Two pieces of news this week epitomize a rising dilemma that cannot be ignored. Research shows that that housing costs now consume fully a third of Saudi salaries. On the same day Saudi business rejected a hike in minimum monthly salaries for nationals from SR 3,000 to SR 5,800 ($ 1,546). On the face of it there is a mismatch here that cannot be ignored.
However the issue bears closer scrutiny. For a start, a rise of nearly 52 percent in the cost of anything, let alone labor, is steep. Business can with some justice argue that such increases need to be underpinned by rises in productivity. The contention that since a jump would be across the board, it would therefore be absorbed by the market and thus no Saudi private sector enterprise would be disadvantaged, is not entirely accurate.
Some firms work on better margins than others and this sharp increase in the price of labor, which generally comprises the largest corporate cost, would disadvantage less profitable companies. Moreover, Saudi Arabia is no longer a closed economy. Since our membership of the World Trade Organization eight years ago, our corporate sector has had to learn to compete in equal terms with rivals around the world.
Now it might be argued that a minimum monthly wage of just over $ 1,500 still keeps the Saudi private sector competitive in comparison with Western economies. Most businessmen here in the Kingdom would accept this. It is however the pro rata effect that is worrying them. If the lowest wage in a firm goes up, there will be a knock-on effect for salaries further up the organization. Low-level managers will understandably wish to preserve their earnings differential in relation to the employees they oversee. Then middle managers in their turn will be concerned to preserve their differential over the low-level managers. And so it will go on throughout a company, so that the overall effect of a more than 50 percent hike for the lowest paid Saudi national, will actually translate into a 50 percent increase in the firm’s entire wage bill. Put in these terms, this new minimum wage really can be seen as unsustainable, certainly if it were introduced in one fell swoop. The effect might be different however, if it were phased in over a period of three years.
Yet this said, the family budgets of Saudi nationals working at basic jobs in the private sector are under intense pressure. Overall inflation is being contained at around four percent this year, but housing cost inflation seems to be on an entirely separate upward trajectory.
It is easy to blame greedy landlords and developers who prefer to make more money by catering for the high end of the housing market. It is easy, but it is also unfair. This is the market at work. Developers cannot be blamed directly for any social tensions arising from the lack of affordable housing for rent or purchase. Nor are they responsible for the fact that keeping a home for your family now gobbles up a third of what you earn.
The government and local authorities are committed to building hundreds of thousands of new homes, but the program does not seem to be coming through fast enough. The independent Housing Ministry set up 18 months ago has, in the view of some, yet to hit its stride. It is a truism the world over that governments find it more difficult than business to spend budget allocations. In a country as bustling with construction as the Kingdom right now, government officials who are anxious to obtain fair value deals for new housing projects, must be prepared to pay market prices, and maybe then some, to lure contractors away from other profitable work. Given the pressing social need, perhaps cost should not be seen as an issue.
However, before writing big checks, thought out to be given to how the use of Public Private Partnerships cannot only get homes built more quickly but can also boost the private sector. The essence of a PPP housing project is that working with government guarantees and contracts, whereby the state undertakes to pay rent for the accommodation, the private sector builds and then maintains and manages the new properties for a given period of time. Penalized if they perform poorly but rewarded if they get it right, private business can lock into housing projects, which they can finance cheaply, because of the state underwriting, and from which they can earn guaranteed revenue flows for 20 or 30 years.
Editorial: Rents and wages can be made to fit
