The Curionomist Podcasts | #4: A Chat with AirBnB’s Mike Orgill

My first experience with AirBnB was on a trip to Europe last year – couldn’t have afforded France if not for it, and got insider tips, driving cheats, and great eats because of it.  A year later, it was great to catch up with a top AirBnB official and chat about the platform. Mike Orgill, head of Public Policy for AirBnB Asia-Pacific, was in town for the Sri Lanka Economic Summit 2016 and we did this podcast on the sidelines of the event. We talked about AirBnB and its role in global travel, the public policy tensions the platform has to contend with, whether the sharing economy has led to the emergence of ‘crowd regulation’, and how AirBnB is growing in Sri Lanka. I last met him when he visited Colombo in his previous role at Google and it was a pleasure catching up with him again.

(Skip to the podcast here)

Growth of AirBnB

The platform now has over 1.7 million homes in 34,000 cities and 191 countries. In fact, they are the first American travel brand to enter Cuba after relations were normalised recently, and they are not in only a handful of countries like North Korea and Syria. On a peak night last August around 1 million people across 180 countries stayed in an AirBnB property. Just this week, the company filed papers in Delaware state to raise US$ 850 million on a US$ 30 billion valuation. This would take AirBnB’s equity raise up to US$ 3.2 billion (yet, still only a fraction of Uber’s US$ 68 million valuation).

Regulatory shift

While staying with AirBnB hosts in different cities, I couldn’t help but think about how regulators must be utterly confused as to how to tackle this growing phenomenon. Unlike in traditional hotel regulation, where a country’s tourism authority would set standards and benchmark properties against it before rating them (1 to 5 stars, for instance), with AirBnB the regulators and ratings are by the community itself. It’s a complete shift in how regulation occurs.

The flat is you-clean, but is it me-clean?

I guess a big difference to contend with is that while community regulation can work – with so many people rating and scoring hosts and travellers on various aspects of the stay – each one of us has different standards – particularly on things like cleanliness. While in a traditional hotel model, a room’s cleanliness would be rated against a benchmark set by a single authority, and that would be applied more or less equally across all other hotels with that start-class regulated by that authority. Think about it – do all your friends have the same level of cleanliness or standards of hygiene that you do?

What do we call it?

With AirBnB there isn’t a single authority or regulator. It is large distributed groups of people. There are tens of thousands of regulators, as it were. It has blurred the lines between the users of a platform and regulators of that platform’s product/service offering. Economists are yet to figure out what to call this. I would suggest one of the following – ‘Distributed Regulation’, ‘Crowd Regulation’, ‘Community Regulation’.

Tourism tensions?

Whatever it is called, the fact remains that AirBnB is coming up against tourism incumbents and also confusing traditional regulators. How do you even begin to regulate something that is just an online platform? Something that simply connect micro-entrepreneurs offering a place to stay, with buyers (travellers). An economic service that is blurring the lines between personal and professional in the provision of commercial hospitality services. How do you even begin to think about taxes? In a speech at a World Economic Forum event, AirBnB co-founder welcomed working with regulators. “As we grow we want to partner with cities. The bigger we get the more regulators say Airbnb are partners to us […] the more people learn about airbnb, the more they love us […] we want to be regulated. To regulate AirBnB is to recognise AirBnB”.

I believe that it is in the interests of tourism agencies, like the Sri Lanka Tourism Development Authority, to take genuine interest, to not attempt to squash it or fumble with regulation of it; rather, to foster it, work with it, and use it to promote more visitors to the country.

Listen to the podcast below (or here).

The new fees on businesses hurt entrepreneurship

The government recently imposed an Annual Registration Fee on Private Limited Companies of LKR 60,000 and a LKR 250,000 closing down fee, both of which were announced in Budget 2016 and came in to effect last month. I find these new fees deeply problematic, for many reasons:

