Study on Informal Sector Linkages Within the Tourism Value Chain

Study on Informal Sector linkages within the Tourism Value Chain

Table of Contents Executive Summary 2 Policy Recommendations 4 1. Introduction 7 1.1. Brief overview 7 1.2. Objectives of the study 9 1.3. Justification 10 1.4. Outline of the report 10 2. Key issues in the literature 11 2.1. Key Findings 11 3. Context 16 3.1. Size and Characteristics of the Informal sector 16 3.2. Informal Sector Contribution to GDP 17 3.3. Policy Framework Supporting Informal Sector 17 4. Methodology and Data 22 4.1. Methodology 22 5. Characteristics and Nature of the Informal Sector 25 5.1. Key Findings 25 6. Tourism Value Chain Analysis 30 6.1. Ampara District 30 6.2. Batticaloa District 35 6.3. Polonnaruwa District 39 6.4. Trincomalee District 45 7. Policy Orientated Recommendations 46

Reference 59 Annex 1: Methodology for Estimating the Informal Sector Contribution to GDP 61 Annex 2: Changes in Economic and Tourism Industry Policy Framework 63 Annex 3: Characteristics and Nature of the Informal Sector – Tables 66 Annex 4: Value Chain Analysis Tables 71 Annex 5: Supply Chain Analysis Figures 75 Annex 6: Case Study Profile Tables 87 Annex 7: Summary of Case Study Findings 91

Executive Summary The Tourism Industry has been identified as one of the key drivers of growth and development in Sri Lanka by the successive governments. The Tourism Strategic Plan 2017 was formulated to transform the sector and support move towards achieving sustainable development goals. In contrast to more advanced countries, the Tourism Industry in Sri-Lanka is largely driven by the informal sector in Sri Lanka. Despite the significant of the informal sector, the government policy framework pays limited attention on how to improve the livelihood of people engaging in informal economic activities in the sector. Indeed, the government formulated a policy framework, Tourism Strategic Plan 2017, for transforming tourism in to a sustainable industry, but limited attention to informal economic activities in tourism despite emphasizing the need for inclusive growth and development. This situation may have occurred due to a lack of comprehensive understanding on the sector and related value chain.

This study aims at filling the knowledge gap identified above and to; (a) understand the current policy environment for the informal employment, (b) map out the characteristics of those engaged in informal activities, (c) explain reasons why people continue to operate in the informal sector, (d) examine how women and those people with disabilities in the informal sector connect with tourism value chain, and (e) estimate the size of the informal sector contribution to gross value addition. Through addressing these issues it is possible to make policy orientated recommendations for implementation.

In order to collect the data and understand the situation a mixture of methods were used, including, a combination of quantitative and qualitative approaches. A literature survey is confined to developing countries helped us understand key issues that should be investigated. A detailed descriptive analysis was conducted to map the characteristics of informal sector employment in the important sub-sectors of the Tourism Industry. The main data source for this analysis was the Labour Force Survey (LFS), conducted by the Department of Census and Statistics (DCS) of Sri Lanka. A case study approach was employed to investigate informal activities around the Tourism Industry, with special reference to women and people with disabilities.. Finally, an indirect method was used to estimate the contribution that the informal Tourism Industry to gross domestic value for tourism in Sri Lanka and in the Eastern Province.

There are a number of boundaries and assumptions underpinning this study. The study is conducted in four selected districts, namely Ampara, Batticaloa, Trincomalee (Eastern Province) and Polonnaruwa districts. When the study was initially designed it was assumed that it would investigate the different sub-sectors contained in the tourism and hospitality sector. However, once the secondary data analysis had taken place it was clear that the vast majority of those engaged in informal activities were located in the food and beverage sub-sectors and to a lesser extent transportation. Given this situation any attempt to improve earning and employment opportunities must focus upon these sub-sectors. Therefore, in order to reflect realities on the ground this study focused upon the former sub-sectors and where possible made reference to other sub-sectors in the tourism and hospitality value chain. Using this approach, the key findings can be summarized as follows:

• According to our research in the Eastern Province, the Tourism Industry accounts for 15 per cent of the provincial GDP, while the Tourism Industry accounts for 11.4 per cent of the nation’s GDP in 2016.At the same-time informal sector account for 1.1 percent of tourism activities of the total provincial gross domestic product (GDP) in the Eastern Province, and 0.9 per cent at the national level. These figures imply that the informal sector plays relatively a larger role in the Tourism Industry in Eastern Province, compared to the rest of the country. • The food and beverage sub-sector, and the transport sub-sectorare dominated by relatively older female, and young or middle-aged male workers. Also, women involvement in the informal tourism activities is relatively higher in Ampara than in other districts. • Firm size in the informal sector is very small, consisting of one or two persons and reason include: structural weaknesses such as unwillingness to expand or lack of business confidence, severe competition, and seasonal fluctuation in sales. • Understandably, the levels of education and training remained relatively low among persons engaged in the informal activities for these sectors, including soft and technical skills.Those who obtained some training, have received lower level of training, i.e. certificate level training. • A clear demarcationexistsin the Tourism Industry where limited linkages exists between large and informal small operators. • In contrast small & medium businesses in the Tourism Industry connect largely with the local economy/community for theirlabour services and inputs. • The tourism value chains has failed to connect with the local economy in the selected districts. The only exception to this statement is in Ampara where the community benefits from linkages. .. • The limited linkages between locals and Tourism Industry is due to number of reasons; ranging from local skill levels, domination of value chains by larger players, limited capacity of small & medium businesses,unfavourable state policies, , poor quality, lack of market information, limited product market, as well as cultural concerns. Most of the former are more pronounced in small businesses run by women. • There is also a general unwillingness to hire female workers due to barriers such as working hour restriction, limited areas of placement, security issues, and attitudes towards working women at tourist hotels. • The research showed that women-run businesses have positive attitude towards employing female workers as against the male-run businesses. It is possible that female workers prefer working at women-run businesses due to security and cultural concerns • People with disabilities receive very limited opportunities to engage in economic activities in the Tourism Industry. In particular, little support is provided to people with disabilities even ex-combatants.

• Foreign language ability is extremely poor at small businesses in the food and beverage sub-sector. This has become one of the major stumbling blocks for both small and medium businesses reaching out to foreign tourists. • Tourism Industry has enormous potential in uplifting the livelihood of people living in the four selected districts. However, the present state of affairs may not automatically generate such wide-spread benefits due to factors just highlighted above..

In the light of above findings, it is imperative to implement a comprehensive policy package in uplifting the livelihoods of people engage in informal economic activities around the Tourism Industry. This study identified a set of policy interventions for consideration by government, as well as the Skills for Inclusive Growth program, and these can be summarized as follows:

Policy Recommendations Policy Interventions for the Government The Government of Sri Lanka formulated a Tourism Strategic Plan (TSP) 2017 with a broader objective of transforming the industry in achieving Sustainable Development Goals (SDGs). Some of the recommendations made below may reiterate some of the already identified areas while others are new and equally important in achieving government’s ultimate objective of achieving SDGs, particularly around inclusivity and the informal sector: Public Invest in tourism site and product development -A number of owners/managers highlighted the fact that one of the key issues faced by the industry in the Eastern Province (including Polonnaruwa district) is the fewer tourist attractions (tourist sites) and/or fewer number of tourism products. It is required that central and provincial governments allocate sufficient resources for developing tourist sites and products. Developing a regional talent pipeline in collaboration with the private sector operators-One of the key concerns of the industry is that current public funded human resources development programmes do not meet the industry requirements. Policy makers must come up with a comprehensive human resources development plan and implement it with a close industry collaboration. Maintaining law & order and ethnic harmony -One of the key responsibilities of the state is to maintain law and order in a country. Recent incidents in the country, including in Ampara district, could have a negative effect on the Tourism Industry. Consensus building is not an easy task since wounds created during the war have not meaningfully been recovered. Request BIO registered businesses to comply with the initial agreement on sourcing local labour from the region.It was revealed during the survey that BOI registered hotels and restaurants agreed to recruit at least 40 per cent of the total employees from the region. None of the hotels/restaurants interviewed have met this requirement so far. This situation must be reversed

Enforce agreed regulations on environment, health, and safety - A number of hoteliers, of all sizes, pointed out how the industry suffers due to violations of standards environment, health, and safety rules and regulations. Some managers of the medium and large hotels/restaurants highlighted the poor health and safety standards maintained by small scale providers. Hence, central and provincial government need to educate small & medium size businesses and make sure they follow basic health and safety standards. Consensus building among operators in the Tourism Industry - Central and provincial governments need to explore possibilities for building meaningful relationship among industry stakeholders for enhancing and sharing value addition in the industry. Different stakeholders have their own strengths and weaknesses and what is needed is to form a collision for industry’s future growth and sustainability. Recommendation for the S4IG program

This section highlights some of the intervention strategies to achieve the broader objectives of the Skills for Inclusive Growth (S4IG) program and how they can support a more inclusive pattern of growth: . Promote social enterprises - As discussed above, medium and large operators in the industry face few constraints when sourcing inputs locally. Most of the above issues could be avoided by forming social enterprises where the social entrepreneur connects with small producers in supplying raw materials and collecting final outputs. This approach could be strengthened and extended for fishermen and meat producers, as well. Promote non-profit organizations -Formation of non-profit organization – with the support of proincial government and Sri Lanka Tourist Development Authority – could be useful way to support small and medium operators, mostly informal operators, in the industry through provision of advertising, marketing, and finances. Non-profit organizations could effectively fill this gap by providing necessary services at a reasonably low price. Piloting consensus building initiatives – Multi-stakeholder platform - creating a multi-stakeholder platform is a pre-requisite for developing and strengthening back-ward linkages useful for creating opportunities for workers engage in the informal sector. Informal operators could enhance the quality of their products and services while formal sector businesses could make use of products and services as inputs and/or facilitate the sales of their final products and services to tourists. Support for product innovation & development - Small and medium size operators tend to offer homogeneous products and services due to lack of product innovation and development. Informal sector operators should be educated on potential products and services that could be offered to tourists and extend support for developing such products and services. Support for a ICT based solution for improving value chain - Information gap among stakeholders is a severe issue in the Tourism Industry in four districts. This information gap could effectively

be address by introducing a mobile app (possible name might be ‘bee’ from the full term, ‘Buy East, be East)1. This is one of the potential market-based solutions for the industry. It is important to examine whether such ICT based solution is acceptable to all stakeholders. Groups formation and strengthening (capacity building) - A small operator is vulnerable on several grounds when act alone due to number of reasons. Therefore, small operators should be encouraged to form groups and draw up some basic principles – related to price, quality, and other things – for operations. For instance, in Arugam Bay, Ampara district, tuk-tuk operators have formed their association and prepared a set of operational guidelines. Other groups of operators in the same sector should follow a similar approach. Financial support for building capital stock: matching grants or soft loans- one of the key issues faced by medium and small businesses in the Tourism Industry is the lack of finance, in particular, working capital. This state of affairs largely restricts opportunities for small operators to cater to the tourists. In this context, it is important to introduce a soft loan or matching grant scheme so that small operators could buy essential capital goods. Conduct awareness programmes on benefits of maintaining conducive environment - As discussed earlier, the industry is under threat due to environmental pollution and various social misdeeds. Some of these are due to lack of public awareness the others are due to lapses in law and order. A comprehensive programmes in educating public on the importance of protecting environment and social order. Provide training on selected areas such as entrepreneurship, marketing, and management–A large number of existing managers/owners of small and medium size businesses have not received any formal training on entrepreneurship and marketing. Most of them have either received some experiences as employees and/or inherit businesses from their parents. Promote women entrepreneurship for selected areas - There are a number of areas for promoting women entrepreneurship training, particularly for beauty parlor, local food centers, local cultural and dancing performance centers, teaching local languages and local clothing centers. The Department of Agriculture provide training on preparing food using local ingredients and centers opened in some part of the country are operating very successfully. It is possible to start up such centers closer to tourist sites and provide opportunities for women to engage in such businesses. Business couching centers – These centers could take few innovative steps for promoting entrepreneurship potential business starters. These include: providing one-to-one meeting with experts (accounts, lawyers, marketing managers, financiers etc.), funding for individual and group entrepreneurship, making available various resources useful for business start-up, and on-line and off-line courses to educate potential entrepreneurs on fundamentals in entrepreneurship.

1 Bee is always busy in collecting small quantities and producing a quality final product. This mobile app could also facilitate connecting small quantities and producing quality final products and services.

1. Introduction The tourism has been identified as one of the key drivers of growth and development in Sri Lanka by the successive governments (Mahinda Chinthanaya, 2005; Mahinada Chinathanaya Forward Vision, 2010; Powerful Sri Lanka, 2016; Tourism Strategic Plan, 2017). This position has vigorously been re-emphasized during the post-war in which Sri Lanka witnessed a notable surge in tourist arrivals as well as significant increase in private investment in the Tourism Industry. During the post-2000, Sri Lanka has introduced several policy initiatives. Notable among them are the Tourism Mater Plan of 2008, Tourism Development Strategy of 2011, and Tourism Strategic Plan of 2017. The Tourism Strategic Plan (TSP) of 2017 emphasizes the need for harnessing the untapped potential of the Tourism Industry aiming at attaining sustainable development goals. In particular, it targets to achieve three Sustainable development Goals, namely (SDG) 8: Promote sustained, inclusive, and sustainable economic growth; full and productive employment; and decent work for all, SDG 12: Sustainable consumption and production patterns, and SDG 14: Conserve and use the oceans, seas, and marine resources for sustainable development. By analyzing the current status quo, the TSP identifies a number of failures in the industry2. It proposes six transformation themes and key activities under each one of them. One of such transformation themes is to engage the workforce and communities in developing the industry. In particular, it emphasizes the need for creating employment opportunities for women.

Regardless of these developments, Tourism Industry is largely driven by the informal sector in Sri Lanka. According to industry experts, published in recent electronic media, 50 per cent of business relating to tourism is done by informal operators (Wahab, 2015)3. Informal sector connects to tourism value chain through two broad channels; (a) providing final products and services to tourists (such as food & beverage; accommodation; services (tour guides, Spa, cultural shows etc.), products (crafts, gift items, paints, decorated furniture) and (b) supplying intermediate goods and raw materials (i.e. vegetable, fruits, fish, meat, etc.) and services (transport, laundry etc.) to both formal and informal businesses catering to tourists.

2 These include; coordination failures, institution failures, resource failures, and market failures. 3It ranges from hotel booking, transportation, accommodation and food and beverage, meeting day-to-day needs, and provision of various services.

Nonetheless, the TSP pays limited attention in improving the economy of the informal sector. Moreover, the TSP adopts a narrower definition for the informal sector. Accordingly, businesses not registered with the Sri Lanka Tourism Board are classified as informal. On that ground, it proposes few strategies to encourage currently unregistered businesses to register with the Tourism Development Board. This narrow definition fails to capture a range of informal economic activities around the Tourism Industry. Moreover, it fails to pay sufficient attention on improving the lower segment of the tourism value chain though it targets to improve the quality of final products and services. Improving the quality of inputs is an essential component for enhancing the quality of final products and services.

In the development literature, labour market informality is often viewed as inferior due to a number of reasons such as limited space for business growth, lower prices for products services offered by informal sector, and poor product quality. Moreover, as discussed above, public policy interventions often pay less attention on informal sector activities; i.e. public policy is biased towards the formal sector. As a result, informal sector accounts for a tiny share in the tourism value chain though it is widespread and provides livelihood opportunities for many in a given locality. As in most other developing countries, informal sector is relatively bigger and wide- spread in Sri Lanka (LFS, 2016). For instance, informal employment accounts for nearly 50 per cent of the total employed persons in the non-agriculture sector in 2016 (LFS, 2016)4. Reflecting the poor economic structure inherited due to the 30-year long civil war, informal employment remains relatively higher in the former war zones, namely in the Northern and the Eastern Provinces, compared to the national averages. For instance, 60 per cent of the total non- agriculture employment is informal in the Eastern Province. If agriculture sector is also considered, informal employment in the Eastern Province may reach over 85 per cent of the total employment in the province. Hence, addressing constraints in the informal sector is a pre- requisite under any initiative for uplifting the livelihoods of masses involving in informal economic activities. This is highly commendable in the context of the Eastern Province. Before

4 When accounted for the agriculture sector, informal employment accounted for 60 per cent of the total employment in the economy in 2016.

the war erupted in early 1980s, Tourism Industry in the Eastern Province had been well developed (TSP, 2017). Most of the infrastructures and businesses were badly affected due to the war and the industry was almost collapsed in many parts of the province. The end of the war in 2009 opened up new hopes for the industry participants as well as new entrants.

Many of such newly opened up businesses currently operate in the informal sector due to number of reasons. Understanding why businesses continue to operate informally is of paramount importance for enhancing the livelihood of poor communities connected to Tourism Industry in the province. In other words, pro-poor tourism development requires policy makers to pay attention to improving informal sector participation in the tourism value chain. A comprehensive understanding on how informal sector activities are organized around the tourism sector value chain is paramount pre-requisite for designing intervention strategies for improving the livelihoods of workers engage in informal activities connected to Tourism Industry.

1.1 Objectives of the study

The objective of this study is to investigate how informal sector activities are organized around the tourism sector with special reference to food & beverage sector in four selected districts, namely Ampara, Batticaloa, Trincomalee (Eastern Province), and Polonnaruwa. In addition, sub- sectors such as accommodation, craft, tour guides, and transportation also will be examined. A particular attention is paid to understand how females and persons with disabilities engage in the informal sector catering to the tourism sector. Specifically following objectives are expected to achieve; • Document the current policy environment for the informal sector and those engaged in informal employment, drawing on existing research/studies. • Map out the characteristics and numbers engaged in informal sector activities and informal employment in the tourism and food-beverage sector in the four districts • Conduct case studies to help explain reasons behind the decision of people to work in the informal sector and to understand what influences a person decision to work in the informal sector.

• Examine how do women and persons with disabilities in the informal sector connect with the tourism value chain • Make policy orientated recommendations for interventions. These should be targeted at how to improve skills and productivity and support the transition to the formal sector. 1.2 Justification In recent decades, development thinkers as well as public policy makers recognize that tourism has enormous potentials in addressing poverty and unemployment (Nadiv and Cantoni, 2015). The pro-poor tourism recognizes that tourism could benefits local communities through generating a wide range of employment, self-employment and informal sector opportunities. However, a number of constraints have been acknowledged by academics which limit the economic participation of the local community in the tourism sector, especially the poor people. These include; lack of human capital, lack of financial capital including access to credit resources, lack of organisation, location barriers for the people who live far from tourism sites, lack of market power resulting from difficulties on ownership or control over resources, low bargaining power against formal sector operators and, limited capacity to meet tourists’ requirements. Others include unfavourable regulations and red tapes including being excluded from registered and promoted categories of tourism facilities and services resulting to inadequate access to tourist market, exclusion by organised formal sector interests, limited official focus on developing alternative markets -including domestic, regional or independent tourism markets and, government support that is mainly targeted to the formal sector. The Government of Sri Lanka’s Tourism Strategic Plan (TSP) identified a number of areas four key areas for reform: (a) coordination failures, (b) institutional failures, (c) resource failures, and (d) market failures. However, the TSP is highly biased towards supporting formal businesses in the industry. The TSP emphasizes achieving sustainable development goals is one of its key priorities, however, it fails to pay sufficient attention on uplifting workers engaged in informal economic activities around the Tourism Industry5. Limited focus on the informal sector may be either due to limited understanding of the sector and/or limited representations made by the informal sector stakeholders during the policy formulation process. This study attempts to achieve above objectives aiming at improving livelihoods of people who engage in informal economic activities around the tourism value chain. 1.3 Outline of the report This report is structured as follows. Section two presents a critical review on informal sector participation in the tourism value chain, paying special attention to the food and beverage sector while section three summarizes some of the best practices adopted in developing countries in

5The TSP focuses on the informal sector largely confines to the area business registration and improving the quality of goods and services offered. In addition, it proposes some measures to address land ownership related issues in the sector whenever it matters with respect to registration.

forming linkages between formal and informal sector. Section three discusses the government policy framework for supporting the Tourism Industry and informal sector. Moreover, this section spells out some of the interventions in the tourism industry. Section four briefly discusses the methodology and data analyses undertaken. Section four reports secondary data on the nature and magnitude of the informal sector around the Tourism Industry while section six presents key findings from the cases studies conducted in selected districts. Section seven makes some recommendations. Most of the compiled data are presented in annexes. 2. Key issues in the literature This section briefly summarizes the key findings of the literature related to informal sector with special reference to informal economic activities around the Tourism Industry. In particular, it is expected to present theories and approaches of informal sector as well as some of the international best practices adopted in linking the informal sector with the main stream. Key findings are summarized below while detailed account on the topics are presented in annex 7. 2.1 Key Findings Approaches for understanding the informal sector A number of approaches have been developed to explain the presence of the informal sector. The dualist school views informal sector as an inferior segment of a dual labor market with no direct links between formal and informal sectors and for the structuralist school it consists of small firms and unregistered workers subordinated to large capitalist firms. In contrast, the legalist school characterizes informal sector as an economic segment consisting of micro- entrepreneurs preferring to operate informally to avoid the costs associated with registration, taxes, and related business and labor regulations. The voluntaristic framework assumes that those in the informal sector make a deliberate choice to stay in the informal sector to avoid tax and regulations.

