Challenge of cost of construction

By Dhananath Fernando

Originally appeared on the Morning

Tourism is one of the key sectors driving Sri Lanka’s economic recovery. It has long been a pillar of the economy, yet few seem to fully grasp the basic economic logic required to elevate the industry to the next stage.

One critical component of the tourism value chain is lodging. The hospitality experience is largely built around where tourists stay – whether in a hotel, boutique property, or small guesthouse listed on platforms like Airbnb or Booking.com. 

Lodging often accounts for the largest share of total tourist expenditure and supports a wide range of ancillary services including restaurants, entertainment, and transport.

Lodging, however, is a capital-intensive industry. The investment is heavily front-loaded: before hosting the first guest, the property owner must invest significantly in construction, infrastructure, and setup. 

In Sri Lanka, the cost of construction is approximately 40% higher than in other countries in the region. This means that hoteliers need significantly more capital just to get started. To make matters worse, the cost of capital (i.e. borrowing costs) is relatively high and utilities like electricity are more expensive than in competing destinations.

These higher input costs drive up room rates, making Sri Lanka’s tourism product less competitive. Much of this is due to protectionist tariffs on essential construction materials such as cement, steel, tiles, bathroom fittings, and more. As a result, hoteliers pass these costs on to tourists.

Moreover, the hotel industry requires refurbishment every five years to maintain standards. The high cost of construction makes this cycle financially challenging and erodes competitiveness over time. Although Sri Lanka aims to attract high-spending tourists, price remains a key lever in travel decision-making and high costs significantly squeeze hotelier profit margins, especially for small and medium-sized establishments, which account for the majority of room inventory.

Labour and productivity challenges

Labour is another critical component of the hospitality equation. Typically, the industry recruits unskilled workers and trains them to deliver services. Wages are structured so that service charges make up a significant portion of employee income. 

However, if there is labour redundancy – more employees than needed – the service charge gets divided among more people, reducing individual earnings. This can lead to moonlighting and low productivity, as employees seek secondary sources of income.

Staff attrition is also common, with employees constantly on the lookout for better-paying opportunities. Productivity is measured through revenue per employee; fewer employees delivering the same service increases profitability and also boosts staff take-home pay via higher service charges.

A compelling case study is Cinnamon Red, presented by Hishan Singhawansa at the Advocata ‘Ignite Growth’ conference. He demonstrated how productivity improvements could increase revenue per employee. Cinnamon Red operates with an employee-to-room ratio of 0.75, compared to the industry average of 0.8-1.6, depending on hotel category (luxury vs. budget).

The hotel’s employee hours per occupied room are around five – roughly twice as productive as peers in the same category. As a result, revenue per employee is double that of competitors, and service charges are 1.6 times higher than other hotels and resorts. This shows that productivity gains translate into higher earnings for employees and better outcomes for businesses and consumers alike.

Cinnamon Red achieved this by removing unnecessary human intervention and embracing automation and self-service: self-check-in kiosks, vending machines, digital concierge services, and self-ordering systems. This transformation was part of a broader strategic repositioning, focused on multitasking and culture change.

The path forward for SL

If Sri Lanka is serious about transforming its tourism industry, reforms are essential. 

Key steps include:

1. Reducing protectionist tariffs on construction materials to lower costs and improve competitiveness

2. Improving labour productivity across the board, ensuring that skilled workers are retained and better rewarded

3. Investing hotelier margins into delivering world-class experiences rather than simply covering high operating costs

There is also a need for a global tourism campaign, eased visa regulations, the removal of price floors for five-star hotels, and other policy changes, but none of this will matter unless we first understand the economic logic of tourism.

At the same time, we must recognise that tourism is highly vulnerable to external shocks. In recent years, Sri Lanka’s tourism sector has suffered due to:

• The constitutional crisis in 2018

• The Easter Sunday attacks in 2019

• The Covid-19 pandemic (2020-2021)

• The economic crisis in 2022

These events underscore the risk of over-reliance on a single sector. While tourism can be a powerful engine of growth, it should not be the sole driver of economic recovery. A balanced, diversified economy is essential for long-term resilience. 

