Stockholm, 24-27, June, 2009

1. DEVELOPMENT OF MODEL AND INTELLIGENT TUTORING SYSTEM FOR INTEGRATED CONSTRUCTION AND REAL ESTATE CRISIS MANAGEMENT IN THE TRANSITION ECONOMY COUNTRIES – THE LUTHIANIAN AND BELARUSIAN CASE STUDY Authors: Dr. Nikolai Siniak, Associate professor of Belarusian State Technological University, E-mail: siniakn@mail.ru siniakn@tut.by Prof. PhD. DrSc. Arturas Kaklauskas, Dr. Uladzimir Valetka, PauliusKazokaitis, K. Zavadskas, M. Urbonas Stockholm, 24-27, June, 2009

2. Situation in the Research • : • Various methods and models (time-series analysis using multiple regression, Box-Jenkins analysis, seasonality analysis methods; three-index model, time-varying parameter model behavioral macroeconomic portfolio model of international capital flows, post-Keynesian models, calibrated macro models) for crisis analysis, forecasting, simulation and management in the construction and real estate sector and in separate segments thereof are applied worldwide. • It may be noted that researchers (Pavlov and Wachter (2009), Bond et al. (2006), Lu and So (2005), Glascock and Kelly (2007), Werner (1994), Nishiyama (2006), Minsky (2005), Bernanke and Gertler (1999), etc.) from various countries engaged in the analysis of crisis in the construction and real estate sector and in separate segments thereof did not consider the research object being analysed by the authors of the present research

3. multiple criteria decision making methods : • A complex analysis of the research object formulated was made with the help of new methods multiple criteria project analysis specially developed for this purpose. • Already multiple criteria decision making methods developed by authors have been applied to a variety of problems in construction and real estate sector (1994, 1999, 2004, 2005, 2006).

4. Situation with mortgage in Belarus 2. ГЕОРЕЙТИНГ КАК ИНТРУМЕНТ ДИАГНОСТИКИ УНИКАЛЬНОСТЬ ИССЛЕДОВАНИЯ ВОЗМОЖНОСТИ СОЦИОЛОГИИ • Traditional analysis of construction and real estate crisis is based on economic, legal/regulatory, institutional and political aspects. Social, cultural, ethical, psychological and educational aspects of crisis management get less attention. In order to make an integrated analysis of the lifecycle of construction and real estate sector crisis, such cycle must be analysed in an integrated manner based on a system of criteria (see Figure 1). • Впервые поставлена задача изучить ресурсы массового инвестирования РФ с разбивкой по регионам. • 2006 год – начало формирования социальной базы массового инвестирования.«Схвачен момент» зарождения массового инвестиционного сословия. • Опросами охвачено 1930 населенных пункта. • Население исследуемых регионов - 94% населения страны. • Объем выборки – 34000 респондентов. • Выборка репрезентативна для населения каждого из 68 субъектов РФ и для России в целом. • Статистическая погрешность по России в целом – не более 1,0%. • Исследование малых групп, формирующих «инвестиционную моду». • Инвестиционная география: создание атласа инвестиционных настроений РФ, учет специфики регионов. • Изучение стратегий инвесторов, каналов влияния и коммуникации. ГЕОРЕЙТИНГ – ЭТО ОПРОС НАСЕЛЕНИЯ РФ, КОТОРЫЙ СКЛАДЫВАЕТСЯ ИЗ 68 РЕГИОНАЛЬНЫХ ОПРОСОВ. ДАННЫЕ РЕПРЕЗЕНТАТИВНЫ КАК ДЛЯ СТРАНЫ В ЦЕЛОМ, ТАК И ДЛЯ КАЖДОГО ИЗ РЕГИОНОВ.

5. The criteria are briefly analyzed below.

6. Economic (or business) indicators include various indices, earnings reports, and economic summaries, such as unemployment, housing starts, Consumer Price Index (a measure for inflation), industrial production, bankruptcies, Gross Domestic Product, retail sales, stock market prices, and money supply changes. Economic indicators are primarily studied in a branch of macroeconomics called "business cycles“ • Various interrelated and interdependent economic and financial processes (bankruptcies, unemployment, increasing amounts of bad loans in banks, decreasing salaries, fall of real estate prices and various expectations) undergo sudden changes. The process is a reversed sequence of the events observed a few years ago. Some construction companies indebted to banks try to avoid bankruptcy by cutting the sales prices of their real estate by 20-50 per cent.

