BUILDING ECONOMICS AND SOCIOLOGY
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IX SEMESTER, B.ARCH
Table of Contents SECTION A: BUILDING ECONOMICS 1. Introduction to economics 1.1 Broad features of economics...................................................5 1.2 Macro and micro economics...................................................10 1.3Money and banking functions..................................................13 1.4Factors of production...............................................................22
2. Land economics 2.1 Land economics: Land as limited resource.............................25 2.2 Land development and conservation.....................................27 2.3 Public policies on land utilization and development...............31 2.4 Theories of land values...........................................................34 2.5 Acts.........................................................................................37
3. Building economics 3.1 Architectural aspects of building economics...........................45 2.2 Rent control and other building acts......................................55 2.3 Economics of high rise buildings............................................60
SECTION B: SOCIOLOGY 4. Man and his environment 4.1 Man and his social environment..............................................63
5. Urbanisation 5.1 Trends and characteristics.......................................................74
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5.2 Dynamics of urban growth, expansion and development.......82
5.3 Urban attitude, values and behaviour....................................86
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5.4 Study......................................................................................90
SECTION A: BUILDING ECONOMICS
1. INTRODUCTION TO BUILDING ECONOMICS 1.1 Broad features of economics 1.2 Macro and micro economics 1.4 Money and banking functions 1.5 Factors of production
1.1 BROAD FEATURES OF ECONOMICS
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Economics is the study of how people and society choose to employ scarce resources that could have alternative uses in order to produce various commodities and to distribute them for consumption, now or in the future, among various persons and groups in society. It is concerned
with the efficient utilisation or management of limited productive resources for the purpose of maximising human satisfaction of needs; and economics is a social science, which studies the principles controlling the alternative applications of limited means in satisfying unlimited wants. Lionel Robbins in a 1932: "the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses." The above definitions touch on several different themes of economics including: a) Scarcity; b) Choice; c) Opportunity cost; d) Specialisation; e) Exchange; f) Equity or income distribution; and g) Economic Systems. a) Scarcity Scarcity occurs when commodities used to satisfy people's material wants are not available in adequate amounts. Scarce commodities are called economic goods. Commodities that are not scarce are called free goods. The problem of scarcity is commonly known as the Economic Problem. It has two aspects: Society's material wants: the material wants of its citizens and institutions are virtually unlimited or insatiable; and economic resources: the means for producing goods and services are limited or scarce. An important question is: "why are commodities scarce?" They are scarce because the resources used to produce them are also scarce. These economic resources are land, labour and capital, also called the factors of production or inputs. b) Choice If all things are scarce in comparison to the desire for them, and if people have a lot of unsatisfied wants, they cannot satisfy all of their wants. People, therefore, have to make choices. In this case the economic problem is how best to use resources available to satisfy human wants. c) Opportunity Cost Opportunity cost is a direct result of having to make a choice. In making a choice, people have to sacrifice; this sacrifice is called opportunity cost or the cost of something given up in terms of alternatives forgone when a choice is made.
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d) Specialisation Specialisation results from division of labour, a result of the problem of scarcity. Its aim is to increase the productivity of labour to produce more goods and services with a given level of capital. This will in turn increase the ability of people t o satisfy their material wants.
e) Exchange Exchange complements specialisation. Any commodities produced must be bought and sold to help economic growth. There must be a ready market for those commodities produced otherwise specialisation would be of no benefit. The principle on which exchange is based is called the Law of Comparative Advantage. It states that it is beneficial if one specialises in the production of the commodity in which he/she is more efficient. International trade is based on this very simple principle. f) Equity or Income Distribution Equity is the distribution of income in society and suggesting how poor, disadvantaged people can be helped without harming the economy. Evaluating income distribution is a fundamental element of modern economics.
Traditional economies Custom and habit forms the cornerstone of the system of solving the economic problem. It is reinforced by superstition and religious belief s and is common in some developing countries.
Market economies There is predominantly private owner ship of economic resources. T he allocation and distribution of economic resources is determined by production, sales and purchase decisions taken mainly by firm s and households through the market forces of demand and supply.
Command economies This is a centre of all planned economy where most decisions about the ownership, allocation and distribution of resources are taken by the central authorities. Firms and households produce according to a “plan” drawn up by government bureaucrats. Competitive markets are not usually allowed to f unction.
Mixed economies This is where t he economic system is a combination of some or all of the other three systems. It may include some level of a market
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g) Economic Systems Another way to combat the problem of scarcity is to organise production and exchange into an economic system. An economic system has two elements: the forces of production; and the relations of production. The forces of production include tools, factories, equipment, production skills, and the level of knowledge of the labour force, natural resources, and the general level of technology. The relations of production are the social relationships between humans, particularly the relationship of each class of humans to the means of production. The basic types of economic systems or organisations are usually described as:
economy with a strong central government. There might be shifts in balance between these two forces. Economic growth is defined as an increase in an economy's ability to produce goods and services. Think of an economy as a giant cake. We all have a slice of the cake to eat, and may be happy with the size of our slice or not. If the economy grows, we would be able to see the overall size of the cake increasing. Whether or not our individual slice grows depends on whether we are able to share in the growing economy. Even if we do not benefit directly, we should still be able to see some advantages to the growing economy. This is because the extra economic growth should produce higher tax revenues, which can then be spent on public services that should benefit everyone. An increase in an economy's ability to produce goods and services, therefore increasing economic output, is possible under two conditions: 1.
More resources are used in the economy.
2.
Existing resources are used more efficiently.
The first resource is land. Even if you are producing a service, you will need somewhere to organise your work and do the necessary administration, such as invoicing your customers and so on. Manufacturers of a product have an even more pressing need for land, as they will require a production site or factory location with storage for supplies and parts. This means using the land resources of an economy. The next resource – labour, it's no good going to all the trouble of acquiring the location where we'll make the extra goods and services if we have no labour to carry out the work. Economic growth is measured in changes in what is called 'gross domestic product' (GDP). This is a measure of everything that has been produced in an economy. Barriers to economic growth We have seen earlier that the ability to grow an economy depends on using more resources (land and labour, for example), or on more efficient use of these resources.
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The correct term for the resources used is: factors of production. There are four factors of production: land, labour, capital and enterprise. Economic growth depends on the quality and availability of these factors. If any of the factors of production suffers from a lack of quality or availability, then economic growth will not be as great as its potential. So what can cause these factors of production to be of low quality or unavailable?
Insufficient or contaminated land
Substandard labour supply
Poor technical infrastructure, such as roads and communications
Poor social infrastructure, such as schools or hospitals
Poor industrial infrastructure, such as factories and machinery
Other barriers exist that can hamper countries' ability to grow their economies. They may be unable to gain access to export markets, due to the trade policies of other countries. In order to protect their own domestic producers, many countries block the imports of goods or services from other parts of the world. The World Trade Organisation (WTO) is a place where member governments go to sort out the trade problems they have with each other. Less developed economies Less
developed economies tend to be in the early stages of industrialisation. In fact many less developed economies have little or no industrial base. People in countries with less developed economies usually have a low standard of living. Seen more broadly than just in economic terms, people in these countries also tend to be ranked in a medium to low position in the Human Development Index, produced by the UNDP.
Less developed economies are often structured in such a way that agriculture forms a large part of their overall economy. Small scale or subsistence farming tends to produce low incomes for the people who work in these countries. This leads to low effective demand for goods and services other than those that are central to life. These economies are often characterised by having low levels of private investment. This tends to be because people are unable to save much of their already low incomes. High fertility rates are often seen in less developed economies. Children often form part of a family's wealth, as their labour is often seen as essential to the family's survival.
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Insufficient factors of production usually plague less developed economies. They can lack the ability to improve the social and technical infrastructure needed to boost their economies and can become stuck in a cycle of poverty.
The costs of economic growth One of the main concerns about expanding rates of economic growth focuses on the effects of congestion, pollution and carbon emissions on the environment. Economic growth in China and India raises fears that the resulting environmental damage could have serious impacts on us all. Other observers say that it is hypocritical for those in the developed world to preach to those trying to develop their economies. Another cost of economic growth is the loss of ancient ways of life and cultures. As countries industrialise, natural resources can be lost as more land is sought. The loss of huge areas of the Brazilian rainforest to cattleranching is an example of this effect. Some opponents to the trend towards greater globalisation in industry and economic development highlight criticisms of economic development that they see as generating large costs:
The 'one size fits all' view of economic development prevents subtle differences in the routes chosen to development.
The search for faster economic growth may prevent countries concentrating on social goals such as care for the elderly or children.
The acceptance of materialism as a general goal in life.
The homogenised global culture that some observers say has arisen.
Reference
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http://www.bized.co.uk/learn/economics/notes/features.htm
1.2 MACRO AND MICRO ECONOMICS: Macro is derived from the Greek word “makros” which means large. Macro economics may be defined as that branch of economic analysis which studies the behaviour of not one particular unit, but of all the units combined together. Macro economics is a study of aggregates. It is the study of the economic system as a whole – total production, total consumption, total savings and total investment. The following are the fields covered by macro economics: Theory of Income, Output and Employment with its two constituents, namely, the theory of consumption function, the theory of investment function and the theory of business cycles or economic fluctuations. Theory of Prices with its constituents of the theories of inflation, deflation and reflation. Theory of Economic Growth dealing with the long-run growth of income, output and employment. Macro Theory of Distribution dealing with the relative shares of wages and profits in the total national income.
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The study of macro economics is indispensable as it is the main agent for formulation and successful execution of government economic policies. It is also indispensable for the formulation of micro economic models. Macro economics is based on the belief that economics are subject to laws of nations, which are interdependent of the internal structure of their constituents. Since macro economics studies the trends in the business activities it has strong and direct orientation to public policy both at the level of debate of great issues of fiscal policy and at the more technical levels of operation of government agencies, which are shouldering the responsibility of creating climate for economic stabilization. [1]
Application: To understand why the overall flow of output and income fluctuates; what factors lead to the growth in the productive capacity and what are social and economic cost of economy’s growth, it is necessary to study the field of aggregate economics i.e., total output income. Another name for the aggregate economics is macro economics. The main topics covered under this branch is study of national income analysis, the statistical measurement of such aggregate flows as the gross national product national income, consumption and investment and establishing systematic relationships, which can explain the change in the aggregates over time. Thus macro economics concerns the determinants of the performance of entire economics of nations, groups of nations and the whole world. [2]
Micro economics may be defined as that branch of economic analysis, which studies the economic behaviour of the individual unit, maybe a person, a particular household, or a particular firm, how they function and how they reach their equilibrium. The branch of economics studies how households and firms make decisions to allocate limited resources, typically in markets where goods or services are being bought and sold. Micro economics examines how these decisions and behaviours affect the supply and demand for goods and services, which determines prices; and how prices, in turn, determine the supply and demand of goods and services. The following are the fields covered by microeconomics:
Theory theory costs. Theory Theory
of Product pricing with its two constituents, namely, the of consumer behaviour and the theory of production and of Factor pricing. of Economic Welfare.
While the economic study is concerned with the working of only one part of the economy at a time and effects of a change in some variable on other are analyzed on the assumption that rest of the economy during that period is at a standstill; other things remaining the same, it forms a part of the problems in micro economics.
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The concept may be made clear at the very outset that a separate study of Macro economics and Micro economics is absolutely necessary because there may be inherent contradictions between the laws of micro economics and macro economics. What might be right policy of an
individual, a firm or an industry may not be right for the economic system as a whole. In fact, the mere aggregation of the laws of behaviour of the individuals, or firms will not hold good for the study of macro economics because there are disharmonies between the behaviour of individual units and the behaviour of economic system as a whole. Since all modern economies are money economies (i.e., income, wages, interests, rents, dividends and taxes, etc., are in terms of money), the economic system can be considered as a system of money flows. The money flows have their counterpart in real flows of goods and services. Therefore the working of the economic system can be studied by following the route through which the money flows or real flow money. [3] Application: Price theory is the main tool of microeconomics because the properties of market supply and demand functions are generally built up from assumptions about the actions of households or firms. The overall magnitude of output also affects the composition of output because it may be seen that during depression when the output falls, the output of durable goods declines more than non durable goods and more than services. Profits fall more than wages and the wages fall more than the interest. Thus economic theory is generally considered to be micro economic when it is based on assumption about behaviour of the consumers and the producers or householders and firms the ultimate decision makers. Analysis of consumption, investment and labour supply behaviour of a household firm is an example of micro economics. [4]
Reference
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AN INTRODUCTION TO SOCIAL SCIENCE 1. Page no. 333 2. Page no. 331 3. Page no. 329, 330 4. Page no. 332
1.3 MONEY AND BANKING FUNCTIONS: What is Money?? Money is anything that is generally accepted as payment for goods and services and repayment of debts. Money is an abstraction, idea or concept, token instances of which are the physical bills or coins which are carried and traded. Money originated as commodity money, but nearly all contemporary money systems at the national level are fiat money systems. Fiat money is without value as a physical commodity, and derives its value by being declared by a government to be legal tender; that is, it must be accepted as a form of payment within the national boundaries of the country, for "all debts, public and private". By law, the refusal of a legal tender (offering) extinguishes the debt in the same way acceptance does.
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The money supply of a country is usually held to consist of currency (banknotes and coins) and demand deposits or 'bank money' (the balance held in checking accounts and savings accounts). These demand deposits usually account for a much larger part of the money supply than currency. Bank money is intangible and exists only in the form of various bank records. Despite being intangible, bank money still performs the basic functions of money, as checks are generally accepted as a form of
payment and as a means of transferring ownership of deposit money. More generally, the term "price system" is sometimes used to refer to methods using commodity valuation or money accounting systems. [1] Functions of money: 1. Money as a Medium of Exchange: The function of money as a medium of exchange solves all the difficulties of barter system. There is no necessity for a double coincidence of wants in the money economy. The man with cow who wants to purchase cloth need not seek a cloth seller who wants a cow. He can sell his cow in the market for money and then purchase cloth with the money obtained. 2. Money as Measure of Value : In money economy values of all commodities are expressed in terms of money. Money is like the yard stick of cloth merchant, as yardstick measures all varieties of cloth, money measures the value of all varieties goods. This function of money makes transactions easy and also fair. 3. Standard of Deferred Payment : In a money economy the contracts are made for future payments terms of money instead of goods and promise to repay the loan in money. In this way money is the standard of deferred payments. This function stimulates all kinds of economic activities which depend on borrowed money. 4. Money as a Store of Value : Goods cannot be stored because they are perishable. People receive their incomes in money form and keep their savings in money form in banks. In this way, money is used to store value of commodities. 5. The essential or primary functions of money are: a) To serve as medium of exchange. b) To serve as a measure of value. The latter two functions are of secondary importance because they; derived functions. In modern economy, money plays a very important role. Its disappearance would cause disappearance of the economy itself. [2]
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Characteristics of money:
The characteristics of what serves as money depend somewhat on the degree of complexity in the society. A relatively simple economy, with relatively few goods and services, few producers and consumers, and few transactions, may be able to function with a form of money that would not work in a more complex society. There are some general characteristics that are usually important for whatever serves as money in a modern economy. i.
ii.
iii.
First, to serve as an effective medium of exchange, money must be durable. Repeating our earlier example, we could have chosen to use apples as money and pay for everything in apples. But problems arise when the apples rot. Who wants to carry around rotten apples? Good apples tend to be eaten, and nothing could erode the value of your money more quickly than having it end up in your stomach. Second, what serves as money must not be easily reproduced by people and should be relatively scarce. We could use chestnuts as money. They’re relatively scarce and last a long time. But, if we did, people would start growing chestnut trees, and we wouldn’t be able to control the supply. Soon there would be so many chestnuts in use, and prices would be bid up so high, that you’d need a truck to carry the chestnuts to pay for bread and milk. Third, although what serves as money must be relatively scarce (not rocks, for example), it can’t be too scarce. Whatever serves as money has to be available in sufficient quantity to enable all the exchanges in our economy to take place. We could use whooping cranes. But there wouldn’t be enough of them to enable all the exchanges that have to take place. We would very quickly run out of money—to say nothing of the poor birds.
iv.
Fourth, money has to be easy to transport. We could use elephants. But just think of all the problems at pay-day if elephant money was used to provide your wage or salary. Pocket money would take on a whole, or should we say whole, new meaning.
v.
And last, money must be divisible into usable quantities or fractions. Imagine the difficulties you would incur to purchase something that had a price of 1/50th of an elephant. Not a pleasant thought.
So money needs to be (1) durable, (2) not easily reproduced by people, (3) relatively scarce, (4) not too scarce, (5) easily transported, and (6) divisible. But, as we emphasized earlier, the most essential attribute of anything that serves as money is its acceptability. It must be readily accepted by people in the economy. [3] Money Supply:
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In economics, money is a broad term that refers to any financial instrument that can fulfil the functions of money (detailed above). These
financial instruments together are collectively referred to as the money supply of an economy. Since the money supply consists of various financial instruments (usually currency, demand deposits and various other types of deposits), the amount of money in an economy is measured by adding together these financial instruments creating a monetary aggregate. Modern monetary theory distinguishes among different types of monetary aggregates, using a categorization system that focuses on the liquidity of the financial instrument used as money. [1] Market liquidity: Market liquidity describes how easily an item can be traded for another item, or into the common currency within an economy. Money is the most liquid asset because it is universally recognized and accepted as the common currency. In this way, money gives consumers the freedom to trade goods and services easily without having to barter. Liquid financial instruments are easily tradable and have low transaction costs. There should be no (or minimal) spread between the prices to buy and sell the instrument being used as money. [1] Measures of money: The money supply is the amount of financial instruments within a specific economy available for purchasing goods or services. The money supply is usually measured as three escalating categories M1, M2 and M3. The categories grow in size with M1 being currency (coins and bills) and checking account deposits. M2 is currency, checking account deposits and savings account deposits, and M3 is M2 plus time deposits. M1 includes only the most liquid financial instruments, and M3 relatively illiquid instruments. Another measure of money, M0, is also used, although unlike the other measures, it does not represent actual purchasing power by firms and households in the economy. M0 is base money, or the amount of money actually issued by the central bank of a country. It is measured as currency plus deposits of banks and other institutions at the central bank. M0 is also the only money that can satisfy the reserve requirements of commercial banks. [1]
Types of money:
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Currently, most modern monetary systems are based on fiat money. However, for most of history, almost all money was commodity money, such as gold and silver coins. As economies developed, commodity money was eventually replaced by representative money, such as the gold standard, as traders found the physical transportation of gold and silver
burdensome. Fiat currencies gradually took over in the last hundred years, especially since the breakup of the Bretton Woods system in the early 1970s. 1. Commodity money
Many items have been used as commodity money such as naturally scarce precious metals, conch shells, barley, beads etc., as well as many other things that are thought of as having value. Commodity money value comes from the commodity out of which it is made. The commodity itself constitutes the money, and the money is the commodity. Examples of commodities that have been used as mediums of exchange include gold, silver, copper, rice, salt, peppercorns, large stones, decorated belts, shells, alcohol, cigarettes, cannabis, candy, etc. 2. Fiat money
Fiat money or fiat currency is money whose value is not derived from any intrinsic value or guarantee that it can be converted into a valuable commodity (such as gold). Instead, it has value only by government order (fiat). Usually, the government declares the fiat currency (typically notes and coins from a central bank) legal tender, making it unlawful to not accept the fiat currency as a means of repayment for all debts, public and private. 3. Credit money Credit money is any claim against a physical or legal person that can be used for the purchase of goods and services. Credit money differs from commodity and fiat money in two ways: It is not payable on demand (although in the case of fiat money, "demand payment" is a purely symbolic act since all that can be demanded is other types of fiat currency) and there is some element of risk that the real value upon fulfilment of the claim will not be equal to real value expected at the time of purchase. 4. Representative money In 1875 economist William Stanley Jevons described what he called "representative money," i.e., money that consists of token coins, or other physical tokens such as certificates, that can be reliably exchanged for a fixed quantity of a commodity such as gold or silver. The value of representative money stands in direct and fixed relation to the commodity that backs it, while not itself being composed of that commodity. [1]
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Banks:
A bank is a financial institution licensed by a government. Its primary activities include borrowing and lending money. Many other financial activities were allowed over time. For example banks are important players in financial markets and offer financial services such as investment funds. In some countries such as Germany, banks have historically owned major stakes in industrial corporations while in other countries such as the United States banks are prohibited from owning nonfinancial companies. In Japan, banks are usually the nexus of a cross-share holding entity known as the zaibatsu. In France, banc assurance is prevalent, as most banks offer insurance services (and now real estate services) to their clients. [4] Functions of a bank: Banks play an important role in the financial system and the economy. As a key component of the financial system, banks allocate funds from savers to borrowers in an efficient manner. They provide specialized financial services, which reduce the cost of obtaining information about both savings and borrowing opportunities. These financial services help to make the overall economy more efficient. Its economic functions can be described as: 1. Issue of money, in the form of bank note and current accounts subject to cheque or payment at the customer's order. These claims on banks can act as money because they are negotiable and/or repayable on demand, and hence valued at par. They are effectively transferable by mere delivery, in the case of banknotes, or by drawing a cheque that the payee may bank or cash. 2. Netting and settlement of payments – banks act as both collection and paying agents for customers, participating in interbank clearing and settlement systems to collect, present, be presented with, and pay payment instruments. This enables banks to economize on reserves held for settlement of payments, since inward and outward payments offset each other. It also enables the offsetting of payment flows between geographical areas, reducing the cost of settlement between them. 3. Credit intermediation – banks borrow and lend back-to-back on their own account as middle men
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4. Credit quality improvement – banks lend money to ordinary commercial and personal borrowers (ordinary credit quality), but are high quality borrowers. The improvement comes from diversification of the bank's assets and capital which provides a buffer to absorb losses without defaulting on its obligations. However, banknotes and deposits are generally unsecured; if the bank gets into difficulty and pledges assets as security, to raise the funding it needs to continue to operate, this puts the note holders and depositors in an economically subordinated position.
5. Maturity transformation – banks borrow more on demand debt and short term debt, but provide more long term loans. In other words, they borrow short and lend long. With a stronger credit quality than most other borrowers, banks can do this by aggregating issues (e.g. accepting deposits and issuing banknotes) and redemptions (e.g. withdrawals and redemptions of banknotes), maintaining reserves of cash, investing in marketable securities that can be readily converted to cash if needed, and raising replacement funding as needed from various sources (e.g. wholesale cash markets and securities markets). [5] How banks work: Banks operate by borrowing funds-usually by accepting deposits or by borrowing in the money markets. Banks borrow from individuals, businesses, financial institutions, and governments with surplus funds (savings). They then use those deposits and borrowed funds (liabilities of the bank) to make loans or to purchase securities (assets of the bank). Banks make these loans to businesses, other financial institutions, individuals, and governments (that need the funds for investments or other purposes). Interest rates provide the price signals for borrowers, lenders, and banks. Through the process of taking deposits, making loans, and responding to interest rate signals, the banking system helps channel funds from savers to borrowers in an efficient manner. Savers range from an individual with a $1,000 certificate of deposit to a corporation with millions of dollars in temporary savings. Banks also service a wide array of borrowers, from an individual who takes a loan of $100 on a credit card to a major corporation financing a billion-dollar corporate merger. [5] Types of banks: Banking institutions may be roughly classified as follows: I. Private Banks. II. Public or chartered banks. 1. Savings banks. 2. Trust companies. 3. Commercial banks. [(a) State banks, (b) National banks]
[6]
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1. Private Banks
Private banking is, perhaps, the oldest form of banking, and some of the most powerful banking concerns in the world to-day are private institutions. They are distinguished from public or incorporated banks in that they are conducted as individual or partnership enterprises, and that, until recently they have not been subject generally to the supervision of the state. The tendency in recent years has been toward public regulation of private as well as incorporated banks. In several states, private banks are now forbidden to use a corporate name, or to use the name "bank' or any similar title. Some states require private bankers to have a minimum capital, and in a few Eastern states certain classes of private bankers are required to post a bond. In a few states the banking business is absolutely denied to unincorporated concerns. Private Banks perform two principal functions: (1) As an adjunct to the brokerage business in large cities. (2) As a means of supplying banking accommodations in small communities where a state or national bank would not be profitable. In larger cities their main business is dealing in securities, foreign exchange and foreign loans. Some of the larger banking houses have been prominent in recent years in promoting large industrial combinations and consolidations, and in underwriting stock and bond issues. Generally speaking, they do not make a practice of discounting commercial paper, making business loans, and accepting checking deposits as commercial banks do. In the smaller communities, having only meagre banking facilities, they do perform this service. Public or chartered banks are created by the state or Federal Government, which usually exercises some supervision over them. Savings banks, trust companies, and state commercial banks are chartered, that is, licensed to do business, by the several states; national banks are chartered by the Federal Government, under the terms of the national banking act and its amendments, and the Federal reserve banks are also chartered by the Government. In the early days of banking, each bank was created by a special charter granted by the legislature; now, nearly all the states have a general incorporation or banking law by complying with the terms of which a group of men proposing" to establish a bank may set a charter. [7] 2. Savings Banks
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Savings banks are of two general kinds: mutual and stock. The mutual savings bank has no capital and consequently no stockholders. It is organized for the exclusive benefit of the depositors. Apart from the expenses of running the bank, the depositors get all the profit arising from the investment of their deposits. In the stock savings bank, which has a capital and stockholders, the profits of the business, over and above the
customary interest to depositors, go to the stockholders as in other types of banks. The basic purpose of the savings bank is to encourage thrift and saving. It provides at once a safe place for the working classes to keep their savings, and an expert, reliable agency for their investment in the safest way. The deposits are invested largely in mortgages, bonds, and other high-grade securities. From the return on these loans or investments, interest is paid the depositors or credited to their accounts at periodic intervals, generally twice a year. Most savings banks require depositors to give notice, varying from two weeks to three months, of intended withdrawals, except where the amount is small. Primarily the savings bank serves the wage-earner, not the business man. [8] 3. Trust Companies The trust company is a comparatively new type of banking institution and its functions are not yet clearly defined. The earliest trust companies were organized to carry on life, fidelity and title insurance and the granting of annuities, but their primary function has been to act as incorporated trustees, accepting and executing trusts of various kinds. In this capacity they serve as executors and administrators of estates, as custodians of funds or properties held in trust, and as guardians of minors. Prior to the Civil War the trust company attracted very little attention, but since that time, particularly since about 1875, the increase in the number and the variety of functions performed by trust companies has been marked. In connection with their duties as trustees these companies have secured from the legislatures additional powers authorizing them to carry on other more or less closely related lines of business, until now they undertake such a great variety of functions that they have been aptly called the "department stores of finance."[1] While it is not possible to draw a sharp line of division between the function of the trust company and that of the commercial bank, it may be said that the commercial bank deals in credit and handles active funds, thus aiding in the creation of wealth, while the trust company deals in capital and handles funds that are principally inactive, thus conserving existing wealth. More and more, however, trust companies have assumed the functions of the commercial bank as well as those of the savings bank and have engaged in a great variety of financial activities. Many trust companies, including some of the most influential, have adhered to their original and essential function of acting as trustees; others make banking their main business; and still others specialize on the financial side. The general tendency in recent years seems to have been toward an expansion of their activities so as to include many or all of these functions.
