing dependency on foreign labor in the private sector. Saudigovernment’s efforts and strides made at the education and training levels, thedevelopment of some job-replacement policies, and the creation of careeropportunities are still not enough. The study also stresses the importance ofharmonizing the education system with the actual needs and requirements of thelabor market in Saudi Arabia. Fakeeh (2009) conducted a study that attempts to determine ifSaudization is the solution to the unemployment problem in Saudi Arabia byanalyzing the shortcomings of the program as instituted by the government andas used by the private sector. The researcher states that policy makers stillview Saudization as an economic and social necessity while understanding thedifficulties that the policy presents to the private sector and the reluctanceof the private sector in applying it.

The paper concludes that Saudizationpolicies must fit the reality of the labor market in order to be moreefficient. Ramady (2013) discusses the Nitaqat program and discusses theeffect of the economic growth and productivity in Saudi Arabia assuming theintroduction of a SAR 3, 000 per month minimum wage for Saudi workers in theprivate sector under the government’s Hafiz system. The paper concludes thatthe Nitaqat program and the minimum wage policies would decrease laborproductivity and potentially affect other Saudi government’s initiatives suchas opening up the Saudi economy to the global market and raising the quantityof foreign direct investment (FDI) inflows. Peck (2014) analyses the effects of quota-based 2011 Nitaqatpolicies on Saudization with firm size, and firm exit in the Saudi’s privatesector as its analyzing criteria. The paper used a comprehensive data set onthe full universe of Saudi private-sector firms to perform a regression kink.

The paper found that the Nitaqat program succeeded in terms of increasing theemployment of Saudi nationals but caused significant costs to private companiesand the shutting down of approximately 11, 000 private companies within 16months of its implementation. Saudi Hollandi Capital (2012) provides an overview of the Nitaqatprogram and discusses its effect on the Saudi’s economy. The research paperhighlights factors that driven the Saudi government to launch the Nitaqatprogram such as the unsuccessful implementation of the Saudization program, large number of foreign employees in the private sector, high unemployment rateamong Saudis, increasing youth population as well as unrest in the region. Thestudy states that the increase in the employment opportunities for Saudis andthe reduction in outward remittances are the positive effects of the Nitaqatprogram while skills mismatch among local labor force, increase costs forprivate companies, fall in the inflow of FDI, and closure of businesses are thepotential negative effects.          In Shah (2006), he investigated thedifficulties associated with the success of localization in the Gulf which arespecifically more relevant to Saudi Arabia. Primary amongthem are: 1) thelucrative nature of visa trading for the local sponsors, along with a ready andeager market of workers willing to buy such visas; 2) the continued reluctanceof the locals to take up jobs that have come to be seen as “ foreigner’s work” even though small attitudinal changes are beginning to be reported; 3)preference among nationals for public sector jobs that are almost guaranteed byvirtue of nationality; 4) the near impossibility of the employer to fireinefficient national workers in the government sector, resulting in poorproductivity and over-employment of nationals; and 5) the inherent contradictionbetween policies to limit the number of expatriate workers on the one hand anddevelop a thriving private sector that relies extremely heavily on the importof such workers to survive and flourish. Koyame-Marsh  (2016) comparesthe performance of the Saudization program before and after the implementationof the Nitaqat during the eighth and ninth DPs. The researcher offers evidenceon the achievement of the Nitaqat program at effectively raising the number ofSaudis employed in the private sector and the shortcomings of the program inreducing the level of unemployment for Saudi nationals.

From its inception in 2011 to 2014, the quota-based Nitaqat programhas reached its goal of moving companies out of the unsafe zones (Red andYellow bands) and increasing the number of Saudis employed in the privatesector. Saudi Deputy Minister of Labor Ahmad Al-Humaidan pointed out thatalmost 86 percent of private firms and establishments were in the safe zones(Green and Platinum bands) of the Nitaqat Saudization program as of October2014. This was a big achievement for the Nitaqat program because in 2011, atthe start of its implementation, companies in the safe and unsafe zones were at50 percent each (Saudi Gazette, 2014a). According to SAMA or the Saudi Arabian Monetary Agency, Nitaqatshows a positive output since its inception due to large increase in the numberof Saudi nationals employed in the private sector which rose by 83.

6 percentbetween 2011 and 2014.  SAMA also notedthat Saudization rate in the private sector rose from 10. 8 percent in 2011 to15. 5 percent in 2014, a 43.

5 percent increase (SAMA 2013, 2015). SAMA describe the employment rate a modest increase because ofhigher number of jobs created in the private sector during those three yearswith about 2. 2 million jobs (90. 2 percent of total jobs created) between 2011and 2014 in the private sector alone.

They noted however that only about 31. 5%of these jobs (0. 7 million jobs) went to Saudis and the remaining 68. 5 percentwent to foreign workers. However, overall assessment by SAMA states that Nitaqatquota system was neither able to curb the level of unemployment for Saudis norspeed up the overall Saudization process during the past three years of itsexistence. SAMA also noted that unemployment rate of Saudi’s only fell from12. 4 percent in 2011 to about 11. 7 percent at the end of the ninth DP in 2014.

The Saudization rate stood at 15. 5 percent in the private sector and at 94. 2percent in the public sector in 2014. The third phase of the Nitaqat program will be a game changer as itwill raise the minimum Green zone’s Saudization requirements for severalsectors such as manufacturing, construction, financial, retail, and wholesalewith the implementation of new calculation methods for the quota, and changethe incentives system. The Saudization requirement for these sectors will risefrom the current 28 percent to 32 percent for those companies in the Greenzone.

While for large commercialestablishments, the Green zone minimum Saudization rate will more than doublegoing from 29 percent to 66 percent, while for big firms will rise from 25percent to 41 percent (SICO, 2015). In addition, start of the third phase of the Nitaqat will alsobring a new calculation of Saudization rate for private sector companies thatwill be based on a moving average of the number of Saudi employees oversuccessive periods of 26 weeks after being registered with GOSI rather than thecurrent 13 weeks. Furthermore, the changes in incentives during the third phasewill affect mostly companies ranked in the low Green zone, while changes inpenalties will mostly impact companies in the Red and Yellow zones.

Companiesin low Green zone will no longer be granted new workers’ visas nor will theyhave permission to move employees around by changing their profession. Companies in the Red zone will have their licenses revoked while those in the Yellowzone will have their license suspended (SICO, 2015). ConclusionAnalysis of the literature review for the effectiveness ofSaudization shows that there is some level of success in meeting its goals interms of employing more Saudi’s in private sector although at minimal level. There is no doubt that Saudization is effective enough in reducing theemployment rate by 2030 as envisioned by Saudi Government. However, by doingso, the government should be careful in terms of weighing in the rules thatapply to the companies in complying with the Saudization as it may alsoadversely affect companies especially in fulfilling qualified talents. Theprogram should not be used to create a temporary job for unemployed Saudi’sjust for the sake of saying that it is working.

Instead, it should work as along-term job placement for locals, but it can only do so if the companies orthe private sector are safe from ceasing their operations because they cannotbe able to meet the Saudization requirements. It is prudent that the SaudiGovernment should consider the reality of Saudi labor market and its economy infurther developing Saudization rules as to not adversely affect the privatesectors especially the small and medium enterprises.