Tourism Investment in Sri Lanka - Case Study Example

A Case for Tourism Investment in Sri Lanka Name Institution Introduction Tourism is considered as a major link in the entire economic development process. It is an industry that employs over 100 million people globally and generates billions in tax revenues for the respective governments. It is currently among the fastest growing sectors in the world, and many Asian countries have given it a priority in development planning. Sri Lanka is one of such countries (Wei Lai, 2011). Up to 2009 when there was a ceasefire, it had a lot of ethnic conflicts and tensions between the majority group, the Sinhalese and the minority group, the Tamil. Currently, the country has an economy which is reasonably stable, and reliant on the service sector for up to a half of its output, and tourism is the main source of this (Strehlow, 2009). In spite of past challenges, the Sri Lankan tourism industry is favourable to investment. This paper presents a case for investment in Sri Lanka. The Country’s Historical Background Sri Lanka attained independence from Britain in 1948 after having been colonized for almost four hundred and fifty years by different countries. As from independence, its politics has been defined by a lot of tension between the Tamil minority and Sinhalese majority. As from the early 1980’s to May 2009 when it was defeated, the nationalist Liberation Tigers of Tamil Eelam (LTTE) militant group carried out terrorist and military activities in order to secure an independent Tamil nation in eastern and northern Sri Lanka, with extensive implications on national security and the tourism sector (Agency for Technical Cooperation and Development, 2012). According to Clarance (2012), ethnic tensions between the Sinhalese and Tamil groups were traceable to a controversy over who came first and is therefore the true founding race of the country. Through political activity, intercommunity suspicion and bitterness, the issue grew into a civil war, decades after the attainment of independence. In July 1983, the tensions led to a civil war in the North eastern parts of the country. The central government’s forces which were predominantly Sinhalese went into war with Tamil militants grouped under the banner of the Liberation Tigers of Tamil Eelam (LTTE). The Tamils remained a protesting group which sought to fight domination, leading to the creation of militant groupings. In 1970, the relations between the Tamils and the government worsened when the government adopted a new constitution which favoured the Sinhala language and Buddhism. Separatist sentiments grew even further, with the Tamil United Front changing its name to the Tamil United Liberation Front (TULF). The Tamil Students Movement was formed in 1970 as a protest to the standardization of university admissions, and this later changed its name to the Tamil New Tigers. In 1975, it transformed into the Liberation Tigers of Tamil Eelam (LTTE). There was afterwards the creation of thirty-six militant groupings but the LTTE however emerged as the best organized and deadliest. Between 1976 and 1983, the militants carried out the assassinations of suspected quislings and police informers while engaging in robberies, attacking police stations and ambushing security forces. On 23rd July 1983, the LTTE carried out an ambush on an army patrol and killed thirteen soldiers. This marked the beginning of anti-Tamil violence that started in Colombo and extended to the east through the south, with a great toll in terms of loss of human life, property and compromising of the country’s security. The tourism industry in turn suffered due to the fear of potential visitors and travel advisories that followed (Peebles, 2006). According to Shaban (2009), the conflict is traceable to colonial times when the British ferried in Tamil labourers to serve them in tea and coffee plantations located in the central highlands. This made the country a significant producer of tea. However, the Buddhist Sinhalese who were a majority felt that the predominantly Hindu Tamils were being favoured by the British. There arose a Sinhalese nationalist movement that pushed for independence from the British after independence in 1948, there were disagreements between the Tamils and Sinhalese in drafting a constitution, and this kind of conflict persisted in some form ever after. The war’s final stages were characterized by intense fighting that led to the displacement of approximately 280,000 around the conflict hotspots. When it ended, the Sri Lankan government sought to rebuild the nation, as a result of which there are many opportunities for reconstruction in the east and northern parts of the country. By the start of 2011, the government in conjunction with the international community had managed to resettle about 300,000 people, with only a few remaining in displacement camps. This is an indicator that normalcy has returned for economic activity (Agency for Technical Cooperation and Development, 2012). Sri