Monthly employee earnings (LKR) vs. estimated living wage

(Source: Slides presented by Hishan Sinhawansa at the Advocata ‘Ignite Growth’ conference)

Tuk-tuk economy: Where algorithms meet asphalt

By Dhananath Fernando

Originally appeared on the Morning

In mainstream media, clashes between app-based ride-hailing taxis and traditional taxis are frequently reported, especially in tourist hotspots such as Kandy, Sigiriya, and even at the Bandaranaike International Airport. 

However, many Sri Lankans, including tuk-tuk drivers, do not fully understand the economic logic behind this. Often, the debate centres on high commissions taken by app companies or the notion that international ride-hailing platforms repatriate profits overseas.

At the ‘Ignite Growth Conference’ organised by the Advocata Institute, PickMe Founder Jiffry Zulfer shed light on the economic transformation driven by platforms like PickMe and its main competitor, Uber.

The core concept of ride-hailing apps is the ability to match demand and supply within a limited geographic radius in real-time. According to Zulfer, PickMe facilitates around 20 rides every second, striving to ensure that passengers always have a ride available and that drivers remain engaged and productive.

This matching of demand and supply has created significant market efficiency. On average, a driver using the app completes around 17 hires per day, compared to just 7-10 hires for a driver waiting at a tuk-tuk stand or roaming the streets. As a result, app-based drivers utilise their vehicles approximately 81% of the time, compared to just 39% for traditional drivers.

From an economic perspective, this availability of information – knowing who needs a ride and who can provide one – drives greater efficiency, not just for passengers and drivers, but for society at large as well. According to Zulfer, PickMe has covered over one billion passenger kilometres and now transports more people daily than Sri Lanka’s railway system.

Early investors in PickMe saw returns of up to 300 times their original investment, and it is likely the Government benefited as well, collecting around 30% in taxes. App-based drivers now earn on average 40% more than traditional taxi drivers, transforming the lives of 30-50% of tuk-tuk drivers in a population of 1.2 million tuk-tuk owners in Sri Lanka. 

In essence, the biggest beneficiaries of this shift have been ordinary working-class drivers, passengers, investors, and the Government.

PickMe is now listed on the Colombo Stock Exchange, opening the door for broader public investment and shared benefits.

It is crucial to recognise that when demand and supply are allowed to interact freely, it creates a win-win outcome for all stakeholders, unlike Government-run businesses, which often favour one group at the expense of others.

Zulfer also categorised tuk-tuk drivers into three groups based on their engagement: a large segment contributes less than three hours per day, a second tier less than six hours, and only a minority works full-time (over eight hours) through the platform. Interestingly, more women are now joining the platform, unlocking new income opportunities and increasing female participation in the workforce.

The PickMe Founder further explained that when adjusting for inflation, ride prices had decreased, providing passengers with real financial benefits beyond mere convenience. At the time of launch, the app’s per-kilometre rate was Rs. 33, compared to the Rs. 40 charged by traditional meter taxis. This holds true across other ride-hailing platforms as well. 

Unfortunately, many policymakers still struggle to grasp the fundamental economic principles at play – how market forces, when allowed to operate freely, can uplift the average citizen.

Ride-hailing services have since expanded into motorbike transport, courier services, and food delivery. These platforms are now among the largest ‘restaurant’ operators in the country, despite not owning a single restaurant. 

The same model has given rise to the ‘dark kitchen’ phenomenon, enabling home-cooked meals and micro-businesses to reach a wide customer base. This has changed food habits, offered consumers more choice, and encouraged families to spend more time together with the convenience of food delivery.

Zulfer’s economic logic applies beyond transportation. It holds true for other network-based platforms like Booking.com, Airbnb, and others. The average person, especially those with entrepreneurial spirit, stands to benefit the most.

In Sri Lanka, the majority of room inventory is offered by micro and small-scale lodge owners. Online platforms have empowered them to tap into the tourism ecosystem and earn foreign income, something that was previously out of reach.

