Tourism

Excessive regulations in tourism – ‘So Sri Lankan’

Untitled design (1).png

In this weekly column on The Sunday Morning Business titled “The Coordination Problem”, the scholars and fellows associated with Advocata attempt to explore issues around economics, public policy, the institutions that govern them and their impact on our lives and society.

Originally appeared on The Morning


By Dhananath Fernando

Tourism – a topic that politicians and bureaucrats never get tired of. Following Easter Sunday, the tourism industry is now on a different trajectory. Security concerns have affected over 170,000 people directly employed and 220,000 people indirectly employed in an industry that contributes about 5% of GDP. The initial plan the Government had for 2020 was to increase tourism earnings to $ 7 billion from its current earning position of about $ 4.3 billion, and increase spending per visitor to $ 264 per day from the current position of $ 178 per day in 2018.

The approach taken by every successive government to increase numbers has been to make their mantra “promotion”. Just as the country follows the same traditions every new year, every successive government and the minister of tourism proposes a new campaign and a slogan for the Sri Lankan tourism industry. They produce scenic showreels and graphics of this splendid island to showcase at many travel exhibitions and to run promotions online as well as offline. We were the “Wonder of Asia”, then converted to the “Little Miracle” for a short time, and to the “Land Like no other”. And now we are “So Sri Lanka”.

While the slogans and promotion campaigns are of paramount importance, governments have failed to provide sufficient focus on the actual details that matter to the industry. This is reflected in the debt relief package offered in the aftermath of the Easter attacks. It might seem unrealistic to expect the Government to address concerns across such a large and diverse industry – when stakeholders range from high-investment airline operators to the destination point trishaw. However, a few simple business principles can be applied regardless of the stakeholder category.

  1. Minimum regulatory barriers to enter and exit the market

  2. Lower taxation so the prices will be affordable

  3. Minimum government intervention to allow greater efficiency at the ground level

Let’s go into detail with a few regulatory barriers mentioned on the website of the Tourism Development Authority for registrations of online/offline travel agents (destination management companies).

Travel agents and destination management companies are entities that coordinate an entire trip within Sri Lanka for tourists. They recommend the travel route, book the hotels and lodging on behalf of the tourist, and arrange everything from airport pick up to drop off. In short, they do an extensive coordination job. These travel agencies can be found on the internet and tourists can directly reach them over the web. There is also a business to business (B2B) model which is common in the industry. In the B2B model, the respective agent from another country approaches the local travel agents and the local travel agent acts as an agent of the particular company, and this works vice versa.

The profile of tourists shows that about 2.3 million tourists only spend an average of $ 163 per day over 10.8 days. The industry needs to be accessible for business newcomers to enter the travel market and create new value propositions to attract more tourists to Sri Lanka, especially at a time where the entire industry is shaken by the Easter attacks.

In the category of registering as a travel agent of Sri Lanka Tourism Development Authority (SLTDA), there are certain requirements which have to be met. Prospective businesses must show a 1.2 million working capital for a sole proprietorship and a one million working capital for a limited liability. Additionally, a bank guarantee of 10% of the working capital is required. Furthermore, SLTDA wants the new travel agent to have 250 square feet of furnished office space with a reception, telephone line, fax line, and a computer reservation system.

They have further made it mandatory to employ a minimum of three professionally qualified or experienced staff to work on transport, accommodation, currency, outcome regulation, reservation of airline tickets, and general information on travel and tourism-related services.

I am sure all these guidelines must have drafted with good intentions, but this has made it almost impossible for a new entrant to enter the market as a travel agent. To fulfil all the guidelines to get a license, you need more than Rs. 3-4 million, which makes it very difficult for a small and micro entrepreneur to enter the industry. In reality, a small operation as a travel agent would require one laptop with internet an individual with excellent coordination and communication skills. It would require a maximum of two to run a small-scale operation. A reception is not required as your clients are visiting scenic destinations and staying in hotels – they will not be visiting your office.

Even if a company wanted to impress their clients with attractive office space, there are many co-working spaces in Colombo where you can hire a desk space and a board room for a few thousand rupees on an hourly basis. While other industries, most notably tech recognising the benefits of a co-working space for start-ups, SLTDA still wants telephone and fax lines for an industry where most clients communicate on email and database call apps.

The guidelines provided for recruitment are a clear-cut case of how government agencies create bottlenecks affecting the ease of doing business. An entrepreneurial individual starting small will never take a risk of having three professionals on the payroll during the start-up period. They will instead hire a semi-skilled person who has the capacity to learn on the go. A travel operation simply does not require a professional graduate to run a small-scale business.

The Government initiated “Enterprise Sri Lanka Loan Scheme – Erambuma” provides a maximum of Rs. 1.5 million for a young graduate with an innovative business idea. While this is commendable, the regulations brought in by SLTDA will make it virtually impossible for a young graduate to set up a travel agency, even with the loan.

If the Government is serious about getting tourism on the track, it is of paramount importance that they reduce entry barriers for new entrepreneurs. If not, the plan of creating a tourism industry worth Rs. 7 billion will remain a castle in the air.