  • The fee affects all private limited firms regardless of their size or any other differentiating characteristics. In taxation there is a principle called ability to pay, and expecting a small one person modest revenue operation to pay the same fee as a larger substantially more profitable one does not make sense. Similar here, this ‘fee’ (which is essentially a flat tax) applies to all firms equally. Considering that a large number of private firms are actually SMEs (in fact according to the latest Economic Census, 99% of all establishments are either micro, small or medium), this LKR 60,000 p.a. fee is often a substantial cost on business operations
  • Imposing a fee for closing down a firm is a recipe for greater in formalisation. Who would want to formally register a business, taking a risk, when there is a LKR 250,000 price tag in the event of having to close down, i.e., fail. This new fee essentially acts as a penalty for failure and is a strong dampener on both risk taking as well as formality. This does not sit well with a country’s development objective of encouraging greater formalisation of firms.
  • This then has a knock-on effect on overall firm growth as well as tax compliance and collection. If such a charge discourages firms from becoming formal, it will affect tax collection. The discouragement to formalisation also affects the firm’s ability to borrow from formal sources, access formal support from institutions, and grow, expand into new markets, access technology, etc.
  • I was also told by many entrepreneurs who wanted to pay the annual registration fee and be compliant that for many weeks and months there was uncertainty as to whether this new regulation was confirmed or not; from which date it is being applied; and from who more information can be obtained. This sort of uncertainty, gaps in information, all add to transactions costs for the firm – particularly smaller firms with limited resources to expend on regulatory compliance requirements, unlike larger firms.

These fees need a serious reconsideration. They hurt entrepreneurship. They impose disproportionate costs on smaller firms than larger ones. They discourage risk-taking and put a penalty on failure. They discourage formalisation. They hamper access to finance and firm growth. And they will ultimately affect tax revenue.

Policy Uncertainty, Raising FDI, Promoting Business – Interview in Sinhala to යුක්තිය (‘Yukthiya’)

This is Part 2 of a recent interview I gave to a Sinhala language current affairs website, යුක්තිය (‘Yukthiya’). It is originally published here http://yukthiya.lk/3577-2/

පසුගිය කොටයේ අවසානයෙන් සාකච්ඡාව ආරම්භ කරන්නේ නම් උදාහරණයක් ලෙස මගේ මිතුරෙක් මොබයිල් පේමන්ට් ඇප් එකක් සංවර්ධනය කළේ ය. ලංකාවේ මහ බැංකුවේ දැනට තිබෙන නීති රිති නිසා ඒ ආයතනය අපේ රටේ පිහිටුවන්නට අපහසු විය. ඊට පසු එම මිතුරා සිංගපූර්වට ගොස් ඒ ආයතනය එම රටේ ආරම්භ කළේ ය. ඒ ඒ වෙළඳ ආයතනය මේ රටේ ලියාපදිංචි වි තිබෙන්නේ. නමුත් ඉහත ප්‍රශ්නය නිසා ඒකට බදු ගෙවන්නේ සිංහපුර් රජයට ය. ඒ වගේ වෙළඳ ව්‍යාපාරයක් ලංකාවේ තබාගන්නට නොහැක. ඒ උදාහරණය ගත්තාම අපිට පෙනෙනවා තොරතුරු තාක්ෂණය අංශයේ එවැනි ව්‍යාපාර මේ රටේ බොහෝ ඇති බව. ඒ වාගේ ම ජාත්‍යාන්තර ජංගම ව්‍යාපාර ද මේ රටේ ඕනෑ තරම් තිබේ. මේවා වෙනත් නිෂ්පාදන මෙන් නොව ලෝකයේ වෙනත් රටක ස්ථාපිත කළහැක. නමුත් ඒ ක්ෂේත්‍රයෙන් බදු අය කරන ක්‍රමවේදයන් ඉතාම සුක්ෂම ය. මා පෙර සඳහන් කළ ආකාරයට ලංකාවේ පුළුල් වි තිබෙන්නේ 60%ක්ම සේවා අංශය නම් ඒ ක්ෂේත්‍රයෙන් බදු අයකරන ක්‍රමවේද තවම දියුණු වී නැති බවයි මට පෙනෙන්නේ. ඒක අද මේ බදු දැළ පුළුල් කරන්නට නොහැකි වීමේ ප්‍රශ්නයක් ලෙස පවතී. පෙර මෙන් සෘජු ලෙසම අතට අසුවෙන දේ පමණක් අපි නිෂ්පාදන කළේ නම් මා ඉහතින් සඳහන් කළ ආකාරයට ඒවාට බදු පැනවීම අපහසු නොවේ. දැන් අපේ ආර්ථිකයේ විශාලතම අංශය සේවා අංශය නම්, ඒ අංශයෙන් බදු අය නොකරන්නේ නම් බදු දැල පුලුල් වන්නේ කෙසේ ද? මේ අංශයෙන් බදු එකතු කිරීම අමාරු වන්නට පුළුවන් වන නමුත් වහාම ඒ අංශය මේ බදු දැළට ඇතුල්කරගත යුතු ය.

