Sri Lanka's tourism industry gets ready to become a key economic contributor

With rapidly rising arrivals and revenues in 2014 and 2015, Sri Lanka is currently in the midst of a tourism growth spurt, which has the potential to turn the small South Asian island nation into one of the world’s most popular tourist destinations in the years to come. In 2015 some 1.8m tourists visited the country, according to data from the regulator, the Sri Lanka Tourism Development Authority (SLTDA). This is up nearly 18% on the previous year. The nation’s newly elected government has made ambitious plans to attract 2.2m visitors in 2016 and 4m by 2020.

Natural Assets

Sri Lanka boasts eight UNESCO World Heritage Sites, plus a bevy of natural, cultural and religious attractions. Taken together with a huge number of planned and ongoing hotel construction projects, these assets have contributed to the country’s rising reputation as an attractive and good value destination for foreign tourists and investors alike. “Since 2009 Sri Lanka has become one of the leading tourist destinations not only within south and east Asia, but globally,” Chamin Wickramasinghe, CEO and director of Theme Resorts and Spas, a local hotel operator, told OBG. “Given that the country is safe and stable, it has an amazing climate and attractions, and is easy to reach from Europe, Asia and the Middle East, it is clear that the tourism industry will continue to grow quickly for some time to come.”

Challenges

That said, rapidly growing demand has gone hand in hand with rising challenges in recent years. Broadly, these hurdles are indicative of a lack of capacity in terms of hotel rooms, tour operators and other related services and service providers. Semi-protectionist economic policies, derided among some local sector participants, have had mixed results in terms of tourism market development in recent years. With nearly 4000 new hotel rooms expected to come online in the next four years, according to Jones Lang LaSalle (JLL), and most of them at the luxury end of the market, there is also some concern about oversupply, which could push prices down over the medium-term and has the potential to contribute to increased levels of competition throughout the sector in the coming years. More fundamentally, low-quality transport infrastructure – particularly in the central and relatively remote eastern areas of the island – is an ongoing challenge for tour operators and tourists alike. The lack of a large pool of well-trained tourism employees is also a perennial concern among hotel operators and other market participants.

Despite these and other issues, it is clear that in the seven years since the end of the Sri Lankan civil war, the country’s tourism industry has come into its own. SLTDA data showed that the sector brought in $2.9bn in cumulative earnings in 2015, up almost 21% on the $2.4bn recorded in 2014, and this figure is widely expected to continue to rise in 2016 and beyond. With this expansion in mind, many local players expect tourism to be one of the nation’s top GDP contributors by 2020. Nonetheless, the government has made it known that all future development must take place with long-term outcomes in mind. “We are quite keen on diversifying the tourism portfolio away from beaches and into new areas,” Paddy Withana, the chairman of the SLTDA, told OBG in 2015. “At the same time, we want to make sure that the sector remains community-based and sustainable.” With these goals in mind, and in conjunction with other federal-level tourism entities at the Ministry of Tourism, in 2015 and 2016 the government launched a number of new tourism development initiatives, designed to see the sector through to 2020 and beyond.

History

For centuries, Sri Lanka has been an important stop-over point for sailors, explorers and traders travelling between East Asia and Europe. In 1937, during the colonial era, British administrators set up the country’s first government tourist bureau, primarily in an effort to facilitate overnight visits to Colombo and Kandy by cruise ship passengers. When Sri Lanka gained independence in 1948, the new national government sought to expand on the earlier colonial efforts. The nation’s first government tourist bureau, which was operated by the Ministry of Commerce, had a broad mandate to both develop and operate tourist facilities and services in Sri Lanka and to market and promote the country abroad.

During this period, the state converted a number of former colonial residences into grand hotels, many of which continue to operate today, including the Galle Face Hotel in Colombo and the Mount Lavinia Hotel in Kandy, among others.

In 1966 the government established a new lead tourism entity, the Ceylon Tourism Board, which was responsible for revitalising the industry and turning the country into a modern tourist destination. Visitor numbers jumped dramatically during the period following its establishment, in line with global trends, and driven largely by the country’s numerous beach resorts. Tourist arrivals jumped by 24% annually between 1976 and 1982, according to data from the SLTDA. With the start of the civil war in July 1983 the country entered a sustained period of decline, and the tourism industry dwindled due to lack of visitors and the ongoing conflict.

