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Nitaqat : The new drive towards Saudisation in companies in Saudi Arabia and its impact on expatriate employment.

The new amendment to the Labour laws in Saudi Arabia has attracted a lot of attention with many Indian journals and politicians decrying its adverse impact on employment of Indian labour. The matter assumed such importance that our External affairs Minister Vayalar Ravi was made to rush to the Kingdom to negotiate the delayed implementation of the decree so that it would give more time for the Indians, who are likely to be displaced, to find alternate employment.
But is this hue and cry really justified? And more important, is this amendment very unfair as some social activists and politicians have been reiterating?
To understand this rather confusing issue one needs to understand the drive of Gulf nations towards localization which has been variously termed as Omanisation (in Oman) Emiratisation (in UAE) and now Saudisation in Saudi Arabia. For long the Middle East has been the El Dorado as far as employment was concerned for many Indians, particularly from the southern states of Kerala, Tamil Nadu and Andhra Pradesh with millions of labour from these states being employed in the Gulf. At one time it was considered a matter of social esteem to have someone, howsoever remotely related to oneself, to be employed in any capacity in the Gulf. This automatically raised the social standing of the family and every family aspired to have one of their own employed in the Gulf. This was particularly prevalent in Kerala and currently many Keralites are employed in the Gulf.
The new-found oil wealth of the Gulf States fueled the economic growth in these nations endowed with this resource by the bounty of nature. Moreover, in the sudden transformation from a nomadic, Bedouin, feudal State to a modern— at least in terms of infrastructure— there was a huge shortage of skilled local workforce. This mis-match between capital and labour was bridged by resorting to recruiting labour from the economically poorer nations of South-East Asia,predominantly from the Indian sub-continent—India, Pakistan, Bangladesh, Nepal and Sri Lanka and also from the Philippines and North African nations like Egypt, Sudan, Somalia. At first this didn’t create any social tension since the local population was ill-equipped, in terms of skill, experience and qualifications to be able to be a part of this economic growth though they did benefit from its other benefits such as free education, free health care, marriage support and other social benefit schemes of the local governments.
Social tension due to unemployment of qualified local work force
Then, after more than two decades of furious growth, the social tension of qualified and educated local youth who were unable to find employment in their own countries began to manifest itself.
Two issues acted as impediments to employment of locals. Firstly, the locals were not willing to accept the working conditions that were applicable to expatriates such as: High work pressure, long working hours, reduced holidays and mediocre pay. The locals demanded higher wages and better working conditions than were applicable to expatriates. Secondly, it was difficult for organizations, who were accustomed for decades to working with expatriate labour in a particular manner, to suddenly change the working conditions. It was also not easy for organizations to change the norms just for locals while they remained the same for expatriates. Most organizations ignored government directives on employment of local labour and continued operating in their usual manner. It was also not possible for the local governments to act tough and implement these changes in one fell swoop as this would adversely affect their economy too which was heavily reliant on the contribution of expatriate labour. Therefore, the governments proceeded with caution in stages, gradually tightening the screws, so to say, and began to implement this localization drive through various ingenious methods.
The first Gulf State to implement this localization in employment was Oman. This was not very surprising as Oman was not one of the richer Gulf States and thus it began this localization drive, appropriately called ‘Omanisation’, more than a decade back; slowly it began reducing the quantum of expatriate labour by reserving some jobs exclusively for locals.
Some of the ways of ensuring employment of locals was to reserve some jobs exclusively for locals and no visa was issued for expatriate labour for these job categories. The process for applying for and obtaining visas for such  jobs was so tedious as to make it almost impossible as the company had to prove that no locals were available with the required qualifications and skills. In most of these cases the government would itself make available lists of eligible candidates from its employment registers maintained by the State Labor department.
However, companies were equally ingenious and invented techniques to get around this limitation of certain jobs being reserved for locals. They did this by applying for visas for jobs that were not reserved and then employing such expatriate employees for doing the jobs reserved for locals. Thus, an HR Manager would be working on a Sales Manager visa as the HR  profession was reserved for local Emiratis only.
 The governments then began making conditions more stringent so that they could force companies to employ more locals. The locals in turn preferred jobs in the public sector and did not like to work in the private sector; but then jobs in the public sector were very limited and all unemployed Emiratis could not hope to obtain work in the public sector.
Nitaqat law in Saudi Arabia
Viewed from this perspective the new law of ‘Nitaqat’ would make sense. ‘Nitqat’ literally means ‘Ranges’ in Arabic. The Saudi government had first introduced this localization drive way back in 1994 when they decreed that 30% of all jobs in any company must be filled in by locals, but this rule was not successfully implemented as the companies were very reluctant to implement it. Therefore, the Saudi Government modified this rule and introduced the Nitaqat amendment.
The Nitaqat amendment—salient features
1.      41 ‘Act
ivities’ have been identified to fix percentages of employment of Saudis for each Activity by each organization
2.      It abolished the earlier flat 30% target of employment of Saudis in each company and instead fixed a variable percentage target depending on
a.       a) the size of the company, and
b.      b) the availability of qualified local labour for each activity
3.      Organizations were placed  in 4 categories based on the no of employees as follows:
a.      Huge (3000+ employees);
b.      Large (500+ employees);
c.       Medium (50 – 499 employees);
d.      Small (10 – 49 employees); and
e.      Very small (9 employees or less).
4.      Therefore, given that there are 41 Activities and 5 Business Sizes, under the new system there is now a total of 205 (41 x 5) categories  within which an organization can be placed.
