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Tourism
sector and shareholder value
The tourism industry has the potential to deliver high returns to
investors provided the government makes sure to develop the infrastructure
required to attract high-spending visitors, our columnist argues.
I
have seen significant attention being paid by the government to
many sectors in the recent past through their budget. A sector worth
giving such support is the tourism sector. Sri Lanka does have what
is known as a comparative advantage in this sector and if managed
well the sector could develop well with very high level of earnings
thereby generating the highest possible wealth for the shareholders
while contributing to the growth of the national economy.
There
are several companies which are related to the leisure and hospitality
sector which are listed in the Colombo Stock Exchange. JKH, Aitken
Spence and LightHouse are some of them. It would be interesting
to see how shareholders can extract more value from their investments
in this sector.
Natural
advantage
Sri Lanka is one of the most beautiful and diverse countries in
the world and therefore is an attractive location for inbound tourism.
Being one of the most attractive locations is not adequate in terms
of shareholder value because there is also a need to consider other
factors such as:
*
Business risk
* Financial risk
* The human element
* The image being created for the country
Business
risk
Every industry has a risk of its earnings fluctuating due to certain
environmental factors. This is known as business risk. As far as
the tourism sector is concerned the fluctuations are of many types
and they can be because of:
1.Climatic conditions
2.Civil unrest in the country
3.International events
4.Economic downturn in developed nations
When these factors change adversely tourist arrivals can drop thereby
affecting the earning potential.
Financial
risk
This is an outcome of how a business has been funded. Financial
risk will be higher if a business has been primarily funded through
what is known as debt (loan) capital when compared to equity (share)
capital. This is because with debt capital there is a compulsory
need to pay interest as well as to repay capital and in times of
cash flow difficulties this may not be easy.
Since tourism projects are capital intensive they could therefore
be heavily funded through debt capital and in that case experience
heavy financial risk.
Human
element
The garment industry in Sri Lanka became a success because there
was a vast pool of female labour and the labour was well trained
by many firms.
Tourism sector too needs such forms of skills development. Institutions
such as The Organisation for Tourism and Hospitality Management
(OTHM) provide educational programmes at different levels for those
individuals wishing to enter into managerial capacity into the tourism
industry. There is also a need to provide skill development in languages.
The
image
For far too long Sri Lanka has been living with the image that it
is a cheap destination for those seeking sun and sand holidays.
There is a need to move away from this and to create a perception
that Sri Lanka offers high value holidays which could also attract
high net worth clientele. There is a need to consider various types
of holidays such as ecotourism, adventures holidays as well as shopping
holidays. This needs significant developments in infrastructure
such as airport, roads and shopping facilities. There is also a
need to provide dependable law and order around the country and
to avoid all types of civil conflict.
Message to the investor
I have seen significant attention being paid by the government to
many sectors in the recent past through their budget.
A sector worth giving such support is the tourism sector. Sri Lanka
does have what is known as a comparative advantage in this sector
and if managed well the sector could develop well with a very high
level of earnings thereby generating the highest possible wealth
for the shareholders while contributing to the growth of the national
economy.
(The
writer could be reached at - ravim@icbsgroup.com) |