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In many trust companies the different kinds of work or activities are carried on by departments, as, for example, the trust, banking, bond and
safe deposit departments. Some of these departments may be subdivided; thus, the banking department may be divided into savings bank and commercial departments; and the larger companies may have various other departments and divisions, such as mortgage, investment, transfer, real estate, title insurance and fidelity insurance. Generally where trust companies carry on trust and a banking business, the two departments are kept separate, each having its own records, clerks and handling of funds. [9] 4. Commercial Banks Commercial banks are classified according to the source of their charters, into state and national banks. National banks are organized under the national bank law of 1863 and its amendments. State banks are chartered by and subject to the supervision of the various states. In some states, private banks are not differentiated from state banks owing to the fact that the same regulations and laws apply to both incorporated and unincorporated banks. So, too, the distinction between state banks and stock savings banks, and, again, between state banks and trust companies is not at all marked or uniform under the varying laws of the different states. In this book, we shall use the term "state bank" in the sense of a bank of discount and deposit incorporated under state law. Commercial banks organized under state laws perform their functions in essentially the same way as national banks. Indeed, there is little to distinguish them in everyday business, except that national banks bear the title "national,"1 and that state banks do not issue circulating notes. Several factors enter into the determination of the relative advantage of incorporating under state law or the national system. In general, the state banking laws permit the organization of banks with smaller capital than under the national system. No national bank may be organized with less capital than $25,000; while in several states, banks may be started with as little as $10,000, and, in one state, $5,000. This makes it possible for small towns to secure the advantage of a bank under state law, which otherwise might have to do without. Until recently national banks were forbidden to loan on real estate, while state banks in most of the state's are permitted to make such loans. Generally, the reserve required of state banks is lower than under the national system. National banks alone can profitably issue notes; the issues of state banks are subject to a tax of ten per cent, which amounts to a prohibition. There are a few special exceptions to this rule.
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There is little or no justification for the popular opinion that national banks are safer and sounder than state banks. Most of the states now have excellent banking laws, which in many instances are modelled upon the national banking law. The percentage of failures among state banks is only a trifle higher than among national banks. The soundness of a bank depends, not upon the authority which issues its charter, but upon the ability and honesty of its management and supervision. [10]
References: 1. http://en.wikipedia.org/wiki/Money 2. http://www.informationbible.com/FunctionsOfMoney.html 3. http://www.moneyandyouth.cfee.org/en/resources/pdf/moneyfunct.p df 4. file:///D:/acedamics/ix%20sem/b.e.s/money%20and%20banking %20concepts/Bank.htm 5. file:///D:/acedamics/ix%20sem/b.e.s/money%20and%20banking %20concepts/FUNCTION%20OF%20BANK.htm 6. http://chestofbooks.com/finance/banking/Money-And-BankingHoldsworth/Chapter-X-Functions-Of-The-Bank-75-Classification-OfBank.html 7. http://chestofbooks.com/finance/banking/Money-And-BankingHoldsworth/76 Private-Banks.html 8. http://chestofbooks.com/finance/banking/Money-And-BankingHoldsworth/77-Savings-Banks.html 9. http://chestofbooks.com/finance/banking/Money-And-BankingHoldsworth/Chapter-XIX-Trust-Companies-152-Functions.html 10. http://chestofbooks.com/finance/banking/Money-And-BankingHoldsworth/79-Commercial-Banks.html
1.4 FACTORS OF PRODUCTION: In economics, factors of production are the resources employed to produce goods and services. They facilitate production but do not become part of the product or are significantly transformed by the production process. The factors are generally divided into four major groups:
Land Labor Capital Enterprise
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Land includes natural resources, such as air, soil, water, minerals, climate, natural grasslands and woodlands. Labor uses capital on land to produce wealth. Every tangible good is made up of the raw materials that come from nature -- and because all people (and other living things) have material needs for survival, everyone must have access to some land in order to live. Land is the passive factor in production. To the economist,
therefore, the meaning of `land' is broader than its usual meaning. The payment for land use and the received income of a land owner is rent. Below are some of the characteristics of land: a) b) c) d) e)
Limited in supply; No costs of production; Varies in quality; Has a wide range of alternative uses; More productive land is in greater demand.
Labour includes all human resources physical and mental, available for the production of goods and services. It may be unskilled, semi-skilled, or skilled, and local labour markets vary in the size and nature of the pool of labour. The payment for someone else's labor and all income received from one’s own labor is wages. The supply of labour is the number of hours which people are willing to work for a given wage-rate over a period - say a year. The supply of labour will, therefore, depend on the number of workers found multiplied by the average number of hours worked by each worker. Ability and willingness to work do not, in themselves, guarantee employment. Job creation depends on the expansion of the economy. The supply of labour must also consider the quality of labour and how efficiently the workers do the tasks given to them. The efficiency of labour depends on education and knowledge of the work force, motivation, working conditions and social welfare. Capital is a man-made resource. The term capital in economics is all man-made aids to further production. Examples of capital are buildings, machines and other equipment, which are used in making the goods we consume. Capital may be considered under various categories: fixed capital; working or circulating capital; financial capital; social capital; individual capital; and natural capital including renewable and nonrenewable natural resources. a) Fixed capital includes machinery, factories, equipment, new technology, buildings, computers, and other goods that are designed to increase the productive potential of the economy for future years. b) Working capital includes the stocks of finished and semi-finished goods that will be economically consumed in the near future or will be made into a finished consumer good in the near future. These are often called inventories. The phrase "working capital" has also been used to refer to liquid assets (money) needed for immediate expenses linked to the production process (to pay salaries, invoices, taxes, interests...)
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c) Financial capital is simply the amount of money the initiator of the business has invested in it. "Financial capital" often refers to his or her net worth tied up in the business (assets minus liabilities).
d) Social capital is the value of network trusting relationships between individuals in an economy. e) Individual capital which is inherent in persons, protected by societies, and trades labor for trust or money. Close parallel concepts are "talent", "ingenuity", "leadership", "trained bodies", or "innate skills" that cannot reliably be reproduced by using any combination of any of the others above. f) Natural capital which is inherent in ecologies and protected by communities to support life, e.g. a river which provides farms with water. g) Infrastructural capital is non-natural support systems (e.g. clothing, shelter, roads and personal computers) that minimize need for new social trust, instruction, and natural resources.
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Enterprise/Entrepreneurship is the risk taking activity that utilizes land, labour and capital to produce goods or services in the expectation of a future reward. That reward is called profit in economics. Often these entrepreneurs are seen as innovators, developing new ways to produce and new products. In a planned economy, central planners decide how land, labor, and capital should be used to provide for maximum benefit for all citizens.
SECTION A: BUILDING ECONOMICS
2. LAND ECONOMICS 2.1
Land economics: Land as limited resource
2.2 Land development and conservation 2.3 Public policies on land utilization and development 2.4 Theories of land values 2.5 Acts
2.1 LAND ECONOMICS: LAND AS LIMITED RESOURCE:
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Land is a natural resource which yields some income and has some exchange value .Land economics is a branch of the economics which focuses on the use of land and the role of land in economics. It often intersects with environmental economics, since land use policies have an impact on the health of the environment, and many land economics trade journals focus on the environmental ramifications of land-use around the
world. Specialists in this branch of economics work in a number of places, from university campuses to public utilities. Characteristics of Land: 1. 2. 3. 4. 5. 6.
It is nature’s free gift. It is fixed in quantity. It doesn’t have any supply value. It is permanent. Land lacks mobility in geographical sense. Land provides infinite variation of degree, fertility and situation so that no two pieces of land are exactly alike.
The pressure of growing population in developing countries has laid a heavy burden on the physical resources of the countries. The scarcity of land and infrastructure facilities has come in the way of housing development, especially in the urban areas. High Cost of Urban Land:
The cost of land and its development to provide essential housing services and other infrastructure facilities has steeply risen and now accounts for substantial cost of housing construction. It has become therefore to devise ways and means of effecting saving in the use of land cost of its development. At the same time, the quantity of housing and human settlement that emerges should not be adversely affected. It is therefore, incumbent on planners to achieve economic physical planning by application of the latest advances in sciences and technology. Local planning regulations and building by-laws have a significant impact on land use planning and cost of land development for housing.
New developments: Some basic principles of physical planning to ensure land use economy as well as economy in cost of development of land which need to be further researched and studied for practical adoption are: ECONOMICAL SPACE NORMS:
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Until the economic conditions of the masses improve , minimum space norms would have to be realistically laid down for built up accommodations , open spaces and residential densities, so that these are actually adopted and also progressively improved without adversely affecting the environmental conditions.
1. 2. 3. 4.
HEALTHFUL HOUSING COMMUNICATION FACILITIES ADVANCES IN CONSTRUCTION TECHNOLOGY COMMUNITY PARTICIPATION
Land itself is a resource like labor or capital, especially when the land harbors deposits of natural resources like minerals, oil, or timber. It is also a fixed resource: the amount of available land on Earth is finite, although land speculation may create situations in which the supply of land cannot meet the demand. The way in which land is used can have a profound impact on a local or national economy, whether that use is urban or rural. Public and private uses of land and their sometimes conflicting needs are also of interest in land economics. One of the fields of focus in land economics is the allocation of land. As a fixed resource, land's value is dictated by its availability, and the allocation of land resources can play a critical role in how land is treated. In packed cities, for example, land can be scarce and difficult to obtain, and it has a correspondingly high price. In rural regions, however, land may be very inexpensive due to decreased demand. Or, demand for land which can be used as housing may inflate the prices of farmland, making it difficult for farmers to buy or retain land for farming use. Researchers in this field may look at issues like government acquisition of land to satisfy right of way requirements for roadways and utilities, and land use policies which force land to remain unoccupied and unused for large stretches of time. They also look at how land can be made more profitable, and how land values shift over time in response to a variety of factors including market pressures and the discovery of natural resources. The study of land economics is often closely wrapped up in politics, especially politics on a local scale. Powerful planning commissions and lobbies may be able to push the nature of land use in their communities, shaping land use policies and the economics of locally available land in ways which sometimes surprise economists. Regional and national governments also play a role in land economics, by establishing policies which are designed to balance the needs of individuals against the needs of the government and the population as a whole.
2.2 LAND DEVELOPMENT AND CONSERVATION:
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Land economics is a branch of economics field which focuses on the use of land and the role of land in economics.
Land itself is a resource like labour or capital, especially when the land harbours deposits of natural resources. It is also a fixed resource: the amount of available land on earth is finite, although land speculation may create situations in which the supply of land cannot meet the demand. The way in which the land is used can have a profound impact on a local or national economy, whether that use is urban or rural. Public and private uses of land and their sometimes conflicting needs are also of interest in land economics. One of the fields of focus in land economics is the allocation of land. As a fixed resource, land value’s is dictated by its availability, and the allocation of land resources can play a critical role in how land is treated. In packed cities, for example, land can be scarce and difficult to obtain, and it has a correspondingly high price. In rural regions, however, land may be very inexpensive due to decreased demand. Or, demand for land which can be used as housing may inflate the prices of farmland, making it difficult for farmers to buy or retain land for farming use. Researchers in this field may look at the issues like government acquisition of land to satisfy right of way requirements for roadways and utilities, and land use policies which force land to remain unoccupied and unused for large stretches of time. They also look at how land can be made more profitable, and land values shift over time in response to a variety of factors including market pressures and the discovery of natural resources. [1] Land development: Land development refers to altering the landscape in any number of ways such as:
Changing landforms from a natural or semi-natural state for a purpose such as agriculture or housing. Subdividing real estate into lots, typically for the purpose of building homes. Developing property or changing its purpose, for example by converting an unused factory complex into condominiums.
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The conversion of land from one use to another is the generally accepted definition of land development. [2] This age old process began with ancient societies organised themselves into tribes, on and claiming land, forming villages and primitive towns, for the mutual protection and livelihood for all. The great civilisation of Egypt, Greece and Rome can be traced to
humble beginnings of tribal communities. Their growth in size and complexity is typical of urban development and unlike what we are experiencing today. With their complex roadways, aqueducts, commercial markets and residential areas the ancient problems associated with land development endeavours- those of adequate transportation, waste disposal, drainage, water supply, population densities and others posed a challenge then and continue to require innovative solutions today. Today the process for finding solutions and developing scenarios for land use that serve the greater good is systematic one, and is to a large degree, uniform in principle and practise. The systematic approach to the land use planning, analysis and engineering is known as land development design. Since the early 1950s, the conversion of land to a different use generally meant a more intense use. The definition formally applied almost exclusively to residential, commercial, retail, industrial and office uses. It did not take long however, before city planners and residents alike echoed to have areas preserved for recreational, educational, social and cultural activities. In response to this social need the definition of land development was broadened to include such as converting rural land to agricultural use constructing major transportation and utility systems, and even urban and suburban redevelopment projects. Thus, land development is the conversion of land from one use to another, usually of great intensity, and is typically applied to a single parcel or group of parcels and includes supporting uses and infrastructure improvements. Land development design and consulting constitute the systematic process of collecting data, studying and understanding the data, extrapolating the data, and creating on paper the plans for reshaping the land to yield a land development project that is politically, economically and environmentally acceptable to the client and the public. Persuasion, salesmanship and negotiation are all part of each step in the land development design process. [3] The steps involved in land development are: Step1 Feasibility/programming initiates the process with a general review of proposed program and existing site conditions, with particular emphasis on identification of environmental, cultural and infrastructure resources.
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Step2
Site analysis determines the allowable use of the site based on local master plans, codes and ordinances and recommends a course of action to accomplish the development program with respect to those documents. Feasibility review and site analysis are usually performed concurrently, these studies result in a complete site inventory, identify usable site area and form the foundation of further design efforts through provision of adequate base mapping and establishment of project goals. Step3 Conceptual design presents the initial organisation of the development program. Step4 Schematic design is a refinement of the initial concept sketches that adds scale, dimensions and precise testing of specific uses, including building arrangements and infrastructure systems. Step5 Final design is the conclusion to the primary design effort. Carried out predominantly by engineers, preliminary plans are enhanced with a level of detail sufficient to construct all aspects of the project Step6 Plan submission and permitting represent the formal regulatory review of final design (construction) documents by all governing agencies as well as application for procurement of all necessary site and building permits. Step7 Construction is the final step in land development process. During construction the land development consultant is a valuable resource for both the client and the contractor and is often responsible for stake out, reviewing submittals, shop drawings and RFIs, certain inspections and field and formal revisions. [4]
Land Conservation:
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Land is one of the most precious natural resources, the importance of which in human civilisation needs no elaboration. The total available land area in the state sets the limits within which the competing human needs have to be met. The needs of agricultural, industrial, domestic and others
often result in diversion from one use to the other. Diversion of land from agriculture to non-agriculture uses adversely affects the growth in agriculture sector. Even the available land is subjected to soil erosion of varying degrees and degradation problems of different magnitudes. [5] Land being the major non renewable natural resource is inelastic in nature. There is lot of pressure on land due to the increasing population from the agricultural, industrial and housing sectors. On the other hand, the land is subjected to soil erosion and land degradation problem due to rain and wind action and faulty cultivation practices resulting in loss of topsoil, which is the place where all nutrients are available. This leads to poor yields, uneconomic returns, reservoir sedimentation, and reduction in storage capacity, and shutdown of hydel power stations, ecological imbalance, environmental pollution, draughts and floods. Hence the conservation, development and management of the land resources which ensures the physical and chemical and biological health of soil profile is of prime importance. In a predominantly agricultural system, the objective of improving the productivity, profitability and prosperity of the farmers and achieving agricultural development on an ecological sustainable basis can be attained only when conservation, development and management of the land resources are assured. [6] Conservation action provides benefits such as opportunities for active outdoor recreation, and for the appreciation of landscapes and the historic heritage. Public conservation land and other natural areas also contribute other often overlooked products such as clean water supplies, and the benefits such as the regulation of the effects of flooding, erosion and climate change. [7] References
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1. http://www.wisegeek.com/what-is-land-economics.htm 2. http://en.wikipedia.org/wiki/Land_development - Pg-2 3. Land Development Handbook, Planning, Engineering & Surveying/ Dewberry, Third Edition,Chapter-1- Overview of The Land Development Process, Pg- 3 4. Part-1- Overview-Pg-1 5. http://www.tn.gov.in/spctenthplan/CH_9_4.PDF 6. http://www.tn.gov.in/spc/annualplan/ap2004-05/ch9_4.pdf 7. http://www.doc.govt.nz/conservation/threats-and-impacts/benefitsof-conservation/economic-impacts/
2.3 PUBLIC POLICIES ON LAND UTILIZATION AND DEVELOPMENT: Public policy can be generally defined as the course of action or inaction taken by governmental entities (the decisions of government) with regard to a particular issue or set of issues. Other scholars define it as a system of "courses of action, regulatory measures, laws, and funding priorities concerning a given topic promulgated by a governmental entity or its representatives. "Public policy is commonly embodied "in constitutions, legislative acts, and judicial decisions." [1] Urban Land Policy in India: Land reform measures were initiated in rural India soon after independence in 1947. Urban Land Reforms were however, slow in coming. Some public interventions in different form were also made in the land market, but the first major step aimed at fundamental reforms in the urban land systems came only in 1976 when a comprehensive land ceiling legislation took place. Despite these efforts India lacks a comprehensive Urban Land Policy. Neither the Government of India nor the State Government has formulated any such policy. While one may find expressions or intentions and isolated policy announcements, there has been no consistent Urban Land Policy formulated on the basis of detailed study of the problems that are encountered. Sources of Land Policy:
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The following constitute the vital sources of urban policy matters in India.
Reports/papers government Five year Plans Legislation
(i)
(ii)
(iii)
(iv)
brought
out
by
the
central
or
State
Report of the Committee on Urban land Policy: The first attempt towards evolving an Urban Land Policy was made when the Government of India, Ministry of health consisted a Committee to examine the problems related to urban land Policy in1963. The report submitted by the committee in 1965 must be considered as a landmark in the field of urban policy literature in India. The committee took note of the declining man-land ratio and considering a comprehensive long policy measures. Task force on housing and Urban Development: The planning Commission set up Task forces to evolve a long term perspective on housing and urban development Issues in 1982. The task Force on ‘Planning of urban development which submitted its report in 1983 critically examined, inter alia, the problems of urban land policies in India. It reviewed the existing approaches to land policy, especially with reference to Delhi and called for a new approach to promote efficiency in the allocation of land and to help the poor in their access to land for Shelter. National housing Policy: The national Housing policy document of the government of India (1988) emphasized the need for the formulation and implementation of a purposeful land policy in the context of achieving the goal of eradicating houselessness in the country by the turn of the century. It also suggested strategies to augment the supply of land, particularly to meet the housing requirements of the weaker sections. National commission on Urbanization (1988): An important step towards understanding the urban problems of the country was taken by the government of India when it appointed national commission on urbanization. The Commission in its report examined the dimensions of urbanization and the issues relating to the existing urban patterns and policies in India and made recommendation on the range of policy interventions necessary to bring about more human and efficient urban seducements. It identified the failure to anticipate the rising demand for urban land and ensure an adequate land at affordable prices as possibly the most disastrous feature of the past four decades of urbanization in India. Emphasizing the significance of urbanized land as a vital resource that needs to be generated in sufficient quantities for appropriate usage. The commission strongly advocated a realistic land policy to overcome the problems of shortage of urban land and the rising land prices.
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Five year plan:
The five year plans constitute an important source of state policy on issues relating to socio economic development in India. While the first two plans of the central government recognized the need for formulation of policies relating to urban planning and development, the first serious effort at laying down a broad policy with regard to urban development was made while formulating the third five year plan. The plan referred to the high costs of urban development in rapidly growing urban areas and proposed measures to control urban land values. The Fourth Five Year Plan stressed the need of urban land policy and called for action on the recommendations of the report of the committee on urban land policy of 1965. The Fifth Five Year Plan is of great significance so far as urban land policy is concerned. It recognized that, perhaps the most important instrument necessary for achieving breakthrough in urban development will be the formulation of Urban Land Policy. In the Sixth Plan the thrust of urbanization policy was on development of small and medium towns and achieving balanced distribution of urban population. The Seventh Five Year Plan called for slowing down the growth of big metropolises and stressed the need for preparation of regional and sub-regional Urban Development Plans. Legislations: Legislation is a source as well as an instrument of Public Policy. The State seeks to achieve many of its policy objectives through enactment of laws. A major difficulty in the articulation of urban land policy is the plethora of existing legislation and regulation which govern the land market Planning Commission 1989.These laws relate primarily to land use regulation which restrict private rights, and direct intervention in the land market to gain social control of land. The most important constitutional provision in relation to Urban Land Policy is article 19(1)(f) which confers on individual the right to property. The operation of this provision is, however restricted by article 19(5) which empowers the state to place reasonable restrictions on property rights in public interest. It is this provision that enables the state to directly acquire private lands or restricts private rights over land. The various laws governing the land market passed by the Central and State government may be classified as follows:
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1. Town Planning Legislation including Urban Development Authority Acts: To control the use of land with a view to regulate its planned growth and development.
2. Land Acquisition Act: To acquire land for public purposes. 3. Municipal enactment including building byelaws: To control building activities. 4. Slum Improvement and Clearance Act: To improve the living conditions of slum dwellers. 5. Urban Land Ceiling and Development Act: To improve ceiling limits on land holdings and achieve equitable distribution of urban land. Objectives of Urban Land Policy: The Committee on Urban Land Policy (1965) outlined four basic objectives: 1. Optimum social use of urban land. 2. Supply of adequate quantity of land at reasonable prices. 3. Encouraging community effort for land development and housing. 4. Preventing concentration of land ownership. Reference 1. www.wikipedia.org. 2. URBAN LAND POLICY – Author : A. RAVINDRA, page no.- 35-39
2.4 THEORIES OF LAND VALUES:
The concept of land value may be classified as “the monetary evaluation of land use. It is dependent on both the present and the future use which , in turn , is influenced by the physical and economic characteristics of the site and the social control of land use” ( Clarke , 1965 ). According to Lichfield (1956), values are created and changed by the same forces that create and change uses. Clarke has clarified that the value may also change before any change of use actually takes place. For example, where the site possesses value for a future use its potential is reflected in the present price or rent. Value may, therefore, be classified as “current value”, i.e., value for the present use or “potential value”, i.e. value for a different and usually more valuable use at some future date.
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Land value can be considered in two contexts. One is the market value, which is the price of a land parcel negotiated at the time of sale of the parcel, and the other is the assessed value, which is the estimated worth
of the parcel made by a competent private or public assessor (Northam, 1975). The market value of a piece of land may be different from the assessed value. The first important work on urban land use values was written by R.M. Hurd (1901), often regarded as the father of modern land economics. He adopted the principles put forward by Ricardo for agriculture land to the urban land. Alfred Marshall (1916) introduced the concept of ‘location value’ which is expressed in the financial advantage derived from the location of the site. According to him, the site value was equal to the agricultural rental and the location value. In other words, the urban land value is determined by adding the location factor to the agricultural land value. One other factor influencing the value of urban land is the amount of floor space in the building. R.M. Haig (1926) introduced the notion of the friction of space i.e. hindrance to perfect or immediate accessibility, for without such ‘friction’ there would be no transport costs and all locations would be perfect. He tried to establish a three-way relation of rent, transport costs and location which is independent. Ratcliff (1949), carrying forward the argument of Haig opined that the utilization of land was ultimately determined by the relative efficiencies of the uses in various locations. Efficiency in use is measured by the ability to pay rent and the use that can extract the greatest return from a given site will be the successful bidder. [1] The Valuation Of Real Estate. Theory Of Land Values Agricultural land has value because of its fertility, that is, its ability to yield produce for its owners. However, the most fertile land is not always the most valuable. Proximity to communities and to means of transportation makes some agricultural land more valuable than other land, more fertile but also more remote. In cities, towns and villages, land is of use chiefly for placing buildings upon it. The use to which such buildings may be put determines the value of the land in relation to the other land in the community and their use depends to a great extent upon their location. Current Financial Crisis, and How Economic Theory should be taught....
