Battle lines drawn over fate of minimum room rates

Tourist enjoying a boat ride in Sri Lanka

• SLTDA adamant over decision to remove minimum rates, gazette to be issued soon  
• Minister says industry stakeholder discussions in Nov., decision by year-end 
• Gazette on minimum room rates expired in March, focus on increasing biz during off-peak period 
• City hotels oppose move, argue staff salaries and taxes will reduce, insist move helped small players
• THASL wants lower indirect taxes, promotion campaign and informal sector regulated if floor rate removed 
• Tour operators back market pricing  

By Charumini de Silva

Confident of resilience built by strong postwar growth, the Sri Lanka Tourism Development Authority yesterday stuck to removing a nine-year-old minimum room rate scheme for Colombo hotels, despite a proposal by Tourism Minister John Amaratunga to discuss the issue in November and protests by hoteliers, setting the stage for a potential standoff between stakeholders. SLTDA Director General Upali Rathnayake insisted the SLTDA Board arrived at a decision to remove the minimum room rate for five-star hotels in Colombo at a meeting held in July and the authority would gazette the decision soon. 

“We found that after nine years there is sufficient capacity in the capital and the market is not driven by the price but the quality and services they offer. Considering these factors, the Board decided it was not the right mechanism to control the prices with a minimum rate,” he told Daily FT.

He pointed out that the minimum rate was introduced to the market at a time when city hotels were finding it difficult to continue business.

“Out of the 15 players at that time in Colombo, 13 violated regulations and five-star room rates were dropping drastically. The mechanism was introduced to safeguard the players and allow hotels to upgrade their standards with the high income they earned,” Rathnayake said.

The Director General denied industry allegations that the decision was not communicated. 

“The decision to remove the minimum room rate was first informed to the Tourism Advisory Board and it was also informed to industry stakeholders at different forums where the Minister was also present,” he added.

Rathnayake believes that the discipline in the market will continue, while helping industry players to uphold the quality driven by market forces.

Nonetheless, the decision does not appear to have impressed itself upon Minister Amaratunga who outlined plans to hold talks with the industry in November and take a decision by the end of the year.

“The gazette imposed on minimum room rates for five-star hotels within the Colombo city limits has now expired and it’s inactive at the moment. We will discuss the matter with industry stakeholders and the Sri Lanka Tourism Development Authority (SLTDA) in November and see whether the gazette needs to be renewed,” the Minister said.

According to the Minister, the gazette for minimum room rates scheme for five-star hotels in Colombo had expired on 31 March 2018.

“September and October are usually the lean period, where we don’t get many tourists. Upon considering the views from the trade and authorities we will arrive at an appropriate decision towards the end of the year,” Amaratunga added. 

However, Colombo City Tourist Hotel Association (CCTHA) President M. Shanthikumar contended that if the Government decided to remove the minimum rate it would adversely impact the two- to four-star city hotels. He also expressed concern that a removal would result in the staff service charge being reduced by 50%. 

“The removal or the continuation on the minimum rate was not discussed with CCTHA. In an industry that has high staff turnover, this is crucial. On the other hand, this may allow competition with the informal sector which is growing fast by reducing rates,” he opined.

Shanthikumar noted that the minimum rate was gazetted in 2009 after consultation and the request of the CCTHA to avoid undercutting.  

“The two- to five-star category hotels had their rates ranging from $ 45 to $ 125. The implementation of the minimum rate undoubtedly helped the smaller hoteliers to be in business and benefited the economy by way of taxes and the staff to get much higher service charge. If not for the implementation of the minimum rate, most of the city hotels would not have been able to be refurbished or renovated. This was a benefit seen across the higher star class hotels as well in spite of not having a proper monitoring mechanism by the authorities,” he added.

He pointed out that the city mostly depended on corporate, MICE and airline crews. The leisure component constitutes only about 20% of total occupancy. Therefore Shanthikumar said it could be misleading to describe Colombo as expensive for leisure. 

“Moreover, the airline crews have a special rate from $ 45-$ 65 (depending on star category 3 to 5). The MICE rate was reduced for all categories one year ago,” he stated.

Meanwhile, Sri Lanka Association of Inbound Tour Operators (SLAITO) President Harith Perera welcomed the move by authorities to be lax about enforcing minimum rates in recent months. 

“I think the market forces should decide the price. We welcome the move,” he stated. 

The Tourist Hotels Association of Sri Lanka (THASL) has agreed for the conditional removal of the minimum room rate.

“If the Government is planning to replace the minimum room rate we have requested for three conditions to be fulfilled before that. Firstly, to reduce indirect taxes on hotels as we find it difficult to compete with regional players. Secondly, to expedite the promotion campaign which they have failed to do so during the past three and a half years. Thirdly, to regulate the informal sector where the majority of the tourists now prefer staying at. We hope that the authorities will consider these before removing the minimum room rate,” said THASL President Sanath Ukwatte.

He pointed out that the minimum room rate mechanism was introduced to discipline the market and take action against players that were undercutting the prices. 

“Since the gazette expired, we have seen a continuous drop in the prices of room rates in Colombo. It has come down from $ 125 to $ 80 per night at present. We hope and pray that the prices of five-star hotels will not decline to the levels of $ 50,” he said.   

Outlining that the majority of tourists coming to Colombo hotels are business travellers, conference delegates and people who patronise casinos, Ukwatte asserted that continuing the minimum room rate would have no adverse impact on the tourism industry in Sri Lanka.

“Colombo is no longer on the tourist map. With the opening of the Southern Expressway the majority of travellers go to tourist hotspots in the Southern Province. Around 20% of total tourist arrivals chose to stay in Colombo for leisure purposes. Colombo is now visited mostly by businessmen, conference delegates and people who come to casinos. For these three categories, paying $ 150 per night for a five-star hotel is quite worthwhile compared to staying in a similar star class hotel in India or Singapore,” he explained.

Further, underlining the positives, Ukwatte said it allowed hotel shareholders and staff to benefit with the high returns they gained over the past nine years having the minimum room rate mechanism.

“Tourism is the only trade that shares 10% of its revenue with the staff. With the implementation of the minimum room rate scheme, our staff received a significant amount added to their monthly salaries as service charge. If the Government decides to remove it, the share of revenue with shareholders and staff will be reduced,” he added.