Tourism - the way forward

With sun, sea, sand, hills, wildlife and all the beauties one could imagine, Sri Lanka had all the attributes to become a top tourist destination in the world. 
But decades of bloodshed and civil unrest made travellers across the globe to bypass the island in search of more peaceful nations in Asia, although such destinations were not as attractive as Sri Lanka.

The tourism industry of the Maldives was the biggest gainer from the civil war in Sri Lanka, as wealthy and well to do travellers, mainly from Europe flocked to the island despite their limited diversity of attractions. 
Premier Sri Lankan conglomerates like John Keells and Aitken Spence were relying on the Maldivian resorts to offset the losses of their Sri Lankan hotel operations during the civil war.

But now things have completely changed for the better. Today, Sri Lanka is recognised as the best country to visit in the world by no other than the reputed New York Times newspaper.

Until the end of May this year, tourist arrivals amounted to 233,922. The highest number of tourist arrivals to Sri Lanka of 566,203 was recorded in 2004 during the period of the ceasefire agreement. 
Compared to the first five months of 2004, tourist arrivals to the country from January to May represented a growth of 21%, in manifestation of a strong and robust upsurge in tourist arrivals to the country. 
All the indications are that the country will attract 600,000 tourists at the end of this year, bringing a great deal of fortune to the economy.

Economic significance
In 2009, the Hotel and Leisure sector contributed 1.4% to the GDP of Sri Lanka. 
The leisure sector grew by an impressive 13.3% in 2009 compared to 2008. 
The tourism industry earned US$ 350 million in 2009 which is far below the US$ 3.3 billion worth remittances. 
The industry created 52,147 direct jobs and 73,006 indirect jobs. 
The direct contribution to the economy by the industry does not seem to be immensely significant at this point of time. 
However, the multiplier effect of the tourism industry is quite substantial to an economy. 
The tourism generates a spill over of economic benefits to many sectors of the economy, increasing the wealth of fruit growers, vegetable cultivators, fishermen, taxi drivers, poultry farmers, construction firms, cement and ceramic manufacturers , retail groceries and even liquor producers (hopefully only that of legal ones).

The boom in the tourism will also give the opportunity to the treasury to fill its coffers. 
Tourist taxes form a significant portion of the government revenue in Maldives. 
The recent decision to relax restrictions on sale of liquor at tourist hotels and the subsequent decision to raise the taxes of liquor are signs that the government is thinking of capitalising on the increased tourist arrivals to the country to fill its empty coffers, notwithstanding its noble objective to wipe out the consumption of liquor from the country via Mathata Thitha. 
The prices of chicken and eggs have already gone up with hotels filling up its shelves ahead of the season. 
With proper planning tourism can certainly become the golden goose of the economy.

Strategic direction
The government has set an extremely ambitious target of attracting 2.5m tourists in 2016. If we assume that we will get 600,000 tourists this year to reach the 2.5 million target in 2016, tourist arrivals to the country will go up by at least 26.9% in each year from 2011 to 2016, quite a lofty aim indeed.
Table 1 Source: The Revival, the Hotel and Travel sector outlook report, compiled by the research team of Acuity Stock Brokers (ASB) 
As evident from table 1, in terms of the receipts per arrival, Sri Lanka received far less than India and slightly less than Maldives in 2008, but they earned more than the other countries in the region.

Table 2 Source: Central Bank Annual Report 2009
Most of the tourists who arrive in Sri Lanka from UK visit for the purpose of pleasure. 
“When analysing the “purpose of visit” by the top three nation’s i.e. India, the UK and Maldives, the UK tourists, who visit for pure pleasure purposes amounted to 85% in 2008 whereas tourists from India and Maldives amounts to 61% and 56% respectively” – The Revival, ASB Research. 
The report of ASB also claims that a considerable number of tourists from India arrive to the country for official business activities and for private purposes.

The Lanka Business Online website on October 12 quoted the managing director of Aitken Spence Hotels, Malin Hapugoda as stating at the annual conference of the Institute of Certified Professional Managers, that the government’s aim to attract 2.5 million tourists in 2016 is neither achievable nor desirable.

He had suggested the approach of getting high yielding tourists instead of undertaking a mass market strategy as envisaged by the government, which necessitates creating more and more hotel rooms. 
The arrival of more than 2.5m tourists to a geographically small island like Sri Lanka per year will no doubt cause a great deal of stress on both the environment and the physical infrastructure of the country.

Speaking to The Bottom Line, the former Chairman of Sri Lanka Tourist Board, Renton de Alwis observed that before setting up a target in terms of arrivals, the policy makers must assess the maximum capacity the prime attractions can cater to. 
“It is important to identify the number of arrivals that can be accommodated by places of attractions such as, Sigiriya, Bundala, Yala and Wilpattu and we must be mindful of protecting the golden goose that lays the golden eggs. Unlike the developed countries, even now the nature of Sri Lanka remains unspoiled and pristine and we must not put them under pressure by an over load of tourist arrivals, Alwis,” observed.

He pointed out that attracting even a 1 million high yielding tourists or half of that will be immensely helpful to the country’s economy. 
He stressed that such a strategy requires premium pricing, proper marketing and high skilled tourist manpower.

Getting the investments
The government is hoping to add 25,000 hotel rooms to the existing room network in the next five years to accommodate the anticipated rise in tourist arrivals. 
The expansion of the hotel rooms by that extent requires a significant amount of investments. But hotel investments do not generate high returns compared to other industries. 
The Return on Equity (ROE) of the hotel sector is much less than that of other sectors, according to financial analysts. 
The absence of attractive ROEs might discourage investments into the sector. 
Analysts also point out that most of the resorts outside Colombo remain underutilised during the off season. 
There are also complaints of delays in getting the required lands for new hotel projects which too does not augur well in terms of expanding the existing network of hotel rooms to occupy a larger number of tourist arrivals. 
Table 3 Source: John Keells Stock Brokers (JKSB) Market strategy – July 2010
Table 4 Source: Ceylon Tourism Fund – Information Memorandum 2010

As per the data of table 4, The Asian Hotels and Properties (AHPL), the owners of Cinnamon Grand and Cinnamon Lakeside are expected to be the most profitable leisure entity at the end of the current financial year. 
However, AHPL is exposed to property development apart from operating hotels. Speaking to The Bottom Line, a Research Analyst of ASB, Anjula Nawarathna pointed out that hotels are built out of substantial investments and that initial capital expenditure involves the commitment of a massive amount of funds. 
Furthermore, she said a significant proportion of the costs of hotels are fixed costs, thereby compelling hotels to have high occupancy rates to break even.

“Most of the hotels were lowering room rates to increase the occupancy rates with the demand being stagnant during the previous years and therefore ROEs were low. But we expect that ROEs of hotels will rise with the peace returning to the island as room rates are anticipated to go up due to increased arrivals with the number of hotel rooms remaining more or less static in the short to medium term,” Nawarathna added.

Her view is endorsed by the JKSB research team as well, “the country is expected to reach an unprecedented 600,000 arrivals this year with hotels expected to enjoy high occupancy and increasing ARRs given the fact that significant additions to the existing room supply will probably only begin to come on stream by financial year 2013”, -JKSB Market Strategy – July 2010.

The need for proper planning
In the aftermath of the end of the war, tourism possesses a great potential to offer to the economy of Sri Lanka. 
But the industry needs a clear strategic direction to maximise the benefits such potential provides whilst understanding the concerns of the environment, community, religious lobbies and other stake holders of the society.

Courtesy - The Bottom LineBy Asela Gunawardena