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Yes, the current financial crisis highlights how scholars need to recast the economic theory that they teach. The key concept that is missing today is LAND VALUE. Classical economics divided factors of production into three: land, labor, and capital. Beginning around 1920, scholars conflated land
with capital. This left them totally unprepared to cope with or explain the crash of 1929. At this time "macro-economics", as we now call it, rose to the fore. For a time it eclipsed "micro-economics", which had degenerated into the explanation of the allocation of resources among competing ends. Gradually, micro-economics came back to be integrated with macro, but in the process land value almost disappeared. Scholars have "disappeared" land values in two main ways. One is to conflate them with values of man-made capital, overlooking or trivializing all differences. One obvious fault in this is that interest rates and land rents vary inversely. The other way is simply to trivialize land values as a quantity. This is based on no respectable quantitative research whatever, and a systematic ignoring of research showing land values to be a major element of wealth. When it comes to the dynamics that lead to crises like that of 2008, land values move in cycles of high amplitude, much higher than the values of reproducible capital. When values are high and rising they lead to great excesses of urban sprawl. These excesses fructify vast new areas around growing cities, resulting in an overhang of "ripening" land that far exceeds possible demands, resulting in a crash. As to teaching money and banking, few or no texts recognize that expanding banks, by taking land under and around speculative developments, in effect "monetize" those speculative land values. When the wave of land values ebbs, and debtors default, banks have to contract, as they are now. Yet economic theorists, and those statesmen whom they have trained, attend mainly to the froth on the waves, ignoring the basic wave of land value that drives the cycle. Another and related fault in theory is to ignore the turnover of capital. In a boom of land values, capital goes into investments that pay out slowly. The basis of allocating loans is not marginal productivity, but collateral security, as perceived by bankers who do not distinguish land from capital. The loan turnover of banks slows down, because a bank, no matter how positive its balance sheet, cannot lend much faster than its debtors repay their loans. The result is to slow down new loans and seize up the system, as we see today.
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Tax theory is now based on the fallacy that a progressive tax must also be one that suppresses and distorts incentives. This reflects economists ignoring the high concentration of the ownership of land, and the positive
incentive effects of taxing land in lieu of work, enterprise, building, and income-creating investing. [2] Land value taxation (LVT) Is an ad valorem tax on the value of land. This ignores buildings, improvements, and personal property. Because of this, LVT is different from other property taxes on real estate — the combination of land, buildings, and improvements to land. Every jurisdiction that has a real estate property tax has an element of land value tax, because land value contributes to overall property value. Most taxes distort economic decisions. If labor, buildings, machinery or plants are taxed, people are dissuaded from constructive and beneficial activities. The efficiency are penalized due to the excess burden of taxation. This does not apply to LVT, which is payable regardless of how well the land is actually used, because the supply of land is inelastic. Market land rents depend on what tenants are prepared to pay rather than on the expenses of landlords, and so LVT cannot be passed on to tenants. The only direct effect of LVT on prices is to lower the market price of land. In the other way, LVT is often said to be justified for economic reasons because if it is implemented properly, it will not deter production, distort market mechanisms or otherwise create deadweight losses the way other taxes do. Nobel Prize winner William Vickrey believed that "removing almost all business taxes, including property taxes on improvements, excepting only taxes reflecting the marginal social cost of public services rendered to specific activities, and replacing them with taxes on site values, would substantially improve the economic efficiency of the jurisdiction." A correlation between the use of LVT at the expense of traditional property taxes and greater market efficiency is predicted by economic theory, and has been observed in practice. [3]
Reference
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1. Alan W. Evans, the Theory of Land Values. Publisher – University of reading department of Economics, 1988. 2. http://chestofbooks.com/real-estate/Real-Estate-PrinciplesPractices/chapter-XIV-the-valuation-of-real-estate-theory-of-landva.html, paragraph 1 and 2.
3. Land value taxation in theory and practice. By Charles theory Chomley, Robert Leonard Outhwaite. Page no. 76
2.5 ACTS: Land Use and Building Act (132/1999, amendment 222/2003 included): General objective of the Act: The objective of this Act is to ensure that the use of land and water areas and building activities on them create preconditions for a favourable living environment and promote ecologically, economically, socially and culturally sustainable development. The Act also aims to ensure that everyone has the right to participate in the preparation process, and that planning is high quality and interactive, that expertise is comprehensive and that there is open provision of information on matters being processed. Objectives in land use planning The objective in land use planning is to promote the following through interactive planning and sufficient assessment of impact: i. a safe, healthy, pleasant, socially functional living and working environment which provides for the needs of various population groups, such as children, the elderly and the handicapped; ii. economical community structure and land use; iii. protection of the beauty of the built environment and of cultural values; iv. biological diversity and other natural values; v. environmental protection and prevention of environmental hazards; vi. provident use of natural resources; vii. functionality of communities and good building; viii. economical community building; ix. favourable business conditions; x. availability of services; xi. An appropriate traffic system and, especially, public transport and non-motorized traffic. Planning review
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At least once each year, local authorities must draw up a review of all planning matters that are or will in the near future become pending in the local authority or the regional council and which are not of minor importance (planning review). The review briefly explains planning matters and the stage of processing reached as well as any such decisions and other actions which have an immediate influence on the basic premises, objectives, content and implementation of plans.
Planning reviews must be publicized in a manner appropriate for their purpose. Objectives of building guidance The objective of building guidance is to promote: a) the creation of a good living environment that is socially functional and aesthetically harmonious, safe and pleasant and serves the needs of its users; b) building based on approaches which have sustainable and economical life-cycle properties and are socially and economically viable, and create and maintain cultural values; c) The planned and continuous care and maintenance of the built environment and building stock. Areas requiring planning An area requiring planning is an area the use of which involves needs that require special measures, such as road, water main or sewer construction or arranging other areas. Provisions concerning areas requiring planning also apply to construction where the environmental impact is so substantial as to require more comprehensive consideration than the normal permit procedure. In a legally binding local master plan or building ordinance, local authorities may also designate areas where, due to their location, community development requiring planning may be expected, or where land use planning is warranted by particular environmental values or hazards, as areas requiring planning. An order in a local master plan or a building ordinance designating an area as requiring planning may be in force for a maximum of ten years at a time. National land use objectives National land use objectives are decided upon by the Council of State. National land use objectives may concern matters which have: a) international or more extensive than regional bearing on local structure, land use, or the transport or power network; b) a significant impact on national cultural or natural heritage; or c) Nationally significant impact on ecological sustainability, the economy of the local structure, or avoidance of environmental hazards. When national land use objectives are issued, the general objectives of this Act and the objectives for land use planning laid down in section 5 must be taken into account. The Finnish Building Code
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The competent ministry will issue technical and corresponding general regulations and instructions supplementing this Act, which are published in the Finnish Building Code. In addition, the ministry is in charge of
harmonizing regulations concerning buildings issued by government authorities. Furthermore, regulations that concern building but are issued under other legislation may also be included in the Building Code. The regulations in the Building Code are binding. Instructions are not binding, however, and approaches other than those suggested in them may be applied if they meet the requirements set for building. The regulations in the Building Code concern the construction of new buildings. Unless otherwise specifically prescribed by the regulations, they are applicable to renovation and alteration work only in so far as the type and extent of the measure and a possible change in use of the building or part thereof require. Building restriction A building restriction is in force in areas designated by the regional plan as recreation or protection areas or areas for transportation or technical service networks. The area covered by building restrictions may be increased or decreased by a special order in the plan. Land Acquisition (Companies) Rules, 1963: The difficulties that come in the process of Land Acquisition in India are immense, given the population density and the type of land use in the country. This is evident from the fact that the fundamental issue in a number of top stories in the past few years has been the Process of Land Acquisition; be it Narmada Bachao Andolan or the recent Nandigram issue. With number of State Governments demarcating lands as Special Economic Zones the problem just is going to get worse. The evolution of Law of Land Acquisition as it exists today in various forms in different statutes in India has undergone an evolution in the last decade. Originally the wishes of owners of property were totally irrelevant, but at present, the law tries to provide various provisions for objections and alternative remedies in case of inadequacy of compensation. Exercise of the powers conferred by section 55 of the Land Acquisition Act 1894 (1 of 1894), the Central Government hereby makes the following rules for the guidance of the State Government and the Officer of the Central Government and of the State Governments, namely :—
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1. Short title and application a. These rules may be called the Land Acquisition (Companies) Rules, 1963. b. These rules shall apply to acquisition of land for all companies under Part VII of the Act. 2. Definitions In these rules: a. “Act” means the Land Acquisition Act,1894 (1 of 1894); and
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b. “Committee” means the Land Acquisition Committee constituted under rule 3 3. Land Acquisition Committee. a. For the purpose of advising the appropriate Government in relation to acquisition of land under Part VII of the Act the appropriate Government shall, by notification in the Official Gazette, constitute a Committee to be called the Land Acquisition Committee. b. The Committee shall consist of: i. The Secretaries to the Government of the Departments of Revenue, Agriculture and Industries or such other officers of each of the said Departments as the appropriate Government may appoint; ii. Such other members as the appropriate Government may appoint for such term as that Government may, by order, specify; and iii. The Secretary to the Department or any officer nominated by him dealing with the purposes for which the company proposes to acquire the land. c.The appropriate Government shall appoint one of the members of the Committee to be its Chairman. d. The Committee shall regulate its own procedure. e. It shall be duty of the Committee to advise the appropriate Government on all matters relating to or arising out of acquisition of land under Part VII of the Act, on which it is consulted and to tender its advice within one month from the date on which it is consulted: provided that the appropriate Government may on a request being made in this behalf of the Committee and for sufficient reasons extend the said period to a further period not exceeding two months. 4. Appropriate Government to be satisfied with regard to certain matters before initiating acquisition proceedings a. Whenever a company makes an application to the appropriate Government for acquisition of any land, that Government shall direct the Collector to submit a report to it on the following matters, namely : i. that the company has made its best endeavour to find out lands in the locality suitable for the purpose of the acquisition; ii. that the company has made all reasonable efforts to get such lands by negotiation with the person interested therein on payment of reasonable price and such efforts have failed; iii. that the land proposed to be acquired is suitable for the purpose; iv. that the area of land proposed to be acquired is not excessive; v. that the company is in a position to utilise the land expeditiously; and
vi. Where the land proposed to be acquired is good agricultural land that no alternative suitable site can be found so as to avoid acquisition of that land. b. The Collector shall, after giving the company a reasonable opportunity, to make any representation in this behalf, hold an enquiry into the matters referred to in sub-rule (1) and while holding such enquiry he shall : i. in any case where the land proposed to be acquired is agricultural land, consult the Senior Agricultural Officer of the district whether or not such land is good agricultural land; ii. determine, having regard to the provisions of sections 23 and 24 of the Act, the approximate amount of compensation likely to be payable in respect of the land, which, in the opinion of the Collector, should be acquired for the company; and iii. Ascertain whether the company offered a reasonable price (not being less than the compensation so determined), to the persons interested in the land proposed to be acquired. Explanation— For the purpose of this rule “good agricultural land” means any land which, considering the level of agricultural production and the crop pattern of the area in which it is situated, is of average or above average productivity and includes a garden or grove land. c. As soon as may be after holding the enquiry under sub-rule (2), the Collector shall submit a report to the appropriate Government and a copy of the same be forwarded by that Government to the Committee. d. No declaration shall be made by the appropriate Government under section 6 of the Act unless— i. the appropriate Government has consulted the Committee and has considered the report submitted under this rule and the report, if any, submitted under section 5A of the Act; and ii. the agreement under section 41 of the Act has been executed by the company.
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5. Conditions under which sanction may be given for transfer of land. Where a company for which land has been acquired under the Act applies for the previous sanction of the appropriate Government for the transfer of that land or any part thereof by sale, gift, and lease or otherwise, no such sanction shall be given unless: i. the proposed transfer of land along with dwelling houses, amenities, buildings or work, if any, is to some other company or where the company is a co-operative society, such transfer is to any or all of its members, or
ii. where the land has been acquired for the erection of the
dwelling houses for workmen employed by the company, the proposed transfer of the land along with dwelling houses, if any, is to such workmen or their dependent heirs: Provided that before giving any such sanction the appropriate Government shall consult the Committee 6. Repeal. All rules made by the appropriate Government for the guidance of its officers with respect to acquisition of land for companies under Part VII of the Act and in force immediately before the commencement of these rules shall, to the extent of the repugnancy, cease to have effect. The Process of Land Acquisition For the purposes of Land Acquisition Act of proceedings are carried on by an officer appointed by the government known as Land Acquisition Collector. The proceeding under the Land Acquisition Collector is of an administrative nature and not of a judicial or quasi judicial character. When a government intends to occupy a land in any locality is has to issue a notification under Section 4 in the official gazette, newspaper and give a public notice which entitles anyone on behalf of the government to enter the land for the purposes of digging, taking level, set out boundaries etc. The notification puts forward the intention of the government to acquire and entitles government officials to investigate and ascertain weather the land is suitable for the purpose. The section also makes it mandatory for the officer or person authorised by the government to give a notice of seven days signifying his intention to enter any or building or enclosed court in any locality. This is a mandatory provision of the process of land acquisition. An officer or authorised person of the government has to tender payment for all necessary damage, and dispute all disputes to insufficiency of amount lie to the collector. Under Section 5(a) any person interested in land which is notified under section 4 (who is entitled to claim an interest in compensation) can raise an objection, in writing and in person. The collector after making inquiry to such objections has to forward the report to the government whose decision in this respect would be final. After considering such report made by the collector under section 5(a) the government may issue a declaration within one year of the notification under section 4 to acquire land for public purposes or company, this declaration is a mandatory requirement of the acquisition.
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After the declaration under Section 6, collector has to take order from the appropriate government weather state or central for the acquisition of land under section 7. The next step in the process of acquisition is that collector has to cause land to be marked out, measured and appropriate plan to be made accurately, unless it is already done. Requirement of this section deals only with approximation and does not
require exact measurement. An important process that takes place under this section is demarcation which consists of marking out boundaries of land to be acquired, either by cutting trenches or fixing marks as posts. Object is to facilitate measurement and preparation of acquisition plan, but also let the private persons know what land is being taken. It is to be done by requiring body that is the government department or company whichever be the case. Obstruction under Section 8 and Section 4 are offence punishable with an imprisonment not exceeding one year and with fine not exceeding fifty rupees. Section 9 requires the collector to cause a public notice at convenient places expressing government’s intention to take possession of the land and requiring all persons interested in the land to appear before him personally and make claims for compensation before him. In affect this section requires collector to issue two notices one to the locality of acquisition and other to occupants or people interested in lands to be acquired, and it is a mandatory requirement. Next step in the process of acquisition requires a person to deliver names or information regarding any other person possessing interest in the land to be acquired and the profits out of the land for the last 3 years. It also binds the person by requiring him to deliver such information to the collector my making him liable under sections 175 and 176 of the Indian Penal Code. The object of this step is to enable the collector to ascertain the compensation by giving him a vague idea. The Final set of collector’s proceedings involve an enquiry by the collector into the objections made by the interested persons regarding the proceedings under section 8 and 9 and making an award to persons claiming compensation as to the value of land on the date of notification under section 4. The enquiry involves hearing parties who appear with respect to the notices, investigate their claims, consider the objections and take all the information necessary for ascertain the value of the land, and such an enquiry can be adjourned from time to time as the collector thinks fit and award is to be made at the end of the enquiry. The award made must be under the following three heads:
Correct area of land Amount of compensation he thinks should be given
Apportionment of compensation
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Section 11 makes it obligatory on the part of the collector to safeguard the interests of all persons interested, even though they might not have appeared before him. In awarding compensation the Land Acquisition Collector should look into estimate value of land, give due considerations to the other specific factors. Value of the property in the neighbourhood can be used as criteria. The award should be made within 2 years.
References
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1) The Constitution of India 2) List of Statutes a) THE LAND ACQUISITION ACT, 1894 3) List of Cases Referred 1. Somnawati v. State of Punjab AIR 1963 SC 151. 2. Ratni Devi v. Chief Commissioner Delhi AIR 1975 SC 1699. 3. Bali Malimambu v. State of Gujrat AIR 1978 SC 515. 4. Babu Barkya Thakur v. State of Bombay [1961] 1 SCR 128. 5. Balwant Ramachandran v. Secretary of State ILR 29 Bom 480. 6. Hamabai Framjee v. Secretary of State AIR 1914 PC 20. 7. Amulya Chandra Banerjee v. Corpn of Calcutta AIR 1922 PC 333. 8. Clark v. Nash (1905) Law Co. 1085. 9. Mathurbhai Hirajibhai Patel v. State of Gujrat AIR 1973 Guj 261. 10. Valjibhai Muljibhai Soneji v. State of Bombay AIR 1963 SC 1890. 11. V Doraiswami Pillai and Ors v. Government of Tamil Nadu AIR 1990 Mad 321. 12. Gajamand v. State of Madhya Pradesh AIR 2000 MP 2. 13. Valliammal v. State of Madras AIR 1967 Mad 332. 14. Pran Jivan Jaitha v. State of West Bengal AIR 1974 Cal 210. 15. Jayaram Reddy and Ors. v. The Land Acquisition Officer (1997) 2 MLJ 85. 16. Vellagapudi Kanaka Durga v. District Collector AIR 1971 AP. 17. Dossabhai v. Special Officer, Salsette ILR 36 Bom 599. 18. Revenue Division Officer, Trichinopoly v. Varadachai AIR 1944 Mad 271. 19. Ambyan Menon and Ors. V. State of Kerala AIR 1966 Ker 187. 20. Khub Chand and Ors. v. State of Rajasthan AIR 1907 SC 1074. 21. Narendrajit Singh and Anor. V. State of UP (1970) 1 SCC 125. 22. Raghunath Das v. District Collector of Deccan 11 CLJ 612. 23. Luchmeswar Singh v. Darbhanga Municipality ILR 18 Cal 99. 24. Ponnaira v. Secretary of State AIR 1926 Mad 1099. 25. Luitang v. Deputy Commissioner AIR 1961 Mani 31. 26. Ram Charan v. State of U.P. AIR 1952 ALL 752. 27. Hamabai Famjee v. Secretary of State ILR 39 Bom 279. 28. Province of Bombay v. Khushal Das AIR 1950 SC 222.
SECTION A: BUILDING ECONOMICS
3. BUILDING ECONOMICS 3.1 Architectural aspects of building economics 3.2 Rent control and other building acts 3.3 Economics of high rise buildings
3.1 ARCHITECTURAL ASPECTS OF BUILDING ECONOMICS: 3.1.a Increasing organization:
building
efficiency
through
proper
space
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Manage space efficiency to decrease occupancy costs and optimize utilization through accurate chargeback.
Adding space to an existing organizational footprint is not always a readily available option. The Space Management application helps users improve space efficiency and evaluate the true costs associated with space usage. The reports resulting from a space management analysis will reveal how each square foot or meter of space is being allocated, which can enable a highly granular chargeback process. This can, in turn, improve reimbursement rates from third parties who require accurate and defensible space allocation and occupancy reports. With Space Management, organizations can easily satisfy these needs and better plan for current and future space needs across the enterprise. Benefits • Facilitates improved space efficiency to lower overall occupancy costs • Automates space charge backs to accommodate specific billing and reporting requirements • Ensures space planning information is always accurate and defensible by linking drawings with facilities and infrastructure data • Allocates space usage and reports charge backs accurately to minimize disputes • Generates building performance reports based on IFMA ratios Increase Space Efficiency to Lower Costs: Efficient space usage can lower your occupancy cost per square foot or meter, thereby increasing your organization’s profitability. Develop and integrate intelligent databases and drawings to track the use of space in your buildings. Flexible methods for collecting and organizing space information support your specific reporting requirements. Further optimize space with the optional ARCHIBUS Reservations and Hoteling applications, which allow you to schedule the use of shared rooms or transient space based on availability, chargeback rates, amenities, and seating capacity. • Analyze space inventory information by department • Generate space inventories with gross area, rooms, service areas, vertical penetrations, and more • Create trial layouts to compare space efficiencies of relocation or layout scenarios.
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Satisfy Reporting Requirements Easy access to accurate square footage/square meter and usage information makes it simple to satisfy external reporting requirements. If your organization relies on third-party funding or reimbursement, the difference between estimated and actual information can translate into recovery of millions of dollars. Plus, the application’s easy to implement
Chargeback functionality ensures that each department within the organization is held accountable for its space usage and is appropriately billed. • Choose from built-in and customizable chargeback methods • Calculate room percentage for recording partial or seasonal facility usage • Provide summaries of each department’s area with Departmental Room Analysis reports Defend Your Space Planning Needs: Space Management includes many tools that make it easy to show why more space, or a reassignment of space usage, is necessary. Forecast composite space needs based on headcount, functional usage, and logistics to help departments understand the influences on occupancy costs. Run reports based on the specific details that drive strategic decision-making. • Share facilities and infrastructure information with users in any organization • Determine space efficiency based on industry standards • Charge departments for the areas they occupy, plus their share of common areas • Achieve seamless integration with drawing programs, such as industrystandard Autodesk® AutoCAD®, AutoCAD, Architecture and Revit® Architecture to easily associate space data with floor plans. Eliminate Space Allocation Disputes Accurately determine the usable area allocated to each department. Create benchmarks that determine the amount and type of space required for each employee or department function. Using objective methods to assign space helps mitigate “fairness” concerns associated with allotted space. Develop occupancy plans and quickly locate vacant space for new hires, as well. • Prepare occupancy plans, average area per employee reports, and employee rosters by site and building • Perform charge backs by group, room, employee, or BOMA standards • Add employee designator symbols to drawings using population features
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Analyze Building Performance Space Management supports the International Facility Management Association’s (IFMA) established conventions for measuring building efficiency rates by comparing usable areas and rentable areas. • Gain visibility to how much space is devoted to service areas to better determine ways to increase efficiency rates • Develop the data necessary to generate the Building Performance report, which documents two important ratios defined by IFMA rentable/usable ratio and the usable/rentable ratio.
3.1.b Construction Methods: A new generation of innovative concrete products and construction techniques has been, and is being, developed. New construction philosophies aim to improve design and construction efficiency, generate innovation and enhance performance as both client and members of the project team strive to achieve even greater quality and profitability. Concrete's range of structural solutions, its thermal efficiency, inherent fire resistance, acoustic and vibration performance, durability and low maintenance ensure that concrete can offer best value solutions.
Self compacting concrete Tunnel form construction
Hybrid concrete construction
Post tensioned construction
Tilt up Self Compacting Concrete Self-compacting concrete (SCC) is a relatively new product that sees the addition of super plasticizer and a stabilizer to the concrete mix to significantly increase the ease and rate of flow. By its very nature, SCC does not require vibration. It achieves compaction into every part of the mould or formwork simply by means of its own weight without any segregation of the coarse aggregate. Developed in Japan and Continental Europe, SCC is now being increasingly used where apart from health and safety benefits it offers faster construction times, increased workability and ease of flow around heavy reinforcement. Having no need for vibrating equipment spares workers from exposure to vibration. No vibration equipment also means quieter construction sites. SCC is a generic term for mix designs that differ from traditional concretes at the molecular interface between the cement compounds and the admixture polymers. The fluidity of SCC ensures a high level of workability and durability whilst the rapid rate of placement provides an enhanced surface finish. SCC's high strengths overnight strengths typically reach 3040N/mm2 and 2 day strengths can break the 100N/mm2 barrier enable easier and more reliable demoulding. SCC is certainly the way forward for both in-situ and precast concrete construction. The health and safety benefits and the improved construction and performance results make it a very attractive solution.
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Tunnel Form Tunnel form is becoming one of the most common methods of cellular construction in the UK as its cost effectiveness, productivity and quality benefits are being realized on a wide range of projects.
Tunnel form is a fast-track method of construction that is well suited to repetitive cellular projects such as hotels, apartment blocks and student accommodation. Recognized as being a modern method of construction, tunnel form simplifies the whole construction process by enabling a smooth and fast operation that can result in frame costs being reduced by 15 per cent and provide frame programme time savings of 25 per cent. During the tunnel form construction process, a structural tunnel is created by pouring concrete into steel formwork to make the floor and walls. Each 24 hours, the formwork is moved so that another tunnel can be formed. When a storey has been completed, the process is repeated on the next floor. A strong, monolithic structure is thus constructed that can reach 40 or more storey’s in height. The use of high strength concrete ensures fast construction. Tunnel form creates cells which are 2.4 to 6.6m wide. These can be easily subdivided to create smaller rooms. Where longer spans (up to 11m) are required, the tunnel form can be extended using a mid-span section. The walls can be designed as deep beams and supported at low level on fin columns to permit car parking. As long as the architect has chosen or is prepared to work within the constraints of regular wall alignments, tunnel form is an excellent structural solution. Hybrid Concrete Construction Hybrid concrete construction can be described as being 'best of both worlds'. It marries together the advantages of precast and in-situ concrete construction with often significant benefits. For example, the adoption of a hybrid concrete frame instead of a composite steel frame on a shell-and core office project in central London resulted in construction savings of 29 percent and a 13 percent increase in net let table floor area.
