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Summary of the Approval of the Cooperative Project

ROK Ministry of Unification
2004-04-23

1. Project Summary

¡à Land Development around Gaeseong city & Panmun-gun (20 million pyong or 66 million m2)

­Industrial Complex: 8 million pyong (27 million m2)

­Host City (Residential, Commercial & Tourist Areas): 12 million pyong (39 million m2)

­The industrial complex will be developed in three stages. In the first stage, 1 million pyong (3.3 million m2) of lot will be developed.

¡à Industrial Complex: Three-Stage Development Plan

­First Stage (1 million pyong or 3.3 million m2): Industrial complex for labor-intensive SMEs

­Second Stage (2 million pyong or 6.6 million m2): Build world-class exporting base

­Third Stage (5 million pyong or 17 million m2): Compound industrial complex for heavy chemicals and various industrial facilities

¡à 1st-Stage Development Summary

­Developer: Korea Land Corporation (KLC) & Hyundai Asan Corporation

(The KLC will assume the leading role in the joint project)

­Project Cost: approx. 220.5 billion won (109.5 billion won for infrastructure)

­Around 250 companies will move in from 2006.

Note: 10,000- pyong (33,000 m2) site for a model complex (for about 10 companies) will be completed in June 2004.

¡à Major Progresses

¡à Project Timetable

¡à Project Structure

¡áSouth Korean Operators: Joint development between the Korea Land Corporation & Hyundai

¡áROK Government: The Ministry of Unification (MOU) coordinates and supervises the project under consultation with other relevant government agencies.

­The Gaesong Industrial Complex Support Group (tentative name) will be organized, and will i) establish and coordinate major plans for the Gaesong Industrial Park development project; ii) supervise support measures for the management institution of the industrial complex; iii) implement support measures for companies operating in the complex, etc.

Note: Composed of private-sector experts and government officials (Ministry of Construction & Transportation, Ministry of Commerce, Industry & Energy, etc.), the "Support Group" will serve as a trans-governmental supporting agency, to be established under the Ministry of Unification.

¡áNorth Korea (Central Guidance Agency): i) Designates developers; ii) supervises the industrial park development project; iii) establishes detailed enforcement regulations of the Laws on the Gaesong Industrial Complex; iv) guarantees the provision of manpower, water and materials; v) sells the products manufactured in the industrial complex in North Korea; vi) carries out tax management, etc.

­Management Institution: i) Approves the establishment of companies, registers them and approves their operations; ii) approves and inspects construction works; iii) manages infrastructure; and iv) issues official documents, e.g. industrial park access passes, automobile passes, building registration documents.

2. Project Significance

¡à Inter-Korean Cooperative Project creates a win-win situation for both Koreas

¡áSouth Korea's capital and technology will come together with North Korea's land and manpower, bringing mutual benefits.

¡áSouth Korean SMEs suffering from weakened competitiveness will utilize the industrial complex as their manufacturing base, realizing a reasonable division of labor between the two Koreas.

Economic Effects of the Gaesong Industrial Complex Development Project

Source: Analysis of the Construction & Economy Research Institute of Korea

¡áThe industrial complex will grow into a logistics hub linking the two Koreas and serve as the heart of inter-Korean economic cooperation that leads the way in building a single economic community.

Note: Construction is in progress to link Seoul and Sinuiju with the aim of completing the Gyeongui Highway by the first half of this year, and the Gyeongui Railway by the end of the year. At present, negotiations are continuously underway with the North regarding the opening date.

¡à Promotes Inter-Korean Relations

¡áIncreases the economic interdependence between the two Koreas, and lays the foundation for stable development of inter-Korean relations and co-prosperity.

¡áLays the groundwork for building a single economic community based on massive exchanges of human resources and economic cooperation.

¡áPeacefully utilizes the nearby areas of the DMZ and thereby contributes to easing military tensions.

¡áContributes to creating favorable conditions for the North to change and open its boundaries, as well as for resolving the nuclear issue in a peaceful manner.

¡à Contributes to ROK Economic Growth

¡áOffers new opportunities for SMEs that have been suffering from high-cost production structures, etc.

Note: South Korean companies appreciate Gaesong Industrial Complex's competitiveness such as geographical location, low labor cost, low parcel-out cost, and others.

¡áEnables SMEs to efficiently use their facilities, and replace labor-intensive products with imported goods.

¡áImproves the international credit standing of the Korean economy through active inter-Korean economic cooperation and eased tensions.

