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Design of Infrastructure Design of Infrastructure Development in North Korea: A Development in North Korea: A Practical ApproachPractical Approach

March 2008

Kim, Won Bae

KRIHS

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1. 1. Rationale for Development Rationale for Development AssistanceAssistance 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

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2. 2. Preconditions for Infrastructure Preconditions for Infrastructure AssistanceAssistance 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.

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3. 3. The importance of infrastructure The importance of infrastructure in the North Korean economyin 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

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3.1 Status of infrastructure in North Korea

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 portsAirports: 33 airports but only one international airportEnergy: Dilapidated facilities with inefficienciesCommunication: Networks centered on Pyongyang, mostly manual exchange

system

Source: NSO. 2005. 「 Comparison of South and North Korea’s Socio-Economic Profile 」 .

Type S. Korea N. Korea South/ North ratio

Port capacity

53,278 3,690 14.4

Road & railRoad Rail Road Rail Road Rail

100,278 3,374 25,185 5,235 4.0 0.6

Generation capacity &

volume

Capacity

VolumeCapacit

yVolume

Capacity

Volume

5,996 3,421 777 206 7.7 16.6

(Units: 10,000 ton, Km , 10,000kW, 100 million kWh)

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3.2 3.2 Assessment of Infrastructure in Assessment of Infrastructure in the Norththe 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

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4. 4. Demand for InfrastructureDemand for Infrastructure

Three types of demandsType I: Bilateral exchanges such as SK-

NK and NK-ChinaType II: Transit trade such as China or

Russia using NK transport facilities to trade with third countries

Type III: Domestic demand

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4.1 4.1 Demand AssessmentDemand Assessment

Demand Type I Type II Type III

Transport Existing in a few cross-border areas

Mainly in Rajin area

Not strong yet

Energy Existing in a few cross-border areas

Russia’s interest area

Badly needed for industrial production and daily life

Communication Existing in a few cross-border areas

Emerge in the long run

Needed in major cities

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5. 5. Practical Approach to InfrastructurePractical 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

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5.1 Interests in Infrastructure 5.1 Interests in Infrastructure Development Assistance by CountryDevelopment Assistance by Country

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&UNNuke, international norms

Conditional, loans & special funds

Responsible member

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5.2 5.2 Inter-Korean Projects in progressInter-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

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5.2.1 Projects suggested by 2007 Inter-5.2.1 Projects suggested by 2007 Inter-Korean SummitKorean Summit

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5.3 5.3 China-N. Korea ProjectsChina-N. Korea Projects under under discussiondiscussionRajin port developmentRajin-Hunchun roadNew bridge over the Aprok riverPyongyang thermo power plantMost of these projects are related to

China’s needs and some are packaged with natural resources development in NK

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5.4 5.4 Russia-N. Korea ProjectsRussia-N. Korea Projects under under discussiondiscussion 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

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5.5 5.5 Problems of Bilateral ApproachProblems of Bilateral Approach

Rent-seeking by Pyongyang regimeUnnecessary competition and

duplication of efforts by neighboring countries

Fragmented projects without coordination and loss of efficiency

Not conducive to forging regional cooperation in NEA

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6. 6. Economic Justifications for Economic Justifications for Infrastructure Development 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 1When NK embarks major economic

reforms and opening, BC ratio will increase due to the rise of inter- and intra-country demand for infrastructure

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7. 7. Basic Directions for Infrastructure Basic Directions for Infrastructure BuildingBuilding 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

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7.1 7.1 Basic Design for Infrastructure 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

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7.2 7.2 Phased ApproachPhased 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

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7.3 7.3 Reasons for Phased ApproachReasons 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

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7.4 7.4 H-Design InfrastructureH-Design Infrastructure

1st stage

남포

신의주

원산

청진

라진

평양

서울

고성개성

금강산

단동

션양

옌지핫산

2nd stage

남포

신의주

원산

청진

라진

평양

고성개성

금강산

단동

션양

옌지핫산

함흥

강릉인천

부산

목포 광양

서울해주

서울

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8. 8. Lifting up the Economy with Lifting up the Economy with Four CornersFour 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

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8.1 8.1 Reinventing the Four CornersReinventing 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

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8.2 8.2 Two Additional Growth PointsTwo 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

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8.3 8.3 Assumptions in the H-designAssumptions 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

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8.4 8.4 Corresponding industrial Corresponding industrial development in the Northdevelopment 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)

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9. 9. Selecting Priority ProjectsSelecting 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

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9.1 9.1 Selection Criteria for Priority Selection Criteria for Priority ProjectsProjects 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)

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9.2 9.2 Priority Projects and AssessmentPriority Projects and Assessment

Projects Criteria

1st phase C1 C2 C3 C4 C5 C6 C7 Remarks

Gaesong industrial park (1st phase) H (type I) H H L H L M Under const.

