MIDEAST MONEY-Saudi businesses fear impact of new fees for foreign workers

JEDDAH, Saudi Arabia, Dec 5 (Reuters) - Glancing through the

newspapers one morning last month Saudi Arabian businessman

Ihsan al-Naeem was stunned by a government announcement that he

fears will threaten the survival of his family's 30-year-old

contracting business.

In the latest and most aggressive of a series of labour

reforms, the government has started imposing fees on companies

that hire more foreign than local workers. The requirement

covers everyone from expat professionals to hospital workers and

labourers on construction sites and is in addition to quotas

already in place to limit foreign staff numbers.

The new rule is aimed at reducing unemployment of 10.5

percent among Saudi nationals by getting them into jobs now

performed by 8 million expatriates in the country, a long-term

Saudi goal given fresh impetus by the uprisings in Arab

countries last year that were partly driven by high

unemployment.

Labour Minister Adel al-Fakeih said in January that the

largest Arab economy needed to create 3 million jobs for Saudi

nationals by 2015 and 6 million by 2030, partly through

"Saudi-ising" work now done by foreigners.

However, in an economy in which imported labour fills nine

in 10 private sector jobs, according to central bank data, many

companies fear the new fees will hit their businesses hard by

adding to their costs and shrinking the pool of available

workers.

"There are no Saudis who can drill or operate heavy

machinery ... Where will they work in the construction

industry?" said Naeem, who employs more than 1,000 foreign

labourers working on 17 government contracts.

As of Nov. 15, Naeem and other private sector employers who

hire more foreigners than Saudis must pay a fee of 2,400 riyals

($640) a year for each additional expatriate when they renew an

expat's one-year residency permit.

The rule does not cover foreigners with Saudi mothers or

nationals of other Gulf states.

Businessmen protested outside Labour Ministry offices after

the decision, threatening to raise their fees to cover the

additional labour costs o r terminate existing government

contracts.

A Labour Ministry spokesman said there were no plans to

reverse or amend the decision.

"The decision is based on detailed studies of the market

mechanisms and it will hopefully increase the competitiveness of

our local youth in a market that has no mercy, which has eight

foreigners in every 10 employees of the private sector, who

compete with our youth for their livelihood," the spokesman,

Hattab Alenezi, said.

Businesses say the new system will not address the problem

of Saudis unwilling to work in the private sector. Wages are

much lower than in government jobs and in many cases people are

better off on unemployment benefit, which pays 2,000 riyals a

month for up to a year. A security guard in the private sector,

for example, earns only around 1,500 riyals a month.

After the 1970s oil boom, which propelled many Saudis into a

lifestyle of wealth and luxury, locals viewed jobs requiring

manual labour as menial and imported cheap foreign labour to

build their cities and service their offices.

Construction labourers from India, Pakistan, Bangladesh and

the Philippines form the biggest group of foreign workers.

"I have never come across a Saudi willing to work as a

labourer," Naeem said, estimating his medium-sized company will

have to pay around 2.4 million riyals in annual fees.

QUOTA SYSTEM

Businesses complain that the fees on foreign workers were

introduced with immediate effect with no warning or

consultation, and that they appear to contradict other recent

reforms to encourage "Saudi-isation" that take account of

different industries' requirements.

Last year the Labour Ministry overhauled a crude quota

system for Saudi and foreign employees to take account of a

company's size and sector. Those who do not comply with the

quotas, known as Nitaqat, face hiring restrictions.

Before the overhaul the local quota was a flat rate of 30

percent. Now the rate varies depending on what sector a company

is in and what size it is. A small construction company is

allowed more foreigners than a large bank, for instance.

The impact of the Nitaqat reform is not yet clear but some

economists fear the introduction of fees on foreign staff fit an

old pattern of ineffective measures that add costs for

companies.

"I think that (the fee) is going to be treated as a tax by

some companies rather than an incentive to employ additional

Saudis. It doesn't really address the supply issue which is that

Saudis need to be incentivised to take private sector jobs,"

s aid James Reeve, a senior economist at Samba Financial Group.

There is no formal minimum wage despite government efforts

to raise pay for Saudis in private companies.

Under Nitaqat rules, construction and transport businesses

only need employ one Saudi for 19 expatriates and fear the new

fees will hit them particularly hard.

"Saudis can work in the administration, but there are only a

few jobs there," said Mahfooz Bin Mahfooz, who owns a transport

company and said he cannot find Saudis to work for him as truck

drivers.

"I want a job in the field that I studied for. I did not go

to college so I can work as a driver," said a 22-year-old

unemployed Saudi in Jeddah w i th a computer science degree.

Not all businessmen disagree with the fee. Some say it is

important to achieve the kingdom's long-term goal of getting

more Saudis into work.

Mohammed al-Agil, head of the kingdom's largest listed

retailer Jarir Marketing Co, said about 40 percent of

his employees are Saudi although he accepted that it was easier

to find local workers in his sector.

"I think it is a good initiative but I think they should

have given enough notice," he said.

Many newspaper commentators, however, have voiced vehement

opposition.

"The first to be harmed by it are local business owners, and

secondly consumers who will no doubt bear the brunt of rising

prices," said Essam al-Ghafaily, a columnist in al-Watan daily

newspaper.

Even the price of bread could rise by as much as 7 percent

as bakers expect to transfer the cost of the new fees onto

consumers, said Ali al-Shehri, head of the Jeddah Chamber of

Commerce bakers' committee, in remarks printed by al-Watan

newspaper.

Naeem, the contractor, said he feared missing out on

important tenders because the price of his bids will have to

rise.

"Coming from a medium-sized company I'm getting exhausted

... my activities internally may change and I may even look to

shift business a b road," he said.

(Editing by Angus McDowall and Susan Fenton)