Focus KSA Webinar Explores “Saudi Labor in Transition” – Transcript

Published: May 18, 2014

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Editor’s Note:

The international news cycle has moved on from President Obama’s visit to Riyadh in late March. The surge of commentary surrounding his trip tended toward hand-wringing about the status of the US-Saudi Arabia relationship and the tension between American and Saudi perspectives regarding Iran, Syria and Egypt.

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More extended analysis noted that these three issues represent just the short list of Saudi Arabia’s regional concerns.  A fuller accounting includes the dangers inherent in the crumbling state of affairs in Yemen and Iraq, spillover from the Syrian crisis to Jordan and Lebanon, sectarian strife in Bahrain, the challenge of the Muslim Brotherhood and the fractious GCC itself.

Each issue presents complex strategic and security challenges that Saudi Arabia is working to ‘get right’ in order to preserve economic, political and social stability at home.

However, with regard to preserving economic, political and social stability at home, none of these external issues may be as important for Saudi Arabia to ‘get right’ as the issue of jobs.

On May 14th Focus KSA presented “Saudi Labor in Transition: What are the Challenges facing the Kingdom?” and considered the context for a constructive conversation:

  • Just under 50% of Saudi Arabia’s population is younger than 25 years old.
  • Saudi men and women are graduating from high school and college in record numbers.
  • A quarter of Saudi Arabia’s last three annual budgets has been devoted to education and training.
  • The number of foreign laborers has been reduced by over 1 million in the last 12 months.
  • The King Abdullah Scholarship Program is underwriting close to 150,000 Saudis studying abroad (75,000 in the United States)
  • Strict guidelines and penalties have been put in place to promote the hiring of Saudis (Nitaqat)
  • Minimum wage levels have been established in both the private and public sectors.

Saudi Arabia is attempting to respond simultaneously to its demographic youth bulge, restructure its private-sector labor market, diversify its economy, revamp its educational system to produce more employable graduates AND evolve Saudi work habits.

How is it doing?

That’s what Focus KSA, a collaboration between SUSRIS and the Saudi-US Trade Group (SUSTG), asked a distinguished panel: Mr. Amr Khashoggi, Vice President Group Affairs at the Zahid Group; Dr. John Sfakianakis, Chief Investment Advisor, MASIC; and Mr. Nathan Field, Co-founder Industry Arabic.

Today we present a transcript and the archived video from the Webinar for your consideration. Also take a look at our helpful timeline on labor issues in Saudi Arabia [Link] and the SUSRIS Special Section titled: “Saudi Labor in Transition: What Are the Challenges?” [Link] You can watch the video on SUSRIS.com in our Multimedia Resources section. [Link]

Focus KSA provides a venue for specialists to talk — online, interacting live with an audience — about the issues, challenges and developments in Saudi Arabia and in Saudi-US relations. Interactive Webinars are held about every month and other Focus KSA sessions are scheduled as developments warrant. You can keep up with the Focus KSA schedule and the archive of previous Webinars on SUSRIS. [Link]

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Saudi Labor in Transition: What are the Challenges facing the Kingdom?

Moderators

  • Patrick Ryan, Editor in Chief, Saudi-US Relations Project (SUSRIS.com)
  • Richard Wilson, President, Saudi-US Trade Group (SUSTG.org)

Panelists

[Mr. Khashoggi participated from Dubai, UAE; Mr. Sfakianakis participated from Athens, Greece and Mr. Field participated from Washington, DC. Mr. Ryan and Mr. Wilson participated from SUSTG offices in Tysons Corner, Virginia.]

[Patrick Ryan] Good morning. Welcome to Focus KSA.

patrick ryanWe’re glad you had the opportunity to join us today as we’re going to have a very interesting and informative conversation about the challenges in the Saudi labor issue.

We’re joined today by a very distinguished panel and we’ll introduce them shortly. First let me tell you about Focus KSA. We’re an association between the Saudi-U.S. Trade Group, SUSTG.org, for those of you that are getting the news review you are very familiar with SUSTG. For those of you that aren’t you should be subscribing to that through their home page; and SUSRIS.com. I’m Patrick Ryan, Editor in Chief of SUSRIS and we have Richard Wilson, President of the Saudi-U.S. Trade Group.

This is our third in the Focus KSA series which brings you distinguished panelists to talk about the pressing issues in the Saudi-U.S. relationship and developments in Saudi Arabia.

Today we’re going to talk about the transition in the Saudi labor force and challenges to the Saudi Arabian government, policymakers and businesspeople, and how that is playing out in the current environment.

I’m going to hand off to Richard Wilson who will talk about the issue, and then we’ll have our terrific panel make some remarks. We invite your questions – you can submit them either through your control panel or through email to me – PatRyan@SUSRIS.com – and we’ll get those in the queue for the open question and answer period. But right now it’s my pleasure to introduce Richard Wilson, President of the Saudi-U.S. Trade Group.

People Richard Wilson SUSTG President[Richard Wilson] Hey Pat, thanks very much, and thanks as ever for being the driving force behind this program. It’s nice to have you in town. Amr, John, Nathan, thank you for joining us. We’ve got Amr in from Dubai, John in Athens, and Nathan here in D.C.

I’d like to just offer some context and a hope in terms of how you organize your thoughts. Our last session discussed the visit of President Obama to Saudi Arabia. It touched on some important geo-strategic topics – obviously Iran, Syria, Egypt, and other neighborhood issues – Yemen, Iraq. These are critical issues that Saudi Arabia needs to get right. None are as critical as other domestic issues, one of which we’re talking about today, and that’s Saudi labor in transition.