Lanka as a Tourist Destination The Sri Lankan nation is made up of an island, 65,610 square kilometers in size and found in the Indian Ocean towards the Southeastern coast of India. It had a population of about twenty million people as at 2010, with an approximate population growth of 0.7% (Agency for Technical Cooperation and Development, 2012). According to Wei Lai (2011), it has a lot of natural endowments, one of which is its beaches. There are coastlines measuring over 1600 Kilometres, making it popular for having tropical resorts on beaches which provide a variety of attractions throughout the year. From November to April, the best destination is the southwestern coast while between April and November it is best to go to the east coast. Among the most popular beach spots in Southwestern Sri Lanka are Ambalangoda, a place famous for mask-making and dancing, Hikkaduwa, famous for underwater sports and viewing of coral gardens and Galle, a spot popular due to its natural harbor which has a history of having been a Dutch fort. Sri Lanka is marketed as ‘a land like no other’. It is endowed with both man-made and natural attractions. There is a wide variety of tourism attractions that would suit virtually all possible market segments. There is a big collection of royal artifacts and antiques from ruling dynasties, and also many natural attractions (Singh, 2012). Most tourists come for ordinary sea, sun and sand tourism and as a tourist destination; the country mainly offers cultural tourism products in its heritage sites, together with eco-tourism and active tourism (Strehlow, 2009). In its east coast, there are attractions in water sports, underwater photography, whale watching, deep-sea and scuba diving in coral reefs and shipwrecks that are found in the waters. The popular towns for tourists here include Batticaloa, Nilaveli, Trimcomalee and Kalkudah. The country also has wildlife reserves and national parks. In spite of being quite small, Sri Lanka has a lot of biodiversity because of the broad range of climatic and topographic characteristics. The country is famed as being twenty five greatest biodiversity areas in the world. It has a rich birdlife with 251 species. There are also animal orphanages and parks whose visitors can form a sufficient base for any tourist-related business (Wei Lai, 2011). According to Hoffman (2006), Sri Lanka has a good transport and communications network, many attractive natural types of scenery, magnificent architectural structures and a rich ancient culture. It also has impressive recreational facilities ranging from golfing, spear-fishing, surfing, skin-diving, mountain climbing and sunbathing. Visitors to its national parks are able to see a variety of animals within their natural habitats. In spite of the attractions, the civil war that involved Tamil separatists and government troops has been one of the factors that have reduced the country’s tourist appeal, especially because many tourists became unwilling to come to the country after the disaster. Sri Lanka’s main sources of tourists for Sri Lanka are The United Kingdom, India, Italy, France and Germany. The secondary markets are Thailand, Scandinavia, Australia, Netherlands, Japan, Malaysia, Belgium, Spain, Eastern Europe, Russia, Switzerland, Austria and Thailand (Atkinson, 2009). The tourists may be categorized into those seeking spiritual experience, eco-tourists, roots-seekers, culture buffs, soft adventurers, golfers, expatriates, honeymooners, film crews, cruise passengers, sports enthusiasts, families and repeaters (Ellis, 2011). According to Wei Lai (2011), the country is famous for its cultural triangle for heritage tourism. It has several magnificent old monuments and cultural relics located in different ancient cities. These are for instance Anuradhapura, Kandy and Pollonnaruwa. Sri Lanka has beautiful hills and the city of Kandy whose focal point is a temple named the Temple of the Tooth is a popular attraction. It is gold roofed and has the status of being the country’s most significant religious relic. Tourists also like visiting Nuwara Eliya, a small town in the middle of a tea country referred to as Little England, traceable to colonial times, and built by the British. The Tourism Industry in Sri Lanka The Sri Lanka government’s main objective is to ensure the development of sustainable tourism products, enhancing the sector’s yield, extending its benefits to communities and promoting peace and harmony (Ellis, 2011). Hoffmann (2006) reports that as one of the measures aimed at boosting tourism in the country, the government of Sri Lanka has developed a number of tourism zones across the country. These are areas reserved for the building of upscale hotels and resorts. The government seeks to create a total of fifteen tourism zones. Although the facilitation of investment in upscale investments is likely to lead to greater revenues in the sector, the rebuilding plan for the sector remains controversial. A large number of small-scale investors