Improvement on the Investment Environment of Khabarovsk Territory 2014 Knowledge Sharing Program II with Russia (Khabarovsk Territory) 2014 Knowledge Sharing Program II with Russia (Khabarovsk Territory)
In Cooperation With Ministry of Economic Development and External Relations of Khabarovsk Territory
Program Director Kye-Hwan Kim, Director, Industrial Cooperation and Globallization Division, KIET
Senior Advisor Dong-Gyu Shin, Former President of NongHyup Financial Group Inc.
Authors Chapter 1. Hak-Ki Kim, Moon-Hyung Lee, Mok Sakong, KIET Chapter 2. Sun-Bae Kim, Research Fellow, KIET
Program Officer Seung-Youb Lee, Researcher, Industrial Cooperation and Globalization Division, KIET
Government Publications Registration Number 11-1051000-000643-01 ISBN 978-89-5992-805-7 978-89-5992-803-3 (set) Copyright ⓒ 2015 by Ministry of Strategy and Finance, Republic of Korea Government Publications Registration Number
Actively engaging in the development of the Far Eastern district, the Russian government makes its primary goal to transfer the Far Eastern district to the advanced manufacturing-based competitive region, which should increase population and raise household income, as well as improve housing conditions and the welfare system. Tasks including building a manufacturing and natural resources processing base, developing agriculture, forestry & fishery sectors, cultivating skilled workforces, support- ing R&D activities, constructing industrial infrastructure (transportation, power, etc.) and establishing a public welfare system are the major challenges to achieving the goal. In December 2014, President Putin signed the federal law entitled “Territories of Priority Development District and Supporting Programs for other Far Eastern Countries.” From 2015, the Project of the Priority Development Territories (TOR) will be enacted. The TOR Project regulates the removal of various restrictive measures, to offer one-stop service and to provide a wide range of tax incentives for investment promotion. President Putin also proposed that the Russian government grant a free-port status to Vladivostok as parts of the development policies in the Far Eastern district.
As described above, the Russian government has been proven to have strong commitments to developing the Far Eastern district. In order to explore sufficient FDI opportunities in the district, how- ever, it seems that many obstacles should be resolved immediately. In particular, poor housing con- ditions, aloft inflation, insufficient transportation infrastructure, high logistic cost, inadequate labor force, regulatory inertia, complex administrative procedure and small-scale marketplace are considered the major problems at present. Given the Russian government’s strong commitments, rapid progress in business environment improvements and the TOR Project, however, the adverse effects due to the aforementioned obstacles are anticipated to be largely relieved. If proceeded as scheduled, the Russian government expects that in the World Bank’s Business Environment Index, the country will be ranked 15th by 2020 vs. 62th in 2015. The 15th place is between Germany (2015: 14th) and Canada (16th), but is ahead of Japan (29th) and France (31th).
Despite growth potentials and continuous talks since the establishment of diplomatic relationships in 1990, Korea and Russia have failed to produce meaningful outcomes in terms of the cooperative developments in the Far Eastern district. Due to the political tensions between the South and North, the Korean-Russian ground transportation network has not opened yet. Lack of skilled workforce, poor business climates, small-sized markets and few historical success stories have been other major factors hindering the Korean-Russian investment relationships in the Far Eastern district. Upon President Putin’s official visit to Korea in 2013, the presidents of both countries announced the Joint Statement. The Statement presented that the two countries agreed to cooperate in the various fields: sharing economic policy experiences for the development of the Far Eastern district, supporting joint launches of infrastructure, agriculture & industrial projects, boosting economic cooperation at the national as well as the regional level, seeking cooperative ways to develop and to utilize the port and logistic systems in the Far Eastern District, enhancing bilateral corporate cooperation in fishery investments for the region and upgrading cooperative relationships between the Korean and the Russian companies in civil aircraft, automobiles and shipbuilding sectors. In the 6th Korean-Russian Business Dialogue held in Seoul, November 2013, President Putin also stressed that the two nations should advance their bilateral relationships towards the strong technological and industrial alliance in the Far Eastern district.
In regards to the joint business between the Korean government and regional governments in the Far Eastern district, the KSP-II Russia project aims to expand the trade and industrial cooperative relationships between the two countries. In detail, the Project puts its primary goal on accelerating the Korean-Russian industrial relationships in the Far Eastern district through sharing of economic policy experiences as agreed upon by the Presidents of the two countries.
In order to find effective ways for expanding economic cooperation, the authorities of the two countries have extended strenuous efforts through professional exchanges. While visiting their Russian counterparties three times, the Korean government officials have engaged in talks with local govern- ments, institutions as well as company executives to explore business opportunities in the Far Eastern district. The Korean delegates have informed the Korean government and Korean companies of accurate information to implement investment projects in the Far Eastern district. They have also presented policy advice to the Russian counterparties for greater investment promotions for the region. For the Russian side, the government officials have visited various Korean institutions such as Invest Korea (the national investment promotion agency), innovation clusters, ports and local governments. The Russian delegates have also had policy consultations with their Korean counterparties to promote bi- lateral investment activities and to expand economic relationships. Hosted by the Russian delegates, the regional FDI fairs have successfully drawn attention from many Korean companies. As described, the KSP-II Russia project is the joint project between the two governments. Under the guidance of the Ministry of Strategy and Finance of Korea and backed by Consulate General of the Republic of Korea in Vladivostok, KIET (Korea Institute for Industrial Economics and Trade) and KOTRA have initiated the Project together with local governments in Russia. Offering full administrative supports and valuable advices, the Russian counterparties have also provided a wide range of in- formation regarding the 2020 Khabarovsk Investment Strategy and the activities of the regional invest- ment promoting agencies.
As a principal writer for this report, Mr. Hak-Ki Kim, Research Fellow at KIET has supervised the surveys for Korean corporates. Mr. Moon-Hyung Lee, Senior Research Fellow at KIET and Mr. Mok Sakong, Research Fellow at KIET have written for the Chinese investment promotion system and the Japanese investment promotion system, respectively. For this paper, we have also been greatly supported by other institutions including KOTRA and had talks with many professionals. In order to effectively assist the bilateral cooperation between Korea and Russia, we have tried to reflect various opinions of the Korean companies herein. The views from the Russian counterparties including local governments, economic research institutions as well as the Russian Chamber of Commerce are also presented in this report.
We hope this report will help the governments of both countries establish beneficial policies for expanding their economic cooperation and implement the sectional agenda as stipulated in the 2013 the Korean-Russian Joint Statement. We will be more than delighted that this report would be an effective tool for the Korean companies to invest in the Russian Far East and be a navigator for the Russian authorities to establish the investment promotion strategy.
Views or opinions expressed herein do not necessarily represent those of the Korean government, KIET or KOTRA.
2014 KSP-II with Russia (Khabarovsk Territory) ························································································ 011 Overview ····························································································································································· 016 Executive Summary ··········································································································································· 027
1. Investment climates in Khabarovsk Territory and corresponding strategies ································ 038 1.1. Investment climates in Khabarovsk Territory ··············································································· 038 1.2. Investment trends in Khabarovsk Territory and their implications ········································ 039 1.3. Arranging legislative environments and improving investment climates ····························· 041 1.4. Investment promotion strategies across the industries ····························································· 042 2. Improving the investment promotion supporting system in Khabarovsk Territory ··················· 047 2.1. Mechanisms to improve investment attractiveness ····································································· 047 2.2. Financial mechanisms for investment promotions ······································································ 049 2.3. Establishing management system for investment promotions and enhancing competencies of local institutions ·············································································· 049 3. Features of investment promotion systems of South Korea, China and Japan and their implications ···················································································································· 051 3.1. South Korea ·········································································································································· 051 3.2. China ······················································································································································· 053 3.3. Japan ······················································································································································· 055 3.4. The implications ··································································································································· 056 4. Opinions on the investment promotion projects in the Far Eastern district and in Khabarovsk Territory ····························································································································· 057 4.1. Opinions on investments in the Far Eastern district and their implications ······················· 057 4.2. Opinions for major investment projects in the Far Eastern district ······································ 061 4.3. Korean companies’ interests to the investment projects as presented by the government of Khabarovsk Territory ····················································································· 062 5. Prospect investment areas and sectoral strategies ············································································· 062 5.1. Launching the Korean-Russian joint innovation cluster project as part of the comprehensive investment promotion strategy ··································································· 063 Contents
5.2. Cooperation and joint research for strategic industries ··························································· 064 5.3. Other prospect sectors and directions for implementation ····················································· 065 6. Collaborative efforts to promote investments in the Far Eastern district ··································· 066 References ··························································································································································· 069
1. Introduction: Background and Objectives ····························································································· 072 2. Theoretical Review: The Case of port development and industry clusters ································· 073 2.1. Major factors to be reviewed on port development ································································ 073 2.2. Factors to be reviewed on industrial cluster ··············································································· 074 3. Highlights of Vanino-Sovetskaya Gavan PSEZ Development Plan ·················································· 076 3.1. Development environment and outline of Vanino-Sovetskaya Gavan PSEZ ························ 076 3.2. Vanino-Sovetskaya Gavan PSEZ major development plan ························································ 078 4. Case of PSEZ development in Korea: Gwangyang Bay Free Economic Zone ····························· 082 4.1. Overview and Conditions of Gwangyang Bay Free Economic Zone ····································· 082 4.2. The district development direction and key industry ································································ 084 4.3. Implications ············································································································································ 085 5. Opinions and Policy Suggestions ············································································································· 086 5.1. Comprehensive evaluation of the Vanino-Sovetskaya Gavan PSEZ ········································ 086 5.2. Short-term development strategy suggestions ··········································································· 087 References ··························································································································································· 094 Contents | List of Tables
[Table 1] KSP-II Activities in Russia ·············································································································· 012 [Table 2] 2014 Demand Survey and Theme Selection for the KSP-II Khabarovsk Territory ········ 013 [Table 3] The Korean Research Team for the KSP-II Khabarovsk Territory and the Consulting Assignments ········································································································· 015 [Table 4] Key Macroeconomic Indicators of Russia ················································································· 017 [Table 5] Key Macroeconomic Indicators in the RFE (1) ······································································· 019 [Table 6] Key Macroeconomic Indicators in the RFE (2) ······································································· 020 [Table 7] Industrial Mix of Gross Value-Added for the Russian Federation ···································· 021 [Table 8] Industrial Mix of Gross Value-Added for the RFE ································································ 021 [Table 9] Industrial Mix of Gross Value-Added across the Regions within the RFE ······················ 022 [Table 10] The RFE’s Trade Volume with South/North Korea, China and Japan ···························· 023 [Table 11] Objectives and Tasks of the Development Plan for the RFE-Baikal ······························· 025 [Table 12] Investment Potential Rankings across the RFE ····································································· 026
Chapter 1 [Table 1-1] SWOT Analysis for Investments in Khabarovsk Territory ················································· 039 [Table 1-2] Major Indicators and Targets to Improve FDI Climates in Khabarovsk Territory ······ 041 [Table 1-3] Preferential Development Strategies and Recommendations for Khabarovsk Territory ··· 042 [Table 1-4] Principles of the Investment Promotion Strategies in Khabarovsk Territory and Corresponding Recommendations ··························································································· 045 [Table 1-5] Establishing Mechanisms to Improve Investment Attractiveness and Major Tasks ···· 048 [Table 1-6] Goals for the Pilot Project of the Korean-Russian Innovation Cluster and the Implementation Strategy ··································································································· 064
Chapter 2 [Table 2-1] Various Tax Benefits of Vanino-Sovetskaya Gavan PSEZ ·················································· 081 [Table 2-2] Russian Far East Regional Trade Volume Status ································································ 088 [Table 2-3] Russian Far East Trade Volume by Item ··············································································· 088 [Table 2-4] Development Plan in the Far East Port ················································································ 089 [Table 2-5] Korea non-Administrative Agency Port Construction Status ··········································· 090 [Table 2-6] Rankings of Major Countries and Russia Trade Clearance ·············································· 092 Contents | List of Figures
[Figure 1] Three Asian Countries’ (South Korea, China and Japan) FDIs into the RFE ················ 023
Chapter 1 [Figure 1-1] FDIs Trends in Khabarovsk Territory ···················································································· 040 [Figure 1-2] 3 Asian Countries’ (Korea, China and Japan) FDIs into Khabarovsk Territory ········· 040
Chapter 2 [Figure 2-1] Relations Map between Port, Hinterland and Foreland ················································· 074 [Figure 2-2] Components of Cluster ············································································································ 075 [Figure 2-3] The Location of the Vanino-Sovetskaya Gavan PSEZ ······················································ 076 [Figure 2-4] International Transport Conditions of Vanino-Sovetskaya Gavan PSEZ ······················ 077 [Figure 2-5] Vanino-Sovetskaya Gavan PSEZ Infrastructure Development Plan ································ 079 [Figure 2-6] Port and Industrial Cluster Development plan of Vanino-Sovetskaya Gavan PSEZ ··· 080 [Figure 2-7] Functions of Fishery Processing Cluster in the Vanino-Sovetskaya Gavan PSEZ ······· 080 [Figure 2-8] Sovetskaya Gavan District Development Plan ···································································· 081 [Figure 2-9] Vanino District Development Plan ························································································ 082 [Figure 2-10] Gwangyang Bay Area FEZ Vision and Development Strategy ···································· 083 [Figure 2-11] Gwangyang Bay Area FEZ District Development Plans ················································· 084 [Figure 2-12] Electronic Customs Clearance Services Map ····································································· 093 2014 KSP- II with Russia (Khabarovsk Territory)
1. Background
Starting from 2013, the KSP-II Russia is now in its second year. While focusing on Primorsky Territory in the first year, the subject regions of the KSP-II Russia have been expanded to Khabarovsk Territory, Primorsky Territory, Kamchatskiy Krai as well as Sakhalin Region in 2014.
KSP (Knowledge Sharing Program) is designed to share South Korea’s economic development experiences with developing countries and help them accomplish their development objectives in various industrial sectors. The KSP-II Russia has focused on the development of policy measures that will help the country carry out its industrial policies more efficiently.
In the meantime, KIET selected two major themes for the KSP-II Khabarovsk Territory; ① how to improve investment promotion environments in Khabarovsk Territory and ② how to enhance investment attractiveness of Khabarovsk Territory under the general policy consulting goal, “Improvement of investment climates in Khabarovsk Territory.”
As a Project Manager for the KSP-II Khabarovsk Territory, Mr. Hak-Ki Kim, Research Fellow at KIET, has been directing collaborate research activities between the South Korean and the Khabarovsk government.
2014 KSP-II with Russia (Khabarovsk Territory) ∙ 011 [Table 1] KSP-II Activities in Russia
• How to reshuffle administrative system for improving investment promotion environments in Russia 2013 • How to strengthen competencies of the Institute of Eurasian Studies, (Primorsky Primorsky investment promotion agency Kookmin University Territory) • Review the 2013-2017 Social and Economic Development Strategy of Primorsky and establish working-out plan
• How to improve investment promotion 2014 environments in Khabarovsk Territory KIET (Khabarovsk • How to enhance investment attractiveness of KOTRA Territory) Khabarovsk Territory
The KSP-II Khabarovsk Territory has been evolving steadily. During a local demand survey and pilot studies between June 16 and June 21, 2014, KIET and the Russian counterparties held a conference for research themes and project schedules. Then KIET hosted a local reporting workshop in Khabarovsk and launched additional pilot studies for the project from September 22 to September 27, 2014,
Given the demand survey results obtained from the Government of Khabarovsk Territory, we also made industrial inspections for prospective local production facilities in November 16~20, 2014. Recently, KIET held a senior policy dialogue and the final reporting workshop in Khabarovsk from February 23 to February 25, 2015.
012 ∙ 2014 Knowledge Sharing Program II with Russia (Khabarovsk Territory) 2. Current status of KSP in Khabarovsk Territory
2.1. Reception of Demand survey and selection of research assignments
As shown in the following table, a demand survey was completed and themes for the implementation of the 2014 KSP-II Khabarovsk Territory were selected.
[Table 2] 2014 Demand Survey and Theme Selection for the KSP-II Khabarovsk Territory
2014 Knowledge Sharing Program II with Russia (Khabarovsk Project name Territory)
• Focusing on the theme of “Improvement on the investment environment of Khabarovsk Territory”, 2014 demand survey were submitted to Consulate General of the Republic of Korea in Vladivostok. (11/27/2013)
Khabarovsk Territory-proposed themes (Demand survey) Proposing Proposed themes ministryReception of • Enhance investment attractiveness of demand I. Khabarovsk Territory (building infrastructures survey Themes for investment promotions and production considered and relevant Ministry of facilities; arranging infrastructures for land details Economic sites & industrial complexes) Development and External Relations of • Strengthen investment promotion in Khabarovsk Khabarovsk Territory (specializing investment Territory promotion agency as well as management organization; launching one-stop servicing investment projects, developing investment projects)
2014 KSP-II with Russia (Khabarovsk Territory) ∙ 013 [Table 2] Continued
• After several reviews for multiple candidate projects presented by the Khabarovsk government, KIET specified sub-topics and working-out titles for the KSP-II Khabarovsk Territory as follows;
Theme ① Theme ② • How to improve investment • How to enhance Themes promotion environments in investment attractiveness Khabarovsk Territory of Khabarovsk Territory • Specializing investment promotion agency and investor management organization • Propose the development Sub- • Improve investment promotion project for the port special topics system (incl. one-stop service scheme) economic zone (PSEZ) in • Study investment promotion Vanino-Sovetskaya Gavan systems at neighboring countries and consider their implications 1) Investment promotion II. 1) Research background and environments and strategy in Selection purpose Khabarovsk Territory process for final 2) Theoretical review focusing 2) Improve investment promotion themes on ports development and system of Khabarovsk Territory industrial clusters 3) Features and implications of 3) Highlights of the PSEZ investment promotion systems of development plan in South Korea, China and Japan Vanino-Sovetskaya Gavan
Working- 4) Opinions for the investment 4) Case study: the South out titles promotion projects of the Korean PSEZ development Russian Far East and Khabarovsk project (Gwangyang Bay Territory Area Free Economic Zone) 5) Prospect areas for investment promotion and sectoral implement strategies in Khabarovsk Territory 5) Opinions and policy 6) South Korean-Russian policy recommendations coordination for encouraging investment promotion in Khabarovsk Territory
2.2. Selection of the research team members
In cooperation with relevant ministries and agencies as well as in consideration of their expertise and working-level experience, the members of KIET research team were selected as shown in [Table 3].
014 ∙ 2014 Knowledge Sharing Program II with Russia (Khabarovsk Territory) [Table 3] The Korean Research Team for the KSP-II Khabarovsk Territory and the Consulting Assignments
Assignments Name Position Project Manager Hak-Ki Kim Research Fellow, KIET Hak-Ki Kim Research Fellow, KIET ① How to improve investment promotion Moon-Hyung Lee Senior Research Fellow, KIET environments in Khabarovsk Territory Mok Sakong Research Fellow, KIET ② How to enhance investment Sun-Bae Kim Research Fellow, KIET attractiveness of Khabarovsk Territory
2.3. Demand Survey and Pilot Study
While conducting a local demand survey and pilot studies from June 16 to June 21, 2014, KIET we had a conference with local high-ranking officials and working-level staffs for selecting research themes and arranging project schedules for the KSP-II Khabarovsk Territory. Reflecting the demand survey results, the Russian priorities were largely considered during the conference.
