Advocata urges govt. to rethink minimum room rates policy

• Says MRR contradicts principles of competitive market economy and the govt.’s stated policy framework, potentially undermining competition
• Argues that MRR could harm tourism sector’s growth, burden hoteliers already dealing with pandemic challenges, and reduce competitiveness in the regional tourism market
• Says Uniform MRR neglects the diverse range of accommodations in Colombo, including guest houses and Airbnbs, undermining consumer choice

Colombo-based independent policy think tank Advocata Institute has expressed concerns over the recent proposal by Sri Lankan authorities to impose minimum room rates (MRR) on hotels in the city of Colombo.  
Advocata said the MRR undermines competition and oversteps in a serious way the role of government in a competitive market economy, the stated policy framework of the government. 
MRR, which is set to take effect from October 1, 2023, stipulates rates of US$ 130 for 5-star hotels, US$ 100 for 4-star hotels, and US$ 80 for 3-star hotels. 

“While authorities argue that this measure aims to counter underpricing by higher-tier hotels, this policy threatens to undermine the growth and vitality of the tourism sector. 
It places an unnecessary burden on hoteliers already grappling with the challenges posed by the global pandemic and subsequent economic crisis. Further, it undermines the country’s competitiveness in the regional tourism market,” Advocata said in a statement. 

“Pricing acts as a reflection of the quality of services offered by hotels and serves as a differentiating factor. If prices fail to accurately represent the services provided, customer dissatisfaction can ensue, especially when compared to more competitively priced options in neighbouring countries such as Thailand and Vietnam,” it added.
Sri Lanka has previously attempted to implement price controls between 2009 and 2019, following lobbying by a segment of hoteliers aiming to compete more effectively against 5-star rated hotels. 

However, this policy failed due to numerous violations resulting from inadequate monitoring and enforcement by the authorities. 
“The imposition of minimum room rates restricts hotel owners’ flexibility in setting prices in accordance with market demand and effectively stifles healthy competition among various establishments. 
The tourism industry experiences fluctuations in demand that correspond to seasonal and weekly trends.

Such demand patterns necessitate the ability for hotels to tailor their pricing strategies to capitalise on peaks and optimise profitability.
Every hotel has its unique room pricing considerations depending on factors such as location, size of the hotel, market demographics, level of competition, and type of service offered to name a few. The uniform imposition of minimum rates disregards the diverse range of hotels and accommodations available in Sri Lanka, catering to various budgets and preferences. 
This one-size-fits-all approach disregards the crucial factor of consumer choice. Imposing minimum room rates on a certain type of accommodation whilst disregarding alternate forms of accommodation available within the city of Colombo such as guest houses and Airbnbs, undermines the effectiveness of this policy,” the statement noted.

Advocata also emphasised that hotels derive income not only from room occupancy but also from various auxiliary revenue streams, including food and beverage services and other hotel-related offerings. 
To illustrate this, a prominent Colombo-based hotel achieved 77 percent of its revenue from food and beverages in 2022, significantly outweighing the 19 percent generated from accommodation services. 

“Therefore, when the government intervenes in one component of a hotel’s business model, it disrupts the interconnected methods of revenue generation,” Advocata stressed. 
“Further, the foundation for these minimum rates—star classifications—is itself flawed. This system primarily relies on quantitative factors, often overlooking qualitative aspects such as service quality and ambiance. The inability to quantify these vital attributes compromises the accuracy of the classification,” it added.
“The Advocata Institute strongly urges Sri Lankan Authorities to reconsider this ill-advised proposal. By fostering an environment that embraces market competition, Sri Lanka can position itself as an attractive destination for travellers while allowing its hotels to thrive and cater to diverse consumer demands,” the statement concluded.