As we go through this I’d like to ask your help for me and for the listeners to organize and maybe prioritize some of the key issues that may involve the demographics, the bulge in youth population. As we all know, close to 50% of Saudi Arabia’s population is 25 and younger. Close to 30% are under 15. There’s a transition in terms of the private sector labor market in terms of Nitaqat, Saudization. The educational system is actively being addressed and needs to be refocused and reoriented to produce employable Saudi graduates. And this is not even addressing the issue of women.

So as we go through this, I know each of you has expertise and ideas in different parts of this, but help us draw together – because this is a monumental task that Saudi Arabia needs to get right – and help us understand how they might approach it and what they must do to succeed.

With that, Amr – if you in your Dubai hotel room – if you can start us off. I know you are actively involved with all these issues, and I’ll come back later because I want to hear a little bit about what Zahid Group and what you’ve involved in, in some of your lifetime initiatives that deal with youth, employment, and issues related to that. But please, let me turn it over to you.

People Amr Khashoggi[Amr Khashoggi] Thank you Richard and thank you Patrick. It’s a pleasure to be here with Nathan and John. And I hope at the end of this session that the listeners or viewers will have something of value to take home.

Obviously general capacity is the biggest challenge to actually business and every employer, whether they’re in the private sector, public sector, or non-profit sector. Finding astute people with the right kind of attitude, with the right kind of abilities and knowledge is hard sometimes. Additionally, there is the issue of whether these young Saudis want to work or do not want to work. There are some who actually don’t want to work. They’re happy to just not work, and that is sad because I believe it is every Saudi’s duty to work and contribute to the growth of our national economy and the prosperity for all.

In order to really just go through the process, it all starts in schools. So you’ve got education that has to play a role in honing the skills and building the skills, and attitude, and discipline, and code of ethics and shared values that are very important to any employee, if they are going to succeed in the business environment.

Secondly, you’ve got whatever the educational institutes miss out on that can be covered by the training institutes, and there are many. Some that are private, some that are public. Some who are domestic, some that are international. And then within the work environment you need to have supplementary. A lot of the time some businesses fail to look after young Saudi men and women, and even persons with disability, and they just sort of throw them in the water and see how they will swim, without really proper guidance, without proper mentoring. That is really needed in order for them to start building a career, a career path. And that will lead you to retention. People leave their jobs – the biggest reason for leaving one’s job is because they can’t get along with the manager, and that is a global problem.

So just to summarize it, because I don’t want to take too much time, you’ve got to start with expectation – expectation of the job seeker and what he expects out of the employer, what the employer is providing. These expectations have to be realistic. And if the employer provides the things I talked about in order to give the employee a happy working environment, then that will lead to job satisfaction, and job satisfaction leads to retention.

[Wilson] I think it’s interesting, Amr, being part of a very large conglomerate you focus on retention and employability. It makes sense. I think this is one of the key issues for Saudi Arabia is finding employable Saudis and retaining them.

With that we’ll turn to John Sfakianakis. John provides, and we’re fortunate, provides regular columns published by the Saudi-U.S. Trade Group. And John does not pull any punches in terms of his analysis of the Saudi labor market. So I’m curious, John, to see what you’re going to lead off with. In just the last few months you’ve written articles that deal with labor reform, deal with Nitaqat, deal with training – all these things that you see could be done better in Saudi Arabia. How would you approach this?

People John Sfakianakis[John Sfakianakis] Quite simply the issue is not the issue of supply. It’s mainly the issue of demand. And if the demand, which is the private sector, is fundamentally based on low wages, low productivity, low skills, unfortunately that creates a vicious circle.

So for instance, I fully agree that Saudi nationals cannot compete on levels of wages that prevail in ascending countries, in the sub-continent and other parts of Asia. In fact if these were attractive, Saudis then would have emigrated themselves. So the issue is not just about wages, but overall conditions, the preparedness, skills, and motivations in order for Saudis to substitute workers. So at present, the jobs are aligned with low wages, low labor intensive and labor intensive techniques, and this is not common in other high or even many middle income economies.

So the answer lies in one, managing migration, and letting wages reflect the citizens’ skills and aspirations. This is one issue.

Second issue is that if you look at — since the 1980s — any regression analysis of all the Gulf countries, Saudi Arabia unfortunately has the lowest per capita income increase since 1980, despite high oil prices. And so that creates three kinds of challenges.

One is that the demographic window of opportunity is closing. That’s because people are aging and you have to capture them while they’re young. The government is trying of course to do its part, but you need the help and you need the debate with the private sector. You need to align yourself with the private sector. Two, as I said before it’s not so much an issue of demand but also an issue of supply and what the private sector is willing to pay because if the private sector continues to pay low wages based on low skills then the economy will continue to be attractive for those kind of people.

So migration has to be controlled. And actually migration over the last twenty-five, thirty years is driving the economy towards low productivity, although it is still profitable for the private sector to employ people due to low wages. So people are quite happy in the private sector, but this is not something you can push forward and you cannot create a viable, sustainable economy.

And oil, finally, remains a dominant factor, but historically is a volatile sector, and has created this kind of feeling that things are great. However, history shows that oil prices could very well change, and it is a cyclical business. So there are three questions that one has to keep in mind.

One is the binding constraint for employing nationals. The issue is here again the labor demand. Low value-added low wages, that has to change. And the labor supply. And the labor supply Amr touched upon, and I fully agree, but if you don’t have the right demand, then the supply will not be there. So people will be sitting at home opting not to work for 5000 Riyals because they can earn 10,000 Riyals, so they sit at home doing nothing. So you have the incentive, which is Nitaqat, and I’ll talk about this later.

So the skills, attitude, and incentives right now are not there. The private sector is being pushed in order to comply. So what can the government do? The government can do many things.