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In terms of costs, in-situ reinforced concrete is commonly viewed as being the most economic framing option while precast concrete promotes speed and factory quality. Combining the two as a hybrid frame results in even greater construction speed , quality and overall economy. Traditional formwork typically accounts for up to 40 percent of an in-situ frame costs. These costs can be significantly reduced by increasing the use of precast concrete which has no on-site formwork requirement. Some HCC techniques can remove the need for follow-on trades such as ceilings and finishes. This allows for an even faster programme. HCC also encourages speed of construction by promoting increased build ability, which should be a fundamental design objective. HCC is about providing best value. It is not necessarily about first cost, although this alone can result in hybrid concrete construction being chosen. Gains from improved build ability on site soon overtake any material cost differences. Inherent benefits, such
as occupier comfort and increased efficiency, lead to potentially massive cost benefits in comparison with other structural approaches. For the full potential of economy, safety, speed, builds ability and performance to be realized then HCC should be considered at the beginning of the design process. Post Tensioned Construction The use of PT offers several benefits, not least of which is the fact that the PT floor slabs are generally thinner than an ordinary reinforced concrete slab. They can also be up to 300mm thinner than a floor in a steel frame. This minimises the building's height to the extent that this could mean an extra storey on a ten storey building. The amount of pre-stress can be adjusted to control deflection, thus enabling the minimum depth of slab to be used. PT slabs can economically span further than a reinforced concrete slab. This in turn reduces the required number of columns and foundations and increases flexibility for space planning. Flexibility is further enhanced by a PT slab being able to accommodate irregular grids. In addition to all the above benefits, PT equals rapid construction. Thin slabs equals less concrete which equals fewer lorries. There is less reinforcement which reduces fixing time and early stressing of the concrete allows the formwork to be struck quickly. There are two methods of PT: 1. Bonded 2. Unbonded Objectives: ·To present a global perspective on low cost housing technologies ·To present the state of the art of the latest innovative technologies for manufacturing pre cast building components ·To disseminate up-to-date information, knowledge and experience on design, production, certification and application of low cost and innovative housing materials ·To present the country perspective on status of low cost housing technologies. ·To promote and encourage networking and cooperation between countries of the region, for the adoption of appropriate and affordable technologies on low-cost housing ·To arrange display of innovative & low cost housing materials developed & promoted by Building Materials & Technology Promotion Council (BMTPC).
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Abstract:
Many new materials are being developed from polymers, metals, and ceramics. Industry is beginning to introduce some of these highperformance or new-technology materials in construction and manufacturing applications because the materials have advantages over traditional materials like steel, concrete, wood, and aluminium. However, many high-performance materials have not been used in large-scale construction projects. Economic and Technical Barriers hinder industry's aggressive introduction of these new technologies despite their advantages over traditional materials. The primary economic barrier preventing the use of new technology material is their high initial cost. Regardless of how cost effective a material might be over the life cycle of the project, industry balks at high up-front costs, particularly when the life-cycle costs of a new material are relatively uncertain. This cost barrier inhibits construction applications of - and eventually research in - new materials. Yet the construction industry has many potential applications; for example, fiber-reinforced polymers (FRPs) and high-performance concrete and steel are technically viable substitutes for conventional bridge materials. FRPs are also likely candidates for use in marine structures and offshore oil rigs. Germany and Japan are leading the world in FRP use in construction; if U.S. companies are to remain globally competitive, they too will likely need to introduce new technology materials in their construction projects. To overcome this cost-based barrier to the adoption of new materials, the construction industry needs practical economic methods for evaluating alternative building and construction materials in a comprehensive and consistent manner. Modern Methods of Construction There are many ways in which the concrete industry has embraced innovation and advocated modern methods of construction. Innovation is an essential feature that must be present in construction; a definition of innovation is to exploit existing and develop new technologies. Concrete Masonry Modern masonry construction is a tried and tested method long popular in Britain and Western Europe and responsible for 90% of the new homes built in the last ten years. High productivity concrete block work allows construction times to be reduced, with gains in robustness, acoustic performance, durability and fire resistance.
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Permeable Concrete Paving
Concrete paving blocks are attractive, durable and cost-effective for landscaping around housing developments. Innovative thinking has turned concrete paving into a sustainable solution to tackle problems caused by rainwater runoff from the site. Permeable concrete paving allows rainwater to drain through the paved surface in a controlled way into the ground before being released into sewers or water courses. Sustainable drainage systems (SUDS) incorporating permeable concrete paving and precast tanks and pipes also allow the capture of water for re-use for nonpotable purposes such as garden watering and toilet flushing. In-situ Concrete Ready-mixed concrete is made under factory controlled conditions For large projects it can be used in systems such as Tunnel Form and in smaller projects in innovative systems such as Insulating Concrete Formwork. Today’s ready-mixed concrete is a modern construction material offering factory controlled quality, exact quantities and minimal waste. Insulating Concrete Formwork (ICF) ICF is a building system that provides permanent insulated formwork for in-situ concrete walls and floors in housing. It consists of twin-walled expanded polystyrene (EPS) panels or blocks filled with ready-mixed concrete. The result is a wall structure ready to accept the roof or floor construction, thermally insulated by the EPS which remains in place, with a uniform surface ready for the direct application of plasterboard or proprietary cladding systems. Modern Concrete Basements Land availability and quality are declining while its cost has been steadily increasing. At the same time homeowners wish they could have more living space for recreation and increased storage. The introduction of a modern concrete basement offers a better use of land with no overall change in the height of the building, potential energy savings of 10%, and increases the value of the property. 3.1.c
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Low Cost Housing is a new concept which deals with effective budgeting and following of techniques which help in reducing the cost construction through the use of locally available materials along with improved skills and technology without sacrificing the strength, performance and life of the structure. There is huge misconception that low cost housing is suitable for only sub standard works and they are constructed by utilizing cheap building materials of low quality. The fact is that Low cost housing is
done by proper management of resources. Economy is also achieved by postponing finishing works or implementing them in phases. Building Cost The building construction cost can be divided into two parts namely: Building material cost: 65% to 70% Labour cost: 65% to 70% Now in low cost housing, building material cost is less because we make use of the locally available materials and also the labour cost can be reduced by properly making the time schedule of our work. Cost of reduction is achieved by selection of more efficient material or by an improved design. Areas from where cost can be reduced are: 1) Reduce plinth area by using thinner wall concept.Ex.15 cms thick solid concrete block wall. 2) Use locally available material in an innovative form like soil cement blocks in place of burnt brick. 3) Use energy efficiency materials which consume less energy like concrete block in place of burnt brick. 4) Use environmentally friendly materials which are substitute for conventional building components like use R.C.C. Door and window frames in place of wooden frames. 5) Preplan every component of a house and rationalize the design procedure for reducing the size of the component in the building. 6) By planning each and every component of a house the wastage of materials due to demolition of the unplanned component of the house can be avoided. 7) Each component of the house shall be checked whether if it’s necessary, if it is not necessary, then that component should not be used. Cost reduction through adhoc methods
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Foundation Normally the foundation cost comes to about 10 to 15% of the total building and usually foundation depth of 3 to 4 ft. is adopted for single or double store building and also the concrete bed of 6″(15 Cms.) is used for the foundation which could be avoided.
It is recommended to adopt a foundation depth of 2 ft. (0.6m) for normal soil like gravely soil, red soils etc., and use the uncoursed rubble masonry with the bond stones and good packing. Similarly the foundation width is rationalized to 2 ft.(0.6m).To avoid cracks formation in foundation the masonry shall be thoroughly packed with cement mortar of 1:8 boulders and bond stones at regular intervals. It is further suggested adopt arch foundation in ordinary soil for effecting reduction in construction cost up to 40%.This kind of foundation will help in bridging the loose pockets of soil which occurs along the foundation. In the case black cotton and other soft soils it is recommend to use under ream pile foundation which saves about 20 to 25% in cost over the conventional method of construction. Plinth It is suggested to adopt 1 ft. height above ground level for the plinth and may be constructed with a cement mortar of 1:6. The plinth slab of 4 to 6″ which is normally adopted can be avoided and in its place brick on edge can be used for reducing the cost. By adopting this procedure the cost of plinth foundation can be reduced by about 35 to 50%.It is necessary to take precaution of providing impervious blanket like concrete slabs or stone slabs all round the building for enabling to reduce erosion of soil and thereby avoiding exposure of foundation surface and crack formation. Walling Wall thickness of 6 to 9″ is recommended for adoption in the construction of walls all-round the building and 41/2” for inside walls. It is suggested to use burnt bricks which are immersed in water for 24 hours and then shall be used for the walls. Rat-trap bond wall It is a cavity wall construction with added advantage of thermal comfort and reduction in the quantity of bricks required for masonry work. By adopting this method of bonding of brick masonry compared to traditional English or Flemish bond masonry, it is possible to reduce in the material cost of bricks by 25% and about 10to 15% in the masonry cost. By adopting rat-trap bond method one can create aesthetically pleasing wall surface and plastering can be avoided. Concrete block walling
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In view of high energy consumption by burnt brick it is suggested to use concrete block (block hollow and solid) which consumes about only 1/3 of
the energy of the burnt bricks in its production. By using concrete block masonry the wall thickness can be reduced from 20 cms to 15 Cms. Concrete block masonry saves mortar consumption, speedy construction of wall resulting in higher output of labour, plastering can be avoided thereby an overall saving of 10 to 25% can be achieved. Solid cement block technology It is an alternative method of construction of walls using soil cement blocks in place of burnt bricks masonry. It is an energy efficient method of construction where soil mixed with 5% and above cement and pressed in hand operated machine and cured well and then used in the masonry. This masonry doesn’t require plastering on both sides of the wall. The overall economy that could be achieved with the soil cement technology is about 15 to 20% compared to conventional method of construction. Doors and windows It is suggested not to use wood for doors and windows and in its place concrete or steel section frames shall be used for achieving saving in cost up to 30 to 40%.Similiarly for shutters commercially available block boards, fibre or wooden practical boards etc., shall be used for reducing the cost by about 25%.By adopting brick jelly work and precast components effective ventilation could be provided to the building and also the construction cost could be saved up to 50% over the window components. Lintels and chajjas The traditional R.C.C. lintels which are costly can be replaced by brick arches for small spans and save construction cost up to 30 to 40% over the traditional method of construction. By adopting arches of different shapes a good architectural pleasing appearance can be given to the external wall surfaces of the brick masonry. Roofing Normally 5″(12.5 cms) thick R.C.C. slabs is used for roofing of residential buildings. By adopting rationally designed in-situ construction practices like filler slab and precast elements the construction cost of roofing can be reduced by about 20 to 25%.
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Filler slabs They are normal RCC slabs where bottom half (tension) concrete portions are replaced by filler materials such as bricks, tiles, cellular concrete blocks, etc. These filler materials are so placed as not to compromise
structural strength, result in replacing unwanted and nonfunctional tension concrete, thus resulting in economy. These are safe, sound and provide aesthetically pleasing pattern ceilings and also need no plaster. Jack arch roof/floor They are easy to construct, save on cement and steel, are more appropriate in hot climates. These can be constructed using compressed earth blocks also as alternative to bricks for further economy. Ferro cement channel/shell unit Provide an economic solution to RCC slab by providing 30 to 40% cost reduction on floor/roof unit over RCC slabs without compromising the strength. These being precast, construction is speedy, economical due to avoidance of shuttering and facilitates quality control. Finishing work The cost of finishing items like sanitary, electricity, painting etc., varies depending upon the type and quality of products used in the building and its cost reduction is left to the individual choice and liking. Conclusion The above list of suggestion for reducing construction cost is of general nature and it varies depending upon the nature of the building to be constructed, budget of the owner, geographical location where the house is to be constructed, availability of the building material, good construction management practices etc. However it is necessary that good planning and design methods shall be adopted by utilizing the services of an experienced engineer or an architect for supervising the work, thereby achieving overall cost effectiveness to the extent of 25% in actual practice.
References http://www.archibus.com/products/datafiles/Space.pdf http://www.concretecentre.com/main.asp?page=148 http://www.concretecentre.com/main.asp?page=438 http://www.concretecentre.com/main.asp?page=335 http://www.concretecentre.com/main.asp?page=627 http://www.concretecentre.com/main.asp?page=609 http://www.engineeringcivil.com/low-cost-housing.html
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1. 2. 3. 4. 5. 6. 7.
3.2 RENT CONTROL AND OTHER BUILDING ACTS: 3.2.a All transactions in Indian real estate sector are governed by various laws enacted by the Central Government of India and respective State governments. One such law is the RENTAL LAWS. These laws govern the rental of commercial and residential property and are necessary to enforce individual civil rights of both landlord and tenant and prevention of any kind of deceit. The real estate scene in India is flawed by land market distortions. The most glaring ones include inflexible zoning, rent and tenancy laws. Zoning laws, rent controls and protected tenancies have been detrimental to the healthy rental trends in India. They have put a freeze to land in city centres that could be otherwise made available for new retail outlets and flats. These laws also gloss over operational inefficiencies and scuttle competition. Tenants residing could not be evicted for a long time and would not surrender their cheap tenancies on their own volition. The renovation of buildings could hardly happen. One such act favouring the rental property market in India is the Rent Control Act. Rent Control Act Rent Control Act was an attempt by the Government of India to eliminate the exploitation of tenants by landlords. Rent legislation tends to providing payment of fair rent to landlords and protection of tenants against eviction. But the allowances have been very generous and hence tenants residing in rental properties in India since 1947 continue to pay rents fixed then, irrespective of inflation and the realty boom. The Rent Control Act has led to several adverse situations like languishing investment in rental housing, withdrawing of existing housing stock from the rental market, stagnating municipal property tax revenue. The rent control along with security of tenure has not given any encouragement to house owners to renovation their houses and most houses as a result have a worn out look. Repeal of the Rent Control Act would lead to construction boom and meet the growing need for housing and aid employment generation. There will be more rational use of prime locations and will set off a continuous process of urban renewal.
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In 1992, the Central Government proposed a model rent control legislation, which was meant for and circulated to all states. The model Act proposed modification of some of the existing provisions on inheritance of tenancy and also prescribed a rent level beyond which rent control could not apply. The New Delhi Rent Control Act that was passed
in 1997 was based on this but failed to be notified due to resistance from traders who are sitting tenants. Very few states have introduced the model Act. The new Maharashtra Rent Control Act, Delhi Rent Control Act, Tamil Nadu Rent Control Act, Karnataka Rent Control Act all has provisions for the dispute among the landlords and tenants. Each of the State Rent Act provides for fixation of Standard Rent as well decree for possession and provisions that lay down the satisfaction of the Court. Rental Agreement is an integral part of rental law Rent or lease of a residential or commercial property in India is subject to strict Indian laws. A mutual agreement on the terms and conditions of the rented property by the landlord and the tenant is required. In the present times, leasing a commercial space in India as opposed to owning commercial real estate is turning out to be a brilliant move. Professional legal advice becomes a necessity as there are fewer tenantfriendly laws in the area of commercial leases, and no standard lease agreements. A lawyer’s help will be useful for making an informed decision in negotiating the best deal on a commercial lease as he/she can research zoning laws and local ordinances and inform you about local real estate market conditions and customs. A rental agreement refers to a relationship between the landlord and the tenant. It is legally binding upon the parties. It may be brief, or it may have extra conditions or obligations. However, any changes or additions to a rental agreement should be maintained in writing. The rental agreement is a ‘Legal Form’ which has to be completed, signed and dated by the tenant and landlord. There are leases and rental forms for renting, leasing and managing residential rental properties. Both the parties must have access to the document once it is signed. The landlord should get the agreement registered. The landlord must give the tenant a duplicate copy of the rental agreement, failing which the tenant is not obligated to pay rent until the tenant receives a copy of the rental agreement. For a lease agreement, the terms of the lessee (tenant) and the lessor (landlord) when they enter into a lease agreement would include terms like the term of lease, deposit amount and monthly rentals. The lessor or the landlord should ensure the premises come back in the right shape in repossession. There has been no damage to the tiling, plumbing, flooring or electrification and the premises are in the proper condition.
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No major changes have been incorporated in the premises. If the lessee has made some changes, which are not acceptable to the lessor, the latter may ask him to undo the changes.
In the case of leasing of furnished premises, the condition of the furnishings is in proper condition.
All the electricity and telephone charges have been taken care of till the specified date by the lessee or tenant at the time of repossession.
On satisfactory fulfilment of all these aspects, the lesser should offer the refund the security deposit (if given) to the lessee offering vacant and peaceful possession of the premises. In a Tenancy Agreement there is a transfer of interest and it establishes the non-eviction of the tenant by the owner except on the grounds of eviction mentioned under the Rent Act. Under the Leave and License Agreement transfer of interest takes place on permission and the same can be terminated as per the terms of the agreement. The possession can be demanded back from the licensee. The label to the agreement could be Leave & License or Tenancy Agreement, but it is the intention of the party that counts. Documentation of the commercial lease is also an important rental law procedure. Conclusion The rental laws in India need to be revised to protect the owner and his/her property from the tenant.
Special areas of focus should be on terminating old tenancies, removing constraints on increase of rentals and empowering owners in the sense of being able to reclaim their properties without any court proceedings.
The market forces should be allowed to determine the rental amounts and the owner must have full protection for his/her property. This will go a long way in providing security to the landlord and also reduce the deposit amount required with the lease agreements.
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If these laws are enacted and strictly enforced, there is every chance that more investors will want to enter the real estate market to utilize the rental fees as income. This is especially true for the commercial sector. The tax laws also need to be revised so that renting of properties becomes a financially viable option. Amendments in the Rent Acts of several states are a progressive move.
3.2.b The Government Buildings Act, 1899,ACT No.4 OF 1899, [AS ON 1956], 3rd February, 1899. This Act provides for the exemption from the operation of municipal building laws of certain buildings and lands which are the property, or in the occupation, of the Government and situate within the limits of a municipality. Whereas it is expedient to provide for the exemption from the operation of municipal building laws of certain buildings and lands which are the property, or in the occupation, of the Government and situate within the limits of a municipality. It is hereby enacted as follows: 1. Short title and extent. (a) This Act may be called the Government Buildings Act, 1899. (b) It extends to the whole of India except [the territories which, immediately before the 1st November, 1956, were comprised in Part B States] 2. Municipal authority defined. In this Act the expression "municipal authority" includes a municipal corporation or a body of municipal commissioners constituted by, or under the provisions of, any law or enactment for the time being in force. 3. Exemption of certain Government buildings from municipal laws to regulate the erection, etc., of buildings within municipalities.
The word “Imperial” rep. by the A.O.1948.
Subs. by the A.O.1937 for "the Govt.
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Nothing contained in any law or enactment for the time being in force to regulate the erection, re-erection, construction, alteration or maintenance of buildings within the limits of any municipality shall apply to any building used or required for the public service or for any public purpose, which is the property, or in the occupation, of the Government, or which is to be erected on land which is the property, or in the occupation, of the Government: provided that, where the erection, re-erection, construction or material structural alteration of any such building as aforesaid (not being a building connected with [1] defence, or a building the plan or construction of which ought, in the opinion of [2]the Government concerned], to be treated as confidential or secret) is contemplated, reasonable notice of the proposed work shall be given to the municipal authority before it is commenced.
4. Objections or suggestions as to erection, etc., of certain Government buildings within municipalities (1) In the case of any such building as is mentioned in the last preceding section (not being a building connected with i) defence or a building the plan or construction of which ought, in the opinion of ii) the Government concerned], to be treated as confidential or secret), the municipal authority, or any person authorized by it in this behalf, may, with the permission of the State Government previously obtained, but not otherwise, and subject to any restrictions or conditions which may, by general or special order, be imposed by the State Government, inspect the land and building and all plans connected with its erection, reerection, construction or material structural alteration, as the case may be, and may submit to the State Government a statement in writing of any objections or suggestions which such municipal authority may deem fit to make with reference to such erection, re-erection, construction or material structural alteration. (2) Every objection or suggestion submitted as aforesaid shall be considered by the State Government, which shall, after such investigation (if any) as it shall think advisable, pass orders thereon, and the building referred to therein shall be erected, re-erected, constructed or altered, as the case may be, in accordance with such orders: Provided that, if the State Government overrules or disregards any such objection or suggestion as foresaid, it shall give its reasons for so doing in writing. [3]
The word “Imperial” rep. by the A.O.1948.
Subs. by the A.O.1937 for "the Govt.
Sub-section (3) rep. by the A.O.1937.
References:
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1. www.indianground.com/rentals/rental-laws-in-india.aspx 2. http://www.vakilno1.com/bareacts/Laws/The-Government-BuildingsAct-1899.htm
3.3 ECONOMICS OF HIGH RISE BUILDINGS: A high-rise is a tall building or structure. Normally, the function of the building is added, for example high-rise apartment building or high-rise offices.
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High-rise buildings became possible with the invention of the elevator (lift) and cheaper, more abundant building materials. Buildings between 75 feet (23 m) and 491 feet (150 m) high are, by some standards, considered high-rises. Buildings taller than 492 feet (150 m) are classified as skyscrapers. The average height of a level is around 13 feet (4 m) high, thus a 79 foot (24 m) tall building would comprise 6 floors.
There is a general understanding that construction cost will rise as storey height increases. This is not universally true for increased number of storeys. Morton & Jagger (1995) pointed out that some cost factors will increases and some cost factors will decrease the cost per square metre as height increases and the significance of these cost factors will change at different heights. Flanagan and Norman (1999) pointed out that construction cost generally falls as the number of storeys increases. They categorize construction cost into four cost components for considering the number of storeys and the height of the buildings: (1) Cost items fall as the number of storeys increases, e.g. roofs, foundation. (2) Cost items rise as the number of storeys increases, e.g. lift installation, fire services. (3) Cost items fall initially and then rise as the number of storeys increases, e.g. curtain walling. (4) Cost items unaffected by height, e.g. floor finishes, do Size of Floor Plate The size of the floor plate is primarily determined by the user’s requirement subject to various statutory constraints. For instance, the building regulation may stipulate the permitted maximum site coverage which in effect limits the size of the floor plate in relation to its site area. The building regulation may also stipulate the maximum travel distance from the farther point on a floor to a protected stair. The major considerations behind the economics of floor plates are the lettable (or rentable) to gross floor ratio and the wall to floor area ratio. Lease Span Lease span is the clear distance from the building core to the external wall. It depends upon the functional requirement and size of floor plate. Based on the collected data common lease span is approximately 12m, ranging from 9.80m to 13.89m. The Bank of ChinaTower has the longest lease span of approximately 17m at its lower floors due to its split core design. Floor Height The floor height consists of two aspects; namely, the floor-to-floor height and floor-to-ceiling height. The minimum floor height may be determined by the relevant building regulations. As the floor-to-ceiling height ranges from 2.60m to 2.80m with an average of 2.69m. The difference between the lowest and highest ceiling height is only 200mm.
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Plan Shape of Building The geometry of the floor plan has significantly impact upon the interior space planning, exterior building envelope and structural system. Generally the simpler and more regular the floor shape, the more easily it can be adapted to the user’s needs in terms of space planning. Square and rectangular floor plans work more efficiently than curved and irregular shapes.
Service Core A service core is those parts of a building consisting of the lift shafts, lift lobbies, staircases, toilets, mechanical and electrical systems, riser-ducts and plant rooms. The design of a service core can significantly affect the overall space efficiency of the building, vertical circulation system and distribution routes of mechanical and electrical system. In many tall buildings the core structure also acts, either in isolation or in conjunction with the perimeter frame, as the principal load bearing element for both the gravity and wind loadings.
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Conclusion The two main considerations other than economic value are the client’s preference and the statutory requirements on tall buildings. The cost effect of high-rise buildings concerns the quality and the quantity change of different building elements. This calls for a sensible choice of the systems or the type of materials used for a say, a 10-storey building, 20storey building, a 30-storey building and so on, up to a height or number of storey permitted by the statutory requirements. This study presents a cost data analysis of the building elements in respect of the number of storey and height of seven office buildings which provide an indication of the cost trend and the cost change for a change of the numbers of storeys and heights.
SECTION B: SOCIOLOGY
4. MAN AND ENVIRONMENT 4.1 Man and his social environment 4.2 Social changes
4.1 MAN AND HIS SOCIAL ENVIRONMENT
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In Oxford Advanced Learner's Dictionary, environment is defined as the nature conditions, example land, air and water in which people, animals and plants live. On the other hand, it is the surroundings of man, both physical and social that consists of all the natural laws, principles and
things
made
by
both
nature
and
man.
Types of environment (i) The Physical Environment - The physical environment refers to the geographical areas or territory which man occupies. This consists of dry lands, forests and grasslands, lakes and deserts. Man's physical environment, to a large extent determines the type of occupation those living in it are likely to engage in. (ii) The Social Environment - Since no man is an island, man lives together as a group or society. This group or society is referred to as 'Man's Social Environment'. Man's real social environment is men. It is the social environment that conditions human development or behaviour. Things that mould social behaviour include ideas, beliefs, notions, biases, presuppositions, etc. The most important part of the overall environment of man is the social environment. It differs from one nation to another, one period to another, one class to another, and its influences are outside the control of any one individual. The social system needs to be remodelled such that individual success does not conflict with communal welfare. This can be achieved by encouraging such social traits as altruism, readiness to cooperate, sympathetic enthusiasm, and so forth, instead of putting a premium on many anti-social traits such as egoism, cunning, and insensitivity to human misery. All in all, differences among mankind are the outcome of nature and nurture, of heredity and environment. Some are sharp, some are dull. Nevertheless many apparently dull persons can be restored to normal intelligence by proper education, regular exercise of the mind, and facilities for wholesome association. The way to progress lies in a ceaseless effort to develop our knowledge and intelligence. Such development is possible only when the mind is kept steady and wellpoised. How man influences his physical environment: Man has continued to change his physical environment in order to improve his living conditions. He has been able to develop and turn many of the natural conditions to his own advantages, such as in the following example:
ii.
iii.
