Advocata Policy Brief : Minimum Room Rates

The proposed minimum room rates seek to place a rate of USD 100 on 5 star hotels, USD 75 for 4 star hotels, USD 50 for 3 star hotels, USD 35 for 2 star hotels, and USD 20 for 1 star hotels within the city of Colombo, effective from October 1, 2023. This will, in effect, act as a price control, ensuring that hotels within these star classifications located within the city of Colombo cannot price their rooms at rates lower than those prescribed by the government. The below policy brief will explore the dynamics of the hotel industry and provide a critical analysis of the potential consequences and challenges of implementing this scheme. By critically evaluating these effects, we aim to provide policymakers and stakeholders with a holistic perspective to inform their decisions.

Here is a link to Advocata’s Policy Brief on Sri Lanka’s Minimum Room Rates

The Government Should Rethink the Minimum Room Rates Policy

Originally appeared in the Daily FT, Daily Mirror, Daily News, Lanka News Web

The Advocata Institute expresses concern over the recent proposal by the Sri Lankan Authorities to impose minimum room rates on hotels in the city of Colombo.  

This proposal, set to take effect from October 1st 2023, stipulates rates of USD 130 for 5-star hotels, USD 100 for 4-star hotels, and USD 80 for 3-star hotels. While the authorities argue that this measure aims to counter underpricing by higher-tier hotels, this policy threatens to undermine the growth and vitality of the tourism sector. It places an unnecessary burden on hoteliers already grappling with the challenges posed by the global pandemic and subsequent economic crisis. Further, it undermines the country’s competitiveness in the regional tourism market.  

Pricing acts as a reflection of the quality of services offered by hotels and serves as a differentiating factor. If prices fail to accurately represent the services provided, customer dissatisfaction can ensue, especially when compared to more competitively priced options in neighboring countries such as Thailand and Vietnam. This is supported by a comment made by the Sri Lanka Association of Inbound Tour Operators (SLAITO) which states that “before implementing such prescribed rates, it is crucial to generate demand and interest in Sri Lanka...Adopting these rates will render Sri Lanka uncompetitive and result in a loss of clients, even when compared to hotels in New Delhi, with which they are currently competitive”.

Sri Lanka has previously attempted to implement price controls between 2009 and 2019, following lobbying by a segment of  hoteliers aiming to compete more effectively against 5-star rated hotels. However, this policy failed due to numerous violations resulting from inadequate monitoring and enforcement by the authorities. Many hotels, including those that initially advocated for the government's proposed room rates, have not complied with the established rates, as alleged by the former Minister of Tourism, John Amaratunga. 

The imposition of minimum room rates restricts hotel owners' flexibility in setting prices in accordance with market demand and effectively stifles healthy competition among various establishments. The tourism industry experiences fluctuations in demand that correspond to seasonal and weekly trends. Such demand patterns necessitate the ability for hotels to tailor their pricing strategies to capitalize on peaks and optimize profitability.

Every hotel has its unique room pricing considerations depending on factors such as location, size of the hotel, market demographics, level of competition, and type of service offered to name a few. The uniform imposition of minimum rates disregards the diverse range of hotels and accommodations available in Sri Lanka, catering to various budgets and preferences. This one-size-fits-all approach disregards the crucial factor of consumer choice. Imposing minimum room rates on a certain type of accommodation whilst disregarding alternate forms of accommodation available within the city of Colombo such as guest houses and Airbnbs, undermines the effectiveness of this policy.  

Furthermore, hotels do not solely rely on revenue from room occupancy; rather, the occupancy of rooms paves the way for alternative sources of income such as from food and beverages, along with the provision of other hotel-related services. For example, a leading hotel in Colombo earned 77% of their revenue from food and beverages in contrast to the 19% earned from accommodation services in 2022. Therefore, when the government intervenes in one component of a hotel’s business model, it disrupts the interconnected methods of revenue generation.  

Further, the foundation for these minimum rates—star classifications—is itself flawed. This system primarily relies on quantitative factors, often overlooking qualitative aspects such as service quality and ambiance. The inability to quantify these vital attributes compromises the accuracy of the classification.