7. Some industries undergo significant cyclical fluctuations of production, jobs and sales. Such sectors as construction, steel manufacture and aerospace industry are among them. US airspace industry incurs profit losses up to 40 per cent in consequence of rather cyclical fluctuations of US economy (Seidl and Kleiner, 1999). • The companies which take such cycles for granted and consider them part of reality manage to get ready for future recession in the times of boom. They often employ long-term management strategies, which help to survive recession easier (Lovelock, 1997, Sheridan, 1997).

8. Chowdhry and Goyal (2000) provide evidence for the argument that the crisis reflected institutional inefficiencies within Asian economies. As the real estate market is closely tied to the financial stability of any economy, it is hoped that these Asian experiences can shed light on how the real estate loan lending process could be perfected to help mature the real estate market (Lu and So, 2005). • Quigley (2001) argues that the crisis can partly be attributed to the combination of outmoded banking practices and an immature real estate market.

9. The globalization of financial markets is affecting real estate markets. During the period 1985 to 1994, a large number of countries experienced strong real estate booms that peaked around 1989 followed by severe asset price deflation and an output contraction that usually lasted until 1994 (Renaud, 1997). • Renaud (1997) research has three threads: What triggered this first global cycle? What has been its impact? Are there lessons for countries that are not yet fully integrated into global capital markets such as semireformed socialist economies, newly industrialized economies, and other developing countries?

10. European construction market is far from homogenous. The current situation and prospects of each Member State depends on its initial state (with regards to the needs, demographic trend, economic fundamentals, etc.), whether or not real estate market corrections recently occurred, the specific exposure of the national economy to the financial and economic crisis and finally to which extend recovery measures will succeed and operate in the construction sector (Detemmerman, 2009).

11. Successful strategies for sustainable construction and real estate crisis management should be more-or-less compatible with economic, political, legal/regulatory, technological, technical, organisational, managerial, institutional, social, cultural, ethical, psychological, educational, environmental, confidence and other situation in the country under consideration. A varied spectrum of strategies can be launched, while keeping in mind that the mix of influencing factors and the relative emphasis is on one or other of the factors and overall will depend on local conditions.

12. Therefore, the best sustainable construction and real estate crisis management strategy of another country cannot just be copied. Strategies may only be adapted into a real economic, social, political, legislation/regulation and the provisional situation of the existing state. There is no such thing as a single sustainable construction and real estate crisis management strategy to suit all societies and that could be applied to all countries.

13. The Model for a sustainable construction and real estate crisis management in Lithuania and Belarus suggested by this research is based on the presumption that the efficiency of sustainable construction and real estate crisis management depends on many micro, meso and macro-level variables. The presence of specific micro, meso and macro-level variable factors immediately imposes objective limitations for efficient sustainable construction and real estate crisis management.

14. Sustainable construction and real estate crisis management, in the presence of these objective limitations, tries to perform its functions within their bounds with the utmost efficiency. This research aims at producing a Model of the rational sustainable construction and real estate crisis management in Lithuania and Belarus development by undertaking a complex analysis of micro, meso and macro environment factors affecting it and to present recommendations on increasing its competitive ability.

15. The research was performed by studying the expertise of advanced industrial economies and by adapting it to Lithuania and Belarus by taking into consideration its specific history, development level, needs and traditions. A simulation was undertaken to provide insight into creating an effective environment for the RSCRECM by choosing rational micro, meso and macro factors.

16. The main objective of this model is to analyze the best experiences in the field of SCRECM, to compare it to the present situation in a particular country and consequently to present particular recommendations. In this particular case, the development perspectives of Lithuania and Belarus were analyzed.

17. This research included the following six stages. • Stage I. Comparative description of the sustainable construction and real estate crisis management in developed countries and in Lithuania and Belarus: • A system of criteria characterizing the efficiency of crisis management was determined by means of using relevant literature and experts methods; • Based on a system of criteria, a description of the present state of crisis management of developed countries and Lithuania and Belarus is given in conceptual (textual, graphical, numerical, etc.) and quantitative forms.

18. Stage II. A comparison and contrast of sustainable construction and real estate crisis management in developed countries and Lithuania and Belarus includes: • Identifying the global development trends (general regularities) of the crisis management; • Identifying sustainable crisis management differences between developed countries and Lithuania and Belarus; • Determining pluses and minuses of these differences for Lithuania and Belarus; • Determining the best practice for crisis management for Lithuania and Belarus as based on the actual conditions. • Estimating the deviation between stakeholders’ knowledge of worldwide best practice and their practice-in-use.

