Excessive regulations in tourism – ‘So Sri Lankan’

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.