2.4. Local Reporting Workshop and Additional Pilot Study
Revisiting the Russian counterparties including the Khabarovsk government in September 22~27, 2014, KIET held a local reporting workshop and launched additional pilot studies for the project. In order to figure out concrete demands and hear the opinions from the Khabarovsk government, KIET also paid a visit to prospect industrial facilities in relation to the KSP-II Khabarovsk Territory.
2.5. Interim Reporting and Policy Practitioners’ Workshop
Upon the visit of Khabarovsk’s officials to South Korea, KIET held an interim reporting session and workshop for policy practitioners from November 16 to 20, 2014. The Russian officials performed industrial inspections for the Incheon Free Economic Zone and the Incheon International Airport in which the Government of Khabarovsk Territory has keen interests. During the workshop for policy practitioners, the Khabarovsk’s officials also participated in the investment forum for the Four Russian Far Eastern districts hosted by KOTRA.
2.6. Senior Policy Dialogue and Final Reporting Workshop
By hosting a senior policy dialogue and final reporting workshop in Khabarovsk in February 23-25, 2015, KIET delivered its final research results to the high-ranking officials of the Government of Khabarovsk Territory.
2014 KSP-II with Russia (Khabarovsk Territory) ∙ 015 Overview
Hak-ki Kim (KIET)
1. Direction of the Russian government’s economic policies
The objectives of the Russian government’s economic policies are mainly placed on the development of competitive industries and the establishment of diversified, new economic structure encompassing prospect service industry and efficient agriculture & fishery sector. In order to achieve these policy objectives, the Russian government has set the direction of its economic policies towards; (1) lower dependence on resource export-driven industries but higher reliance on technology-driven industries, (2) estab- lishing efficient mechanisms for the economic reform, (3) building sufficient infra- structures across the country, and (4) creating investor-friendly climates, prompting investment activities into high-tech sectors from both at home and abroad, forming favorable business environments for greater capital funding and private investments, etc. Regarding the country’s new economic structure geared into high-tech, knowl- edge-based industries rather than natural resource sectors, the Putin administration has particularly reiterated the significance of enhanced innovation and stronger labor productivity.
016 ∙ 2014 Knowledge Sharing Program II with Russia (Khabarovsk Territory) [Table 4] Key Macroeconomic Indicators of Russia
Unit 2005 2010 2011 2012 2013 Population (end of period) Millions 143.2 142.9 143.0 143.3 143.7
Avg. monthly income per capita RUB 8,088 18,958 20,780 23,221 25,928
RUB Real GDP 21,610 46,309 55,967 62,218 66,755 billions
RUB Industrial production, Mining 3,062 6,218 8,020 8,950 9,748 billions
RUB Industrial production, Manufacturing 8,872 18,881 22,813 25,111 27,133 billions
RUB Industrial production, Agriculture 1,380.9 2,587.8 3,261.7 3,339.2 3,687.1 billions
RUB F/X Reserves 182.2 479.4 498.6 537.6 509.6 billions
RUB Fixed capital expenditures 3,611.1 9,152.1 11,035.7 12,586.1 13,255.5 billions
Consumer prices index % 110.9 108.8 106.1 106.6 106.5
Producer prices index % 113.4 116.7 112.0 105.1 103.7
USD Exports of goods and services 240.0 392.7 515.4 527.4 523.3 billions
USD Imports of goods and services 123.8 245.7 318.6 335.8 341.1 billions
Source : Rosstat, the Russian Statistical Yearbook 2014
2. Counter policy measures against recent economic crisis
It is clear that the Russian economy remained stagnant since 2013. From 2014, in particular, price falls of crude oil and other commodities, the Russia-Ukraine tensions, the economic sanctions and rapid depreciation of the ruble have combined to amplify the economic difficulties in Russia.
Against the backdrop, Prime Minister Medvedev has presented the principles of the Russian government counter policy measures in January 2015. Those included (1) maintaining open-economy mechanism, (2) keeping free convertible currency system, (3) meeting international obligations, (4) securing freedom of corporate activities, (5)
Overview ∙ 017 increasing efforts for energy cost-savings and project efficiencies, (6) intensifying social cohesion, etc. In order to address urgent economic issues, he has also delivered the following economic policy tools; (1) launching import substitution policies for defense, medicine and pharmaceutical, machine tool, oil & gas facilities and food sectors, and modifying industrial supporting policies in the forms of institutional aids for industrial complexes, technological parks, etc. (2) extending export propping measures for IT, nuclear and aerospace sectors, (3) implementing “the National Technology Initiative” which focuses on production of innovative goods, development of manufacturing tech- nologies, utilization of bio & renewable energies as well as production of composite materials.
In addition, the government has made all-out efforts to solidify international relation- ships to cope with the current economic hardships and to enhance competitiveness of the Russian economy. Specifically, it plans to normalize the relationships with EU soon, to strengthen bilateral relationships with neighboring countries via the Eurasian Economic Commission, and to join such multinational cooperative bodies as BRICS, the Shanghai Cooperation Organization, G20, etc. Given the fact that the Asia-Pacific countries stood at one-fourth of the nation’s trade volumes, it seems reasonable that the Russian government has shown keen interests to expand the relationships with the Asia-Pacific region. The Russian government has stressed that Russia’s gearing into the Asia-Pacific region is nothing to do with the western sanctions against the country, but is only based on the economic perspectives.
It is noteworthy that President Putin has proposed “the National Technology Initiative” (национальная технологическая инициатива) in his speech at the Congress in December 2014. As the Initiative focuses on addressing issues the country would face in the next 10-15 years, he has accentuated that corporates, advanced education institutions and research centers across the country should consolidate their capabilities to enhance the national security, to improve quality of life and to develop leading-edge technologies.
3. Industrial mix in the Russian Far East (RFE)
As of 2012, wholesales/retails, transportation equipment & repair services sectors took the lion’s share of 18.2% in the country’s gross value-added. They were followed by manufacturing, mining, real estates/leasing, and transportation/ communication sec- tor, each of which stood at more than 10% of gross value-added of the Russian Federation. But it is revealed that the significance of manufacturing, mining, agriculture/forestry/fish- ery, wholesales/retails/repair service had decreased somewhat between 2005 and 2012, while the contribution of construction, real estates/leasing and other sectors to the nation’s gross value-added had increased over the same period.
018 ∙ 2014 Knowledge Sharing Program II with Russia (Khabarovsk Territory) [Table 5] Key Macroeconomic Indicators in the RFE (1)
Unit: % of the Russian Federation Production Avg. Avg. 01/01/ Avg. (RUB in millions) number monthly Fixed Territor- 2014 nominal of 2012 income assets Electricity, ies Popula- wages, Process- employ- GRP per (RUB Mining, gas, (000㎢) tion monthly ing ed capita millions) mineral water, (000s) (RUB) & Mfg. (000s) (RUB) etc.
Volume 6,169.3 6,226.6 3,285.8 28,929 28,929 37,579 19,383 37,579 2,700,318 8,359,973
RFE total % of the 36.1 4.3 4.8 5.6 6.3 11.27 1.57 5.44 Federation
Republic of 18 0.7 0.7 1.1 31,528 46,542 1 3.47 0.1 1.12 Sakha
Kamchatskiy 2.7 0.2 0.3 0.3 35,371 48,629 0.2 0.06 0.16 0.36 Krai
Primorsky 1 1.3 1.4 1.1 24,343 29,966 2 0.14 0.67 1.24 Territory
Khabarovsk 4.6 0.9 1.1 0.9 29,382 34,132 1 0.44 0.42 1.12 Territory
Amur 2.1 0.6 0.6 0.5 24,671 30,542 0.6 0.51 0.08 0.61 Region
Magadan 2.7 0.1 0.1 0.2 42,463 57,121 0.2 0.55 0.01 0.27 Region
Sakhalin 0.5 0.3 0.4 1.3 39,971 49,007 1.1 5.73 0.1 0.41 Region
Jewish autonomous 0.2 0.1 0.1 0.1 20,417 27,358 0.1 0 0.01 0.07 district
Chukotka autonomous 4.2 0.04 0.05 0.1 52,695 68,261 0.1 0.36 0 0.24 district
Source : Rosstat, 2014 regional social-economic indicators in Russia (compiled statistics)
Overview ∙ 019 [Table 6] Key Macroeconomic Indicators in the RFE (2)
Unit: % of the Russian Federation Fixed Gross Agricultural Retail, Hous- capital production Distri- Tax revenue Const- ing expen (RUB in billions) bution Exports Imports ruction area diture Animal ㎡ (RUB Federal Total Crops (000 ) Total (RUB products billions) budget billions)
Volume 110.8 57.2 53.7 2,173.3 922.7 814.5
RFE % total of the 3 3 3 5.6 3.1 3.9 3.32 0.61 6.1 5.4 3.9 Federation
Republic of 0.6 0.4 0.8 1.1 0.6 0.6 0.65 0.09 1.5 0.9 0.1 Sakha
Kamchatskiy 0.2 0.2 0.2 0.3 0.1 0.18 0.19 0.05 0.2 0.1 0 Krai
Primorsky 0.8 0.9 0.6 1 0.9 1.05 0.66 0.19 0.9 0.6 2.7 Territory
Khabarovsk 0.5 0.5 0.5 1.1 0.5 0.89 0.5 1 0.3 0.3 Territory
Amur 0.6 0.6 0.6 0.5 0.5 0.5 0.29 0.03 0.9 0.1 0.2 Region
Magadan 0 0 0 0.3 0.02 0.1 0.09 0.2 0.1 0.1 Region
Sakhalin 0.2 0.3 0.2 1.2 0.4 0.48 0.85 0.64 1.3 3.2 0.4 Region
Jewish autonomous 0.1 0.1 0.1 0.1 0.09 0.08 0.04 0.01 0.1 0 0 district
Chukotka autonomous 0 0 0 0.02 0.001 0.02 0.06 0.1 0 0.1 district
Source : Rosstat, 2014 regional social-economic indicators in Russia (compiled statistics)
At the regional level, mining contributed most (27.1%) in gross value-added of the RFE in 2012, and transportation/communication (12.9%), wholesales/retails/repair service (10.7%), construction (9.8%) sectors took the next spots. Compared with the national average, the RFE has seen higher contributions from mining, trans- portation/communication and fishery sectors. Between 2005 and 2012, however, the
020 ∙ 2014 Knowledge Sharing Program II with Russia (Khabarovsk Territory) share of mining in the regional gross value-added jumped from 14.9% to 27.1%, while the contributions of manufacturing (-2.4%), agriculture/forestry (-2.3%), fishery (-1.9%) and wholesales/retails/repair service sectors (-2.7%) lowered over the same period. Within the RFE itself, industrial mix has been also differentiated across the region. Mining took the lion’s share of 61.6% in industrial mix of Sakhalin Region and 42.9% in the Republic of Sakha. On the contrary, contributions from transportation/communication and wholesales/retails/personal service sectors stood relatively high in industrial mix of both Primorsky Territory and Khabarovsk Territory. In Kamchatskiy Krai, fishery has maintained the leading industry status for years.
[Table 7] Industrial Mix of Gross Value-Added for the Russian Federation
Transpor- Agriculture Electricity Wholesale Real Manufac- Construc- tation Forestry Mining Gas Retail estates Others turing tion Commu- Fishery Water Repair Leasing nication
2005 5.5 12.8 18.5 3.8 5.7 21.8 10.6 9 12.3
2010 4.5 10.4 17.7 4.5 6.9 19.4 10.5 11.4 14.7
2011 4.9 11.2 17.8 4.2 7.0 19.4 10.1 11.1 14.3
2012 4.4 11.2 17.3 3.8 7.1 18.2 10.4 11.9 15.7
Source : Rosstat, 2014 regional social-economic indicators in Russia (compiled statistics)
[Table 8] Industrial Mix of Gross Value-Added for the RFE
Whole- Trans- Agricul- Electricity Real Manu- Const- sale portation ture Fishery Mining Gas estates Others facturing ruction Retail Commu- Forestry Water Leasing Repair nication
2005 5.7 4.3 14.9 7.7 5.3 9.3 13.4 15.2 7.7 16.5
2010 3.8 2.8 24.3 5.3 4.4 12.1 10.6 13.2 6.4 17.1
2011 3.8 2.3 26.9 5.4 4.0 13.2 10.0 12.2 5.8 16.4
2012 3.4 2.4 27.1 5.3 3.9 9.8 10.7 12.9 6.1 18.4
Source : Rosstat, 2014 regional social-economic indicators in Russia (compiled statistics)
Overview ∙ 021 [Table 9] Industrial Mix of Gross Value-Added across the Regions within the RFE
Electri- Whole- Trans- Agricul- Real Manu- city Const- sale portation ture Fishery Mining estate Others facturing Gas ruction Retail Commu- Forestry Leasing Water Repair nication
Russian 4.2 0.2 11.2 17.3 3.8 7.1 18.2 10.4 11.9 15.7 Federation
Far Eastern 3.4 2.4 27.1 5.3 3.9 9.8 10.7 12.9 6.1 18.4 federal district
Republic of Sakha 2.3 0 42.9 2 3.8 10 7 10.6 4.4 17 (Yakutia)
Kamchatskiy 3 13.9 4.4 9.6 7.2 7.6 9.9 6.8 5.4 32.2 Krai
Primorsky 4.2 4.7 1.2 8.8 3.7 10.3 18.3 20.1 9.2 19.5 Territory
Khabarovsk 6 1.2 6.6 8 4.7 8.9 14.8 18.7 7.4 23.7 Territory
Amur 6.3 0 14.6 3.5 5.1 14.2 9.9 21.7 5.1 19.6 Region
Magadan 1.9 3.1 18.6 2.8 8.7 6.7 14.2 6.2 5.8 32 Region
Sakhalin 0.8 2.1 61.6 3.6 1.2 7.9 4.7 4.1 4.8 9.2 Region
Jewish autonomous 8.9 0 0.5 4.8 4.3 25 8.4 15.8 6.1 26.2 district
Chukotka autonomous 1.5 1.4 35.2 0.2 11.5 11.1 10 4.8 1.1 23.2 district
Source : Rosstat, 2014 regional social-economic indicators in Russia (compiled statistics)
It is well known that the RFE has maintained close relationships with major Asian trading partners, namely, South Korea, China and Japan. Trade volumes with the three Asian countries now reaches approximately 80% of the RFE’s total trade volumes. Key export items in the RFE are minerals and fuel products, in particular, take the leading share of two-thirds in the region’s export mix. In terms of import product mix, machi- nery/transport equipment accounts for about 50% in the RFE’s total imports, followed by textiles (12%) and foods (10%).
022 ∙ 2014 Knowledge Sharing Program II with Russia (Khabarovsk Territory) [Table 10] The RFE’s Trade Volume with South/North Korea, China and Japan
Unit: USD millions 2010 2011 2012 Total 26,232.6 34,122.1 36,386.0 Exports 18,579.0 25,012.4 25,831.2 Imports 7,653.6 9,109.7 10,554.8 South Korea 6,235.1 9,774.6 10,260.8 Exports 5,350.3 8,462.4 8,368.2 Imports 884.7 1,312.2 1,892.6 China 6,985.4 8,192.2 10,002.6 Exports 3,075.9 3,967.7 5,110.7 Imports 3,909.6 4,224.4 4,891.9 Japan 6,928.4 7,758.7 8,441.1 Exports 6,155.3 6,855.3 7,454.6 Imports 773.1 903.4 986.4 North Korea 13.5 16.5 21.8 Exports 8.7 13.4 19.9 Imports 4.8 3.1 1.8
Source : The Russian Customs Statistics. Hak-Ki Kim and others, “Study for the South-North Korean-Russian tripod economic cooperation”, KIET, 2014.12.
[Figure 1] Three Asian Countries’ (South Korea, China and Japan) FDIs into the RFE
Unit: Gross volume, USD in millions 12,000 Korea China 10,000 Japan
8,000
6,000
4,000
1,901 2,000 1,543 1,280 1,530 1,262 830 45 46 280 265 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source : Rosstat. Hak-Ki Kim and others, “Study for the South-North Korean-Russian tripod economic cooperation”, KIET, 2014.12.
Overview ∙ 023 4. Development policies of the Russian government for the RFE
Upon the Vladivostok APEC Summit in September 2012, the Russian government has materialized its development path for the RFE. At the end of March 2013, it approved “the National Program for Social and Economic Development in the RFE-Baikal”, a long-term development plan towards 2025. The program aims to more than double the region’s GRP by 2025 compared with the 2011 level, while it also targets to increase the RFE’s industrial production by 53%, to triple export volumes and to raise population by 1 million over the forecast period. In order to achieve these goals, the program has presented key tasks to be fulfilled; (1) fostering manufacturing and resource process- ing sector, (2) cultivating skilled workforce and expediting R&D activities, (3) establishing sufficient infrastructures including logistics, power grid, etc. (4) expanding social infra- structures for improving residents’ welfares.
In addition, movements to designate the advanced development zone and to build a free port within the RFE have been very active. Proposed by President Putin in his State of the Union address in December 2013, the advanced development zone pro- gram is a pilot scheme designed to build export-driven special economic zones in the RFE. Hence, it differs from the existing special economic zone program (such as in- dustrial production type, technology-innovation type, port type or tourism-recreation type). In order to save infrastructure building costs and meet labor demand, the Russian government plans to locate the advanced development zone in vicinity of metropolitan areas in the RFE, and it also intends to grant a wide range of dereg- ulation preferences to the advanced development zone. Separately, in the Congressional speech in December 2014, President Putin suggested that the govern- ment grant a free port status to Vladivostok as part of the economic development policies for the RFE.
024 ∙ 2014 Knowledge Sharing Program II with Russia (Khabarovsk Territory) [Table 11] Objectives and Tasks of the Development Plan for the RFE-Baikal
Objectives Tasks for the Objectives
• Securing the regional GRP and investment growth rates at 1.5 pp higher than the national averages per annum Establishing • Rebalancing economic structure of the region through prompt favorable developments for resource processing sector environments • Enhancing the regional competitiveness by optimizing energy, for the transportation and communication infrastructures, stronger technological economic innovation and capabilities of research institutions development • Swift development of new infrastructures including logistics, electricity, etc. and • Creating investor-friendly environments comparable to the western parts Strengthening of Russia by providing incentives in terms of budget, taxation and customs competitiveness • Easing the geographical remoteness by shorter traffic times and greater st (1 Objective) ground networks • Strengthening trade relationships with the Asia-Pacific region and increasing export activities of local companies
Increasing • Raising birthrate and life expectancy, Increasing population by lower outflow population and and higher inflow demand Improving • Accelerating wage growth to set the RFE wage level in 2025 at 30% higher wages and than the national average welfare • Expediting housing construction and welfare infrastructure development nd (2 Objective) • Supporting ways of life and stable growth of the aborigines
Source : the National Program for Social and Economic Development in the RFE-Baikal region. Hak-Ki Kim. “Development strategy and policy measures for the Russian Far East after the APEC Summit – Industrial collaboration by utilizing the regional innovation cluster policies“, KIET, 2013.12.