who lost their guesthouses and hotels during the Tsunami for instance might not be able to rebuild their businesses in the zones. Because of this, it is believed that many local investors will be dissatisfied. A boom in the industry has led to increased interest in investment by foreign firms, both those existing and new ones. For instance, a number of hotel operators, both international and local have either began or expressed their intention to set up new properties in Sri Lanka. They include Shangri-La Asia Limited from Korea which is constructing a 500- room luxury establishment worth $ 500 million in Colombo and China National Aero-Technology Import and Export Corporation which intends to build its own $ 500 million development next to the Shangri-la project (Associated Newspapers of Ceylon, 2011). The Minor Group from Thailand and ITC India are companies that have already committed their resources to investment. Others such as the Accor Hotels, the Banyan group, Qatar investors and Dushit from Thailand have also expressed their interest in investing (Board of Investment of Sri Lanka, 2012). According to Associated Newspapers of Ceylon (2011), a number of local companies also intend to construct new properties and enhance their capacities while refurbishing the existing structures so as to increase competitiveness. The local companies include Aitken Spence PLC, John Keells Holdings PLC, Sierra Cables, Softlogic Holdings and Lanka Orix Leasing Company. . The government has specified major areas that are targeted for tourism development, with efforts being made to ensure that hotel and resort developments are encouraged. the destinations include a 530 acre area in Kuchchaveli in the Trincomalee district located along the northeastern coast, in the east coast Passikudah, Kalpitya in the southwestern coast and Deeduwa on the northwestern coast there is Kalpitiya, Deeduwa on the northwestern coast . Sustained infrastructural development and active encouragement of investment by the government has ensured that foreign investment is effectively attracted. A number of large tourism projects are expected, with several international hotel investors such as Hyatt, Avani, Starwood, Six Senses, Marriott, Hyatt, Movenpick and Onyx having either started operations or planning to start working in the country (Wij & Vardharajan, 2012). The cultural heritage and diverse landscapes provide a lot of business opportunity for investors. However, the opportunities are currently underexploited. While ‘beach and sun tourism’ is still the main attraction, alternative forms have grown, though on a smaller scale as the alternative that would help avoid the negative economic, environmental and social impacts that are usually associated with tourism development (Wei Lai, 2011). Singh (2012) explains that for a long time, Sri Lanka was heavily dependent on European visitors. Its product was therefore designed for and provided to this group. Such reliance has ensured that the tourism market remains highly vulnerable, considering that the security situation has been untrusted since the 1980s. Performance of the Tourism Industry While the over a quarter-a-century long conflict heavily impacted on business and tourism, there was also a Tsunami which hit about a thousand kilometers of the country’s southern and eastern coastline in 2004, killing about 35,000 people and displacing almost a half a million more. This affected the image of the country and led to a further dip in the interest of foreign visitors to visit Sri Lanka (Agency for Technical Cooperation and Development, 2012). The tsunami in 2004 was catastrophic to the human society and although it did not have much negative effect on natural co-systems, it created a great challenge to the tourism sector (Atkinson, 2009). The tourism sector is experiencing immense growth, a trend that can be traced back to 2009 when normalcy returned to the country. The growth has been noted in both foreign exchange national venues and number of arrivals. The main tourism sub-sector is accommodation comprising of boutiques, hotels, villas and guesthouses. There are a total of 1215 such establishments, out of which only 256 are graded hotels. The firms have a joint room capacity of 22,735. 15,529 of the rooms are found in villas and graded hotels which make up 68% of the total occupancy. About 3500 more bed spaces are required in the next five years in order to cope with the positive growth in tourist numbers which is expected to grow even further. As a result, there is the need to invest a further US $ 3 billion over the five years. The demand offers a well-diversified range of areas for investment (Board of Investment of Sri Lanka, 2012). The country’s tourism witnessed significant growth during 2011, in which there was a 45.7% revenue growth from the previous year. Receipts from tourism amounted to $840 million, up from $576 million in 2010. While the government had anticipated a target of 750,000 tourists in 2011, this figure was surpassed and