Legislation & Oversight

In 2005 the government passed Act No. 38, known as the tourism act, which replaced a 1966 law that had set the development agenda for the sector for the previous four decades. Under the new legislation, which came into effect in 2007, the SLTDA was established as the country’s primary tourism development entity, under the umbrella of the Ministry of Tourism and Sports, now officially dubbed the Ministry of Tourism Development and Christian Affairs, following parliamentary elections in 2015. A handful of additional entities were also launched around the same period, including the Sri Lanka Tourism Promotions Bureau (SLTPB), the Sri Lanka Institute of Tourism and Hotel Management and the Sri Lanka Convention Bureau, all of which fall under the regulator.

Under Act No. 38, the government also established the Tourism Development Fund, an account that is managed by the SLTDA and financed through a 1% tax on the turnover of all registered tourism companies, as well as one-third of Sri Lanka’s airport tax revenue. The development fund is used to finance the state’s promotional and development plans for the sector. The SLTDA allocates funding to the SLTPB, the convention bureau and the hotel school.

Planning For Growth

The state has carried out a number of development initiatives in recent years. The SLTDA’s 2011-16 Tourism Development Strategy, which is currently drawing to a conclusion, laid out a series of ambitious goals for the sector, including increasing tourist arrivals from 650,000 in 2010 to 2.5m by 2016, though this latter figure was subsequently reduced to 2.2m. By most accounts the plan has resulted in significant, sustained improvements across the sector, as evidenced by Sri Lanka’s rising reputation as a popular new destination on travel itineraries and top-10 lists around the world. At the time of writing, the SLTDA was in the process of designing and drawing up a new medium-term tourism development plan, which is expected to cover the period 2017-20. Though specific details about the plan had yet to be announced, it is being developed in conjunction with the private sector and the UN’s World Tourism Organisation.

Since a new government took charge in Sri Lanka after elections in early 2015, a number of changes have been made at the federal level, including throughout the public tourism industry. That year the SLTPB launched a major promotional initiative at a cost of SLR3.4bn ($24.48m), which was designed to shore up Sri Lanka’s reputation as an increasingly popular tourist destination in key markets, including India, China, the UK, Germany, France, the Middle East, Russia, the US and Malaysia, among others. In early 2016 the plan was extended through the end of the year. The current annual development plan is built around five strategic objectives: attracting 2.2m visitors over the course of 2016; boosting the average daily spend of incoming tourists to $200; increasing the average number of nights tourists spend in the country; generating overall tourism revenue of $2.75bn; and shoring up Sri Lanka’s brand value by investing up to $80m in a global digital marketing campaign, to be carried out by an international public relations firm. In the longer term, the state aims to attract 4m visitors annually by 2020.

However, many industry stakeholders cite the consistent lack of planning, implementation, or the creation of a coherent branding message as a traditional impediment to growth. “Sri Lanka’s branding campaign has relied on the premise of being safe since the civil war ended in 2009, but today at least 100 countries in the world are equally safe”, Hiran Cooray, Chairman of Jetwing Hotels, told OBG. “We require full implementation of a reasonable marketing plan developed by well-paid professionals.”

In Figures

According to provisional 2015 data published by the SLTDA, in 2015 some 1.79m tourists arrived in Sri Lanka, up from 1.53m in 2014, 1.27m in 2013, 1m in 2012 and just 447,890 in 2009, the year the civil war ended. As these figures suggest, arrivals have grown dramatically over the years. Indeed, between 2009 and 2015 the number of arrivals to Sri Lanka quadrupled. In addition to tourist arrivals, the SLTDA tracks annual “excursionist” arrivals to Sri Lanka, which consist “almost exclusively of passengers on sea cruises, who come on shore for purposes of sightseeing, shopping, etc. while the ship is in harbour,” according to the authority. In 2014 some 138,097 excursionists arrived in Sri Lanka, according to the SLTDA. The nation’s cruise tourism segment has steadily expanded in recent years (see analysis).

Sri Lanka’s rising reputation as a tourist destination around the world is reflected across a range of other data collected by the SLTDA. In 2014, for example, tourists spent a total of 15.12m nights in hotels and guest houses in the country, up by almost 100% from 10.91m the previous year, and just 4.1m in 2009. Tourist receipts, meanwhile, hit $2.9bn in 2015, up from $2.4bn in 2014, $1.7bn in 2013, $1.03bn in 2012 and just $349.3m in 2009, which represents growth of more than 730% over the seven-year period between 2009 and 2015. Finally, room occupancy rates at graded hotels have also grown in recent years, from 48.4% in 2009 to 74.3% in 2015.