In recent years, based on the idea of multi-segmented labor markets, there emerged an integrated approach to conceptualize informal employment (Fields, 2005)). This new approach encompasses the different approaches mentioned above. Accordingly, the lower-segment is dominated by households engaging in survival activities with few links to formal economy, as the dualists suggest; the upper segment with micro-entrepreneurs who choose to avoid taxes and regulations, as the legalists and voluntaristic framework suggest; and the intermediate segment with micro-firms and workers subordinated to larger firms, along the lines suggested by the structuralists.

For operational and measurement purposes, the enterprise-based definition of informal employment, adopted in 15th of International Conference of Labour Statisticians (ICLS), combined with a broader, job-based concept of informal employment, adopted at the 17th ICLS. According to current definition - for measuring purposes - informal employment includes: (i) employments in informal enterprises (small-unregistered or unincorporated) and (ii) informal employments outside the informal sector, mainly in the formal sector. This informs the research undertaken for the current study.

Key characteristics of informal activities There certain characteristics associated with informal activities, some of which are positive and others negative. Key characteristics include: (a) an activity the informal sector, activities may be either legal or illegal; (b) informal businesses prefer to exchange goods/services to a ‘immediate’ party and for ‘immediate cash’ to avoid transaction related records as well as due to lack of working capital; (c) working conditions under which workers are mostly employed are relatively poorer than that of the formal sector; and (d) finally, the informal sector is often viewed as an inferior alternative to formal sector employment.

Positive benefits associated with the informal sector include (a) being paid in cash without taxes, (b) flexibility, (c) controlling one’s income and working environment, (d) exercising creativity and self-expression, (e) building occupational skills. Negatives associated with informal employment are overwhelmingly larger and include (a) lack of employment benefits (social security, paid leave, health benefits, etc.; (b) the lack of economic security, (c) reduced opportunity to access to credit, (d) dealing with dishonest employers, and (d) the risks/penalties of not reporting income.

Why people engage in the informal sector? People engage in informal economic activities for a variety of reasons. For some, it is a necessity, i.e. their last resort, or their best option: a better alternative than low-wage formal employment. As mentioned previously, others involve in informal work as a choice, for personal fulfillment, social connection, or to supplement primary income (Schneider, 2011). In some cases, businesses start by being informal and with business success they gradually join the formal sector.

Informal sector and Tourism Industry The informal sector is defined as “all those individuals and businesses that engage with tourists and the Tourism Industry but are not members of any formal association or trade organization”6 In Sri Lanka, those businesses and individuals who have not registered with Sri Lanka Tourist Board fall into the category of informal sector. In the broader sense, informal sector around the Tourism Industry may include; unlicensed guides, unregistered restaurants or road-side vendors who does not pay taxes, street sellers, craft markets, taxi drivers, tour operators, lodging service providers who have not registered legally to offer the services are part of the informal sector.

The Tourism Industry creates direct, indirect and induced employment opportunities. Direct employment in Tourism Industry refers to jobs created by companies such as tourist accommodation, travel agencies, tour operators, transport companies, restaurants and others that provide goods and services to tourists and earn income from them. Indirect employment refers to jobs offered by firms that are closely related to tourism companies, namely, by firms that supply and produce goods and services for tourists and residents in destinations: stores, construction companies, hotel furniture companies, etc.

6 See Slocum et al., (2011) for a comprehensive review.

In the Tourism Industry, informal economic activities are wide-spread; some of the informal activities directly cater to the demand of the Tourism Industry while the other activities are organized in supplying inputs to both informal and formal businesses in the Tourism Industry. These activities will disappear with modernization and are limited linkages between formal and informal sector in the Tourism Industry. The operators in the two sectors often blame each other on the ground of the quality of the products and services offered. Informal sector operators often blame formal sector operators for preventing customers buying products and services from the informal sector.

Informal sector operators mostly operate at survival level and face several constraints such as lower level of working capital, poor quality of products and services, and lack of market information. There exists a severe competition among informal sector operators as they often tend to offer a set of homogeneous products and services. Finally, informal sector continues to cater a large number of tourists though it claims a smaller share of the value chain.

Meyer (2006) argues that the informal sector can complement the formal economy’s products and services, however, such linkage is rarely established without an intentional effort of government and/or non-government institutions’ intervention. The author highlighted a number of channels, such as outsourcing and procurements, through which formal sector could link with the informal sector businesses. However, the formal sector has always been the dominant party with the power to force informal ventures to leave principal sites. This often limits the informal sector participation in the tourism value chain.

A number of studies have found that informal sector operators have developed strong backward linkages with the community compared to that of the formal sector businesses, especially through sourcing their raw materials locally. Moreover, recent studies have provided evidence that linking labour, products and services of local communities (mostly operating in the informal sector) in developing countries to the tourism sector is vital in providing opportunities for workers engaged in the informal sector7. It is argued that such linkages need be developed by effective government and non-government institutions intervention. Kirsten and Rogerson (2010) suggested that linking informal businesses to larger enterprises by means of outsourcing, subcontracting or other arrangements is paramount important means of improving the livelihood of those engage in the informal economic activities. Thomas and Thomas (2005) developed a framework identifying three different kinds of resources useful for enhancing small tourism businesses to grow over the years. These include knowledge resources (including the ability to recognize, operate within, and perhaps alter and subvert, key frames of reference and hegemonic discourses); relational resources (including establishing relationships of the right kind with the right interests/actors at the right time) and a mobilisation

7 See Adiyia, Vanneste, Van Rompaey, and Ahebwa, (2014); Mitchell and Faal, (2008); Nyaupane and Poudel, (2011) more details.

capacity (or an ability to act collectively) (Bah and Goodwin, 2003). It is argued that multi- stakeholder consensus and cooperation is vital for opening up sustainable income earning and employment opportunities for the informal sector operators. The development of informal-formal linkages can be difficult given the complexity of the tourism system, consisting of multi-sectoral and multi-scalar relationships. In developing countries, empowered stakeholders tend to organize the tourism value chain vertically in which tourists are led in a spatially and socially confined trajectory in the destination (Adiyia et. at., 2015). The authors argue that promoting culture tourism is one of the solutions to build up such local linkages compared to nature and eco-tourism. Policy initiatives for enhancing informal sector participation in Tourism Industry One of the key challenges for policy makers and development practitioners is how to enhance opportunities for informal sector businesses to benefits from the Tourism Industry. Supporting informal businesses certainly enhances the livelihoods of many poor households and improve inclusivity in the development process. Reference to case studies in other countries can provide lessons on how to enhance the participation of the informal businesses and/or connectivity of marginalized groups, such women and certain ethnic groups, to Tourism Industry, including the following: International Best Practice in Linking Informal Sector to Formal Sector • South Africa introduced a Tourism Broad-Based Black Economic Empowerment (B-BBEE) in 2003 so that the opportunities and benefits of the Tourism Industry are extended to black South Africans. This initiative aims to broaden participation in the economy of the country to result in an equitable society through the creation of opportunities for those people who were previously excluded from meaningful economic participation. It seeks to address issues such as the ownership of enterprises, management and control of those enterprises, procurement, enterprise development, skills development, employment equity and socio-economic development. However, a number of recent studies have found this policy significantly failed to deliver the expected outcomes due to corruption and a failure to raise skill levels. • Netherlands Development Organization’s agricultural development and local capacity building project implemented in West Humla, Nepal demonstrates how a carefully crafted intervention can have a significant on a small number of tourist. The project implemented several intervention strategies covering areas such as infrastructure development, capacity building, group strengthening, and local community engagement (Saville, 2001). • The Department for International Development (DFID) launched a pro-poor tourism development initiative in Gambia in early 2000s where it aimed at securing market access of the economically poor informal sector operators around the Tourism Industry. The evidence suggested that a series of multi-stakeholder interventions secured significant livelihood improvements for the guides, fruit sellers, juice pressers, and craft workers, with data on the livelihood benefits (Bah & Goodwin 2003, and Goodwin 2007)

• The Overseas Development Institute (ODI) launched ‘Pro-poor tourism pilots in 2002 to 2005 in, Southern Africa’ to see what could be achieved by working with private sector companies through their supply chains to address poverty reduction. Empirical evidence showed that the project was successful in promoting local linkages thereby having positive effects on poverty reduction. • Ashley et. al., (2005) documented how linkage between tourist hotels/restaurants and local farmers were developed in Republic of Jamaica. The programme intended enhance the quality and quantity of farm products while encouraging hotels to introduce local food and beverage recipes. The project provided effective coordination among chefs and hotel management, farmers, and agricultural extension officers. The project was able to increase the income of both farmers as well as hotel through the project activities.

Literature survey summary and lessons learnt As in other industries, linkage between formal and informal businesses in the Tourism Industry remains very weak. As a result, workers in the informal employment accounts for a tiny share of the total tourism value chain though a sizable share of total employment in the Tourism Industry engage in informal economic activities. Linking informal economic activities around the Tourism Industry with the formal businesses is a pre-requisite condition for improving the livelihood of informal workers. Such connection not only leads social inclusivity but also promote Tourism Industry in a country. As in other industries, market forces often fail to build linkages between the formal and informal sectors thereby requiring a set of effective intervention strategies. Some successful intervention schemes – led by government and non-government organizations - showed that multi-stakeholder consensus, capacity (including skills) building, community engagement, and group strengthening are vital elements for improving the livelihood of people engage in the informal economic activities around the Tourism Industry.

3. Context 3.1 Size of the Informal Sector in Sri Lanka Informal employment account for nearly 60 per cent of the total employed persons in Sri Lanka (LFS, 2016). Reflecting the overall weaknesses of the economic structure, the share of informal employment slightly declined during the last decade8. Compared to females, there is a higher probability that males take up informal employment, party as the last resort. For instance, around 63 per cent of total employed males hold informal employment as against the 54 per cent of total female employed workers9. Around a half of the total employed persons in the non-agriculture sector engages in informal economic activities10. In terms of businesses, there are over 950 thousands non-agriculture businesses operate informally and the trade sector accounts for over 40 per cent of total businesses in the informal sector, and the services sector accounts for 33 per cent. It is interesting to note that 75 per cent of the informal businesses are located in the rural sector, indicating that informality is largely a rural phenomenon in Sri Lanka. More specifically in relation to our sub-sector, around 154 thousands of workers are engaged in the accommodation and food services activities in the informal sector. In terms of value added, Economic Census 2013/14 estimated that 46 per cent of total value addition is generated within trade sector while non-agriculture services sector contributing to 28 per cent of the total informal sector value addition. Out of the 85 thousands informal businesses in the accommodation and food services, closer to 90 per cent of businesses engage in food & beverage services activities in the country.

Contribution of the Informal Sector to GDP Recent estimates suggest that travel and tourism sector account for nearly 11.4 per cent of the Sri Lanka’s annual Gross Domestic Products (GDP) in 2016 (World Travel and Tourism Council, 2017). In terms of employment, Tourism Industry provides 406 thousand direct employments. In addition, the industry creates 291 thousand indirect and 198 thousand induced employment opportunities. Altogether, the industry generates 894 thousand total employment opportunities in the economy. In relative terms, the industry accounts for 10.7 per cent of the total employment in 2016. In summary, 10.7 per cent of total employed people account for 11.4 per cent of GDP. From productivity perspective, the industry does perform well.

Data on informal sector contribution to GDP is not available, however, the Department of Census and Statistics of Sri Lanka recently published data for non-agriculture informal establishments. Nevertheless, in official statistics on industry classification, Tourism Industry is not separately identified as an economic activity. This study made an attempt to estimate the contribution of informal businesses in the Tourism Industry. A detailed account on the methodology is presented in annex 1.

8 The share declined from 63 per cent in 2006 to 60 per cent 2016. 9 In terms of absolute numbers, 4.8 million workers engage in informal employment in Sri Lanka, out of which 3.3 millions are male. 10 In the agriculture sector, 87 per cent of total employed workers are in informal sector. One of the main reasons for this is that agricultural activities in Sri Lanka are mostly small-scale.

According to our estimates, the Tourism Industry accounts for 15 per cent of the Eastern Province’s GDP (see Table 1). This implies that the Tourism Industry makes relatively higher contribution to the economy of the Eastern Province than it does for the whole economy. Interestingly, the informal sector activities around the Tourism Industry in the Eastern Province account for 1.1 per cent of its total provincial GDP. That number is relatively higher than the national average of 0.9 per cent. According to our estimates, informal sector activities around the Tourism Industry accounts for 8 per cent of the total value addition, generated by the industry. It is important to note that 95 per cent of the total persons employed in the Tourism Industry in the Eastern Province are informal workers. It is irony that 95 per cent of total persons engaged account for just 8 per cent to the total value addition of the industry. In other words, labour productivity is significantly lower in the informal sector. Low productivity means low earnings for the participants and low re-investment levels at businesses. It creates a vicious cycle thereby trapping businesses and workers at low equilibrium trap. Hence, policy strategies need to be identified to break this cycle. This may require a set of policy instrument addressing issues in several areas such as physical, social, and human capital deficiencies, information asymmetries, and financial literacy and marketing skills.

Table 1: Informal Tourism Sector Contribution to GDP in Sri Lanka and in Eastern Province Item Sri Lanka Eastern Province Total GDP in 2016 (RsBn ) 9592.00 684.00 Tourism sector value addition 2016 (Rs. Bn) 1405.40 104.00 Tourism sector value addition to GDP 12% 15% Informal non-agriculture activity value addition (Rs. Bn) 703.00 51.00 Informal non-agriculture activity value addition to GDP 7.4% 7.5% Informal activities around the tourism sector contribution to GDP 0.9% 1.1% Source: Author’s estimation based on the data extracted from Central Bank of Sri Lanka - Annual Report 2017 Department of Census and Statistics of Sri Lanka - Non-Agriculture Economic Census 2013/14 Sri Lanka Tourism Development Authority - Annual Statistical Report – 2016 World Travel and Tourism Council - Travel & Tourism - Economic Impact 2017 - Sri Lanka

3.2 Government Policy Framework on Tourism Industry and Informal Sector Since independence, Sri Lanka has adopted a number of policy frameworks in developing the Tourism Industry (see Annex 2 – Table A2-1). In particular, Sri Lanka has given a greater priority for tourism development during the post-war period. The government of Sri Lanka formulated a medium-term policy framework for developing the Tourism Industry in 2017. It aims at transforming the Tourism Industry to make Sri Lanka a competitive in the global travel market

place. To that end, the Tourism strategic plan (TSP) recommends actions and implementation mechanisms for 2017-2020, with a long-term view toward Tourism Vision 2025 and achieving the United Nations (UN) sustainable development goals. The TSP postulates that tourism in Sri Lanka has been a story of untapped potential and it aims at achieving three high-level objectives; namely (a) higher-skill & more jobs, more female employment, (b) more opportunities for investment (both foreign and local), and (c) greater inclusivity and sustainability. At least two of these objectives are highly correlated with the objectives of the Skills for Inclusive Growth (S4IG) Initiatives implemented by the Australian government in the Eastern Province including in Polonnaruwa district. The current policy framework is based on seven guiding principles; namely (a) capture the benefits of tourism for Sri Lanka, (b) democratization of economic participation, (c) conservation and world-class management of assets, (d) local community involvement, (e) memorable experiences rooted in heritage, (f) responsible destination marketing, and (g) safety and security for all. From the perspective of inclusivity, compared to previous policy frameworks, the current policy has identified the importance of community involvement and democratization of economic participation for two broad purposes; namely (a) improving their livelihood by connecting with the tourism value chain, and (b) reducing the tension between the tourists and local people. The framework states that Sri Lanka’s Tourism Industry, in particular the role that the public sector plays, requires a systematic rethinking and reorganizing to address a number of failures, namely (a) coordination failures, (b) institutional failures, (c) market failures, and (d) resource failures. It recommends that a whole government and whole industry approach is needed for addressing above failures. The current policy framework identify a number of initiatives/interventions correct these failures under six broad themes. These include (a) improving governance and regulation, (b) understanding visitors, (c) marketing and communicating effectively, (d) developing sustainable destinations, (e) lifting industry standards, and (f) engaging the workforce and communities. East Coast Sunrise Corridors (4-Year Project) Under the developing sustainable destinations theme, the TSP aims at developing a number of tourist destinations around Sri Lanka. The TSP identifies a number of issues related to the Tourism Industry in the Eastern Province. These include (a) poor access from Colombo, (b) lack of destination planning and development, (c) lack of developed regulatory framework, (d) absence of large anchor investors and investment, (b) absence of a consultative dialogue between private and public sectors, (f) weak capacity in product offering and lack of innovation, (g) lack of service standards. It is expected to promote Eastern Province as one of the leading tourist destination. A number of private sector led (or public-private partnership) projects to develop some physical spaces are proposed by the TSP. Among them following projects are to be launched during the medium term.

➢ Dutch Fort in Batticaloa – A concession for the buildings within the fort to the private sector to develop as a small boutique hotel, restaurants, café, and other tourism services. Family Entertainment, Passikudah – for soft adventure, small restaurants, events, music etc. ➢ Waterside development in Trincomalee – The development of a ‘tourist street’ in Trincomalee town. The street development would attract restaurants, shops, and possibly small accommodation facilities. ➢ Nature Tourism, around Arugam Bay – develop nature tourism by connecting the national parks around the Arugam Bay area.

