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UNCLAS SECTION 01 OF 02 COLOMBO 002104 
 
SIPDIS 
 
SIPDIS 
 
DOL/ILAB FOR TINA MCCARTER 
 
DRL/IL FOR LAUREN HOLT 
 
STATE FOR SCA/INS 
 
MCC FOR S GROFF, D NASSIRY AND E BURKE 
 
GENEVA PASS USTR 
 
 
E.O 12958: N/A 
TAGS: ECON ELAB ETRD PHUM SOCI CE
SUBJECT:  SRI LANKA: TOURISM INDUSTRY DECIMATED BY CONFLICT 
 
 
¶1.   Summary. Sri Lanka's tourism industry has suffered dramatically 
in recent months as incidents of terrorism have increased and 
western countries have ramped up their travel warnings for Sri 
Lanka. Hotel companies are responding to the drop in business by 
implementing severe cost cutting measures, including staff 
reductions.  The Hotel Association of Sri Lanka (THASL) has appealed 
to the Ministry of Tourism for relief, including the release of 
industry funds from the Sri Lankan Treasury and the signing of new 
tourism legislation. Although hotel executives are confident that 
Sri Lanka's tourism industry will bounce back, some of Sri Lanka's 
biggest hotel operators are expanding into India while they wait for 
the Government to put the peace process back on track. End Summary. 
 
¶2. Sri Lanka's tourism industry has suffered dramatically in the 
last several months as incidents of terrorism have increased and 
western countries, including the U.S., have issued tougher travel 
warnings for Sri Lanka. THASL reports that the travel advisories 
have resulted in vast cancellations of confirmed bookings. The hotel 
industry is experiencing a 60 percent drop in occupancy compared to 
last year, and most hotels expect to have only 40 to 50 percent 
occupancy rates over the next few months.  This is a significant 
drop from the 80 to 90 percent occupancy rates normally expected 
during the December through March peak tourist season. Hotel 
operators are worried that they will not earn enough revenue this 
winter to carry them through the typically slower summer season. 
 
¶3. Some members of THASL have described this as the worst crisis to 
face the industry to date, even worse than 9/11, the attack on 
Bandaranaike International Airport in 2001, and the 2004 tsunami. 
This year's Galle and Habarana attacks were particularly damaging 
because they occurred near tourist destinations. Hotel industry 
executives cite France as having the most stringent travel warning 
and note that French tour operators have suspended sales of Sri 
Lankan tours until February 4, 2007.  (Note: A follow-up 
conversation with Deputy Head of Mission Yves Lo Pinto of the French 
Embassy revealed that French tour operators are gun-shy of conflict 
areas due to a Supreme Court ruling where a tour operator was held 
liable for harm done to tourists by terrorists in the Philippines. 
End Note.) Industry executives point out that travel advisories are 
currently the strongest ever issued, even though Sri Lanka has 
experienced worse periods of violence in the past.  They speculate 
that the stringent advisories are meant to send a political message 
to the Government of Sri Lanka (GSL) to find a resolution to the 
conflict.  However, they doubt the government is listening and note 
that the tourism industry, not the government, is suffering. 
 
¶4.  Hotel companies are responding to the drop in business by 
implementing severe cost cutting measures, including staff 
reductions.  Hotel employees that are able to keep their jobs may 
have to accept reduced wages.  Indirect tourism sectors, such as 
taxi companies and gift shops, are also finding their business 
drastically reduced. Some small hotels in tsunami affected areas are 
unable to service the loans they took to rebuild their properties. 
Hotel operators want to conduct an immediate marketing campaign 
including advertising and special packages in the United Kingdom, 
which has one of the least cautionary travel advisories, to try to 
salvage some winter season business.  THASL has appealed to the 
Ministry of Tourism for some form of relief, arguing that this is a 
national level crisis. 
 
¶5. One major complaint of the tourism sector is the state of the 
Tourism Cess Fund, a fund which receives tax proceeds from the 
industry.  All companies registered with the government-run Sri 
Lanka Tourist Board (SLTB) contribute 1 percent of earnings to the 
SLTB, which also collects a USD 5 surcharge built into airline 
tickets.  These two funds are intended to be used to promote the 
tourism industry.  Unfortunately, the SLTB is accused of spending 
the money inappropriately, and the Sri Lankan Treasury has frozen 
the contributions from the ticket sales.  The industry itself has no 
access to the frozen funds, and little or no input on how their 1 
percent contributions are spent by the SLTB.  Industry executives 
 
COLOMBO 00002104  002 OF 002 
 
 
would like to use that money now to help fund the UK marketing 
campaign. 
 
¶6. Hotel operators also would like to see the Tourism Act of 
September 2005 implemented.  Under the new law, the SLTB would 
receive only licensing fees and would function simply as a 
regulatory agency.  The cess funds would be managed by a new Tourism 
Promotional Authority, which would be a joint private-public entity. 
Seventy percent of the funds would be used for tourism promotion, 12 
percent for a hotel and tourism school, 14 percent for the 
administration of the Tourism Promotional Authority, and 4 percent 
to attract more conventions to Sri Lanka.  The act was passed by 
parliament in 2005, but has never been signed into law by the 
Tourism Minister.  A Vice-President at John Keel's Holdings, Sri 
Lanka's largest hotel operator, told Econoff that the Tourism 
Minister is under pressure from the SLTB not to sign the law because 
it would reduce the SLTB's power. 
 
¶7. Hotel executives told Econoff that the tourism industry has 
always managed to bounce back.  They said it typically takes about 2 
years of peace before they see the tourists returning.  Meanwhile, 
some of Sri Lanka's hotel giants are expanding into India.  Hotel 
executives say this expansion is part of their long term business 
plan, but that they have pushed up the timeline on some projects 
because of the loss of revenue in Sri Lanka. The tourism industry's 
Tourism Master Plan had projected 1 million tourists traveling to 
Sri Lanka annually by 2010.  Hotel executives admit that this is now 
a "pipe dream" but say that if numbers ever return to normal there 
will be room in Sri Lanka for further expansion.  Sri Lanka 
currently has 14,000 hotel rooms and would need many more than that 
to accommodate 1 million annual visitors.  Executives told Econoff 
that the Government's role should be to put the peace process back 
on track, and to help develop infrastructure and aviation to 
facilitate tourism. 
 
¶8.  The continuing growth of tourism from India is compensating for 
some lost revenue.   Mr. Sunjay Sudhir, Economic and Commercial 
Officer of the Indian High Commission in Colombo, attributes this 
growth to an awareness among Indians that parts of Sri Lanka are 
relatively safe, a greater tolerance for violence than other tourist 
groups, higher Indian hotel charges which make Sri Lanka an 
attractive and affordable option, and the prominence of Sri Lanka as 
a destination for Indian conferences and exhibitions.  However, 
Sudhir noted that many Indians prefer to stay in Colombo and shop, 
limiting their impact on the tourism sector to the capital. 
 
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Comment 
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¶9. The tourism sector appears to be focusing its dissatisfaction on 
the travel advisories issued by foreign governments rather than on 
the real root of the problem, the GSL's inability to resolve the 
ongoing conflict.  In the meantime, the tourism giants will continue 
to diversify locally and expand overseas in hopes of staying afloat 
until the industry makes a comeback.  Tourism is Sri Lanka's fourth 
largest foreign exchange earner and has the potential to earn much 
more if political conditions improve. 
 
BLAKE