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Hospitality experts divided over regulating informal sector

22 September 2015 02:30 am - 0     - {{hitsCtrl.values.hits}}

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By Chandeepa Wettasinghe
Mixed signals are coming out of the bureaucratic woodwork over the regulation of the informal accommodation in the hospitality sector.

The Tourism Ministry had initiated a dialogue to bring the informal sector within regulation last month. However, Sri Lanka Tourism Development Authority (SLTDA) Chairman Paddy Withana, who is in charge of tourism infrastructure development, seems to have other thoughts in mind.

“This informal sector is growing and it’s a good thing for the economy of this country,” he replied to Mirror Business over a query of how the SLTDA is assisting the ministry’s effort.

He added that legislation and regulations must be brought in to strengthen the informal sector.

The informal sector is one of the biggest problems in Sri Lanka’s hospitality today, as it does not pay any form of taxes or employee benefits, existing in the economy indirectly through interactions with its suppliers. Those employed in the sector do not benefit from standardized training or job security. The informal sector also does not adhere to set accommodation standards or provide accountability—which could damage the country’s reputation.

Due to lesser costs arising from the lax standards and tax avoidances, it can offer room prices vastly lower than registered establishments. 

It drives business through online bookings. 

According to official figures, online bookings are estimated to take up a 60 percent share in Sri Lanka’s accommodation and 48 percent of room nights are also nabbed by the informal sector.

Further, the construction rate of informal accommodation is vastly outpacing the formal sector, according to industry sources. However, due to being outside regulation, the informal sector will not be able to gain funding for major expansions through formal means. Withana’s logic is that the formal and informal sectors are not economically connected. “The hotels have a lot of standards and investment and they will maintain the formal sector but I think the informal sector should grow,” he added.

In recent years, all apex hospitality organisations have been requesting the government to provide a solution for the informal sector, as it has hurt the profitability of the hospitality industry.

Hotels are waging price wars in an attempt to emulate the low prices—at times against the minimum regulated rate in Colombo—of the informal sector with the intention of drawing in a larger segment of tourists.

Due to cost cutting in these price wars, the formal sector too could end up compromising on quality. However, formalizing the informal sector will be a long process, according to the ministry. In the past, the bureaucracy was concerned over how the informal sector could lodge fundamental rights cases over being forced to formalize, as most properties would have to be demolished and rebuilt due to problems in structures and standards.
 
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