Valuing labour: Industry weighs up employment reform

Raising employment levels has been a core concern for the Saudi government for several years now. As the Kingdom looks to develop a more sustainable economy, based on higher-value products and strong productivity, it is also looking to deal with the unemployment rate and place more Saudi nationals in the labour market.

A number of schemes have been devised to achieve this including the Nitaqat programme introduced by the Ministry of Labour in 2011. Under this initiative, 600,000 nationals have gotten jobs as of the first half of 2013 and the unemployment rate fell from 12.4% to 11.7%. Furthermore, more than 1m citizens received a pay increase in line with the decision in February 2013 to raise the minimum wage to SR3000 ($800) per month.

Unfinished Business

While this success has been noticeable, it does not fully address the employment imbalance in the construction sector. Indeed, this industry is home to many low-wage expatriate labourers. In 2013 the government attempted to address this issue, along with other associated problems, by clamping down on illegal labour in the country. While this may have some short-term implications for business, the government is confident that it will improve the competitiveness of the economy in the longer term. Since a government-imposed amnesty for illegal workers came to an end in November 2013, the immediate impact on the economy and the construction industry has been dramatic. The strict enforcement of work permit and sponsorship rules led to the exit of almost 1m foreign workers from the Kingdom in 2013, according to Reuters.

Impact 

The industry is still feeling the effects of this policy. An IMF study found that wages for Saudi construction workers are nearly five times higher than those for foreign labourers. Many firms are thus struggling to source and pay for flexible, project-based labour. Local media has reported up to 40% of small and medium-sized contractors have stopped working.

Indeed, many analysts forecast a slowdown in sector growth in the short term as a result of the move. Fahad Al Bogami, a member of the Jeddah Chamber of Commerce and Industry’s specialised committee, told local media that contracting companies are heavily dependent on labourers that are paid by the day, regardless of whether they are in possession of residence permits, or are overstayers. For the most part, this is due to the seasonality of the sub-contractors’ jobs. Al Bogami noted that, “The minimum percentage of Saudiisation for the construction and building sector is 7.5%, as per the labour ministry regulations. The sector is labour-intensive, and companies cannot find Saudis to hire onsite, and they are not trained enough. In addition, construction jobs are not preferred by citizens.”

Increased Risks

The general impact on the sector is evident in the performance of the country’s cement industry. In November 2013 cement sales decreased by 19%, the biggest year-on-year contraction on record. The swift government action on informal labour has put many contracting companies in a difficult situation. For existing projects, the risks have increased rapidly and contractors’ margins will be threatened. According to Rayed Jeffa, business development officer at the Saudi Binladin Group, a Jeddah-headquartered construction multinational, “Some contractors are interpreting [the labour clampdown] as a change in the law and so are looking for compensation, as they signed the contract under a previous law. However, it is a sensitive issue and there is still no clear-cut resolution.”

Many contracting firms have filed a claim with their clients on labour prices. For new contracts tendered since the end of the amnesty, there has been a strong jump in bid prices, according to local contractors. Firms that have a pool of labourers on their books are currently the most competitive. However, even here, it is likely that firms will start to price for additional risk in labour supply. As such, in the short term, the state’s intervention in the labour market will have a dramatic impact on the sector. In the longer term, sector players are likely to look to the government to facilitate easier visa access and employment conditions for labourers to give contractors the flexibility they need do their work.