The tourism industry in Sri Lanka has historically played a crucial role in the country's economic development, providing employment opportunities, promoting cultural exchange, and contributing significantly to foreign exchange earnings. However, the recent decision to enforce minimum room rates could deter these potential visitors who are seeking affordable accommodation options, particularly given the publicity international vloggers have given Sri Lanka as a tourist destination. Further, this approach stifles innovation within the hospitality sector, and ultimately leads to reduced tourist arrivals and negatively impacts the entire value chain that relies on a thriving hospitality sector.

This policy undermines competition and oversteps in a serious way the role of government in a competitive market economy, the stated policy framework of the government. 

The Advocata Institute strongly urges Sri Lankan Authorities to reconsider this ill-advised proposal. 

By fostering an environment that embraces market competition, Sri Lanka can position itself as an attractive destination for travelers while allowing its hotels to thrive and cater to diverse consumer demands.

Online Discussion: Building The image of destination Sri Lanka in the post COVID-19

Sri Lanka Tourism (Official Policy Partner - Advocata Institute) hosted an online discussion on 'Building Destination Image for Post Covid Tourism Revival” via Zoom and Facebook on December 11, 2020. 

The discussion featured John Bailey (Managing Consultant, Global Communication Consulting), Kimarli Fernando (Chairperson, Sri Lanka Tourism), Damian Cook (Global Tourism Marketing Consultant | CEO, E Tourism Frontiers), and Dr. Lalith Chandralal (Senior Lecturer, University of Sri Jayewardenepura). The session was moderated by Dileep Mudadeniya (V.P Marketing & Events, Cinnamon Hotels & Resorts).

Watch this video on Youtube 

Media coverage on the online discussion on the impact of COVID-19 on SL tourism industry

The Advocata Institute hosted an online discussion on Zoom with Kimarli Fernando (Chairperson, Sri Lanka Tourism), Vipula Gunatilleka (CEO, SriLankan Airlines), Sanath Ukwatte (Chairman, Sri Lanka Hotel Association), Mahen Kariyawasam (President, Sri Lanka Inbound Travel Operators); moderated by Murtaza Jafferjee (Chair, Advocata Institute) on the impact of COVID-19 on Sri Lanka's Tourism Industry. The discussion explored the current challenges faced by the Sri Lankan tourism industry and the road to recovery.

The Morning: Top tourism trio outline predicament, preparation, prospects

The Covid-19 pandemic is now estimated to put 50 million jobs in the global travel and tourism industry at a risk, with travel set to go down by 25% this year and Asia being the most affected continent, according to the World Travel and Tourism Council, which represents the international tourism industry. Statistics from the council site show that the global tourism industry currently accounts for 10% of global GDP, having contributed $ 8.8 trillion to the global economy in 2018, and is responsible for over 319 million jobs worldwide. Similar to this, Sri Lanka’s tourism industry is a major contributor to the country’s GDP, with its direct contribution being 4.9% in 2018 according to the Sri Lanka Tourism Development Authority (SLTDA) annual report. Last year, the country saw the arrival of 1.9 million tourists, a drop from 2018’s 2.3 million, due to the Easter Sunday attack.

Read the full article

Ceylon Today: Recovering from the Tourism Meltdown

As an island nation, tourism has been Sri Lanka's bread and butter for quite some time and has provided livelihoods for many. However, the spread of the new coronavirus (COVID-19) and the subsequent responses from nations worldwide led to a global tourism meltdown.

In an online discussion organised by the Advocata Institute, leading tourism industry heads and regulators elaborated on the impact of COVID-19 on the industry, amidst the global pandemic.

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Economy Next: Sri Lanka tourism sector braces for 12-month slump on COVID-19 hit

Sri Lanka’s tourism industry is bracing for a year long downturn with the Coronavirus crisis coming on top of a hit from Easter Sunday attacks in April 2019, but there were tentative bookings for next year already, officials said.
Sri Lanka Hotel Association, Chairman, Sanath Ukwatte said two crises coming on top of each other had hit the industry but it had gone through bad times earlier and somehow recovered. The government and banks had also given debt moratorium. “Recovery seems 6, 8 month or maybe a year,” Ukwatte told an online forum organized by Advocata Institute, a Colombo-based think tank.