Policy Framework towards the Informal Sector According to the TSP, informal sector consists of businesses not registered with the Sri Lanka Tourism Development Authority (SLTDA), nevertheless, it emphasizes the need for a broader definition. Mainstreaming (formalization through registering with the Sri Lanka Tourism Development Authority) is the main policy trust towards the informal sector in the TSP. Accordingly, it is expected that mainstreaming the informal sector will facilitate financing, promote innovation, product development and investment, and increase consumer confidence. Under the mainstreaming informal sector, the TSP aims at exploring options of a moratorium on back taxes for business registration. Moreover, it plans to ease restrictions on land ownership requirement for businesses registration. In addition to the TSP, government policy on small and medium enterprises could also influences businesses currently operating in the informal sector. The government of Sri Lanka formulated the Small and Medium Enterprises Development Action Plan (SME-DAP) in 2016 to uplift the small and medium enterprises regardless of the industry they operate. However, this policy framework does not identify the informal sector as a separate sector. Under this policy framework, businesses employing 10 or less employees in the service sector are considered as micro enterprises. In that sense, all most all the informal sector businesses, operating around the Tourism Industry, fall into the category of micro enterprises. The SME-DAP of 2016 identified a number of areas for supporting small and medium enterprises. Among them, (a) finance, (b) access to information and markets (c) linkage formation, and (d) entrepreneurship skills are important policy supports for the business operating in the informal economic activities around the Tourism Industry. Limitation of the current policy framework (Tourism Industry and Informal Sector) Both the TSP and the SME-DAP presume that informal sector may diminish over the time, hence, need no policy interventions. There are a number of limitations/gaps in the existing policy frameworks, First, the TSP is formulated with a bias towards formal sector businesses. This may be either due to lack of understanding and/or limited representations made by the players in the informal sector during the policy formulation. Second, the TSP’s intervention in the informal sector confines to facilitate the process of business registration. Third, it is quite clear that a large

number of informal businesses connect with the tourism value chain and any quality improvement in final goods and services offered by the formal and informal business to tourists could only be improved by enhancing the quality of inputs supplied mostly by informal businesses. The policy pays scant attention on it. Fourth, the TSP identifies the need for enhancing skills in the workforce, however, it does not pay attention on improving skills in ‘currently working population’ in the informal businesses. Fifth, it is not clear how the TSP attempt to improve the inclusivity when it is largely biased towards the formal sector businesses. In that sense, it is highly possible that ‘inclusivity’ largely confines to words rather than outcomes. Sixth, the TSP expects to increase the female share in the total employment in the Tourism Industry. It is not clear as to what extent the policy makers are clear about the social and cultural constraints faced by women in taking up employment opportunities in the Tourism Industry. This is particularly valid in the context of the Eastern Province. Seventh, the TSP proposes some projects in the Eastern Province for creating more opportunities in the Tourism Industry. It is not clear to what extent small players in the industry may receive opportunities in those locations. The past experience is that small players are mostly chased away from the highly attractive tourist places. Eighth, the TSP identifies the coordination failures in the industry. However, it fails to recognize the coordination failures exist with respect to supply chain in the Tourism Industry and the need for a consensus building among formal and informal players in the industry. Ninth, the successive governments have implemented a number of policy frameworks for uplifting the economies of the small and medium size businesses. However, the results show limited success due to factors associated with effective implementation, targeting, and addressing issues relevant to different context. It is important that the policy identifies and address area specific issues pertaining to the small businesses rather than adopting a ‘one fits all’ strategy. Finally, in recent past, the lack of policy continuity and consistency has become one of the major issues in many sectors. None of these policy frameworks contain components/mechanism to guarantee the stakeholders that the policy environment remains stable at least in the foreseeable future. Lack of such mechanism could limit the required support from the stakeholders to execute the identified policy initiatives. Informal sector development initiatives in Sri Lanka

In Sri Lanka, public policy on Micro, Small, and Medium industry does not contain specific strategies for promoting informal sector activities around the Tourism Industry. For instance, Sri Lanka Tourism Strategic Plan 2017-2025 pays little attention to developing and/or integrating informal tourism sector to formal sector. Sri Lanka has implemented a number of initiative for improving informal sector. These included; (a) providing social security to people in the informal sector, (b) policy reforms for improving returns to livelihoods, (b) minimizing variability of incomes, and (c) health insurance schemes, micro finance schemes, and old age protection. During the post war period, a number of initiatives were launch by national and international

organizations in improving small and medium tourism businesses. Some of them are briefly discussed in below.

• GTZ assistance in building institutional capacities in the SME sector in Tourism (2005) The Association of Small and Medium Enterprises in Tourism Sri Lanka, popularly known as ASMET, was founded in 2005 by the Core Group for Alternative Tourism, an initiative in co-operation with the “Value Chain Promotion Component (VCPC)" of the “Capacity Building for Competitiveness and Qualified Employment (CBCQE) Programme" of GTZ- Integration. • International Financial Cooperation (IFC) assistance for Integrating SME sector with Larger conglomerates (2008) IFC launched the Hikkaduwa Tourism Service Providers’ Association in 2008 to help develop a model that integrated small businesses into the value chains of larger conglomerates. The association trained small industries to provide consistent quality of professional services and to reach out to a larger customer base through better marketing. As a result, micro and small entrepreneurs can now access new business opportunities in the tourism value chain and register and formalize their businesses. • Solimar International assistance for Human Resource Development in the Northern and Eastern Province (Under the IFC assistance) (2016-2017) The project aimed at collaborating with local tourism providers to ensure the most up-to- date client services and implement skills development training to these tourism providers in geographical areas. In addition, the project intended to develop 15 tourism products and services to increase the availability of tourism attractions that offer cultural, historic or nature-based tourism products and services in the region. • World Bank assistance for strengthening institutional framework (2010) The objective of this project was to strengthen the institutional framework for the Tourism Sector to facilitate environmentally and socially sound investments, in particular in the Eastern regions of Sri Lanka. The project provided technical assistance and funding to all institutions including the Ministry of Tourism (MoT); Sri Lanka Tourism Development Authority (SLTDA), Sri Lanka Tourism Promotion Bureau (SLTPB), Sri Lanka Institute of Tourism and Hotel Management (SLITHM) and Sri Lanka Conventions Bureau (SLCB). • World Vision assistance to Handicraft in Batticaloa district (2014) The project was first launched in Koralaipattu, Batticaloa in 2014. Its main aims were to empower women and increase their chance for employment and entrepreneurship at grassroots levels. Identifying the greater need to geographically extend the project and to promote rural producer groups, Phase II will include areas such as Vaharai, Kiran, Eravurpattu and Vellavali in the Batticaloa District. The batch of trained entrepreneurs, numbering around 70, will be increased to nearly 200 in Phase II. While improving the livelihoods of these local communities in the relevant project areas, strengthening and diversifying income-generating activities through tourism is a key goal. Thus, the project focuses on strengthening women’s handicraft production groups in the Batticaloa District. It supports them through business training, finding market linkages, as well as facilitating access to finance.

4. Methodology and Data The purpose of this study is to investigate how informal sector activities are organized around the tourism sector with special reference to food & beverage sector in four selected districts, namely Ampara, Batticaloa, Trincomalee (Eastern Province), and Polonnaruwa. In addition, sub- sectors such as accommodation, craft, tour guides, and transportation will also be examined. Specifically following objectives are expected to achieve; • Document the current policy environment for the informal sector and those engaged in informal employment, drawing on existing research/studies. • Map out the characteristics and numbers engaged in informal sector activities and informal employment in the tourism and food-beverage sector in the four districts • Conduct case studies to help explain reasons behind the decision of people to work in the informal sector and to understand what influences a person decision to work in the informal sector. • Examine how do women and persons with disabilities in the informal sector connect with the tourism value chain • Make policy orientated recommendations for interventions. These should be targeted at how to improve skills and productivity and support the transition to the formal sector. Following diagrammatic representation summarizes our overall approach in this study;

A review on literature, policy environment, and previous interventions

Mapping out characteristics of the informal sector using secondary data

In-depth analysis in to informal sector Estimate the value addition operators based of the sector to provincial on case-studies GDP

Policy recommendations

We adopt a General-to-Specific Approach, where analysis was further deepened and strengthened at each level of investigation. We started by reviewing the existing literature, policy environment, and previous interventions related to informal economic activities around the

Tourism Industry. On the basis of the review, secondary data were collected and analysed in order to discover the key characteristics of the persons and businesses engaged in the informal sector. In addition, secondary data were utilized in estimating the relative importance of the informal economic activities around the Tourism Industry to provincial GDP. Literature survey and the secondary data guided us to identify the cases to be investigated in detail. Accordingly, case-studies were determined and conducted to look into specific areas such as supply chain, workforce, finance, marketing, and opportunities for women and people with disabilities. A variety of different approaches and methods were used to collect and analyses the data. At each level of analysis, policy recommendations were identified. The study focuses heavily on the food & beverage sector due to a number of reasons. First, food and beverage sub-sector is highly connected with the Tourism Industry and wide-spread in any given locality. Second, compared to other sub-sectors, food and beverage sub-sector offers multiple opportunities/venues for value addition. Third, this sector clearly encompasses a numbers of community members as farmers, collectors, traders, processors, whole sellers, distributors, and home-based food producers. Hence, the sector offers vast opportunities for employment creation for marginalized groups such as women and people with disabilities. Fourth, local contents in food and beverage sub-sector are generally higher than any other sub- sectors, thereby creating demand for locally produced goods and connecting the Tourism Industry with the local community. Finally, this is one of the few sectors in which there exist value chain linkages running from formal to informal businesses. Due to above reasons, it is logical and reasonable to focus more on this sector since the Skills for Inclusive Growth (S4IG) initiatives attempts to promote inclusive growth around the Tourism Industry. A literature review was conducted to understand the characteristics of the informal sector. The review focused upon published research studies conducted in the context of developing countries. One of the limitations was the limited number of studies that investigated strengthening informal sector linkages with the Tourism Industry. This study also reviews the existing policy framework governing the Tourism Industry and the informal sector. In addition, the review covered programmes implemented to enhance the livelihood of marginalized groups who cater to the Tourism Industry in developing countries, including those in Sri-Lanka. A detailed descriptive analysis was conducted to map the characteristics of informal workforce engaged in economic activities around the Tourism Industry. The main data source for this analysis is the Labour Force Survey (LFS), conducted by the Department of Census and Statistics (DCS) of Sri Lanka11. In doing so our study captured a number of labour market activities, at 5- digit ISIC, associate directly or indirectly with the Tourism Industry (the list of 5-digit industries is given in the appendix). According to official definition, employees in businesses that employ less than 5 regular workers or unregistered businesses with Inland Revenue Department and

11 The analysis extracted data from three labour force surveys, namely 2013, 2014, and 2015. It was observed that number of data points remained very limited when the sample is restricted to Tourism Industry in the study area.

businesses that do not contribute to social securities for employees are considered to be operated in the informal sector12. In addition, the study utilized data from the non-agriculture economic survey of 2012/13, conducted by the Department of Census and Statistics of Sri Lanka. This census contains data on no of establishments, people engage by gender, and value addition in businesses operating in the non-agriculture informal sector. Data related to secondary data analysis is presented in Annex 2. In order to collect details on the characteristics of those working in the informal sector a primary survey was implemented. A structured questionnaire was administered in collecting information related to selected areas of business operations. Some of the information areas included; business ownership, sources of inputs and destinations of output, workforce by different skill categories, constraints related to input and labour sourcing, and nature and magnitude of local linkages13. A detailed descriptive analysis was conducted to identify the level of local linkages, constraints faced by businesses in the areas the workforce, finance, and local sourcing. The analysis specifically examined the constraints. The survey was designed to cover informal businesses run by men, women as well as by people with disabilities. The expected number of women headed businesses were surveyed, though, the survey failed to cover the number of businesses run by people with disabilities as initially expected. Moreover, the case study covered businesses of different sizes that cater directly to Tourism Industry. Moreover, a number of businesses that supply inputs - such as fish, meat, vegetables, crafts, and various services were also investigated. A total of 80 case studies were conducted in four districts faced by women run businesses as well as difficulties faced by people with disabilities. Table 2 provides details about the type of businesses covered in the case study exercise for a given district. Data related to case studies are presented in Annex 3, 4, and 5. The case study exercise attempts to look deeper into informal economic activities in identifying value chain linkages, factors influencing businesses to operate informally, and constraints limiting their economic performance. The cases for the investigation were selected based on both the literature survey and the secondary data analysis. Moreover, selected cases were refined based on the pilot survey carried out in two districts.

12The list of economic activities, at 5-digit level,is given in the appendix. 13 See the appendix for the questionnaire.

Table 2: Case-Study: District-Wise Section of Cases for the Study – For a Given District Wome Persons with Type of business/activity Male n disabilities Small size hotels/guest and rest houses 1 Home-stay/cottage/cabana 1 Small size restaurants/bar/pub/karaoke 1 4 4 Road-side food stalls/take-out/eating houses Tourist site-based eating/fruit juice/general 2 stores/handicraft Mobile food vehicles/temporary food & beverage stores 1 Renting vehicles/boats/sport items 2 1 Transport services/safari/three-wheel/car/others 3

Spa/Personal services/Tour guides Source: Author’s compilation

5. Characteristics and the Nature of the Informal Sector

This section examines the nature and magnitude of informal employment in the Tourism Industry with special reference to Food and Beverage sub-sector14. The first part of the section provides an overview of informal employment in the economy and a discussion on informal employment in the Tourism Industry as well as its Food & Beverage sub-sector. The second part of the section maps out the key characteristics of informal workers engaged in economic activities around the Tourism Industry and its Food & Beverage sub-sector. Before starting this review, it is necessary to define the term informal employment. According to the official definition, informal sector consists of workers employed in small and/or unregistered businesses15. Informal employment is quite broader; it captures both informal sector workers as well as workers in the formal sector, who are not entitled to social security benefits. Since 2006, the Department of Census and Statistics (DCS) of Sri Lanka collects data on informal employment, however, the DCS introduced some changes into the survey schedule in 2013 resulting limited comparability16.

14 The methodology section discusses the reasons for focusing on the food & beverage sub-sector. 15The Economic Census (2013/14) defined informal sector as business entities that do not maintain a complete set of accounts or unincorporated entities having ten or lesser number of employees were defined as informal in the economic census 2013/14 (Department of Census and Statistics of Sri Lanka). 16Main among them is the adoption of the Sri Lanka Industry Classification (SLIC) revision 4. During the pre- 2013, the DCS adopted SLIC revision 3.1. There remains a significant difference between the two Industry classification systems.

5.1 Key Findings

Informal employment in the Eastern province

Around 76 thousand informal businesses are located in the Eastern Province and the province accounts for 8 per cent of total value addition in the non-agriculture informal sector. Informal accommodation and food services sub-sector accounted for nearly 10 per cent of informal business entities and employ around 6 per cent of the total non-agriculture informal workforce in the province. Around half of the total workforce in the informal accommodation and food services is female, reflecting higher female participation in the sector compared to other sectors. In Ampara district, there are around 3,750 informal businesses providing accommodation, food, and beverage services and those businesses employ around 6 thousand workers. Interestingly, informal accommodation, Food & Beverage sector is dominated by female workers; i.e. over 54 per cent of total workers are female. In Batticaloa district, a total of 3,500 informal businesses engaged in accommodation, Food & Beverage services sector while this number is around 2,000 in Trincomalee district. In both districts, the share of the female workforce in the sector remains relatively lower than that of the other two districts (see A3-1 in Annex 3).

One of the factors influencing the low female participation in the accommodation and food beverage sub-sector may be cultural concerns. In Polonnaruwa district, there are around 2thousands informal businesses in accommodation, Food & Beverage services sector. A number of observations need to be made. First, the size of the informal businesses remains relatively smaller. It could be argued that most of such businesses are for ‘just survival’ purposes and are operated with family labour. Moreover, it is possible that level of productivity to be relatively lower resulting very limited transition from informal to formal sector. Second, female engagement is relative higher in Ampara and Polonnaruwa compared to other two districts. Finally, possibilities are high that the share of female businesses to remain high in this sector.

Informal Sector in the Tourism Industry: Size, Composition, and Sectoral Distribution The main objective of this section is to provide a brief overview on the informal sector in the food and beverage sub-sector in the Eastern Province. This section begins with an overview on the overall situation with respect to informal sector in the Tourism Industry in Sri Lanka. The analysis makes use of both Census data and Labour Force data17. Tourism Industry provides 426,000full- time employment opportunities (both formal and informal) in Sri Lanka18. In relative terms, the industry accounts for around 5 per cent of the total employment in the country. Out of the total people engaged in the Industry, around 399,000 (87%) are engaged in informal employments and the remainder 27,000 persons (13%) engaged the formal sector. According to LFS (2015) data,

17The Labour Force Survey data are not sufficient to conduct a detailed discussion on employment situation in the food and beverage sub-sector. In particular, no of observations related to formal employment are limited at district level. Hence, this section only provides data for the informal employment. The Non-Agriculture Census data are only available at disaggregated level. 18World Travel and Tourism Council (2017) estimated that the TourismIndustry directly provides 406,000 jobs in 2016 in Sri Lanka.

Tourism Industry accounts for 22,500 employments in the Eastern Province and, which is 7 per cent of the total employed people in the province. Accordingly, Tourism Industry makes relatively higher contribution to employment generation in the province compared to that in the national economy. This fact is further confirmed by our estimation related to Tourism Industry contribution to provincial GDP. The Tourism Industry accounts for 12 per cent of the GDP in the economy while the industry’s contribution to Eastern Province GDP remains at 15 per cent. The Tourism Industry in the Eastern Province, as argued by the Tourism Strategic Plan 2017, is mostly untapped. Hence, the industry has vast potentials to contribute to both provincial output and employment generation. Interestingly, informal economic activities around the Tourism Industry in the Eastern Province account for 97 per cent of total employments. This implies that, compared to national average, a larger share of total employments in the Tourism Industry in the Eastern Province is informal. From the above analysis, two important facts emerged, namely (a) Tourism Industry makes relatively higher contribution to the economy of the Eastern Province and (b) a significantly higher share of total employment in the industry engage in informal economic activities. Hence, it is imperative that policy makers pay greater attention on transforming the informal sector and prioritizing this agenda within the overall policy framework for developing the Tourism Industry in the province.

Non-Agriculture Informal Sector Census of 2012/13 provides some useful data on the informal accommodation, food and beverage sub-sectors in the four districts of our interest. It is required to interpret the data since the reported data do not necessarily relate to the Tourism Industry. However, some interesting observations could be made from the data (see Table A3-2 in Annex 3). First, the size of the informal businesses remain very small, the average number of employed persons remains around two persons. This indicates that most of such businesses are run with use of unpaid family labour. Second, the share of the female workforce remains relatively higher in some districts. This may largely be due to social and cultural concerns. Finally, informal economic activities seem to be female bias. In other words, there is a higher probability that females tend to join the sector, partly due to the greater flexibility of such employments. With respect to S4IG project, however, it is important to examine the above in the context of businesses which cater to the Tourism Industry. We make use of LFS (2015) data to examine the characteristics of people engaged in the food & beverage sub-sector in the Tourism Industry. However, the LFS (2015) does not warrant us to examine employment in the formal sector of the Tourism Industry in the Eastern Province since the number of observations remains very limited. Hence, subsequent discussion confines only to the informal employments in the industry. In Batticaloa district, a total of 9 thousand people are engaged in informal employments in the Tourism Industry (see A3-3 in Annex 3). In relative terms, it is 8 per cent of the total employed people in the district. Thus, from the perspective of employment generation, Tourism Industry makes relatively higher contribution than that in the province and the economy as a whole. Both in Ampara and Trincomalee districts, the total number engaged in informal employment remain around 7 thousand persons19. In Batticaloa district, a total of 4.7 thousands informal workers engaged in Food & Beverage sector in the

19 In relative terms, informal economic activities around the Tourism Industry accounts for 4 per cent of the total employed people in Ampara district whereas this number for Trincomalee district is 6 per cent.

Tourism Industry, out of which, one-fourth (887) is female. In contrast, female workers account 63 per cent (1425) of the total informal workers in the Food & Beverage sector in Polonnaruwa district.

Food & Beverage sub-sector has become one of the leading employment providers, among the other economic activities around the Tourism Industry, in the study area. Table A3-4 in Annex 3 reports data on the relative importance of employment in Food & Beverage sector in the Tourism Industry. Around 29 per cent of the total informal employment in the Tourism Industry engages in Food & Beverage sub-sector in Sri Lanka. Interestingly, this share is much higher in all the districts, except Ampara, than the national average. In Batticaloa district, over 50 per cent of the total informal workers in the Tourism Industry engage in the Food & Beverage sub-sector. In contrast to the other three districts, the share of informal employment in the Food & Beverage sector in Ampara district remains relatively lower. This may be due to the fact that most of the informal workers in Ampara engage in wide range of activities, as found in the primary survey, such as surf lessons, boat races, nature tracking, safari, and renting out sport items. This implies that interventions in Ampara district need to be worked out within a broader context by focusing on some additional sub-sectors.