Despite the Russian government’s strong commitment for the development of the RFE, still there are many tackling issues to be resolved. In particular, weak investment activities, insufficient transportation infrastructure, lack of workforce, aloft inflation, poor housing condition, regulatory inertia and complex administrative procedures are deemed major problems for the region at present. Given the government’s strong commitment, rapid progress in business environment improvements as well as the region- al governments’ strenuous efforts for investment promotion, however, most of the adverse effects arising from the aforementioned institutional obstacles are likely relieved in the next few years.
In the meantime, it is reported that the Russian government has set the ambi- tious goal to locate the country at 15th position in the World Bank’s Business Environment Index by 2020. Given the fact that the country’s ranking sharply rose from 123th in 2012 to 62th in 2015, the Russian government’s plan seems to be on the right track.
Overview ∙ 025 [Table 12] Investment Potential Rankings across the RFE
Invest- Share Sub-index rankings ment of Sub- potential poten- Consump- Produc- Finan- Institu- Innova- Natural Labor struc- Tourism ranking tial**, tion tion cial tion tion resources * % ture
Primorsky 20 1.192 18 27 25 31 17 33 44 18 10 Territory
Republic of 21 1.186 50 47 38 35 52 51 81 2 68 Sakha (Yakutia)
Khabarovsk 34 0.939 28 31 37 34 31 43 63 13 22 Territory
Sakhalin 55 0.649 72 61 29 30 59 73 54 24 70 Region
Amur 67 0.489 61 60 61 61 64 63 66 26 55 Region
Kamchatskiy 70 0.419 74 74 71 73 72 61 69 17 54 Krai
Magadan 74 0.348 79 77 72 77 75 59 72 14 80 Region
Chukotka autonomous 78 0.282 82 83 78 79 82 83 68 16 77 district
Jewish autonomous 79 0.211 81 81 80 82 76 80 59 50 82 district
Source : Export Note: * Out of total 83 regions, ** Investment potential of the whole country = 100
026 ∙ 2014 Knowledge Sharing Program II with Russia (Khabarovsk Territory) Executive Summary
Seung-Youb Lee (KIET)
Chapter 1. Finding Measures to Promote Investments in Khabarovsk Territory
1. Investment climates in Khabarovsk Territory and corresponding strategies
Khabarovsk Territory is keen to explore its economic growth dynamics by launching complex investment projects such as the transportation-logistic hub in Vanino-Sovetskaya Gavan, establishing energy, transportation & logistic infrastructure, modernizing machi- nery manufacturing facilities, developing agricultural complexes, producing innovative building materials and constructing compound housings.
In the past 10 years, foreign direct investments (FDIs) into Khabarovsk Territory remained stagnant at approximately US$ 250 million. FDIs from major Asian investors, namely Korea, China and Japan also remained insignificant. The three Asian countries accounted for only for one tenth of total FDIs in Khabarovsk Territory. It is highly recommended offer special measures and establish customized investment promotion strategies for the most likely investors.
Like other regional governments in Russia, the government of Khabarovsk Territory
Executive Summary ∙ 027 has been preparing legislative measures and implementing various policy tools to promote FDIs complying with the industrial innovation scheme of the central government of Russia. The Government of Khabarovsk Territory has also presented a wide range of quantitative, qualitative evaluation indicators and policy targets in line with the economic and investment policy directions set by the central government. The Far Eastern district is likely to remain one of the most lagging parts in the country in terms of the World Bank’s Business Climate Index. The central government needs to have a different approach to promote FDIs in the Far Eastern district by greater policy supports including labor and logistic costs.
While it is widely subject to the Far Eastern Development Strategies set by the federal government, the government in Khabarovsk Territory has also implemented the independent investment strategies. Announced in March 2014, the Khabarovsk 2020 Investment Strategy set its priorities on materializing the regional investment projects, improving resident’s quality of life, launching a sustainable investment promo- tion system and overcoming social, economic challenges based on the long-term prospects.
The key policy directions, the preemptive development tasks, and the principles of the investment promotion strategies are summarized as follows. Preferential develop- ment strategies for Khabarovsk Territory are building economic and social infrastructure for developing mineral resources for mining, expanding seafood processing capacities, producing high-value added wooden building materials and decorations, Promoting engineering sector with cluster development, building material sector development, launching cruise program by utilizing rich resources of the Amur River, Establishing modern logistic centers and large cold storage facilities in the Vanino-Sovetskaya in- dustrial complex and developing innovation cluster. Investment promotion strategy for major industries in Khabarovsk Territory are considering the joint seafood processing center for among the South and the North Korea as well as Russia, Enhancing strategic relationships with South Korea in aviation and shipbuilding sector, expanding PPP-based constructing infrastructure, Industrializing the BAM railway travel, Open air routes be- tween Vanino-Sovetskaya Gavan and Vladivostok, Establishing the South Korean-Russian aviation & shipbuilding innovation in the Komsomolsk-na-Amure and building the South-North Korean-Russian innovation cluster.
2. Improving the investment promotion supporting system in Khabarovsk Territory
The tasks to build mechanisms for improving investment attractiveness presented in the Khabarovsk 2020 Investment Strategy include forming investment promotion
028 ∙ 2014 Knowledge Sharing Program II with Russia (Khabarovsk Territory) & public relation organizations, arranging investment platforms, developing preferential infrastructures, cultivating complex project management professionals, and enhancing local investment attractiveness. The Strategy also suggests establishing an investment promotion agency, assigning an individual investment operator as well as launching a systematic branding. The results of our reviews for the mechanisms to improve invest- ment attractiveness and the building tasks indicated in the Khabarovsk 2020 Investment Strategy are establishing overseas investment promotion offices, expanding PPP-based investment projects, developing PPP professionals, forming legal advisory teams and offering basic legal services. Particularly, in order to resolve various issues in implementing the operating process systems for improving investment attractiveness, we propose that professional resources both at home and abroad should be fully utilized. We believe that the government of Khabarovsk Territory should find effective ways to provide relevant investment information via routine promotion seminars and to maximize publicity effect by operating overseas investment offices.
As financial mechanisms for investment promotions, it is important to arrange vari- ous fresh financing tools, we believe that the investment strategy should put its prior- ities on providing concrete benefits to prospect investors. In order to, establish manage- ment system for investment promotions, granting more authorities to local govern- ments and institutions, enhancing local tax contributions for higher tax revenues and more fiscal efficiencies at regional governments, developing professional capabilities of local public officials due to the poor investment climates as witnessed by insufficient infrastructure and lack of financial resources in the Russian Far East, enhancing invest- ment promotion competencies of local assembly members should be treated as key priorities and encouraging private companies to participate in regional investment proj- ects should be made.
3. Features of investment promotion systems of South Korea, China and Japan and their implications
Based on its own authorities, organizations, and human capital resources, the govern- ment of Khabarovsk Territory should develop distinctive policy platforms and service systems to promote FDIs in the region after careful analysis for the policy measures of South Korea, China and Japan. In particular, the investment ombudsman scheme and the PM system in South Korea, the policy of the concentration and choice, the strong one-stop service platform as well as the differentiated application system based on the investment volume in China, and the matching service scheme between foreign companies and local institutions in Japan are viewed as good policies for considerations.
Executive Summary ∙ 029 Given the peculiar situations in the Russian Far East, it is highly recommended that detailed information be offered about target industries or key sectors to prospect foreign investors. The more failure stories there are, the bigger the impacts on following runners. Therefore, the Government of Khabarovsk Territory should collect various successful investment experiences in key projects and utilize them as public relation tools.
4. Opinions on the investment promotion projects in the Far Eastern district and in Khabarovsk Territory
As part of the Russian KSP-II Project in 2014, we have surveyed Korean companies that have shown interest or already made inroads in the Far Eastern district. The main contents of the survey are as follows. Many Korean companies have keen interests in the Far Eastern district. Regarding questions about the break-through, 41.8% of the respondents viewed that there would be business prospects after the implementation of the TOR Project. For their geographical preferences, 38.2% of the surveyed companies said they have interests in the Far Eastern district as a whole, 21.8% responded they prefer Sakhalin Region, while 16.4% and 7.3% of the respondents chose Khabarovsk Territory and Kamchatskiy Krai as their favorite places for investments, respectively. For the target investment fields, the respondents showed their keen interests in resource developments and processing, construction of transportation infrastructures (road, rail- ways, ports, etc.) and investing in plant constructions, infrastructure buildings & managements.
Korean investors prefer a joint advance method between large corporations and SMEs into the special economic zone like TOR or a collective corporate formation through the Korean-only innovation clusters.
In regards to the questions about major investment obstacles in the Far Eastern district, half of the respondents pointed out legal issues, complex licensing procedures and administrative problems, while some companies picked a small-sized market as a key challenging factor. This implies that the government of Khabarovsk Territory should streamline its administration procedures, initiate market growth drives and in- tensify public relation activities.
As few Korean companies responded to the TOR project which has been initiated by the Ministry of the Far East Development, it was hard to draw a valid conclusion. The investment projects in Khabarovsk Territory out of the 23 development complex projects for the Far Eastern project presented by the National Program for the Social
030 ∙ 2014 Knowledge Sharing Program II with Russia (Khabarovsk Territory) and Economic Development of the Far East and the Baikal Region also failed to draw attentions from Korean companies. This is due to lack of information and yet-to-be materialized projects.
5. Prospect investment areas and sectoral strategies
Based on the agreement between the two countries and the principles of the collabo- ration direction, we summarize the promising investment sectors for Korean companies which have keen interests in Khabarovsk Territory.
First, Korean investors prefer a joint advance method between large corporations and SMEs into the special economic zone like TOR or a collective corporate formation through the Korean-only innovation clusters. Given the favors of Korean companies, we propose that the Russian government should focus its investment promotion strategies on collective promotions for prospect large corporations and SMEs rather than on a few individual investments. As part of the comprehensive investment promotion strategy across industries, we view the Korean-Russian joint innovation cluster as being the best consideration. Targeting the Russian as well as the Asia-Pacific markets, the innovation clusters could be located on the Grand Ussuriysk Island in Khabarovsk Territory or on the bordering regions to China. In the long- term, if materialized, the South Korean-Russian (even with the North Korean) joint innovation clusters will function as key manufacturing bases for the Chinese, the CIS and the Middle East markets. As a pilot program for the Russian government’s comprehensive investment promotion strategy for the Far Eastern district, we also believe the joint cluster projects are worth proceeding.
Second, we propose South Korea and Russia cooperate in the strategic industries such as including aviation and shipbuilding. We particularly believe that both parties should conduct joint research for establishing the Komsomolsk-na-Amure aviation & shipbuilding cluster project in Khabarovsk Territory. Based on the research results, they may go forward to the collaboration in the aviation & space sector. Through joint research activities, Korea and Russia are also required to expand their relationships in shipbuilding sector. From technological trainings for shipbuilding professionals to nuclear-powered ice breaker construction in preparation for opening the Arctic Route, the two countries might find various areas to cooperate in the shipbuilding sector. In view of high demands for repairing shipyard construction, they should bear in mind that many challenges such as procuring parts, etc. must be overcome first in order to operate the shipyards successfully.
Executive Summary ∙ 031 Third, the investment promotions for the strategic industries, we view that the Korean government and the Government of Khabarovsk Territory could incorporate mutual business opportunities in the developments for port, fishery, agriculture, medical service and SMEs sector. Given the opinions of the Korean companies over the ①invest- ment promotion strategies of the government in Khabarovsk Territory, however, the Russian counterparty is required to focus on short-period projects, and to enhance public relations by communicating success stories.
6. Collaborative efforts to promote investments in the Far Eastern district
The following are key policy challenges for expanding investment relationships be- tween the two countries. ①The governments of Korea and Russia should look for timely solutions to counter major issues. ②Given the importance and distinctiveness of the region, it is required that the governments of both countries should proceed with the investment projects in the Far Eastern district by forming a joint organization first. ③It is suggested that the local institutions in both countries seek effective ways to support regional joint investment projects by establishing an economic cooperation organization. ④It is necessary to expand the tripod economic relationships (the South-, the North Korea-Russia) by utilizing the North Korean workforces in the Far Eastern district.
Lastly, by maximum utilization of the KSP-II Russia project, the two countries should make joint efforts to create and expand successful investment stories.
Chapter 2. Khabarovsk Territory Investment Promotion Plan
Trans-Siberian Railway and Baikal Amur Railway(BAM) passes through the Khabarovsk Territory, and through Vanino port, this region is close to the Asia Pacific region as soon as possible, which corresponds the transport and freight hub region of the Russian Far East. Thus, the Russian federal government and the Government of Khabarovsk Territory is promoting the PSEZ Development Plan to promote the expansion of infra- structure and industry development through large-scale investment projects. This study
032 ∙ 2014 Knowledge Sharing Program II with Russia (Khabarovsk Territory) aims to review the Vanino-Sovetskaya Gavan PSEZ development plan of the Russian federal government and Government of Khabarovsk Territory, the status and seek policy measures for early activation of mutual cooperation with Korea (companies).
Russian federal government established a development plan of Vanino-Sovetskaya Gavan PSEZ integrating the Vanino port and the Sovetskaya Gavan port. December 31, 2009, it decided to establish the ‘Vanino-Sovetskaya Gavan Port Special Economic Zone’ according to the Russian federal legislation #1185. Location of the PSEZ is Sovetskaya Gavan coast, is an area of 2.9 km2(expandable up to expandable up to 4.5 km2), federal budget is planned to total 3.74 billion rubles.
Major development plans of the PSEZ is composed of building infrastructure, fostering industrial clusters, and providing investment incentives.
First, building infrastructure planning in the PSEZ is as follows. There are plans to increase BAM railway transportation capacity, to construct 120 megawatt cogeneration plant and 220 kilowatt electricity tower, to construct road connected to federal highways, and operation of scheduled flights connecting Khabarovsk – Vanino-Sovetskaya Gavan autonomous districts. Second, a major development plan of Vanino-Sovetskaya Gavan PSEZ is setting up a shipping cluster and an industry cluster.
The shipping cluster is planned to have port transshipment terminal, which will function as coal, grain, iron ore, container and fishing port, and warehouses, which will handle fishery, vegetables, frozen meat, grain and other logistic products and integration of fishery processing complexes and ship repair factories. Lastly, public investment for constructing infrastructure, various tax incentives and systematic manage- ment plans are ready for the activation of Vanino-Sovetskaya Gavan PSEZ.
Vanino-Sovetskaya Gavan PSEZ is included in the region that has large amount of port development potential. First, BAM passes through the region which contains abundant natural mineral resources. Second, it is the nearest port from cities such as Khabarovsk (600 km) and Komsomolsk-na-Amure (300 km), and it is considered a transportation gateway of the Khabarovsk Territory. Third, it includes Trans Siberia Railway, an alternative means of transportation. Fourth, Sovetskaya Gavan holds the advantage of relatively inexpensive seaport development cost due to its favorable natural conditions and deep water level.
In this respect, the Vanino-Sovetskaya Gavan PSEZ is considered to have favorable conditions to be developed in terms of needs and potential. A problem is that the development shows unsatisfied level of progress due to the stagnation of investment after the establishment of the plan. Therefore, for the early activation of the Vanino-Sovetskaya Gavan PSEZ, a phased development plan is suggested which separates the short-term development strategy from the long-term one. Of course, in the longer
Executive Summary ∙ 033 term, it is necessary for the Vanino-Sovetskaya Gavan PSEZ to be developed as a modern industrial district which meets the international standards as the direction of current development initiatives and development plans. In other words, it is required to foster high value-added industry cluster, such as construction of cargo terminals dealing with bulk cargo and container cargo, shipbuilding, fishery processing and wood processing.
This study is based on Vanino-Sovetskaya Gavan PSEZ potential for development, current status of the development plan, Korea's experience and cooperation possibilities, and expert opinions and other related companies. The five strategies in terms of the short-term development strategies as a way to promote mutual cooperation in the early activation of Korea (companies) and the PSEZ was proposed.
First, it is necessary to focus on development of an export port for bulk cargo in the short term. Container cargo is not likely to increase considering trade volume growth of each item, Russia Port Infrastructure Development Strategy 2030, and the conditions of the industrial and economic development in Khabarovsk and the regions near BAM railway. Therefore, the early connection of the BAM railway to the Vanino-Sovetskaya Gavan Port and the development of a terminal focusing on the bulk cargo export are necessary in the short term.
Second, Port infrastructure expansion by non-administrative agency port development scheme is needed. With the aim of developing itself as a logistics cluster, the Vanino-Sovetskaya Gavan PSEZ is planning port infrastructure expansion which is neces- sary to foster port logistics and industries, but the actual progress of the plan is not satisfactory. Therefore, the Vanino-Sovetskaya Gavan PSEZ is required to attract private and foreign investment by adopting non-administrative agency port development scheme. Korea also adopted non-administrative agency port development scheme to improve the operational efficiency of port facilities by helping actual demanders (ship owner, owner of goods, shippers, etc.) promptly obtain facilities.
Third, Early attraction of repair shipyard anchor companies by consignment manage- ment is needed. The repair and shipbuilding industry in the Russian Far East region targeting fishing vessels in the Northern Pacific ocean can have market potential if developed with the fishery processing industry, and the Vanino-Sovetskaya Gavan PSEZ is located in a favorable area. Therefore, it is essential to attract anchor companies which are in charge of establishing and managing the base shipyard for early vitalization of shipbuilding-repairing cluster in the Vanino-Sovetskaya Gavan PSEZ which has a location advantage and potential for development. To this end, it is strongly suggested to consider establishment of shipyards with consignment management by companies in other countries such as Korea which have the technology and management know-how. A successful case of shipyard consignment management can be found in the Oman shipyard which is established and operated by Korea’s Daewoo Shipbuilding & Marine Engineering Co., Ltd.
034 ∙ 2014 Knowledge Sharing Program II with Russia (Khabarovsk Territory) Fourth, it is necessary to attract fishery processing companies by guaranteeing invest- ment stability. The situation in the Russian Far East and the North Pacific region is experiencing clash of interests between the fisheries resources right of Russia and fishing right of foreign countries including Korea. Foreign companies' difficulties are escalating because Russia is linking fishery quota and fishery product processing facility investment in the North-pacific region. Particularly, the requirements of fishery products processing companies in Korea can be summarized as follows. The institutionalization of a foreign private company's availability of sole long-term lease for port land or land purchase and measures to ensure hiring third country's labor force is needed. To solve the un- certainty and investment security guarantees, etc. provide tax or export tax incentives is also needed.
Fifth, it is necessary to improve of Russian customs clearance system. Russia’s compli- cated import and export customs clearance and arbitrariness of customs workers in charge have been pointed out as the biggest barrier to attracting foreign investment. Thus, this study proposes that Russia improve its customs clearance system by referring to international practices like Korea and adopting advanced customs clearance system in the following two directions. One is improving the overall clearance system of some specific areas such as the Vanino-Sovetskaya Gavan PSEZ on a trial basis. The other is improving the most troublesome feature of the clearance system for foreign companies (e.g., tariff on import and export).