Man constructs shelters of various kinds. This comprises shelters for dwelling, marketing and for other gatherings. He has also constructed shelters for schools, hospitals, industries etc. Man builds dams and canals thereby changing the natural environment. By so doing, he has been able to overcome the problem caused by lack of rainfall. He also uses the dams as source of generating electric power. Barren soils and lands have been made reach by the use of artificial manure. For instance, the N.P.K. 15.15 fertilizer was discovered and
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i.
manufactured by man to enrich the soil and enhance the production of food for man's consumption. Furthermore, man reclaims marshy and flood lands by means of drainage. Some lands that would have been rendered useless as a result of nature, have been reclaimed by man and used for erecting buildings, construction of roads to link up places necessary for man's survival, etc. Man has discovered and is still discovering other means through which he can effectively influence his physical environment in order to satisfy his unlimited wants, needs and desires. How man is influenced by his physical environment: Man, on the other hand, has been influenced and is still being influenced by his physical environment in the following ways: i. ii. iii.
iv.
v.
Man sleeps when it is time to sleep and wakes when it is day-light. He moves about during the day and confines himself at night. Man, in order to protect himself from rain and sun, builds shelters as his dwelling place. Man has been forced by nature to wear clothes in order to protect himself from cold. Man wears clothes according to the climatic conditions of his area. For instance, a man in the cold region wears very thick clothes while a man in the tropics wears light clothes. When a man lives near lakes, sea or other water bodies, he engages in fishing to earn a living. For instance, those living in the Riverine area of Southern Nigeria that is characterized by thick mangrove forests are engaged in fishing, net making and lumbering. Man farms where the land is arable. He plants the type of crops that are favoured, by his soil and climatic conditions of his region. He keeps live stocks where there is good grass and other favourable conditions for keeping animals. For example, in Nigeria the Northerners keep live stock because there is good grass and extensive pasture lands.
How man influences his social environment: Man, as a social being influences his social environment through the following ways:
ii.
iii.
Man lives together in groups or communities and takes advantages of group work and group living. He makes rules and regulations in order to guide the behaviour of people and ensure harmony and tranquillity in the society. A society without rules and regulations will be filled with mal-adjusted citizens who will constitute nuisance. Man, in a bid to satisfy his unlimited wants, produces goods and services and engages in export and import of such goods and services. For instance Nigeria exports her petroleum product and imports cars and some other services to make life more comfortable for its citizens.
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i.
iv.
Man makes music for leisure and happiness. 'All work no play makes Jack a dull boy'. Therefore, in order to ease-off stress after the day's work, man engages himself in music production or other avenues of creating humour or entertainment. In addition, man in a bid to live exemplary life, founds religion and religious beliefs. For instance, the Christians worship the supreme God. They make effort to obey the commandments of God in other to inherit His Kingdom. The Moslems practice the Islamic religion which was founded by Prophet Mohammed. They worship Prophet Mohammed and observe his commandments. Consequently, the traditional religion was founded by our forefathers. Those who practice it make graven images, worship it and observe its rules and regulations, etc.
How man is influenced by his social environment: On the other hand, man has been influenced and is still being influenced by his social environment in the following ways:
ii.
iii.
He obeys existing laws and customs of his community. Before man is born, there are already existing rules and customs in his community. To fit in properly into such community man is bound to observe them. Man conforms to the modes of worship in his society. Though, there is freedom of worship but most of the religions man subscribes to are already there before he was born. Man enjoys the pleasure of what exists around his environment, such as the type of food and drinks that are produced in his environment. He also adapts himself to the trend of fashion in his society. Every society has a language of communication. Therefore, man speaks the language that is already in use by the people of his society. In conclusion, man cannot exist in a vacuum. He lives in an environment. As such, he interacts with his environment and in the process of interacting with his environment, the environment influences him and he, in turn, influences the environment. This interaction has to a large extent alleviated some of the problems man was encountering. A typical example is the early men who were eating their food raw, moving about aimlessly in the forest like animals. When they started interacting with their environment, they discovered that when two stones were struck together, fire was produced to cook their food. They also discovered that they can cultivate the soil to plant their crops. Hence, they were the first to discover agriculture. Today, as a result of how man influences his environment and vice versa, man has been able to discover various ways of alleviating
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i.
some of the numerous problems he is surrounded with. Examples of such problems include: communication, transportation, clothing, shelter, food, medical services, just to mention but a few. The status of Nigerian families has changed from what it used to be to what it is today as a result of the above listed factors. Human families will continue to experience more changes as a result of their unlimited wants, needs and desires in a bid to make life more enjoyable and comfortable.) [3] Social Structure “...social structure is seen as comprising the relationships themselves, understood as patterns of causal interconnection and interdependence among agents and their actions, as well as the positions that they occupy.” “...social structure is seen as comprising those cultural or normative patterns that define the expectations of agents hold about each other's behaviour and that organize their enduring relations with each other.” [4] Definitions:
Social structure is a term frequently used in anthropology, sociology and social theory to refer to enduring relationships or bonds between individuals or groups of individuals. [1] Social structure possession of scarce goods. Additionally, in any society there is a more or less regular division of labour. [2]
The ways in which people within a culture are organized into smaller groups; each smaller group has its own particular tasks. [2]
Social structure refers to regularities in social life, its application is inconsistent. For example, the term is sometimes wrongly applied when other concepts such as custom, tradition, role, or norm would be more accurate. Social structure is sometimes defined simply as patterned social relations—those regular and repetitive aspects of the interactions between the members of a given social entity
Karl Marx argued that the economic base substantially determined the cultural and political superstructure of a society.
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A.R. Radcliffe-Brown - social structure a central place in his approach and connected it to the concept of function. In his view, the components of the social structure have indispensable functions for one another—the continued existence of the one component is dependent on that of the others—and for the society as a whole, which is seen as an integrated,
organic entity. Societies demonstrated that the interdependence of institutions regulated much of social and individual life. Parsons - social structure was essentially normative—that is, consisting of “institutional patterns of normative culture.” Put differently, social behaviour conforms to norms, values, and rules that direct behaviour in specific situations. These norms vary according to the positions of the individual actors: they define different roles, such as various occupational roles or the roles of husband-father and wife-mother. Social structure has been identified as:
the relationship of definite entities or groups to each other, enduring patterns of behaviour by participants in a social system in relation to each other, and Institutionalized norms or cognitive frameworks that structure the actions of actors in the social system.
Social structure in a general sense, the term can refer to:
entities or groups in definite relation to each other, relatively enduring patterns of behaviour and relationship within a society, or
Social institutions and norms becoming embedded into social systems in such a way that they shape the behaviour of actors within those social systems.
The notion of social structure as relationships between different entities or groups or as enduring and relatively stable patterns of relationship emphasizes the idea that society is grouped into structurally related groups or sets of roles, with different functions, meanings or purposes. One example of social structure is the idea of "social stratification", which refers to the idea that society is separated into different strata (levels), according to social distinctions such as a race, class, disability or gender. Social treatment of persons within various social structures can be understood as related to their background. Social structure may be seen to influence important social systems including the economic system, legal system, political system, cultural system, and others. Family, religion, law, economy and class are all social structures. The "social system" is the parent system of those various systems that are embedded in it. Social structures have informed the study of institutions, culture and agency, social interaction, and history. Origins and evolution:
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Some believe that social structure is naturally developed. It may be caused by larger system needs, such as the need for labour,
management, professional and military classes, or by conflicts between groups, such as competition among political parties or among elites and masses. Others believe that this structuring is not a result of natural processes, but is socially constructed. It may be created by the power of elites who seek to retain their power, or by economic systems that place emphasis upon competition or cooperation. [4] Divisions: Social structure macrostructure.
can
also
be
divided
into
microstructure
and
Microstructure - is the pattern of relations between most basic elements of social life, that cannot be further divided and have no social structure of their own (for example, pattern of relations between individuals in a group composed of individuals - where individuals have no social structure, or a structure of organizations as a pattern of relations between social positions or social roles, where those positions and roles have no structure by themselves). Macrostructure - is thus a kind of 'second level' structure, a pattern of relations between objects that have their own structure (for example, a political social structure between political parties, as political parties have their own social structure). Some types of social structures that modern sociologist differentiate are Relation structures (in family or larger family-like clan structures), Communication structures (how information is passed in organizations) and Sociometric structures (structures of sympathy, antipathy and indifference in organizations. Social structure in a general sense, the term can refer to:
entities or groups in definite relation to each other, relatively enduring patterns of behaviour and relationship within a society, or
Social institutions and norms becoming embedded into social systems in such a way that they shape the behaviour of actors within those social systems.
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The notion of social structure as relationships between different entities or groups or as enduring and relatively stable patterns of relationship emphasises the idea that society is grouped into structurally related groups or sets of roles, with different functions, meanings or purposes. One example of social structure is the idea of "social stratification", which refers to the idea that society is separated into different strata (levels), according to social distinctions such as a race, class, disability or gender. Social treatment of persons within various social structures can be understood as related to their background.
Social structure may be seen to influence important social systems including the economic system, legal system, political system, cultural system, and others. Family, religion, law, economy and class are all social structures. The "social system" is the parent system of those various systems that are embedded in it. Social structures have informed the study of institutions, culture and agency, social interaction, and history. [4] Social network: A social network is a social structure made of individuals (or organizations) called "nodes," which are tied (connected) by one or more specific types of interdependency, such as friendship, kinship, financial exchange, dislike, or relationships of beliefs, knowledge or prestige. Social network analysis views social relationships in terms of network theory about nodes and ties. Nodes are the individual actors within the networks, and ties are the relationships between the actors. The resulting graph-based structures are often very complex. There can be many kinds of ties between the nodes. Research in a number of academic fields has shown that social networks operate on many levels, from families up to the level of nations, and play a critical role in determining the way problems are solved, organizations are run, and the degree to which individuals succeed in achieving their goals. In its simplest form, a social network is a map of all of the relevant nodes between all the nodes being studied. The network can also be used to measure social capital -- the value that an individual gets from the social network. These concepts are often displayed in a social network diagram, where nodes are the points and ties are the lines. [5] Social groups: A group can be defined as two or more humans that interact with one another, accept expectations and obligations as members of the group, and share a common identity. By this definition, society can be viewed as a large group, though most social groups are considerably smaller. A true group exhibits some degree of social cohesion and is more than a simple collection or aggregate of individuals, such as people waiting at a bus stop. Characteristics shared by members of a group may include interests, values, ethnic or social background, and kinship ties. According to Paul Hare, the defining characteristic of a group is social interaction. "Man can only make progress in cooperative groups."
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A social group consists of two or more people who interact with one another and who recognize themselves as a distinct social unit. The definition is simple enough, but it has significant implications. Frequent interaction leads people to share values and beliefs. This similarity and
the interaction cause them to identify with one another. Identification and attachment, in turn, stimulate more frequent and intense interaction. Each group maintains solidarity with all to other groups and other types of social systems. Groups are among the most stable and enduring of social units. They are important both to their members and to the society at large. Through encouraging regular and predictable behaviour, groups form the foundation upon which society rests. Thus, a family, a village, a political party a trade union is all social groups. These, it should be noted are different from social classes, status groups or crowds, which not only lack structure but whose members are less aware or even unaware of the existence of the group. These have been called quasi-groups or groupings. Nevertheless, the distinction between social groups and quasi-groups is fluid and variable since quasi-groups very often give rise to social groups, as for example, social classes give rise to political parties. Types of groups: Primary groups are small groups with intimate, kin-based relationships: families, for example. They commonly last for years. They are small and display face to face interaction. Secondary groups, in contrast to primary groups, are large groups whose relationships are formal and institutional. They may last for years or may disband after a short time. The formation of primary groups happens within secondary groups. Individuals almost universally have a bond toward what are known as reference groups. These are groups to which the individual conceptually relates him/her, and from which he/she adopts goals and values as a part of his/her self identity. Other types of groups include the following:
Peer group - A peer group is a group of approximately the same age, social status, and interests. Generally, people are relatively equal in terms of power when they interact with peers. Clique - An informal, tight-knit group, usually in a High School/College setting, that shares common interests. There is an established yet shifting power structure in most Cliques.
Club - A club is a group, which usually requires one to apply to become a member. Such clubs may be dedicated to particular activities, such as sporting clubs.
Household - all individuals who live in the same home, there are various models in Anglophone culture including the family, blended families, share housing, and group homes.
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Community - A community is a group of people with a commonality or sometimes a complex net of overlapping commonalities, often but not always - in proximity with one another with some degree of continuity over time. They often have some organization and leaders.
Franchise- this is an organization which runs several instances of a business in many locations.
Gang - A gang is usually an urban group that gathers in a particular area. It is a group of people that often hang around each other. They can be like some clubs, but much less formal.
Mob - A mob is usually a group of people that has taken the law into their own hands. Mobs are usually a group which gather temporarily for a particular reason.
Posse - A posse was initially an American term for a group of citizens that had banded together to enforce the law. However, it can also refer to a street group.
Squad - This is usually a small group, of around 3-8 people, that would work as a team to accomplish their goals.
Team - similar to a squad, though a team may contain many more members. A team works in a similar way to a squad.
Groups can also be categorized according to the number of people present within the group. These categories are defined as follows:
Couple or Pair - 2 people Few - 3 people
Group - 3 to 5 people
Bunch - 6 to 9 people
Heaps - 10 or more people
Significance:
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Territorial and dominance behaviours in humans are so universal and commonplace that they are simply taken for granted. But these social behaviours and interactions between human individuals play a special role in the study of groups: they are necessarily prior to the formation of groups. The psychological internalization of territorial and dominance experiences in conscious and unconscious memory are established through the formation of personal identity, body concept, or self concept. An adequately functioning individual identity is necessary before an individual can function in a division of labor (role), and hence, within a cohesive group. Coming to understand territorial and dominance
behaviours may thus help to clarify the development, functioning, and productivity of groups. Development of a group: If one brings a small collection of strangers together in a restricted space and environment, provide a common goal, and maybe a few ground rules, a highly probable course of events will follow. Interaction between individuals is the basic requirement. At first, individuals will differentially interact in sets of twos or threes while seeking to interact with those with whom they share something in common: i.e., interests, skills, and cultural background. Relationships will develop some stability in these small sets, in that individuals may temporarily change from one set to another, but will return to the same pairs or trios rather consistently and resist change. Particular twosomes and threesomes will stake out their special spots within the overall space. Again depending on the common goal, eventually there will be integration of twosomes and threesomes into larger sets of six or eight, and corresponding revisions of territory, dominance ranking, and further differentiation of roles. All of this seldom takes place without some conflict or disagreement: for example, fighting over the distribution of resources, the choices of means and different sub goals, the development of what are appropriate norms, rewards and punishments. Some of these conflicts will be territorial in nature: i.e., jealousy over roles, or locations, or favoured relationships. But most will be involved with struggles for status, ranging from mild protests to serious verbal conflicts and even dangerous violence. By analogy to animal behaviour, these behaviours can be termed territorial behaviours and dominance behaviours. Depending on the pressure of the common goal and on the various skills of individuals, differentiations of leadership, dominance, or authority will develop. Once these relationships solidify, with their defined roles, norms, and sanctions, a productive group will have been established. Dispersal and transformation of groups:
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Two or more people in interacting situations will over time develop stable territorial relationships. As described above, these may or may not develop into groups. But stable groups can also break up in to several sets of territorial relationships. There are numerous reasons for stable groups to malfunction or to disperse, but essentially this is because of loss of compliance with one or more elements of the definition of group. The two most common causes of a malfunctioning group are the addition of too many individuals, and the failure of the leader to enforce a common purpose, though malfunctions may occur due to a failure of any of the other elements (i.e., confusions status or of norms).
In a society, there is obvious need for more people to participate in cooperative endeavours than can be accommodated by a few separate groups. [6] Conclusion Different social groups and structure like industrial, agriculture, cultural, religious, political and aesthetic etc have evolved and developed during various stages of development of human civilization, and these social structures represented man’s accumulated cultural resources primarily based on natural environment. Human behaviour has been known by his characteristics social organization, social processes, economy and culture depend upon the geographical environment. Density and distribution of population, social differentiation, cultural variations, and character of economy, political, social, religious organizations and all social phenomena contribute in the making of the socio sphere. [7]
References
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1. wikipedia.org/wiki/Social_structure 2. www.britannica.com/EBchecked/topic/629641/violence 3. www.nigeriansinamerica.com/articles/3659/2/Mans-Family-And-HisEnvironment---An-Essay-On-The-Issues-Of- The-Society/Page2.html 4. wikipedia.org/wiki/Social structure 5. wikipedia.org/wiki/index.html?curid=325726 6. wikipedia.org/wiki/Social group 7. nos.org/331courseE/L-22%20SOCIETY%20AND %20ENVIRONMENT.pdf
SECTION B: SOCIOLOGY
5. URBANISATION 5.1 Trends and characteristics 5.2 Dynamics development
of
urban
growth
expansion
and
5.3 Urban attitude, value and behaviour
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5.4 Study
5.1 TRENDS AND CHARACTERISTICS Organization In organization is a social arrangement which pursues collective goals, which controls its own performance, and which has a boundary separating it from its environment. The word itself is derived from the Greek word “organon” [itself derived from the better-known word ἔργον ergon - work; deed - > ergonomics, etc] In the social sciences, organizations are studied by researchers from several disciplines, the most common of which are sociology, economics, political science, psychology, management, and organizational communication. The broad area is commonly referred to as organizational studies, organizational behaviour or organization analysis. Therefore, a number of different theories and perspectives exist, some of which are compatible, Organization – process-related: (organization as task or action).
an
entity
is
being
(re-)organized
Organization – functional: organization as a function of how entities like businesses or state authorities are used (organization as a permanent structure). Organization – institutional: an entity is an organization (organization as an actual purposeful structure within a social context) Organization in sociology
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In sociology "organization" is understood as planned, coordinated and purposeful action of human beings to construct or compile a common tangible or intangible product. This action is usually framed by formal
membership and form (institutional rules). Sociology distinguishes the term organization into planned formal and unplanned informal organizations. Sociology analyzes organizations in the first line from an institutional perspective. In this sense, organization is a permanent arrangement of elements. These elements and their actions are determined by rules so that a certain task can be fulfilled through a system of coordinated division of labor. An organization is defined by the elements that are part of it (who belongs to the organization and who does not?), its communication (which elements communicate and how do they communicate?), its autonomy (which changes are executed autonomously by the organization or its elements?), and its rules of action compared to outside events (what causes an organization to act as a collective actor?). By coordinated and planned cooperation of the elements, the organization is able to solve tasks that lie beyond the abilities of the single elements. The price paid by the elements is the limitation of the degrees of freedom of the elements. Advantages of organizations are enhancement (more of the same), addition (combination of different features) and extension. Disadvantages can be inertness (through co-ordination) and loss of interaction. [1]
The Smallest Level of Social Organization: Dyads The dyad is the smallest level of organization that exists. Dyads consist of two people.
Interaction is very personal and intimate. require continuing active participation and commitment of both members
People make up rules during the interaction.
are the most unstable of social groups
A unique feature of dyads is that each individual in the dyad has total veto power over any aspect of the relationship (Appelbaum and Chambliss, 1997:84). Groups A. General Characteristics of Groups
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1. A Group Consists of People Who Interact and Form Social Patterns
A group is at least one person larger than a dyad. It has three or more people. Groups are different from dyads in that they depend less on the individual actor for continuity. 2. Increases in Size Equals Loss of Freedom As the group grows in numbers, the individual freedom of any particular member is de-emphasized. Furthermore, as the group grows in size, more emphasis is put on the well-being of the group. 3. Interaction Reaffirms Social Patterns Groups depend on interaction to affirm and reaffirm social patterns. The strength of patterns in the group depends on the history of the interaction. Usually, the longer the group exists, the stronger the bonds become. 4. Groups Contribute to Larger Organization Social organization at the "formal level" is sufficiently large that continuous interaction among all actors is impossible. Even in large organizations interaction between individuals still occurs in small groups. The interaction of small groups within the frame work of larger organizations reaffirms the social patterns of the larger social organizations. 5. Groups Define Reality for the Individual The group's definition of reality is a pattern that the individual assumes. The individual forms expectations about the world through group involvement. One learns within the group what the important issues are and the guide lines (the rules) that the group expects you to live by. Formal Organizations Formal organizations include churches, clubs, schools, armies, colleges, the IRS, and hospitals. A. Characteristics of Formal Organizations Characteristics of formal organizations include: 1. Impersonal interaction among group members. 2. As groups grow in size, they make objectives explicit in writing (e.g., they become more formal). 3. Formal organizations are created to work toward specified goals. When they meet goals, the individual moves on.
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B. Three Types of Formal Organizations
There are three types of formal organizations according to Amitai Etzioni (1961). 1. Coercive Organizations Coercive organizations rely on force to achieve order. Force is necessary because people tend to resist being a part of the organization. Examples are prisons and mental hospitals 2. Utilitarian Organizations Utilitarian organizations see individuals conforming to organization standards because organizations pay them to be a part of that organization. Of course, most jobs are utilitarian 3. Normative Organizations Normative organizations are based on a shared moral commitment. People conform to the organizations standards out of a positive sense of obligation. Normative organizations include political parties, religious organizations, and fraternities. [6] Bureaucracy Bureaucracy is the collective organizational structure, procedures, protocols, and set of regulations in place to manage activity, usually in large organizations and government. As opposed to adhocracy, it is represented by standardized procedure (rule-following) that guides the execution of most or all processes within the body; formal division of powers; hierarchy; and relationships, intended to anticipate needs and improve efficiency.
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A bureaucracy traditionally does not create policy but, rather, enacts it. Law, policy, and regulation normally originate from a leadership, which creates the bureaucracy to put them into practice. In reality, the interpretation and execution of policy, etc. can lead to informal influence. A bureaucracy is directly responsible to the leadership that creates it, such as a government executive or board of directors. Conversely, the leadership is usually responsible to an electorate, shareholders, membership or whoever is intended to benefit. As a matter of practicality, the bureaucracy is where the individual will interface with an organization such as a government etc., rather than directly with its leadership. Generally, larger organizations result in a greater distancing of the individual from the leadership, which can be consequential or intentional by design.
Definition- Bureaucracy is a concept in sociology and political science referring to the way that the administrative execution and enforcement of legal rules are socially organized. Four structural concepts are central to any definition of bureaucracy: 1. a well-defined division of administrative labour among persons and offices, 2. a personnel system with consistent patterns of recruitment and stable linear careers, 3. a hierarchy among offices, such that the authority and status are differentially distributed among actors, and 4. Formal and informal networks that connect organizational actors to one another through flows of information and patterns of cooperation. Examples of everyday bureaucracies include governments, armed forces, corporations, non-governmental organizations (NGOs), intergovernmental organizations (IGOs), hospitals, courts, ministries, social clubs, sports leagues, professional associations and academic institutions. Types of Bureaucratic Agencies: Production organizations are those in which both outputs and outcomes are observable. Procedural organizations are those where outputs can be observed, but outcomes are unclear or not observable. Craft organizations are those where outputs are hard to observe, but outcomes are fairly easy to evaluate. Coping organizations are those where neither outputs nor outcomes are observable. [3] Organizational structures Main article: Organizational structure
Pyramids or hierarchies Committees or juries
Matrix organizations
Ecologies
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The study of organizations includes a focus on optimizing organizational structure. According to management science, most human organizations fall roughly into four types:
Pyramids or hierarchies A hierarchy exemplifies an arrangement with a leader who leads leaders. This arrangement is often associated with bureaucracy. Hierarchies were satirized in The Peter Principle (1969), a book that introduced hierarchiology and the saying that "in a hierarchy every employee tends to rise to his level of incompetence". Committees or juries These consist of a group of peers who decide as a group, perhaps by voting. The difference between a jury and a committee is that the members of the committee are usually assigned to perform or lead further actions after the group comes to a decision, whereas members of a jury come to a decision. In common law countries legal juries render decisions of guilt, liability and quantify damages; juries are also used in athletic contests, book awards and similar activities. Sometimes a selection committee functions like a jury. In the middle Ages juries in continental Europe were used to determine the law according to consensus amongst local notables. Committees are often the most reliable way to make decisions. Condorcet's jury theorem proved that if the average member votes better than a roll of dice, then adding more members increases the number of majorities that can come to a correct vote (however correctness is defined). The problem is that if the average member is worse than a roll of dice, the committee's decisions grow worse, not better: Staffing is crucial. Matrix organization This organizational type assigns each worker two bosses in two different hierarchies. One hierarchy is "functional" and assures that each type of expert in the organization is well-trained, and measured by a boss who is super-expert in the same field. The other direction is "executive" and tries to get projects completed using the experts. Ecologies This organization has intense competition. Bad parts of the organization starve. Good ones get more work. Everybody is paid for what they actually do, and runs a tiny business that has to show a profit, or they are fired.
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Companies who utilize this organization type reflect a rather one-sided view of what goes on in ecology. It is also the case that a natural ecosystem has a natural border – eco regions do not in general compete with one another in any way, but are very autonomous.