Age profile of the workforce is one of the key determinants of productivity, innovation, and learning. A break-down of the data by age can be found in the table A3-4 in Annex 3, but one of the key findings is that over 70 per cent of male informal formals workers are in the age category of 20-50 while over 60 per cent of female informal workers are in the age group of 40-70. It implies that female enter into informal Food & Beverage business activities as their last survival livelihood activities. This age profile may be very useful in designing policy interventions.

It is also important to examine whether there is gender segregation along the informal activities in the Tourism Industry. The distribution of workers by sub-sector industries providing various Tourism goods and services are reported in table A3-5 in Annex 3. It could be noted that a majority of informal male workers engage transport activities and the majority of informal female workers engaged in food and beverage sub-sector. For instance, nearly 64 per cent of total informal male workforce engaged in the transport sub-sector while 79 per cent of total informal female workforce engaged in food and beverage sub-sector. In contrary, it could be noted that majority of male and female formal workers engaged in accommodation sub-sector.

Firm size is one of the key determinants of adoptability, productivity growth, quality maintenance and the data in A3-6 in Annex 3 shows that over 75 per cent of informal workers are employed in businesses that have no paid employees or regular employees. It means that most of the informal activities in the Tourism Industry organized with the family labour and possibly don’t pay employees on regular basis. Key insight of these patterns is that informal workers operate at mico-scale where amount of labour and capital input remain relatively low. Mico-scale businesses are at disadvantage on several grounds such as lack of financial capital, skills, technology and marketing information. Moreover, most informal workers engaged in informal activities on ‘survival-basis’ rather than as commercial businesses. Policy makers find it difficult

to enhance productivity and product/service quality since owners/managers of such businesses have limited motivation/interest in business expansion (growth).

Education and Training among Informal Workers Data on education level indicates that a greater share of less educated persons enter the informal sector and suggests that poor educational background is one of the main reasons for workers to engage in the informal sector or informal employment. In other words, the majority of people tend to join the informal sector due to lack of formal sector opportunities that suit with their educational qualification, i.e. involuntary informalisation. In Sri Lanka, around 36 per cent of total workers in the informal sector are employees and 46 per cent of total workers in the informal sector are own account workers (see Table A3-7 and A3-8 in Annex 3). This aspect has to be taken into account when designing strategies for enhancing capacities of persons engaged in the informal sector. One of the key characteristics of persons engaged in the informal sector is the lower level of educational performance when comparing to their counterparts in the formal sector. Around 93 per cent of total persons engaged in the informal sector have GCE O/L or less. There is also a gender dimension for the East, with 50 per cent of female informal workers completing less than General Certificate of Education Ordinary Level (GCE/OL) (see Table A3-9 in Annex 3) words, those informal female workers have completed less than 10 years of schooling. When compared with the national averages, informal female workers record poor educational achievements. This aspect needs to be taken into account when programmes are designed in developing informal sector businesses in the region. Hence, developing human resources must be an integral component of any programmes promoting informal businesses in Sri Lanka, in particular, in disadvantaged districts and provinces.

One of the ways to upskill those working in the sector are through vocational training institutes. Unfortunately, in the Eastern province there are a small number of public funded vocational schools. Data on participation rates for vocational training shows that only 22.6 of total trained persons have received some form of training in the field of Tourism Industry (see Tables A3-10 and A3-11 in Annex 3). It is interesting to note that majority of informal workers have received relatively little training compared to trained workers engage in the formal sector20. In most cases, such training courses last around 6 months. This implies that level of human capital in the informal sector remain very low. Finally, ability to work in a foreign language, in particular in English, is a crucial factor for selling goods and services to foreigners. Out of the total workforce in the Tourism Industry, only 22 of per cent could read & write in English (see Table A3-12 in Annex 3).

20 This refers to all the industries in the economy. We do not have sufficient cases to look into the training status in the Tourism Industry.

6. Tourism Value Chain Analysis

Introduction This section presents case studies conducted in each of the four districts and provides a broad picture of emerging themes, particularly around the degree of linkages between operators in the informal sector and those in the formal sector (or not as the case may be). Before presenting the case studies it is important to understand how the characteristics of tourism vary across the four districts since this will influence how the value chain operates. These characteristics of the tourism product and the type of visitors also determine what type of intervention required to strengthen or to facilitate such linkages when they do not exist. Table 3 summarises some important characteristics of the Tourism Industry in each district. Table 3: Nature and Magnitude of Local Linkages District Type of Main Averag Existing Nature of the Existing tourists purpose of e Time- local linkage Magnitu visiting visit spent de of the mostly local linkage Medium- Small & medium spending Adventure hotels/restaurants – Relativel Ampara young , beach, 1 week demand for low cost y strong backpacke nature wide variety of local rs products/services Large High- Calm hotels/restaurants – spending Very Batticaloa relaxation, 1 week demand high quality middle- weak beach limited local aged products/services Old-aged Large& medium size Visiting Fleeting hotels/restaurants/craf Polonnaru historical 1-2 encounter t sellers – demand for Weak wa places/nat days (drop in high quality limited ure on) local products/services Medium &large hotels/restaurants/cab Medium- Relaxation anas as well as small spending and Trincomale 1 week restaurants -demand Medium middle experienci for quality and wide aged ng, beach variety of local product/services

Source: Based on views expressed by owners/managers of businesses catering to the Tourism Industry. The information in the table needs to be treated cautiously since this compilation is based on a smaller segment of the industry. . 6.1 Ampara District In Ampara district, a case-study exercise was conducted in Arugam Bay area, covering both formal and informal businesses catering to the industry directly or indirectly. It was observed that, compared to three other districts where the same case-study exercise was conducted, mostly small and medium size hotels, restaurants, guest houses, cabanas, and cottages are visible in the area. This is partly due to the type of tourism products available and type of tourists visiting in the area. Moreover, the Tourism Industry in the area has a long history, thereby having several positive aspects which could be harnessed for further development. Partly as a result of above characteristics, the Tourism Industry in Ampara district maintains productive and good-sized linkages with the local community as against the situation in the other districts, In recent years, some of large businesses in the industry started opening up their branches in the area. Such arrivals may affect the existing situation in coming years. Following sections discusses some important characteristics of the industry with special reference to informal businesses around the industry. Relatively strong backward linkages Compared to the other three districts, Tourism Industry in Ampara is largely dominated by medium size hotels, restaurants, accommodation suppliers. Small businesses also account for a fair share of the market. At present, the number of large hotels/restaurants is few in the region. Party as a result of this industry structure, the Tourism Industry in Ampara district (in particular, Arugam Bay area) is fairly developed and connected firmly with the local economy/community. Moreover, it is observed that there are a number of tourism products and services available in the region. For instance, around 65 per cent of medium size businesses source more than 80 per cent of all inputs from the region (see Table A4-1 in Annex 4). More importantly, over half of the large businesses source more than 80 per cent of the total inputs from the locality. As revealed by the stakeholders, a number of factors have contributed to these strong linkages, including the following:

• The charcteristics of the industry, including the size of the hotels/restaurants/accommodation businesses made it possible for local suppliers to develop business linkages in a sustainable manner. • Compared to other districts Arugam Bay has a long history in the Tourism Industry and locals have identified and developed businesses to cater the Tourism Industry. For instance, not only the locally available inputs but also the inputs produced in other parts of the country are supplied to hotels/restaurants by local agents (and not those in Colombo).

• Farmers in Amapra district produce a number essential inputs, such as rice, vegetables, fruits and spices. Poultry, dairy, meat, and fish industries in the region are relatively equipped in catering to the needs of the Tourism Industry, often brining products to door- step during the peak-season. • Previous interventions supported bv donors and government have helped in improving capacities to cater to the Tourism Industry and strengthen existing linkages or facilitated the development of new ones. • Local businesses and producers demonstrate a fair level of understanding of the industry and invest in essential areas in enhancing human capital stocks. This helps to ensure that an increased commitment obtained amongst employees. • Finally, a number of industry associations in the district have developed informal codes of conducts thereby providing acceptable level of quality services. For instance, ‘tuk-tuk’ drivers’ association in the region has determined travelling chargers for different destinations and the safety of travelers. With respect to labour inputs, businesses of all sizes depend, to a greater extent, on local workforce. For instance, all sizes of businesses source at least 50 per cent of the total low skill workforce from the region and local sourcing is much prominent with respect to middle skill workers (see Tables A4-2 & A4-3). Relatively higher level of local sourcing is due to number of factors such as the availability of sufficiently qualified workers in the region and positive attitude towards the Tourism Industry. Nevertheless, evidence emerged during the case-study survey, that the demand for and supply of female workers remain relatively low due to cultural concerns. Females belong to Sinhala ethnicity tend to take up training and jobs related Tourism Industry though employers are relatively reluctant to employ them on the ground of general concerns on family responsibilities and security issues. Unmarried females in other communities, namely Muslim and Tamil, are yet to show any interest in acquiring skills and taking up jobs in the Tourism Industry.

Backward linkages with informal suppliers In Ampara district, operators of the Tourism Industry, both formal and informal, establish linkages mainly with informal suppliers. These informal suppliers are collectors of vegetables, fruits, and fish products. In addition, some of them are suppliers of products produced by formal business entities mostly located outside the region. Most businesses have around 8-10 smaller informal input supplier. Apparently, there is a severe completion among suppliers and, in most instances payments are done upon the delivery. In other words, there no permanent contracts between the business and input suppliers. Lack of contract agreements has both positive and negative effects. On the positive side businesses engage in food & beverage sector need not worry about the input supplies since many suppliers take their products to the region during the peak season. On the negative side there are concerns about the quality of supplies, but hoteliers said this could be overcome such situation through proper inspections. The available evidence

showed that even small restaurants pay greater attention on maintaining the quality of their products and services; i.e. quality consciousness remains very high. Hence, it is required to get small input suppliers organized and improve the quality of their products so that final users could easily maintain the quality.

Human Capital Stock Compared to Trincomalee and Batticaloa districts, there appears to be less of a skill shortage. Most managers of medium size hotels/restaurants are quite happy with the set of skills in potential employees, but managers work at the larger hotels raise concerns about the level of skills, attitudes towards work, and work commitment. It must remembered, that skill levels relate to the tourism product on offer. As discussed earlier, type of tourists who visit (Ampara) Arugam Bay are different from those who visit other three districts. Most visitors are young and their main purpose is adventure, and they expect average quality at affordable price. Moreover, the Tourism Industry in this area has a long history of work with this sector and knowledge accumulation. Yet, there is a clear need for a comprehensive human resource development programme to enhance the level of skills in the eve of new large players coming into the area and vast untapped potential of the industry. Most females work in the industry are low skill workers and have limited chances for career progress. Cultural concerns play a larger role in determining females’ education, training, and length of work. A clear majority of businesses prefer to hire male workers due a number of concerns over female recruitments. Higher level of labour turnover Although labor availability and workers’ skills are not a current constraint for businesses, labour turnover is a formidable challenge to most businesses, especially for medium size businesses. The higher level of labour turnover is partly due to the seasonal nature of activities as well as due to relatively low salaries. Most workers in medium size businesses move to large hotels/restaurants once they accumulate 1 to 2 years of experiences. One managed opined; “Every season, we have to recruit new set of workers with limited or no previous experience. We have to teach them and tolerate their mistakes. However, they leave us within 1 to 2 years. Our hard work make no sense at the end of the day” Some managers think that labour turnover is one of the serious issues that constrains business growth. It seems that there is a vicious cycle between low salaries and labour turnover thereby making hard to accumulate skills at medium-size businesses. Breaking this is hard given the seasonal nature of economic activities.

Property ownership and working capital deficiencies Most small businesses operate from rented premises and the agreements cover a period of 1 to 2 years. There are some restrictions over the use of such properties. In particular, managers face restrictions over any space expansion and in some instances, the agreements do not get extended. As a result of this situation, small businesses do not plan to grow their businesses and tend to think short-term. Similarly, most small businesses face issues with respect to working capital deficiencies. This issue is prominent during the off-season. Some alleged; “land and building owned by the one community. They do not want to operate businesses related to Tourism Industry. So, they rent out to us. However, they make complaints to police whenever there is a party. Police visits the premises and stop such event. We have to pay the rent, but they do not allow us to conduct event which make some earnings” These situations also reflect certain level of hostility prevail in the region between different ethnic groups. Small business managers argue prevailing rent charges are really high and as a result, they cannot build up capital for business expansion. A wide range of tourism products/services Compared to the other districts, a number of tourism products/services are available in Ampara district (in particular Arugam Bay area). Those products include; night parties, surfing, fishing, boating, nature tracking, Safari, Ayuredic Spa, and cooking festivals. As a result, a significant segment of the society directly or indirectly is involved in Tourism Industry related activities, in particular, in Arugam Bay region in Ampara district. There are still opportunities for expansion in economic activities such as dressing, beauty parlors, cultural shows, traditional dancing, and photograph could be promoted after giving proper training. More opportunities could be created for women entrepreneurs in the former areas. Low product and service quality. Managers/owners of most small and medium hotels/restaurants maintained that they are concerned about the quality of the products and serviced offered to tourists. In some cases, managers prepared foods/drinks to ensure quality. One manager of a small restaurants stated; “I alone engage in preparing food in order to make sure prepared food meet the required quality. My family members engage only in cleaning and other activities. Public health officials visit the place and fine if we do not maintain standard level of cleanness” However, the discussions and observations revealed that quality of products and services offered by small restaurants do not meet international standards. This is partly due to lack of training on quality maintenances and due to the limited number of employees at the business. Hence, it is

important that managers/owners are given a proper training on health standards that they have to meet during food preparation. Moreover, it is imperative that they are educated on waste disposal.

Homogeneous set of products and services A number of small and medium-size businesses serve food and beverage related products, and very little differentiations exist. In other words, they mostly offer similar products and services. As a result, competition among businesses is severe and they mostly engage in a price war. This price competition leads to lower profit margin and tourists largely benefit. Competition is a healthy sign, but severe price competition most often leads to lower profit and capital accumulation. This situation could be address by encouraging businesses to offer greater variety and innovative products and services. Homogenous nature of products/services leads to lower tourist expenditure. A proper training should be given to small and medium-size businesses to innovate products/services.

An overview of Findings and Key Issues – Ampara District The linkages between the Tourism Industry and the local community/economy currently remain relatively strong in Ampara district. A number of factors have contributed to these strong linkages, namely the industry’s long history, type of tourists visiting the area, past interventions, and the size of businesses. More importantly, businesses and workers in the informal sector largely benefits from the industry. There exist a number of tourist products and local people engage in a wide range of activities related to the industry. With the entry of new large scale businesses in to the area, it is possible that this area get attracted by high-spending tourists. The existing supply chains are briefly summarized in diagrams for small, medium, and large businesses in Annex 5 – Figure 1a, 1b, and 1c respectively. Many irregular small (individual) suppliers and mobile traders connect with the supply chain of the small hotels, restaurants, and accommodation providers (homestays). All of them operate in the informal sector. In addition, businesses in food & beverage sub-sector purchase some goods from the general stores. Medium-size hotels, restaurants, and accommodation providers connect largely with informal businesses to receive their supplies. Some have established permanent linkages with few suppliers while the others depend on irregular supplies. Large-size hotels and restaurants have developed very strong connections with both formal and informal sector suppliers. Moreover, they have developed connection with few suppliers in and outside the region to buy perishable items such as fish, meat, fruits, and vegetables. A number of issues/challenges could be identified in the context of the district. These include; (a) poor female participation, (b) low product and services quality, (c) working capital deficiencies, (d) lack of product and service variety, (e) higher labour turnover, and (f) tension between

communities. Addressing these issues is vital for improving the livelihood of people engage in the Tourism Industry.

6.2 Batticaloa District A series of case studies were conducted in Passikudah, Kalkudah, and areas surroundings Batticaloa. According to respondents, before the civil war, Tourism Industry was well established in Batticaloa district and the industry was dominated by small and medium businesses. The Tourism Industry totally collapsed during the civil war and the industry’s workforce switched to other industries. The government took several initiatives to revive the industry during the post- war period. The Board of Investment (BOI) offered various concessions, including leasing out government owned lands along the coastal areas, to large hoteliers to start businesses in the Pasikudah and Kalkudah areas. In addition, medium-sizes hoteliers and restaurants were offered various other concessions. The industry emerged out of the ashes within a short period and attracted high-end tourists to the region. Nevertheless, the industry continues to remain underdeveloped and it connects marginally with the local community and the economy. Some of the key findings are discussed below. A Sharpe ‘dualism’ in the Tourism Industry Evidence shows there is a sharp ‘dualism’ in the Tourism Industry in Batticaloa district. On one side, large hoteliers and restaurants, locating on the costal belt cater to the high spending tourists and on the other side, small & medium hoteliers and restaurants, located mostly away from the costal belt, cater to the local and relatively low spending tourists (or back-packers). It is not likely that tourists who stay in large hotels visit small and medium restaurants operating in the informal sector. Complementarity between the two sectors remains very weak and formal large businesses offer all most all the required products and services by themselves. Even for ‘tuk-tuk’ drivers, there are limited opportunities for providing transportation services to tourists staying at the large hotels21. Some informal operator even mentioned that large hoteliers and restaurants prevent tourists visiting informal places22. To some extent, some of the state policies have created this division. For instance, the BOI focuses upon leasing out costal belt to large hoteliers, and small & medium hotels and restaurants are only permitted to operate away from the coastal belt in Pasikudha and Kalkudha area. This policy as well as the large players’ attitude towards small and medium businesses has created a sharp division within the industry. This division has negatively affected small informal sector businesses in joining the tourism value

21 According to ‘tuk-tuk’ drivers, large hoteliers prevent them entering to hotel premises and/or parking nearby. 22Large hoteliers maintains that there hardly available restaurants and other businesses in the area, not just for tourists, but even for local people. One manager of a large hotel maintained that “lack of business enthusiasm among the community is one of the major reasons for not opening up business even if there are plenty of opportunities for the local community”.

chain. Hence, it is essentials to form linkages between formal large businesses and small informal operators in making sure benefits of the Tourism Industry to reach local communities. Limited local sourcing in large hoteliers and restaurants The study found that local sourcing by large players in the industry remains very low compared to the other three districts under the study (see Table A4-4 in Annex 4). Vegetables, fruits, flour and other ingredients are (over 90 per cent) sourced from outside the areas such as Dambulla, Nuwaraeliya, and Colombo. Managers of the large hotels maintained that limited vegetable production in the area is one of the reasons for this situation. Meat, such as beef, is sourced locally while large hotels/restaurants depend on outside suppliers for chicken and other meat varieties. Fish is mostly sourced locally (in Batticaloa district), however, large hotels and restaurants depend on one supplier who has cooling facility. Mangers of the large hotels said they are unable to get supplies from small & medium scale fishermen since such fishermen cannot supply the required quantities and varieties on timely basis. Main fish supplier is based in Colombo and he runs a facility in Valachcheni, Batticaloa. The main supplier buys fish varieties from different parts of the district such as Vakarei23. It was also found that large hotels and restaurants do not have interest in purchasing organic vegetables and fruits even though products are available in the region due to lack of consistent demand from the customers. They think that organic vegetables and fruits are expensive and the customers base (those who wish to consume organic products) is not large enough to warrant them purchasing such products on continuous basis. According to an agreement reached between the BOI and large hoteliers, at least 40 per cent of those employed have to be sourced from the region. However, our research found that the majority of employees, in particular, high skills and middle skill levels, are recruited from outside the region (see Table A4-5 & A4-6 in Annex 4). One of the main reasons, according to the managers of the large hotels and restaurants, is the lack of qualified/trained labour force in the area. In contrast to high and middle skill workers, a sizable portion of low skill workers are from the local area. In particular, middle and large hotels, restaurants, and accommodation providers employ fair share of women, in addition to young and middle aged males, from the local community. Local suppliers are small and expensive A significant number of owners/managers of medium & large hotels, restaurants, and accommodation providers said that one of the major issues facing local suppliers is that they have capacity and a variety of other constraints. Moreover, local suppliers are relatively expensive.