One is to begin to think in a holistic way about the labor market. So when you have a five-year plan you think how this five-year plan can work to adjust itself on the labor side. Why? Because labor is, to me, the most important component of the future of Saudi Arabia, along with the issue of diversification, because if you do not diversify you can have a lot of people who could be in the future gainfully employed but you don’t have an economy. And then you need a time horizon. So to turn the economy to high value-added, high productivity, high wages, more employment creation by the private sector, it has to be acceptable to citizens, and it has to be acceptable to the private sector. That’s why you need the dialogue. But this is something that doesn’t take five years or ten years to adjust. This is a generational issue, and it will take a fairly long time to do.

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So what you need to address is the issue of capacity and willingness – willingness politically to ruffle some feathers, because obviously this is a huge adjustment in the private sector, and at the same time for the public sector to readjust itself by saying that we’re not going to hire more people into the public sector because that gives people the wrong incentives. In fact since 2011 30-40 percent of all Saudis who got employed in the economy were hired by the public sector. So even if there’s willingness by the private sector, the public sector needs to do its part. And there you have, you need to have political commitment and adjustment. I don’t want to delve further – I can discuss the issue of Nitaqat and its successes and also failures, but I want to pass the floor to you guys and for Nathan to have a chance to say his part.

[Wilson] Let’s do that. I think it’s critical that we come back to Nitaqat and when you talk about the government’s willingness, this is clearly the strongest, most determined initiative of this sort that the government’s pursued. There are issues with that. Agreed. Let’s give Nathan an opportunity to get on the field and discuss where you think you see some priorities and some possible solutions.

Nathan-Field2[Nathan Field] Well thanks, Richard and Pat for inviting me to be a part of this discussion. It’s an honor to be on a panel with distinguished guests like John and Amr.

My hypothesis is that it’s useful to view the issue of Saudi labor reform as possibly fifty percent economics, but at least fifty percent politics. It really needs to be understood in the context of the ongoing Arab Spring, and what it fundamentally means, or should mean, to be effective new jobs, and new economic opportunities for normal, average Saudis.

I think one policy area that can be effective at doing that is creating and promoting new SMEs, companies of up to 250 employees. It’s been shown to be effective around the world at generating private sector driven growth, but just as important politically in the context of the Arab Spring it can be effective at creating new stakeholders in the system.

But the key question in the Saudi context is what does – what is an effective SME in the context of Saudi Arabian labor reform? Because it’s not necessarily about profit, because the business model with Saudi investors and senior Saudi managers, and ninety-five percent foreign labor can make a lot of money, but the real issue is it’s about getting jobs for Saudis. And I think there are four features of a successful SME in the Saudi reform context.

Number one: overwhelmingly, if not exclusively hiring Saudi nationals. Most SMEs statistically are still at least 50% foreign nationals, a high quantity of new hires. Most SMEs in Saudi right now are one to three to four people, primarily maybe a Saudi owner and three foreign nationals. There were a couple of articles yesterday about really cracking down on cover up companies. So a lot of the SMEs in Saudi are not really generating jobs for Saudi nationals.

Number three: being reasonably attractive and productive in employment that would attract the best and the brightest of Saudis. A lot of the younger Saudis like to work for the big, prestigious, and most stable employers like Aramco or SABIC or certain government ministries, or in the private sector companies like Amr’s.

And number four: profitability. I think it’s been very difficult until recently for a Saudi company to start and within a year or two to have thirty, forty, fifty new Saudi hires and be profitable. It comes down to – to follow up on what John said – among several reasons, but one of the main reasons is the addiction to foreign labor.

Just over the course of three, four decades, millions and millions of foreign nationals from countries with a cheaper standard of living than Saudi, and just to be clear many of these foreign nationals were welcomed and played an essential and valuable role in the Saudi economy, and were needed for a long period of Saudi history. At the same time it has had the effect of driving down market wages in many sectors so that normal, average Saudis could not find jobs in their own economy.

I’ll take one example, which is trucking. In the 1960s and 1970s many Saudis worked in trucking, but now it’s dominated by migrant workers from the Indian sub-continent or the Horn of Africa, and market wages are five hundred to eight hundred dollars a month, which can support a family in Bangladesh or India, but it’s not going to support a family in Saudi Arabia. It’s not attracting jobs and Saudi interest.

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So I think the reform context of the last two to three years is correcting this situation, and I think as a benchmark should be a situation where a new SME can be founded and within a year or two you could have 30, 40, 50 new Saudi hires and be profitable in some sectors. And I think government policy in the last couple of years is moving in this area, and that Nitaqat for example is limiting the presence of foreign workers, a minimum wage of $800 a month, taxes on foreign labor, harsh penalties on use of illegal workers – it’s $2,600 now is the fine for using foreign workers who are illegal.

The Human Resources Development Fund is another effective tool that is removing some of the incentive to hire foreign workers and it also removes some of the risk for Saudi companies by paying half the salary for the first two or so years. But it’s not just an issue of getting rid of foreign workers – there’s other factors. It’s about improving the productivity of Saudi labor.