Organizational Trends There are five key organizational trends that you should be aware of. Globalization Increasingly globalized sales, manufacturing, research, management Movement from direct exports to having sales offices in different countries to having manufacturing to all functions spread across the globe
Increasingly globalized labor market
Due to: o
reduced cost and improved quality transportation and communication
of
o
search for unsaturated markets
o
exploit regional cost and expertise differences
international
Diversity Workforce getting more heterogeneous sexually, racially, culturally, individually, etc. Source of both innovation and conflict/communication problems
Need to cope with different styles of interaction, dress, presentation, physical appearance
Due to: o
changing demographics
o
globalization of the labor market
Flexible Organizational systems and processes and people that can respond differently to different situations Fewer detailed rules and procedures Greater autonomy, encouragement for initiative
Customizable employment relationships: sharing, mommy tracks, pay for skills
Lifetime employability, not lifetime employment
Due to:
telecommuting,
job
o
differentiated customer needs -- filling them exactly is source of competitive advantage
o
increasing diversity in workplace
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o
increased pace of change in technology and markets
Flat
Fewer levels of management, Workers empowered to make decisions
Fewer differences in responsibility (not in pay) across levels
Due to: o
need for speed, which makes it helpful to empower employees to make decisions, which means fewer managers are needed
o
changes in information technology mean less need for the communication and control functions of middle managers
o
globalization means intensified competition, which increases the need to cut costs
Networked Direct communication across unit & firm boundaries, ignoring chain of command Cross-unit team structures
Outsourcing & downsizing
Strategic alliances with competitors and others Now have firms that are your competitors, customers and collaborators all at the same time
Close coordination among firms (e.g., JIT systems) and information sharing (open computer systems)
Across the board contact with customers, not just official boundary spanners
Customization
Decentralization
Due to: o
new information technologies, especially groupware, clientserver, distributed computing
o
fast changing customer needs and competitor offerings
o
more complicated products require better integration of manufacturing, design, and marketing functions
Here is a diagram linking up all the concepts above.
[2]
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o
Characteristics of organization Main characteristics of formal organization
Deliberately planned and created Concerned with the co-ordination of activities
Hierarchically structured with stated objectives
Based on certain principles such as the specification of tasks
Organization structure is laid down by the top management to achieve organizational goals.
Organization structure is based on division of specialization to achieve efficiency in the operations.
The authority and responsibility relationships created by the organization structure are to be honoured by everyone.
Developed through delegation of authority
Organization structure concentrates on the jobs to be performed and not the individuals who are to perform jobs.
The organization does not take into consideration the sentiments of organizational members. [4]
labor
and
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Main characteristics of informal organization
The informal organization is flexible and loosely structured Relationships may be left undefined
Membership involvement
Involves two or more people
Informal relationships, groupings & interactions
Repeated contacts but without any conscious joint purpose
Involves the human need to socialize
Includes both friendly and hostile relationships and interactions
Informal association precedes formal organization, as it requires preliminary (informal) contact and interaction before establishment.
is
spontaneous
and
with
varying
degrees
of
[5]
Reference 1. 2. 3. 4. 5. 6.
http://www.en.wikipedia.org/wiki/sociology http://www.en.wikipedia.org/wiki/organizational behaviour http://www.en.wikipedia.org/wiki/organisation http://www.en.wikipedia.org/wiki/formal organization http://www.en.wikipedia.org/wiki/informal organization http://www.delmar.edu/socsci/rlong/intro/org.htm
5.2 DYNAMICS OF URBAN GROWTH, EXPANSION AND DEVELOPMENT This study of urban dynamics was undertaken principally because of discoveries made in modelling the growth process of corporations. It has become clear that complex systems are counterintuitive. That is, they give indications that suggest corrective action which will often be ineffective or even adverse in its results. Very often one finds that the policies that have been adopted for correcting a difficulty are actually intensifying it rather than producing a solution.
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Choosing an ineffective or detrimental policy for coping with a complex system is not a matter of random chance. The intuitive processes will select the wrong solution much more often than not. A complex system—a
class to which a corporation, a city, an economy, or a government belong —behaves in many ways quite the opposite of the simple systems from which we have gained our experience. Most of our intuitive responses have been developed in the context of what are technically called first-order, negative-feedback loops. Such a simple loop is goal-seeking and has only one important state variable. For example, warming one's hands beside a stove can be approximated as a first-order, negative-feedback loop in which the purpose of the process is to obtain warmth without burning one's hands. The principal state variable of the loop is the distance from the stove. If one is too close he burns his hands, if too far away he receives little heat. The intuitive lesson is that cause and effect are closely related in time and space. Temperature depends on the distance from the stove. Too much or too little heat is clearly related to the position of the hands. The relation of cause and effect is immediate and clear. Similarly, the simple feedback loops that govern walking, driving a car, or picking things up all train us to find cause and effect occurring at approximately the same moment and location. But in complex systems cause and effect are often not closely related in either time or space. The structure of a complex system is not a simple feedback loop where one system state dominates the behaviour. The complex system has a multiplicity of interacting feedback loops. Its internal rates of flow are controlled by nonlinear relationships. The complex system is of high order, meaning that there are many system states (or levels). It usually contains positive-feedback loops describing growth processes as well as negative, goal-seeking loops. In the complex system the cause of a difficulty may lie far back in time from the symptoms, or in a completely different and remote part of the system. In fact, causes are usually found, not in prior events, but in the structure and policies of the system. To make matters still worse, the complex system is even more deceptive than merely hiding causes. In the complex system, when we look for a cause near in time and space to a symptom, we usually find what appears to be a plausible cause. But it is usually not the cause. The complex system presents apparent causes that are in fact coincident symptoms. The high degree of time correlation between variables in complex systems can lead us to make cause-and-effect associations between variables that are simply moving together as part of the total dynamic behaviour of the system. Conditioned by our training in simple systems, we apply the same intuition to complex systems and are led into error. As a result we treat symptoms, not causes. The outcome lies between ineffective and detrimental.
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The study of urban dynamics requires tools that allow the exploration of the Change phenomenon in time and space. Urban modelling techniques have been traditionally used to explore issues in urban dynamics, and automata
models like cellular automata and agent based models seem to be a particularly suitable approach for this kind of study. Therefore, an agent based model was used in order to unfold the problem of urban growth of Latin American cities through their dynamics. Agent based models are based on the understanding that human decision making plays a major role in urban processes and urban change. Their framework allows interactions between agents and their landscape to be explicitly represented. Hence, this kind of model permits the analysis of dynamic processes that link spatial development with social issues, which is of fundamental importance when dealing with cases of strong social differentiation, as is the case of urban dynamics In peripheral settlements, upgrading occurs simultaneously with the incorporation of the settlement into the inner city by urban growth. In the Present study the term ‘upgrading’ will be used to designate improvements in the physical conditions of the settlement itself, while the term ‘recontextualisation’ will be used to refer to the process of change in the relative location of the spontaneous settlement. The process can be generally described as fallows. “With the passage of time and with the provision of minimal public services, squatter settlement can become stable and substantial neighbourhoods. Because the amount of filtereddown middle-class housing is limited, especially in cities undergoing rapid growth people simply improve their present homes and neighbourhoods. The older the squatter settlement, the better and more substantial it is. It is not uncommon to find entire neighbourhoods of low storied concrete houses that have evolved during a decade or two from one-room cardboard shacks. With the gradual addition of paved streets, street light, planting and many early squatter settlements are now indistinguishable from neighbourhoods with less checked histories. New squatter settlement are being added to peripheries so that the poorest quality housing continues to be located at the edges of city”. (Griffin & ford, 1980, page 404)
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The process of upgrading can be either a natural process of improvement or it can be a result of an upgrading project, which is usually an intervention by the local by the local government. Even as a natural process of evolution, there is always a partial plan, since the services are provided by the local government and not by the inhabitant themselves. It was on the basis of this evolution, or upgraded process that turner suggested that spontaneous settlement were housing solution conditions in low-income housing settlements improve over a period of time and thus there was no need to demolish spontaneous settlement since they were part of housing solution. He also argued that slum dwellers preferred the opportunity to improve and consolidation their existing housing by self –
help, as opposed to accepting an institutionalization government strategy of redevelopment (Turner, 1967). His ideas started a large discussion of the role of the urban poor and spontaneous settlements, more specially about whether the settlements were slums of hope or slums of despair. Peripherisation is defined here then as a kind of growth process characterized by the expansion of borders of the city through massive formation of peripheral settlements, which are in most cases, low-income residential areas. These areas are incorporated into the city by a long term process of expansion in which some of the low –income residential areas are reconceptualised with in the system and occupied by higher economic groups while new low income settlement keep emerging on the periphery. In terms of urban planning policies the peripherisation phenomenon is seen usually from a static point of view. The focus of government interventions is still on the local/ housing scale, upgrading settlement and providing housing tracts for low-income groups. There has been little focus, either on the dynamic of the process or on the linkage between the local and global scales, that is , on the overall growth of cities , which has been as a mere result of a demographic phenomenon. There is very little research on intra- urban mobility or inner city dynamics. The most important study was developed by Turner (1968), based on his experienced of settlements in Peru. Turner proposed a model of intraurban mobility for low-income groups, more specifically, for migrants from rural areas. According to the modal migrants would follow a two stage process of initial settlement and subsequent intra-urban relocation in which they would first live as renters in the inner city and later move as owner to peripheral settlements. His modal provoked a large discussed the validity of the modal for different context based on the available evidence (see Brett 1974; Conway 1985; Conway and Brown, 1980; Gilbert & Ward, 1982; Kliest & Scheffer, 1981; Lindert, 1992). GENTRIFICATION
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Gentrification has been seen as a deviation of the filtering process. It consists essentially of reinvestment in a central urban area, usually one which has lost value for occupation by a higher economic group. The reinvestment serves both to revitalize the urban area and to renovate the housing stock, and might be a private investment as in Britain, or planned and public ally funded, as in the United States. This process usually involves some kind of displacement of the lower economic group which occupies the area. According to Smith (1982, page 141) gentrification as a process is “rendered a chance, extraordinary event, the accidence outcome of a unique mix of exogenous factors”. Its roots are “the devaluation of much inner and central city residential property; the middle class migration to other neighbourhoods and the suburbs: the 49
accelerated devolution of suburban property, with the influx of working class tenants and their landlord” (Smith, 1979, page 25). Gentrification has been erroneously understood as a return of people from the suburbs, but it actually involves “migration with in the inner city itself as small, youthful household, commonly in the pre-child bearing or early childrearing stages of the family cycle have moved from rented accommodation to single family owner occupation in the inner city, rather than seeking a suburban home”. (Hamnett, 1984, page 285) Although many studies of gentrification have been made, the most widely acknowledged hypothesis is Smith’s rent gap theory. (Smith,1979; 1982; 1986). Smith’s theory is essentially focused on the consumer-side of gentrification, rather than using traditional demand oriented economic approach. In short, Smith suggests that gentrification occurs in places where the values of the potential rent are higher than the actual rent (due to the ages of the building stock and the physical conditions of the neighbourhood). Gentrification consists of a process of revitalization of an urban areas and its housing stock, in order to obtain the highest possible rent in the areas. Smith argues that gentrification is part of a larger process of uneven development, in which investments in urban areas are always shifting location in search of higher profits. In Smith’s view there is a cycle of capital investment and disinvestment, which result in devolution (or depreciation) in specific urban areas, while other areas are being revitalized and gentrified. Urban systems have been traditionally studied using modelling techniques. Since the 1960 a number of models have been developed and, more recently, with advances and popularization of computer tools, the possibilities for exploring urban systems from this viewpoint have increased considerably.
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The computer becomes an important research environment in geography and urbanization in the 1960 and techniques and tools have been developed ever since. In urban research, the use of automata-based models, more specifically cellular automata, is replacing traditional transport and land use modals, shifting the paradigm of urban modals towards a complexity approach. The idea of structure emerging from a bottom up process where local action and interactions produce the global pattern has been widely devolved ever since automata-based models proved to be useful for a number of different urban applications. Urban systems have been traditionally analyzed using the systemic approach, which conceives the city as a system a set of interconnected parts. What complexity theory introduces to this well known concept is the idea that instead of studying 60 the phenomenon as a sum of parts, the urban
system as well as other system are seen as result of the interaction of these parts. This means that not only is the whole more than a sum of parts, but the whole is different from the sum of parts (Batty, 2000). From the point of view, complexity theory can be seen as a new systemic approach, which studies the relation between parts and whole in a different way, stressing the idea of a structure emerging from a bottom-up process where local action and interactions produce the global pattern. One of the highlights of complexity theory is that it offers a new approach to the study of systems dynamic (Wu, 2002). Dynamics can be more important than structure (Batty, 2000) since they permit the understanding of such systems to go beyond description (in static terms) towards capturing the internal essence of the phenomena of charge. Hence the identification and exploration of the various surprise-generating mechanisms governing the behavior of complex systems is an essential issue, and moreover, a sine qua non for the development of a theory of complex systems (Casti, 1997).
5.3 URBAN ATTITUDE, VALUE AND BEHAVIOUR Urbanization Process Urbanization is defined as the increase in the number of cities and urban population. Urbanization is not only a demographic movement. Therefore, when describing urbanization; social, economic and psychological changes that constitute the demographic movement should be considered. Based on this, comprehensive definition of urbanization can be made as follows: Urbanization is a process that leads to the growth of cities due to industrialization and economic development, and that leads to urbanspecific changes in specialization, labor division and human behaviors.1 In that way, urbanization is a forced and inevitable demographic movement and this process should not certainly be neglected.
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In a moving population, the process of acquiring urban characteristics and isolation from rural life in terms of economic and social aspects starts together with urbanization. This is a cultural transformation process and besides the development of urban culture, city dwellers should psychologically, physically, and behaviourally is in harmony with this process. In developed countries, urbanization is an old process and it was formed in parallel with industrialization, technologic reforms, and infrastructure services, and it still continues. In underdeveloped and developing countries, this process is more recent and has been rapidly experienced in a short time. Especially in developing countries among the problems, which have been faced in the last 30-35 years, are the rapid increase in population and rapid urbanization. In these countries, annual
increase in average population varies between 2-3%, whereas urban dwellers have increased from 14% to 50%. Urbanization involves social drift and social residue concepts that may explain prevalence of urban mental disorder. Social drift is defined as the tendency of certain individuals to migrate to certain areas, whereas social residue expresses residual groups remaining at certain areas after migration of population. Relative impacts of these concepts depend on primarily pushing (as a result of poverty in rural areas) or pulling (because of better job opportunities) immigrants to cities. The forces that cause people to leave their original areas and to dwell cities are defined as push and pull effects. Reasons for push to cities are divided into two as the change and the stagnation factors. Technical unemployment among the change factors and reduction in useful land areas due to rapid population increase known as the stagnation factor lead to people’s flowing to cities. Abandonment of rural areas due to push factors is more difficult and violent process for immigrants themselves. Among the reasons that pull people from rural areas to cities (pull urbanization) are better education, health, employment opportunities and higher life standards. As the factors that push people from rural areas to cities do not depend on individual’s own preference, these factors threaten and affect persons’ mental health more negatively when compared to pull factors. The impacts of such urbanization are often harmful to mental health. Effects of Urbanization Rapid growth of cities due to immigration leads to: • Overcrowding and increase in population with an under-standard life, • Unemployment, poverty, • Crime, • Pollution, • Cultural change, conflict, estrangement, isolation, • Child employment, • Disintegration of families, • Rapid increase in shanty houses, living in poor home environment, decay in aesthetic structure, • Traffic problems, • Uncertainty of future, and anxiety. Thus, negatively affected mental health of individuals
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Life-style differences between abandoned areas and destination areas emerge as a cultural conflict. Common aims with the new living area disappear, especially during initial periods. An aimless and hopeless lifestyle leads to insensitivity, disinterested and aggressive behaviours. Eventually, balance and order of the community deteriorates. People live on their own in accordance with their own rules. Individuals, who come from rural areas and live away from traditional culture and values, are influenced by urban way of life, which may include unhealthy, selfish, and egoistic tendencies. Therefore, immigrant persons may undergo identity
problems. Together with the urbanization process, urban dwellers have difficulty accepting immigrant people and therefore, adaptation of immigrants to urban life gets more difficult and is affected more negatively. Thus, these persons feel refused and stranger to city life. Difficulty in having relationship, estrangement, and failure in being attuned in big cities cause increased violent behaviour through isolation and externalization. Limiting factors in villages and towns, small number of population, the same social status among persons, close relationships and neighbourhood provide a common control of relations and social solidarity. Thus, aggressive behaviours, violent events and crime rates decrease. Slum Problem, Violence, and Unemployment One of the main problems resulting from immigration from rural areas to urban districts is slum problem. Slum leads to important problems as well. Especially, they form inadequate environment for children. These negative conditions may affect children and may provide basis for personalities that tend to commit crime. In addition, as parents in cities have to work, the control of family on children attenuates so that children may imitate bad role models and may join groups that are liable to crime. Thus, these children may show substance and alcohol abuse, play truant and show behavioural disorders such as aggressiveness. Houses and buildings with inadequate housing environment in slums, and problems such as unemployment, environment, and traffic may result in disharmony. Discordant structure in slums and maladjusted life-style may cause intense hate and revenge feelings. Such individuals may express their hate via violence.8 Intensive disobedience, hostility to parents and authority, telling lies, burglary, fraud, playing truant, aggressiveness, fighting, torture, incitement, sexual behaviour disorders, and alcohol and drug addiction may be seen in aggressive persons. Factors such as deterioration in economic status and unemployment play an important role in violent behaviour. The characteristic of population, demographic movements and social changes have roles in psychosocial aspects of violence. It is reported that rapid demographic change and economic development reduce violent behaviour. The young person, as an obscure unemployed person, comes downtown by the attractiveness of the city. Lack of family support, being unemployed, social class difference, and prevalent crime factors in cities make suitable environment for crime. A low level of economic status in community, even if it is indirect, affects adaptation to city-life negatively.
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Unemployment and the threat of unemployment may expose an attack against the social identity and welfare of individuals. The relationship between unemployment and mental disorder cannot be well understood; however, unemployment may trigger mental disorder in predisposed persons. Whatever the conditions, any migration exposes immigrant people to mental stress. Therefore, there is the possibility that the balance, which the/an individual made in his/her originally adapted
environment, may mildly or heavily, continuously or discretely deteriorate in the new environment.10 The balance formed over hundreds of years in the life of a rural person comes under the risk of decaying through the immigration to town. A rural individual, who tries to express his /her personality in town, and to behave independently, however, mostly fails to obtain what he/she wants and becomes unhappy. Such a failure causes both psychosocial and economic distress. Lack of harmony resulting from an isolated life-style in town is accepted as the augmenter of behavioural diseases. Briefly, rural person has an “identity” and it is important for him. Conversely, urban person can be accepted as “anybody”. [1]
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Conclusion While demographic data still shows a world population growth one can see that unbalanced trends are destroying human cohesion and building social exclusion in cities and regions. MAIN ISSUES – STRONG MIGRATION FLOWS; INCREASE OF DEMAND ON METROPOLITAN AREAS Another side of the problem is the permanent increase of demand of nutrients and other resources while most of them are locally becoming less and less. OTHER ISSUE – CONGESTION OF MARKETS, UNEVEN DISTRIBUTION OF OFFER AND DEMAND, HOMELESS PEOPLE A third problem lies on technology development with large impacts on environment, employment, on economy and on social aspects, bringing UNBALANCED EFFECTS on them, very difficult to deal with. A fourth question lies on the rapid changes of mentalities and beliefs, through globalization and the world-wide spread of information, where most PEOPLE IS LOOSING A SCHEME OF HUMAN VALUES, getting confused and becoming an easy target for marginalization, drug addict, crime… or suicide! As a result there is a rapid growth of panic in big cities and metropolitan areas, destroying their character of a “space of an integrated social relation“and bringing instead the walled condominiums and street crime. ISSUES: SOCIAL CONFLICTS AND CRIME, ATMOSPHERE OF FEAR. [2] Reference 1. Anatolian Journal of Psychiatry 2008; 9:238-243 a. TOPIC: Impacts of urbanization process on mental health b. M. Tayfun TURAN, Aslı BESIRLI 2. Manuel da Costa Lobo, “Problems and solutions of environment and urbanization in the World”, a. 44th ISOCARP Congress 2008 b. TOPIC: PROBLEMS AND SOLUTIONS OF ENVIROMENT AND c. URBANIZATION IN THE WORLD d. HEADING: I – THE PROBLEMS OF TODAY.
5.4 STUDY CHINA GREEN BUILDINGS http://chinagreenbuildings.blogspot.com Green Building Economics 101 As promised, today’s post will describe the economics of green building and why green buildings are so much more valuable than their brown
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counterparts. I will follow this up with a post describing how developers
can use these economics to make affordable green housing work financially. How to value real estate- DCF basics The Discounted Cash Flow method and the Direct Capitalization method are the fundamental tools for valuing real estate investments and I will use that to inform the discussion today. The Discounted Cash Flow (DCF) valuation method attempts to account for all future cash flows from an investment and discount them to a present value. So to make that more concrete, let’s say I buy a building today. I can assume I will get rent every year for the life of the building, and also assume that I will have to pay expenses over the same period. The difference of the rent income and the expenses is my profit. But as everyone knows, a dollar of profit today is a lot more valuable than a dollar of profit in the future, so we have to discount the future cash flows to today’s value using the time value of money. We also can’t be certain that we will continue to receive rent in the future, so we should also discount the future cash flows to reflect this uncertainty. The DCF is the best theoretical way to value real estate, but it is somewhat more complex than the direct capitalization method I will focus on today. Direct capitalization generally captures nearly the entire important nuance of DCF, but does so in a much easier-to-understand formula. Therefore, I will focus on capitalization today. The direct capitalization method involves taking the current net operating income (NOI) of a building and capitalizing (multiplying it by a large numbergenerally between 10 and 20) to reflect the face that this income will continue into the future. So the direct capitalization valuation method works like this: 1. To calculate NOI, we simply add up all of the revenues (rent and other revenue) and then subtract all of the operating expenses (management fee, utilities, etc). It’s important to note that we only
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subtract operating expenses, so we don’t subtract things like taxes
or interest payments. Although obviously important, these expenses don’t factor into NOI.
2. We then take the NOI and divide it by a capitalization rate. The capitalization rate is a percentage that takes into account 3 things: NOI will continue indefinitely into the future and in many cases grow over time; future NOI needs to be discounted to today’s value; future NOIs need to be discounted for risk and uncertainty. Capitalization rates are generally between 5 and 10%, but can be lower or higher depending on circumstances.
So then, the value of a building is roughly equal to: Building value = (Revenue-Costs)/Capitalization rate Other valuation methods Of course, DCF and direct capitalization are not the only valuation methodologies. Another extremely useful type of valuation tool is comparables. Comparables involves taking two or more similar assets and comparing their values. If, for example, we wanted to value Prosper Centre, we could use the value of the neighbouring Kerry Centre as a proxy. For example, Prosper Centre and Kerry Centre should have similar capitalization rates. Of course we’d have to do slight tweaks to account for variations, for example, but their valuation should be in the same ballpark (although as I will show Prosper should have a lower cap rate since it's green and Kerry is not). Comparables is a very good way of valuing marketable assets, but I will leave this valuation method aside and focus primarily on DCF today. Another valuation method often used by real estate developers is simple payback period. Simple payback period measures how many years it takes to recoup an investment. One knock on many green systems is that they
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have a long payback period. Since many developers usually have a limit
on their desired payback period, say 5 years, they often will not make investments that have longer investments. While it may be true that some green building systems have long payback periods, this totally misses the point in my mind. Simple payback period makes no sense as a rigorous valuation tool for several reasons. First and most importantly, payback period has no concept of revenues. For example, imagine an investment that required $1 today, and then made no revenues for the first 5 years, but made $1,000,000 in the 6th year. If a developer were to strictly use the simple payback period with a 5 year limit, they would miss this clearly profitable investment. This may be an extreme example, but captures a serious flaw in the simple payback period method of valuation. For this reason, I do not consider the simple payback method to be a useful method of valuation. While it generally is true that investments with short paybacks have good returns, it is not necessarily true that investments with longer payback periods do not have
good
returns.
Therefore I will ignore simple payback entirely and focus instead on direct capitalization
today.
How green building drives increased building value One more time, direct capitalization works like this: Building value = (Revenue-Costs)/Capitalization rate As we can see from this equation, in order to maximize value, we need to maximize revenue, minimize costs, and minimize the cap rate. Green building helps do all three of these things, and in turn increases building value. (Note: for this discussion, I will assume that we are talking about an office building, where tenants rent the building on a gross lease, i.e. one monthly payment from the tenant to the landlord that covers utilities, maintenance, insurance, and taxes in addition to rent. Other lease structures, such as triple net, are more common, but the green valuation
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issues remain the same. Please email me or use the comments box for
any questions that relate to different lease structures and I will be happy to respond.) Reduced costs The first way green buildings increase building value is through lower operating
costs.
Obviously, a green building that uses less energy will have lower utility bills. Since LEED rated buildings on average use 33% less energy than regular buildings, this means utility costs are about 33% lower. Since utilities account for ~25 to 30% of an office building’s operating expenses, this adds up to big value. Smaller water and waste bills also make for better economics. Green buildings can also lower other less-obvious expenses. For example, the Fireman’s Fund, a leading insurance company, offers lower insurance rates for LEED certified buildings. Other possible cost saving measures for green buildings include lower interest rates through green banks (although again this doesn’t affect NOI, only returns to the owner) and lower
maintenance
costs
thanks
to
smaller
systems
commissioning
and
better
processes.
The result is less operating expenses for green real estate, which means higher
building
value.
Increased revenues Green buildings also benefit from higher revenue, primarily through increased
rents.