23 Managers of medium and large hotels and restaurants observed that purchasing fish products from small fish traders and fishermen is difficult since such small fish traders and fishermen do not have the capacity to supply the required quantities and varieties due to lack of cooling facilities. On the other hands, hotel & restaurants do not show any interest in purchasing and storing due to demand uncertainty.

One large hotel has done a market survey and has found out that directly purchasing from Dambulla and Nuwaraeliya (two major vegetable markets) is cheaper than buying from Batticaloa24. These concerns could further erode the existing weak linkages in the industry. According to whole sellers, the losses incurred during the transportation and storage are some of the for the higher prices. A number of issues with local workforce A number of large and middle scale hotels, restaurants, and accommodation providers observed that potential employees in the region lack strong work commitment. One manager in a leading hotel observed “We interviewed and offered positions asking the persons to report to work from the next day. They promised, but rarely turned up for the work. We have experienced several of such situations” Similarly, managers in middle and large hoteliers and restaurants expressed concerns with the ethics and attitudes of local people towards work. One of the manager opined “locally recruited employees tend to forget things very easily. Management staff needs to remind them every time to complete the task properly. For instance, when guests are severed drinks, management needs to remind the worker to collect the glass, if not, it does not happen. We have come across several of such incidents with employees recruited from the region.” Most managers maintained that protracted war may have had a negative impact of their general attitudes towards work and life. They presumed local people are sincere and honest, but less serious on work. Similarly, poor foreign language ability severely hinders the prospect of local recruitments. Training schools tend to use local languages as medium of instruction since ability to work with English remain very poor among who attend the training school. Hoteliers maintained that they faced difficulties even to offer internships for locally trained students. Limited Motivation and Finance Discussion held with owners of informal businesses revealed that most of them have little interest in expanding their business activities. One of the reasons for this situation is the fluctuation of business sales due to seasonality and other reasons. Owners fear investing in physical assets since demand for their products/services are determined by a number of factors, including seasonality. As a result, small & medium size businesses tend to relay on their own

24 This calculation includes all types of costs relating to a team of workers visiting Dambulla and Nuwaraeliya and making purchase. The manager observed that such purchasing may not be viable during the season since sending some kitchen staff is not viable during the season.

funds for investment. A comprehensive marketing strategy and a wide range of tourism product developments could easily smooth out the existing higher level of seasonal fluctuations in tourist arrivals. Lack of working capital is viewed as a major problem faced by small and medium size businesses in the industry in all districts. This situation not only forces small businesses to borrow from the informal money market at a higher interest rates but also prevent them from offering products and services to clients on credit facility basis. It was also observed that some informal hotels/restaurants/ accommodation providers have developed some relationships with local taxi drivers to attract businesses. This practice not only denies opportunities for some informal businesses, but also eats out a sizable share of sales revenue as commission fees to taxi drivers. An effective information and communication technology (ICT) based solution could easily rectify these types of situation. Weak Human Capital Stock The discussions held with owners/managers of small & medium operators in the informal sector revealed that most have not received formal training on entrepreneurship, marketing or business management. Some of them have worked in tourist hotels and/or restaurants while others have experiences related to general hotel and restaurant management. More importantly, Tourism Industry is relatively new to many of the informal operators resulting limited products are services offered to tourists. Most informal operators limit their activities to traditional areas such as providing rooms and/or offering food and beverage (or even handicraft). In other words, informal sector players tend to offer homogenous products and services and lack innovative product development. According to a manager of a guest house Batticaloa district, in particular Pasikudha and Kalkudha areas, has had a well-developed Tourism Industry before the civil war was initiated in 1983. Revival of the industry is a key challenge at present. Cultural barriers for Female Employment Some hoteliers maintained that the management faces difficulties in recruiting female workers, largely due to lack of skills and cultural factors. Females are often reluctant to accept jobs at large hotels and restaurants due to cultural reasons. Moreover, if somehow recruited, the culture could prevent women from effectively performing their tasks and the duration of their employment. Some mis-conceptions towards the Tourism Industry could also affect female labour force participation in the industry25. Some hoteliers maintained that married females take up jobs that require minimal skills to perform.

25 In particular, some uninformed people tend to believe that females are unsafe when working at tourist hotels due to type of job related activities that they have to perform at the hotels (in short, females are prone to sexual mis-conduct).

An Overview of Key Findings and Issues/challenges – Batticaloa District Tourism Industry in Batticaloa district shows dual economic features. Large hoteliers source their inputs (both good and service, including labour) from outside the region while small hotels/restaurants/accommodation provides largely depend on the local economy for their inputs. There exist weak complementarities between the formal large hotels and informal businesses. This dual nature is partly created by the government policy interventions. In addition, there exist a mis-trust between the large hotels and informal sector operators. Supply chains for the small, medium, and large size hotels, restaurants, and accommodation providers are roughly sketched and presented in Annex 5 by Figure 2a, 2b, and 2c respectively. A number of small suppliers connect with the supply chain of the small hotels, restaurants, and accommodation providers (homestays). All of them operate in the informal sector. In addition, businesses in food & beverage sub-sector purchase some goods from the general stores. Medium-size hotels, restaurants, and accommodation providers connect largely with formal businesses to receive their supplies, except for perishable items. In addition, they also depend on few outside whole sellers for goods (vegetables and other things) that are not produced within the locality. Large-size hotels and restaurants have developed very strong connections with formal sector suppliers in outside the region and such suppliers keep visiting the places on regular basis. Moreover, they have developed connection with few suppliers for fish and meet in the region. A clear majority of workers, in particular high and medium level employees, are from outside the region while around on-fourth of low skilled persons are from the region.

Informal businesses around the Tourism Industry in Batticaloa district face several issues/challenges. These include; (a) very capacity, in terms of quality and quantity, (b) limited financial, human, and social capital stock, (c) lack of motivation for growth, and (d) lack of information and knowledge, (j) foreign language difficulties. The industry is characterized with several issues such as (a) high labour turnover, (b) mis-trust between big and small players in the industry, (c) unrest among ethnicities, (d) cultural concerns over female labour force participation (e) lack of opportunities for people with disabilities, if they are ex-combatants, and (f) lack of work ethics and positive attitudes towards the Tourism Industry. Moreover, there are number of issues with respect to human resource trainings offered by public-funded institutes.

6.3 Polonnaruwa District In Polonnaruwa district, this study conducted case studies in Minneriya, Girithala, and in and around the city area of Polonnaruwa. A large number of tourists, both local and foreign, frequent Polonnaruwa district every year. Compared to the other three districts, the Tourism Industry is relatively developed, however, it connects marginally with the local community due to structural weaknesses. The amount of time spent by tourists in Polonnaruwa is one of the main worries of

the business operators. According to industry sources, this is largely due to lack of tourism products in the region. Moreover, it is alleged that Tourism Industry in the region is largely controlled by large players, limiting opportunities for small businesses to develop. Some of the key findings are summarized below.

Limited Local Sourcing The research found that small businesses, engaged in food & beverage sector, source vegetable, fruits, and some grains (mostly rice) mostly from informal businesses in the local economy (see Table A4-7 in Annex 4). However, medium-size and large hotels/restaurants have developed contract with few whole sellers, operating in the informal sector, who buy their supplies from outside the district26. In addition, fish, eggs, and meat supplies come from smaller traders to small hotels/restaurants while medium-size and large hotels/restaurants receive them from super market chains and/or large-scale producers operating in the formal sector. Most of such suppliers are from outside the region. Small operators buy other goods directly from super market chains and/or whole sellers mostly operated in the formal sector. In short, share of the total inputs purchased locally remain relatively smaller. With the opening up of supermarket chains, even the small operators tend to buy their inputs from supermarkets operating in the formal sector. Large hotels, restaurants, and guest houses employ workers who are largely from outside the region while small & medium hotels and restaurants mostly employ local persons (see Table A4-8 in Annex 4).

Diminishing Market for Handicrafts With respect to handicraft businesses, most of the handicrafts are done by craftsmen living nearby villages and operated informally. In addition to supplying handicrafts to main craft-selling shops, which operate formally, some craftsmen take their goods to different parts of the country where there are favorable demand for their products. Some handicrafts are sold in tourist-site based shops and such places are mostly operated informally. These shops buy handicrafts from handicraft producing villages. Persons engaged in handicraft businesses allege that their livelihood is under threat due to imported products from countries such as Nepal and Malaysia. Moreover, they maintain that demand for handicrafts have declined over the years partly due to the low tourist spending. A manager of handicraft selling shoe, with 38 years of experience in the sector, expressed;

26 Small & medium size accommodation and food & beverage providers work with around 10-15 informal traders while large scale hotels and restaurants connect with 2-3 large scale, yet informal, traders. Such larger scale traders have well established supply chain networks connecting with major markets.

“I had around 60 employees in 1990s. Now I have just 10 employees. Sales have declined over the years. Tourists visit the place and expressed that handicrafts are excellent, but they rarely buy. This is a diminishing sector. People do not want to engage due to weak demand for their products. Sellers mostly imports from other countries” Hence, it is important to take into account these developments when intervention strategies are identified.

Information and Knowledge Gap The discussions revealed the existence of information and knowledge gaps in a number of areas. One among them is the marketing information (see Table A4-9 in Annex 4). The research found that accommodation providers find it difficult to maintain sufficient and sustainable demand for their service since they rely on a third party -such as tour guides to market their services. Informal sector accommodation providers do not use ICT or any other advanced mode of communication to reach potential customers. Instead, tour-guides and/or other parties (such as taxi drivers) introduce customers to accommodation providers. The arrangements outlined above have led to a number of issues, with middlemen charging a sizable share of the total amount earned by the accommodation providers. Moreover, it was found that some transport facility providers were unaware in reaching out customers. One of such providers mentioned that the taxi service is in a position to rent out all type of vehicles, yet the company does not received sufficient demand for the services. It was also mentioned that the company representatives visited a number of leading hotels, guest houses, and other accommodation places and discussed about the possibility of providing the service. Nevertheless, the company has not go a single opportunity to cater to local or foreign tourists. The interview had with the female manager of the taxi service revealed that she has limited understanding about how to utilize ICT for reaching out potential customers. Language Barriers Lack of sufficient command in foreign language is one of the main barriers for growth of small businesses to cater for international tourists. Most of owners/operators of the road-side business, providing meals, fruit juice etc., tourist-site based shops, selling handicrafts, and general grocery items, etc. lack sufficient command in foreign language. In most cases, they could describe certain characteristics of the good/item in English, yet, such description often fails to impress/educate foreigners sufficiently to make a purchasing decision. Ability to speak some of the other leading foreign languages, such as German, French, Chinese, Spanish, Japanese, etc. remain very weak. Moreover, it was found that the taxi company, though attempted to link up with hotels/guest houses in providing the transport services to tourists, one of the main barriers it faces is the lack

of drivers who could command at least few words in English. Similarly, some owners/operators engaging in accommodation and homestay businesses are not able to communicate in any foreign language though they offer services to foreign tourists. At present, most entities cater only to local tourists. These findings confirm lack of sufficient command in foreign language is detrimental to informal sector engagement in tourism value chain. Our research also examined to what extent business face difficulties in finding workers with language ability. It was revealed that small & medium scale businesses face severe difficulty in finding low skill and middle skill workers with sufficient foreign language knowledge (see Table A4-10 in Annex 4). According to our survey results, 50 per cent of the total firms who identified ‘knowledge of a foreign language’ as a major barrier in requiting low skill workers, informal small businesses. Interestingly, large businesses also face difficulties in finding low skill with sufficient level of foreign language ability. Limited Motivation and Innovation The discussions held with owners/managers of small & medium hotels, restaurants, guest houses revealed that the operators lack motivation to expand theirbusiness, and cater for foreign and high-end local tourists. Moreover, those businesses tend to offer homogenous products/services and lack innovative business ideas. Most of owners/managers/operators of the small & medium scale businesses have not received a formal training though most of them have several years of experience in the field. Limited Financial Resources A number of informal operators complained about difficulties they faced gaining access to finance. Some of the accommodation providers recognized that there is a growing demand for accommodation from local and international tourists. However, they are not in a position to cater to this growing demand since they lack enough space and/or facilities. In most of the cases, attempts to expand or add new facilities failed because they could not access to finance in the formal sector due to their old ages and/or lack of mortgagable assets. Existing finance schemes do not provide any credit guarantee system for old-aged applicants. Similarly, road-side vendors as well as tourist-site based vendors find it difficult to access formal sector finance due to lack of clear-cut land and/or building ownership. In most cases, they borrow from the informal sector where interest rate remains really high. Similarly, a number of informal sector operators said they lack working capital and are not in a position to cater to the demand (see Table A4-11 in Annex 4). A number of businesses have indentified lack of working capital as one of the major constraints for increasing their sales. Limited working capital has meant that some restaurants/hotels do not provide their services for vouchers. Most Colombo based hotels/tour operators issue vouchers for meals and it takes nearly 1-2 months for cashing. Small restaurants/hotels find it difficult to wait such lengthy periods since they lack working capital. Hence, they do not join the tourism value chain. Access

to lower cost finance remains one of the greatest difficulties facing businesses operating at the lower level of value chain. Drop in on Tourists Formal and informal businesses mentioned that one of the regional disadvantage they face is that tourists only stay in Polonnaruwa for a short period, often lasting for one or two days or even a couple of hours..This situation is applicable to both local and foreign tourists. Hence, the operators highlighted the need for a comprehensive plan to develop Polonnaruwa as an attractive tourism destination where a wide variety of tourism products are offered for tourists to engage so that tourists stay more time in the district thereby opening up more opportunities for people to join the tourism value chain. The TSP has identified a number of projects aiming at reviving the industry in Polonnaruwa district. One among them is the opening up of an airport in the district. The construction of an airport in Polonnaruwa has been on air for some years, though tangible steps are yet to be taken. Unfair Market Arrangements Most small vendors (road-side and tourist-site based) complain that they find it difficult to sell their products/services to tourists, specially foreign tourists since there is a well-organized network that bar others operators from entering the value chain (see Table A4-12 in Annex 4). In other words, large players in the industry decide who should participate in the tourism value chain. This practice could affect wider participation in the value chain. Some argue that there are a number of issues when buying services from small players. Hence, it is important to link up small players with large businesses. Improvement of quality of services is mostly required in linking small businesses with large players in the industry. High Labour turnover Most operators complained about the higher level of labour turn-over. Almost all businesses, irrespective of size or location face this situation. This is partly driven by workers’ desire to seek higher wages in businesses operating in the same industry and others keep shifting to other industries for various reasons. It was found that most formal sector businesses employ workers from outside the regions and in contrast most workers in the informal businesses are from the same region. This is partly due to the fact that informal businesses are mostly run by unpaid family workers. An overview of Key Findings and Issues/Chllanges – Polonnaruwa District Our findings broadly indicate very limited informal sector participation in the Tourism Industry, partly due to the fact Polonnaruwa district has limited tourism products and unethical practices of the big players in the industry. Value chain connecting informal sector is relatively shorter and large businesses in the industry mostly source inputs (goods/services/labour) from outside the regions and mostly from established formal sector operators.

Supply chains for the small, medium, and large size hotels, restaurants, and accommodation providers are roughly sketched in Annex 5 - Figure 3a, 3b, and 3c respectively. Around 8-10 small (individual) suppliers connect with the supply chain of the small hotels, restaurants, and accommodation providers (homestays). Most of them are the collectors of vegetables, fruits, and fish products. In addition, businesses in food & beverage sub-sector purchase some goods from the general stores as well as from super market chains. In addition, some home-based food producers also supply prepared foods to homestay places. Medium-size hotels, restaurants, and accommodation providers connect both with formal and informal businesses. Instead of many small suppliers, they depend on few whole sellers to make sure that they could receive right quantity-quality mix. They also depend on super market chain and in some cases receive goods directly from distributors. Large-size hotels and restaurants have developed very strong connections with formal sector suppliers in outside the region and such suppliers keep visiting the places on regular basis. Informal businesses around the Tourism Industry face several issues/challenges in Polonnaruwa district. These include; (a) lack of capacity and quality in products and services, (b) limited working capital. This issue prevents them connecting with big players (tour agents mostly operated from Colombo), (c) poor foreign language capacity, (d) lack of finance for business expansion, (d) lack of marketing and managerial skills, (e) poor human and social capital stock, (f) lack of product/service variety, (g) limited demand (in particular of handicraft products), and (h) lack of innovation. The Tourism Industry is characterized with (a) high labour turn over, (b) limited availability of skilled workers in the region (c) unfair business practices, and (d) lack of tourism products in the district.

6.4 Trincomalee District In Trincomalee district, case studies were mainly conducted in and around the Trincomalee city and Nilaweli beach. Tourism Industry in the district was also largely affected due to the civil war. The industry in Trincomalee district is moderately connected with the local economy, with opportunities to further development. However, the level of connectivity is not strong when compared to the situation in Ampara district. Vast potential exists for providing opportunities to the informal sector and for strengthening linkages with the formal sector. A number of barriers prevent informal businesses from getting access to the value chain. The nature of these constraints and related issues are discussed below. Seasonal and off-seasonal patterns affecting informal operators The Trincomalee district attracts tourists primarily from March to August each year. This is the peak-season, and most informal operators in and around main destinations, confine their business activities to this period. These include; restaurants, cabana, and other types businesses. As a result, most of these informal businesses have remained small and are run by family labour. This has become one of the major issues for developing sustainable livelihood, particularly for

those engaged in small and medium size Tourism Industry related activities such as food & beverages. In contrast, large hotels, restaurants, and accommodation providers could negate the effect of seasonal variation in demand, to some extent, through attracting local tourists under various packages and sponsorships. Nevertheless, they also lay off some workers, in particular low skill workers, during the off-season. Hence any attempt to develop livelihood of local communities through tourism need to come up with strategies to shorten and/or smoothening the length of the off-season. High labour turnover Both medium-size and large hoteliers/restaurants complained about the higher level of labour turn-over (see Table A4-13 in Annex 4). This is not a significant issue for small businesses since they are run with unpaid family labour and/or irregular workers. High labour turnover is partly driven by workers’ eager to seek for higher wage opportunities in businesses operating in the same industry while other employee keep shifting to other industries due to various reasons. One of the reasons for high labour turnover is that majority of workers are from outstation. Hence, they tend to move to take up jobs closers to their living areas once they receive some work experience. High labour turnover has affected negatively on firm-level human resource training. Moreover, businesses are unwilling to fill all vacant positions due to high labour turnover issue. Lack of formal training for informal operators The discussions held with owners/managers of small & medium operators in the informal sector revealed that most of them have not received formal training on entrepreneurship, marketing or business management. Some of them have worked in tourist hotels and/or restaurants while others have experiences related to general hotel and restaurant management. More importantly, Tourism Industry is relatively new to many of the informal operators resulting limited products are services offered to tourists. Most informal operators limit their activities to traditional areas such as providing rooms and/or offering food and beverage (or even handicraft). In other words, informal sector players tend to offer homogenous products and services and lack innovative product development. Limited local sourcing of labour As in other districts under the study, large hotels, restaurants, and accommodation providers higher fewer percentage of workers – high, middle, and low skills, from the region citing lack of technically qualified human resources (see Table A4-14 & A4-15 in Annex 4). In addition, they complain about language capacity of personals trained by training institutes, both pubic and private, in the region. Out of the total low skill employees, around 30-40 per cent is sourced from locally and in most cases on temporary basis. During the off-peak season, most of these temporary workers are laid off. Hence, young employees have limited interest in pursuing a career in Tourism Industry.