the 15% targeted growth was more than doubled as a year by year tourist arrival growth being registered at 31%. Considerable growth is also being noted in 2012, with the first half of the year having experienced a 19% growth over the same period in 2011. There is now a government target of 1.5 million arrivals in 2012 (Wij & Vardharajan, 2012). At the moment, Asia has risen to be the main supplier of Tourists to Sri Lanka, with a figure of about 39%. Western Europe is the next at 36.8%, then the Middle East at 6.7%, Australasia 5.4% and lastly Eastern Europe and North America with 5.7% each. India is the main market for Sri Lanka, producing 20% or 171,374 arrivals and the average stay per guest is 10 nights and room capacity in graded tourist hotels is 14,653 (Sri Lanka Tourism Development Authority, 2012). Prospects for growth in the hotel industry and tourism sector in general are high, especially in the medium and short term. The industry’s outlook has been transformed and expected to play an even greater role in future. The hotel sector in 2011 boasted an almost 70% occupancy rate. In peak times, it at times surpasses 90%. Greater demand has made it possible for hotels to raise their room rates, as a result of which revenues have risen and margins increased for many establishments (Associated Newspapers of Ceylon, 2011). The economic situation of a country is a good indicator of whether it is worth investing in or not. In spite of the many years of war in Sri Lanka, the devastating tsunami that worsened the situation even further and the global financial crisis which necessitated the country’s taking of an IMF loan, the economy has been revived and has recorded impressive and healthy growth rates of approximately 5.5% per year. Its GDP grew in 2010 and peaked 7.5%. The Gross National Income per capita was on its part $2,013 by 2008, and life expectancy stood at a figure of 74.4 years. Literacy levels stand at 91%. This figure is considerably higher than a majority of its neighbours in South Asia (Agency for Technical Cooperation and Development, 2012). Political and Economic Environment Tourism is a highly significant industry in Sri Lanka, and because of this its leaders have always tried to develop tourism for many years. In 1966, the government established the Ceylon Tourist Board to facilitate the improvement and expansion of guest facilities in the country. In the subsequent decades, the board ensured the building of hotels and guesthouses in every major city and town. In trying to boost the country’s tourism industry, the government has embarked on a campaign to encourage vacationing in Sri Lanka. The national task-force on the country’s reconstruction actively partners with the Tourist Board in trying to market Sri Lanka as an ideal destination for vacationers (Hoffmann, 2006). In 2011, the Sri Lanka Tourism Development Authority launched a one-stop-shop measure for tourism-related projects to be able to get approvals for resorts and hotels much faster as one of the ways of encouraging such investments. the one-stop shop gives any required information to anyone interested in investing within the sector and is also a liaison office for getting all the approvals needed from various agencies and ministries, in addition to applying for incentives for instance tax breaks and import duties. On 1 December 2012, the government launched the Electronic Travel Authorization (ETA) system. This provides visas to foreigners from 78 countries, excluding Singapore and Maldives. Prior to the system, the visa used to be given to free of charge on arrival. The system has boosted revenues further and with its continuation, it is likely that support for the sector by the government will become greater and therefore investment conditions will improve further (Wij & Vardharajan, 2012). One of the main turning points in the history of Sri Lankan tourism and the economy in general was the civil conflict that began in July 1983 (Lanka Business Online, 2009). According to Sri Lanka Tourism Development Authority (2011), it had an adverse effect on the performance of the sector, as for instance arrivals dropped by 43% in 1982 to 1983. The total arrivals numbered 230,106 in 1986, a 43% reduction from what it was in 1982. The tourism governing body at the time, the Ceylon Tourist Board offered several concessions that would help in strengthening it so as to cope with the crisis. In 1987 there was a decline in arrivals by 23% between 1986 and 1987. During the mid-1980’s, the security situation had deteriorated further and by 1988, every aspect of ensuring economic development in the new decade seemed linked to ensuring a quick end to the ethnic conflict. Airports have been developed in the recent past. The government is currently working on building a new international airport at Mattalla. This is aimed at offering an alternative to the single international airport located in the capital Colombo and also raises the level of accessibility to other corners of the country. The