ECONOMYNEXT – Sri Lanka’s John Keells Holdings is seeking government help to beat competition by unleashing new regulations on players on the small business and start up ecosystem which is expanding East Asia-style with the help of online booking engines.
"Although the supply in room inventory was mainly driven by the graded category, competition is also increasing from the informal sector which is priced attractively considering the lower cost base and different service offering," JKH, told shareholders in the annual report.
"Provisions for a suitable regulatory framework for the registration and regulation of the informal sector will be imperative to ensure that tourism services provided in the country are of a minimum regulated standard," the conglomerate which has annual revenues of 68 billion rupees said.
An ecosystem of small star up hotels, which do not have inflated building costs are mushrooming in Sri Lanka mimicking the growth seen in East Asia earlier, with occupancy driven by booking engines like Agoda.com and Booking.com.
At sites like Agoda.com hotels are under constant self-regulation by solicited user reviews forcing management to take corrective action or lose ratings, subjecting them to on-going regulation.
The online booking engine revolution started in Asia with sites such as Asiarooms.com, which is no longer in operation, mainly started by expatriates resident in Thailand. Agoda.com also has Thai links, analysts familiar with the East Asian growth story say.
Sri Lanka’s tourism promotion office has already begun to clamp down on smaller establishments with a set of regulations. The regulations go beyond safety and fire codes, which are needed for all buildings regardless of whether occupants are foreign or domestic.
Regulation by the state allows relevant agencies to collect fees by imposing rules. Critics also say in many countries state regulations also allows inspectors and staff to collect cash to help some operators avoid the regulations.
Standards and facilities on online booking engines are however transparent and users are free to accept them or not.
They use the principle of ‘disclosure regulation’, practised in many advanced financial markets, instead setting arbitrary rules on the number of rooms, their sizes or facilities which users may or not care about, based on perceived merits.
Less adventurous travellers can avoid newer hotels and instead opt for older establishments with a greater number of reviews backing ratings.
Analysts say in a competitive capitalist market system, firms beat others by keeping costs down or building brands and not by seeking state help to crush competition.
Meanwhile the market is also evolving ‘merit regulation’ mechanisms.
The brand Yohobed.com offers visitors minimum standards without going through the hassle of trolling through reviews.
Meanwhile JKH said the state regulations will "ensure that leisure operators are on an equal platform in terms of regulations and taxes and other levies, which currently deprive the Government of much needed tax revenue."
It is not clear why the government is not getting taxes from rooms sold on booking engines as customers are already charged taxes. A booking engine makes it easier for a government to collect taxes, not more difficult as they can be directly remitted to the tax authorities, observers say.
On sites like Agoda.com a 6.41 percent National Building Tax and another 15 percent tax – presumably VAT – is also already collected from customers staying at Sri Lanka hotels.
Due to a shortcoming in Sri Lanka’s value added tax law, voluntary registration below the threshold is not possible and all customers are also not required to be given an invoice. (Colombo/June16/2017 – update II)