Sri Lanka slams new difficulty in doing business as official star ratings lose relevance

ECONOMYNEXT – Sri Lanka’s budget has proposed a new restriction on smaller hotels, blocking them from getting on an online booking engine unless they are registered with a state tourism regulatory agency, with archaic star ratings increasingly losing relevance.

Sri Lanka’s Tourist Development Authority has been on a re-regulatory drive, forcing hotels to get their own star rating and register with it, making it more difficult to do business in the island.

Its latest attempt is to work through the political process to block small businesses from entering booking engines, without its approval.

"… [F]rom 1 April 2020, any online booking/reservation website, can register hotels and similar establishments offering more than 5 rooms per property, only if such establishments are registered with the Sri Lanka Tourism Development Authority (SLTDA)," Sri Lanka’s budget for 2019 said.

"The registration process of the SLTDA will be further simplified to facilitate this."

With user reviews becoming an ongoing and effective regulatory tool used by customers, along with Facebook and similar media, hotel regulatory agencies around the world have been struggling to stay relevant.

Ironically, star ratings were started in free markets in the West as a community or market-based disclosure regulation system by organisations such as the Automobile Association and as a coercive arm of a state.

At online booking engines, which are cross-border exchanges where buyers and sellers meet and trade – like a stock exchange – online reviews are the system of disclosure regulation. Sri Lanka has also slammed a 3.5 percent tax on individial cross border credit and debit transaction, showing a rise in economic nationalism.

Unlike national star ratings which may use different criteria and be subject to corruption, online reviews help buyers compare ratings across countries mostly on the same basis, since users travel to multiple countries and ratings are near universal.

"..[T]the seismic change in the global hotel industry over the last two decades has rendered the official star rating systems out-of-date and inconsistent across Asia," Quo, an Asian-based leisire industry branding agency said in a study.





"The credibility of these systems has diminished and in many cases has left the consumer relying more on social media and other channels to judge the quality of a hotel."

Sri Lanka’s small hoteliers are now caught in the turf war between online ratings and government star ratings.

In Sri Lanka, larger hotel chains – which are feeling the heat as smaller hotels are driving the industry to the level seen in East Asia – have also been attempting regulatory capture and is egging the agency on to tighten controls on start-ups.

Sri Lanka is lagging behind East Asia in most sectors, but tourism is one area it is catching up fast, driven by initially getting listed on East Asia-based booking engines like

Many small entrepreneurs have set up hotels, simply to register and trade their rooms on booking exchanges, using tools available on the exchanges to market themselves.

It is not only in Sri Lanka that state agencies that were set up to ‘develop’ or ‘promote’ industries ended up hindering their progress, the nation at large, and prosperity of the people in general.

It was first noted in Europe, especially in Eastern Europe in countries where liberal traditions were weak, and people were not watchful of their freedoms, that state agencies were easily able to restrict economic freedoms and block progress.

"It is true that the officeholders are no longer the servants of the citizenry but irresponsible and arbitrary masters and tyrants," economist Ludwig von Mises explained as far back as 1944.

"But this is not the fault of bureaucracy. It is the outcome of the new system of government which restricts the individual’s freedom to manage his own affairs and assigns more and more tasks to the government."

"The culprit is not the bureaucrat but the political system. And the sovereign people is still free to discard this system."

Even larger hotels, however, are suffering from star ratings, which are based on innovation-stiffling criteria such as room numbers, square feet, whether a bar has air conditioning or not, its square area, which are determined on bureacratic desires and may or may not be what customers want.

"Our research suggests that officially accredited “stars” take a backseat in influencing consumer decisions, as the rating systems have variable meaning across markets, are plagued by disparities and are not  geared toward reflecting guest experience," Quo observed. (Colombo/Mar09/2019-SB)

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