building work is in progress for the first phase, comprising of one taxiway and runway that would ensure a one-million passenger capacity. The project is anticipated to end before 2013. There is the plan to double the total capacity for handling passengers countrywide from six to twelve million by 2016. In order to attain this goal, the airport that is available in Katunayake will also be expanded by adding an extra passenger terminal and expanding its cargo handling facility. Many airlines have said they are willing to start flying to Sri Lanka, with some such as China Eastern Airlines and Jet Airways having almost doubled their flights between 2009 and 2010. In 2011, Air Arabia, Gulf Air, Spice Jet and Emirates also increased their flights in order to cash on the tourist in flows (Wij & Vardharajan, 2012). In addition to the infrastructural development, the country has experienced much change in its basic tourism infrastructure, a factor which is expected to facilitate the sector’s growth as a major tourist destination in South Asia. Ellis (2011) explains that for a long while, the industry was governed by the Sri Lanka Tourism Board. However, as from October 2007, a new body was formed, the Sri Lanka Tourism Development Authority. This works through five subsidiaries; the Institute of Tourism and Hotel Management, the Sri Lanka Tourism Promotion Bureau, the Tourism advisory Committee, the Tourism Advisory Committee and the Sri Lanka Convention Bureau. There is also a department that specifically deals with complaints that relate to tourism and its related investment activities, and this is the office of the Commissioner for Tourism. The government policy towards tourism investment is that hotels in Sri Lanka be encouraged to improve their service standards for the benefit of guests, as the improved quality that results will lead to a higher spending per tourist. This will assist the industry to make improvements and become more competitive in the global markets as a tourist destination, unlike simply wanting to chase larger numbers of guest, a move that would otherwise be detrimental to the industry. By 2010, the effects of the civil war had seemingly subsided. For instance, the economy has undergone a lot of economic growth in the past three years. Wij & Vardharajan (2012) explain that in 2011, GDP growth stood at 8.3%. This was the highest economic growth rates since the country’s attainment of independence in 1948. Inflation was at a manageable level of 6.7% and unemployment rates dropped to 4.2% in 2011 from 5.8% in 2009. Growth projections indicate that there will be an average growth rate of 7.4% between 2013 and 2016. The Government has strived to ensure that the basic units for economic growth are developed further together with the increase in tourist arrivals. For instance, there has been a massive development of expressways and highways. The first access-controlled expressway in the country measuring 96-kilometres was opened in 2011, linking Colombo to Galle at the cost of about $700 million. With it, Galle has become more accessible by both tourists and locals as the commuting time has been reduced from five to two and a half hours. The resorts and hotels along the Southwest Coast for instance experienced a lot of growth in profits as soon as the expressway was opened. The opening of the remaining part that extends to Matara is expected to be done by 2013. Sri Lanka is projected to have positive prospects as from 2012 to 2015, as the country is expected to benefit from the outcomes of peace after the civil war. GDP growth as from 2011 to 2015 will be expected to be about 6.6% annually. The agricultural sector will have greater output as the previously unproductive conflict zones will join in production. Business, tourist and consumer confidence increases will also be expected to stimulate wealth generation. With such projections, the future appears bright for potential investors in the tourism industry, just like the other sectors (Agency for Technical Cooperation and Development, 2012). The capacity of seaports has increased tremendously. Hambantota Port, found in Southern Sri Lanka was opened up for shipping by international vessels in June 2012 at an approximate cost of $800 million. It is ideally placed to connect the Middle East with Europe and South East Asia. In addition, the port at Colombo is being expanded through addition of about six hundred Hectares of space, new berthing facilities and three terminals. When complete, the project will make Sri Lanka a highly significant logistics hub (Wij & Vardharajan, 2012). Direct Challenges to Investors As business entities, investors have to put up with a number of challenges. For instance, there is the global challenge of fluctuations in oil prices. This has led to increases in fuel charges by airlines so as to cater for the high costs of fuel, and these have to be passed to consumers through higher fares. Consumers are left with no choice but to reconsider peak season and leisure travels