19. Stage III. A development of some of the general recommendations as how to improve the efficiency levels for construction and real estate stakeholders and construction (real estate) firms. • Stage IV. Submission of particular recommendations for construction and real estate stakeholders and construction (real estate) firms were presented at this stage. Each of the general recommendations proposed in the fifth stage carry several particular alternatives.

20. Stage V. A multiple criteria analysis of sustainable construction and real estate crisis management’s components and a selection of the most efficient version of crisis’s management life cycle were determined at this stage. After this stage, the received compatible and rational components of a crisis management are joined into the full sustainable crisis management process.

21. Stage VI. Performance of transformational learning and redesigning the mental and practical behaviour: • Construction (real estate) stakeholders (firms) becoming aware and conceptualize of their practice-in-use; • Construction (real estate) stakeholders’ (firms’) becoming aware and conceptualize of their knowledge of worldwide best practice; • Construction (real estate) stakeholders (firms) estimating the deviation between knowledge of worldwide best practice and their practice-in-use; • Performance of best practice learning; • Fulfilling of best practice actions (understanding what the recurring motives caused stakeholder’ initial behaviour are; redesigning stakeholders’ core patterns of thought and behaviour); • Performance of transformational learning (acquiring new manners of technological, social, ethical, etc. behaviour, get better understanding of how to interact with micro, meso and macro environment) and redesigning the behaviour.

22. In order to demonstrate the components of the Model in detail, we shall analyze as an example: • some measures for recession mitigation suggested in the EU and the USA; • submission of particular recommendations for the Lithuania and Belarus.

23. Various short- and long-term mitigation and prevention measures are suggested for the US financial crisis. Some of them are briefly reviewed below. • Short-term mitigation/prevention measures for the US financial crisis could be as follows: cut business/corporate income tax rates (U.S. corporate tax rate is not globally competitive); cut individual income taxes (including high income individuals who pay taxes and have capital to invest); do not rescue any more non-banks (let market correct); do not introduce any new programs (markets cannot deal with the unpredictable and arbitrary); do not waste resources on non-essential government programs, etc.

24. A few long-term mitigation and prevention measures for the US financial crisis are also suggested: return to originate/hold for residential mortgages (do not “save” irrational competitors (mutual money funds)); raise capital requirements for bank (especially “start ups”); make it explicitly clear that Federal Reserve can not/will not “save” non-banks; stop subsidies to housing (tax policy); encourage productive investment – low/neutral tax rates: tax consumption, not savings – increase productivity; free trade; carefully and systematically privatize medicare, social security, and education; significantly cut cost of defense: by defending U.S. – not “saving” world; encourage immigration of the productive and hardworking (especially well educated); restore discipline to system (save more, spend less), etc.

25. The recovery plan of the EC proposes i.a. (Detemmerman, 2009): • increased financing for climate change, energy security and infrastructure investment (EIB, EBRD, structural funds) • €5 Bn investment in broadband and energy infrastructure • "frontload“ financing of TEN-T projects (€500 M) • Increased EIB interventions (by €15 Bn/y) • European energy-efficient buildings (innovation) initiative worth €1 Bn • Reduced VAT on housing and green products and services

26. Some examples of construction related measures in some EU countries plans (Detemmerman, 2009): • Germany announced on 13/1/2009 its second recovery plan: between €17 and €18 billion out of €50 billion will be spent on the modernisation of federal, regional and local infrastructure (roads, rails, schools, universities). Some national experts have calculated that this expenditure programme should achieve GDP growth of 0.5 to 0.7 points in 2009 and the creation/maintenance of 200,000 jobs.The first recovery plan presented in November 2008 (€31 billion) also partly targeted the construction sector but was considered insufficient. • In Spain, €8 billion will be distributed to local authorities to help them launch new public works projects. The objective is to create 200,000 jobs in a sector which has seen thousands of job losses since last year. • France announced a €10.5 Bn effort in public investments, the creation of an extra 100.000 units in social housing , an extension of the zero-rate credit for the first acquisition of one’s own dwelling, amongst other measures.

27. All EU countries develop plans to fight the crisis and allocate investments to revive the construction sector.

30. The best crisis management solutions of other countries cannot just be copied. They may only be adopted in a real economic, political, legal/regulatory, technological, technical, organisational, managerial, institutional, social, cultural, ethical, psychological, educational and environmental situation of the state. There is no such thing as a single crisis management solution for all societies that could be applied to all countries. Economic systems depend on the political objectives of government and the interaction of political groupings.