To shift gears for a minute or so. Which sectors of the new economy could SMEs be effective at creating jobs for Saudis? I would actually point to blue collar sectors in the Saudi economy – construction, maintenance, potentially manufacturing. And I know that’s not what most people would say, but one interesting statistic is that the least successful sector in terms of Saudization is construction. Six percent of workers in the construction industry are Saudi. But if you flip that around it also means that it’s the sector of the economy where there’s the most potential for large numbers of new Saudi jobs. The jobs are already there. There’s clear demand for them. If overnight every single foreign accountant was replaced by a Saudi accountant, that would make a very small dent in the unemployment. But if you – over one, two, three, four years in construction, that could make a big dent. And there’s a negative stereotype out there that says Saudis don’t like working with their hands. I don’t think that – I think that’s very simplistic and largely inaccurate. I think it comes down to the wages, because if you look at the grandfathers and great-grandfathers of the current, younger Saudi generation, they work with their hands. And the founders of many of the big, major Saudi private sector companies started out working with their hands. It’s a question of status. Financial status and the social status that comes with it. And I spent several years working in Saudi, working with – worked directly with Saudis in their twenties and thirties, and I never got the sense that they were inherently – they would not shift their interests if the conditions changed.

I would just draw attention to one important program to watch over the next couple of years, which is the industrial clusters manufacturing program, and there’s a lot of details – and I won’t go into in detail. People can read about it on the Internet, but Saudi has some very detailed and ambitious, well-funded programs to be competitive in five manufacturing sectors over the next decade, and if they are successful – if they are fifty percent successful, it’s going to mean a more diversified economy with more jobs in manufacturing in the more blue collar sectors of the economy. It’s something to look out for.

The key question I think is what would change interest amongst young, normal, average Saudis to get them more interested in these fields. Better pay, but I think if they felt like they were involved in something of importance to the Kingdom that is tied to its future success, that would be a factor, and where you have their output tied to incentives, which does not usually happen in most parts of the public sector in Saudi Arabia.

So in conclusion, I would just look at Germany and the U.S. where mechanics, construction workers, plumbers, and factory workers can make very good wages, and just as important that those jobs have a certain status within their community. And there’s no reason that can’t happen in Saudi Arabia. I think something like that needs to happen in order to bring about long-term employment.

[Ryan] Terrific. Thank you Nathan. We appreciate those comments. We’re going to give our panelists time for a brief commentary on what’s been said, but first let me remind everyone that this is Focus KSA, a joint effort of the Saudi-U.S. Trade Group and the SUSRIS.com website.

You can get detailed biographies of our panelists again at SUSRIS.com/FocusKSA, and we’ll look to questions from our audience, and we have some very good ones lined up.

Amr, maybe you can lead the commenting on what’s been said, and then we’ll get to questions.

[Khashoggi] Okay, thank you.

First of all I would like to agree with Nathan that really SMEs are the way to go forward in order to create job opportunities for young Saudis. Saudi Arabia today, SMEs are really ranked at the very bottom of the list in creating jobs and hiring Saudis.

One of the key issues there is there is no rule of law to protect young Saudi entrepreneurs from hiring other Saudis, training them, getting them to learn the business, and then they go and open next door and compete directly against them. So that is one of the reasons that Saudis are discouraged from hiring other Saudis. So that is one issue.

The other issue has got to be blue collar, I agree with you. At Zahid Group, we have a three-year apprentice program for blue-collar workers. We do train them. And I agree with you, the retention is much higher than white-collar workers. We have factories that work with foreign companies for lubricating oil. We have other factories that assemble trucks. The percentage of Saudis there is upward of sixty, seventy percent. It is definitely – they like to work with their hands if they are trained properly, but it takes three years to graduate them with a guaranteed job at the end of the day.

Things Zahid Group Building Trucks Industry Business

So I agree with you that blue-collar is definitely one area. When it comes to the issue of wages – I’d like to just make a comment. There is a mismatch, or let’s call it a dysfunctional system here whereby if you are a contractor and you are appealing for a job, you’ve got to win that job based on price, but you’re not giving any weighting assistance if you hire Saudis. So you kind of are caught between a rock and a hard place. Do I hire Saudis? If I hire Saudis I won’t be able to afford to be competitive and win the bid. At the same time the person who is giving that contract is funding the training of Saudis.

So I think if we can manage our funds as a nation in a better and more efficient way so we would encourage contractors and construction companies to hire more Saudis and not penalize them by awarding contracts to people who are hiring third-country nationals at half the prices. So that’s one issue.

One other point I wanted to kind of comment on with regards to what John was saying – I agree with him, it is an issue of supply and demand. And mentioning the two together is always a challenge. But the only thing I would like to add to what he said is that Saudi Arabia is not a homogenous country when it comes to Saudi labor. They’re very different from one city to another, from one town to another, from one village to another. If you go to Yanbu, for example, or Jubail, where there are the Royal Commission industrial cities that are based on petrochemicals, or the new ones, you will find that Saudis are willing to work, willing to work for less wages, and I think that we can increase the employment in those regions more significantly than we would in the big cities of Riyadh, Jeddah, and Dammam. So I think that is very important aspect.

Also, these new places, new areas, new industrial cities like the four industrial economic cities like King Abdullah Economic City. I am seeing already, and we are investing heavily in King Abdullah Economic City. I am seeing more and more Saudis are interested there, but the biggest challenge is mobility. The Saudi people are home-driven, family-driven. They don’t like to travel very far from their families, and that presents a major challenge.

So we’re trying to attract them by creating more of a family environment for them in these cities. So that is where the biggest challenge is.

[Ryan] Great. Thanks Amr. John, do you want to make some brief comments?

[Sfakianakis] Yeah, let me say a few things first of all about SMEs. So it’s very nice everybody talks about SMEs. That’s the future of Saudi Arabia, like most other modern economies. Countries such as Japan has sixty percent of its value-added coming out from SMEs. But in Saudi Arabia it’s not going anywhere, and it’s not going to go anywhere until the following steps are taken.