Executive Summary ∙ 035
2014 Knowledge Sharing Program II with Russia (Khabarovsk Territory) Improvement on the Investment Environment Chapter 1 of Khabarovsk Territory
Finding Measures to Promote Investments in Khabarovsk Territory (Specializing managerial institutions and improving the investment promotion system)
1. Investment climates in Khabarovsk Territory and corresponding strategies 2. Improving the investment promotion supporting system in Khabarovsk Territory 3. Features of investment promotion systems of South Korea, China and Japan and their implications 4. Opinions on the investment promotion projects in the Far Eastern district and in Khabarovsk Territory 5. Prospect investment areas and sectoral strategies 6. Collaborative efforts to promote investments in the Far Eastern district ￭ Chapter 01
Finding Measures to Promote Investments in Khabarovsk Territory
Hak-ki Kim, Moon-Hyung Lee, Mok Sakong (KIET)
1. Investment climates in Khabarovsk Territory and corresponding strategies
1.1. Investment climates in Khabarovsk Territory
Major industries in Khabarovsk Territory are comprised of transportation & communi- cation, wholesale & retail, automotive repair and manufacturing. These industries account for more than half the region’s total output. Given the region’s rich resources of mineral, timber as well as fishery, the Investment Strategy of Khabarovsk Territory towards 2020 (hereafter, “the Khabarovsk 2020 Investment Strategy”) places its emphasis on the development of such strategic industries as logistics, mining & manufacturing, fishery and timber processing. It also indicates that agriculture, steel, machinery, chemical, energy, construction, tourism, financial service and transportation are the major industries to be developed. In the meantime, the Khabarovsk 2020 Investment Strategy holds its clear intentions to expedite innovation, foster SMEs, develop scientific education as well as expand infrastructure.
In particular, Khabarovsk Territory is keen to explore its economic growth dynamics by launching complex investment projects such as the transportation-logistic hub in Vanino-Sovetskaya Gavan, establishing energy, transportation & logistic infrastructure, modernizing machinery manufacturing facilities, developing agricultural complexes, producing innovative building materials and constructing compound housings.
038 ∙ 2014 Knowledge Sharing Program II with Russia (Khabarovsk Territory) [Table 1-1] SWOT Analysis for Investments in Khabarovsk Territory
Strengths (Internal factors) Weaknesses (Internal factors) 1. Historically diversified economic structure 1. Population outflow 2. Quasi-capital role in the Far Eastern district 2. Lack of professional workforce 3. Proven experience in economic relationships 3. Low overall productivity with neighboring countries 4. Big companies‘ HQ relocation to Moscow 4. Geographic advantages; bordering on the 5. Insufficient infrastructure capacity for Asia-Pacific and the NE Asian markets transportation (mainly railways) 5. Localizing big projects; Suhoi Superjet-100 6. Lack of ground transport network series manufacturing 7. Remote and isolated image 6. Rich resources of timber, non-ferrous metal, 8. Muted growth of local businesses fishery and building mineral 9. Weak competitiveness and low demand for 7. Professional operating staff local products 8. Social, economic experts and balanced 10. High energy costs and even higher wage professional education system expectation 11. Mid-level quality of life Opportunities (External factors) Threats (External factors) 1. Asia-Pacific region, the epicenter of the 1. WTO pressures on the region’s key industries global economic growth 2. Adverse market environments in the steel 2. The government’s strong commitments to industry the Far Eastern district 3. The FDI promotion policies in Primorsky 3. Possibilities in creation of technological Territory and Sakhalin Region, intensifying platform for development priorities and competition exporting goods production (economic 4. Rapid industrial & infrastructure growth in special zone, industrial & agricultural the Chinese NE provinces complexes, etc.) 5. Lack of industrial parks and poor investor 4. Improving legislative environments for sentiments in technological platforms investment and innovation policies, 6. Higher reliance on imports of advanced increasing supports for SMEs manufacturing techniques 5. Higher investment prospects in line with 7. The recession in the Russian economy robust economic growth in the Asia-Pacific region 6. Growing logistic demands for mineral and other natural resources freight 7. Higher purchasing power in the Russian economy
Source : The Khabarovsk 2020 Investment Strategy, 2014. 3. p. 24.
1.2. Investment trends in Khabarovsk Territory and their implications
From 2005 to 2013, foreign direct investments (FDIs) into Khabarovsk Territory remained stagnant at approximately US$ 250 million. During those years, FDIs have been centered upon a few industries such as transportation (pipeline & transportation services), manu- facturing (timber processing & automotive equipment producing), geological exploration for natural resource research, mining, fishery, trade and construction. While the manu-
Chapter 01 _ Finding Measures to Promote Investments in Khabarovsk Territory ∙ 039 facturing sector accounted for 55-76% of total FDIs in Khabarovsk Territory in 2007-2010, the shares dramatically fell to 22.3% in 2011 and further to 17.4% in 2012, 5.5% in 2013. In the meantime, FDIs into transportation & communication, agriculture & forestry and mining have consistently risen. The drastic fall of FDIs into manufacturing represents that ripple effects from the manufacturing sector have largely diminished.
[Figure 1-1] FDIs Trends in Khabarovsk Territory
Unit: US$ in millions 450 419 400 350
300 265 276 246 249 240 250 218 200 171 150 118 100 96 50 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source : Rosstat
[Figure 1-2] 3 Asian Countries’ (Korea, China and Japan) FDIs into Khabarovsk Territory
Unit: US$ in thousands 18,000 16,000 Korea China 14,000 Japan 12,000 10,000 8,000 6,000 4,000 2,000 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source : Rosstat
FDIs from major Asian investors, namely Korea, China and Japan also remained insignificant. The three Asian countries accounted for only for one tenth of total FDIs in Khabarovsk Territory (3.6-6.2% in 2006-2009 and 8.9-13.6% in 2011-2013). In particular, FDIs from Korea, China and Japan in 2013 remained just at 0.3% of total FDIs into the region. These adverse developments serve to imply Khabarovsk Territory’s failure to attract FDIs. The Far Eastern federal district, as a whole, has not been a major FDI destination of the three Asian economies, either. It is highly recommended that the Far Eastern federal district offer special measures and establish customized investment promotion strategies for the most likely investors including Korea, China and Japan.
040 ∙ 2014 Knowledge Sharing Program II with Russia (Khabarovsk Territory) 1.3. Arranging legislative environments and improving investment climates
Like other regional governments in Russia, the government of Khabarovsk Territory has been preparing legislative measures and implementing various policy tools to promote FDIs complying with the industrial innovation scheme of the central government of Russia.
The government of Khabarovsk Territory has also presented a wide range of quantita- tive, qualitative evaluation indicators and policy targets in line with the economic and investment policy directions set by the central government. Given the high level of the policy targets, these measures are expected to bring loud and clear outcomes for improving investment climates in Russia. The same indicators and targets are being applied to evaluate FDI climates in other regions in Russia. Once evaluated by the uniformed criteria, the Far Eastern district is likely to remain one of the most lagging parts in the country in terms of the World Bank’s Business Climate Index. It is reasonable that the Far Eastern district should be evaluated by adjusted indicators and targets to reflect the distinct situations in the region. The central government also needs to have a different approach to promote FDIs in the Far Eastern district by greater policy supports including labor and logistic costs.
[Table 1-2] Major Indicators and Targets to Improve FDI Climates in Khabarovsk Territory
Major indicators Base (2012) Targets (2020) GRP RUB 335 billion RUB 541 billion in 2020
Quant- Industrial productions 111% 120% p.a. in 2012-2020 itative Fixed capital investments 89% 118% p.a. in 2012-2020 Population -500 +30,000 by 2020 World Bank Business Climate Index Ranking 123th 15th in 2020 Investment attractiveness 3B1 2B in 2020 (by experts) (low potential, mid-risk) (mid-potential, mid-risk) Number of positive references to 90,000 1,000,000 in 2012-2020 investment climates (by Integrum) Evaluation for the business- friendly 5.5 10 in 2020 Qualit- climates policies (by corporations) ative Number of administrative procedures 40 11 in 2020 for building permits Days for building permits 350 56 in 2020 Number of administrative procedures 8 5 in 2018 for power grid Days to for power grid 276 40 in 2018
Source : The Khabarovsk 2020 Investment Strategy, 2014. 3.
Chapter 01 _ Finding Measures to Promote Investments in Khabarovsk Territory ∙ 041 1.4. Investment promotion strategies across the industries
While it is widely subject to the Far Eastern Development Strategies set by the federal government, the Government of Khabarovsk Territory has also implemented the independent investment strategies. Announced in March 2014, the Khabarovsk 2020 Investment Strategy set its priorities on materializing the regional investment projects, improving resident’s quality of life, launching a sustainable investment promo- tion system and overcoming social, economic challenges based on the long-term prospects.
The key policy directions, the preemptive development tasks, and the principles of the investment promotion strategies are summarized as follows. Given the massive potential of the Chinese market, processing sectors need to first be developed by utilizing geographic advantages and rich natural resources. In order to resolve labor shortage issues, however, the Government of Khabarovsk Territory is required to explore the opportunities to utilize the North Korean workforces.
[Table 1-3] Preferential Development Strategies and Recommendations for Khabarovsk Territory
Sectors Key policy directions Opinions and recommendations
• Build economic and social • Promote compound housing infrastructure for developing mineral investments in resource development resources complexes or clusters • Invest in geological exploration for • Develop non-ferrous metals & rare enhancing competitiveness metal and locate processing facilities Mining in the vicinity of BAM railways or inland canals for the Arctic Route • Foster SMEs’ small equity investments and arrange proper legislative measures
• Expand seafood processing capacities • Consider the joint seafood processing • Modernize aquiculture and fishing center for among the South and the vessel and create fishery logistic North Korea as well as Russia complexes • Focus on FDIs promotion for SME • Develop cold-storage facilities and sector expand processing capacities at ports • Prepare countermeasures to • outdated transportation networks Fishery Create a unified brand for the Khabarovsk fishery (produce packaging materials for long-range shipping, develop air transport network for high-end fishery freights, operate luxury seafood restaurant overseas and utilize as the investment information center)
042 ∙ 2014 Knowledge Sharing Program II with Russia (Khabarovsk Territory) [Table 1-3] Continued
Sectors Key policy directions Opinions and recommendations
• Develop projects for producing • Strengthen by-pass production high-value added wooden building capacities in timber processing (joint materials and decorations research for the environment sector) • Develop projects for timber recycling • Timber recycling, housing • In-depth research for the paper-mill construction in resource Forestry construction project development complexes and tourist sites • Locate wooden pallet plants in the vicinity of ports (securing raw material supplies and price competitiveness)
• Promote engineering sector with • Enhance strategic relationships with cluster development strategies, focus South Korea in aviation and on new professional subsidiaries and shipbuilding sector by providing small innovative projects aggressive offers to the Korean Engineering • Maintain human capital resources, corporate counterparties) maximize growth potential in • Initiate joint research as pilot project Komsomolsk-na-Amure for bilateral cooperation • Obtain shipbuilding orders in the • Offer the establishment of the government’ procurements Korean-Russian Innovation Cluster
• Accelerate building material sector • Expand prefabricated housing development construction • Promote cottage construction • Lower entry barriers for foreign construction companies • Encourage construction sector by Construction higher consortium-led orders (PPP, constructor+hospital, environment, professional management companies) • Easier financing conditions for the consortiums
• Launch cruise program by utilizing • Industrialize the BAM railway travel, rich resources of the Amur River establish the tourism cluster by • Reinforce echo tourism, develop utilizing in-land canals (promotion Tourism fishing and rafting travel program, for “Travel Siberia in Winter”) build infrastructure • Develop cruise programs for the Ussuri Island (build luxury hotels and restaurants on the Island)
Chapter 01 _ Finding Measures to Promote Investments in Khabarovsk Territory ∙ 043 [Table 1-3] Continued
Sectors Key policy directions Opinions and recommendations
• Establish modern logistic centers and • Set up close relationships with large cold storage facilities for neighboring countries for the FDIs in growth potential in the the Vanino-Sovetskaya Gavan ports Vanino-Sovetskaya industrial (discover prospect industries by complex expanding interchanges with the • Develop the Khabarovsk International South Korean mid-sized ports incl. Airport as one of the Russian air hubs Gangneung, Ulsan, Pohang, etc.) • Extend transportation network • Build tourism clusters by utilizing Transport- (ground network), intensify trade inland canals ation relationships with the Asia-Pacific • Open air routes between countries Vanino-Sovetskaya Gavan and Vladivostok for passengers, special mineral and high-end seafood freight demand • Foster the Khabarovsk International Airport by utilizing the prospect South-North Korean-Russian innovation cluster
• Focus on the preferential innovation • Establish the South Korean-Russian projects and develop cluster projects aviation & shipbuilding innovation in • Develop an innovation supporting the Komsomolsk-na-Amure, build system and minimize investor risks the South-North Korean-Russian • Implement innovation projects, build innovation cluster in the Ussuri Island industrial and technology parks and (Rakitnoye) and offer aggressive Innovation create business incubating systems proposals to South Korea for exploring business opportunities as well as to North Korea for utilizing its workforce • Promote consumer goods and component sector for the Chinese, the CIS and the Middle East markets.
Source : The Khabarovsk 2020 Investment Strategy, 2014. 3. Note: Opinions and Recommendations in the third column are the author’s views based on the results from various corporate conferences.
044 ∙ 2014 Knowledge Sharing Program II with Russia (Khabarovsk Territory) [Table 1-4] Principles of the Investment Promotion Strategies in Khabarovsk Territory and Corresponding Recommendations
Principles Directions Opinions and recommendations
1 Portfolio mix • Large-scale projects between • Launch joint projects with foreign of the sectors partners for strategic industries investment • Cumulative effects of the projects (aviation & shipbuilding, ports projects • Primary industry projects development related to resource • Small, innovative projects processing sector) • Explore constructive measures for the Chinese market (launch the South-the North Korean-Russian joint projects)
2 Establish • Select optimal models for • Build competitive investment business- investment promotion system by promotion systems by analyzing friendly analyzing budget efficiencies and investment promotion schemes in legislative investor demands South Korea, China and Japan environments • Increase capital in regional research • Prepare decisive measures for institutions for participating in joint improving investment climates investment projects • Launch joint projects among • Enhance public relations for industries, universities and research prospect investment projects institutions • Strengthen public relations (multilingual contents at the homepage: Korean, Chinese, Japanese) • Enhance joint research activities with foreign partners (develop strategic industries through joint researches between South Korea and Russia)
3 Improve • Optimize functions of local • Operate corporate investment investment community conferences for consulting teams under the direct climates investments, economics and supervision of the governor businesses under the guidance of • Launch outcome-oriented the local authorities. investment projects • Prevent overlapped supports and • Expand international cooperation to form preferential investor packages promote FDIs for improving business efficiencies • Streamline administrative • Offer effective administrative procedures, provide clear reasons supports for investors under the for refusal and offer effective direct supervision of the governor supports for resolving issues
4Explore and • Prepare new projects based on • Seek flexibilities for utilizing capital attract public-private partnerships resources (recruit opinions from overseas • Initiate new projects for inviting the foreign private companies) capitals federal fiscal development • Present effective management institutions (VEB, RVC, RUSNANO, plans for fund utilization AHML, management companies for the special economic zones)
Chapter 01 _ Finding Measures to Promote Investments in Khabarovsk Territory ∙ 045 [Table 1-4] Continued
Principles Directions Opinions and recommendations 5 Cultivate • Set up supervising offices for • Enlarge public investment officials investment preferential investment projects • Encourage public officials’ interests professionals and establish systems for in investments department authority assignments • Introduce effective evaluation • Arrange training systems for systems and provide executives and professionals in performance-based incentives charge of investment promotions • Operate overseas investment and investor relations promotion agencies • Intensify overseas training for public investment officials • Grant greater authorities to public officials at local governments and institutions 6 Develop • Form talented human capital pool • Open recruiting for investment social capitals for various social, cultural and promotion ideas (via homepages, etc.) business projects • Routine meetings with foreign • Study regional recruiting programs institutions and corporations in in Russia for top professionals Khabarovsk Territory (collect opinions • Execute budgets into compensation for investment promotion and packages for top investment discuss about problem-solving tools) professionals • Create consulting teams for local foreign companies • Appoint foreign professionals as members of the investment advisory committee • Governor’s awarding certificate of appointment (invite key foreign corporate executives and private investment professionals as honorary members of the investment advisory committee) 7Active • Create local brands and sub-brands • Enhance promotion activities via communication for individual sectors overseas investment forums strategy • Consolidate marketing strategies • Launch performance-focused for investment project investment fairs implementations • Publish working reports for • Participate in investment fairs, investment fairs and share forums and symposiums both at information with foreign home and abroad counterparties 8 Greater • Capitalize special funds for SMEs in • Establish international joint support for Khabarovsk Territory innovation clusters for inviting SMEs • Form the 2nd-stage funds SMEs (create the South • Encourage qualified SMEs to participate Korean-Russian cluster on the in the innovation supporting programs Ussuri Island) and the cluster projects • Invite SMEs targeting the Chinese • Establish monitoring system for the market (develop manufacturing efficient utilizations of the SEM sector by utilizing the North Korean funds (audit business procedures) workforce)
046 ∙ 2014 Knowledge Sharing Program II with Russia (Khabarovsk Territory) [Table 1-4] Continued
Principles Directions Opinions and recommendations 9 Enhance • Create incentive schemes for • Seek appropriate policy measures expertise of evaluating professionalism and for higher expertise and greater public efficiencies of investment public investment professionals (utilize officials officials foreign corporate executives and • Write program logs for higher present honorary citizenship) expertise in the areas of • Motivate public officials for the consolidated information, investment promotion success and education platform, investment support for positive outcomes (assign banking, venture capital, funds individual tasks across industries) management, etc. • Operate investment promotion committee comprising industry experts, private companies, foreign investment partners • Build competitive systems by analyzing investment promotion schemes in South Korea, China and Japan • Launch performance-based evaluation and incentive system • Increase overseas training opportunities for public investment officials
Source : The Khabarovsk 2020 Investment Strategy, 2014. 3. Note: Opinions and Recommendations in the third column are the author’s views based on the results from various corporate conferences.
2. Improving the investment promotion supporting system in Khabarovsk Territory
2.1. Mechanisms to improve investment attractiveness
The tasks to build mechanisms for improving investment attractiveness presented in the Khabarovsk 2020 Investment Strategy include forming investment promotion & public relation organizations, arranging investment platforms, developing preferential infrastructures, cultivating complex project management professionals, and enhancing local investment attractiveness. The Strategy also suggests establishing an investment promotion agency, assigning an individual investment operator as well as launching a systematic branding. The following tables are the results of our reviews for the mecha- nisms to improve investment attractiveness and the building tasks indicated in the Khabarovsk 2020 Investment Strategy.
In the meantime, in order to resolve various issues in implementing the operating process systems for improving investment attractiveness, we propose that professional
Chapter 01 _ Finding Measures to Promote Investments in Khabarovsk Territory ∙ 047 resources both at home and abroad should be fully utilized. In particular, we believe that the Government of Khabarovsk Territory should find effective ways to provide relevant investment information via routine promotion seminars and to maximize publi- city effect by operating overseas investment offices (for instance, one in South Korea). In addition, it is advisable to open customized retail shops or restaurants to promote the Khabarovsk specialties in targeting countries while those businesses might also be utilized as financing tools for operating expenses at overseas promotion offices or as public relations centers.