There is, however, some concern around the rise of informal accommodation throughout Sri Lanka, which industry players advise is not accounted for in statistics. “Statistics show no differentiation between informal and formal accommodation,” Cooray told OBG. “We estimate 30% of arrivals stay in informal accommodation, and while budget accommodation is fine and important, it must be regulated or else vices can proliferate under the table, which ultimately hurts the industry in the long run.”

Nonetheless, broadly speaking, figures reflect the broader growth of domestic hotel capacity in the country. Excluding unclassified hotel and guest house capacity, as of the end of 2014 there were 18,078 hotel rooms and 35,976 beds in Sri Lanka, according to the SLTDA. These figures constitute a solid increase, up from 16,223 rooms with 32,284 beds in 2013, 15,510 rooms with 30,880 beds in 2012 and 14,653 rooms with 28,844 beds in 2011.

The state’s development plans for the sector involve encouraging tourists to stay longer and spend more money in Sri Lanka. Over the past seven years the average duration of a tourist visit to Sri Lanka has hovered around 10 nights. In 2014 this figure was 9.9 nights, for instance, according to SLTDA data. Average daily spend, however, has increased considerably over this period, from $81.8 per tourist per day in 2009 to $160.8 per tourist per day in 2014, for example. As mentioned previously, the government is aiming to reach $200 per tourist per day in the coming years.

Foreign Markets

Tourists travel to Sri Lanka from all over the world. In 2015 India, its closest neighbour and the second most populous country in the world, was the largest source of tourist arrivals, with 316,247 Indians visiting their island neighbour to the south. India has historically been the top source of foreign visitors to Sri Lanka, topping the list of foreign source markets for the past decade. In second place in 2015 was China, with 214,783 incoming tourists over the course of the year. Chinese visitors to Sri Lanka have increased rapidly in recent years atop rising incomes and a growing desire for foreign travel in China. In 2009 just 9899 Chinese tourists visited Sri Lanka. In the years since then this number has ballooned (see analysis). In third place was the UK, which has historic ties with Sri Lanka. In 2015 some 161,845 Britons visited the country, up around 12% from 144,168 the previous year and more than 98% from 81,682 in 2009. Rounding out the top 10 source countries for foreign tourists in Sri Lanka in 2015 were Germany, with 115,868 visitors; the Maldives, with 90,617 visitors; France, with 86,126; Australia, with 63,554; Russia, with 61,846; the US, with 47,211 visitors; and Japan, with 39,358.

Main Segments

Since international tourists began travelling to Sri Lanka in the 1950s and 1960s, the country’s beaches have been a major draw. Following the opening up of the eastern coastline in 2009, accessible beaches effectively ring the island – with more than 1600 km of them in total, according to the SLTDA. With nearly 68% of incoming tourists in 2014 travelling for the purpose of pleasure or holiday, the country’s “sun and surf“ segment is a major draw. Additionally, the country boasts one of the highest rates of biodiversity in the world, being home to Asian elephants, leopards, wild buffalo and 88 other species of mammal, plus a vast array of marine and bird life. As a result, nature safaris, trekking, whale watching, birdwatching and photography are staples of most domestic tour operators.

Heritage tourism has also become a key area of focus. Sri Lanka has some 3000 years of history on display in ancient palaces, Buddhist temples and townships carved into rock faces throughout the country’s interior. It is home to eight UNESCO World Heritage Sites, which can be categorised according to their affiliations with Buddhism, the succession of ancient civilisations that inhabited the island, and its colonial legacy. Religious and pilgrimage tourism (Sri Lanka is home to a number of key Buddhist sites), and so-called tea tourism are also key growth segments.

The country’s tourism industry has also worked to attract visitors interested in Ayurvedic medicine, ecotourism, adventure sports, arts and crafts, volunteering, spices, and food and shopping, for instance. “Sri Lanka has many attractions, but so far the state’s promotional strategy has not differentiated us from other markets in South Asia,” said Kishan Perera, the managing director of Kings Rent a Car, a Colombo-based automobile rental business and tour operator. “Hopefully the new branding strategy will be better in this regard than past plans have been.”

Niche Segments

In addition to the major attractions listed above, a number of new tourism segments are on the rise in Sri Lanka. The meetings, incentives, conferences and exhibitions (MICE) segment has become a key area of focus in the industry in recent years. “MICE is potentially a huge segment, and we want to target it,” the SLTDA’s Withana told OBG. “But we need private investment to build a major convention centre, as we do not yet have this.”