Limited local sourcing of all the other inputs (including fish and meat products) The study found evidence that local sourcing bylarge players in the industry remain very low compared to the other three districts under the study (see Table A4-16 in Annex 4). Vegetables, fruits, flour and other ingredients are mostly (over 90 per cent) sourced from outside the areas such as Dambulla, Nuwaraeliya, and Colombo. Managers of the large hotels maintained that limited vegetable production in the area is one of the reasons for this situation. Meat, such as beef, is sourced locally while large hotels/restaurants depend on outside suppliers for chicken and other meat varieties. Issues in the local workforce As found in Batticaloa district, some managers in large hotels and restaurants observed that local workforce lack required skills and work attitude suitable for the industry (see Table A4-17 in Annex 4). One among them is the foreign language ability among middle and low skill workers. As a result, over 70 per cent of middle skill workers in large hotels/restaurants are from the outside the region. It is also observed that public funded training institute failed to provide sufficient training due to number of reasons such as lack of qualified teachers as well as higher level of students’ absenteeism during the training period. One manager stated “Principals in training institute says that they are not in a position to instruct in English since such policy could discourage student enrollment and increase student absenteeism. Hence, the institute adopts a policy which is practical given the ground realities” Similarly, it is also mentioned that public funded training institute in Trincomalee district does only provide training related to cooking and kitchen operation related training and students who wish to obtain training related to other areas in hotel and restaurant operation Limited opportunities in the industry – opportunities are restricted by large players Most small vendors (road-side and tourist-site based) complain that they do find it difficult to sell their products/services to tourists, specially foreign tourists since there is a well-organized network that bar others operators to engage in the value chain. In other words, large players in the industry decides who should be there in the tourism value chain. This practice could affect wider participation in the value chain. One of the owner of a small restaurants stated that “large hotels advise tourists not to eat at small restaurants citing poor food quality. Similarly, tourists are prevented from taking tuk- tuk. However, during the peak-season, tourists coming in disregarding the advice” It seems that there is a certain level of mistrust between the small operators and large & medium size operators in the industry in Trincomalee district.

An overview of Key Findings and Issues/Challenges – Trincomalee District Informal businesses around the Tourism Industry in Tricomalee district moderately connect with the tourism value chain. Both local and foreign tourists are mostly attracted to the district during April-August in every year and a sizable share of informal businesses only operates during this period. Moreover, a sizable share of formal medium-size businesses also operates only during the season. A sizable share of the workforce in large hotel is from the outside the region while majority of the workers in medium-size and small businesses is from the region. The industry has greater untapped potentials in generating more value and employment opportunities in the district.

Supply chains for the small, medium, and large size hotels, restaurants, and accommodation providers are roughly sketched and presented in Annex 5 – Figure 4a, 4b, and 4c respectively. Many irregular small (individual) suppliers connect with the supply chain of the small hotels, restaurants, and accommodation providers (homestays). In Trincomalee district, home-based food preparing businesses are wide-spread due to significant demand for prepared food from homestays, cabanas, and small accommodation providers. Medium-size hotels, restaurants, and accommodation providers connect largely with informal businesses to receive their supplies. In addition, they also depend on few whole sellers for goods (vegetables and other things) that are not produced within the locality. Large-size hotels and restaurants have developed very strong connections with few outside formal sector suppliers. Informal businesses around the Tourism Industry in Trincomalee districts face several issues/challenges. As in other districts, capacity constraints (in terms of quality and quantity) put them at a disadvantage position when catering to large hotels. Moreover, poor access to credit has become a major issue for business expansion. Seasonal pattern in tourist arrivals make it difficult for small businesses to expand their operations. Skill and information gap also remain as barriers for informal sector operators. Most informal operators offer similar set of products thereby leading to severe competition and lower profit margins. Product and service quality also remains at low. Also, small businesses are at a disadvantage position due to unethical practices carried out by the medium and large hotels. The Tourism Industry in Trincomalee district is characterized by several features; namely (a) seasonal nature of business operation (applicable to some small and medium size businesses), (b) lack of trained workforce, (c) moderate level of complementarities among stakeholders, (d) facing challenges due to environmental pollution (costal areas and sound pollution), lack of consensus among stakeholders, and high level of labour turnover27.

27 Summary of key findings are presented in annex 5.

7. Policy Orientated Recommendations

Introduction This section summarizes the key characteristic and issues facing informal sector operators and identifies recommendations for the government, and the Skills for Inclusive Growth (S4IG) project to address challenges faced by the informal sector operators in the four districts. The ultimate objectives of these recommendations are to tap the potentials of the Tourism Industry in such a manner that local communities and disadvantaged groups benefit.

7.1 Summary of the Findings

• The majority of informal workers engaged in the food & beverage and to a lesser extent transportation sub-sectors in the study districts and any attempt to improve earning and employment opportunities needs to focus more on these two sub-sectors. • These sub-sectors tend to be dominated by relatively older female, young or middle-aged male workers. Also, women involvement in the informal activities around the Tourism Industry is relatively higher in some districts. • Firm size in the informal sector is very small, consisting of one or two persons and reason for this situation includes some structural weaknesses such as unwillingness to expand or lack of business confidence, severe competition, and seasonal fluctuation in sales. Moreover, labour turnover is also a concern in the industry. • Levels of education and training remained relatively low among persons engaged in the informal activities for these sectors. Language ability remained very poor among those engaged in the informal activities. • There are a number of unfilled vacancies for middle and low skill categories in the Tourism Industry and this varies across districts, with levels increasing during peak season. • Workers lack soft skills such as communication, team work, responsibility taking, and leaderships. These skills are important no matter the sector to which workers join. • Finally, the workers (those who obtained some training) have received lower level of training, i.e. certificate level training. However, it is doubtful to what extent such training is appropriate given the level of quality expected by incoming tourists. • A clear dualism exists in the industry where little complementarity occurs between the formal large and informal small operators. • Formal operators in the industry mainly connect with the formal businesses in sourcing their inputs (both goods and services). • Compared to small & medium businesses, large operators source a limited amount of labour from the local economy/community and so the local community benefits marginally from the Tourism Industry.

• Small & medium businesses in the Tourism Industry connect largely with the local economy for their labour and inputs. Nevertheless, local economy/community accounts for a tiny share of the total Tourism Industry value addition in respective districts. This suggests tourism value chain has largely failed to connect with the local economy in the selected districts. The exception to the above statement is the Ampara district. • Limited linkages with local economies across the districts occur for the following reasons; Tourism Industry has enormous potential in uplifting the livelihood of people living in the four selected districts. However, the present state of affairs will not generate such wide-spread benefits due to factors just highlighted above. It is widely recognized in the literature that pro- poor initiatives need target local people and businesses, mainly informal businesses, linked with the tourism value chain in a sustainable and productive manner so as to make opportunities available for men and women in the society to benefits from the Tourism Industry. A number of countries have initiated programmes to achieve above objectives though effectiveness of such initiatives is not evaluated empirically.

Table 4: Key Reasons account for the lack of linkages between the informal and formal sector in the Tourism Industry

• Lack of trained workforce, • Inefficient suppliers with limited capacities (in terms of quantity and quality), • Large players organizing the value chain horizontally, • Financial and capacity constraints faced by small & medium businesses, • Unfair business practices adopted by large operators in the industry, • Limited number of tourism product development • State policies creating unequal access to natural resource assets such as costal belt, • Limited of training and motivation in small & medium businesses to expand their activities, • Lack of information on products and services offered by the informal sector operators, • Mis-trust among players in the industry, • Missing (or under-performing) markets due to quality concerns, • Small & medium businesses lack information and knowledge on tourism related products and services, • lack of product innovation, • Lack of concerns in guaranteeing quality (through certification, labelling etc.) in products and services offered by small and medium businesses, • Informal small & medium businesses mostly get branded as back-packers’ places, and cultural concerns.

7.2 Recommendations for the Government The Government of Sri Lanka formulated a Tourism Strategic Plan (TSP) 2017 with a broader objective of transforming the industry in achieving Sustainable Development Goals (SDGs). Some of the recommendations made below may reiterate some of the already identified areas while others may be important in achieving government’s ultimate objective of achieving SDGs. (a) Public Invest in tourism site and product development A number of owners/managers highlighted the fact that one of the key issues faced by the industry in the Eastern Province (including Polonnaruwa district) is the fewer tourist attractions (tourist sites) and/or fewer number of tourism products. On account of this situation, tourists (both local and foreign) either do not visit the region or decide to spend less time when they do travel to the area. As a result, industry participants get fewer opportunities for value addition. It is required that central and provincial governments allocate sufficient resources for developing tourist sites and products. Both central and provincial governments have identified several sites and products for development, however, implementation remains far from satisfactory. (b) Developing a regional talent pipeline in collaboration with the private sector operators. One of the key concerns of the industry is that current public funded human resources development programmes do not meet the industry requirements. As discussed above, it is relatively harder to find middle level and senior level staff from the region and even low skill candidates do not receive sufficient training from the public funded institutes. Policy makers must come up with a comprehensive human resources development plan and implement it with a close industry collaboration. Policy makers need to encourage the industry to take more responsibilities in designing and conducting training programmes. It is important that regional business leaders to play a key role in developing and maintaining a talent pipeline. Policy makers need to give greater responsibility to private sector and private sector needs to get in board collectively to address the present skill shortage in the region.. (c) Maintaining law & order and ethnic harmony One of the key responsibilities of the state is to maintain law and order in a country. The region is clearly divided along the line of ethnicity and religion. Ethnic and religion diversity could be immensely useful for the industry provided such plural societies do not disrupt the social harmony. Recent incidents in the country, including in Ampara district, could have a negative effect on the Tourism Industry. Tourism Industry suffered a lot due to the civil war which protracted around 30 years in Sri Lanka. Tourism Industry in the Northern and the Eastern Provinces witnessed a huge blow during the period. The revival of the industry during the post war could be reversed or experienced slow march if the state does not pay enough attention to improving social harmony by implementing required constitutional changes. Consensus building is not an easy task since wounds created during the war have not meaningfully been recovered. (d) Request BIO registered businesses to comply with the initial agreement on sourcing local labour from the region.

It was revealed during the survey that BOI registered hotels and restaurants agreed to recruit at least 40 per cent of the total employees from the region. Large hotels/restaurants were offered certain benefits on the basis of the above agreement. However, none of the hotels/restaurants interviewed have met this requirement so far. The hoteliers argued that they are unable to find suitable workers from the region. However, at the time of the agreement, the hotels would have known to this fact since the province had undergone severe hardship due to the civil war. Government needs to encourage and support large hoteliers to meet the agreement since this arrangement could immensely benefit locals in the region as well as the industry.

(e) Enforce already agreed regulations on environment, health, and safety A number of hoteliers, of all sizes, pointed out how the industry suffers due to violations of standards environment, health, and safety rules and regulations. Coastal areas have severely been polluted due to waste dumping whereas sound pollution has seriously affected accommodation providers. A number of small scale providers have entered into the accommodation business, but it is not clear whether they comply with health and safety standards. Similarly, small scale restaurants also operate disregarding basic health and safety standards. During the survey, it was witnessed that small operators pay less attention to basic health and safety standards. Moreover, some managers of the medium and large hotels/restaurants highlighted the poor health and safety standards maintained by small scale providers. Hence, central and provincial government need to educate small & medium size businesses and make sure they follow basic health and safety standards. (f) Consensus building among operators in the Tourism Industry Central and provincial governments need to explore possibilities for building meaningful relationship among industry stakeholders for enhancing and sharing value addition in the industry. A number of developing countries such as South Africa, Gambia, and Indonesia have developed such stakeholder consensus for improving local linkages. It is important to remind that improving local linkages not only benefits local people but also helps in developing the industry in a socially sustainable way. Large and medium size operators need to recognize that developing local linkages imperative for long-run sustainability of the industry. Similarly, small players need to recognize the importance of the roles played by the large and medium size hotels play in attracting high spending tourists to the local areas. Different stakeholders have their own strengths and weaknesses and what is needed is to form a collision for industry’s future growth and sustainability.

7.3 Recommendation for the S4IG programme (in terms of interventions)

This section highlights some of the intervention strategies to achieve the broader objectives of the Skills for Inclusive Growth (S4IG) program. According to S4IG program, it aims at supporting sustainable job creation and business growth along the tourism value chain in Sri Lanka, including in the informal sector. In this respect, the S4IG initiative plans to introduce targeted and flexible skills and business development programs. This study identifies some intervention strategies to promote inclusive growth in the context of the Eastern Province. The relative importance/relevance of a particular intervention in a given district is summarised and presented in Table 4. Accordingly, most of the intervention strategies are highly relevant in Batticaloa district. (a) Promote Social Enterprises As discussed above, medium and large operators in the industry face few constraints when sourcing inputs locally (see Figure 1). Major among them are supply constraints, quality concerns, variety constraints, timely delivery constraints, and uncompetitive prices. These factors force large and medium size hotels/restaurants to look for established large players who are generally located outside the region. Most of the above issues could be avoided by forming social enterprises where the social entrepreneur connects with small producers in supplying raw materials and collecting final outputs. The case study found a social entrepreneur who was initially supported by an International Non- Government Organization (INGO) under the post-tsunami livelihood restoration programmes. It collect final products from the farmers by paying market prices and supply to hotels and restaurants in the region. In addition, it connects with several homestay providers and provides them necessary supports and information for the business. It connects with several small holder vegetable, spices, and fruit producing farmers in the area and provides them raw materials as well as information relating to quality maintenance as well as pesticide and fertilizer use. Figure 1: Activities around a Social Entrepreneur

Hotels/Restaurants

Output flow

Input flow

Social Entrepreneur

Small Small Small Small producer/provider producer/provider producer/providers producer/provider

This model could be further strengthened and introduced to the other districts. Under the above arrangement, it is found that rural women benefits largely since most home gardening is carried out by women. This model could be introduced not only for small agricultural producers but also for fishermen and meat producers as well. Small scale fishermen as well as meat producers face several constraints in supplying their products to formal sector businesses. One of such constraints is the lack of cooling facility. This intervention is largely relevant for Batticaloa and Trincomalee districts. A number of strategic areas/concerns must be taken into account at the implementation stage; namely (a) awareness on the objectives and benefits of the arrangement and (b) drafting a comprehensive, yet, easy to understand contract. It is required to pay greater attention in selecting potential entrepreneurs for social enterprises to avoid exploitation in the long-run. (a) Promote non-profit organizations for providing various services Formation of non-profit organization – with the support of provincial government and Sri Lanka Tourist Development Authority – could be useful way to support small and medium operators, mostly informal operators, in the industry. Informal operators face several constraints in the area of advertising, marketing, and finances. Most of the cases, they tend to reply on friends and relatives for information. It is important that they reach accurate and reliable information for better decision making. However, information is costly and small and medium operators find it harder to reach out such information. Non-profit organizations could effectively fill this gap by providing necessary services at a reasonably low price. Non-profit organizations could also help businesses to transit from informal to formal. Moreover, non-profit organization could educate small operators on various types of products and services offered tourists in various parts of the world. Moreover, non-profit organization could provide translation facilities. For instance, these organizations could help preparing menus, posters, and other leaflets in different languages. Moreover, it is possible to make available resources useful for language learning, quality maintenance, food & beverage cultures in different countries. Non-profit organization may need political backing and some financial support from the provincial government. It also could charge reasonable charges for some of the services it offers. It is possible that such non-profit organizations close link with regional universities and other higher education institutes rather than operating in isolation. The universities and higher education institutes could facilitate most of the activities. (b) Piloting consensus building initiatives – Multi-stakeholder platform Creating a multi-stakeholder platform is a pre-requisite for developing and strengthening backward linkages useful for creating opportunities for workers engage in the informal sector. As discussed, there is an information gap between the formal and informal operators in the industry. This information gap has resulted fewer linkages as well as distrust between the two segments. Existing situation is harmful for the industry since it marginally utilizes local sources and resources for value addition. In particular, closer cooperation prevents informal operators joining the tourism value chain in a meaningful manner. Some developing countries such as South Africa has attempted at creating a multi-stakeholder platform for generating more opportunities for

informal businesses run by the marginalized black community. Informal operators could enhance the quality of their products and services while formal sector businesses could make use of products and services as inputs and/or facilitate the sales of their final products and services to tourists. Consensus building exercise needs some local political blessings and strong backing from the government agencies working in the Tourism Industry. Local political leaders could stress the need for a consensus on the ground of benefits locals could derive from such initiatives. Prior to launching initiatives for building consensus, it may be useful to make local politician aware about the benefits of a consensus building as well as the level of the existing linkages (summary of the findings of this study may be useful). (c) Support for product innovation & development Small and medium size operators tend to offer a set of homogeneous products and services. This is mainly due to lack of product innovation and development. Heterogeneity of the basket of products and services offered largely determines the tourist expenditure in any given locality. Lack of innovative products and services is partly due to lack of knowledge on numerous goods and services offered to tourists in major tourists destinations in and outside Sri Lanka. Hence, it is essential that informal sector operators are educated on potential products and services that could be offered to tourists and extend support for developing such products and services. Product and service development may require things such as technology and finance. Non-profit organizations could play a key role in sharing information related to various traditional foods, beverage and cuisines. Moreover, Department of Food Science of regional universities could also extend their assistance through non-profit organizations to support product development and innovation. (d) Support for a ICT based solution for improving value chain Information gap among stakeholders is a severe issue in the Tourism Industry in four districts. Input buyers, mainly hotels and restaurants, have insufficient knowledge about the quality and quantity offered by different input suppliers. And on the other hands, input suppliers have limited understanding on the quality and quantity required by input buyers. This information gap resulted inefficient market conditions for inputs. Similarly, managers in most medium-size and large hotels and restaurants stated that they have no idea about products and services offered by informal sector operators. Some hotels display products and services offered by some organisations such as war widows. Some hotels display information about some restaurants. This information gap could effectively be address by introducing a mobile app (possible name might be ‘bee’ from the full term, ‘Buy East, be East)28. It not only enhances business opportunities available for informal sector operators but also allows medium-size and large hotels/restaurants to buy quality products at competitive prices. Moreover, it will be possible to provide

28 Bee is always busy in collecting small quantities and producing a quality final product. This mobile app could also facilitate connecting small quantities and producing quality final products and services.

employment opportunity related information into this system. This is one of the potential market-based solutions for the industry. It is important to examine whether such ICT based solution is acceptable to all stakeholders (see Figure 2). Figure 2: Composition of Stakeholders

Job seekers Tourists Accommoda Social tion enterprises providers

'Buy East, Be East' - (Bee) - Associations Restaurants Mobile apps

Mobile Individual technology Hotels Informal provider suppliers

The stakeholder consensus building may provide an ideal platform for identifying, designing, developing, and launching the mobile app. In such a context, the stakeholder may share the ownership of the app thereby receiving wider acceptance. During the developing stage, it is importance to consider technical, market, and financial feasibilities of the app. (e) Groups formation and strengthening (capacity building) A small operator is vulnerable on several grounds when act alone due to a number of reasons. In particular, small operator is unable to offer the variety and quantity demanded by large-scale hotels and restaurants. Moreover, opportunistic behavior of some small operators could have a long lasting adverse effect. Hence, it is important to encourage small operators – producers, homestay providers, restaurants, etc. – to form groups and draw up some basic principles – related to price, quality, and other things – for operations. For instance, in Arugam Bay, Ampara district, tuk-tuk operators have formed an association and prepared a set of operational guidelines. The discussions with stakeholders revealed the presence of organizations mostly looking after the welfare of individual members. These associations act, to a limited extent, on issues common to all the members. Hence, to some extent, the S4IG initiative needs to look into avenues for strengthening the existing groups and direct them to develop certain norms and rules for operations.