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Tax Troubles – Interview in Sinhala to යුක්තිය (‘Yukthiya’)

I recently gave an interview on Sri Lanka’s continuing tax troubles, and the impact on the economy, to a Sinhala language current affairs website, යුක්තිය (‘Yukthiya’). I reproduce it in full here (Part 1), with due credit to where it is originally published here – http://yukthiya.lk/ද-දේ-නි-ප්%E2%80%8Dරතිශතයක්-ලෙස-කි/

අප රටේ බදු වැඩි කිරීම පිළිබඳව අප සමාජයේ සාකච්ඡාවක් ඇත. බොහෝ විට මේ සාකච්ඡාවට දේශපාලන අභිලාෂයන් මුසුවීම වැළක්විය නොහැක. එහෙයින් බදු වැඩිකිරීම හා අඩු කිරීම ගැන සාකච්ඡා කරන්නට ප්‍රථම, මා කල්පන් කරන්නේ වෙනත් තැනකින් මේ සාකච්ඡාවට ප්‍රවේශවීම යෝග්‍ය බව ය. ඒ අනුව දළ ජාතික නිෂ්පාදිතය ප්‍රතිශතයක් ලෙස ලංකාවේ බදු ප්‍රතිශතයේ ප්‍රමාණ කොපමණ ද යන්න ප්‍රථමයෙන් අපි ආරම්බ කරමු. කුමන ආකාරයට බදු අඩු වැඩි කළත් ලංකාවේ වසර ගණනාවක් තුළම දළ ජාතික නිෂ්පාදනයට සාපේක්ෂව බදු ප්‍රතිශතය අඩු වී තිබේ. ආර්ථික විශේෂඥයින් කිහිප දෙනෙක්ම පවසා තිබෙන්නේ මෙය ලෝකයේ කිසිම රටක සිදු නොවූ ආකාරයේ අඩුවීමක් බව ය. සාමාන්‍යයෙන් රටක ආර්ථිකයක් නැතිනම් ආර්ථික කටයුතු පුළුල්වන විට ඒ රටේ ආදායම් බදු දෙපාර්තමේන්තුව එකතුකරන බදු වෙන කිසිම රටක නොවන ආකාරයට අඩුවී තිබෙනවා නම් ඒකට හේතුව කුමක් ද යන්න ප්‍රථමයෙන් බැලිය යුතු ය. ඒ අනුව අලුතින් පුළුල් වී ඇති ක්ෂේත්‍රයන් බදු දැළට ඇතුලත් නොවීම මෙයට ප්‍රධාන ලෙස හේතුවක් ලෙස සලකන්නට පුළුවන.

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Brexit Post: Readers’ Views

After my recent post setting out the possible channels of impact of Brexit for the Sri Lankan economy, I had some really excellent and insightful comments from readers who wrote back to me. I thought of sharing some of them here.

(If you need a quick ‘get me smart’ guide to the Brexit and what happened, this post from NYT is great)

On the impact through the exports channel, a friend studying in the UK wrote back,

It would be useful to see what percent of the UK’s overall imports are made up by that 10% of Sri Lanka’s to them (industrywise), and what our industries should be focusing on doing to ensure they retain that hold in order to benefit and grow immediately after the 2 year divorce case the UK is supposed begin after invoking Article 50? To me that seems the only thing we can do now, depending on the terms of exit negotiated by the UK-EU?

He also noted the polarisation of views across the country, particularly ‘London versus the rest’,

“…the overall sentiment in this part of the country (South West of England) was pretty interesting over the last few weeks. Particularly an anti-London/anti-expert bent among small business owners, which is the polar opposite of those who have/are working in or with the City. Interesting too were the dynamics among age groups that I noted here. I can’t speak for the rest of the country, but the (admittedly small) sample group I had access to surprisingly did not seem to consider immigration their number one concern (perhaps because those older folks in the immediate area here are generally of the upper income bracket, whilst the small business owners that I spoke to such as plumbing shops, some builders, real estate companies etc. don’t directly employ much EU labour). The farmers will be hit by a potential pull out of EU subsidies, unless a post-Brexit govt continues it, so they almost certainly voted to remain. In some ways, it just seemed those around here voting out wanted to say a big F U to Cameron, to the City bankers telling them what to do, and the perceived oligarchy – although not the ideal way to set about these things. Today, the sentiment seems to be one of disbelief – among the Brexiters just as much as the Remainers. 

