MOFAT DELIVERS NONPAPER ON KIC EXPANSION

C O N F I D E N T I A L SEOUL 001189

SIPDIS

SIPDIS

NSC FOR CHA

E.O. 12958: DECL: 04/24/2017
TAGS: PREL MNUC EAID KS KN
SUBJECT: MOFAT DELIVERS NONPAPER ON KIC EXPANSION

REF: A. SEOUL 634

B. SEOUL 1175

Classified By: A/DCM Joseph Y. Yun. Reasons 1.4 (b/d)


1. (C) In an April 23 meeting with A/DCM, MOFAT
Director-General for North American Affairs Cho Byung-jae
passed a nonpaper that says, given the February 13 "Initial
Actions" agreement, the ROKG intends to resume efforts to
expand development of the Kaesong Industrial Complex (KIC),
which had been suspended since September 2006. The nonpaper
states that the ROKG plans to announce a sale of 1.77 million
square meters (437 acres) of KIC land at the end of April and
to select tenant companies in late June, with the expectation
that some firms could start factory operations as soon as
year-end. The nonpaper, written in the form of talking
points, also expresses ROKG appreciation for the USG's
understanding. Cho opined that Unification Minister Lee
Jae-joung on February 20 (ref a) had announced his view that
resumption of the expansion plan should begin by late March
or mid-April, so this plan should not be considered entirely
new.


2. (C) A/DCM said he would convey the nonpaper to the
Department. Speaking informally, however, he questioned the
timing of the announcement. Given ROKG assertions that it
wanted inter-Korean dialogue to remain "one-half step behind"
progress in the Six-Party Talks, including Cho's earlier
remarks that the ROKG had just linked rice aid with DPRK
fulfillment of its denuclearization obligations (ref b),
A/DCM expressed skepticism that a significant expansion of
the KIC at this time was consistent. Cho replied that this
plan would take time to implement and therefore could be
reviewed later depending on DPRK actions. See paragraph 3
for the full text of the nonpaper.

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TEXT OF NONPAPER
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3. (U) The full text of the nonpaper titled "The Plan for
the Sale of the Remaining Lots in the 1st Development Area at
the Kaesong Industrial Complex" follows:


1. Overview

We plan to announce the sale of the remaining lots in the
first-stage developmental area.

--A total of 1.77 million square meters at the end of this
April.

Originally, the sale of the lots was to be implemented in
three steps from June 2006 until the end of 2007.

--However, the sales have been delayed by North Korea's
missile launch and nuclear test.

Fortunately, with the efforts of and close cooperation
between the participating countries in the Six-Party Talks,
the agreement "Early Implementation Measures for September 19
Joint Declaration" was reached.

--Considering the agreement above and other circumstances
calling for the early sales of the lots, we plan to announce
the sale at the end of this April.

Many small and medium-sized companies, with intentions to
move into the KIC, are requesting an early sale of the lots.

--With the completion of the construction of the
infrastructure (electricity transformer station, water
supply, and wastewater treatment facilities) in the first
half of this year, the lot sale needs to be followed in the
aspect of utilizing those facilities.

--Korea Land Corporation, the developer and host of the lot
sale, has been continuously requesting the sale to begin
while expressing its financial losses caused by the delay of
the sub-division sales since last year.
After the public announcement of the lot sale at the end of
this month, the tenant companies will be selected at the end
of June through necessary procedures. It is expected that
some companies could be able to start factory operations
around the end of this year or at the beginning of next year.


2. The Detailed Plan for the Sale

The lot sale will be announced publicly in the main
newspapers and on the website of Korea Land Corporation at
the end of April.

--The total area: 1.77 million square meters.

--The lots on sale are the lots for factories (1.18 million
square meters, 128 enterprises),apartment-style factory
complex (1560,000 square meters, 7 apartment-style
buildings),cooperation complexes (133,000 square meters, 9
complexes) and lots for foreign enterprises (110,000 square
meters, 6 lots).

--Apartment-style factory complex has 7 apartment-style
factory buildings, each housing 30-40 small companies.

--Cooperation complexes will house 3-4 companies for each
complex with nine (9) complexes, so a total of 27 to 36
companies could move in.

--Leading enterprises are for those companies who need lots
with minimum 30,000 square meters and have more than USD 7.52
million (7 billion won) as their capital fund. Also, a
leading enterprise has the capacity to move into the KIC.

--Foreign enterprises: Foreign enterprises are those
companies which are South Korean corporations. Also these
enterprises should have more than USD 53,763 (50,000,000
Korean won) as an investment fund and foreign investors have
more than 50 percent of share holdings with voting rights or
50 percent of the sum total of the investment.

The Holder of the Right for the Lot Sale: Korea Land
Corporation (The Developer for the first stage development).

Post Schedules after the public announcement of the lot sale.

--Selection of the tenant companies: About 2 months after the
public announcement of the lot sale.

--Factory construction for the tenant companies: Possible
from the latter half of this year.

--Factory operation: At the earliest, some enterprises could
start operating their factories from the end of this year or
at the beginning of next year. All tenant companies will be
able to start operations by 2009.


3. Taking Out of Materials Including Factory Equipment

Inbound and outbound products related to the KIC should not
be used or transferred for other purposes and the transfer of
the strategic material technology.

--In times of the transfer of the strategic material
technology, South Korea will suffer the most. On this line
of thought, we have established and are operating a prior and
post control system for the thorough inspection of the cargo.

With active cooperation from the United States, we got an
approval of EAR re-export related to the RFID system
equipment and the communication equipment at the KIC.

If any production equipment for the tenant companies at the
main complex of the first-stage developmental area should be
regulated under the EAR, we will let the companies process
their production equipment under the related procedures of
EAR.

Please inform us if there is any change in the EAR
regulations related to the possible progresses in the
U.S.-North Korea relations.

4. The Cooperation Between South Korea and U.S.

With the close cooperation between South Korea and U.S., the
project of developing the KIC has been implemented.

--We would like to express our appreciation for the
understanding and help of the United States.

Throughout the further development process of the KIC, the
South Korean government will have close discussions with the
U.S. government on the transportation of cargo and share the
related information. END NONPAPER.
STANTON