Pressure building

A purge of expatriate workers in Saudi Arabia is forcing a construction slow down. Published in The Gulf, December 2013

Heavy rains swept across Saudi Arabia in mid-November, causing flooding and even deaths in Riyadh. It is not the first time there have been floods in the capital this year and some critics were quoted in the local media as saying the problem lies with the poor construction standards of local roads, bridges and drainage systems.

Once the water ebbs away though, the country may find it difficult to fix any problems it has. There is certainly plenty of construction work to be done in Saudi Arabia, but the government’s new policy of deporting anyone without the right visa means there may not be enough workers to do it all.

The government has embarked on what amounts to a grand experiment to change its labour market this year, accelerating the long-standing policy of ‘Saudisation’. Between April and early November it ran an amnesty for expatriate workers without the right visas, allowing them to get their paperwork in order or leave. At the start of the year there were more than nine million foreigners living in Saudi Arabia. At least one million of those are thought to have left during the amnesty and since it ended on 4 November more have been rounded up and deported each week.

Despite all the advance warnings of the deadline, it has still come as something of a shock to see just how fiercely the Saudi authorities have been implementing the new policy. On the day the amnesty ended the interior ministry spokesman Major General Mansour al Turki set out his department’s plans as if it were embarking on a military operation.

“The field security campaign, in coordination with the labour ministry, will take place in all cities, provinces, villages and rural towns,” he said at a press conference in Riyadh. “The campaign also aims to arrest whoever employs any violator ... it targets also anyone who provides residence or transportation for the violators or hides them.”

Local businesses and expatriates alike have been caught unawares. “The crackdown on illegal workers has caught a lot of businesses by surprise, possibly driven by complacency and a belief that the authorities would not have the appetite to get tough,” says one expatriate in Riyadh a few days after the deadline passed. “This last week has seen extraordinary scenes across the kingdom. Small localised protests, crowds running across busy highways pursued by the authorities, people being dragged out of cars, maids not turning up for work as they fear going out.”

All this could have a significant impact on the wider economy and, more specifically, on the construction sector. There is a lack of official data covering the period since the amnesty ended, but the anecdotal signs that have emerged to date are not promising.

The sector looks particularly vulnerable because of its heavy reliance on cheap foreign labour. According to the Council of Saudi Chambers (CSC), which represents businesses across the country, the vast majority of staff at the country’s 280,000 contracting firms come from abroad. It says that in 2012 Saudis accounted for just 200,000 of the total workforce of 2.2 million in the sector.

Local media reports in early November suggested that more than 100,000 contractors had cancelled their registration with the country’s chambers of commerce because of the crackdown. This could well translate into slower gross domestic product (GDP) growth given the importance of construction work for the wider economy. According to finance ministry data the sector contributed 4.6 per cent to the country’s GDP in 2012, equivalent to 13.2 per cent of total private sector GDP.

The policy appeared to be having an impact even before the 4 November deadline hit, as workers took advantage of the amnesty to leave the country without being penalised. Samba Financial Group, a local bank, says that the net profit of construction and real estate firms fell in the second and third quarters of this year, in part because of the government’s new approach to illegal workers. Samba also points out that lending by the country’s banks to projects has slowed in line with weaker investment spending.

Looking forward, the bank says the labour market crackdown will have a negative impact on retail services and that commercial property prices could also come under pressure, both of which could indirectly hurt the construction industry.

Other signs are slightly more ambiguous, however. The most recent HSBC Purchasing Managers Index (PMI), a survey of around 400 non-oil private sector firms around the kingdom, showed that output still grew in October although it was the second-weakest recorded in the 51-month history of the survey.

It will take a while longer before the full impact of the policy feeds through into official data and for now the authorities appear determined to stick with the crackdown. That is despite the raft of local media stories about the effect the policy is having on day-to-day life for Saudis. Local papers have been filled with stories about garbage going uncollected, dead bodies being left unwashed and water delivery trucks being left in the depots.

The crackdown was prompted by a desire to reduce the country’s reliance on international labour and to provide more jobs for locals. However, the problem for the construction industry and other parts of the economy is that Saudis are often reluctant to take on the sort of jobs they are able to offer. The work is often seen as demeaning and the rates of pay are simply too low compared to public sector jobs.

“The crackdown deals with the immediate issue of a large number of illegals but it does not really deal with the larger structural problem in the labour market,” says one political analyst.

Others are even more dismissive. Ali Alyami, executive director of the US-based Centre for Democracy & Human Rights in Saudi Arabia, says: “It’s not going to change anything. The Saudi system is just buying time, because it deflects people’s attention from home-grown problems.”

Certainly for the construction industry, the signs are that the crackdown seems to be creating more problems that it is solving. Many firms look like they will be left short-staffed until they can bring in more foreign workers on legitimate visas or the government decides to soften its approach to those already in the country. Behind the scenes there is likely to be some concerted lobbying for both to happen.