Number one: there has to be access to finance. Right now SME borrowing from the banking system is about three percent. The bulk of borrowing happens to large enterprises like Zahid. And until that relationship changes, primarily from the banks, not necessarily from the banks – this is the responsibility of the banks – the SMEs are not going to be financed. So there is a problem. We can keep on talking about the future of SMEs in Saudi Arabia, but if there is no access to financing that creates huge problem.

Number two: there is a lengthy bureaucratic process that completely destroys the core of SMEs. Procedures, licensing that’s a big problem. For instance basic accounting is not known by a lot of the SMEs. Educating the SMEs at the level of high schools is very important. Also the structure of these SMEs has to be redone because right now it is based on single proprietorship companies. So that creates all kinds of delegation problems because daily operations are undertaken by expatriate managers and that limits innovation and the acquisition of skills amongst SME Saudis or potential employers or employees, Saudis.

So this has to change, and in order to go from low-margin activities that have very little effort to high-margin activities, innovation has to be there. It’s very important – to change this vicious cycle of things.

At the very top there has to be an institution that oversees the SMEs. Right now in Saudi Arabia you have at least five different definitions of what is an SME. There is a SAMA definition – that is the central bank. There is a Ministry of Commerce definition. There is also a SAGIA definition. And then there is a chamber of commerce definition, respective of the different regions. So there is a Jeddah, there is a Dammam, and there is a Riyadh. So we have to get over that.

Ideally in order to educate perspective SME owners you ought to have something that you have in the U.S. which is very successful over the last few decades, which is the Small Business Administration, and that is very important. And also you need to mandate – and that’s where the government comes in – twenty percent of all government contracts to be given to the SMEs.

Without the above we can keep on talking about SMEs and there will be no SMEs in Saudi Arabia. So that’s that with SMEs.

Let me say a few things about Nitaqat since you’ve brought it up. I think it’s very important to have two things in Saudi Arabia for the private sector. You need the carrots and you need the sticks, and you cannot as I said before embark on an ambitious plan to change the makeup of the labor market without changing the carrots and sticks. You need to have incentives. So administrative measures such as quotas, such as Nitaqat can be good to a certain extent, but the process of nationalizing the labor force cannot happen quickly as both company practices and national job seekers, expectations we need time to adjust. So you need to create incentives for the private sector. And if you look closely at what have been the results of Nitaqat you have mixed results.

And I can go into it in more granular terms. So I would say if you look at the first sixteen months of Nitaqat and I looked at it – I did a study on that – the analysis found that the program succeeded in increasing native employment, but also had significant negative effects on firms. Program compliance rates were high, with firms hiring an additional 96,000 Saudi workers for the first 16 months. So it’s not between 2011 and today, but it’s between 2011 and the 16 months that preceded, but also there were significant costs. The program caused approximately 11,000 firms to shut down, raising exit rates by nearly fifty percent, but also the program decreased total employment among surviving firms, and overall private sector employment decreased by about 418,000 workers, which primarily includes expatriates. But again as I said, the additional on the Saudi side was about 96,000. So there were some successes there, but also some failures in terms of the shutdown of firms.

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As I said, the nationalization of the labor force cannot be done without having a dialogue with the private sector. The private sector needs to understand that the way it has been doing business over the last 40 or so years relied predominately on migrant workers to obtain very high margins can no longer be done.

The question that needs to be asked is the following – do you want to have a country? If you do want to have a country, then something has to fundamentally change because business as usual will not sustain the Kingdom for too many years if we keep on doing what we’re doing today.

[Ryan] Great. Thanks John. Terrific commentary. Richard.

[Wilson] Pat, I know we have questions, but this leads me to an observation. In Saudi Arabia, and having been there and involved with it for thirty years, there’s never a shortage of good ideas. Two things that jump out at me, and it’s been referenced. One is political will. The other is absence, or at least the inefficiency of the public-private partnership.

Each of the topics that have been addressed have either been a shortfall in terms of the political will, the approach, or a disconnect between what the private sector needs in order to make the transition, in order to successfully make the transition, and what the environment allows them to do. So my concern is – go ahead Amr.

[Khashoggi] I just want to respond to this point of yours. I think that what you need to do is if you take a look at cost, ten years or fifteen years of Saudi Arabia, there was a slow progress in building trust between the private sector and the public sector. There was “us and them” – if you’re not with us, you’re against us. Sounds familiar? Okay, that’s what has gone on historically in Saudi Arabia labor.

But as of recently, I think – and I’m sure John would agree me that there are more public-private partnerships that are being developed, especially in cities like Medina, for example, where 97% of commercial registrations are SMEs. They need a lot of help. They’re trying to create … Medina industries, not necessarily blue-collar as Nathan was suggesting, but more of the type of industries that would be attractive to religious visitors to Medina, such as praying beads, praying carpets, other stuff that can be made in Medina, such as packing the dates and selling it, and you can create a whole chain in this industry.

And the private sector is heavily involved in it. Zahid is involved in it. Bin Laden is involved in it. We’re creating a training center there. And like John has said, the banks have got to do their part. We at Zahid, with AJIL Financial Services [www.ajil.com], which is a partnership between Zahid and Riyad Bank, so Riyad Bank is involved in that – we look to young Saudis who cannot get credit from the banks. We fund them, we train them, we plug them in as sub-contractors to our main clients, and we mentor to make them be successful SMEs. We’ve had some great success over the past three years, and now we’re addressing in the north province where there is the mining industries, to create the contractors of the future.

So the private sector have got to bite the bullet and put their hands in the hand of the government, which is really putting it in the hands of the private sector, and to create public-private partnership. That is happening.

[Ryan] Nathan, go ahead.

[Nathan] John, in terms of what you said about the lack of finance and the lack of regulation, I totally agree, but that’s – the topic of this discussion is labor reform, so rather … those are the problems that have plagued, that have prevented the formation of new SMEs up to this point, but it’s essential to the future of the country’s development.