31. In order to minimize the effect of crisis on the Lithuanian and Belarusian construction and real estate sector, we need to analyze in a complex manner and make the reasonable decisions in micro, meso and macro levels. This must include not only economic, political, legal/regulatory decisions, but also other aspects of crisis management such as social, culture, ethical, psychological, educational, environmental, provision, technological, technical, organisational, managerial.

32. Some detailed recommendations on avoidance of crisis and minimizing of its consequences in the above-mentioned fields are given below: • Automatic stabilization: when economy becomes weaker, the expenditures of the state on the field of social insurance are automatically increased, taxes are decreased. • IMF claims that the avoidance of global recession needs the fiscal stimulation reaching at least 2 per cent of the gross domestic product. • During the crisis, the consumer choice criteria change apparently; therefore, the entrepreneurs need to segment the market according to the client’s emotional (ones economize much, others not yet) response to the crisis. For example, a company selling the construction equipment and machinery strengthens the rental segment.

33. With the decrease in budget expenses, the residents’ income is decreasing, they are inclined to economize more and more. And this again encourages the shrinkage in economy (the budget income will decrease more and more). • Reasonable (so that the raised taxes would not be lower than the administrative expenses, and the government would not wait till the wave of resistance from the furious society) introduction of the real estate tax and withdrawal of tax exemptions would encourage the more effective usage of real estate and minimize the swelling of the real estate bubble.

34. A large number of society groups were interested in ignoring the swelling of the real estate bubble: bank managers (they were paid solid bonuses for it); authorities (increasing revenues from VAT and swollen consumption highly improved the economic indices and filled the budget); construction companies (seeing that the banks were ready to finance up to 80 per cent building costs, decided to work as much as possible; and then, leave the problems regarding their repayment to the banks); buyers (encouraged with 20 to 30 per cent bigger salaries, wrongly assessed the prospect of their income, and were not afraid to take the increasingly bigger loans from the banks). • To move to the forced mass housing renovation programme as fast as possible, thus saving the mostly failing building sector which created the biggest part of GDP by now.

35. The bigger taxes push the business to the shadow economy. It is expected that the Lithuanian shadow economy will grow still 5 per cent and reach 22.7 per cent GDP in this year. Belarusian economy can show minimized growth this year about 1-2% with a serious growth external debt. In such scale of the shadow economy, the closed circle of the failures in raising the budget income gets shape. • To try avoiding the acute and chronic stress. It is impossible to order oneself not to worry, when the colleagues are released from work, and the similar thread is hanging over our heads like the sword of Damocles. • The economy must redistribute, clean and rationalize itself. The certain businesses will go bankrupt, some production resources will redistribute themselves. • The capitalization of business, but not of speculations, is necessary.

36. In order to achieve the financial stability, we need to strengthen the system of not only the nationalization of losses, but also of the monitoring of the banks and early warning about the state of this sector. • We need to seek to adapt the corporate culture (the integrated whole of the values, customs, traditions and meanings; the character of an organization) as fast as possible to the requirements raised by the crisis. • The organization must feel the higher social responsibility to their employees and workers. • To rationalize the psychological climate, so that the main concerned groups would behave in a reasonable manner.

37. During the crisis, to give the greater focus to the emotional stress and possibilities to minimize it. • The ethical point of view must be more and more implemented into the decision-making. • To conduct the education of the concerned groups on the history, consequences of crisis, possible solution methods in a more active manner. • Improvement of business environment. Attempts are made to reduce the burden of red tape on business up to 30% in Lithuania within the coming two years. It is planned to reduce the range of licensed activities, to liquidate and merge duplicate institutions controlling business, to ease the procedures of business incorporation and liquidation, to introduce electronic registration of companies. Attempts are also made to abandon the practice when businesses must submit the same data several times to different state institutions.

38. Creation of new methods for crisis forecasts and modelling. • Acceleration and simplification of the procedures for granting of EU funds. Lithuanian business will be able to get funds in advance or the funds will be transferred upon submission of invoices for performed work. Speed and expedience of fund granting will be controlled at the highest level. • Deflation is potentially worse than inflation. But these options would be suitable for long-term perspective. • Complete projects which are already in the pipeline.

39. Invest in infrastructure (giving priority to projects already funded and ready to start). • Promote energy efficiency improvements (renovation and retrofitting of existing buildings); promote private investments in renovation and retrofitting of buildings (through specific incentives). • Maintain and possibly extend the application of reduced VAT to the whole housebuilding sector. • Facilitate access to financing (in particular for SMEs). • Ensure swift payment of public contracts. • Ensure that banks actually use the state guarantees and funds they receive for lending to enterprises and citizens.