Several recent surveys and studies show that green buildings command higher rents. A study by economists for the Berkeley Program on Housing and Urban Policy showed that green buildings on average rent for 2-6% more than their non-green counterparts, after controlling for other variables like location and building age. This green premium even exists in China, where a recent JLL report shows that nearly 70% of high-end real
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estate tenants are willing to pay more for green real estate.
Why do green buildings command these premium rents? Two reasons primarily. First, workers in green buildings are more productive than workers in brown buildings. Thanks to more day lighting, higher air ventilation rates, improved indoor air quality, and other attributes of green real estate, occupants of green buildings tend to be more comfortable and more productive. The US Green Building Council website links to numerous studies showing that productivity in green buildings is higher. Since green real estate space is more productive than regular brown space, tenants are willing to pay more for the productivity benefits. This productivitydriven rent premium for green buildings will continue, as brown buildings just cannot match the many productivity-boosting benefits of green buildings. Second, the supply of green buildings is low relative to demand, meaning the large and growing number of companies who want to occupy green space need to pay a premium to get access to the limited supply. This likely will not persist much longer, since the supply of green buildings will expand dramatically. However, what we will see then is a switch, whereby brown buildings actually require a rent discount in order to lure tenants away from the abundant supply of green buildings. So this will also guarantee continuing premium rents over brown buildings. Since higher rents means more NOI, higher rents therefore drive higher value
for
green
buildings.
Lower cap rate The capitalization rate is essentially a measure of the future outlook of the property. This includes both expected growth in NOI as well as the perceived risk of future NOI. On both accounts, green buildings do better and
therefore
should
receive
lower
cap
rates.
Let’s first look at expected growth of NOI. As more and more companies demand green real estate and are willing to pay more for the productivity benefits, I think it’s safe to say that we can expect rents and NOI at green buildings to grow faster than those at brown buildings. Or conversely,
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when green building becomes the norm, very few tenants will be willing to
pay the same price for brown real estate, meaning negative rent growth for many brown properties. The result is still faster NOI growth for green buildings, and therefore lower cap rates. Green buildings are also less risky than their brown counterparts. Since green buildings use more advanced building techniques and are more likely to satisfy the needs of tomorrow’s tenants, there is less risk of functional obsolescence for green buildings. Moreover, thanks to lower environmental impact, green buildings also face less regulatory risk. The result? Again, lower cap rates for green buildings. Green buildings have higher value So let’s take these results and run through a quick thought experiment. Let’s start with a hypothetical building with rent of $1,500,000, expenses of $500,000 and a cap rate of 10%. Now what happens when we take the same building but assume its green? Well now rents will be 2-6% higher, utilities will be 33% lower, and I'll assume the cap rate will be lower by 0.5 - 1%. As we can see from my calculations below, we get a big value increase.
At the low end, we should expect green buildings to be worth 12% more, and at the high end, green buildings could be worth as much as 25% more than their brown counterparts. Of course this is just a hypothetical example, but the takeaway is clear nonetheless: green buildings are more valuable. What does this mean for developers and owners? For developers, I think this means build green from the start. Even for developers who build to sell immediately upon completion, green building is still compelling. The purchaser of the building will have an interest in owning for the longer-term, and should be willing to pay more for green.
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So even if developers don’t believe the 12% valuation premium example
that I laid out above, it seems they can easily get 5+% for all of the reasons I described. This means as long as that developers can hold the cost premium for green below this 5%, they will be making more money than they otherwise would by building brown. If a developer can build green at 5% but get a 10+% valuation increases, well, now the developer is
really
doing
well
financially
(not
to
mention
socially
and
environmentally). As more developers start to understand green building economics, I think building green will become increasingly more profitable and
eventually
become
the
only
way
to
build.
For owners, I think this means retrofitting to green standards right now. As my hypothetical calculations showed, the benefits of retrofitting and getting green certification are huge. Not only will the building benefit from higher rent, lower operating costs, better corporate image, less risk, etc etc, but it will most likely pay for itself through immediately increased building value. For example, if a building owner could perform a large retrofit on a building for 10% of the building value, the investment would immediately pay for itself thanks to higher post-retrofit building value. Although increased building value isn’t exactly the same as cash in hand for the building owner, the increased building value provides significant security for this investment in energy efficiency and green features. The bottom line is that green building makes sense for the bottom line. As more and more developers, owners and tenants realize this, I expect to see green building become the norm for those who can afford to pay for the green benefits, particularly those in Class A office buildings, luxury apartments and international quality industrial facilities. The trick then will be to figure out how to make green building economics translate into something that works for those other sectors of the market that I’ve been talking about so much recently. Stay tuned for my next post for some initial ideas on how to use these green building economics to make green building affordable- and widespread.
ECONOMIC SURVEY OF THE EUROPEAN UNION 2007: BUILDING
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COMPETITIVE FINANCIAL MARKETS
The following OECD assessment and recommendations summarise chapter 3 of the Economic survey of the European Union published on 20 September 2007. Contents The euro and the Financial Services Action Plan have contributed to greater integration of financial markets. Indeed, Europe has overtaken the United States in some segments of global markets. Capital flows are largely unimpeded and most wholesale markets are well integrated. There has been less progress at the retail level. Retail banking – and mortgage markets especially – are mainly national. Cross-border mergers of financial institutions can be complex due to government guarantees, ownership arrangements, tax issues and resistance by supervisors, although the Commission has improved the rules in this area by limiting supervisors’ discretion. Approval for selling products across borders can be lengthy because they must be tailor-made to cater for national laws on investor and customer protection. In mortgage markets, one option would be to go for full mutual recognition (which implies that the judicial process of the lender’s country would apply) since well-informed customers should be able to decide which product is best for them. However, since consumer safeguards are highly valued in some countries, another way forward may be harmonisation of the most important protections and mutual recognition for the rest. Fragmented payments infrastructure has also been holding back a pan-European banking market, and the industry will need to work quickly to ensure that the Singe Euro Payments Area (SEPA) is up and running on time in 2010. In this respect, the recent agreement by Council and the Parliament on the legal underpinnings of SEPA will help.
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Financial market indicators
Per cent of GDP2 2006
1. EU22 (excluding Czech Republic, Portugal and Slovak Republic) for panels A, B, D and EU15 for panel C; euro area-10 (excluding Finland Portugal) for panels A, B, D. 2. Except for share trading this is in per cent of equity market capitalisation. Source: World Federation of Exchanges, Focus, January 2007; BIS, Quarterly Review, December 2006; IMF, World Economic Outlook, September 2006. Stronger corporate finance markets would help European companies
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Enhanced corporate finance markets would give European firms greater access to capital. By one estimate, a fully integrated financial market could lower the cost of capital by 50 basis points. The MiFID directive, which creates an EU passport for securities, should be a major step towards integrated securities markets, but member states should not unravel the benefits of harmonised rules by adding on their own provisions. The revamp of investment fund regulations that is underway should also improve corporate finance. European funds are small because it is difficult and costly to offer products and merge funds across borders. The Community should opt for full mutual recognition of investment funds, with a simplification of notifications, and eliminate restrictions on the types of assets that can be included, create a framework for cross-border
mergers and revise the simplified prospectus. Lastly, member states should reassess the way they have implemented the takeover directive because they have produced a more restricted market for corporate control that hampers the further integration of capital markets.
Listed companies with a blocking minority of at least 25 per cent
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Source: M. Goergen, M. Martynova and L. Renneboog (2005),”Corporate Governance Convergence: Evidence from Takeover Regulation Reforms in Europe”, Oxford Review of Economic Policy, Vol. 21, No. 2.
ECONOMIC SURVEY OF ICELAND 2009: THE FINANCIAL AND ECONOMIC CRISIS www.oecd.org,www.worldbank.org The following OECD assessment and recommendations summarise chapter 1 of the Economic Survey of Iceland published on 2 September 2009. Contents Iceland has plunged into its deepest economic recession in decades after succumbing to a widespread financing crisis and a collapse of domestic demand. The meltdown of Icelandic banks unfolded against the backdrop of faltering global capital markets, which reached a climax in September 2008 with the failure of Lehman Brothers. By the fourth quarter of last year, almost all OECD countries were experiencing sharp declines in real GDP and world trade was plummeting. After years of rapid expansion, the economic situation in Iceland also turned for the worse when the country’s three main banks collapsed, capital markets seized up and financial relations with foreign countries were shut down. While Iceland is in part a victim of the international crisis, its severe plight largely results from a recent history of ineffective bank supervision, exceptionally aggressive banks and inadequate macroeconomic policies. The government has devised a medium-term adjustment programme to restore policy credibility and economic growth, which is being implemented in the context of an IMF Stand By Arrangement. The origins of Iceland’s severe banking and macroeconomic difficulties and policies for a sustainable recovery are discussed in this Economic Survey.
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The collapse of Iceland’s three main banks caused a deep crisis A banking crisis of extreme severity is unfolding in Iceland. After five years of brisk expansion, the country’s three main banks, representing 85% of the banking system, all collapsed during the same week in October 2008. The failure of Iceland’s banks was not an isolated event: in most other OECD countries, banks also came under severe stress following the sudden meltdown of global capital markets. But Icelandic banks were particularly vulnerable to such a shock because their very aggressive strategies had exposed them to massive equity market risk, and they had relied heavily on precarious sources of funding. Upon their failure, the three banks were put into receivership and new banks were formed to enable the domestic payment system to continue to function smoothly. Complex negotiations between the new banks and the creditors of the old banks were needed to reach a final settlement. With hindsight, it appears that the Icelandic financial supervisory authorities had become overwhelmed by the complexity of the national banking system, and had been unable to stop their expansion. In addition, there was a lack of a macro prudential
framework that would have reacted to unsustainable developments in credit, leverage and risk. By the end, the size of the banks far exceeded the limited capacity of the Icelandic authorities to rescue them. Although the size of the banking sector has been reduced substantially, there is still a need to rethink the regulatory and supervisory framework. The recession is set to be deeper than in most other OECD countries A direct consequence of the crisis is that Iceland has entered a deep recession. The economy had already started to weaken in the first half of 2008 and, following the failure of the banks, the contraction in all components of domestic demand deepened markedly. The retrenchment of domestic demand is already much greater than in other OECD countries. Deep cuts in employment and working time were made, pushing up the unemployment rate sharply from 2.5% in the third quarter of 2008 to 7.1% by the first quarter of 2009. A sharp drop in the exchange rate of the króna caused inflation to soar initially, although it had slowed to 11.6% by May 2009 as the effects of the depreciation eased and depressed economic conditions weighed on firms’ pricing power. Wages have adjusted quickly to the crisis, falling by 6¾ per cent in real terms in the year to April 2009, with the fall being much more marked in the private– than the public sector. On the basis of announced macroeconomic policies (see below), the OECD projects a deep recession this year, with GDP shrinking by around 7%, and a gradual recovery beginning next year assuming that large energy related projects get underway as planned. The unemployment rate is projected to rise to a peak of 10% in 2010 while inflation should fall to around 2½ per cent. A Stand By Arrangement was agreed with the IMF Faced with an unprecedented crisis, the Icelandic authorities turned to the IMF for help and agreed to a programme supported by a Stand By Arrangement. In the near term, the programme seeks to prevent a further sharp depreciation of the króna to reduce the risk of adverse balancesheet effects, which arise notably from the high shares of foreignexchange denominated and inflation-indexed debt in the economy. To this end, the programme foresees a tight monetary policy to make króna assets more attractive and exchange controls to be maintained on the capital account. Beyond this immediate goal, the programme seeks to restore the smooth operation of the banking system. It also calls for strong fiscal consolidation to ensure medium-term sustainability. The Stand By Arrangement envisages access to official financing, from the IMF and other sources, of about US$ 5 billion.
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Iceland’s banks pursued highly risky strategies that doomed them: The financial collapse largely results from the banks’ risky strategies. After the completion of banking privatization in 2003, the new owners set the banks on a path of international expansion and greater risk taking. Global financial market conditions were favourable at the time, enabling the
banks to finance their expansion cheaply, mainly through wholesale markets. They grew quickly, increasing their consolidated assets to the equivalent of 880% of Icelandic GDP by the end of 2007, a very large amount by any standard. As they expanded, the banks increasingly made loans to a few Icelandic investment companies, typically controlled by the main shareholders of the banks, which were taking equity stakes in foreign firms. To finance these loans, the banks borrowed in foreign capital markets, increasing Iceland’s net external debt by 142 percentage points of GDP over the four years to end 2007. This strategy indirectly exposed the banks to equity market risk. In the wake of the global financial meltdown in September 2008, fear about the solvency of the three Icelandic banks became widespread, effectively shutting them off from the wholesale markets and preventing the refinancing of maturing obligations. As the banks were far too big to be recapitalised by the government, the Financial Supervisory Authority (FME) had no choice but to place them all into receivership. Ratio of bank assets to GDP(1)
1. Assets of domestically registered banks as at December - excludes assets of foreign subsidiaries. 2. Consolidated assets of the three largest banks - includes foreign subsidiaries ‘assets. 3. Data for the assets of domestically registered banks (excluding foreign subsidiaries ‘assets) are only available from July 2007. Source: Central Banks of the countries shown.
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International investment position End of year, as per cent of GDP
1. Net external debt is residents' debt claims or non-
residents ‘debt claims on residents. 2. Net external equity is residents ‘equity assets (i.e.,
foreign direct investment and portfolio investments in shares) abroad net of non-residents' equity assets in Iceland. 3. The international Investment Position (IIP) is the sum of net external debt and net external equity asset positions. Source: Central Bank of Iceland, Monetary Bulletin, 2009-2. To restrain the build-up of systemic risks, macro- and micro-prudential supervision must interact The expansion of the banks entailed a major build up of systemic risk in Iceland’s financial system – all of them had significant exposures to the same risk factors: reduced liquidity in global bond markets, a decline in equity markets and exchange-rate depreciation. In addition to these risks, domestic bank lending underpinned an asset price boom in Iceland, increasing risks further. Finally, the banks grew to be too big for the Iceland government to rescue. Banking in these circumstances became very dangerous when the global financial crisis deepened. To restrain the build-up of systemic risks in the future, macro-prudential supervision needs a legal basis to restrain bank behaviour, such as through countercyclical capital adequacy requirements. To implement this reform effectively, it may be necessary to merge the Central Bank of Iceland, the macro-prudential supervisor, and the FME, the micro prudential supervisor, or at least bring them under the same administrative umbrella (as in Finland and Ireland), as planned.
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Bank supervisors need to lay down tougher rules and apply them more strictly Although it will take some time to fully understand the causes of the
financial crisis, some light was shed by studies commissioned by the authorities. The report of the former Finnish supervisor, Mr. Jännäri, notes that the first big mistake made was to allow local investor groups (with major expansion plans) to gain controlling stakes in the banks when they were privatised. The FME was not satisfied with this decision, which it considers to have been political, but acquiesced after lengthy deliberations. The report also points to a variety of practices that would have been considered elsewhere as inconsistent with basic banking regulation. Although banks seemed well capitalised, evidence suggests the capital was of poor quality, sometimes coming from connected parties. The banks had large exposures to investment groups and to each other (via shareholdings), implying a high degree of common vulnerability. While banking regulations were largely transposed from the European Union, Iceland’s supervisors were unable to keep up with the complexity and size of the system as it grew rapidly and applied rules in an excessively legalistic manner. In the future, Iceland’s supervisors should not allow the banking sector to become so complex and so large that they cannot effectively fulfil their supervisory duties. Also, bank supervisors should lay down tougher rules and, subsequently, apply stricter practice on large exposures, connected lending and quality of owners, using discretionary best judgement when necessary. The Depositors’ and Investors’ Guarantee Fund needs to be reformed An important cross-border banking issue raised by the financial crisis was that national deposit guarantee systems may not have enough resources to honour the minimum EU deposit guarantee obligations. The government was obliged to stand behind Iceland’s Depositors’ and Investors’ Guarantee Fund (DIGF) to enable it to meet these obligations, thus exposing Icelandic taxpayers to a large cost. While this issue goes beyond Iceland and would involve reforms of EU wide practices, the Icelandic authorities should review and improve the deposit guarantee system, closely following the developments within the EU, to protect the taxpayer from new large costs.
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Economic recovery requires restoring the smooth functioning of the banking system Following the banking collapse, the authorities decided to create three new banks by transferring the domestic deposits and claims on residents previously held by the old banks, thus effectively separating domestic from foreign operations. While this preserved the functioning of the domestic payment system, the new banks have no capital and there is considerable uncertainty about the value of their assets and liabilities. Once the compensation instruments between the new and old banks have been issued, the government will recapitalise the new banks, which will enable them to provide more normal financial intermediation services. To eliminate uncertainties about the strength of the balance sheets of the new banks, the government should move low-quality domestic assets into an asset management company, which will dispose them over time. In
addition, there is evidence that the banks remain oversized for the Icelandic markets, thus weakening their profitability. The banks should be streamlined to make them profitable, including by merger if necessary (provided that this does not undermine competition in banking services). All of these measures would help to prepare the banks for full privatisation within the next few years. To facilitate privatisation, foreign direct investment into the Icelandic banking system should be encouraged. Other small countries, such as New Zealand, have found that having a banking system that consists almost entirely of well run fully-owned subsidiaries of foreign banks works well and has been particularly advantageous during this period of global financial turmoil. A start to removing capital controls should be made as soon as feasible Iceland has imposed capital controls to prevent disorderly outflows from causing a fall in the external value of the króna, especially outflows of non resident investors’ large holdings of króna-denominated securities, which would have driven many un-hedged firms and some households into bankruptcy. As well, by disallowing investments abroad, the capital controls in effect forced domestic creditors to lend to domestic borrowers, thus sharply reducing the risk premium and lowering market interest rates. Nonetheless, lifting capital controls should start as soon as this can be done safely, to normalize relations with foreign markets and allow firms to tap financial sources abroad. The authorities plan to lift the capital controls gradually once a medium-term fiscal consolidation plan is well in train, the banking sector has been put back on its feet and there are sufficient international reserves. According to available information, some 20% of household debt was denominated in foreign currency in September 2008 and was not hedged while 50% of corporate borrowers with foreigncurrency denominated debt do not have foreign currency earnings. Macroeconomic policy faces challenging times Monetary and fiscal policy challenges have grown hugely. Formulating an exit strategy from the temporary regime of capital controls and high interest rates is a major task. The lack of satisfactory monetary policy outcomes under different regimes in past years points to the limitations of an independent monetary policy in a very small, open country like Iceland, particularly in the context of large capital inflows associated with global carry trade transactions. Moreover, the crisis has imposed a very high budgetary cost. The large fiscal deficits need to be reduced and eventually eliminated and the rising national debt will need to be turned around.
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If it were to become an EU member, Iceland would be advised to seek entry into the euro area as soon as possible, so as to reap the economic benefits.
Iceland’s monetary policy credibility has been seriously damaged by the financial crisis. Even before the crisis, unsatisfactory inflation outcomes had already undermined the credibility of the monetary framework and, consequently, inflation expectations were poorly anchored. Rebuilding credibility is likely to take time and, even then, maintaining it might be very difficult. In the meantime, risk premiums on króna assets will remain high. In view of these considerations, the best way forward for Iceland would be to seek entry into the euro area, which would require accession to the European Union. Iceland would thereby participate in the credibility of euro-area monetary policy, which would be a stabilising influence and would lower interest rate premia. Lower real interest rates would reduce the government’s debt servicing costs, ease balance-sheet adjustment for the private sector and lower the cost of capital to the private sector. The sharing of a common currency would reinforce trade linkages with other euro-area economies and would likely increase the synchronicity of the business cycle. On the other hand, Iceland would lose the option of exchange rate adjustments following idiosyncratic shocks. This consideration may be less important for Iceland than for other countries because its economy is already very flexible. Nevertheless, such a consideration points to the need to maintain and even increase flexibility in labour and product markets. Achieving the macroeconomic conditions for euro adoption – low inflation, stable exchange rate and low deficits and debt – will pose a difficult policy challenge in the years ahead but would in any case be an important ingredient in securing the necessary macroeconomic stabilisation following the crisis. The authorities need to be steadfast in using macroeconomic policy instruments to achieve these goals.
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Volatility of inflation(1)
1. Measured as the standard deviation of year-on-year percentage change of monthly consumer price index. 2. Source: OECD, Main Economic Indicators. In the near term, monetary policy should aim at a level of inflation consistent with euro-area entry
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Euro area entry is, however, some time off, even under the most optimistic circumstances. For the time being, monetary policy should remain geared towards supporting the króna and protecting the balance sheets of unhedged borrowers. Exchange rate stability is the main goal of the capital controls, but since capital controls do not work perfectly, monetary policy needs to maintain a relatively strict stance. Until concerns about disorderly capital outflows diminish, monetary policy should stay focussed on maintaining exchange rate stability, which may limit the scope for further reductions in the interest rate. Once the capital account has been liberalised, a managed exchange rate regime will be increasingly difficult to implement. The authorities should thus adopt an inflation-targeting framework geared to meeting the Maastricht Treaty inflation criteria, which would imply switching from the official CPI to the internationallycomparable harmonised CPI (HICP). To improve the functioning of the
monetary framework, the Central Bank’s credibility should be improved. A good start has been made in this regard with recent reforms to communication policy and to the governance structure of the Central Bank, including the appointment of a Monetary Policy Committee with both internal and external members, coming with adequate credentials, to take interest rate decisions. It is also crucial that the conduct of monetary policy be more decisive than in the past and that the government fully respects the Central Bank’s independence. Required fiscal consolidation measures should continue to be implemented The financial collapse has increased government debt. With the recession and rising debt servicing costs, the public deficit is projected to be above 10% of GDP in 2009, adding to the public debt burden. A considerable fiscal consolidation is therefore required to put public finances back on a sustainable path and to pave the road for a successful euro-area entry. The deficit should be reduced vigorously in the coming years, with the goal of reaching balance. This path is consistent with that called for in the IMF Stand By Arrangement. Both tax increases and spending cuts will be needed, although the former are easier to introduce immediately. The starting point for the tax increases should be to reverse tax cuts implemented over the boom years, which Iceland can no longer afford. This would involve increases in the personal income tax and lifting the reduced rate of VAT. Just undoing the past tax cuts is unlikely to yield enough revenue. In choosing other measures, priority should be given to those that are less harmful to economic growth, such as broadening tax bases, or that promote sustainable development, such as introducing a carbon tax. The government should also increase unemployment insurance contributions to a level that would be expected to balance the fund’s accounts over the economic cycle, as planned.
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The planned fiscal consolidation will necessarily also involve substantial measures to contain expenditures. Expenditures that expanded rapidly in recent years are good areas to look at for savings. Government wages often outpaced those in the private sector, as the then booming financial sector raised the demand for more skilled workers. With retention no longer a problem, government wages should be frozen or even cut in nominal terms, implying significant declines in real terms, at least in 2009. For the same reason, public investment, which rose at an annual average rate close to 10% over 2003 07, should also be scaled back as much as possible, as is already planned. Budget expenditure growth ceilings must also be respected, in contrast to what has happened in the past. To this end, the role of the National Audit Office in the monitoring of the budget should be strengthened. Advice on the macroeconomic consequences of fiscal policy decisions should be further enhanced.
A number of public programmes could be reformed to reduce costs while still achieving the same outcomes. Above all, as discussed in the special chapter of the 2008 OECD Economic Survey, there are several options for enhancing spending efficiency in the health sector. The cost of running hospitals, which accounts for a high share of health care spending, could be reduced by introducing cost sharing and by rapidly implementing activity-based funding arrangements that reward productivity. Analysis in the 2006 OECD Economic Survey identified significant savings in education expenditures, which could be made from reducing the average duration of upper secondary school toward international standards and, as planned, by consolidating the higher education sector. Municipalities, which are responsible for pre-school and primary education, are also facing pressure to cut in these areas as their revenues have fallen and their access to external financing sources is limited. Teacher to student ratios, which are high by international comparison, should be reduced. More generally, there is still scope to achieve economies through greater consolidation of municipalities. The crisis also provides an opportunity to reduce support to agriculture, which is the highest in the OECD. Input efficiency of the health system
Source: World Bank, World Development Indicators database; FAO, Faostat database.
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Input efficiency of the education system
Source: World Bank, World Development Indicators database; FAO, Faostat database. Structural reforms in other areas would also contribute to laying out the foundations for a sustainable recovery
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While macroeconomic policy currently runs high on the policy agenda, this should not obviate the need to conduct growth-friendly structural reforms, notably in the labour market and the product market. The labour market is flexible overall with high participation rates, ease of entry for migrants, strong work incentives and unemployment benefits of short duration by international standards. With Iceland being confronted for the first time in recent history with a massive increase in unemployment, it will be important to avoid introducing policies that would undermine the good functioning of the labour market, such as higher replacement rates and longer duration for unemployment benefits, as this would contribute to a rise in long-term unemployment. Another strength of the Icelandic labour market is that real wages are highly flexible, thus helping to smooth economic adjustment in the face of shocks. Real wage cuts have in the past come in the form of consumer price inflation exceeding the growth of nominal wages. If Iceland joins the euro area, nominal wage flexibility will become more important as a mechanism for adjusting to asymmetric shocks. Although the product markets generally function well, several areas need attention, as indicated in past OECD Surveys. The energy sector is dominated by the state-owned National Power Company and should be opened to foreign investment. In the mortgage market, although the Housing Finance Fund is currently an element of stability, policy makers might have to reassess its role as it benefits from a government guarantee that prevents fair competition and distorts the allocation of resources. More generally, experience of euro-area countries underlines the need for greater flexibility throughout the economy if adjustments to shocks are to occur smoothly and contribute to sustainable growth and high living standards.