So those could be specific areas where the reform should be focused. I said specifically that it’s very difficult to start new SMEs now, but what you listed, I don’t think those are permanent obstacles to starting new SMEs. Those are areas to focus the reform on.

[Sfakianakis] Sure. I completely agree. There is no issue there whatsoever. I think what I wanted to highlight was basically the way to go ahead in order to unlock the potential of the SME sector. So basically providing a roadmap to the government as to how to do it.

Let me say something about the issue of affordability, because this is a question I often get from people, including the private sector, when they ask me can the private sector afford to pay such high salaries? Instead of 2,000, can it be 10,000, and can the majority of the private companies pay as much as let’s say the oil and gas fueled public sector?

Well first of all the private sector can pay more if its productivity increases. That’s very important. So it’s not going to pay more if its productivity decreases over time.

And this will not only contribute to economic growth, that is productivity increasing, but also increase incomes of workers who can then spend more and thus increase further the revenues of the private sector. So this is a circle, this is a very important circle that creates wealth within the economy.

So in some ways I want you to think of the opposite. Can, let’s say, Saudi workers and citizens be eternally doomed because the private sector can operate only with low wages? Think of China, for instance. Wages are now increasing, and increasing fast in China. Hence, China is becoming not so much wage competitive. So aspiring economies need at some point to migrate from low productivity, low wages to high productivity, high wages. And I’ll use an example that I used in my recent op-ed, and I said that you have a lot of people clean streets and they tend to be all expatriates, so what you do there is you apply administrative measures, and that’s where you need to have administrative measures. You get rid of them, and you hire instead a Saudi for the wage of eight expatriates. And you give him a machine, he sweeps the streets clean in an air-conditioned and dignified manner, and I think you will potentially find a lot of Saudis.

The economy definitely has to transform itself from this labor-intensive economy to a more automated, Saudi-based labor economy. And that’s just an example of how they do it. Of course construction, Nathan used an example that is very important, and the only way to change that is to change wages in the construction sector. Of course contractors will shout and yell and say that this is something that we cannot sustain because we can’t build what you, the government, is asking, we need two x’s or three x’s.

Then again the question that needs to be asked here is do you want to have a country? And the answer should always be yes. Hence we go with the proposal that construction, tourism services, as Amr said, part of it is manufacturing. Maybe Saudi Arabia cannot industrialize as much as China, and it shouldn’t.

Assembling cars is not something that Saudi Arabia is going to do very well. There are others who do it much better and they have the size and the economies of scale, but they could very well assemble parts, because sixty percent of the components of the car is plastics, and Saudi Arabia has a lot of plastics as we know, and a lot of petrochemicals. But that, again, doesn’t create a lot of jobs, right? Even if Saudi Arabia becomes the center of automobile assembly in the world, and becomes another Detroit, or another Turkey, or another U.K. It’s not going to create enough jobs, because over the next seven years Saudi Arabia needs to employ about two and a half million Saudis.

So that’s the challenge, but what I’m saying here is the government needs to think in holistic terms from the very top to the very bottom. Everybody in every ministry needs to work towards the goal of creating jobs. And it’s not the goal of anything else. If you pass this message, so the five year plan, which is in other terms is as good as fire for the winter, then you need to think how do you create jobs and how do you help the economy diversify?

[Ryan] Let me follow up on that – we need to get into a couple of questions from the audience here. They’re building up in the queue, and thank you to everyone who’s commented or submitted questions. Just a reminder – we’re conducting a Focus KSA webinar. We thank everyone for coming. This is sponsored by the Saudi-U.S. Trade Group and SUSRIS.com.

John talked about the government taking a holistic approach, and one of the questions that we have in the cue comes from Fahad Nazer who says Amr talked about the Saudi employees expectations from management. What about the Saudi citizen’s expectation from the Saudi state itself? Some analysts, himself included, have written about a sense of entitlement among some young Saudis and whether the changing demographic reality requires the state to recalibrate its ruling bargain? Is it time to redefine the state’s obligations to Saudi citizens as well as Saudi citizen’s responsibilities to the Saudi state and their economic well-being?

And while you ponder that let me also throw another question to our distinguished panel. From Laura Owen, who writes in that, “The elephant in the room is 50% of the population is women. There are no women on this panel. Oops.” I’ll address that. We will be seeing many of the distinguished Saudi businesswomen and others who represent various viewpoints in upcoming Focus KSA panels. Unfortunately we didn’t today. I will note that we are very pleased with the distinguished panel that we do have assembled here.

So perhaps in addition to the first question there can be some comment on Laura’s question, as she says that “unlike many men in KSA, the women want to work. They’re well educated, and have a strong work ethic. Please address this important topic.”

Amr, do you want to start? Is there time to reassess the bargain between the government and the citizenry, and/or the question about representation of Saudi women in the workforce?

[Khashoggi] Okay, let me take the second question first. First of all, I am a champion of women employment and women getting their rights as equal citizens in Saudi Arabia.

I know at Zahid we have been doubling the employment of women every year for the past five years and we will continue to do that. They are getting jobs, not just the traditional jobs in administration and finance and IT and HR, but they are also getting into the technical fields as well. We have electrical engineers. We have Six Sigma certified women. We are very proud of every one of them.

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I agree that women would solve a huge problem of employment. As you know that in Hafez, 80% of the women that are registered in Hafez are unemployed. They are looking for jobs. So we have to help them. We have to really take a concerted and serious effort in employing women in all fields.