Understanding the economic logic of network-based industries is crucial for Sri Lanka’s growth. These platforms enhance productivity, generate opportunities, and create wealth. While foreign direct investment and trade policy are important, we must also pay attention to the power of networking demand and supply.

Imagine a world where the same happens to our entire public transport system. Things will not be perfect, but they definitely would be in a much better form than it is at the moment.  

By simply enabling the right environment – often by not interfering – governments can allow these industries to flourish, driving economic efficiency, opportunity, and prosperity for all.

Meeting pricing equilibrium during the fuel crisis

(Source: Slide presented by PickMe Founder Jiffry Zulfer at the ‘Ignite Growth Conference’)

From Sri Lanka to Singapore

By Dhananath Fernando

Originally appeared on the Morning

A 100-year journey or a 40-year leap?

For many Sri Lankans, one of the most common points of comparison is Singapore. We have heard time and again how Singapore once lagged behind Sri Lanka in terms of GDP per capita but eventually surpassed not only Sri Lanka but also many other developing nations worldwide. 

Given that both countries are in Asia and that Singapore once looked to Sri Lanka as an aspirational model, it is natural for Sri Lankans to frequently draw comparisons between the two.

Recently, at the Advocata Institute’s ‘Ignite Growth Conference,’ Central Bank of Sri Lanka Assistant Governor Dr. Chandranath Amarasekara presented a slide illustrating how long it would actually take for Sri Lanka to reach Singapore’s current GDP per capita under different growth scenarios.

Dr. Amarasekara projected the timeframe based on Sri Lanka’s GDP per capita growth at 3%, 5%, 6%, and 8% annually. For context, GDP per capita is a commonly used measure to gauge a country’s economic prosperity. Currently, Sri Lanka’s GDP per capita stands at approximately $ 3,800, while Singapore’s is around $ 84,000.

The calculation estimates the number of years it would take for Sri Lanka’s GDP per capita to grow from $ 3,800 to $ 84,000, assuming compound annual growth at different rates:

• 3% growth rate: 105 years

• 5% growth rate: 64 years

• 6% growth rate: 54 years

• 8% growth rate: 41 years

The challenge of comparing Singapore and SL

In my view, comparing Singapore and Sri Lanka directly is difficult because the two nations offer entirely different value propositions. Singapore is essentially a city state with a population of six million, whereas Sri Lanka is over 3.5 times larger in terms of population. 

The demographics, political landscapes, and economic structures are vastly different. However, from an economic perspective, an average Singaporean is 21 times wealthier than an average Sri Lankan.

To put it in simple terms:

• Singapore, with just six million people, generates an economic output of $ 500 billion

• Sri Lanka, with 21 million people, produces less than $ 90 billion

Learning from Singapore without copying 

While it may not be meaningful to copy Singapore’s model outright due to fundamental differences in culture and circumstances, there are key economic principles Sri Lanka can adopt.

A rock-solid monetary framework

One of Singapore’s greatest strengths is its monetary stability. The country’s financial system remains robust thanks to sound economic policies developed under visionary leaders like Goh Keng Swee.

A stable currency is crucial because wealth is stored in the form of money. For example, if a farmer produces 100 kg of rice and sells it for Rs. 20,000, depositing that money in a bank means converting his labour into a universally accepted currency. If inflation erodes the value of that currency over time, it discourages productivity. A monetary system that fails to preserve value will ultimately undermine economic progress.

Many admire Singapore’s modern infrastructure, but what they often overlook is the country’s strong monetary foundation. Interestingly, the same Dr. Goh who helped shape Singapore’s economy also advised Sri Lanka, but his recommendations were never fully implemented.

The right policy framework

While reaching Singapore’s current economic level may seem like a monumental task, the key lies in laying the right policy framework. If the right economic policies are put in place, progress will follow naturally. It is not about chasing Singapore’s end results but rather about focusing on the right processes to achieve sustainable growth.

Instead of fixating on when Sri Lanka will become like Singapore, we should prioritise fundamental economic reforms in areas like trade, investment, and labour policies. If we get these right, the rest will take care of itself.

(Source: ‘Ignite Growth Conference’ presentation by Dr. Chandranath Amarasekara)