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Economy Next: Sri Lanka cabinet clears global tourism promotion campaign

Sri Lanka’ cabinet of ministers had cleared a global promotion plan proposed by the tourism promotion office with no modifications but it may be changed to suit post-COVID needs of the country, a top official said.
“The cabinet gave the approval for the global promotion campaign”, Chairperson of Sri Lanka Tourism Kimarli Fernando told an online forum organized by Advocata Institute, a Colombo-based think tank.

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Daily News: Tourism will reopen with strong safeguards

Chairman Sri Lanka Tourism Development Authority Kimali Fernando said that the government was working closely with the army to create safeguards to when possible open up the country for tourism. Fernando was speaking on a panel discussion organized by Advocata on 21 April.

Fernando said that they envisioned having health screening and tracking data collected at the point of passport control at the airport. The tourists would then be provided information detailing institutions that have been certified by the government as passing health safeguards. The system is looking to adopt best practices followed internationally.

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Economy Next: SriLankan Airlines in rescue flights for China, UK, and Australia in COVID battle

SriLankan Airlines which halted scheduled flights to Colombo in April has flown rescue flights for China, UK and Australia, and is also carrying cargo amid a Coronavirus crisis earning some revenues while cutting costs, Chief Executive Vipula Gunatilleka said. “We do a lot of special flights not just for Sri Lankans, helping other nationals,” Gunatilleka told an online forum held by Advocata Institute, a Colombo-based think tank.

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Economy Next: Sri Lanka eyes post-Coronavirus tourism with tighter visa, health rules

Sri Lanka is making plans to draw tourists after the Coronavirus crisis, with a raft of new operating rules for hotels, transport and visa to cut chances of the virus being transmitted and protect workers and their families, a tourism official said. “The visa process will be changed. When you turn up you will not be able to have a visa,’ Kimarli Fernando, Chairperson, of Sri Lanka Tourism told an online forum organized by Advocata Institute, a Colombo-based think tank.

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LBO: Impact of COVID-19 on Sri Lanka’s tourism industry

Kimarli Fernando, Vipula Gunatilleka, Sanath Ukwatte, Mahen Kariyawasam and Murtaza Jafferjee will discuss the impact of COVID-19 on Sri Lanka’s Tourism Industry. The discussion covered the current challenges faced by the tourism industry and route to recovery.

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Businessnews.lk - Online forum on COVID-19 with Tourism industry leaders by Advocata

Advocata Institute is hosting a panel discussion with tourism industry leaders, Kimarli Fernando (Chairperson, Sri Lanka Tourism), Vipula Gunatilleka (CEO, SriLankan Airlines), Sanath Ukwatte (Chairman, Sri Lanka Hotel Association), Mahen Kariyawasam (President, Sri Lanka Inbound Travel Operators); moderated by Murtaza Jafferjee (Chair, Advocata Institute) on the impact of COVID-19 on Sri Lanka’s Tourism Industry.

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Online forum on COVID-19 with Tourism Industry Leaders by Advocata Institute

Published in the Daily News, Lanka Business Online, Business News, Economy Next, the Morning and Travel Voice

Advocata Institute is hosting a panel discussion with tourism industry leaders, Kimarli Fernando (Chairperson, Sri Lanka Tourism), Vipula Gunatilleka (CEO, SriLankan Airlines), Sanath Ukwatte (Chairman, Sri Lanka Hotel Association), Mahen Kariyawasam (President, Sri Lanka Inbound Travel Operators); moderated by Murtaza Jafferjee (Chair, Advocata Institute) on the impact of COVID-19 on Sri Lanka's Tourism Industry. The tourism sector has been hit hard by COVID-19, with international travel into the country slowing down in January and February, even before our airports closed for international arrivals. The World Bank estimates that Sri Lanka’s tourism sector contributes a little over 12% of GDP, and is a major source of local employment. As the tourism sector is also the country’s third-largest source of foreign exchange, the impact of this downturn will be felt throughout the economy. The discussion will cover the current challenges faced by the tourism industry and route to recovery.

The online panel discussion will be hosted on Zoom and live-streamed via Advocata Institute's Facebook Page and other partner channels this Tuesday, 21st of April from 10.30 AM.

Register now: www.advocata.org/events (Limited slots available to join the zoom call)

Send us your questions via slido.com. Event Code: #COVIDLK