Design of Infrastructure Development in North Korea: A Practical Approach

1. Design of Infrastructure Development in North Korea: A Practical Approach March 2008 Kim, Won Bae KRIHS

2. 1. Rationale for Development Assistance • To bring North Korea into dialogue so as to seek a peaceful solution for nuclear problems • To induce North Korea to reform by helping the recovery of the North Korean economy • To facilitate inter-Korean economic cooperation and to build an integrated economy in the Korean peninsula • To promote regional economic cooperation and develop infrastructure networks in Northeast Asia

3. 2. Preconditions for Infrastructure Assistance • North Korea must give up its nuclear ambition (the six-party-talks should render development assistance to North Korea) • North Korea embarks economic reforms and opening policy. • North Korea establishes genuine coexistence with South Korea. • North Korea, however, can maintain its polity and retains self-defense capability at least until 2020.

4. 3. The importance of infrastructure in the North Korean economy • Food, energy and transportation are three shortages • Food shortage can be relieved through institutional reform and other measures (UN and NGOs role would be significant here) • Energy shortage needs to be addressed quickly in order to make production activities normal • Transportation is essential for the development of the North Korean economy and it is critical for the integration of North Korea into the regional economy

5. Rail: Composed of east and west lines due to topography, 10 arterial railways Road: Composed of five axes, supplementing the rail system Ports: Underdeveloped and 8 major trade ports Airports: 33 airports but only one international airport Energy: Dilapidated facilities with inefficiencies Communication: Networks centered on Pyongyang, mostly manual exchange system Type S. Korea N. Korea South/North ratio Port capacity 53,278 3,690 14.4 Road & rail Road Rail Road Rail Road Rail 100,278 3,374 25,185 5,235 4.0 0.6 Generation capacity & volume Capacity Volume Capacity Volume Capacity Volume 5,996 3,421 777 206 7.7 16.6 3.1 Status of infrastructure in North Korea (Units: 10,000 ton, Km , 10,000kW, 100 million kWh) Source: NSO. 2005. 「Comparison of South and North Korea’s Socio-Economic Profile」.

6. 3.2 Assessment of Infrastructure in the North • Huge gaps between the South and the North in terms of quantity and quality of infrastructure • Infrastructure stock value of NK is less than 1% of SK according to our estimation • On the whole, North Korea’s level approximates South Korea’s mid 1970s • This poses a great obstacle to the recovery of the North Korean economy and to the construction of infrastructure networks in Northeast Asia

7. 4. Demand for Infrastructure • Three types of demands • Type I: Bilateral exchanges such as SK-NK and NK-China • Type II: Transit trade such as China or Russia using NK transport facilities to trade with third countries • Type III: Domestic demand

8. 4.1 Demand Assessment

9. 5. Practical Approach to Infrastructure • Collaborative approach is more effective • Two or three-way collaboration first under the six-party-talks framework and then multilateral collaboration • Encourage international consortium of public and/or private firms • International financial institutions’ support and private project financing when North Korea embarks on major reforms

10. Country Prerequisites Commitment Motivation S. Korea Nuke, coexistence of S. & N. Korea Already participating Peaceful coexistence U. S. Security issue, human rights, etc. Conditional, indirect participation Security & regional stability China Nuke Already participating Reg. Stability & influence Japan Nuke, missile, abduction Conditional, part of compensation Reg. Stability & econ. interests Russia Nuke Very likely in rail & energy Reg. stability and econ. interests EU Nuke, human rights Conditional, likely thru a multilateral structure Reg. Stability & econ. interests IFI&UN Nuke, international norms Conditional, loans & special funds Responsible member 5.1 Interests in Infrastructure Development Assistance by Country

11. 5.2 Inter-Korean Projects in progress • Inter-Korean cooperation projects include rail and road connections at Gyeongui and Donghae lines, Kaesong industrial park, and Guemgangsan tourism area - 2007 Inter-Korean Summit added a few more projects • Any further infrastructure investments in North Korea require strong economic justifications and national consensus in SK

12. 5.2.1 Projects suggested by 2007 Inter-Korean Summit

13. 5.3 China-N. Korea Projects under discussion • Rajin port development • Rajin-Hunchun road • New bridge over the Aprok river • Pyongyang thermo power plant • Most of these projects are related to China’s needs and some are packaged with natural resources development in NK