as they are too expensive. Another challenge is a decline in the strength of the sterling pound in relation to the Euro. This has an implication for tourists from the UK that going for cheap holidays in Europe becomes almost impossible. In addition, there is pressure for people to reduce their air travels due to greater awareness of their carbon footprint, hence fewer flights and less tourist travels (Sri Lanka Tourism Development Authority, 2011). In addition, Associated Newspapers of Ceylon (2011) explains that although financial institutions are ready to offer lending services to established businesses which are part of bigger diversified groups, medium and small-sized stand-alone establishments face challenges when it comes to acquisition of funding. Because of this, construction of hotels and upgrading or refurbishment efforts become difficult. The Industry’s Prospects In spite of challenges, the tourism industry in Sri Lanka remains highly promising. For instance, 2011 witnessed a 4.4% growth in the number of tourists to 980 million, way above the previous year’s 939 million. This was in spite of a global economic slowdown, a series of natural calamities in Japan and significant political changes in North Africa and the Middle East. 2011 was marked by a total of 855,975 arrivals, the highest figure ever in the country’s tourism industry (Sri Lanka Tourism Development Authority, 2012). The industry is growing. It steadily attracts foreign investment and tourists. Its placement also enables it to be attractive to transit visitors. The country's important placement also enables it to attract transit visitors into the island. Throughout the years, many beautiful spas, resorts and hotels have come up. Through the incorporation of the diversity in culture within the country, the various businesses that have been set up are able to provide visitors with unique and memorable experiences as they vacation (Sri Lanka Tourism Development Authority, 2011). There is a significant limitation to the tourism industry in terms of human resources. Currently, employees within the sector are about 300,000. According to projections, about 1.5 million workers are required in order to meet the needs of the projected tourist arrivals as at 2016. For this reason, the economy needs to incorporate an integrated HR development framework for the hotel industry, otherwise labour shortages are very likely to occur. Hotels initially depended on domestic demand that in many instances catered for tourist shortages when arrivals were lower. Specifically, domestic tourists dominated the bed spaces in supplementary facilities. Local demand helped to further cushion the beverage and food revenues in the industry (Associated Newspapers of Ceylon, 2011). Conclusion Sri Lanka underwent a long period of instability since its independence in 1948. This was the result of ethnic tensions between the Tamil and Sinhalese groups. The tensions between the two led to twenty six years of war, which had a great effect on tourism. The 2004 Tsunami also had a terrible effect on the sector. However, the government thereafter sought to rebuild the country, and its efforts are already visible in the form of an impressive growth and increased investor confidence. There is a continuous massive investment in infrastructural development, especially that which relates to tourism. With this trend, it is expected that tourism development will play an even greater role in the economy, making it a productive and worthwhile area for both local and external investment. As proof that the crisis days are over, there is a considerable amount of infrastructural development taking place. Much of the changes taking place are either dependent on or aim at enhancing tourism development, and any investor who wants to get in is encouraged to take advantage of the new Sri Lanka. For this reason, investment seems to be a good idea. References Agency for Technical Cooperation and Development (2012). Sri Lanka Country Strategy Paper 2011-2013. Colombo: ACTED Associated Newspapers of Ceylon. (2011). Hotel Sector to Play Wider Role. Retrieved on 16 December 2012 from Singh, S. (2012). Profiling the Domestic Tourism Sector in Sri Lanka in Domestic Tourism in Asia: Diversity and Divergence. New York: Routledge Publishers Sri Lanka Tourism Development Authority (2012). Annual Statistical Report of Sri Lanka Tourism 2011. Colombo: Research and International Relations Division, SLTDA Sri Lanka Tourism Development Authority. (2011). Overview of Tourism Industry in Sri Lanka. Retrieved on 15 December 2012 from Strehlow, A. (2009). Tourism in Sri Lanka: The Advocacy and Cautionary Platform Point of View. Munich: GRIN Verlag Sri Lanka Tourism Development Authority. (2011). Overview of Tourism Industry in Sri Lanka. Retrieved on 14 December 2012 from Wei Lai, T. (2011). Promoting Sustainable Tourism in Sri Lanka in Linking Green Productivity to Ecotourism: Experiences in the Asia-Pacific Region. Tokyo: Asian Productivity Organization Read More