North Korean Economy Watch

The Nautilus Institute has published an interesting paper on energy infrastructure in the DPRK’s initial four special economic zones: Rason, Hwanggumphyong, Kaesong, Kaesong, and Kumgang.

Here is the publication information and  a link:

“Supplying Energy Needs for the DPRK’s Special Economic Zones and Special Administrative Regions: Electricity Infrastructure Requirements”
Nautilus Institute
Roger Cavazos & David von Hippel
2014-8-19

Here is the introduction:

The Democratic Peoples’ Republic of Korea (DPRK) uses special economic zones as a mechanism for engaging in commercial activity with other nations without substantially converting its economy to a market model; earning hard currency while reducing some of the social and political risks associated with a broader opening of the DPRK economy. The DPRK recently announced its intent to increase the number of Special Designated Zones, including Special Economic Zones (SEZ) and Special Administrative Regions (SAR) in the country by fourteen.[1] In most cases, these Special Designated Zones (we will use “Special Zone”, or “SZ”,as the generic term in this Working Paper to apply to Special Designated Zones) will require energy supply (and demand) infrastructure that is now missing, or insufficient, at all existing and proposed Special Zone sites. Even though past is not prologue—and the mechanisms for supplying energy needs to new SZs may be different than those used in the past, this paper seeks to briefly describe already existing Special Zones in terms of their present energy requirements. Present requirements provide rough estimates of the energy requirements of the newly proposed zones. Specifically we examine: the Rason Special Economic Zone and Special Administrative Region, the Hwanggumphyong Special Economic Zone, the Wihwado Special Economic Zone, the Kumgang Mountain Tourist Area, and finally, the Kaesong Industrial Zone. These specially designated zones ideally contribute to economic development in North Korea as well as provide economic benefits to the Chinese and Russian provinces bordering North Korea. Chinese plans to resuscitate and/or invigorate the economies of their three Northeast provinces bordering North Korea would certainly be moved forward by trade with a richer North Korea and access to strategic North Korean ports just across the border. Although this paper does not cover Russian plans, the motivations for Russian investments in North Korean SZs are likely similar—the desire to boost the economies of the areas of the Russian Far East that adjoin the DPRK, and to improve access to markets in Asia.

There is a limited but growing amount of information available to understand how these Special Zones are defined by North Korean policy, how they are currently faring in terms of economic performance, and what future zones will likely require in terms of energy usage. There is also a growing body of rules and regulations by which North Korea and China plan to govern these zones. Except for the Kaesong industrial complex, it appears that all these zones are significantly short on the energy infrastructure necessary to supply their modest current demands, let alone any future projected demands. North Korea’s decision to declare several such zones in North Korea’s interior may possibly indicate a desire to stitch together North Korea’s electrical transmission and distribution networks which are currently more a patchwork of regional grids rather than a unified national grid. Previous Special Zones have always been on or near North Korea’s periphery. Because previous zones were located on the DPRK’s frontiers, they were largely able to “plug in” to already developed electricity transmission and distribution systems on the other side of the border (in China, Russia or South Korea). While we present no specific calculations here, the cost to renew the DPRK’s entire transmission and distribution (T&D) system will certainly cost billions to tens of billions of dollars which could consume on the order of 10 percent or more of North Korea’s GDP for 5 to 10 years, assuming, as estimated by Republic of Korea (ROK) sources, that North Korea’s GDP is in the neighborhood of 40 billion dollars. The costs of T&D renewal are thus well beyond anything North Korea is likely to be able to afford to do in the short-term on anything but a piecemeal basis.

Despite gaps in our knowledge of how Special Zones in the DPRK have formed and operate or will operate, there is a substantial amount of information available from English, Chinese and Korean-language sources describing the basic plans for investment and the businesses that North Korean, Chinese, and in some cases Russian partners hope to develop in some Special Economic Zones. What is missing from the plans for which information is available, however, are detailedplans for building the energy infrastructure required to support the amount of economic activity (in factories, ports, hotels, workers quarters, and other elements of the SZs) envisioned. The electricity infrastructure required to support the economic plans is modest by most industrial standards. The existing infrastructure in most of the SZs, however, is grossly inadequate, and thus will require significant international investment to allow the SZs to operate as planned.

Investing in SZ infrastructure is likely to be more complex than a typical industrial investment. Sources of investment funds for SZ infrastructure could include businesses from a number of nations, and/or government or multilateral funds. Each potential lender/investor will have its own criteria for deciding on whether a given investment is reasonable or too risky. In theory, involving a number of different actors from different nations in DPRK SZ infrastructure investments would help to diversify the risk borne by any given company or nation, and to create a broader constituency for working with North Koreans using business practices that comply with international law and standards. In part, a broader constituency of coordinated investors could also help to discourage the “rent-seeking” by officials that is often a part of projects in the DPRK (and in many other countries). Because the amount of infrastructure-building required is high, there is significant potential for illegal rent-seeking, that is, for example, for DPRK authorities to inflate the price of “surveys” or permits, or the cost of securing import rights for equipment needed for the SZs, in order to gain personally from the transaction.

Working conditions in SZs will be another area of concern for investors and for foreign firms seeking to operate facilities in new or existing SZs. Anecdotal reports suggest that industrial facilities in general in the DPRK tend to operate with limited evident concern for worker safety. In the absence of pressure from investing companies, it is also likely that working conditions will remain poor and dangerous, as there does not appear to be a significant set of DPRK regulations related to industrial safety. Nor, for that matter, does there appear to be a well-established and well-funded government body dedicated to establishing, monitoring and enforcing industrial safety regulations.

This paper describes several of the Special Zones now operating in or in the advanced planning process in the DPRK, together with what is known about plans for their development. For each, it provides a description of the likely energy requirements, based on what can be determined regarding planned activities at each site, and examines adjoining energy infrastructure to identify probable degrees of energy shortfalls that foreign investors, working with DPRK counterparts, will need to overcome. Some of issues and policies that policymakers inside and outside of the DPRK will need to consider in order to arrange for the financing and construction of the requisite infrastructure to operate the SZs.

You can download the PDF here.