Women themselves are becoming more demanding of their rights. We are seeing women are getting more rights. Now they can go open businesses, deal with their own licensing issues and so forth without the need for a male agent, and that is big progress. So it’s work in progress. I add my voice to Laura that really we should have had a women represented on this panel. I’m sure she would speak much better than I would.

As far as the expectations issues. We cannot really separate the citizen from the government. King Abdullah, in every action he has taken, and he is a change agent, has been for the benefit of the citizen, whether the citizen expects it or not. This continues to be his motto. Find the best that there is for every single citizen: from a health point of view, from an economic point of view, from an education point of view – from every single point of view. And he keeps instructing the ministers to provide for the citizens. As far as the citizens are concerned, every citizen has a right to work, whether they are men, women, or persons with disabilities.

I’d like to address that last one. As you know I’m involved with the “Qaderoon” business disability network, which is a non-profit organization. It is a national network and we work directly with the employers, whether those employers are in the private sector, public sector, or the non-profit organization to help them to create a work environment that is conducive to persons with disabilities working, changing their policies and procedures, helping them with training their HR managers and so forth. At the same time we are a lobbyist with the government in order to help get more jobs and greater inclusion of persons with disabilities on an equal footing with everybody else.

So I think it’s all about equality and fairness, and if everybody keeps that in their sight then I think we will succeed in really bringing up our nation to a greater place.

[Ryan] Nathan, any comment on the ruling bargain between the government and the citizenry? Is there a change in how the people of Saudi Arabia should view the labor compact with the government?

[Nathan] Well, I think as a citizen of the United States and not Saudi Arabia, I don’t think it’s my position to comment on the political bargain between the government and the people of Saudi Arabia.

In terms of the labor pact, I take in general a glass half full approach to the government policies of the last couple of years. I think if you look at, read the media there’s always going to be focus on certain bad effects of Nitaqat. Apparently there are people getting hired not to come to work or people not showing up to work, but I really think we need to look at the plus side. More Saudis are getting hired in the private sector, and it won’t happen overnight. That’s one of the important points. This is the situation with the distortions are a product of several decades and it’s going to take time. And also – I would also just say there are going to be some losers of Saudization, in the sense that not everybody is going to benefit. Some of the very small companies will suffer. Some of them will not be able to stay open. The government, and maybe this gets question of the labor pact, the government can use its resources to ease that fall, maybe kind of try and conduct and consolidate some of these small companies into bigger companies and things like that.

[Ryan] John, we have a comment for you from Michael Slater. He leads with your common concern on private sector demand, which is focused on low-skill, low-value workers, which are jobs Saudis will not take. This will be further compounded by the number of university students that will return and require higher-paid jobs. All that said, what sectors does the government need to focus on? Financial services, insurance, pension, asset management, etcetera? Those areas seem to be an opportunity.

[Sfakianakis] None of the above. It is simply because the banking sector has created so far about 30,000 jobs, so even if it becomes the region’s center for financial services, it could potentially create another 40. As I told you there will be a couple of million plus Saudis looking for jobs over the next seven years. So finance is not going to cut it. It has to be the bulk of the employment force in Saudi Arabia for the labor force in general which is coming from the services sector. Wholesale in region alone creates about 850,000 jobs. So if you get rid of half of them you have half a million jobs right there.

Tourism potentially, once you create the infrastructure, once you push more for religious tourism, then you could potentially replace a lot of these Saudis. So I would say the service sector overall in Saudi Arabia needs to think of how it’s going to be seeing itself in the future.

Manufacturing could create some of these jobs as a replacement factor, but Saudi Arabia’s not going to become a manufacturing hub. If Egypt for instance or Turkey progress further, and if Egypt gets its house in order it will compete aggressively with other countries. And mind you, that Saudi Arabia is competitive on the manufacturing side because of the subsidies. If you take out energy subsidies and labor, which is expatriate, then manufacturing does not have a competitive edge except certain areas. So that’s one.

Number two. You asked about the issue of the pact, and the entitlements. Well, I think that things have to change in the future. Saudi Arabia can no longer provide what it used to provide. One, because it’s a much bigger country than what it used to be thirty years ago. So it is a political question, but for sure citizens have to change their minds as well as the government.

Now, as I told you since 2011 up until 2013, so from oh-11 to 13, according to the latest labor survey of the ministry of planning and economy, which produce by the way the statistics on labor, 43% of all jobs were created by the public sector.

So Saudis cannot forever expect that they will be hired by the government. Why? Because 43% of Saudi Arabia’s budget goes towards supporting wages and salaries for the government. So how sustainable is that? That is not very sustainable if you keep on hiring ad infinitum. So that’s with that.

Finally I want to say something about female employment and employment and the issue of that. I would say that economic necessity in Saudi Arabia is going to change dramatically over the next ten years the labor structure in Saudi Arabia. And whether people like it or not, whether they are conservatives or not, in other words, women are going to be very active in the labor market? Why? Because inflation is an issue, costs are rising, and you can no longer sustain a household in Saudi Arabia with one male individual supporting the rest of the family. So you need two members to support the family. And in fact – and I would say that this is a myth – just to support the person that asked the question in the sense that there was no female participation – it is a myth to assume that in Saudi Arabia unemployment is high because of high female unemployment. In fact high unemployment in Saudi Arabia is because of high male unemployment in terms of total numbers, but also high female, but not just because of high female unemployment.

[Ryan] John, if I could ask just quickly, we have a question from Hassan Ghazali, who asks about the tourism and hospitality sector. Can you talk a little bit about the challenges in that sector and improving Saudization and tourism and hospitality? Is that a conversation people are having?

