Sri Lanka hotels association defends minimum room rate policy

ECONOMYNEXT – Sri Lanka’s hotels association believes a minimum room rate policy for star-class Colombo city hotels helped attract more investments and needs to be continued for several more months to prevent a rate war.

At the time the government imposed the minimum rate city hotels had lost confidence and were not making money, Hiran Cooray, president of the Tourist Hotels Association of Sri Lanka, told a tourism forum in Colombo.

"When the government imposed the minimum rate policy, suddenly hotels started making money and they did invest money," said Cooray who is also Chairman of Jetwing Hotels.

City hotel standards improved and some properties like the Kingbury were “completely transformed,” he said. “And they are making money.”

The hotels association believes the minimum room rate policy should be kept for at least another 18 months, Cooray told the Tourism, Hotel Investment & Networking Conference (THINC) organised by HVS, a hospitality consulting firm.

"If not, rates will come crashing down, profitability will go down, there will be a rate war, which we don’t want."

Sanjeev Gardiner, Chairman of the Gardiner Group, which owns the Galle Face Hotel, said minimum rates were considered during the ethnic war when violence deterred investments.

"Bombs were going off, people were not investing," he told the forum. "At that time electricity costs, labour costs, food and beverage costs were rising," he said. "So the minimum rate was something almost mandated to happen – because if it did not, one would not know where it would go."

Analysts say after the war, the floor rates probably helped drive investments into a host of new good quality non-star properties by making it easier for them to compete against 5-star hotels, and win business if they wanted to.

Therefore a lot of new capacity after the war came from outside the established star class hotels who could free ride just below the floor rate or flexibly go lower and draw new visitors to Sri Lanka helping them fill capacity.

Analysts say larger hotels also have banquet and restaurant revenues to supplement lower occupancy that comes from government mandated floor rates.

A top official of John Keells Holdings said minimum rates were unhealthy and should go. "If not, it will create distortions in the economy, it opens up areas for abuse, for manipulation and most importantly it misallocates resources,” he told the conference.

Gunewardene said the imposition of a minimum rate and not allowing demand and supply and price competition to work had led to the proliferation of informal establishments not governed by the floor price.

"Today the informal sector in Colombo city outnumbers the so-called formal sector," he said. A viewpoint being propagated that the minimum room rate structure had attracted large investments in to the hotels sector was misinformation, Gunewardene said.