[Table 1-5] Establishing Mechanisms to Improve Investment Attractiveness and Major Tasks
Mechanisms and Tasks Opinions and suggestions policy measures • Operate overseas branches of the investment promotion agency Establish professional Form the investment including in Korea organizations for investment promotion agency • Study low-cost management systems 1 promotions and investor as a non-profit for overseas branches of the relations organization investment promotion office (consolidate functions of various Khabarovsk public institutions abroad) Cultivate complex project • Expand PPP-based investment operating professionals for Appoint an projects, develop PPP professionals investment platforms, energy, individual • Invite foreign company executives 2 housing & industrial complex investment project as investment advisors constructions, ground network operator • Form industrial investment advisory buildings, and preferential committees infrastructure developments Plan public-private joint Establish a • Form legal advisory teams investment projects incl. competitiveness • Offer basic legal services 3 legislative measures, Prepare enhancing center • Plan investment projects, conduct feasibility studies, and secure supervised by a local feasibility and technology studies technology professionals government with foreign investment advisors Encourage local communities Utilize regional • Build effective systems for to participate in policy effects offices of the providing detailed information 4 evaluation and in regional national industry about prospect regulations and developments association other legislative issues • Reinforce branding activities through overseas investment promotion offices Plan annual • Differentiate branding across cities Enhance regional investment communication 5 (Parallel naming of long city names attractiveness strategy and launch with intimate ones) systematic branding • Empower local investment promotion institutions
Source : The Khabarovsk 2020 Investment Strategy, 2014. 3. Note: Opinions and Recommendations in the third column are the author’s views based on the results from various corporate conferences.
048 ∙ 2014 Knowledge Sharing Program II with Russia (Khabarovsk Territory) 2.2. Financial mechanisms for investment promotions
As financial mechanisms for investment promotions, the Khabarovsk 2020 Investment Strategy aims to cultivate professional investment operators, implement financial educa- tion & training programs, improve interactions with the federal financial institutions, and create standard package models for project financings. While it is important to arrange various fresh financing tools, we believe that the investment strategy should put its priorities on providing concrete benefits to prospect investors.
For instance, it is necessary that flexible operation of existing funds through lower interest rates at the Far Eastern Investment Fund. Publicizing successful funding cases would be another effective tool. It is noteworthy that there have been no actual perform- ances of the Korean-Russian Joint Fund since the agreement between the Presidents of the two countries. We therefore suggest that by extending a partial payment guarantee for large-scale investment projects, the Government of Khabarovsk Territory should find effective ways to utilize the Far Easter Investment Fund which Korean banks have been raising. Officials at the Korean banks have said they have not been able to extend loans because no promising Korean-Russian development projects have been launched in Khabarovsk Territory.
2.3. Establishing management system for investment promotions and enhancing competencies of local institutions
The Government of Khabarovsk Territory views that local institutions, government bodies, residents as well as each economic party should join to resolve issues and problems arising from the diversification in the investment process. The Khabarovsk 2020 Investment Strategy presents guidelines for building investment-friendly environments and for implementing large-scale investment projects, while it advises local institutions to follow the guidelines for planning and initiating their investment programs. In addition to providing the basic guidelines for the investment process, we also believe that the Russian government should consider granting greater autonomous rights to local govern- ments and institutions.
From the view of foreign investors, institutional and administrative issues seem to be the biggest difficulties in their investment decisions for the Far Eastern district. Although the permit-granting procedures in the preferential development zone are anticipated to be greatly streamlined, further discussions might be needed in the context of legislative measures for the investment promotions. The following are major legislative challenges to be resolved regarding FDI promotions in the Far Eastern district.
Chapter 01 _ Finding Measures to Promote Investments in Khabarovsk Territory ∙ 049 First, the Russian government should grant more authorities to local governments and institutions. Given increasing responsibilities upon local governments to induce FDIs, it is reasonable that local governments should have greater autonomous rights to promote foreign investments in their own territories. Higher respect to local govern- ments’ authorities are also needed in case overlapping jurisdiction issues between the central and the regional governments arise. In other words, the central government in Russia should empower local governments and institutions in order to encourage regional investment promotion activities.
Second, local tax contributions should be enhanced for higher tax revenues and more fiscal efficiencies at regional governments. Heavy reliance on the central govern- ment’s fiscal support may cause moral hazards in local governments’ fiscal managements. But in any aspect, the rules of “Higher power, Greater responsibility” must stand.
Third, competencies of public officials are also important. Due to the poor investment climates as witnessed by insufficient infrastructure and lack of financial resources in the Russian Far East, the significance of human capital has been rapidly increasing. Greater understating for the FDI importance among top managements at local in- stitutions, developing professional capabilities of local public officials, higher re- sponsibilities of local licensing officials, and enhancing investment promotion com- petencies of local assembly members should be treated as key priorities. Given their influential status in local administrations, higher education to top executives at local institutions towards the significance of the FDIs should be also followed. Consequently, it is essential that all investment public officials be fairly rewarded based on their performances. Preventing organizational collectivism caused by unfair rewarding systems, all persons participating in successful investment promotions should receive appropriate incentives.
Fourth, all-out efforts to encourage local private companies to participate in regional investment projects should be made. Local private companies are the main bodies to materialize the investment promotion efforts of the central and local governments. Therefore, it is important to have effective systems to enable voluntary involvements of local private companies in the process of regional investment projects. The release of detailed information related to investment promotion projects through homepages is also needed in order to spur local companies’ participations.
050 ∙ 2014 Knowledge Sharing Program II with Russia (Khabarovsk Territory) 3. Features of investment promotion systems of South Korea, China and Japan and their implications
3.1. South Korea
Immediately after the Asian financial crisis, the foreign investment promotion law was enacted in 1998. As a result, 99% of the South Korean industries have been open to foreign investors. In the same year, the South Korean government launched KOTRA, the national investment promotion agency (renamed Invest Korea in 2003), and the Foreign Investment Ombudsman Office in 1999 to offer post-services to foreign investors.
At the end of 2013, the number of foreign investors in South Korea reached 15,513 (versus 1,678 in 1990) and annual FDIs into South Korea amounted to US$ 14.5 billion. Presently, FDIs account for approximately 12% of the nation’s GDP. In South Korea, the service sector accounts for the lion’s share in FDIs, followed by the manufacturing sector, which is dominated by industrial components and material parts.
Tax benefits, location supports, and cash allowances are widely utilized as incentives for FDIs in South Korea. Foreign investors are given various tax benefits. For instance, foreign investors are exempt from corporate taxes for 7 years, while tax reductions for sales, registration as well as property can be extended up to 15 years. In addition, the central and local governments in South Korea provide varied fiscal and location supports including the designation of the Free Economic Zone within industrial complexes.
As the nation’s key investment promotion agency, KOTRA has an extensive overseas network comprising 122 offices (incl. 9 regional HQs and 43 investment promotion task centers) in 84 countries worldwide. Under the guidelines of the Ministry of Trade, Industry and Energy, the Foreign Investment Committee acts as the top decision-maker for the FDI promotion issues in South Korea. Invest Korea implements the strategies and policies set by the South Korean government.
KOTRA’s FDI promotion functions are divided into Invest Korea and the Foreign Investment Ombudsman Office. Invest Korea is also grouped into two departments, while it launched the Global M&A Center in 2013 to expedite M&A activities internationally. Although it is a part of Invest Korea, the Global M&A Center is in- dependently operated. The Foreign Investment Ombudsman Office focuses on providing assistances to foreign investors facing difficulties in proceeding their businesses in South Korea. The Investment Planning Department at Invest Korea consists of three teams; the Investment Administration Team supports investment promotions, while the Investment Public Relation Team takes responsibilities for public relation activities related
Chapter 01 _ Finding Measures to Promote Investments in Khabarovsk Territory ∙ 051 to investment promotion projects, initiates promotion presentations, publishes monthly magazines & annual brochures, manages homepages and plans other promotion events. The Investment Information Team monitors foreign investment trends & statistics and analyzes effectiveness of foreign investment promotion policies. The Investment Promotion Department at Invest Korea is also made up of three teams; the Manufacturing Industry Investment Promotion Team focuses on investment promotions for South Korea’s major manufacturing sector including components, materials, and IT, while the Service & Financial Industry Investment Promotion Team primarily engages in financial and service sectors such as logistics, distribution and alternative energies. The Strategic Investment Promotion Team serves investment promotion activities typically from emerg- ing markets including Japan, China and Middle East. Globally, Invest Korea has 43 overseas investment promotion offices.
From pre-investments to post-investments, Invest Korea offers a free, one-stop service. At pre-investment stages, it focuses on supplying a wide range of information related to the government’s FDI policies and market situations as well as industrial landscapes in South Korea. Pre-investment services are handled by the Investment Consulting Center, which provides professional, customized 1:1 advices to prospect foreign investors in the fields of tax, accounting, legal, visa and incorporation. At investment stages, pro- fessional supports for location, local business partners and administrative services are given to foreign investors for their best interests. At post-investment stage, the Foreign Investment Ombudsman Office actively engages in resolving the difficulties and issues that foreign investors encounter in South Korea.
With the help of professional groups from various government entities including the Ministry of Trade, Industry and Energy, the Ministry of Strategy and Finance, the Ministry of Justice, the National Tax Service, the Korea Customs Service and Korea Industrial Complex Corporation as well as private institutions, the Investment Consulting Center strives to promote foreign investments into South Korea. The Project Manager (PM) scheme has also proved to be effective. As an individual PM is assigned to each project, he or she provides a wide range of services including pre- and post-investment consulting, incorporating supports and meeting arrangements with government bodies. Employees at Invest Korea, public officials of the central government as well as economic professionals across sectors are being invited as PMs.
The Foreign Investment Ombudsman Office comprises the General Investment Consulting Division and the Investment Aftercare Division. The latter employs skilled professionals, called Home Doctors, who focus on resolving the difficulties and obstacles to tackle foreign investors’ businesses in South Korea. The head of the Foreign Investment Ombudsman Office is appointed by the President of South Korea. The Office also provides consulting services for investment incentives, legal procedures and visa applications. Statistics reveal that the professionals at the Foreign Investment Ombudsman Office handle approximately 350 issues annually and have resolved 5,315 cases in 1999-2013.
052 ∙ 2014 Knowledge Sharing Program II with Russia (Khabarovsk Territory) Given the higher possibilities of reinvestments in case of successful problem-solving, the role of the Investment Aftercare Division at the Foreign Investment Ombudsman Office is very significant. UNCTAD also highly evaluates the Korean ombudsman system as the system is able to detect and resolve problems even before disputes and conflicts materialize. It is known that the governments of Russia, Brazil and many others are benchmarking the Korean ombudsman system.
Besides, Invest Korea provides various services and offers events in relation to invest- ment promotions. First, through the Red Carpet Service, it provides airport pickups, fast tracks, translations and hotel concierge services to foreign investors. Second, it launches GAPs (Global Alliance Project Series), a joint program for promoting partnerships between foreign investors and Korean counterparties based on global entrepreneurs and technologies. The program puts its major goals on investment promotions, joint R&D as well as constant network formation. Third, South Korea had the biggest FDI promotion project called “Foreign Investment Week”. As many as 309 companies from 24 countries worldwide have visited the investment fair held in fall 2013. Fourth, KOTRA hosts annual job fair for foreign investors. At the job fair, foreign companies have a chance to meet with many talented candidates. Fifth, in the CEO forum, top foreign corporate executives are able to create their own networks and learn business climates in South Korea. Sixth, Invest Korea runs another program called “Get to Know Korea” which helps foreign investors, embassies and their families better understand the Korean culture and build social networks. Invest Korea also offers administrative supports and chances for visiting Korean language centers and participating in the Korean cultural tours. Seventh, Invest Korea Plaza (IKP) acts as a business incubating center for foreign companies.1)
3.2. China
Through the process of various historical events including the clarification towards the socialist market economy in 1992, the establishment diplomatic relations with South Korea, the WTO membership in 2001 and the Asian financial crisis in 1997, China has greatly stepped up its foreign investments promotion efforts. It is noted that the U.S., the European and the Japanese companies have put their investment priorities on technology-intensive areas such as components and materials for entering the Chinese market, while companies from South Korea, Taiwan, Singapore and Hong Kong have focused their investment paths on labor intensive-industries for the purpose of third country exports.
1) Established in 2006, IPK offers meeting rooms, offices and administrative services, etc. For the foreign companies investing more than US$ 300,000 within the first 6 months, leasing services for executive office are provided. As of 2014, about 40 offices are being leased at lower costs compared with averages in Seoul. Professional advisory services from in-house Investment Consulting Center are also offered to IPK residents.
Chapter 01 _ Finding Measures to Promote Investments in Khabarovsk Territory ∙ 053 It is also noteworthy that the Chinese investment promotion activities have been transformed towards service sectors rather than manufacturing sectors since the global financial crisis in 2008. FDIs in China have demonstrated different trends geographically. While the labor-intensive industries (textiles and footwear) have been rapidly developed in the Eastern coast provinces by 1990s, the technology-intensive industry clusters have been widely established after 2000s; in the Pearl River Delta (white appliances), the Yangtze River Delta (digital appliances and automobiles), and the Gulf of Pan Pohai (communications and automobiles). Since the global financial crisis in 2008, foreign companies in the Eastern provinces have relocated their production bases to the Midwestern provinces.
At end of 2013, foreign companies accounted for 47.2% of the Chinese exports (versus 59.7% in 2006) and 44.8% of the country’s imports, while they employed 28.7 million, representing 7.5% of total urban employment. The number of foreign companies stood at 16.5% of total Chinese manufacturing sectors, and their sales reached 18.2% of the nation’s combined industrial revenue in 2012.
Major characteristics of the Chinese government’s FDI promotion policies are as follows: First, the policy of the concentration and choice for the open markets has been clear. Since the inception of the economic reform in 1979, the Chinese government has aggressively utilized FDIs as countermeasures for poor capital, insufficient workforce and lack of technologies. Given the unproductive nature of the planned economy, poor infrastructure (transportation, communication, power, water) and lack of skilled workforce, the Chinese government has also taken a gradual economic reform drive. Recently, however, the government has been aggressive in opening the nation’s border- ing provinces to their neighboring countries (Southeast Asia, Russia and Central Asia). While putting its FDI promotion goals on increasing exports in the past, China now utilizes FDIs as driving factors for developments of technology-intensive sectors.
Second, the Chinese government has assigned different management institutions and applied opportune legislative measures based on the volumes of foreign investments. The roles between the central and the local governments have been also divided as per contracting investment volumes and targeting industries. The National Development and Reform Commission of the Chinese central government have granted permits for the national core sectors, while the Department of Foreign Investment Administration under the Ministry of Commerce of the PRC has managed large-scale investment projects above US$ 100 million. Local governments have managed investment projects only for pre-approved volumes and sectors by individual provinces, cities (prefectures), or counties.
Third, the Chinese government has guided foreign companies to invest into various special economic zones across the countries. Since 1980s, it has also launched diverse forms of foreign investment industrial complexes for economic efficiencies and balanced regional developments.
054 ∙ 2014 Knowledge Sharing Program II with Russia (Khabarovsk Territory) Fourth, foreign investors have been granted many preferential benefits including low-cost properties and conveniences in the forms of communication, electricity, water as well as transportation services (connection to highways, railways, ports and airports, etc.) Excellent, hardworking labor forces and various tax benefits (15% of corporate income tax to high-tech companies, VAT refunds to export companies and duty-free for capital goods imports) have been also provided.
Fifth, the Chinese government has maintained the strongest-ever one-stop service platform for foreign investment promotions. As most foreign companies have been recruited into foreigners-only development zones, they have been granted preferential accommodations and mobility conveniences. Although it generally takes to at least one month to have building permits, 10 or more different administrative procedures, the whole administrative processes for the foreign companies residing in the special investment zones have been greatly shortened because in-house administrative offices review investment documents and grant permits to foreign investors instantly.
3.3. Japan
JETRO (Japan External Trade Organization) is the core of the foreign investment promotion drives in Japan. JETRO offers one-stop services to foreign companies including preferential locations to match with investors’ business needs, and engages in a wide range of activities; presenting investment climates in Japan and supplying information for the government’s FDI promotion policies via seminars and official web sites.
JETRO has extensive overseas networks comprising 70 offices in 55 nations worldwide and also operates 42 domestic branches to facilitate relationships with regional govern- ments as well as local institutions. From the viewpoint of foreign companies, JETRO’s overseas offices are actively exploring investment opportunities in Japan and offering information & customized consulting services to prospect investors. 6 Invest Japan Business Support Centers (IBSC), which are located domestically, also offer one-stop information services to foreign investors.
Recently, the Japanese government has set a goal to double the outstanding volume of FDIs into Japan from JPY 17.8 trillion in 2012 to JPY 35.0 trillion by 2020. In order to meet this goal, the Japanese government has been launching various incentive pro- grams including rewarding points for top foreign professionals and localizing services for global enterprises. In line with the government’s policy drives, JETRO has also re- inforced its FDI promotion activities through creating the foreign investment promotion headquarter in September 2013 with the joint supports from the Ministry of Economy, Trade and Industry and other foreign investment institutions.
Thanks to the central and regional governments in Japan, JETRO actively engages
Chapter 01 _ Finding Measures to Promote Investments in Khabarovsk Territory ∙ 055 in disseminating the investment attractiveness and the favorable investment climates in Japan to foreign investors. JETRO’s major investor relation activities can be summarized as follows.
First, for supplying investment information worldwide, JETRO enhances its public relation activities through its official website. It publishes “3 Windows on Japan” for presenting the advantages and merits of investment opportunities in Japan. “Success Stories” is another publication to deliver successful investment experiences to prospect foreign companies. “Investing in Japan”, the webpage, in particular, allows foreigners to identify all of the information required for investing in Japan. Major information presented in “Investing in Japan” includes investor protection environments at local governments, legislative information, administrative procedures for incorporation, calcu- lation guidelines for estimated costs and ISBC’s regional introductions. These information are provided in 6 multilingual formats including English, Japanese, German, French, Chinese (both in simplified characters and in traditional characters) as well as Korean.
Second, in order to promote foreign investments, JETRO has been actively hosting routine investment roadshows for major target countries. Third, JETRO has established close relationships with local governments and institutions at home that have strong intentions to invite FDIs. JETRO aims to greater contributions from FDIs to regional economies by matching prospect foreign companies with local authorities, while it also offers various supports to local institutions for their needs. For foreign investors, JETRO supplies in-depth investment information from regional attractiveness and logistics to infrastructure systems via “Navigation Support for Regional Markets” and “Success in Region”. Since 2003, JETRO has assisted foreign companies to incorporate approx- imately 1,000 local subsidiaries in Japan.
3.4. The implications
In terms of investment promotion effectiveness in the Far Eastern district, the Russian government needs to consider applying the investment promotion policy measures and services that neighboring countries have implanted. Based on its own authorities, organizations, and human capital resources, the government of Khabarovsk Territory should develop distinctive policy platforms and service systems to promote FDIs in the region after careful analysis for the policy measures of South Korea, China and Japan. In particular, the investment ombudsman scheme and the PM system in South Korea, the policy of the concentration and choice, the strong one-stop service platform as well as the differentiated application system based on the investment volume in China, and the matching service scheme between foreign companies and local institutions in Japan are viewed as good policies for considerations.