40. Accelerate administrative procedures (and permits); accelerate public procurement procedures, in particular the time necessary for obtaining decisions, permits, certificates etc. from public authorities, in order to speed up the commencement of large-scale public projects: This is already proposed in the EU and in some national recovery plans for 2009 and 2010, and provided for by the public procurement Directives, although the principle that the deadlines have to be such as to allow the submission of good quality tenders must not be jeopardised under the pretext of urgency. • Reduction of the psychological tension and panic related to coming crisis. “Panics” Are All Bad because financial institutions borrow short and lend long. Therefore, “panic” creates liquidity risk for all.

41. Deepest causes are philosophical (different than many people may think) [3]: altruism (affordable housing, redistribute from productive to non-productive, no one has a right to their own life); pragmatism (irrationality, lack of integrity); “free lunch” mentality (social security, medicare); lack of personal responsibility (death of democracies: tyranny of majority).

42. Submission of particular recommendations for construction and real estate stakeholders and construction (real estate) firms were presented at fourth stage. For example, Brown (2008) proposes fivestrategiestoutilizetokeepconstructionbusinessontrackandprofitablenowandinthefuture:

43. Beginwithevaluatingeverythinginyourcompany’sbudgetthatcanreduceexpenses. Lookbeyondthespreadsheets, andbepreparedtomakecuts. Andyes, youmightevenneedtolookatsalariesandwhetherornotcertainemployeesaregeneratingenoughvaluetowarrantkeepingthemonboard. Thesearetoughdecisions, butit’sfareasiertolayoffoneindividualthantotellanentirecompanythatyouaregoingoutofbusiness. • Frequently, companieswillhastilycuttheirmarketingandpromotionseffortsduringadifficulteconomy. Thisisactuallytheoppositeofwhatshouldbedone. Whileitmaysaveaninitialamountofmoneyintheshortterm, itwillultimatelyreducepresenceinthemarketplaceandlowerthechanceofacquiringnewbusiness. Keepingyourcompany’snameoutthereindicatesyourdedicationtotheconstructionindustryandshowsthatyou’reremainingstrongandproductivedespitetheeconomicdownturn.

44. Takethisperiodofslowerbusinesstoreviewallofyourexistingcontracts. Fromcontractsforaccountingservicestoinsuranceandequipment, tothevendingmachinesinthebreakroom, renegotiateyourterms. Vendorsmaybemorewillingthanevertoofferlowerprices, betterterms, orfinancinginordertoretainyourbusiness. Thisisespeciallytruewithbanksrightnow. Oftentimes, youcangetabetterrateonaloanorasktohaveratesreducedonanexistingloanifyourefinanceoroffertomoveyourcompany’sdepositstoanewbank.  • Currentandpastclientsmayalsobefeelinguneasyabouttheeconomicinstability. Takethisopportunitytoremindthemofyourofferings. Utilizeyourmarketingmaterials, makephonecallsandevenhostaclientappreciationdinnerordayofgolftotargetkeypeople. Notonlyareyouthankingthemforbeingloyalcustomers, youarecommunicatingloudandclearyourstayingpower.

45. Hireanexpert. Whilemostofthesestrategiescanbeachievedwithoutoutsidehelp, hiringanexperttoevaluateyourbusinessplanandofferprocessandworkflowimprovementsmightbethebestwaytodevelopalong-termstrategicgameplantostayingsuccessful.

46. For the purpose of the decision put above problems taking into account experience of the developed countries employees of chair of economy and management at the enterprises of chemical-wood complex of BSTU and VTUG have prepared the application for financing of the international project «the Sustainable development through training and an exchange of innovations in building and real estate sector». Creation of the international alliance of the universities carrying out of a research part of the project including definition of factors which form innovation sectors will be which problems is planned. The considerable attention will be given revealing of organizational, contract and financial structures which make active innovations and constant training that is weak researched area even in the developed countries.

47. The educational part of the project is aimed at overcoming of mental restrictions and resistance to innovations by means of remote training. And, at last, creation of the virtual centre of support of innovations in sector of building and the real estate, the creation aimed at activization and distributions of innovations, cooperation development, rendering of consulting and research services is provided.

48. We invite partners for the new projects (information about programme is on the web-site www.eu.baltic.net). • You are also invited to participate in the international conference «ECONOMY, VALUATION AND MANAGEMENT OF REAL ESTATE AND NATURAL RESOURCES», which will be held at the Belarusian State Technological University, Minsk, APRIL 28-30, 2010. www.bstu.unibel.by • inform@bstu.unibel.by or siniakn@mail.ru