ECONOMIC SURVEY OF RUSSIA 2009: RENEWED GROWTH: KEY CHALLENGES
STABILISATION
AND
www.oecd.org,www.worldbank.org The following OECD assessment and recommendations summarise chapter 1 of the Economic Survey of Russia published on 15 July 2009. Contents Between the financial crisis which struck Russia in August 1998 and the global crisis which broke out in earnest in September 2008, Russia had the strongest decade of growth in its history, with real GDP nearly doubling. This strong increase in output, coupled with the vigorous real appreciation of the rouble, driven mainly by the surge in energy and raw material prices, meant that nominal GDP measured in US dollars rose almost 7-fold during that period, more than in any other major country. A wide range of other economic and social indicators also saw dramatic improvements during those ten years. Total factor productivity grew strongly, real wages soared, and unemployment and poverty rates fell sharply. Strong current account surpluses, combined with a swing in the private capital account from large net outflows to even larger net inflows, pushed international reserves to nearly USD 600 billion, behind only China and Japan. The transformation of the government finances was particularly marked. After defaulting on part of its debt in 1998, the federal government ran a string of surpluses and almost extinguished public debt while building up foreign assets amounting to 13% of GDP by end-2008. The picture for inflation was more mixed, but for most of the past decade inflation was on a trend decline, falling from 85% in late-1998 to single digits by mid-2007. At that time, a combination of surging international food and energy prices and very rapid money supply growth in Russia pushed inflation back up to 15%, before it began to fall again in late-2008 as energy and commodity prices collapsed and money supply growth came to a sudden halt.
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Real GDP growth was strong for a decade
Source: OECD calculations based on Federal Service for State Statistics. While stronger macroeconomic policies and structural reforms both contributed importantly to the good economic performance through mid2008, a good deal of the impetus to growth came from transitory factors, as was outlined in the 2006 Economic Survey of Russia. Initially, there was the 50% real depreciation of the rouble at the time of the 1998 crisis, which sparked a recovery driven by import substitution and facilitated by substantial underutilisation of capital, allowing rapid growth to occur without high rates of investment. Then, both during 1999-2000 and to an even greater extent from 2003 to mid-2008, the terms of trade improved sharply, driven mainly by a rising oil price. The loosening of conditions in international capital markets, with declining spreads for emerging market borrowers and rising net inflows combined with low interest rates in advanced countries, gave a further impulse to the strong increase in domestic demand in Russia.
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The contribution of transitory factors to growth in recent years increasingly raised questions about the sustainability of the expansion, particularly as some of the favourable factors (such as oil prices and the compression of borrowing spreads for emerging markets) exceeded or approached record levels. Although investment grew robustly, it remained low in relation to GDP compared with other rapidly catching-up economies, and the economy began to show signs of overheating as capacity utilisation rates rose and labour shortages emerged. Real GDP growth was increasingly driven by booming domestic demand, while the balance of payments and the government budget both became increasingly reliant on oil, with non-oil current account and fiscal deficits rising steadily. There is wide agreement, including within the government, that a shift to a new more self-sustaining growth model is needed. The government’s Russia 2020 growth strategy, which aims for innovation-driven growth and reduced reliance on the production of raw materials, was developed in 2008 while oil prices were still high and rising, but the crisis struck before that strategy could even begin to be translated into concrete policy
actions. It is therefore important to return to the structural reform agenda both within the context of anti-crisis measures and beyond. Why did the global crisis hit Russia so hard? The continuation of rapid growth had certainly become increasingly vulnerable to a decline in oil and gas prices, but a normal oil price downturn would probably have been consistent with merely a growth slowdown rather than the severe recession which is now under way. The size and speed of the decline in oil prices that began in July 2008 were greater than any previous episode, and the effects were exacerbated by similarly extreme falls in the prices of other export commodities. Financial turmoil, including the disruption of emerging market access to international capital markets, was also exceptionally severe. At the same time, world demand collapsed in the last quarter of 2008, dramatically shrinking world trade, which hit the volume as well as the price of Russian exports of metals and natural gas. The impact of these external shocks on the Russian economy was aggravated by domestic vulnerabilities, including fragile confidence in domestic banks and the currency. The impact of the crisis was sudden and large
1. Estimated on the basis of data on change of physical volume of production in agriculture, mining and quarrying, manufacturing, electricity, gas and water supply, construction, transportation, wholesale and retail trade. Source: Federal Service for State Statistics, Institute for the Economy in Transition, Ministry of Economic Development and VTB Europe.
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The strategy for Russia in tackling such a big economic crisis needs to be broad-based, including a range of fiscal and monetary policy measures to support aggregate demand and maintain the functioning of the banking
system. As in other countries, policymakers in Russia should seek measures that maximise the immediate demand effect; minimize distortions; protect macroeconomic stability and fiscal sustainability via a clear exit strategy from stimulus measures; and, where possible, yield longer-term efficiency gains while achieving short-term demand management goals. Designing a response that best conforms to these principles, including finding the right balance where there are trade-offs between them, is the overarching near-term policy challenge. What has been the policy reaction to date, and how should it evolve? The authorities’ reaction to the onset of the crisis was broadly in line with that of many OECD economies, although the response in Russia was unusually rapid and large, reflecting in part the substantial resources available to the authorities after years of fiscal and balance of payments surpluses. Liquidity and capital were provided to the banking system, deposit insurance limits were increased, and a number of expansionary fiscal measures were announced. All told, quantifiable announcements in the first months of the crisis were equivalent to about 13% of GDP. These measures were initially thought to be more than adequate to address the consequences for Russia of the global financial crisis, but it has become increasingly clear that Russia is facing a deeper and longer downturn than was imagined a few months ago. As the stock of available resources has dwindled while the cost of some initial measures has risen (notably the combination of limiting depreciation of the rouble while providing ample liquidity to banks) new measures are being more carefully weighed, especially with respect to possible risks to fiscal sustainability. Demand-support measures will be less effective to the extent that the financial system is not operating smoothly. This implies that maintaining the functioning of the banking system is of prime importance. While liquidity shortages did trigger turmoil at the onset of the global crisis, the main threat to credit growth now appears to be solvency problems, arising from the declining capacity of borrowers to repay bank loans. Banks risk breaching regulatory capital requirements if, as expected, the downturn brings an upsurge in non-performing loans. Such capital shortages can force deleveraging as banks shrink their balance sheets to meet capital adequacy requirements. Banks may also be unwilling to lend as credit risks on new lending rise in an environment of negative real GDP growth both domestically and abroad. The challenge is to maintain capital adequacy and prevent a sharp curtailing of lending flows financing new activities, while minimising moral hazard and the cost to taxpayers.
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Just as monetary conditions during the period of strengthening oil prices were too easy, as balance of payments strength fed through to money supply growth via the central bank’s exchange rate-oriented monetary policy, so they risk becoming too tight in a context of falling oil prices and capital outflows. Intervention to support the rouble in the months following
the onset of the crisis meant sharply falling reserves, and this was accompanied by a large fall in M2 since September 2008. Real interest rates are becoming positive for the first time in years just as aggregate demand is collapsing due to adverse external shocks. In addition, the resistance to depreciation delayed a compensatory stimulus for non-oil tradable when the oil price fell. The stepwise widening of the exchange rate band allowed some breathing space for firms with heavy foreign currency liabilities and possibly prevented a sharper weakening of confidence in the rouble and, thus, a run on deposits. But the costs were heavy, as expectations of further depreciation encouraged capital flight. The central bank’s communication policy should foster the recognition that the real exchange rate eventually has to move in line with large swings in fundamentals such as oil prices. This episode revealed the weakness in the monetary policy framework and illustrated that holding to a fixed exchange rate or managing a float for an extended period is difficult, as serious conflicts with fundamentals are likely to arise sooner or later, particularly in a commodity-dependent economy. The main short-term challenge for fiscal policy is to maximise the fiscal multiplier while managing moral hazard and risks to long-term fiscal sustainability. The former tends to suggest expenditure measures, possibly in the form of transfers to low-income households or lower levels of government, rather than general tax cuts. Temporary measures, such as one-off transfers or temporary tax rebates, can be one effective way of maximising the short-term demand impact. Measures those are hard to reverse, such as raising entitlements or cutting tax rates, could undermine long-term sustainability. The current crisis is increasingly looking like a more extended downturn than originally foreseen, which may make infrastructure spending more attractive than otherwise, particularly since there is evidence that the fiscal multiplier is highest for such spending. The threat to fiscal sustainability would appear to be less of a problem in Russia than in many OECD countries, given low levels of gross public debt and substantial public financial assets. Nonetheless, the federal deficit will be very large in 2009, and is likely to remain at high levels for several years. Moreover, Russia faces underlying negative demographic trends and particularly serious environmental degradation problems, which could entail major fiscal costs in the future. As in other countries, therefore, it will be important for Russia to set its stimulus efforts in a medium-term context that credibly charts a return to a sustainable public debt path.
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Looking beyond the crisis, how can a better growth model be put in place? At some point the crisis will end, and oil prices will probably recover sooner rather than later. In the medium term, Russia will face the challenge of putting in place a healthier model for sustained catch-up growth. This should be one based on innovation, investment, the accumulation of human capital and coherent implementation of the rule of law within a well regulated and competition-enhancing market economy, rather than one largely driven by strong but temporary improvements in the terms of trade
and the increasing reliance on state corporations with inadequate governance structures as well as ad hoc support of selected banks and corporations. To this end, there is considerable scope for major progress in a wide range of areas. For example, education performance is mediocre; the healthcare system is deficient in a number of respects; innovation policy does not get the most from Russia’s considerable potential; administrative reform is needed to improve the efficiency of the public service; and some important prices, notably for natural gas, remain distorted, making the economy more energy-intensive than it should be. Many of these topics have been addressed in past Economic Surveys, and remain valid. Particular challenges discussed in this Survey include macroeconomic management, including the priorities for monetary and fiscal policy, the development of the banking system, and product market regulation reforms to widen the scope for competition. The following OECD assessment and recommendations summarise chapter 2 of the Economic Survey of Russia published on 15 July 2009. Contents After defaulting on part of its debt in 1998, the federal government ran a string of surpluses and almost extinguished public debt while building up foreign assets amounting to 13% of GDP by end-2008. Years of large surpluses reduced public debt to low levels
Source: Federal Service for State Statistics, Central Bank of Russia and Ministry of Finance of the Russian Federation.
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The authorities’ reaction to the onset of the crisis was broadly in line with that of many OECD economies, although the response in Russia was unusually rapid and large, reflecting in part the substantial resources
available to the authorities after years of fiscal and balance of payments surpluses. Liquidity and capital were provided to the banking system, deposit insurance limits were increased, and a number of expansionary fiscal measures were announced. All told, quantifiable announcements in the first months of the crisis were equivalent to about 13% of GDP. These measures were initially thought to be more than adequate to address the consequences for Russia of the global financial crisis, but it has become increasingly clear that Russia is facing a deeper and longer downturn than was imagined a few months ago. As the stock of available resources has dwindled while the cost of some initial measures has risen (notably the combination of limiting depreciation of the rouble while providing ample liquidity to banks) new measures are being more carefully weighed, especially with respect to possible risks to fiscal sustainability. The main short-term challenge for fiscal policy is to maximise the fiscal multiplier while managing moral hazard and risks to long-term fiscal sustainability. The former tends to suggest expenditure measures, possibly in the form of transfers to low-income households or lower levels of government, rather than general tax cuts. Temporary measures, such as one-off transfers or temporary tax rebates, can be one effective way of maximising the short-term demand impact. Measures those are hard to reverse, such as raising entitlements or cutting tax rates, could undermine long-term sustainability. The current crisis is increasingly looking like a more extended downturn than originally foreseen, which may make infrastructure spending more attractive than otherwise, particularly since there is evidence that the fiscal multiplier is highest for such spending. The threat to fiscal sustainability would appear to be less of a problem in Russia than in many OECD countries, given low levels of gross public debt and substantial public financial assets. Nonetheless, the federal deficit will be very large in 2009, and is likely to remain at high levels for several years. Moreover, Russia faces underlying negative demographic trends and particularly serious environmental degradation problems, which could entail major fiscal costs in the future. As in other countries, therefore, it will be important for Russia to set its stimulus efforts in a medium-term context that credibly charts a return to a sustainable public debt path.
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Reorienting monetary policy to achieving inflation objectives implies that insulating the economy from large fluctuations in oil prices will largely fall to fiscal policy, especially as regards the mechanisms for taxing and saving oil. During the recent period of high oil prices reserves of about 13% of GDP were accumulated in two funds, one to smooth oil-pricedependent revenue fluctuations and the other to provide for a stream of income to boost long-term national welfare. In periods of oil price weakness, allowing the lower prices to be reflected in larger non-oil deficits financed by running down the Reserve Fund will offset part of the pressure for depreciation. Using fiscal policy to lean against real exchange rate pressures arising from oil price swings helps to insulate the non-oil economy from such swings and is welcome.
Russia has made major improvements to the structure of its taxation and to tax collection. Tax bases have been broadened, rates cut, and compliance improved. Nonetheless, scope remains for further reform that could speed up convergence to advanced country income levels. Oil and gas taxation should be adjusted to capture economic rents without harming incentives for exploration and development. In particular, export taxes on crude oil and oil products should be removed in the medium term. The government should address problems with VAT refunds directly, rather than bow to demands to cut rates, given that VAT is a relatively efficient tax. Russia has scope to increase the revenue share of property taxes, which OECD research suggests is the least growth-unfriendly form of taxation. Corporate profit tax, which is found to be particularly harmful for growth performance, is already at low levels after the most recent cut to 20% but, subject to satisfactory overall revenue collection, further reductions should not be ruled out. Economic efficiency would also suggest exploring ways of reducing the comparatively high tax wedge, which again is relatively growth-unfriendly. Apart from the possibility to further improve economic efficiency, considerable scope also remains to alleviate poverty, which despite some progress during the recent episode with exceptionally high growth is still far more prevalent than in OECD countries. This may require more redistribution than can be achieved at the moment with a flat tax rate for personal income, a regressive unified social tax and relatively low real estate and wealth taxation. This issue will be dealt with in the forthcoming OECD Labour Market and Social Policy Review. The following OECD assessment and recommendations summarise chapter 3 of the Economic Survey of Russia published on 15 July 2009.
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Contents Just as monetary conditions during the period of strengthening oil prices were too easy, as balance of payments strength fed through to money supply growth via the central bank’s exchange rate-oriented monetary policy, so they risk becoming too tight in a context of falling oil prices and capital outflows. Intervention to support the rouble in the months following the onset of the crisis meant sharply falling reserves, and this was accompanied by a large fall in M2 since September 2008. Real interest rates are becoming positive for the first time in years just as aggregate demand is collapsing due to adverse external shocks. In addition, the resistance to depreciation delayed a compensatory stimulus for non-oil tradable when the oil price fell. The stepwise widening of the exchange rate band allowed some breathing space for firms with heavy foreign currency liabilities and possibly prevented a sharper weakening of confidence in the rouble and, thus, a run on deposits. But the costs were heavy, as expectations of further depreciation encouraged capital flight. The central bank’s communication policy should foster the recognition
that the real exchange rate eventually has to move in line with large swings in fundamentals such as oil prices. This episode revealed the weakness in the monetary policy framework and illustrated that holding to a fixed exchange rate or managing a float for an extended period is difficult, as serious conflicts with fundamentals are likely to arise sooner or later, particularly in a commodity-dependent economy.
The plummeting oil price caused the quasi-fixed exchange rate regime to be suspended
Source: OECD calculations based on Central Bank of Russia.
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The central bank’s welcome intention to shift over time to an inflationtargeting regime would address the tensions which have beset monetary policy in recent years. Inflation targeting has proved a successful framework for a wide range of countries, including those with a high degree of commodity dependence. Also, it has often worked well even when some factors, advanced as pre-conditions for making the transition to inflation targeting, have not been fulfilled. Nonetheless, there is a good
case in Russia for taking a gradual approach to such a transition, as certain important conditions, some of which go beyond technical preparations on the part of the central bank, requiring political support, remain unfulfilled. Too little is yet known about the ability to forecast inflation and the response of inflation to changes in policy interest rates. To that end, the Central Bank of Russia’s recently introduced quarterly inflation reports, which are a welcome innovation, should be improved to become less descriptive and more analytical. Also, inflation targeting would undoubtedly work better if Russia had deeper financial markets and greater central bank independence. The unexpected return to budget deficits should be used to issue more domestic government debt, providing banks with more paper for refinancing and establishing a benchmark for the financial sector.
Single-digit inflation is one condition that should probably be met before adopting inflation targeting
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Source: IMF and OECD estimates. The following OECD assessment and recommendations summarise chapter 4 of the Economic Survey of Russia published on 15 July 2009.
Contents The authorities’ reaction to the onset of the crisis was broadly in line with that of many OECD economies, although the response in Russia was unusually rapid and large, reflecting in part the substantial resources available to the authorities after years of fiscal and balance of payments surpluses. Liquidity and capital were provided to the banking system, deposit insurance limits were increased, and a number of expansionary fiscal measures were announced. All told, quantifiable announcements in the first months of the crisis were equivalent to about 13% of GDP. These measures were initially thought to be more than adequate to address the consequences for Russia of the global financial crisis, but it has become increasingly clear that Russia is facing a deeper and longer downturn than was imagined a few months ago. As the stock of available resources has dwindled while the cost of some initial measures has risen (notably the combination of limiting depreciation of the rouble while providing ample liquidity to banks) new measures are being more carefully weighed, especially with respect to possible risks to fiscal sustainability. Demand-support measures will be less effective to the extent that the financial system is not operating smoothly. This implies that maintaining the functioning of the banking system is of prime importance. While liquidity shortages did trigger turmoil at the onset of the global crisis, the main threat to credit growth now appears to be solvency problems, arising from the declining capacity of borrowers to repay bank loans. Banks risk breaching regulatory capital requirements if, as expected, the downturn brings an upsurge in non-performing loans. Such capital shortages can force deleveraging as banks shrink their balance sheets to meet capital adequacy requirements. Banks may also be unwilling to lend as credit risks on new lending rise in an environment of negative real GDP growth both domestically and abroad. The challenge is to maintain capital adequacy and prevent a sharp curtailing of lending flows financing new activities, while minimising moral hazard and the cost to taxpayers.
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Russia’s banking sector has suffered repeated crises since the start of transition. Policy makers face two broad regulatory challenges in seeking to improve the stability of the banking system: to converge on existing best practice as regards the implementation of prudential supervision and (a challenge shared with many other countries) to address defects in bank regulation which amplify economic cycles and give insufficient weight to liquidity considerations. In the cyclical upswing Russian banks on average maintained but did not increase capital cushions above the minimum standard, and many therefore risk falling below the minimum as loan losses rise as a result of the recession, unless new capital can be found. As in OECD countries, there is a need for a more macro-prudential approach to financial supervision, which takes more account of systemic risks, in addition to focusing on bank-specific ones. Capital requirements and/or provisioning rules should be made counter-cyclical and capital
requirements should be allowed to vary across banks to reflect each bank’s contribution to systemic risk. In addition, stress tests should include assessments of shocks which hit across the banking system. There will be ongoing efforts to reform international rules to strengthen existing supervision approaches, and Russia should actively participate in these discussions while proceeding with own reforms to bolster financial market stability. Russia’s financial system, despite its recent rapid expansion, is still relatively underdeveloped, leaving considerable scope for financial deepening to contribute to long-term growth. A number of reforms would contribute to such deepening. First, although Russia has many banks, competition overall is weak, especially at the regional level. Consolidation of the sector would help, as this would lift more banks above a minimum efficient scale, which is necessary to contribute to effective competition. Over the long term, competition and efficiency would be improved by streamlining the state’s involvement in the sector. Here, as with stateowned enterprises in other sectors, policy goals are mixed with commercial ones, mandates are unclear, and institutions with sub-optimal corporate governance arrangements are given major roles. Beyond being boosted by competition, banking efficiency would benefit from improvements in the rule of law, faster convergence to international financial reporting standards, and measures to lengthen the effective duration of bank liabilities (notably, repeal of the Civil Code provision that allows withdrawal of all household deposits on demand regardless of their contractual term).
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There are still many banks, most of which are very small End of period
Source: Central Bank of Russia.
The largest banks are state-owned
Source: Central Bank of Russia and OECD calculations. The following OECD assessment and recommendations summarise chapter 5 of the Economic Survey of Russia published on 15 July 2009. Contents The OECD’s product market regulation (PMR) indicator for Russia reveals that, despite liberalisation in some areas, such regulation is, on average, highly restrictive. The overall level of regulation is significantly higher and restricts competition to a greater extent than in any OECD country - including the emerging market economies within the OECD area. All three of the high-level sub-components of the overall PMR index are high in Russia relative to comparator countries, although there is considerable regulatory heterogeneity in lower-level sub-components.
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Product market regulation in Russia is more restrictive than in any OECD member
Note: Index scale of 0-6 from least to most restrictive. Source: OECD.
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Reflecting the legacy of the Soviet era as well as the backlash after the chaotic early years of transition to a new system, state control in the Russian economy is extensive, via both direct state ownership and control over economic activity. State-owned enterprises are found across a wide range of sectors and often occupy a dominant position in their industry. Furthermore, there is a pervasive blurring of the line between the public and private sectors, arising not only from the extensive role of stateowned enterprises but also by close ties between government (at all levels) and major private firms. One reflection of this phenomenon is the unusually important role of current or former politicians and senior bureaucrats in business, which gives rise to multiple, distorting and costly conflicts of interest. Recent initiatives to strengthen the obligations for politicians and senior bureaucrats to publicise their incomes and financial assets are welcome. The special-status state corporations, most of which were established recently, are exempt from some reporting and monitoring obligations. These exemptions should be removed. Furthermore, the extent of the problems posed by the unclear governance of these institutions, which are neither under full political surveillance nor privately owned, should be carefully monitored. The PMR indicators also signal a high level of government involvement in the private business sector. In part, this reflects a prevalence of command-and-control-type regulation. Significant benefits in terms of economic performance could be yielded by reducing political interference in the operation of state-owned enterprises (SOEs) and private sector firms. This should include separating the activities with non-commercial policy objectives of SOEs and consolidating them to the relevant government department; improving standards of transparency and disclosure in SOEs; imposing an effective firewall between public and private professional activities to avoid conflicts of interest; disposing of golden shares in SOEs and private firms; increasing the independence and accountability of government representatives and accelerating appointments of independent and accountable directors on SOE Boards; revitalising privatisation (once SOE corporate governance has been improved); reducing the list of strategic
firms and sectors; and using regulatory alternatives to command-andcontrol regulation and direct intervention.
State control stands out as accounting for the high overall score
1. Czech Republic, Hungary, Korea, Mexico, Poland, Turkey. 2. Austria, Belgium, Finland, France, Germany, Italy, Luxembourg, Netherlands, Portugal, Spain. Note: Index scale of 0-6 from least to most restrictive. Source: OECD.
2 5
Russia performs well in some regulatory areas related to barriers to entrepreneurship, including regulatory and administrative opacity and the system of licensing and permits. However, the administrative burden that the government places on entrepreneurs starting a new business, whether they are corporations or sole traders, is still very high and acts as an obstacle to new entry. This could be indicative of more widespread inefficiencies in government administration and reflect ongoing difficulties in reforming the public administration, creating new regulatory institutions and implementing market-orientated forms of regulation. Many measures could be taken to reduce barriers to entrepreneurship and increase competition, including: further public administration reform and cutting red tape; increasing the transparency and accountability of public administration; carrying out Regulatory Impact Analysis to assess significant new regulatory proposals; breaking the dependence of regional governments on a limited number of local firms for revenue raising; providing for more vigorous and uniform implementation of competition law; minimising uncertainty and the need for subjective decision making within the government administration so as to reduce corruption
opportunities; and continuing work to make network industries more competitive, with stronger regulation.
2 5
Russia’s average import tariff rate is somewhat higher than in most other middle-income countries and significantly higher than in OECD countries. Further, despite the implementation of a programme to simplify the rate structure in 2000-01, the dispersion in tariffs has actually increased since the beginning of the 2000s, indicating a less uniform structure. Lowering tariff protection and tariff dispersion to OECD levels would be both beneficial for economic performance and helpful in speeding Russia’s accession to the World Trade Organisation (WTO), which has been under negotiation for more than 15 years. WTO membership would in turn exercise some leverage for making more progress with competitionenhancing reforms. As to foreign direct investment (FDI), inflows have, until recently, been robust, but barriers to foreign ownership are estimated to be high in Russia compared to OECD countries. In part, this reflects the enactment in May 2008 of the law on strategic industries, which defines 42 sectors in which control by foreign investors requires prior authorisation from a government commission. Although this law increases transparency and is less ad hoc than the previous regime, its sectored coverage is broader and notification delays longer than OECDrecommended practice. The emergence of large state-controlled conglomerates with dominant market positions also acts as a barrier to FDI inflows. The scope for foreign investors to acquire equity in these conglomerates or participate in government procurement contracts in the sectors they occupy is strictly limited. Beyond explicit barriers to FDI, the overall regulatory environment in Russia is perhaps the most significant impediment to greater inflows of FDI. The government should increase the openness and predictability of the foreign investment regime, review the list of strategic sectors and ensure a level playing-field between domestic and foreign firms with respect to government procurement and access to subsidies.
2 5
2 5