(f) Financial support for building capital stock: matching grants or soft loans One of the key issues faced by medium and small businesses in the Tourism Industry is the lack of finance, in particular, working capital. Some small restaurants find it difficult to provide products and services for vouchers since it takes nearly 1-2 months for receiving cash. Colombo- based tourist hotels/agents often issue vouchers instead of cash in buying goods and services at outstations. As a result of this situation, tourist guides often stop only at places where vouchers are accepted, mostly at large-scale hotels/restaurants/craft sellers. This state of affairs largely restricts opportunities for small operators to cater to the tourists. Access to finance is severely restricted on several grounds such as collateral requirements. Informal operators tend to borrow from the informal financial market at high interest rate. As a direct consequence of this situation, small operators tend to operate with limited capital stock. In this context, it is important to introduce a soft loan or matching grant scheme so that small operators could buy essential capital goods. The S4IG could explore the possibility of joining force with some other donors to launch this initiative. Soft-loan may be more productive than the matching grants. It will be useful to utilize the existing banking system to channel funds for matching grants/soft loans. (g) Conduct awareness programmes on benefits of maintaining conducive environment As discussed earlier, the industry is under threat due to environment pollution and various social misdeeds. Some of these are due to lack of public awareness while the others are due to lapses in law and order. It is needed to carry out a comprehensive programmes in educating public on the importance of protecting environment and social order. (h) Provide training on selected areas such as entrepreneurship, marketing, and management Compared to other parts of Sri Lanka, in particular Southern province, and in other tourist localities in developing countries, a large number of businesses could be started up in the Eastern Province and in Polonnaruwa districts provided proper training is given to existing and potential entrepreneurs. As found in our case study exercise, existing managers/owners of small and medium size businesses have not received any formal training on entrepreneurship and marketing. Most of them have either received some experiences as employees and/or inherit businesses from their parents. Hence, there is a real need in the study area to provide comprehensive training on entrepreneurship and marketing. It is important to conduct these training in collaboration with the vocational training institutes in the areas (be them private or public funded). Moreover, it is also important to improve the capacity of training institutes/trainers in order to make sure the sustainability of human resources development related above areas. The S4IG could join hands with National Enterprise Development Authority (NEDA) it its endeavor to conduct above training programmes as the NEDA is one of the public funded institute in carrying out training and supporting programmes for enterprise development.

(i) Promote women entrepreneurship for selected areas There are a number of areas for promoting women entrepreneurship training. These may include; (a) beauty parlor, (b) local food centers, (c) local cultural and dancing performance

center, (d) Teaching local languages and (e) local clothing centers. The Department of Agriculture provide training on preparing food using local ingredients and centers opened in some part of the country are operating very successfully. The department has put up the physical structures and trained women engaged in preparing and serving local foods. It is possible to start up such centers closer to tourist sites and provide opportunities for women to engage in such businesses. (j) Business couching center Business couching center could take few innovative steps in promoting entrepreneurship potential business starters. These include (a) providing one-to-one meeting with experts (accounts, lawyers, marketing managers, financiers etc.), (b) funding for individual and group entrepreneurship, (c) making available various resources useful for business start-up, and (d) online and off-line courses to educate potential entrepreneurs on fundamentals in entrepreneurship.

Table 4: Relative Importance of the Proposed Intervention by District Ampara Batticaloa Trincomalee Polonnaruwa Promote social enterprises

Non-profit organization for providing various services Consensus building among stakeholders

Support for product innovation and development Introducing a Mobile app for connecting businesses around the Tourism Industry Group formation and strengthening

Financial support for enhancing capital stock Conduct awareness on the benefits of the tourism and ethnic harmony Provide training on entrepreneurship, marketing, and management Promote women entrepreneurship in selected areas Business couching centers

Relative Importance High Medium Low Level

7.4 Concluding comments This section attempted to make some recommendations to uplift the livelihood of people engaged in the informal economic activities around the Tourism Industry. Government has formulated a policy framework for transforming the Tourism Industry with the ultimate objective of achieving sustainable development goals. On the other hand, the S4IG program specifically emphasize on improving skills and promoting businesses for a inclusive growth and development. The identified recommendations fall in line with the objectives of the government’s policy framework as well as that of the S4IG program. In the context of developing countries, particularly in Sri Lanka, policy execution remains very weak due to a number of reasons. It is important that the S4IG program coordinates with relevant parties (public and private organizations) and falls in line with the overall policy framework (in particular, with the Tourism Strategic Plan 2017) when implementing the policy recommendations. Some of the policy recommendations, for instance ICT based solution, may need further refining at the implementation stage.

Reference Adiyia, B., Vanneste, D., Van Rompaey, A., &Ahebwa,W. (2014),“Spatial Analysis Of Tourism Income Distribution In The Accommodation Sector In Western Uganda”, Tourism And Hospitality Research, 14(1–2), 8–26. Ashley, C., Roe, D. And Goodwin, H. (2001) Pro-Poor Tourism Strategies: Making Tourism Work For The Poor. A Review Of Experience. Pro-Poor Tourism Report No. 1, Accessed Via Http://Www.Propoortourism.Org.Uk/Ppt_Report.Pdf Bah And Goodwin (2003), "Improving Access For The Informal Sector To Tourism In The Gambia", Access Via Https://Www.Odi.Org/Sites/Odi.Org.Uk/Files/Odi- Assets/Publications-Opinion-Files/4032.Pdf Department Of Census And Statistics (2016), Labour Force Survey, 2016: Colomb, Department Of Census And Statistics Of Sri Lanka Fields, S. G. (2005),“A Guide To Multi-Sector Labour Market Model”, Paper Presented At World Bank Labour Market Conference, Washington, USA. Retrieved From Http://Www.Law-Economics.Cn/Book/17.Pdf Goodwin (2007), "Tourism, LOCAL Economic Development, AND POVERTY REDUCTION", Access Via Http://Haroldgoodwin.Info/Uploads/ARED2008goodwin_Online_V5n3_Propoor_ Tourism.Pdf Government Of Sri Lanka (2017), Tourism Strategic Plan, Colombo: Government Of Sri Lanka Government Of Sri Lanka (2005), Mahinda Chinthanay, Colombo: Government Of Sri Lanka Government Of Sri Lanka (2010), Mahinada Chinathanaya Forward Vision,Colombo: Government Of Sri Lanka Government Of Sri Lanka (2016), Powerful Sri Lanka, Colombo: Government Of Sri Lanka Government Of Sri Lanka (2016), Small And Medium Enterprises Development Action Plan (SME-DAP), Colombo: Government Of Sri Lanka Kirsten, M. And C. Rogerson (2010), "Tourism, Business Linkages And Small Enterprise Development In South Africa", Development Southern Africa, Vol. 19(2) Meyer, D. (2006), “Caribbean Tourism, Local Sourcing And Enterprise Development: Review Of The Literature. Pro Poor Tourism”, Working Paper No 19, London: Overseas Development Institute (ODI), International Institute For Environment And Development (IIED) And International Centre For Responsible Tourism (ICRT). Mitchell, J., And Faal, J. (2008),“The Gambian Tourist Value Chain And Prospects For Pro- Poor Tourism”, Overseas Development Institute. Nyaupane, G. P., And Poudel, S. (2011),“Linkages Among Biodiversity, Livelihood, And Tourism”,Annals Of Tourism Research, Vol. 38(4). Schneider, F. (2016), “Estimating The Size Of The Shadow Economies Of Highly-Developed Countries: Selected New Results”, DICE Report, 14(4), 44-53.

Slocum, S. L., Backman, K. F., And Robinson, K. L. (2011),“Tourism Pathways To Prosperity: Perspectives On The Informal Economy In Tanzania”, Tourism Analysis,Vol. 16(1). Standing, G. (1999), Global Labour Flexibility: Seeking Distributive Justice, New York: St. Martin’s Press. Timothy, D.J., And Wall, G. (1997), “Selling To Tourists: Indonesian Street Vendors”, In: T. Huybers (Ed.), Tourism In Developing Countries, Edward Elgar Publishing, Massachusetts, USA, 319-339 Wahab, I, N. Rohana, And S. Zarina (2015), "The Sustainable Competitive Advantage Of Small And Medium Enterprises (Smes) With Intellectual Capital, Knowledge Management And Innovative Intelligence: Building A Conceptual Framework", Advanced Science Letters 21(5):1325-1328 World Travel And Tourism Council (2017), Travel & Tourism: Economic Impact 2017 - Sri Lanka: Colombo, World Travel And Tourism Council

Annex 1 Methodology for Estimating Informal Sector Contribution to Gross Domestic Product (GDP) Among the alternative methods, this study employed an indirect approach in estimating the size of the informal sector in the Tourism Industry. World Travel and Tourism Council (2017) recently estimated the Tourism Industry total value addition. This allowed us to estimate the relative share of the industry as a percentage of GDP. Next, we made use of the total value addition of the non-agriculture sector and estimated the relative size of the non-agriculture sector’s value addition in GDP. Relative share of the informal sector’s (in the Tourism Industry) value addition is the weighted share of the total Tourism Industry value addition. The share of the non- agriculture sector value addition was used as the weight for the calculation. This study estimated the relative share of the informal sector’s (in the Tourism Industry) value addition for the entire economy as well as for the Eastern province. The share of the Tourism Industry’s value addition in the Eastern Province was calculated by adjusting the total industry value addition to the guest nights (both local and foreign) in the province. Detailed methodology is presented in the appendix. The estimation is based on data collected for a number of sources such as Central Bank of Sri Lanka, Department of Census and Statistics, Annual Statistical Report published by Sri Lanka Tourism Development Authority, and the recent research published by World Travel & Tourism Council. Specifically, the methodology adopted is outlined as follows; Estimating at national level Where; y= GDP (national or provincial)[source: Central Bank of Sri Lanka) x= tourism industry value addition[Source: World Travel and Tourism Council] [x/y]= share of tourism industry value addition in GDP z= informal non-agriculture activity value addition[Source: Department of Census and Statistics of Sri Lanka] [z/y]= share of the informal non-agriculture value addition to GDP

Share of the total value addition of the informal sector in the tourism industry to national GDP = [x/y]*[z/y] Estimating at provincial level The department of census and statistics estimate provincial GDP, however, data are not available for the provincial tourism industry value addition. This study employs a proxy measure, namely share of foreign and local guest nights in the Eastern Province to total foreign and local nights in Sri Lanka, for capturing Eastern Province’s tourism industry value addition29. Eastern Province Tourism value addition (q);

29 It is possible that this measure may over-estimate the tourism sector contribution in the province.

q=x*(EP’s total guest nights to total guest nights in Sri Lanka) p= Eastern Province (EP) GDP [Source: Central Bank of Sri Lanka] q= Tourism industry value addition in the EP [Source: Author’s calculation] [q/p]= EP tourism industry value addition in the EP to EP’s GDP r= Non-agriculture informal sector value addition in the EP [Source: Department of Census and Statistics of Sri Lanka] [r/p] = share of the informal non-agriculture value addition in the EP to EP’s GDP Share of the total value addition of the informal sector in the tourism industry in the EP to EP’s GDP = [q/p]*[r/p] It is possible that this measure contains some limitations, nevertheless, having some understanding on the share of informal sector contribution to provincial GDP would be useful for policy makers and development practitioners30.

30 Terms of Reference (TOR) of the study requires to estimate the contribution of the food & beverage sector contribution of gross value addition. However, it is difficult to derive such disaggregated numbers due to lack of reliable data for the province.

Annex 2

A2-1: Changes in Economic and Tourism Industry Policy Frameworks

Annex 2

A2-1: Changes in Economic and Tourism Industry Policy Frameworks

Table A2-1: Changes in Economic and Tourism Industry Policy Framework National Economic Policy Period Regime Tourism Development Strategy Main features of strategies

1937 -first tourism bureau was Before The pre-independence - open established Provided services to the passengers who sailed between the West and 1948 economic policy 1940 - Tourist Bureau ceased its East through the port of Colombo operation during to the war Continuation of pre- 1948- independence open economic 1948 -Revival of government Began to undertake tourism marketing and promotional strategies 1956 policy tourist bureau immediately after the independence from the colonial rulers Under the closed economy tourism 1956- Closing up the economy with did not play an important role in the Under the directionless and loosely organized tourist bureau there were 1965 the import-substitution strategy national development strategy no tourism promotional and marketing activities

1966 -The government legislative Revival of tourism promotion and marketing strategies body was established for the Tourism board Act No 10 of 1966 tourism sector Ceylon Hotel corporation Act no 14 of 1966 Tourism development act no 14 of 1968 1956- Partial departure from the 1970 closed economy 1966 -Introduction of the first ten The plan became the blueprint for tourism development and witnessed year master plan for tourism first tourism boom in Sri Lanka The country witnessed a first-wave of new hotel construction with five resort development zone

Rate of investment growth in tourism fell down due to the re- No new government initiative to Closing up the economy establishment of import control measures. However, tourism grew develop tourism 1970- rapidly as a result of previous promotional activities and peaceful 1977 environment 1977-introduction of trade Opening the economy liberalization, exchange rate reforms and incentives for FDI Sri Lanka managed to attract a large number of tourists specially from 1977- Second-wave of economic 1992 - Introduction of the second Europe under the open economic policies, Tourism was promoted. The 1996 reforms in 1989 ten year tourism master plan progress continued till 1983. Tourism became a victim of was since 1983

Continuation of opening 2002 - signing a cease fire economic policies with some agreement and created peaceful The relatively peaceful short term environment gave rise to an increase limitation environment for the tourism sector in tourism arrivals to Sri Lanka

2005 - new tourism act Closer relationship between government and private sector through 1996 to 2008 - introduction of the third joined experiences. The tourism board built integrated approach to 2014 tourism master plan tourism End of the war in 2009 - launching a new tourism promotion strategy Tourism sector has made a remarkable recovery and it is became one of 2011 - implementation of the the fastest growing and dynamic industries in the country mainly due to tourism development strategy the peaceful environment Tourism strategic plan recommends actions and implementation mechanisms for the next four years, with a long-term view toward Tourism Vision 2025 and achieving the united nations (un) sustainable development goals. The strategic plan focuses heavily on promoting sustainable tourism that Continuation of open economic 2015 to 2017 -Sri Lanka tourism strategic creates jobs and promotes local culture and products policy framework with greater date plan private sector participation It aims at making the industry Sri Lanka's 3rd highest foreign exchange earner, creating employment opportunities for 600 thousands, and make sure women accounting at least 10 per cent of the total employment, and increasing daily expenditure by a tourist The Tourism Strategic Plan pay greater attention on informal sector actors and aim at getting them to mainstream

Annex 3 Characteristics and Nature of the Informal Sector - Tables

Table A3-1: Distribution of Informal establishments and persons engaged in accommodation, food, and beverage by district District No of Total Male Female (Female/Total) businesses employment % Ampara 3,759 6,185 2,838 3,347 54 Batticaloa 3,590 6,867 4,351 2,516 37 Tricomalee 2,016 3,236 2,038 1,198 37 Polonnaruwa 2,299 4,313 2,110 2,203 51 Source: Economic Survey, 2013/14

Table A3-2: Distribution of Workers employed in Informal Economic Activities around the TourismIndustry All informal activities in the Food & Beverages District TourismIndustry Male Female Male Female Ampara 638 462 5,146 919 Batticaloa 3,833 887 7,034 2,059 Polonnaruwa 843 1,425 3,480 1,425 Trincomalee 1,982 845 6,130 845 Source: Labour Force Survey 2015

Table A3-3: Relative importance of Employment in Food & Beverage Sector District As a % of total informal employment in TourismIndustry Ampara 18.14 Batticaloa 51.91 Polonnaruwa 46.24 Trincomalee 40.53 Sri Lanka 29.35 Source: Labour Force Survey 2015

Table A3-4: Distribution of informal workers in the Food & Beverage sector in the four selected districts by age in ‘East +’ Male Female Less 20 2.9 5.6 20-29 26.5 5.6 30-39 17.6 27.8 40-49 29.4 16.7 50-59 11.8 33.3 60-69 8.8 11.1 70 or + 2.9 0.0 Total 100 100 Source: Author’s estimation based on LFS, 2015

Table A3-5 : Distribution of Workers by Industry and Gender in ‘East +’ Male Female 2-digit Industry Formal Informal Total Formal Informal Total Retail Activities 2.1 3.0 2.9 8.6 7.4 7.5 Transport 8.5 63.8 56.4 2.9 4.3 4.2 Water Transport 0.0 0.1 0.1 0.0 0.0 NA Accommodation 59.3 6.8 13.8 45.7 7.4 12.5 Food & Beverage Supply 21.2 23.3 23.0 22.9 78.7 71.3 Renting vehicles 0.5 0.3 0.4 0.0 0.9 0.8 Tourist guides 8.5 2.7 3.5 20.0 1.3 3.8 Total 100.0 100.0 100.0 100.0 100.0 100.0 Source: Author’s estimation based on LFS, 2015

Table A3-6: Distribution of Workers by Firm Size – All Island Firm Size Formal Informal Less than 5 0.0 16.1 5-9 0.0 6.1 10-15 22.8 1.2 16-49 22.8 0.4 50-90 17.4 NA 100 or more 32.6 0.1 No paid employees/regular employees 4.5 75.9 working for household 0.0 0.1 Total 100.0 100.0 Source: Author’s estimation based on LFS, 2015

Table A3-7: Distribution of Workers by Education and Gender: Tourism Industry – All Island Formal Informal Education level Male Female Total Male Female Total Below Gr5 0.0 0.0 0.0 9.1 17.4 10.4 Gr5-9 7.4 11.4 8.0 22.5 20.9 22.3 GCE O/L 65.1 45.7 62.1 62.2 47.8 59.9 GCE A/L & above 27.5 42.9 29.9 6.1 13.9 7.4 Total 100.0 100.0 100.0 100.0 100.0 100.0 Source: Author’s estimation based on LFS, 2015

Table 3A-8: Distribution of Informal workers in the Tourism Industry by Education Level in the ‘East +’ Region education level Male Female Below Gr5 17.3 32.0 Gr5-9 30.6 24.0 GCE O/L 45.9 40.0 GCE A/L & above 6.1 4.0 Total 100.0 100.0 Source: Author’s estimation based on LFS, 2015

Table A3-9: Distribution of Informal workers in Food & Beverage Sector by Education Level in ‘East +’ education level Male Female Below Gr5 29.4 33.3 Gr5-9 52.9 16.7 GCE O/L 11.8 50.0 GCE A/L & above 5.9 NA Total 100.0 100.0 Source: Author’s estimation based on LFS, 2015

Table A3-10: Training Received by Field of Training: All Island Field % Food & Bakery 4.52 Clothing related 1.01 Small Business 0.5 Technical Production 0.5 Maintenance 1.01 Transport Related Mechanics 15.08 Technical 5.53 Electricity related 10.55 House Designing 0.5 Building construction 1.51 Health service 1.01 Teaching 0.5 Computer related 17.09 Management, Sale and Finance 4.52 Business and Management 3.52 Tourism Related 22.61 Office services 1.51 Personal care/Services 1.51 Law related 0.5 Languages 1.51 Personal hospitality 0.5 Handicraft, dancing, music 3.02 Designing 1.01 Media related 0.5 Source: Author’s estimation based on LFS, 2015

Table A3-11: Training Level by Sector Engaged Training certificate Formal Informal Total General Certificate 62.0 77.5 71.4 Diploma Certificate 32.9 17.5 23.6 Higher diploma Certificate 1.3 0.8 1.0 NVQ Certificate 3.8 4.2 4.0 Total 100.0 100.0 100.0 Source: Author’s estimation based on LFS, 2015

Table A3-12: English Language Ability by Education Level in ‘East +’ Region English language ability Formal Informal Ability to read & write English language 22 7 Unable to read & write English language 78 93 Total 100 100 Source: Author’s estimation based on LFS, 2015

Annex 4 Value Chain Analysis Tables

Table A4-1: Local Sourcing: All Raw Materials - Ampara District % of local sourcing More Size 20-50% 51-80% than 80% Total Less than 5 employees 25.00 0.00 75.00 100.00 5-25 employees 0.00 33.33 66.67 100.00 More than 25 employees 0.00 50.00 50.00 100.00 Source: Primary survey

