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Converting the informal to the formal

21 August 2015 06:39 am - 0     - {{hitsCtrl.values.hits}}

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A recent newspaper report stated that the Tourism and Sports Ministry is currently formulating a plan to bring the informal accommodation sector under regulation. 
The plan apparently is to address the issue of the large number of unregistered hotels and restaurants operating in Sri Lanka. The report adds that the first meeting was held with officials from the Tourism and Sports Ministry, members of the Local Governments and the Local Government Ministry. 


Strangely, other key stakeholders of the industry, particularly the private sector were not involved in the discussions. The explanation by the Ministry Secretary that the presence of the government representatives “was because it benefits them the most in the long term as these hotels and restaurants don’t pay taxes”, is an unfortunate indictment on how those in government look at the industry-at-large. Clearly, this demonstrates a lack of discernment or long-range perspective in thinking or planning. 



Formalizing the informal simply to get them to pay taxes may be a desirable outcome for policy makers (e.g. it will increase the government’s tax base) but is that an incentive for the informal to pocket out? And, will it create a level playing field? Make no mistake tourism must benefit everyone in the long term and should not be viewed myopically as merely an opportunity to earn more taxes. The approach instead must be holistic in order to move the informal into the legitimate economic and social mainstream. 



One of the root causes of the informal sector is the inability of industry to create sufficient numbers of ‘Quality’ jobs to absorb the labour force. Even in countries and regions with high rates of economic growth, the informal economy exists and will play an economic role. Most new job opportunities are created in the informal economy. One has to recognise that the informal economy acts as a buffer between employment and unemployment.



Who operates in the Informal sector?
Let’s for a moment turn the clock back to the early 1980’s. Even way back then, the size of the informal tourism sector was causing great concern and statistics from a Census of the Unauthorised Establishments in the Informal Tourism Sector, released by the then Ceylon Tourist Board (CTB) of a survey done in 1983, indicated that as many as 18,810 people were employed in the informal sector compared with 22,374 in the formal. For example, The ‘Welcome to Sri Lanka’ booklet (July-Sept 1982) published by the CTB, listed for Kandy: 11 hotels, 11 Guest houses and 34 paying guest accommodations. Yet, everyone in Kandy knew that the number of guest houses operating within the Municipality was as high as 150. Fast forward to today and what have you? 


A report carried in an English daily datelined 1st August 2015, claims that “Sri Lanka has a room capacity of 29,103 from those registered with the Sri Lanka Tourism Development Authority (SLTDA).However on the other hand, it is learnt that the informal sector is estimated to have a room capacity of around 38,000.”  If these statistics are accurate, then it stands to reason that the informal workers in the hospitality industry outnumber their counterparts in the formal sector.



For a long time, it was widely perceived that the informal tourism sector proliferated only in marginalised populations – that it was predominantly the unemployed and people living in deprived areas that undertook informal work. Indeed, although the informal sector continues to be popularly depicted as conducted by ‘marginalised’ people, no longer is it true today. Instead, the vast majority who operate in the informal bandwidth are those already in employment and residing in relatively affluent communities, who have ‘crashed’ the party… and this is one huge party that can land everyone in tourism including the formal sector in big trouble.
 

''In Sri Lanka, been allowed to grow without any restriction, the informal sector is recording alarmingly high growth levels''


Problems caused by ‘informal’ sector
Legitimate businesses will cite several problems they face due to the emergence of the informal sector. These include:
  • The use of cheap labour giving the informal sector an unfair advantage over law-abiding operators.
  • Accommodation units operating informally create pressure on legitimate competitors forcing them to surreptitiously “maneuver around” or even abandon regulatory compliance.
  • This leads to a kind of ‘informalisation’ within the formal sector, where a form of ‘hyper-casualisation’ in the labour force occurs, resulting in an increase in casual employment. Casualisation not only leads to lower wages and benefits, but also increases the intensity of work. It is a process where a dual labour market develops, stratified and mutually isolated: a small core of permanent employees overseeing a large periphery of workers on fixed-term / temporary contracts. 
  • Leads to a decline in services and the erosion of regulatory control over the quality of jobs available in the industry.
  • Allowing the informal sector to grow (It is feared that the informal sector capacity will have higher rate of growth than the formal sector for the next five years), translates to a large proportion of operators in the industry routinely engaging in illegal activity and signals contempt towards the law in general.
Another debilitating problem is the social costs associated with the existence of the informal sector, namely that it is a fraudulent activity that denies the state revenue in terms of payment of income tax, etc. 
Those in the formal sector will also declare that the informal does not contribute towards promoting/marketing the country and yet benefits enormously from the destination marketing spend, while operating below the radar. Arguably, there is injustice - particularly if 48 percent of inbound tourist in 2014, stayed in informal accommodation as per the market report issued by JB Securities (Pvt.) Ltd. 


Characteristics of work in informal sector
Consider the plight of those who work in the informal sector:-
  •     Work places lack adequate work space, safety and health standards.
  •     Workers typically earn low, unstable or irregular income.
  •     Encounter long working hours.
  •     Posses low level of skills and productivity due to been deprived of any proper training.
  •     Are not recognized, registered, regulated or protected under labour legislation and social protection.
  •     Informal businesses can also lack the potential for growth, trapping employees in menial jobs indefinitely.
  •     Denied access to credit, capitol or financial assistance.
Overall, workers in the informal economy are generally characterized by poverty leading to being helpless, ineffectual, excluded and unprotected. 
 

''One of the root causes of the informal sector is the inability of industry to create sufficient numbers of ‘Quality’ jobs to absorb the labour force''



Persuading the informal to become formal
For starters, one must accept the fact that the informal sector remains a persistent and sometimes growing problem. In Sri Lanka, been allowed to grow without any restriction, the informal sector is recording alarmingly high growth levels. Undeniably, businesspersons who operate in the informal sector primarily do so to circumvent costly and exigent government regulations as well as to avoid paying taxes. The key to moving informal ventures into the formal mainstream will be to create an environment in which the benefits of formalizing outweigh the costs of remaining informal; in other words, create   incentives for those operating informally to see the value of becoming formal.  

Key areas where formalisation can be promoted include:  adherence to basic employment policies, introduce formal education and vocational training systems, occupational safety and health practices, social protection, improvements in the accessibility of micro-finance, and regular dialogue and representation. In order to achieve all of this, there has to be a ‘Push’ (deterrent) and ‘Pull’ (enabling) approach that encourages and supports the ‘informal’ to formalise their activity. Unless this is undertaken soon, the ballooning informal sector will cast a dark shadow over the entire hospitality industry in Sri Lanka. 
Of course, there will be protests with those who shout the most enjoying some form of political backing. Imposing minimum rates and similar silo-centric knee-jerk reactions are simply not going to make the problem go away.  Let not the industry be labeled as one that operates on an exploitative low-paid basis under sweatshop conditions…a reputation Sri Lanka tourism can ill-afford to project to the rest of the  world.



(Shafeek Wahab has an extensive background in Hospitality Management spanning over 30 years. He is a customer experience transformist, helping organizations improve business results by changing how they deal with customers. Whilst focusing on corporate education, training, consulting and coaching he is passionate about identifying emerging best practices and helping companies become more customer-centric. He can be contacted on shafeekwahab@in2ition.biz. Website: www.in2ition.biz)
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