Electricty to Gaesong H (type I) H H L H L M Under consideration

Electricty to Guemgangsan H (type I) H H L H L M Under consideration

Rajin port renovation H (type II) H L H H H H Intern. Consortium

Rajin-Wonjeongri road H (type II) H L H H H H Intern. Consortium

Rajin-Namyang rail renovation H (type II) H L H H H H Intern. Consortium

Khasan-Rajin rail renovation H (type II) M L H H H M Intern. Consortium

Sonbong oil refinery H (type I) H L M H H H NK-Russia

Dandong-Shinuiju new bridge H (type I) H L H H H H NK-China project

Shinuiju-Anju highway M (type I) M L H H M M 3 way cooperation

Shinuiju free zone H (type I & III) H L H H M M Intern. Consortium

Electricity from Dandong to Shinuiju M (type I & III) H L H H H M 3 way cooperation

Backbone communication facilities M (type I & III) H H L M L L NK-SK

H: high, M: medium, L: low

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9.2 9.2 Priority Projects and AssessmentPriority Projects and Assessment

Projects Criteria

2nd phase

Gaesong-Pyongyang highway H (type I) H H H M L M NK-SK (+ IFIs)

Rajin-Pyonggang rail renovation H (type I & II) M H H H H M 3 way cooperation + IFIs

Seoul-Shinuiju rail renovation H (type I & II) M H H M H M 3 way cooperation + IFIs

Rajin-Wonsan road renovation H (type I & III) M H L M M M NK-SK (+ Japan?)

Oil pipeline from Nakhodka to Chongjin H (type II & III) M L H H H L multilateral cooperation

New power plants & distribution networks H (type III) H H L H M L multilateral cooperation

Vladistok-Chongjin electricty H (type III & II) H L H H H M 3-way cooperation

Nampo port expansion & high-tech zone H (type III) H M L H L H NK-SK (+ IFIs)

Wonsan port renovation & shipbuiling M (type I & III) H M L H L M NK-SK (+ Japan?)

Pyongyang-Wonsan highway M (type III) M M H H L M NK-SK (+ Japan?)

Gaesong international enterprise zone H (type I & III) H H L L M H Private firms

Guemgang-Seorak int. tourist zone M (type I & III) H H L M M M Intern. Consortium

Sockcho-Wonsan road M (type I & III) M H M M L M NK-SK

Mobile communication & data transmittal H (type III) H H H M H H multilateral cooperation

H: high, M: medium, L: low

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9.2 9.2 Priority Projects (1Priority Projects (1stst Phase) 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

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9.3 9.3 Catalyst Projects 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

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9.3.1 9.3.1 Tumen River AreaTumen 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

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9.3.2 Crude Oil Delivery thru 9.3.2 Crude Oil Delivery thru RailRail

- 56km rail renovation from Khasan to Rajin costing about $ 200 mil.

- Russia supplies crude oil and imports refined products

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9.3.2 Sinuiju Special Zone 9.3.2 Sinuiju Special Zone

-Special zone, new bridge, and increased electricity supply from Soopoong dam

- costing about $700 mil.

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10. 10. Investment Needs for Investment Needs for Infrastructure ConstructionInfrastructure 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)

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10.1 10.1 Public Capital MobilizationPublic 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

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11. 11. Institutional Arrangements for Institutional Arrangements for Infrastructure ProjectsInfrastructure 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

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11.1 KIEDO Structure11.1 KIEDO Structure

KIEDO

ROK: Chair & Secretariat

IFIs & IOs

Private funds/firms

EU & other Countries

Industry & economy

Energy

Transport & comm

Environ-ment

Training

6 PT members

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10.1 10.1 Institutional Arrangement for Institutional Arrangement for the 1the 1stst Phase Phase

Infra Infra building building in NKin NK

Private Firms/NGOs

KIEDO

Inter-Korean coopera-tion

Other bilateral dev. assistance

US

Japan

S. Korea

EU +

China & Russia

6-Party Talks

TRADP

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10.2 10.2 Institutional Arrangement for the Institutional Arrangement for the transition between 2transition between 2ndnd and 3 and 3rdrd Phase Phase

Inter-Korean Coopera-tion

Japan’s ODA

Other bilateral dev. assistance

World Bank-led Consultative Group

Project financing

Special fund

KIEDOKIEDOInfra Infra building building in NKin NK

6-Party Talks

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10.2 10.2 Institutional Arrangement for the Institutional Arrangement for the 3rd Stage3rd Stage

Inter-Korean Coopera-tion

Bilateral dev. assistance

Project financing

NEADB

NEAIDONEAIDOInfrastructInfrastructure ure building building in NK & in NK & NEANEA

NEA Security Organization

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11. Remaining Issues11. Remaining Issues

Needs assessment reflecting NK’s reality and priorities

Synchronizing with NK’s economic reform and opening policy

Coordinating bilateral projectsSetting up a channel for establishing

KIEDO in the 6PT

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Thank you for your attentionThank 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