In 2009, Sri Lanka’s tourist arrivals were a mere 447 thousand. By 2010 the arrivals increased almost 50 percent to 654 thousand. That number is estimated to have almost doubled by 2013 to almost 1.3 million. The current plans are for this number to double again by 2016 to 2.5 million. But what got Sri Lanka here (doubling tourist arrivals from 2010 to 2013) will not get it there (doubling again from 2013 to 2016).
Sri Lanka’s tourism: room to boast
The reported growth in Sri Lanka’s tourism sector over the past few years has been impressive. Average year-on-year revenue growth is reported as exceeding 40 percent from 2009 onwards, the year the war ended. Looking at arrivals, UNESCAP, a UN body, found that Sri Lanka’s 31 percent arrival growth rate between 2010 and 2011 was the world’s highest.
This year’s Central Bank Annual Report credits “the peaceful environment in the country together with the ongoing strategic investments in the tourism sector, new tourist attractions and mega promotional campaigns” with this success.And indeed the numbers do provide significant room to boast: the current growth rate at 26.7 percent is four times greater the 6 percent Asia-Pacific average.
The World Economic Forum’s Travel and Tourism Competitiveness Index is a good place to begin some strategic analysis. This global index assesses the extent to which economies are putting in place the factors and policies that make them attractive to develop the travel and tourism sector. The index ranks the best economy in the first place (rank one) and the worst economy as last (rank 140).
Examining the index, it becomes clear that Sri Lanka’s high growth rates in the number of tourists are due to its low base, and the end of the war, not because of significant improvements in its global competitiveness. Since 2009, the year the war ended, Sri Lanka’s rank on the index improved by just four places, going from 78th place to 74th. This is not very encouraging as some of Sri Lanka’s competitors performed much better. For example, Indonesia increased its rank by 11 places and Vietnam by nine places. If Sri Lanka is to become as competitive as the regional tourism heavyweights, Thailand and Malaysia, it will have to increase its rank by 30 places.
This analysis is corroborated by looking at tourist arrivals per capita. Sri Lanka started off with less than 2.5 tourist arrivals per 100 people in 2009, and has now increased to 6.2 per 100 people. These figures are among the lowest when compared to the ASEAN region (see Exhibit III).
What got us here, won’t get us there
Sri Lanka has already milked the benefits of ending the war (what the Central Bank calls “peaceful environment”). What the Central Bank calls “strategic investments” (mainly in adding hotels and rooms) and “mega promotional campaigns” suffer from what economists call diminishing marginal returns: the more you do it, the less you gain from continuing to do more of it.
Therefore, what got Sri Lanka here from 2009 is not likely to get it there – achieving 2.5 million arrivals in 2016. Realising this goal will require some new strategies to increase competitiveness. One good starting point is to begin by identifying opportunities highlighted in the Tourism Competitiveness Index.
The index has some clues on where Sri Lanka should focus its attention. Sri Lanka’s four place bump between 2009 and 2013 is explained by an improvement in its regulatory environment sub-rank and human, cultural and natural resources rank. The primary cause for the regulatory environment sub-rank’s significant increase is the over 100 place improvement in Sri Lanka’s business cost of terrorism sub-rank. Having won the war, Sri Lanka’s focus should now turn to (1) the low hanging fruit, areas where its sub-rank is particularly low and (2) the rotting fruit, areas where Sri Lanka’s sub-rank is declining
Rotting and low hanging fruit
The analysis indicates that environmental sustainability, tourism infrastructure and ICT infrastructure are the key low hanging and rotting fruit. The primary cause for Sri Lanka’s low and declining, environmental sustainability rank is its low environmental regulation, pollution and environmental treaty ranks. In the case of tourism infrastructure the number of hotel rooms, presence of major car rental companies and number of ATMs are the major areas to focus on. Finally, in the case of ICT infrastructure improving broadband access and the number of individuals using the Internet will help increase the score considerably.
Rotting and mid-level fruit
Human resources and cultural resources come under this category. Three major factors explaining the decline in human resources are the availability of qualified labour, hiring and firing practices and ease of hiring foreign labour. Cultural resources can be improved by increasing the number of world heritage sites and hosting more international fairs and exhibitions.
The insight is simply this: Sri Lanka has doubled its tourist arrivals since 2010, and credit goes to “ending the war” and “building the rooms”; and emphasis on “promotional campaigns”. But these factors have diminishing marginal returns. If Sri Lanka is to double its tourist arrivals again by 2016, as planned, it will need to adopt some new strategies – a good place to start is with the opportunities identified here by analysing Sri Lanka’s place in the Tourism Competitiveness Index. If the success is to be sustained a strategic shift is required. Now.
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(Verité Research provides strategic analysis and advice to governments and the private sector in Asia. Comments welcome, email [email protected])