056 ∙ 2014 Knowledge Sharing Program II with Russia (Khabarovsk Territory) Given the peculiar situations in the Russian Far East, it is highly recommended that detailed information be offered about target industries or key sectors to prospect foreign investors. For major business such as the Khabarovsk Airport renovation project, the aviation-shipbuilding cluster at Komsomolsk-na-Amure, the development project at Vanino-Sovetskaya Gavan, core information has to be provided in multilingual channels including English, Korean, Chinese and Japanese. Detailed information about anticipating obstacles, resolving processes, additional services, available funds, partnership candidates in Russia as well as project managers should be also accompanied
Besides, regional governments in the Far Eastern districts may also need to open joint investment offices in South Korea, China, Japan and other target countries. It is also advisable that the Government of Khabarovsk Territory review to offer differential incentives to foreign investors based on the geographic conditions in the Far East or in Khabarovsk. Due to their adverse environments, Khabarovsk Territory, Kamchatskiy Territory and Sakhalin Oblast have provided greater incentives to foreign investors over Primorsky Territory. We believe that the same rules should apply to investment incentives within Khabarovsk Territory. In other words, differential incentive schemes need to be offered based on the level of infrastructure and housing conditions across the regions.
The more failure stories there are, the bigger the impacts on following runners. Therefore, the Government of Khabarovsk Territory should collect various successful investment experiences in key projects and utilize them as public relation tools.
4. Opinions on the investment promotion projects in the Far Eastern district and in Khabarovsk Territory
4.1. Opinions on investments in the Far Eastern district and their implications
4.1.1. Survey results and implications
As part of the KSP-II Russia Project in 2014, we have surveyed Korean companies that have shown interest or already made inroads in the Far Eastern district.2) Followings
2) Our surveys have been conducted in three different ways; on-line survey via KIET’s system, interviews with the participating companies in the joint forum for the four Far Eastern provinces and KOTRA’s mail survey for Korean companies in Russia. Out of total 75 respondents, 55 Korean companies have submitted valid responses. The 55 companies were comprised of large companies (23.6%), mid-sized corporations (30.9%) and SMEs (45.5%). Survey period: August 1-December 31, 2014.
Chapter 01 _ Finding Measures to Promote Investments in Khabarovsk Territory ∙ 057 are the summary of the survey titled, “Survey for policy recommendations in expanding the Korean-Russian industrial cooperation and opinions for major investment projects in the Far Eastern district in Russia”.
Regarding questions about the business conditions in the Far Eastern district after the Vladivostok APEC Summit in 2012, only 9% of the surveyed companies responded there have been improvements while 52.7% of the respondents said there have been little improvements.
Regarding questions about the investment timing in the Far Eastern district, 14.5% of the respondents said they were already late, and 38.2% of the surveyed companies said they would invest in a couple of years. This implies that many Korean companies have keen interests in the Far Eastern district.
Regarding questions about the break-through, 41.8% of the respondents viewed that there would be business prospects after the implementation of the TOR Project, followed by after securing markets (36.4%), after sufficient infrastructure build-ups (30.9%) and after interconnection of the South-the North Korean logistic networks (20.9%). Korean companies’ interests in Russia’s top 20 ranking in the Word Bank’s Business Climate Index, local supply sources for raw materials & components, or utilization of the North Korean workforces remained comparatively low.
For their geographical preferences, 38.2% of the surveyed companies said they have interests in the Far Eastern district as a whole, 21.8% responded they prefer Sakhalin Oblast, while 16.4% and 7.3% of the respondents chose Khabarovsk Territory and Kamchatskiy Territory as their favorite places for investments, respectively. In the mean- time, 65.5% of the respondents viewed business feasibility as the most important factor for their location considerations and 41.8% picked transportation issues as the prime factor. 34.5% and 30.9% of the respondents selected level of infrastructure development and speed of administrative process as their primary consideration for location, respectively.
Regarding questions about their interested sectors, 32.7% of the respondents showed their strong interests in manufacturing, followed by infrastructure building such as transportation, energy and housing (20-31%). Interests in food & beverage industry (23.6%) were comparatively higher in manufacturing sectors, while interests in con- struction (29.1%) and service industry (20%) were particularly greater in non-manufactur- ing industries.
In regards to entry methods into the Far Eastern district, most Korean companies (43.6%) preferred a joint entry method between large companies and SMEs into the preferential development territories. 23.6% of the surveyed companies responded pos- itively to a collective formation or a SME-consortium, namely joint advance into the Korean companies-only innovation clusters. Given the preferences of Korean companies,
058 ∙ 2014 Knowledge Sharing Program II with Russia (Khabarovsk Territory) it is recommended that the Russian government should focus its investment promotion strategies on attract collective investments from prospect large corporations as well as SMEs rather than on few individual investments.
For the target investment fields, 45.5% of the respondents showed their keen inter- ests in resource developments and processing and 34.5% positively responded to con- struction of transportation infrastructures (road, railways, ports, etc.) 20-23.6% of the surveyed companies said they have intentions to invest in plant constructions and in- frastructure buildings & managements. However, fishery & seafood processing (5.5%) and agriculture & food processing sector (12.7%), which are Russia’s key development fields in the Far Eastern district, have failed to draw sizable interests from Korean companies.
- For the questions about the 14 TOR projects in the Far Eastern district, few Korean companies responded due to lack of information. However, some respondents showed their interests in infrastructure buildings and production cooperation for the TOR schemes. Regarding the prospects of the TOR project, approximately 60% of the respondents viewed the project would produce positive outcomes.
- For the 23 complex development projects in the Far Eastern district presented in the Russian government’s national social and economic development pro- grams for the Far Eastern-Baikal region, few Korean companies responded due to insufficient information as is the case with the TOR project. Regarding cooperation methods, however, some Korean companies demonstrated again their interests mainly in infrastructure buildings.
- For the 17 projects which the Government of Khabarovsk Territory has pre- sented to Korean companies, only 3-5 companies showed their interests in each project. But they viewed possibilities of various cooperative means includ- ing equity investments, production collaborations, infrastructure con- structions or consulting services.
- In regards to the questions about major investment obstacles in the Far Eastern district, half of the respondents pointed out legal issues, complex licensing procedures and administrative problems, while some companies picked a small-sized market as a key challenging factor. This implies that the government of Khabarovsk Territory should streamline its administration procedures, initiate market growth drives and intensify public relation activities.
- For the Korean government’s policy directions towards economic relation- ships with the Far Eastern district, half of the respondents said that the Korean government should support the Korean companies in the region
Chapter 01 _ Finding Measures to Promote Investments in Khabarovsk Territory ∙ 059 based on the joint policy with the Russian government. 43.6% of the sur- veyed companies pointed out that the two governments have to launch a comprehensive supporting system for the Korean companies in the Far Eastern district. The survey results suggest that the governments of the two countries should establish a joint, comprehensive supporting system for Korean companies immediately in order to further develop the Far Eastern district.
4.1.2. Implications of corporate interview results
We have interviewed the Korean corporates that had experienced in the Russian investments or have intentions to invest in the Far Eastern district. The following are the highlights of the interview results.3)
First, the Korean companies showed their keen interests in the Far Eastern district. About 50% of the interviewed companies are described with “High” interests, 40% with “Mid” interests, while only 10% of the companies showed “Little” interests in investing in the Far Eastern district.
Second, contrary to their keen interests, the Korean companies, in general, responded negatively to initiating effective investments in the region. In terms of the prospect investment sectors, however, most of the Korean companies said they preferred large-scale construction projects including social infrastructure or plants construction. Once established for project financing scheme between the two governments, therefore, it is expected that the Korean companies would actively take part in various construction projects in the Far Eastern district.
Third, many Korean companies negatively responded to the port development project, the seafood processing complex project or the tourism development plan which the regional governments of the Far Eastern district have strongly proposed. The big differ- ences in preferences between the two parties imply that more discussions should be made for feasible investments in the region. The Russian government is also required to establish an effective system to hear opinions of foreign investors.
Fourth, due to unfavorable experiences in the past, most Korean companies have negative feelings and their responses are greatly varied.
Fifth, it is better for the Russian government to apply the rules of the choice and concentration to small-scale investment projects like social infrastructure developments rather than to large-scale investment projects. Given Russian’s strong appetites for
3) We have conducted phone interviews with the Korean companies across the industries which were related to the investment promotion projects presented by Khabarovsk Territory. Out of 15 companies, 10 companies have had prior economic relationships with their Russian counterparties while 5 companies had no business experiences. Interview period: 2014.8.19-21
060 ∙ 2014 Knowledge Sharing Program II with Russia (Khabarovsk Territory) FDIs and Korea’s keen interests, the Korean-Russian investment activities in the Far Eastern district are expected to increase rapidly once some impediments resolved. Large-scale investment projects such as resource development, port facility expansions, and ground network constructions require huge capitals and lengthy administrative talks between local governments and the central government in Russia. The tedious administrative procedures will definitely result in slowing business processes which should in turn degrade Korean investors’ enthusiasm for the Far Eastern district or even may cause business withdrawals from the region. The consequences of the ineffective admin- istration procedures in Russia will be in large and adversely affect the whole investment projects in the Far Eastern district.
In order to build successful investment relationships, therefore, it is advisable that the Korean and the Russian government should first launch small-scale, high-demanding but short-period projects with effective supporting tools. In this respect, we believe the social infrastructure construction project could be one of the prospect fields as it is typically in high demands from the Russian side as well as the Korean investors. If the two countries utilize the Far Eastern Investment Fund appropriately and agree to diversify payment methods into BOT, alternative PIK or development rights, the Korean companies’ investments in the Far Eastern district are anticipated to materialize soon.
Given the fact that many Korean companies depend their investment decisions on detailed information, it is also recommended that the Russian counterparties should expand their communication channels and provide more details to the Korean investors about the development projects in the Far Eastern district.
4.2. Opinions for major investment projects in the Far Eastern district
As few Korean companies responded to the TOR project which has been initiated by the Ministry of the Far East Development, it was hard to draw a valid conclusion. This is due to lack of information and yet-to-be materialized projects.
The investment projects in Khabarovsk Territory out of the 23 development complex projects for the Far Eastern project presented by the National Program for the Social and Economic Development of the Far East and the Baikal Region also failed to draw attentions from Korean companies. This is also due to lack of information and insufficient public relation activities. In order to draw attentions from investors, therefore, it is suggested that the Russian authorities should provide sufficient project information including countermeasures for anticipating problems.
Chapter 01 _ Finding Measures to Promote Investments in Khabarovsk Territory ∙ 061 4.3. Korean companies’ interests to the investment projects as presented by the government of Khabarovsk Territory
The Government of Khabarovsk Territory has requested us to review 17 prospect projects for feasibilities out of the KSP-II Russia project. They include 6 construction projects for the Khabarovsk International Airport, modernization projects for Russian manufacturing companies, 2 natural resource development projects for mineral process- ing complex & cement production plant construction in Razo, 3 construction projects for the housing, timber & paper-mill Kombinat and timber processing plant facilities, development projects for the Vanino-Sovetskaya Gavan ports and seafood processing complexes, a greenhouse vegetable cultivating project, a cruise operation project in the Amur River and a chemotherapy center project.
The Government of Khabarovsk Territory has presented detailed information for some projects, while brief plans have been supplied for others. Against the presented projects, 1-6 Korean companies have showed their interests, while their opinions have been varied for the ways of cooperation; infrastructure constructions, joint productions, equity investments, consulting, etc.
5. Prospect investment areas and sectoral strategies
In November 2013, the Presidents of South Korea and Russia announced the 2013 Korean-Russian Joint Statement. The Joint Statement has stipulated the two nations would step up their economic cooperation in the field of civil aircraft, automobile, shipbuilding, shipyard construction & modernization, ice breaker/ice class construction & operation, space, and the Far Eastern agriculture & fishery. It has also been suggested to share experiences in economic policies for the developments in the Far Eastern district & the Siberian provinces. Through the Joint Statement, the Presidents has clarified that Korea and Russia will collaborate for mutual benefits in infrastructure buildings, support joint developments for agricultural & industrial projects, enhance bilateral or multilateral cooperation for regional economic relationships, and step forward to develop and utilize logistic facilities in the Russian Far Eastern district.
In the 6th Korean-Russian Business Dialogue, President Putin again stressed that Korea and Russia should enhance the economic partnerships towards a strong techno- logical and industrial alliance. While proposing to launch a joint shipbuilding system, he particularly emphasized to resolve political issues between the South and the North
062 ∙ 2014 Knowledge Sharing Program II with Russia (Khabarovsk Territory) Korea in order to realize the huge economic potential from the prospect tripod coopera- tion (the South and North Koreas and Russia).
Based on the agreement between the two countries and the principles of the col- laboration direction, this chapter summarizes the promising investment sectors for Korean companies which have keen interests in Khabarovsk Territory. The following are the results from meetings, business calls or interviews with many industrial pro- fessionals and enterprises which have demonstrated their intensions to invest in the Far Eastern district. More than 10 investment forums have been also hosted for this issue.
5.1. Launching the Korean-Russian joint innovation cluster project as part of the comprehensive investment promotion strategy
As indicated in the survey results, Korean investors prefer a joint advance method between large corporations and SMEs into the special economic zone like TOR or a collective corporate formation through the Korean-only innovation clusters. Given the favors of Korean companies, we propose that the Russian government should focus its investment promotion strategies on collective promotions for prospect large corpo- rations and SMEs rather than on a few individual investments.
As part of the comprehensive investment promotion strategy across industries, we view the Korean-Russian joint innovation cluster as being the best consideration. Targeting the Russian as well as the Asia-Pacific markets, the innovation clusters could be located on the Grand Ussuriysk Island in Khabarovsk Territory or on the bordering regions to China. In the long- term, if materialized, the South Korean-Russian (even with the North Korean) joint innovation clusters will function as key manufacturing bases for the Chinese, the CIS and the Middle East markets. As a pilot program for the Russian government’s comprehensive investment promotion strategy for the Far Eastern district, we also believe the joint cluster projects are worth proceeding. In the early stages, the South Korean and the Russian authorities should focus on preliminary research for the feasibility by utilizing the KSP-II Russia project without massive investments. And based on the research results, the Korean and the Russian governments may materialize other projects for the future.
Chapter 01 _ Finding Measures to Promote Investments in Khabarovsk Territory ∙ 063 [Table 1-6] Goals for the Pilot Project of the Korean-Russian Innovation Cluster and the Implementation Strategy
Key contents
• Establish manufacturing base and increase exports for the Russian and the Goals Asia-Pacific market, in mid to long-term, even for the Chinese, the CIS, and the Middle East markets.
• Joint research for preliminary feasibility study • In early stages: implement pilot projects for small processing sectors (such as jewelry processing, electronic parts assembly, non-ferrous metal processing, Target other consumer goods manufacturing, and health care service) sectors • In mid to long-term: expand project base into the strategic development sectors initiated by the Government of Khabarovsk Territory (space, aviation, shipbuilding, machinery and building material production)
Target • The Chinese-Russian bordering regions including the Grand Ussuriysk Island locations • Khabarovsk TOR and other industrial innovation clusters
• Stage 1: Joint research for preliminary feasibility study (corporate participation) - Surveys for SMEs across industries - Business presentations (utilize the KSP-II project & investor forum) • Stage 2: Sign a joint agreement and establish relevant institutions Implementa - Form the Korean-Russian Cooperation Committee for the Far Eastern district -tion • strategies Stage 3: Open a pilot center of the Korean-Russian joint innovation cluster in the Far Eastern district complying with the development policies of the Government in Khabarovsk Territory • Stage 4: Launch investment projects for small enterprises - Strong supports from the Government of Khabarovsk Territory
• Implement industrial supporting programs as part of the 2013 Korean-Russian Joint Statement • Private sector-led support with the help of the Korean and the Russian Collaborate government (utilize the Korean-Russian Far East fund) supports • Cooperate to utilize the North Korean workforce from Korea (more supports anticipated from the Russian government) and Russia • Open a task office for the establishment of the Korean-Russian innovation cluster in proper locations such as the Russian Academy of Science, economic research institutions, etc. • Streamline customs clearance
5.2. Cooperation and joint research for strategic industries
5.2.1. Aviation and space
In 2013, the Presidents of South Korean and Russia agreed to cooperate in the strategic industries such as including aviation and shipbuilding. In this regard, we propose
064 ∙ 2014 Knowledge Sharing Program II with Russia (Khabarovsk Territory) the Government of Khabarovsk to materialize parts of the agreement. Given previous experiences in the aviation & space sector, we particularly believe that both parties should find effective ways to cooperate for the Komsomolsk-na-Amure aviation & ship- building cluster project in Khabarovsk Territory.
In the short-term, the two countries should conduct joint research for feasibilities, and based on the research results, we may go forward to the collaboration in the aviation & space sector. Carbon-fiber aircraft parts, electronic components and satellite broadcasting service would be major interests and prospect fields of cooperation for both economies. However, more cooperative supports from the Russian counterparties are expected for these strategic industries.
5.2.2. Shipbuilding & ship repair
Through joint research activities, Korea and Russia are also required to expand their relationships in shipbuilding sector. From technological trainings for shipbuilding professionals to nuclear-powered ice breaker construction in preparation for opening the Arctic Route, the two countries might find various areas to cooperate in the shipbuild- ing sector.
In view of high demands for repairing shipyard construction in the Far Easter district, we believe that the authorities in South Korea and Russia should review concrete measures to build small repairing shipyards in the Komsomolsk-na-Amure or the Sovetskaya Gavan special economic zone. However, they should bear in mind that many challenges must be overcome first in order to operate the shipyards successfully.
5.3. Other prospect sectors and directions for implementation
There is a wide range of industries that the government of Khabarovsk Territory sets its investment promotion priorities on. In addition to the pilot programs for the comprehensive promotion projects and the investment promotions for the strategic industries, we view that the Korean government and the Government of Khabarovsk Territory could incorporate mutual business opportunities in the developments for port, fishery, agriculture, medical service and SMEs sector. Given the opinions of the Korean companies over the investment promotion strategies of the Government in Khabarovsk Territory, however, the Russian counterparty is required to focus on short-period projects, and to enhance public relations by communicating success stories.
Chapter 01 _ Finding Measures to Promote Investments in Khabarovsk Territory ∙ 065 6. Collaborative efforts to promote investments in the Far Eastern district
Despite growth potentials and possibilities, the Korean-Russian collaboration in the Russian Far East has been short of expectations. Mid-to-low investment potentials but high risk profiles of the region (Khabarovsk Territory’s investment potentials remaining at 34th, but investment risk standing at 30th out of 83), the political issues between the South and North Korea, and unsuccessful investment experiences in early stages have been major concerns for the Korean companies that have intentions to invest in the Far Eastern district.