In 2014 just 0.3% of incoming visitors listed an event like a convention or meeting as the reason for undertaking a trip to Sri Lanka, though over the course of the previous decade this figure hovered between 1% and 3% of total arrivals, according to data published by the SLTDA. An additional 1.3% of incoming tourists in 2014 reported travelling to the nation for business, which is closely related to the MICE market and may, in certain cases, have some overlap. In 2014 visitors from India accounted for an estimated 29% of the 4495 total incoming MICE tourists.

Other burgeoning tourism areas in Sri Lanka include religious tourism, sports tourism and cruise tourism. The SLTPB has made a concerted effort to promote the country at travel trade fairs in India and other countries with significant Buddhist populations, in an effort to attract tourists interested in Sri Lanka’s rich religious history. Similarly, in mid-2015 the SLTPB announced that it would invest in organising sporting events in an effort to attract more visitors in the coming years. Surfing, golf and cricket are all potentially major draws. Finally, in late 2015 the state announced that it planned to invest heavily in cruise tourism, which has been a growing source of foreign tourists in recent years (see Analysis).

Hotels

Sri Lanka’s hotel market is in the midst of period of rapid change, with numerous large-scale luxury projects currently nearing completion. As of the end of 2015, the SLTDA estimated that around 60% of the country’s total supply of around 28,000 hotel rooms were in informal boarding houses and ungraded establishments. The formal hotel segment is populated by a handful of large domestic chains such as Jetwing Hotels, Aitken Spence and John Keells.

“There is currently a tension in the hotel market between sustainability and volume,” Lalin Michael Jinasena, the chairman of Casa Colombo, a boutique hotel brand in the capital, told OBG. “We want to ensure that the formal hotel market continues to be relatively upscale, but at the same time the government is pushing to attract 2.2m visitors by the end of 2016 and more in the future. This is a major challenge moving forward.”

A number of international hospitality players are currently developing properties in Sri Lanka. According to JLL, as of the end of 2015 more than 8000 hotel rooms were either nearing completion, in development or planned in Sri Lanka. Around 60% of these were high-end properties. Large new mixed-use projects that include a hospitality component are currently being developed by John Keells (Sri Lanka’s largest developer), Shangri-La Hotels and Resorts, Fairway Holdings, Hyatt, and Mövenpick, among others (see Real Estate chapter).

While increased room numbers should serve the industry well, the hotel industry in Sri Lanka, particularly in Colombo, faces levels of protectionism, which has caused some controversy in recent years. Following the conclusion of the civil war, the City Hotels Association pushed for a minimum pricing structure that would avoid price wars and ensure that all operators are able to survive. From 2009 all five-star hotels were required to set a minimum price of $125, with varying grades down to two-star hotels at $60. The system remains in place into 2016, against the wishes of many inbound tour operators, who argue that Colombo has outpriced itself against many of the competing destinations in Asia.

Meanwhile hoteliers argue their protected margins are continually reinvested in the industry, mostly around refurbishment and maintaining international standards. It is unclear the effect the establishment of international brands, such and Shangri La, Hyatt, and Mövenpick, will signal for the potential liberalisation of pricing structures in the years to come.

Outlook

Sri Lanka’s tourism industry currently faces a number of challenges. The nation’s road, rail and air links have been improved considerably over the past decade, and particularly since the end of the war in 2009. Nonetheless, it remains difficult to travel around the island due to traffic congestion and, in inland areas in particular, because of poor transport infrastructure. The government currently has a variety of development plans in place to address this issue (see Transport chapter).

Another pressing issue to be resolved has to do with staffing and human resources at hotels and other tourism facilities. In general, Sri Lanka suffers from a lack of well-trained tourism staff – many of which have emigrated to higher paying gulf countries. “There are a lot of big properties with high volumes of visitors currently in operation, and many more are planned,” said Jinasena. “All of these hotels are clamouring for well-trained staff.”

Despite these and other issues, the tourism industry’s recent performance, plus the substantial amount of investment that is currently being spent in Sri Lanka, bode well for the future. Indeed, according to SLTDA data, in January 2016 alone some 194,280 tourists entered the country, up more than 24% from the same period in 2015.

Assuming this rate of year-on-year visitor growth continues to hold over the course of 2016, the country will easily reach the government-set goal for the sector of attracting 2.2m tourists in total. “Demand jumped so fast in 2009 that we, as an industry, were caught off guard,” said Wickramasinghe. “Rapid growth will likely continue, but now each year we are increasingly better prepared to make the most of it.”

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The Report: Sri Lanka 2016

Tourism chapter from The Report: Sri Lanka 2016

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