[Sfakianakis] No, it’s not something that’s involved, as we say. It’s not something that is in the minds of the high policymakers at the moment. Definitely this is something that will add, potentially, a lot of value. Tourism – it contributes about nine point three of GDP to the Saudi economy, and it could by 2025 add another five to six percentage points if it’s done properly. Again in order to do that you need financing, You need to be able to do that in order to create additional jobs. Tourism throughout the world has many multiplier effects. It creates more jobs for a lot of people in restaurants and hotels, in many of the service areas. So it’s something that Saudi Arabia needs to think of, mindful of its culture. Saudi Arabia could potentially create multiple Sharm el-Sheikhs. That is the resort in Egypt, multiples of that. Saudi Arabia is not going to become Sharm el-Sheikh but eventually it could cater to the religious component, which is visiting Saudi Arabia. And you can attract them to stay in Saudi Arabia longer, spend more money, and eventually create more jobs. That is something that is very important.

Out of the total amount of jobs in the tourism sector today, which is 751,000 people, only 27% percent of them are actually Saudis. So alone if you Saudi-ize that, you create about 750,000 jobs today, and then additional jobs as the market expands.

[Ryan] Great. Amr, you have your hand up. Last comment. We’ve run over – and I apologize that we’ve exceeded our time. I know people have to make appointments. Amr, and then Nathan – any closing comments and we’ll wrap it up?

[Khashoggi] Yeah, I just wanted to add to what John said. A lot of people when they think of tourism in Saudi Arabia, they tend to think of religious tourism, but actually there is what we call environmental tourism. We have areas where there are volcanic rocks that are absolutely beautiful that can be visited. We have also a lot of archeological sites all over the country. We have some beautiful areas where people can go and picnic. And we have many people, especially from the Gulf, who come to the south of Saudi Arabia and Abha and so forth, and they spend their summers there. It’s cooler, it’s higher. So I think that definitely tourism is a big thing, it could be a job creator for sure.

Just in closing I want to extend my gratitude and thanks to Richard and Patrick for putting together this fantastic panel, and I’m really proud to join the panel with John and Nathan. We’ve addressed some very, very important issues. We can be sitting for ten hours talking about it, and maybe this can be a seed for further discussion.

We have the Jeddah HR Forum coming up soon enough. I don’t know if you’re participating, John, but this is something that we can definitely carry on the conversation. This conversation should never end with just a one-hour webinar. It should be a continuous dialogue, and I would really encourage SUSTG and SUSRIS to carry the dialogue forward with listeners of yours, and encourage people to send their comments and thoughts.

[Ryan] Thank you, Amr. Nathan, the floor is yours for a minute.

[Nathan] Just a quick closing comment. I think just in general the big picture now … it’s important to have reasonable expectations. This is a long-term problem that won’t be solved overnight. The government has put in place I think serious strategies to fix them, but they’re not going to be perfect. There’s going to be inefficiencies. The data suggests more people are being hired in the private sector, which in balance is a good thing. Number two: the government can’t do everything, and it’s really on young Saudis to step up.

The government, in terms of SMEs – this is one area, where John focused on real, genuine problems in the past, but moving forward some of them can be eliminated. That’s where the opportunities are. And it’s also important to be realistic about the nature of the different sectors in Saudi Arabia. As John mentioned there are 40,000 finance experts right now in Saudi Arabia. Best case scenario — that might double to 80,000, so it’s important to be realistic about … jobs, and I think specifically it’s in the blue collars.

Thank you to Amr and John, Patrick and Richard for this very interesting discussion.

[Ryan] Thanks, Nathan. John, a last minute.

[Sfakianakis] Thank you everybody. It has been a great pleasure. Amr, I would gladly attend the forum if I get invited.

[Khashoggi] You are my guest.

[Sfakianakis] It has been a pleasure guys. Two things to keep in mind. There are two propositions here. One is for the employment space and the other is for the policy space.

Let me start from the policy space. The critical policy instrument is the five-year plan. What gets included in it and how well it is implemented on the labor issue is very critical. So the five-year plan in my opinion needs to think of labor, labor, labor. That’s it.

On the issue of the employment space, it is the demand for labor that determines the level of employment and required skills. Now, the supply of labor, that is education and skills, determines employability. You need to look at both of these things. We have been looking at education. Technical education is key in Saudi Arabia. We need to enforce that. But it is both demand and supply that drive incentives and drive labor costs and migration for employers that need to be their administrative control in order to control the inflow of migration. And that eventually will increase the level of wages and the quality of employment for job seekers, so eventually the economy will go to a high wage economy that creates more opportunity.

That’s all from my side. Thank you guys. Again, fantastic work.

[Ryan] Thanks John. Thanks so much. Thank you Nathan Field, the co-founder of Industry Arabic, Amr Khashoggi, Vice President for Group Affairs at Zahid Group, and John Sfakianakis, the chief investment advisor at MASIC in Riyadh. I’m Patrick Ryan, the Editor in Chief of SUSRIS.com.

This has been Focus KSA. We’ll be here regularly. Check SUSRIS.com for listings of what’s coming up, and I will pass it over to Richard Wilson, the president of the Saudi-U.S. Trade Group.

[Wilson] Gentlemen, wonderful. Thanks so much for being with us.

John, you finished on an important point, and that’s sort of the other elephant in the room, in addition to women and that’s education. As a segue for a future edition of this series we’ll focus on education, because that speaks to the productivity you’ve talked about, the matching up of the labor force with the needs. So education will definitely be a topic we’ll dive into deeper.

Thanks so much for everyone’s input today. It was a terrific conversation.

[Ryan] Great. Thanks Richard, and thanks for everyone for participating, our distinguished panel, and our audience. We look forward to seeing you at the next Focus KSA. Have a great day.

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