14. 5.4 Russia-N. Korea Projects under discussion • Khasan-Rajin rail renovation • Oil delivery through rail and refining at Sonbong • Vladivostok-Chongjin electricity • In the longer term, oil and natural gas pipelines and TSR-TKR connection • Most of these projects are related to Russia’s interest in earning income by exporting oil, electricity and natural gas as well as by using its transport facilities in the RFE

15. 5.5 Problems of Bilateral Approach • Rent-seeking by Pyongyang regime • Unnecessary competition and duplication of efforts by neighboring countries • Fragmented projects without coordination and loss of efficiency • Not conducive to forging regional cooperation in NEA

16. 6. Economic Justifications for Infrastructure Development • In the short run, insufficient demand for most projects except for a few small-scale cross-border transport projects • Benefit-cost ratio unlikely to exceed 1 • When NK embarks major economic reforms and opening, BC ratio will increase due to the rise of inter- and intra-country demand for infrastructure

17. 7. Basic Directions for Infrastructure Building • Multilateral approach combined with bilateral approach • Demand-serving and yet considering the supply-side effects • Flexible approach taking into account of larger issues and changing circumstances • Matching with SK’s long-term territorial development goals

18. 7.1 Basic Design for Infrastructure • H-design composed of four corners (six later) and three transport axes (east, west, and horizontal) to lift up the North Korean economy and connect to the regional economies of NEA • Six pockets of growth points to push the economy forward

19. 7.2 Phased Approach • 1st phase: four corners and partial connection with neighbors • 2nd phase: completion of three axes and six growth points • 3rd phase: completion of networks • Timetable would be 2008-2012 for the 1st, 2013-2020 for the 2nd, 2021- for the 3rd phase. But this timetable may change depending on the conditions to be satisfied or not

20. 7.3 Reasons for Phased Approach • It is assumed that security issues will be resolved one way or another by 2012 • 2012 is the year of presidential election in S. Korea • Even small-scale projects takes minimum of 4-5 years to complete • 2020 is the target year of S. Korea’s 4th territorial development plan

21. 7.4 H-Design Infrastructure

22. 8. Lifting up the Economy with Four Corners • Shinuiju, Kaesong, Guemgangsan, and Rason are the four corners where cross-border exchanges have been occurring • These are natural anchor points to lift NK economy in the first stage and they have a special status • Neighboring countries have some interest in these areas • Bold measures are required to give them sufficient momentum

23. 8.1 Reinventing the Four Corners • Shinuiju: gateway city to China • Kaesong: international enterprise zone (mostly for S Koreans now) • Guemgangsan: international tourist zone (mostly for S Koreans now) • Rason: transit trade center

24. 8.2 Two Additional Growth Points • Nampo: export-processing zone that will be turned into a hi-tech center (esp, environment technology) • Wonsan: a center of logistics and shipbuilding in the east sea rim as well as a hinterland city for Guemgang-Seorak international tourist zone

25. 8.3 Assumptions in the H-design • Even if North Korea takes a bold switchover, its economy would not grow rapidly if major economic reforms are not taken. Furthermore, reforms may not guarantee a success • In this basic design, we assume the best possible scenario, i.e., a successful economic transition t0 t6 t24 Successful reform Failed reform

26. 8.4 Corresponding industrial development in the North • Phases of industrial development in the North are assumed to follow: • Export of light industry goods, primary goods and tourism and transit trade in the first phase (border cities) • Export of selected heavy industry goods with some technology, international logistics, and IT-related services in the second phase (coastal cities) • Export of intermediate goods with knowledge components and knowledge services in the third phase (large cities)

27. 9. Selecting Priority Projects • Given the variable constraints, e.g., political and financial, priority projects need to be identified • Priority projects should satisfy multiple purposes of infrastructure building • Selected projects should play a catalyst role for NEA infrastructure networks building

28. 9.1 Selection Criteria for Priority Projects • Revealed or potential demand (C1) • Economic effects on the NK economy (C2) • Geo-economic integration of the peninsula (C3) • Contributions to regional cooperation (C4) • Ease of acceptance by NK (C5) • Acceptability and willingness of assistance by neighbors (C6) • Possibility of financing (C7)