Notwithstanding the Russian government’s aggressive development drives and invest- ment promotion policies since the Vladivostok APEC Summit, in particular, there have been little improvements in FDIs (other than energy resources), population, or residents’ incomes in the Far Eastern district. The Vanino-Sovetskaya Gavan special economic zone project has not produced meaningful outcomes yet, while few Korean companies have been interested in the Far Eastern TOR project, either.
In light of these unfavorable situations and the regional uniqueness, we believe that the Russian government should prop up its supporting policy measures to improve investment climates and offer customized aid programs for lowering investment risks in the Far Eastern district. For details, enhanced efforts should be geared into infra- structure buildings by utilizing varied measures including PPP, in addition to the govern- ment’s drive towards the World Bank Business Climate Index ranking of 15 in 2020. While increasing public relation activities for the TOR project, the Russian authorities should also exert strenuous efforts on creating success investment stories in the investment project
The following are key policy challenges for expanding investment relationships be- tween the two countries.
First, the governments of Korea and Russia should look for timely solutions to counter major issues. In particular, effective measures to resolve financial difficulties are much needed to expand economic collaboration in the Far Eastern district; (1) Prepare risk-hedg- ing tools for the Far East fund, (2) Activate export insurance scheme by easier qualification terms for the fund application, (3) Increase utilization of Korea EXIM Bank’s interbank financings, lower interbank rates, enhance public relations for interbank businesses in the Far Eastern district and expand project financing activities.
Given the recent drastic falls of the Russian ruble, the two countries are required to find practical ways to avoid currency risks. The two countries may temporarily agree to use their home currencies for payments of the business transactions in the Far Eastern
066 ∙ 2014 Knowledge Sharing Program II with Russia (Khabarovsk Territory) district, while aggressive approaches from the Russian side will be needed for this matter.
Second, given the importance and distinctiveness of the region, it is required that the governments of both countries should proceed with the investment projects in the Far Eastern district by forming a joint organization first. Due to the nature of the government-controlled economic system and complex administration procedures in Russia, it is very hard for an individual company to proceed with its business not only for large-scale investment projects but also for small-scale projects. As a result, many Korean SMEs believe it is impossible to launch independently their investment projects in the Far Eastern district. The adverse situation proves the need for a joint organization both at the national and the regional level, which will lead Korean corpo- rates’ investment projects in the Far Eastern district
The two sides may also consider establishment of the Korean-Russian joint committee for public & private cooperation in both the Khabarovsk and the Far Eastern projects. With the joint committee, the Korean and the Russian counterparties should be better positioned for resolving legislative issues, discussing policy measures, proposing large-scale investment opportunities, supporting business activities, and sharing information. In the 8th Korean-Russian Business Dialogue held in Khabarovsk, the two governments have demonstrated their positive responses to the proposal for the Far East Working Committee formation. In order to deal with the bilateral investment relationships and various trade issues, we propose the Russian government follow the Korean government’s policy direction, which has enabled the launching of the Eurasian Committee and the Private-Public Industrial Council in March 2015.
Third, it is suggested that the local institutions in both countries seek effective ways to support regional joint investment projects by establishing an economic coopera- tion organization. Like the national-level relationship, the regional-level economic collab- oration should be in the forms of concrete business proposals and project implementations. South Korea and Russia should arrange effective programs for explor- ing promising business opportunities, while industry experts should make every effort for business success by responding to investors’ opinions. As far as small-scale investment projects go, we believe full authorities should be granted to local governments in Russia.
The development projects in both Khabarovsk Territory and the Far Eastern district have great potential for Korean SMEs. In some small-scale projects, Korean companies may find business opportunities once effective supports are provided from local author- ities in the two countries. For instance, if the agricultural cooperative association at Gangneung or Pohang in Korea and the local authorities in Khabarovsk or other provinces in the Far Eastern district agree to cooperate, they may succeed in small-scale projects like greenhouse agricultural investments.
Chapter 01 _ Finding Measures to Promote Investments in Khabarovsk Territory ∙ 067 Fourth, it is necessary to expand the tripod economic relationships (the South-, the North Korea-Russia) by utilizing the North Korean workforces in the Far Eastern district. Utilizing the North Korean labor forces will lead many Korean companies to invest in the region, while it is better to focus on small-scale projects for realizing outcomes in the short-term. In this regard, we view that fishery & seafood processing, agriculture & farm product processing, social infrastructure & housing construction and natural resource development in remote areas could be the best candidates for the tripod economic relationships. The success of these pilot projects will bring positive impacts to extend the tripod cooperation into other sectors.
Given the present tensions between the South and the North Korea, however, it is advisable that the Russian government should be more aggressive to utilize the North Korean workforce. If Russia proposes to utilize the North Korean labor force to South Korea or proceed with the tripod collaboration projects, there will be a much greater chance for business success.
Lastly, by maximum utilization of the KSP-II Russia project, the two countries should make joint efforts to create and expand successful investment stories. The Far Eastern district is the key region for both the Russian government’s Far East Development Strategy and the Korean government’s Eurasian Initiative Policy. Based on the bilateral cooperation, successful development of manufacturing industry and processing sector will serve as a stepping-stone for the economic prosperities of the two countries.
068 ∙ 2014 Knowledge Sharing Program II with Russia (Khabarovsk Territory) References
Korean
KIET, KIET Overseas Industries Information, http://www.kiet.go.kr
Kim, Hak-Ki(2013), Russian Far East Development Strategy and its Counterplan Post-APEC Summit - Industrial Cooperation Utilizing Innovative Policies on Regional Clusters -, KIET.
Kim, Hak-Ki, Seok-Hwan Kim(2013), Study on the Plan for Triangular Economic Cooperation among South Korea, North Korea and Russia – From the Viewpoint of the Economic Coopertaion and the Russian Far East Development Strategy, KIET.
Kim, Hak-Ki, Russia’s Far East Development Strategy and Directions of Korean-Russian Industrial Cooperation’, co-hosted by KIET･KOTRA Russian Far East Investment Forum with four Far East Territories, presentation material, 2014. 11. 18.
Kim, Hak-Ki, ‘Korea’s Cooperation Strategy in the Far East in accordance with Russia’s Far East Development Strategy’, Russia’s Far East and Arctic Development Policy and Korean-Russian and South Korean-North Korean- Russian Cooperation Strategy’ hosted by KIET International Seminar, presentation material, 2013.10.29.
Kim, Hak-Ki, Russia’s Far East Development and Potential Korean and Chinese Industrial Specialization’, Russia’s Far East Development and Korea-China-Russian Cooperation - International Cooperation Strategies for Eurasia Initiative’, co-hosted by KIET and Shanghai Academy of Social Science, International Seminar, presentation material, 2014. 2. 24.
Kim, Hak-Ki, Current Changes in Russian Far East Development Policy and Responding Strategies’, KIET Industirial Economics, 2014. 1.
Kim, Hak-Ki, Implications for North Korea and Russia’s Economic Cooperation and Triangular Cooperation between South Korea, North Korea, and Russia’, KIET Industirial Economics, 2015. 2.
Korea Institute for International Economic Policy(KIEP), Consulate General of the Republic of Korea in Vladivostok and Asia-Pacific Research Center of Hanyang Univ, Investment Guide of the Russian Far East, 2013.
Yonhap News Agency, ‘Interview with the Minister of The Ministry of the Far East Development, Alexander Galushka’, 2014. 12. 8.
Cheongwadae(Blue House), Cheongwadae News, No. 251, “Korean-Russian Joint Statement 2013”, 2013. 11. 13.
Cheongwadae(Blue House), Cheongwadae News, No. 199, “Eurasia Conference key- note speech”, 2013. 10. 18.
Chapter 01 _ Finding Measures to Promote Investments in Khabarovsk Territory ∙ 069 Korea Eximbank, “2.5 Billion Dollars of Financial Cooperation for a Stepping-Stone to Eurasia”, press release, 2013. 11. 14.
Korea International Trade Association(KITA), KITA Statistics & Reports.
Russian
Expert Online, http://expert.ru
Government of Khabarovsk Territory
Plenipotentiary Representative of the President of the Russian Federation in the Far Eastern Federal District (http://www.dfo.gov.ru/
Russian Federation President, ‘Russia-Korea Business dialogue’ speech (http://kremli- n.ru/news/19610), 2013. 11. 13.
Russian Federal Government, “Development of Social Economy in Far-East Russia and Baikal Region” by Program Sponsored by the Government of Russian Federation (http://www.gosprogrammy.gov.ru/Main/Start)
Russian Federation Federal State Statistics Service(Росстат), http://www.gks.ru
The Ministry of the Far East Development of Russian Federation (http://minvostokrazvitia.ru/)
государственной программы Российской Федерации, Социально-экономическое ра звитие Дальнего Востока и Байкальского региона, 2013. 3.
ПЕРЕЧЕНЬ ИНВЕСТИЦИОННЫХ ПРОЕКТОВ, РЕАЛИЗУЕМЫХ И ПЛАНИРУЕМЫХ К РЕАЛИ ЗАЦИИ НА ТЕРРИТОРИИ ХАБАРОВСКОГО КРАЯ НА ПЕРИОД ДО 2025 ГОДА, 2011.
ПРАВИТЕЛЬСТВО ХАБАРОВСКОГО КРАЯ, ИНВЕСТИЦИОННАЯ СТРАТЕГИЯ Хабаровск ого края на период до 2020 года, 2014.
ПРАВИТЕЛЬСТВО ХАБАРОВСКОГО КРАЯ, О СТРАТЕГИИ СОЦИАЛЬНОГО И ЭКОНОМ ИЧЕСКОГО РАЗВИТИЯ ХАБАРОВСКОГО КРАЯ НА ПЕРИОД ДО 2025 ГОДА, 2011.
ПРАВИТЕЛЬСТВО ХАБАРОВСКОГО КРАЯ, ОБ ОСНОВНЫХ НАПРАВЛЕНИЯХ ДЕЯТЕЛЬНОС ТИ ПРАВИТЕЛЬСТВА ХАБАРОВСКОГО КРАЯ НА ПЕРИОД 2014 - 2018 ГОДОВ, 2014.
ПРАВИТЕЛЬСТВО ХАБАРОВСКОГО КРАЯ, ПРОГРАММА РАЗВИТИЯ ИННОВАЦИОННОГО ТЕРРИТОРИАЛЬНОГО КЛАСТЕРА авиа- и судостроения Хабаровского края)”, 2012.
NOMURA Research Institute, North Japan Port Consultant, ФОК, Концепция создания и развития портовой особой экономической зоны в Советской Гавани, 2011.
070 ∙ 2014 Knowledge Sharing Program II with Russia (Khabarovsk Territory) 2014 Knowledge Sharing Program II with Russia (Khabarovsk Territory) Improvement on the Investment Environment Chapter 2 of Khabarovsk Territory
Khabarovsk Territory Investment Promotion Plan (‘Vanino-Sovetskaya Gavan’ Port Special Economic Zone development policy proposals)
1. Introduction: Background and Objectives 2. Theoretical Review: The Case of port development and industry clusters 3. Highlights of Vanino-Sovetskaya Gavan PSEZ Development Plan 4. Case of PSEZ development in Korea: Gwangyang Bay Free Economic Zone 5. Opinions and Policy Suggestions ￭ Chapter 02
Khabarovsk Territory Investment Promotion Plan
Sun-Bae Kim (KIET)
1. Introduction: Background and Objectives
The importance of the Russian Far East port is escalating along with economic growth in Asia-Pacific countries, including Korea, China and Japan. Trading volume of the Russian Far East Main Ports has increased by an annual average of 7.9% in the past 10 years, which is attributed to increased exports of Siberian natural resources such as coal and steel. In addition, more than 80.0% of the total trading volume in the Russian Far East is handled by ports in Primorsky and Khabarovsk Territory4). Thus, Russia is in the situation that requires an expansion of port facilities as the development of Siberia resources is accelerating. The Russian federal government has been active in port maintenance and development and announced 'Transport Strategy by 2030'5).
In particular, the competition between the Primorsky Territory and the Khabarovsk Territory to become the Asia-Pacific regional gateway port is intensifying. As the Sovetskaya Gavan port in Khabarovsk Territory was designated as Port Special Economic Zone before ports in the Primorsky such as Vostochny, the Khabarovsk has gained advantage over the Primorsky in this competition. As the transportation hub in the Far East region where the Trans-Siberian Railway and the Baikal-Amur Railway Line pass through, the Khabarovsk has the advantage of direct access to Asia-Pacific countries through the Vanino-Sovetskaya Gavan port. The Khabarovsk has adopted the develop-
4) Russian Far East trade volume statistics of FEMRI and KMI internal data(Kim, Chanho, 2014, Russian Far East Port Development and Investment) was referred to. 5) The Russian Federation Government, 2013, and KMI internal data(Kim, Chanho, 2014, Russian Far East Port Development and Investment) was referred to.
072 ∙ 2014 Knowledge Sharing Program II with Russia (Khabarovsk Territory) ment strategy that seeks to expand infrastructure and foster its industry through large-scale investment projects. In order to attain this goal, as of December 31, 2009, it decided to establish the ‘Vanino-Sovetskaya Gavan port Special Economic Zone’ accord- ing to the Russian federal legislation #11856).
This study aims to review the Vanino-Sovetskaya Gavan PSEZ development plan of the Russian federal government and the Government of Khabarovsk Territory and seek policy measures for early activation and ways for promoting cooperation with Korea (companies). To this end, based on theories of port and industry cluster develop- ment and Korea’s case of Gwangyang Bay Free Economic Zone, the study reviews the port facilities expansion plan and industry cluster development plan of the Vanino-Sovetskaya Gavan PSEZ development plan. Additionally, the study presents the plan for early activation of Vanino-Sovetskaya Gavan PSEZ and ways for promoting cooperation with Korea (companies), based on comments elicited by in-depth interviews with Korean experts and companies about PSEZ Development Plan and the business environment of the port. In particular, the study focuses on how Vanino-Sovetskaya Gavan PSEZ can attract foreign investment and cooperate with Korea companies.
2. Theoretical Review: The Case of port development and industry clusters
2.1. Major factors to be reviewed on port development
The three basic requirements for port development are hinterland (trading volume), foreland (networks) and port location. First, trade volume in the hinterland can be generated only when there are industrial park, logistic facilities, minerals･agricul- tural･fishery producing area, consuming area (large cities), etc. Second, foreland means other ports that are connected with it. In the case of export port, it is important to have enough numbers of connected import ports, and in the case of import port and transshipment port, they should secure sufficient numbers of connected export ports and feeder ports respectively. Third, as for port location, several factors are crucial such as enough depth of water so that ships can be docked, sufficiently large areas in the hinterland, a stable soil structure that can accommodates large equipment, neigh- boring cities that can provide sufficient labor force, and infrastructure (water, sewage, energy supply facilities, etc.). Therefore, a network connection of port is essential and it is necessary to develop hinterland to create trade volume. Key concepts related to port development are shown in the following figure.
6) Government of Khabarovsk Territory , 2014 ,
Chapter 02_ Khabarovsk Territory Investment Promotion Plan ∙ 073 [Figure 2-1] Relations Map between Port, Hinterland and Foreland
Nation A City A
Foreland (destination) Nation B a Harbor Port Port Hinterland city City B City D
Nation C City C
Source : Lee, Sung-woo(2014).
Considering these factors, this study will review the adequacy of the port complex cluster (bulk cargo, freight container, industrial clusters, etc.) development plan which is a target of ‘Vanino-Sovetskaya Gavan PSEZ’ and seek early activation measures. In particular, it will primarily explore trade volume characteristics of the hinterland of ‘Vanino-Sovetskaya Gavan PSEZ,’ i.e. the overall growth trend of trade volume and which commodity has shown trade volume increase.
2.2. Factors to be reviewed on industrial cluster
The cluster strategy aims for the endogenous regional development to foster the industry on the basis of regional resources. In other words, it is a strategy that effectively utilize and systematically expand the resources necessary for the development of the local industry. Thus, the cluster policy model represents the policy model for the utilization and expansion of the resources based on the key elements of the local economy.
Various regional economic entities mutually interact and cooperate with each other in the regional processes of production and technology and knowledge creation, dif- fusion, and utilization. From the viewpoint of the conceptual system, a cluster is the network system in which the regional economic entities are linked through their mutual interaction and cooperation. Therefore, the basic structure of the cluster consists of the production system of the local industry, corporate support organizations (technology, production, and marketing), the local industry platform, and the industrial site (integrated facility). The strategy efficiently bonds science and technology and the corporate support system on the center of the production system of the local industry. Furthermore, there is a need to renovate and expand the regional innovation infrastructure (regional finance, education and training, information and communications, and logistics and distribution) necessary for the formation of the cluster and the autonomous regional
074 ∙ 2014 Knowledge Sharing Program II with Russia (Khabarovsk Territory) development. Lastly, it is also necessary to build the regional innovation governance system for management and operation necessary for the efficient utilization of the industrial cluster and the regional innovation infrastructure.
In particular, market failure is likely to occur in the cooperation part of the production system and the science and technology and corporate support systems of the local industry, it is even more likely in the underdeveloped regions if the degree of the scale and development of the local economy has not reached the threshold (critical mass).7) Thus, the cluster strategy preferentially requires policy intervention to comple- ment the market failure. In other words, it is most important to expand the support programs and special agencies to strengthen the functions of overall planning and coordination of the regional economic development, linkage between production and science and technology systems, and connection between production and corporate support systems.8).
[Figure 2-2] Components of Cluster
PLATFORM (Window, Brokering)
Business Science- Technology Business Production Service Technology Support Support System Support System Institute System Institute
Agglomeration Facilities CLUSTERS
Source : Kim, Sun-Bae(2001).
On the basis of the above industrial cluster policy model, this study will first look at the potential of production systems development of industrial clusters development plan of ‘Vanino-Sovetskaya Gavan PSEZ’. In other words, it will first review the degree of integration of related companies (whether or not they obtained the critical size of the production system), focusing on ' fishery processing,' ' shipbuilding and repair’ industries which the PSEZ plans to promote. If the integration of enterprise is insufficient, the study will primarily seek efficient ways to attract related companies around the anchor company.
7) Kim, Sun-Bae, 2003, “Innovation system building measures towards innovation-driven economy,” Science and Technology Policy, STEPI. 8) Jeong, Jun-Ho, Sunbae Kim, Changuk Byeon, 2004, “Spatial Structure of Industrial Cluster and Regional Innovation Governance”, KIET.
Chapter 02_ Khabarovsk Territory Investment Promotion Plan ∙ 075 3. Highlights of Vanino-Sovetskaya Gavan PSEZ Development Plan
3.1. Development environment and outline of Vanino-Sovetskaya Gavan PSEZ
Russia established a development plan of Vanino-Sovetskaya Gavan PSEZ integrating the Vanino port and the Sovetskaya Gavan port. The Vanino port is a major port in the Far East region which is connected to Trans-Siberian Railway, Baikal-Amur Mainline and sea routes to Asia-Pacific countries. Although the development of Sovetskaya Gavan port is belated, it has the deepest water depth in the Far East coast and holds a favorable geographical condition which features scalability. Government of the Russian Federation sees the development of Vanino-Sovetskaya Gavan PSEZ as a way of contributing to the development of the Far East in terms of infrastructure maintenance. Moreover, in terms of international logistics, Vanino-Sovetskaya Gavan PSEZ development is re- garded as one way of shortening the distance from Europe via Western Russia to USA northern Pacific coast transportation routes.