Another reader (an economist in an international lender) wrote back with a substantial set of new questions that arise from all this,

I agree with the views expressed by you. Given that all countries now need to negotiate trade agreements with Britain where would we stand?  How would the priorities assigned by the British government.  Would Sri Lankan ministers role publicized role in the Referendum have any adverse impact on the negotiations.  Should Sri Lanka given so much publicity to Sri Lanka’s role? ……This might be something the Government needs to look into in their future strategy.  Looks like there will be other referendums in the future in other countries such as the Netherlands, France etc. Are all exports to EU (especially to Britain) under GSP plus? In any case the GSP plus is still not in operation, isn’t it? Probably the fish exports will have a more serious impact but given its early stages may need to take immediate action  and the GOSL can immediately negotiate with Britain on the  concessions. Immediately with the collapse in the Sterling pound the imports will be cheaper in UK and the demand might be more to offset the concessions. That might give the GOSL time to negotiate.  However as you pointed out raising funds for the Government in the short term would be a problem. BREXIT might have a ripple effect in EU countries and therefore it might be better for the Government to strat preparing for it if certain countries are major trading partners.

In my original post, I had not highlighted the impact of Brexit (and a sharp fall in the Sterling) on remittances to Sri Lanka, as another reader (an economist at a local think tank) pointed out,

Another way Sri Lanka will be affected by the Brexit is through our expatriates in England. If the pound remains weak the remittances they send will be low.  A large number of Sri Lankan expatriates also visit the country yearly as tourists. These flows will also get affected.

Another reader’s comments (an apparel exporter) really captured the continued uncertainty of it all and the need for Sri Lanka to brace itself,

I guess the problem is the great unknown. By most reckoning it will take the full 2 years for the UK to negotiate the exit, and given that they don’t look like invoking the infamous Article 50 until Cameron’s successor is appointed in October, we should be able to continue on the status quo until then? 2 key things to push would be a) to independently negotiate a trade agreement with the UK – this should be “relatively” easy as the current political relationship is good, and b) as you say aggressively pursue new markets. That unfortunately has been a call for some time now, but there doesn’t really seem to be much progress there. Overall 2016 will be extremely challenging from an apparel perspective. Both the EU and the US markets are down and the uncertainty over the process and implications of Brexit together with the upcoming US elections and all that chaos will continue to restrict demand for our product.

Meanwhile, renown economics Professor at ANU, Premachandra Athukorala, wrote back with a different perspective to mine on the potential trade impacts,

I am not sure that trade impact of  Brexit  (on Britain and her trading partners)  is going to be that significant.  The bulk of trade (over 70%) between Britain and the EU countries takes place within global production networks.  Tariff rate differentials are not a sigficant determinant of locational decisions of firms within production networks (such as Japanese automakers assembling cars in England for the other European countries). 

Another relevant point is that Britain’s bilateral trade with some major non-EU countries has been glowing at comparable or at even higher rates in rent year.   (The role of tariff (and tariff reductions under FTAs has been vastly exaggerated in the recent trade policy debate in Sri Lanka. Frankly I do not any reason for any hasty response on our part to diversify export market or to get into the costly business of signing FTA with other countries.

He also shared this paper that looks at ‘Global production sharing and the measurement of price elasticity in international trade’

I will keep updating this post as new views come in.

Brexit it is then.