Table A4-2: Level of Local Sourcing: Low Skill Employees - Ampara District % of Local sourcing Size 21-50% More than 80% Total Less than 5 employees 50.00 50.00 100.00 5-25 employees 33.33 66.67 100.00 More than 25 employee 50.00 50.00 100.00 Total 42.86 57.14 100.00 Source: Case-study survey Table A4-3: Level of Local Sourcing: Middle Skill Employees - Ampara District % of Local sourcing Size 20% or less 21-50% More than 80% Total Less than 5 employees 0.00 25.00 75.00 100.00 5-25 employees 0.00 33.33 66.67 100.00 More than 25 employee 50.00 0.00 50.00 100.00 Total 11.11 22.22 66.67 100.00 Source:Case-study survey Table A4-4: Level of Local Sourcing: All Inputs (products/Services): Batticaloa District % of local sourcing: All Inputs Size 20-50% 51-80% More than 80% Total Less than 5 employees 0 0 100 100 5-25 employees 0 33.33 66.67 100 More than 25 employee 100 0 0 100 Source: Case-study survey

Table A4-5: Level of Local Sourcing: Middle level employees: Batticaloa District % of local sourcing More than 80 20% or less 21-50% per cent Total 5-25 employees 0.00 0.00 100.00 100.00 More than 25 employees 75.00 25.00 0.00 100.00 Source: Primary survey

Table A4-6: Level of Local Sourcing: High skill employees: Batticaloa District % of local sourcing Size 0% 20% 100% Total Less than 5 employees 0.00 0.00 100.00 100.00 5-25 employees 0.00 0.00 100.00 100.00 More than 25 employee 75.00 25.00 0.00 100.00 Source: Primary survey

Table A4-7: Level of Local Sourcing: All Inputs (products/Services): Polonnaruwa District % of local sourcing: All Inputs Size of the business 20-50% 51-80% More than 80% Total Less than 5 employees 0.00 20.00 80.00 100.00 5-25 employees 0.00 50.00 50.00 100.00 More than 25 employee 100.00 0.00 0.00 100.00 Source: Case-study survey

Table A4-8: Level of Local Sourcing: Labour Input: Polonnaruwa District Low Skill workers Size 51-80% More than 80% Total Less than 5 employees 0.00 100.00 100.00 5-25 employees 0.00 100.00 100.00 More than 25 employee 100.00 0.00 100.00 Middle Skill workers Less than 5 employees 0.00 100.00 100.00 5-25 employees 0.00 100.00 100.00 More than 25 employee 100.00 0.00 100.00 Source: Case-study survey

Table A4-9: Lack of Technology and Information: Polonnaruwa District Size No barrier Minor barrier Substantial barrier Total Less than 5 employees 20.00 60.00 20.00 100.00 5-25 employees 50.00 0.00 50.00 100.00 More than 25 employee 100.00 0.00 0.00 100.00 Source: Case-study survey

Table A4-10: Knowledge of a foreign language: The Largegest Constraint in Finding Workers (%) low skill Middle skill Size workers workers Less than 5 employees 50.00 50.00 5-25 employees 25.00 50.00 More than 25 employee 25.00 0.00 Source: Case-study survey

Table A4-11: Main Barrier to Increase Sales: Opportunities Restricted by Major Industry Players: Polonnaruwa District No minor Severe Size barrier barrier barrier Total Less than 5 employees 0.00 40.00 60.00 100.00 5-25 employees 50.00 50.00 0.00 100.00 More than 25 employee 100.00 0.00 0.00 100.00 Source: Case-study survey

Table A4-12: Main Barriers to Increase Sales: Lack of Working Capital: Polonnaruwa District Severe No Minor substantial Barrie Size barrier barrier barrier r Total Less than 5 employees 0.00 20.00 20.00 60.00 100.00 5-25 employees 0.00 50.00 0.00 50.00 100.00 More than 25 employee 100.00 0.00 0.00 0.00 100.00 Source: Case study survey

Table A4-13: Barriers affecting the growth of businesses: Labour Turnover in Trincomalee District Minor Substantial Severe Size barrier barrier barrier Total Less than 5 employees 50.00 50.00 0.00 100.00 5-25 employees 33.33 33.33 33.33 100.00

More than 25 employees 0.00 50.00 50.00 100.00 Source: Case-study survey

Table A4-14: Local sourcing: Middle skill workers – Trincomalee District % of local sourcing 20% or 21- 51- More Size less 50% 80% than 80% Total Less than 5 employees 50.00 25.00 0.00 25.00 100.00 5-25 employees 0.00 0.00 25.00 75.00 100.00 More than 25 employees 100.00 0.00 0.00 0.00 100.00 Source: Case-study survey

Table A4-15: Local sourcing: Low skill workers – Trincomalee District % of local sourcing More Size 21-50% 51-80% than 80% Total Less than 5 employees 25.00 0.00 75.00 100.00 5-25 employees 0.00 25.00 75.00 100.00 More than 25 employees 100.00 0.00 0.00 100.00 Source: Case-study survey

Table A4-16: Local sourcing: All inputs – Trincomalee District % of local sourcing Less than More than 20% 51-80% 80% Total Less than 5 employees 0.00 75.00 25.00 100.00 5-25 employees 0.00 100.00 0.00 100.00 More than 25 employees 100.00 0.00 0.00 100.00 Source: Case-study survey

Table A4-17: Is foreign language a Barrier for Recruitment? Trincomalee District size No Yes Total Less than 5 employees 25.00 75.00 100.00 5-25 employees 50.00 50.00 100.00 More than 25 employees 0.00 100.00 100.00 Source: Case-study survey

Annex 5 Supply Chain Maps

Figure A5-1a: Supply Chain: Small Hotels/Restaurants/Accommodation Providers: Ampara District

Outside the region Within the region Products/services purchase

Many Informal sector Vegetables, Fruits, fish, producers/collectors/trad meat, dairy products, ers rice, poultry products etc. Farmers in nearby villages/region Super markets Informal Farmers/collectors Oil, cheese, butter, other ingredients used for cooking purposes and National level Few Informal sector stores preparation of beverages producers/distributors

National level Whole sellers Weekly market (pola) – Sanitary, cleaning, and producers Informal traders other related products

Main agriculture marketing center Transport, laundry, Few Individuals (Dambulla) cleaning, accounting, ICT related services

Note:Size of the arrow reflects the magnitude of sourcing

Figure A5-1b: Supply Chain: Medium-size Hotels/Restaurants/Accommodation Providers: Ampara District

Outside the region Within the region Products/services purchase

Few Informal sector Vegetables, Fruits, fish, collectors/traders meat, dairy products, rice, poultry products etc. Farmers in nearby villages/region Super markets Farmers/collectors Oil, cheese, butter, other ingredients used for cooking purposes and General stores National level preparation of beverages producers/distributors

National level Whole sellers Few whole sellers Sanitary, cleaning, and Producers other related products

Main agriculture Few small marketing center Transport, laundry, (Dambulla) firms/individuals cleaning, accounting, ICT related services

Note:Size of the arrow reflects the magnitude of sourcing

Figure A5-1c: Supply Chain: Large-size Hotels/Restaurants/Accommodation Providers: Polonnaruwa District

Outside the region Within the region Products/services purchase

Informal Vegetables, Fruits, fish, collectors/traders meat, dairy products, rice, poultry products etc. Whole sellers in outside the region Super market chain Informal Farmers/collectors Oil, cheese, butter, other ingredients used for cooking purposes and National level preparation of beverages producers/distributors

Producers in outside Whole sellers Few whole sellers in the Sanitary, cleaning, and the region region other related products

Main agriculture marketing center Few firms Transport, laundry, Firms in outside the (Dambulla) cleaning, accounting, ICT region related services

Note:Size of the arrow reflects the magnitude of sourcing

Figure A5-2a: Supply Chain: Small Hotels/Restaurants/Accommodation Providers: Batticaloa District

Outside the region Within the region Products/services purchase

National level Whole sellers Weekly market (pola) – Sanitary, cleaning, and producers Informal traders other related products

Main agriculture marketing center Transport, laundry, Few Individuals (Dambulla) cleaning, accounting, ICT related services

Note:Size of the arrow reflects the magnitude of sourcing

Figure A5-2b: Supply Chain: Medium-size Hotels/Restaurants/Accommodation Providers: Batticaloa District

Outside the region Within the region Products/services purchase

Few Informal sector Vegetables, Fruits, fish, collectors/traders meat, dairy products, rice, poultry products etc. Farmers in nearby villages/region Super markets Farmers/collectors Oil, cheese, butter, other ingredients used for cooking purposes and National level Genera stores preparation of beverages producers/distributors

National level Whole sellers Few whole sellers Sanitary, cleaning, and Producers other related products

Main agriculture Few small marketing center Transport, laundry, (Dambulla) firms/individuals cleaning, accounting, ICT related services

Note:Size of the arrow reflects the magnitude of sourcing

Figure A5-2c: Supply Chain: Large-size Hotels/Restaurants/Accommodation Providers: Batticaloa District

Outside the region Within the region Products/services purchase

A collector (fish) Vegetables, Fruits, fish, meat, dairy products, rice, poultry products etc.

Whole sellers

Informal Farmers/collectors Oil, cheese, butter, other ingredients used for cooking purposes and National level preparation of beverages producers/distributors

Few whole sellers in the Producers in outside Whole sellers Sanitary, cleaning, and region the region other related products

Main agriculture marketing center Few firms Transport, laundry, Firms in outside the (Dambulla) cleaning, accounting, ICT region related services

Note:Size of the arrow reflects the magnitude of sourcing

Figure A5-3a: Supply Chain: Small Hotels/Restaurants/Accommodation Providers: Polonnaruwa District

Outside the region Within the region Products/services purchase

National level Whole sellers Weekly market (pola) – Sanitary, cleaning, and producers Informal traders other related products

Main agriculture marketing center Transport, laundry, Few Individuals (Dambulla) cleaning, accounting, ICT related services

Note:Size of the arrow reflects the magnitude of sourcing

Figure A5-3b: Supply Chain: Medium-size Hotels/Restaurants/Accommodation Providers: Polonnaruwa District

Outside the region Within the region Products/services purchase

Few Informal sector Vegetables, Fruits, fish, collectors/traders meat, dairy products, rice, poultry products etc. Farmers in nearby villages/region Super markets Farmers/collectors Oil, cheese, butter, other ingredients used for cooking purposes and National level preparation of beverages producers/distributors

National level Whole sellers Few whole sellers Sanitary, cleaning, and Producers other related products

Main agriculture Few small marketing center Transport, laundry, (Dambulla) firms/individuals cleaning, accounting, ICT related services

Note:Size of the arrow reflects the magnitude of sourcing

Figure A5-3c: Supply Chain: Large-size Hotels/Restaurants/Accommodation Providers: Polonnaruwa District

Outside the region Within the region Products/services purchase

Vegetables, Fruits, fish, meat, dairy products, rice, poultry products etc.

Whole sellers Super market chain Informal Farmers/collectors Oil, cheese, butter, other ingredients used for cooking purposes and National level preparation of beverages producers/distributors

Producers in outside Whole sellers Few whole sellers in the Sanitary, cleaning, and the region region other related products

Main agriculture marketing center Few firms Transport, laundry, Firms in outside the (Dambulla) cleaning, accounting, ICT region related services

Note:Size of the arrow reflects the magnitude of sourcing

Figure A5-4a: Supply Chain: Small Hotels/Restaurants/Accommodation Providers: Trincomalee District

Outside the region Within the region Products/services purchase

National level Whole sellers Weekly market (pola) – Sanitary, cleaning, and producers Informal traders other related products

Main agriculture marketing center Transport, laundry, Few Individuals (Dambulla) cleaning, accounting, ICT related services

Note:Size of the arrow reflects the magnitude of sourcing

Figure A5-4b: Supply Chain: Medium-size Hotels/Restaurants/Accommodation Providers: Traincomalee District

Outside the region Within the region Products/services purchase

Few Informal sector Vegetables, Fruits, fish, collectors/traders meat, dairy products, rice, poultry products etc. Farmers in nearby villages/region Super markets Farmers/collectors Oil, cheese, butter, other ingredients used for cooking purposes and National level preparation of beverages producers/distributors

National level Whole sellers Few whole sellers Sanitary, cleaning, and Producers other related products

Main agriculture Few small marketing center Transport, laundry, (Dambulla) firms/individuals cleaning, accounting, ICT related services

Note:Size of the arrow reflects the magnitude of sourcing

Figure A5-4c: Supply Chain: Large-size Hotels/Restaurants/Accommodation Providers: Trincomalee District

Outside the region Within the region Products/services purchase

Vegetables, Fruits, fish, meat, dairy products, rice, poultry products etc.

Whole sellers A collector (fish products) Informal Farmers/collectors Oil, cheese, butter, other ingredients used for cooking purposes and National level preparation of beverages producers/distributors

Producers in outside Whole sellers Few whole sellers Sanitary, cleaning, and the region other related products

Main agriculture marketing center Few firms Transport, laundry, Few fiirms (Dambulla) cleaning, accounting, ICT related services

Note:Size of the arrow reflects the magnitude of sourcing

Annex 6 Case Study Sample Profile Tables

A6-A: Distribution of Sample by Mostly engaged economic activity: Polonnaruwa District Main activity No of businesses % Food & Beverages 12 60 Accommodation 5 25 Crafts & artifacts 2 10 Transportation services 1 5 Total 20 100

A6-B: Distribution of Sample by Mostly engaged economic activity: Trincomalee District Main activity No of businesses % Food & Beverages 12 60 Accommodation 6 30 Bar 1 5 Crafts 1 5 Total 20 100

A6-C: Distribution of Sample by Mostly engaged economic activity: Batticaloa District Main activity No of businesses % Food & Beverage 12 60 Accommodation 4 20 Craft, gifts, artifacts 1 5 Transportation services 1 5 Fish & organic food suppliers 2 10 Total 20 100

A6-D: Distribution of Sample by Mostly engaged economic activity: Ampara District Main activity No of businesses % Food & Beverage 10 50 Accommodation 5 25 Renting vehicles and tourism related equipment 2 10 Ayuredic Spa 1 5 Organic food supplier 1 5 Safari & surf lessons 1 5 Total 20 100

A6-E: Distribution of Sample by Size of the Business (in full-time employment): Trincomalee District Size No of businesses <5 employees 8 5-25 employees 8 More than 25 employees 4

A6-F: Distribution of Sample by Size of the Business (in full-time employment): Polonnaruwa District Size No of businesses <5 employees 10 5-25 employees 7 More than 25 employees 3

A6-G: Distribution of Sample by Size of the Business (in full-time employment): Batticaloa District Size No of businesses <5 employees 7 5-25 employees 7 More than 25 employees 6

A6-H: Distribution of Sample by Size of the Business (in full-time employment): Ampara District Size No of businesses <5 employees 10 5-25 employees 7 More than 25 employees 3

A6-I: Types of value chains Investigated 1 Food & Beverages 2 Accommodation 3 Bar/restaurant 4 Spa 5 Craft producing/Crafts selling 6 Fish collecting and distributing 7 Vehicles renting 8 Renting sport equipment 9 Conducting Surf lesson 10 Growing vegetables/fruits 11 Laundry services 12 Fun entertainments 13 Artifacts selling 14 producing and Selling decorated furniture 15 Producing and selling furniture relate products 16 Local beverage (king coconuts, orange etc.) 17 Selling Gift items 18 Safari tours/tour guides 19 Coffee Bar 20 Ayurvedic spa 21 Producing organic fruits 22 Collecting and distributing Vegetable, spices, and fruits

A6-J: Age-Profile of Managers Interviewed Age group Male Female Total 20-29 6.90 0.00 5.71 30-39 34.48 50.00 37.14 40-49 37.93 50.00 40.00 50-59 10.34 0.00 8.57 60 + 10.34 0.00 8.57 Total 100.00 100.00 100.00

A6-K: Distribution of managers by Education level and Firm Size

Primary or GCE A/L or less Secondary GCE O/L above Total Less than 5 employees 6.670 73.330 13.330 6.670 100.000 5-25 employees 0.000 25.000 58.330 16.670 100.000 More than 25 employee 0.000 0.000 28.570 71.430 100.000 Total 2.940 41.180 32.350 23.530 100.000

Annex 7 Summary of Case Study Findings

• A clear dualism in the industry where little complementarity exists between the formal big and informal small operators. • Formal operators in the industry largely connect with the formal businesses in sourcing their inputs (both goods and services). • Small & medium businesses in the Tourism Industry connect largely with the local economy/community for labour services and inputs. • Compared to small & medium businesses, big operators source labour very limitedly from the local economy/community. If any, such sourcing mostly limit to low skill workforce. • On account of above state of affairs, local community benefits very limitedly from the Tourism Industry. Except in Ampara district, tourism value chain very limitedly touches the locals.Local economy/community accounts for a tiny share of the total Tourism Industry value addition in respective districts. In other words, tourism value chains has largely failed to connect with the local economy in the selected districts. • Limited linkages between locals and Tourism Industry is due to number of reasons; (a) lack of trained workforce, (b) inefficient suppliers with limited capacities (in terms of quantity and quality), (c) big players organizing the value chain horizontally, (d) financial and capacity constraints faced by small & medium businesses, (e) unfair business practices adopted by big operators in the industry, (f) limited number of tourism products (g) state policies creating unequal access to natural resource assets such as costal belt, (h) limited of training (i) limited motivation among owners/managers of small & medium businesses to expand their activities, (j) lack of information on products and services offered by the informal sector operators, (k) mis-trust among players in the industry, (l) missing (or under-performing) markets due to quality concerns, (m) small & medium businesses lack information and knowledge on tourism related products and services, (n) lack of product innovation, (o) lack of concerns in guaranteeing quality (through certification, labelling etc.) in products and services offered by small and medium businesses, (p) informal small & medium businesses mostly get branded as back-packers’ places, and (q) cultural concerns. • Small businesses run by women face several constraints.These include lack of proper training, limited working capital, and ownership of assistance. In addition, they lack marketing skills and social recognition. They show interest in business expansion, however, their capacity is constrained by their family and social responsibilities. • General unwillingness to hire female workers due to barriers such as working hour restriction, limited areas of placement, security issues, and attitudes towards working women at tourist hotels.

• Moreover, lack of educated and trained females is also a barrier for recruiting female workers. Cultural concerns over working in the Tourism Industry prevent female receiving training in the field of Tourism Industry. • Case studies found evidence that lack of working capital is a severer in women headed businesses than that of the male-headed businesses. This may be due to multiple factors such as poor access to credit, lack of assets, poor level of social capital, and lack of proper training on financial management. Hence, intervention strategies must be designed to address this issue through interventions such as introducing matching grants or soft-loan scheme and enhancing financial management knowledge among women. • It is interesting to find that women-run businesses have positive attitude towards employing female workers as against the male-run businesses. It is possible that female workers prefer working at women-run businesses due to security and cultural concerns and/or women managers find it easy to manage businesses with female workers. Regardless of the underlying reasons, this implies that supporting women businesses could promote female participation in the Tourism Industry. • People with disabilities receive very limited opportunities to engage in economic activities in the Tourism Industry. General unwillingness to offer job opportunities to people with disabilities due to lack of required skills in them as well as physical constraints. In particular, little support to people with disabilities if they are ex-combatants. • Foreign language ability is extremely poor at small businesses in the food and beverage sub-sector. This has become one of the major stumbling blocks for both small and medium businesses reaching foreign tourists. Hence, improving language capacities remains as one of the top priorities of any policy intervention to improve the livelihood of poor engage in the Tourism Industry. • Tourism Industry has enormous potential in uplifting the livelihood of people living in the four selected districts. However, the present state of affairs may not automatically generate such wide-spread benefits due to factors just highlighted above. It is widely recognized in the literature that pro-poor initiatives need get local people and businesses, mainly informal businesses, linked with the tourism value chain in a sustainable and productive manner so as to make opportunities available for men and women in the society to benefits from the Tourism Industry. A number of countries have initiated programmes to achieve above objectives though effectiveness of such initiatives are widely not evaluated empirically.

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