5.      Each category has its own percentage of Saudisation fixed as a target which, companies, who fall in that category, are obliged to meet. If they fail to maintain the mandatory percentages of Saudisation the company will be placed in a colour scheme as explained below:
Based on the level of Saudisation companies were placed in the following 4 colour bands each with varying privileges:
A.      Premier-green
B.      Green
C.      Yellow, and
D.     Red
Each colour has separate privileges or limitations acting as punitive measures. Predictably, companies placed in the premier-green and green bands enjoy facilities which are not available to companies in the yellow and red bands.
The main privilege was the eligibility to apply for new employment visas for expatriate la
bour as long as they continue to maintain the percentage of Saudisation for each Activity. They can also open new branches or offices and can thus expand their business. And the biggest privilege is that these companies are eligible to employ expatriate labour from companies in the yellow and red bands even without these companies giving ‘no objection certificates’ to their  employees who would like to leave their services and work for companies in the premier-green and green bands. This means they have no control over retention of their employees as this makes it an open labour market system but limited to the yellow and red bands. However, expatriate employees of premier-green and green bands cannot leave their companies without an ‘NOC’ to work for other companies; which means that these companies can continue to control their employees by not permitting them to work for other companies if they leave their current employment within 3 years of service or before the end of their labour contracts.
Also, companies in the yellow and red bands are not permitted to apply for new visas to employ expatriate labour and they are not given permission to open new branches or expand their activities. Thus they are placed in an adverse condition vis-à-vis their peers who are in the premier-green and green bands.
Another limitation for the red and yellow band companies is that, once the current work permit ends for their present expatriate employees this will not be extended further. This effectively means the end of employment for such expatriate labour working in such companies as they would be without a work permit and without visa and will have to return to their native countries.
What can India do?
It is this category of expatriate employees that will hurt India and other Asian nations the most as these employees will no longer be able to work in their current companies and will have to return home and, if possible, find alternate employment in Saudi companies who are in the premier-green and green bands. Even then, the work permit will be issued for a maximum period of 6 years which will effectively be the length of their service in future in Saudi Arabia. There will be no longer, long-term service.
Therefore, India will eventually have to work out alternate means to ensure gainful employment for such returning labour back home. However, from experience it is seen that such 6 year limitations are rarely enforced due to economic compulsions and may probably get extended but nevertheless there will continue to be curbs on the employment of expatriate labour and it will never the same as before.
Another very vital aspect of the Nitaqat amendment that is overlooked, probably because of incorrect understanding of the Nitaqat that this amendment actually lowers the percentage of mandatory employment of Saudis to a maximum of 12% based on the size of the company and the activity as compared to the gating earlier flat mandatory requirement of 30%. So this is actually mitigating the negative impact of its earlier law,
Viewed from this perspective it is but natural that these Gulf States would take measures to improve employment of locals. This is a legitimate effort on the part of the local governments to improve employment opportunities for locals and our social activists would do well to factor this in before raising objections. The mission of our external affairs minister was ostensibly not to stop implementation of the Nitaqat legislation as that would tantamount to interference in the local governance which no sovereign country would tolerate but to request the Saudi government to postpone the implementation to give more time for expatriate labour to find alternate employment.
However, there is no escaping this trend of localization by all Gulf States and it will only gather momentum in future in correlation with the reduced influence of petroleum on their economy.
Analysis of the impact of the Nitaqat
Impact on the quota system
The Nitaqat law actually lowers the Saudization quota from the earlier flat 30% to a minimum of 12% for organizations to avoid being placed in the yellow category with its attendant negative consequences. This is therefore not a regressive step but rather a progressive one.
Impact on free movement of labour
Another benefit, although only available to employees in the red and yellow category companies, is the free movement to change jobs to green and premier-green categories without obtaining the mandatory permit from their current employers.
One of the most baneful of labour practices in the Middle East is the sponsorship system in which an employee is not permitted to change jobs freely but must either wait for the end of his present contract, which is normally 3 years, or obtain permission from his current employer to change jobs which, of course, is rarely given. This system keeps employees tied down to their current employers for long periods.
This system of sponsorship also has another negative spin off effect of keeping down wage levels as there is no free movement of labor. Therefore there is no pressure to drive up wages. This sytem acts in favour of the employers and is against the interests of labour. The Nitaqat law also mitigates this negative impact although only under certain
conditions. This is a welcome development.
Impact on employment of locals
However, the moot issue is whether the proposed beneficiaries —the local unemployed Saudi nationals, are actually willing to work in the private sector and whether they are willing to adjust  to the demanding work environment of the private sector. All over the Middle East locals prefer to work in the public sector as the private sector is seen as ‘outsiders’ and have very exacting work cultures. Even if the Nitaqat drive is implemented in full gusto it is doubtful whether the Saudis themselves will be enthusiastic about working in the private sector.
Long-term impact on expatriate labuor
However one major danger of the Nitaqat, which seems to have missed the attention of our politicians and social activists, is the limitation of service period to 6 years for each work permit. This effectively means that the service of expatriates will be limited to a maximum of two contracts of 3 years each after which he has to return home. Thus there is no prospect of a long-term career option in Saudi Arabia. This may have an adverse effect on the availability of highly-skilled labour as they would prefer long term job prospects, even if at lower salaries, back home.
In conclusion, the Nitaqat has both positive and negative effects on the supply of expatriate labour and their continuity in Saudi Arabia but it remains to be seen how effectively it will be implemented.
Be Aware : Focus on Kingdom of Saudi Arabia, Middle East, June 2012
Nitaqat, the new localization system for jobs in the Kingdom of Saudi Arabia, Lex Arabiae, 2013
Labour and Workmen Law(1969), Royal Embassy of Saudi Arabia, Washington D.C.