Please note that the contents of this post are my personal observations and not to be published and attributed to the Ceylon Chamber of Commerce (CCC). The CCC will be releasing a statement within the course of the day, in response to numerous requests from the media.
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Here are some of the early impacts in global markets:
  • The GBP has fallen by sharply, not seen since the financial crash of 2008/9. The GBP is at levels not seen since 1985. Currency markets are seeing sharp volatility. Global risk sentiment will be substantially negatively affected.
  • At the time of writing, GBP to USD is down a sharp 10.5%; GBP to EURO is down a sharp 6.8%; and EURO to USD is down over 4%. 
  • Update: FTSE opened 7% down; bank stocks have taken a sharp beating (around 30%); investors are flocking to ‘safe haven’ assets like gold, US treasuries, and USD
We are likely to see substantial market volatility in the coming days as the shock effect of the results pan out and markets take into account the impacts, with substantial dampeners on international currency and capital markets. Of course, with it bottoming out and stabilising over time as markets begin to price in the results.
Some likely  impacts for Sri Lanka are from the following channels:
  • The impact on international capital markets as volatility affects borrowing costs for countries like Sri Lanka. This is a spanner in the already edgy financial markets. Generally, in times of volatility, investors tend to stay out of frontier and emerging markets like Sri Lanka and go to safer assets like Dollar and Gold.
  • The impact on economic activity and dynamism in Europe and the impact on the markets for our exports there. Britain being in the EU helps the EU economy as a whole. Britain buys a lot from the Rest of Europe (ROE), encouraged by the free trade area and customs union. So the ROE’s exports will no doubt be impact.
  • SL having to do possibly do a bilateral deal with Britain, as regaining GSP plus won’t help in our market access to Britain. We will certainly not be the first in line for the bilatarels – estimates suggest Britain will have to do over 100 bilateral trade deals, which would take years
  • In the longer-term, if Brexit triggers other exits by other member countries (and there is no reason to believe this is immediately likely), this will affect the Euro and increase trade costs in Europe, which of course affects market access and competitiveness of Sri Lankan exports to Europe
  • Sri Lanka could also be impacted by a wider slowdown in the global economy – economists have estimated that Brexit could cause global growth to dip below 3% which is tricky territory.
  • Protracted political gridlock in the EU as a result of Brexit and the resultant negotiations for a post-Brexit deal can hurt policy coordination on economic issues, impacting business, trade and finance.
Now the severity of each of these impact channels on Sri Lanka won’t be known for sometime and we are not able to quantify the impact at this stage. These are the indicative channels of impact we should continue to look at.
As background information, 10% of Sri Lanka’s exports go to the UK (USD 1 billion; approx. LKR 139 billion) and 28.8% of exports go to the EU as a whole (USD 3 billion; approx. LKR 411 billion). Close to 56% exports go to the USA and EU together.
On the global implications, Standard Chartered Bank set out these in a Research Note circulated today, after the final results were announced:

 

The vote has hit global risk sentiment, with the USD and JPY rallying and Asia- Pacific equity markets selling off sharply. We expect more pronounced risk aversion in the coming days, with GBP assets at the heart of this negative dynamic. The euro area is also at the forefront, with bank equities likely to come under pressure and peripheral sovereign yields likely widening versus Germany. We expect GBP-USD to echo the c.15% fall following ‘Black Wednesday’; GBP-USD could fall to around 1.20- 1.25. We expect safe-haven flows into USD and JPY assets, with EUR-USD at 1.03, AUD-USD at 0.65, NZD-USD at 0.63, USD-CAD at 1.40 and USD-JPY at 95. The coming days will test central banks’ ability to support market sentiment, as well as the Bank of Japan’s willingness to allow broad-based JPY strength.

 

In an earlier post this week, I recapped what experts are indicating as the possible impacts of a Brexit on the Brtish economy, including the loss of GDP, impact on trade, and impact on jobs. This side by side comparison by the FT nicely shows how the EU membership has helped the British economy. While it isn’t certainly the only factor, it has contributed.
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The article by FT also summarises the forecasts by a bunch of economists and think tanks on the likely sustained growth impacts of Brexit.
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GBP v USD at 9.30am LK time
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GBP v EUR at 9.30am LK time
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Updated: 6.55pm LK time.
Cover image from BBC News

Britain’s EU Vote: Will Facts Win Over Fear?

This article originally appeared in the Sunday Observer of Sunday 19th June 

I could clearly see the transformation of London; returning after seven years, the evidence was everywhere. High-rise high-end apartment buildings dotting a new Docklands skyline; construction cranes across Zone 1 peering over the old city and shaping a new one; a new tech city with a clustering of ‘new economy’ businesses alongside the established ‘city’ financial district; digital and creative-types drinking flat white coffees amongst city workers – London had clearly continued to transform itself and become one of the fastest growing cities in Europe. And a magnet for people from across Europe seeking a piece of that success, as much of the rest of Europe languishes with tepid growth. My Uber driver on the ride from the airport, a Somalian immigrant and British citizen of twenty years, was rather enlightened. “They are taking a lot of jobs as Uber drivers, tube workers, plumbers and builders. It is even hard for people like us who aren’t from the EU – they get first preference. But without European migrants most places here wouldn’t be able to function. We all would be worse off”, he remarked. In a way, London is a victim of its own success. It wasn’t surprising that immigration had become such a top issue in the referendum debate.

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