While regulation is important, especially to maintain standards and ensure quality, it is also important to distinguish between regulations that will help the industry grow and those that will stifle it. SLTDA regulates more than 25 such industries from hotels to scuba diving, and bringing all these regulations to light would fit a decent-sized book. It is necessary that SLTDA revisits its guidelines, keeping in mind how these guidelines affect both established players as well as new entrants who would really make a difference.

It is said “how you do small things will determine how you do big things”. While tourism authorities run promotions on the “So Sri Lanka” slogan, it would be useful for them to keep this phrase in mind too, before imposing regulations which restrict entry into the market.

All eggs in the tourism basket?

Untitled design (1).png

In this weekly column on The Sunday Morning Business titled “The Coordination Problem”, the scholars and fellows associated with Advocata attempt to explore issues around economics, public policy, the institutions that govern them and their impact on our lives and society.

Originally appeared on The Morning


By Aneetha Warusavitarana

The Easter Sunday attacks devastated Sri Lanka. As much as the attacks shattered lives, the economy too has taken a hard hit. According to Reuters, full-year median growth could drop as low as 2.5%, with analysts concerned that second-quarter growth could be zero or even drop to negative. To give these numbers context, these growth numbers are the worst the country has seen since 2001, when Bandaranaike International Airport (BIA) was attacked. The economic hit to the tourism sector is the most visible, due to the nature of the attacks, with occupancy dropping drastically from 75% to a paltry 5%.

Officially, the tourism sector accounts for 5% of GDP, but in reality, the industry adds a lot more to the economy. The growth we see in the formal tourism sector is also an indication of the growth created in the informal sector. If one gets off the train at Ella or walks around Sigiriya, it is clear that a large number of tourists backpack throughout the country; staying at low-budget homestays and eating at local eateries. The result is a boom in local industries as people work as tour guides, make cheese kottu, drive a trishaw, and take a loan to build a homestay on their property.

This addition to the economy is notoriously difficult to enumerate, and it is virtually impossible to include all economic activity created by tourism into national figures. However, one can conclude with certainty that tourism is an important sector on which the livelihoods of thousands of people are dependent.

While this seems positive, the downside is that this means that the lull in tourism has an impact that goes far beyond what’s calculated. The economic losses and instability brought to thousands of livelihoods is difficult to comprehend. The Government put forward a relief package for the industry, and while this is timely, it is also important to look at the rest of the economy.

Before the attacks, the industry was optimistic – Lonely Planet ranked us the number one destination for 2019, and the Government launched the “So Sri Lanka” brand. It is clear that growth in this sector was and continues to be a priority. However, if we want to create long-term, sustainable growth for the country, more needs to be done.

Resilience beyond the comfort zone

While tourism is important and we do need to focus on this, we cannot neglect the rest of the economy. Ideally, our economy should be resilient, with other sectors of the economy able to absorb a shock, reducing the time taken for the country to recover. While we have a comfortable comparative advantage in tourism, we need to move into other areas.

For all intents and purposes, Sri Lanka opened its economy in 1977. While we were one of the first countries in the region to open up, our export sector failed to keep pace with our comparator countries. Nationalist sentiment drove mainstream discourse, and free trade is perceived as a threat to local industries and local jobs. Successive governments were swayed by or actively promoted this perception, resulting in a country which is in practice, not very open.

The Government’s role

Export diversification has been a buzzword over the last few years. GDP growth in countries such as Vietnam and Indonesia was driven by strategic export diversification. As is visualised in the chart, these countries are miles ahead of Sri Lanka in the contribution their exports make to GDP. Sri Lanka has recognised the importance of export growth, and key areas have been targeted through the National Export Strategy. However, export diversification will not happen overnight, and it will not happen in isolation. There needs to be a legal and regulatory environment that is conducive to this growth, creating the right incentives for businesses to take the initiative and diversify. As such, the Government should push a much wider reform programme.

The Singapore-Sri Lanka Free Trade Agreement, signed in 2018, was the first trade agreement we signed in a decade. This is only a partial victory – the trade agreement faced significant opposition, even after it was signed. The Government needs to take the initiative, not only to sign free trade agreements, but also to make sure the local businesses are in a position to take advantage of these agreements.
A vital part of creating buy-in on a national scale is the effective and timely dissemination of information. Open, transparent discussions should be held before signing free trade agreements; these would go a long way in countering anti-free trade mentality.

In addition, regulations should be eased for export-oriented businesses; making it easier and not more difficult for an entrepreneur to sell their product abroad. Finally, the Government should speed up its current programme of tariff removal. Restricting imports to the country via tariff barriers actually suppresses the growth capacity of our export industries. Free trade works best when borders are truly open and intervention is limited, and our export industries often depend on imported inputs which are cheaper than local alternatives. By removing tariffs on these imported inputs, the Government will allow export industries to produce goods at lower prices, and price their final goods on par with global competition, creating opportunity for our export industry to grow and diversify.

While it is important that focus is given in the short term to industries that have been hit the hardest, a responsible government would take this opportunity to assess the health of other key sectors of the economy, and take steps to facilitate their growth, as opposed to hindering it.