¡à Contributes to Easing North Korea's Economic Difficulties

¡áEnables the North and its people to earn wages, sell raw and supplementary materials, collect transportation fees, and obtain foreign currency when the industrial complex is constructed and in operation.

¡áThe North will share in the technology and business know-how of the South, and modernize the infrastructure (railways, highways, etc.) near the industrial complex, all of which raises the possibility of developing industries related to the complex.

3. Feasibility Study

¡à Potential for Success

¡áThe success of the project depends on whether: i) the authorities of the two Koreas actively implement policies and support measures; ii) the industrial complex secures competitiveness; iii) South Korean SMEs are willing to move into the complex, etc.

¡áA new growth engine can be created if we maximize the advantages of the complex's geographical location, i.e. the metropolitan areas support the industrial complex, convenient logistical accessibility, etc.

¡à International Competitiveness: Favorable Investment Environment

¡áGeographical Location: Proximity to metropolitan areas (1 hour to Seoul, 2 hours to Pyongyang), supporting cities (Seoul, Gaesong), logistics base already in place (Incheon International Airport, Incheon Port), etc.

¡áBusiness Environment: Minimum wage of 57.5 dollars per month (yearly wage increase rate is less than 5%), autonomous labor management, low tax rates of 10-14% per year guarantee profits, and infrastructure (electricity, telecommunications) is similar in quality with that of the South.

¡áBusiness Stability: Agreements on communications, customs and quarantine, a transit agreement, nine subordinate regulations of the North and others warrant free corporate activities.

¡áParcel-Out Costs: Parcel-out costs will be settled under 150,000 won due to the land leasing cost of 1 dollar per m2 , governmental support of infrastructure, etc.

Parcel-Out Costs of Overseas Industrial Complexes                 (In 1,000 Won per Pyong)

¡à Obstacles

¡áPossible negative impact of: the North Korean nuclear issue, US-DPRK relations, inter-Korean relations, unforeseen extraordinary incidents during the project, etc.

¡áPossible business obstacles stemming from the fact that North Korea lacks experience in running industrial complexes, some poorly run institutional devices, etc.

¡áSome foreseen difficulties arising from the problem of marking the place of origin on products made in the industrial complex, marketing for these goods, bringing strategic materials and other valuable resources into the industrial complex, etc.

¡áThe government plans to spare no effort in preventing or minimizing causes of the aforementioned obstacles. It will:

­Move forward in improving inter-Korean relations, realize stability on the Korean Peninsula, resolve the nuclear issue and engage in other efforts to foster peace.

­Continuously urge the North to resolve the nuclear issue as soon as possible, using inter-Korean channels of dialogue.

­Closely consult with the international community to resolve the problems of marketing products made in the industrial complex, transporting facilities and materials in and out of the area, etc.

4. Government Support Plan

¡à Support Infrastructure Construction Costs (Reduction of Parcel-Out Costs)

¡áProvide funding for the construction of an internal infrastructure (Water, wastewater, waste materials) and so forth at a level equal to that of domestic industrial complexes.

­Spend 109.5 billion won of the Inter-Korean Cooperation Fund. For 2004, 47 billion won has been secured.

¡áOffer funds for the construction of telecommunications and electrical resources in accordance with commercial practices and provide long-term loans.

­Considering that the building of an external infrastructure could pose an initial risk, offer long-term low-interest loans.

Note 1: Provide electricity using power distribution methods for the model complex (15,000 kW), and power transmission methods for the completed industrial complex (70,000 kW).

Note 2: Directly connect the communications of South Korea with the Gaesong Industrial Complex and operate such systems (100 wired lines for the model complex, and 10,000 for the completed industrial complex).

¡à Support for Selected Companies

¡áSupport through the Inter-Korean Cooperation Fund

­Offer loans with favorable terms from the Cooperation Fund, and expand credit loans based on companies' assets situated in North Korea.

­Initiate a financial loss support scheme from May 2004 and improve stability of inter-Korean transactions so as to reduce the risk for operators.

¡áEstablish and operate a "Labor Training Center" to retrain North Korean manpower.

¡áProvide information on companies operating in the Gaesong Industrial Complex and strengthen support for other services.

¡áEstablish and operate the Inter-Korean Economic Cooperation Consultative Office to expand direct inter-Korean transactions, economic cooperation, etc.

­Anticipated positive effects include: i) saving time and money required when involving a third party in transactions; ii) reducing business risk of having to do business through an intermediary, etc.

¡áSimplify procedures as much as the current legal framework permits for business-related meetings with North Koreans, visiting the North, bringing materials in and out of the North, approving cooperative projects and so forth.