29. 9.2 Priority Projects and Assessment H: high, M: medium, L: low

30. 9.2 Priority Projects and Assessment H: high, M: medium, L: low

31. 9.2 Priority Projects (1st Phase) • Infrastructure development in the nodal points • Rajin- Hunchun/Khasan road • Rajin-Khasan rail, Khasan-Rajin oil delivery and Sungri petro-plant • Rajin port renovation • Dandong-Sinuiju new bridge & electricity • Vladivostok-Cheongjin electricity • Second stage Kaesong Industrial Park • Anbyun Shipbuilding yard

32. 9.3 Catalyst Projects • For multi-party collaboration Ƹ Rajin-Khasan and Rajin-Tumen rail renovation plus oil delivery, Rajin port renovation and industrial park (costing about $0.5 bil.) Ƹ Sinuiju special zone, new bridge and expansion of electricity supply ($0.7 bil) • Inter-Korean projects Ƹ 2nd phase Kaesong industrial park ($0.5 bil), Mt. Baekdu tourism, Anbyun shipbuilding, and mineral resources development

33. 9.3.1 Tumen River Area • - Rail and road connections among China, NK, and Russia • Rajin as a logistic hub for Tumen River area • TRADP as a useful mechanism

34. 9.3.2 Crude Oil Delivery thru Rail • 56km rail renovation from Khasan to Rajin costing about $ 200 mil. • Russia supplies crude oil and imports refined products

35. 9.3.2 Sinuiju Special Zone -Special zone, new bridge, and increased electricity supply from Soopoong dam - costing about $700 mil.

36. 10. Investment Needs for Infrastructure Construction • Estimates vary depending on assumptions, ranges from $20 bil. to 700 bil. • KRIHS study adopted two methods (ratio of infrastructure stock over GNI and ICOR) • Over 14 year period (2007-2020), estimates for investment needs for infrastructure range between $18 - 42 bil. dollars (1.3 – 3 bil.per year)

37. 10.1 Public Capital Mobilization • $3 - 4 billion possible per year at least for 10 years if NK takes a bold switch-over policy - SK: $1-2 billion - Japan: $1 billion - US: $ a few hundred million - Other six party members: $ a few hundred million - EU and other countries: $ a few hundred million • Compare with the costs of Iraq war

38. 11. Institutional Arrangements for Infrastructure Projects • Maximize the opportunities for collaboration with neighboring countries (i.e., UNDP TRADP) • “KIEDO” (Korean Peninsula Infrastructure & Economic Dev. Org.) can be considered during the resolution process of security issues (in the first phase) • “Special trust fund” can be set up at the World Bank in the second stage to coordinate infrastructure and development assistance to NK • In the long run, ideas of NEADB or NEAIC can be considered for the NEA region including North Korea • Or international financial institutions can be utilized when North Korea meets the requirements

39. KIEDO 6 PT members IFIs & IOs ROK: Chair & Secretariat Private funds/firms EU & other Countries Training Transport & comm Environ-ment Industry & economy Energy 11.1 KIEDO Structure

40. 6-Party Talks KIEDO US Japan S. Korea EU + China & Russia Inter-Korean coopera-tion Infra building in NK Other bilateral dev. assistance Private Firms/NGOs 10.1 Institutional Arrangement for the 1st Phase TRADP

41. 6-Party Talks World Bank-led Consultative Group Inter-Korean Coopera-tion KIEDOInfra building in NK Project financing Japan’s ODA Special fund Other bilateral dev. assistance 10.2 Institutional Arrangement for the transition between 2nd and 3rd Phase

42. NEA Security Organization Inter-Korean Coopera-tion NEAIDO Infrastructure building in NK & NEA Project financing NEADB Bilateral dev. assistance 10.2 Institutional Arrangement for the 3rd Stage

43. 11. Remaining Issues • Needs assessment reflecting NK’s reality and priorities • Synchronizing with NK’s economic reform and opening policy • Coordinating bilateral projects • Setting up a channel for establishing KIEDO in the 6PT

44. Thank you for your attention “Narrow path, thick brush and evening dew will not deter us as long as we believe we are not wrong” From Tao Yuanming