[Figure 2-3] The Location of the Vanino-Sovetskaya Gavan PSEZ
Source : Sovetskaya Gavan Autonomous District Government (2014) “Sovetskaya Gavan Port Economic Zone (Sovetskaya Gavan PSEZ)”, Seoul Investment Conference presentation.
076 ∙ 2014 Knowledge Sharing Program II with Russia (Khabarovsk Territory) [Figure 2-4] International Transport Conditions of Vanino-Sovetskaya Gavan PSEZ
Source : Sovetskaya Gavan Autonomous District Government (2014).
Based on the Russian federal government and the Government of Khabarovsk Territory data, this study examined the development conditions of the Vanino-Sovetskaya Gavan PSEZ regarding its current competitiveness and potential separately. The results can be summarized as follows9). First, the gulf of Sovetskaya Gavan has favorable natural conditions for port development, so it has competitiveness of port development. This is one of the widest and deepest gulfs in the area where Russia and the East Sea are facing with navigable water depth of 30 meters, so a ship of deep draft which is heavier than 100,000 tons can be docked. In addition, as it is located in the natural deep water, port development is possible at low cost. Although this port is possible to allow year-round navigation, it is expected that there may be sea ice when there are frequent navigations.
In addition, Vanino-Sovetskaya Gavan PSEZ is included in the region that has large amount of port development potential. First, Baikal Amur Railway (BAM) passes through the region which contains abundant natural mineral resources, and this railway is con- nected to Vanino port, so Vanino-Sovetskaya Gavan PSEZ has potential to be developed as an export port. Second, this region is close to Northeast and Southeast Asia, which
9) This chapter is based on the two materials below: the Government of Khabarovsk Territory, 2014, , introduction data, Sovetskaya Gavan Autonomous District Executive Office, 2014, “Sovetskaya Gavan PSEZ”, Seoul Investment Seminar presentation.
Chapter 02_ Khabarovsk Territory Investment Promotion Plan ∙ 077 are the main export markets of extraction of minerals, timber and marine products in the Far East Russia. Third, it is the nearest port from cities such as Khabarovsk (600 km) and Komsomolsk-on-Amur (300 km), and it is considered a transportation gateway of the Khabarovsk Territory.
Vanino- Sovetskaya Gavan PSEZ was designated as a PSEZ in accordance with the legislation of the Russian Federation (# 1185, December 31, 2009), and the basics are as follows:
- Location: the coast of Sovetskaya Gavan autonomous district - Area: 2.9 square kilometers (expandable up to 4.5 km2) - A total of 3.74 billion rubles of national funding (3.15 billion rubles from the federal budget / 0.59 billion rubles from the local budget)
Vanino-Sovetskaya Gavan PSEZ aims to be developed as an industrial cluster of biofuels, fishery processing and ship repair through port and logistics activation. In other words, ‘Vanino-Sovetskaya Gavan’ PSEZ is planning to create a large logistics complex and specialized industrial park, based on the hub of transportation and industry. Port Industrial Park plans to handle various types of bulk cargo and attract businesses including ship repair companies. A bio-Industrial complex is planned to be established inside of the Lososin district, and a specialized bulk cargo transshipment port will be constructed in the Vaninsky autonomous district.
As the first step, the goal is to provide 290 hectares of industrial land to new tenant companies, including 140 hectares in the Cape Maria and 150 hectares in the Cape Muravyova respectively. For this purpose, the construction of Southern Region’s port facilities such as iron ore transshipment complex and container terminal has started, and this development will expand to the entire Sovetskaya Gavan gulf area in the future. As the second step, in addition to development of transportation infrastructure, ports with terminals that handle different kinds of goods will be constructed in the northern areas of the gulf.
3.2. Vanino-Sovetskaya Gavan PSEZ major development plan
The Russian Federation Government and the Government of Khabarovsk Territory are planning to build infrastructure, foster industrial clusters, and provide investment incentives for the systematic development of Vanino-Sovetskaya Gavan PSEZ.
078 ∙ 2014 Knowledge Sharing Program II with Russia (Khabarovsk Territory) [Figure 2-5] Vanino-Sovetskaya Gavan PSEZ Infrastructure Development Plan
Source : Government of Khabarovsk Territory (2014).
Information on building infrastructure in the PSEZ is as follows. First, there are plans to develop railway infrastructure in the eastern region to increase BAM railway trans- portation capacity (32.6 million tons of transport until 2020). Second, it is planned to construct 120 megawatt cogeneration plant and 220 kilowatt electricity tower to meet the demand for electricity in the Vanino-Sovetskaya Gavan. Third, Khabarovsk- Lidoga-Vanino road will have access to the Komsomolsk-on-Amur, and a road that is connected to ‘Amure’(Chita - Khabarovsk), ‘Vostok’(Khabarovsk - Nakhodka), and ‘Ussuri’(Khabarovsk - Vladivostok) federal highways will be constructed. Lastly, operation of scheduled flights connecting Khabarovsk – Vanino-Sovetskaya Gavan autonomous dis- tricts (Sovetskaya Gavan airport (Maygatka)) and aircraft upgrading are being considered.
Next, a major development plan of Vanino-Sovetskaya Gavan PSEZ is setting up a shipping cluster and an industry cluster.10) The shipping cluster is planned to have port transshipment terminal, which will function as coal, grain, iron ore, container and fishing port, and warehouses, which will handle fishery, vegetables, frozen meat, grain and other logistic products.
As for the industry cluster, the major plan is the integration of fishery processing complexes and ship repair factories. First, a ship repair industry cluster will be constructed based on the existing companies such as OAO Yakor, OAO Severniy SRZ. Second, a seafood processing industry cluster will be created. Specifically, a seafood processing plants complex will be built in the Lososin region of Sovetskaya Gavan, which will
10) Vanino-Sovetskaya Gavan PSEZ is still in the planning stage, and its project status is inadequate in overall. As of the site visit in September 2014, there was not any progress at all in the promotion of building port logistics and industrial clusters in Vanino-Sovetskaya Gavan District.
Chapter 02_ Khabarovsk Territory Investment Promotion Plan ∙ 079 be equipped with modern facilities, logistic infrastructure and cooling equipment. Through this, the Lososin region will be fostered as an outpost of deep-sea fishing inside of the PSEZ, which will enable land use for new industrial and cooling facilities equipment, promote the cluster linkage effect between fishery companies in Sakhalin Region, Kamchatskiy Krai and Khabarovsk Territory.
[Figure 2-6] Port and Industrial Cluster Development plan of Vanino-Sovetskaya Gavan PSEZ
Port Logistic Cluster Transshipment terminal Refrigerating capacity Storage capacity Fish, vegetable, meat Cereals and other logistics Coal Grain Iron Container Fishing harbor Siberia Far Eastern Federal District Transportation for logistics (Rail load, vehicle road, airway) Export logistics Far Eastern Federal District Fish finished product Domestic raw material Foreign market supply market Industrial Cluster (Asia-pacific countries) Fishery processing ship maintenance Ship repair services Fish complexes factories Asia sea area Other types of producing activities Foreign market Domestic market Raw material Finished pr oduct Grain products, fishery Facility, skill, raw material Market(exchange, auction) product, bulk and other Asia, Europe Wholesale business at production sites cargo Vanino Port Sovetskaya Gavan Port Specialization Harbor specialized for Various typesof bulk transshipment - Fishery processin g exported bulk - Ship repairing transshipment - Manufacturing
Source : Government of Khabarovsk Territory (2014).
[Figure 2-7] Functions of Fishery Processing Cluster in the Vanino-Sovetskaya Gavan PSEZ
Main Function
Fishery and processed fishery Inshore fishery and shipments of fishery and processed fish product Refrigeration system & warehousing
Recycling and production of Marine biofuel biofuel and logistics Artificial breeding
Fuel loading and Fishery wholesale ship supply
Source : Sovetskaya Gavan Autonomous District Government (2014).
Lastly, public investment for constructing infrastructure, various tax incentives and systematic management plans are ready for the activation of Vanino-Sovetskaya Gavan
080 ∙ 2014 Knowledge Sharing Program II with Russia (Khabarovsk Territory) PSEZ. First, infrastructure provision (3.7 billion rubles in the early stages (about 96 billion Korean won)) from the government is planned for smooth business activities. Second, various tax incentives are being considered such as applying preferential tax rates when renting land, complete supply of the required infrastructure and government warranty and support. The Russian government is promoting that a 30% reduction of investment cost is possible compared to investing in other regions through tax reductions (15.5% of income tax, 10 years of property tax exemption, 5 years of land tax exemption, 5 years of transportation tax exemption, exemption of import duties and VAT). Third, the organic management operating system of the Russia Economic Development Ministry (PSEZ management, licensing agency), the Government of Khabarovsk Territory, JSC SEZ (Moscow, setting PSEZ plan, supplying and managing) will be prepared.
[Table 2-1] Various Tax Benefits of Vanino-Sovetskaya Gavan PSEZ
Tax Standard rate Resident companies Profit tax 20% 15.5% Property tax 2.2% Exempted for 10 years Real estate tax 1.5% Exempted for 5 years Traffic tax Depends on transportation Exempted for 5 years Import duties Fixed import duties applied to equipments, Exempted & VAT raw materials, finished products
Source : Sovetskaya Gavan Autonomous District Government (2014).
[Figure 2-8] Sovetskaya Gavan District Development Plan
Source : Government of Khabarovsk Territory (2013).
Chapter 02_ Khabarovsk Territory Investment Promotion Plan ∙ 081 [Figure 2-9] Vanino District Development Plan
Source : Government of Khabarovsk Territory (2013).
4. Case of PSEZ development in Korea: Gwangyang Bay Free Economic Zone11)
4.1. Overview and Conditions of Gwangyang Bay Free Economic Zone
Based on development practices and experience of special economic zones (called Free Economic Zone (FEZ) in Korea) in Korea, this section will review implications for development of Vanino-Sovetskaya Gavan PSEZ. Gwangyang Bay Area was designated as FEZ in order to be fostered as a business hub of Northeast Asia in October 2003. The FEZ includes 5 districts and 21 sub-districts in Yeosu, Suncheon, Gwangyang of South Jeolla Province and Hadong County of South Gyeongsang Province, with a total area of 77.71㎢ and planned population of 73,257. The project period is planned from 2003 to 2020, and the total project cost is estimated at 17.8658 trillion won (13.2705 trillion won for district development plus 4.5953 trillion won for infrastructure) while investment in the public sector is planned at 5.7186 trillion won (3.8831 trillion won for district development plus 1.8355 trillion won for infrastructure).
The Gwangyang Bay Area FEZ around Gwangyang port is equipped with the optimal conditions for growth to become the Logistic Hub of Northeast Asia in the 21st century,
11) Throughout this chapter, Gwangyang Bay Free Economic Zone Data (http://www.gfez.go.kr/) is cited.
082 ∙ 2014 Knowledge Sharing Program II with Russia (Khabarovsk Territory) which is rapidly growing as one of the world's three major trade zones. First, the bay is located on the fairway in Northeast Asia and the Pacific region which includes China-North America routes that is the world's largest route. Second, it has secured more than 50 major cities in which nearly one million people are populated within a radius of 1,200km. Third, up to 30 tons or larger ships can enter and depart from the bay because the water depth reaches up to 41m. This makes the Gwangyang Bay much more advantageous to become a maritime logistics hub over competing ports in China and other countries, such as Shanghai Port whose water depth is low. Fourth, it has an absolute advantage to absorb Northeast transshipment cargo demand. When the new Iron Silk Road opens through construction of TCR(Trans China Railway), TMR(Trans Manchuria Railway) and TSR(Trans-Siberian Railroad), it is expected that the Gwangyang Bay FEZ will obtain more favorable conditions with the comparative advantage over other competing ports. Fifth, the FEZ is forecast to play the role as Northeast Asian land and marine logistics hub which connects North America, Northeast Asia, Southeast Asia and Europe.
Gwangyang Bay Area FEZ is developing 5 districts and 21 complexes step by step by 2020, and made each district specialized one in order to reap synergies as much as possible. Gwangyang Bay Area FEZ has the development vision of “the world's leading industrial and logistic district development” and five development strategies. Gwangyang Bay FEZ is one of the world's leading international ports (approximately 242 million ton was handled in 2012)with convenient transportation infrastructure, such as aviation facilities within one-hour distance (Yeosu, Sichuan, Guangzhou), KTX connected to the metropolitan area and 5 freeways connected (three -hour distance from the metropoli- tan area). Gwangyang Bay FEZ is also equipped with optimal industrial infrastructure. It is adjacent to POSCO Gwangyang Steelworks and Yeosu National Industrial Complex, includes industrial complex with sufficient size (188.9㎢, which is 14.7% of Korea’s Industrial Complex), and provides excellent settlement environment.
[Figure 2-10] Gwangyang Bay Area FEZ Vision and Development Strategy
Vision
GHEZ`s New Vision For 2020 Developing the World`s Best Industrial & Logistics Area
5 Strategies
Best Educational National and Medical Tourism & Logistics Hub International Production Hub Educational Leisure Hub of Mortheast Business Area Base and Medical Asia Hub
Source : Gwangyang Bay FEZ
Chapter 02_ Khabarovsk Territory Investment Promotion Plan ∙ 083 4.2. The district development direction and key industry
Gwangyang District seeks to attract logistic products through the activation of transshipment function and building the steel and non-steel materials handling base to become a Northeast Asian logistics hub, under the two-port system policy of the Korean government. To this end, it is promoting phased development of 6 complexes such as Gwangyang container terminal, Gwangyang Container Terminal hinterland step 1 and 2, POSCO Terminal CTS, and golden industrial park and prosperous hinterland.
[Figure 2-11] Gwangyang Bay Area FEZ District Development Plans
Source : Gwangyang Bay FEZ
084 ∙ 2014 Knowledge Sharing Program II with Russia (Khabarovsk Territory) Yulchon district intends to activate production functions of container terminal by attracting basic industries such as the Yeosu petrochemical complex which is the existing national industrial complex or steel-related factories. For this purpose, annual con- struction of 4 complexes is planned such as YulchonⅠ, Ⅱ, Ⅲ industrial complexes and the Yulchon wharf.
Sindeok district plans to promote the activation of Gwangyang Bay Free Zone economy through the development of hinterland functions such as education and medical facilities to accommodate foreigners, and it will also create a pleasant living environment with education, resident and leisure facilities. The district is composed of 6 complexes, which are Shin-Dae hinterland complex, Gwangyang Sepung industrial complex, Hae-Ryong industrial complex, Gwangyang complex business complex, Wellbeing County Park and Seonwol High Park complex.
As the hub of southern coast tourism belt, Hwayang district plans to attract tour, recreation, sport and leisure functions, and the development will be promoted through receiving private capital investment in order to prepare for the maritime era.
Hadong District is planning to foster shipping industry related with Gwangyang Steelworks and support functions such as resident, business and leisure facilities. The district consists of 4 complexes, which are Galsa Bay shipbuilding industry complex, Deokcheon hinterland, Du-You hinterland and Dae-Song industrial complex.
4.3. Implications
Gwangyang Bay FEZ in Korea has large differences from the Vanino-Sovetskaya Gavan PSEZ in terms of socio-economic conditions and the population size of the hinterlands. However, the two regions have similarities in that development has been planned in strategic need of port development at the national level, and the internal regional structures resemble each other. Gwangyang Bay FEZ in Korea has the following implications for effective development strategies of the Vanino-Sovetskaya Gavan PSEZ.
First, the Vanino-Sovetskaya Gavan PSEZ and Gwangyang Bay FEZ have a similarity in that their development are part of national 2-PORT strategy. The Gwangyang Bay FEZ has been developed with a long-term intention of the Korean government, which is shifting the port system from the current single-port system based on Pusan port toward a 2-PORT system. The industry of Gwangyang Bay FEZ has been relatively underdeveloped. The area, however, has established and pursued a plan of developing an international logistics port and forming an industry cluster in areas with blessed natural conditions and high potential to become an international logistics port hub. Gwangyang Bay FEZ has been establishing and promoting a phased development plan which separates the short-term development strategy from the long-term one in order
Chapter 02_ Khabarovsk Territory Investment Promotion Plan ∙ 085 to overcome the difficulties which arose at the early stage of the development, such as relatively underdeveloped industry conditions and low trading volume.
Second, although Gwangyang Bay FEZ has a considerably different population size from that of the hinterlands of the Vanino-Sovetskaya Gavan PSEZ, they have similarities in terms of their local structure in that they link the older port city and the development of a new port. Of course, the integrated population level of the Vanino-Sovetskaya Gavan region in Russia is about 80,000, whereas that of Yeosu-Gwangyang FEZ is about 50 million, which shows a big difference. Gwangyang Bay FEZ has established a develop- ment plan of developing regionally-specific functional-districts while setting forth the integration plan of two port cities: Yeosu, the existing port city, and Gwangyang, the new port city. To sum up, enhancing the efficiency of the project is being obtained with a district-specific development plan while exerting efforts to associate the existing city and new port development.
Therefore, the Vanino-Sovetskaya Gavan PSEZ also needs to implement the current development plan as a phased development plan which separates the short-term develop- ment strategy from the long-term one as Gwangyang Bay FEZ does, considering the current economic and industrial conditions, resource development and export, and the increasing trend of export and import volume. Additionally, the district-specific develop- ment strategies for Vanino-Sovetskaya Gavan PSEZ and neighboring areas need to be strengthened in a way that they are closely linked to short-term and long-term plans.
5. Opinions and Policy Suggestions
This section will seek ways for the early activation of the Vanino-Sovetskaya Gavan PSEZ and ways for promoting cooperation with Korea (companies). It intends to provide opinions and policy suggestions based on review of the theoretical aspects of the develop- ment of the port and the industry cluster, the case of Korea (Gwangyang Bay FEZ), and experts’ opinions and survey on demands of firms.
5.1. Comprehensive evaluation of the Vanino-Sovetskaya Gavan PSEZ
As noted earlier, it is evaluated that the Vanino-Sovetskaya Gavan PSEZ has significant potential for development, and the Russian Federation needs to develop this region. First, the Vanino-Sovetskaya Gavan PSEZ needs to develop a resource export port because natural mineral resources are rich around the BAM railway which is connected to this region. Second, the Vanino-Sovetskaya Gavan PSEZ is the marine transportation gateway
086 ∙ 2014 Knowledge Sharing Program II with Russia (Khabarovsk Territory) for the Far East of Russia and the Khabarovsk Territory (Khabarovsk 600km, Komsomolsk 300km). It also includes Trans Siberia Railway, an alternative means of transportation. Third, Sovetskaya Gavan, which is a new development district, holds the advantage of relatively inexpensive seaport development cost due to its favorable natural conditions and deep water level.
Thus, the Vanino-Sovetskaya Gavan PSEZ is considered to have favorable conditions to be developed in terms of needs and potential. A problem is that the development shows unsatisfied level of progress due to the stagnation of investment after the establish- ment of the plan. Therefore, for the early activation of the Vanino-Sovetskaya Gavan PSEZ, a phased development plan is suggested which separates the short-term develop- ment strategy from the long-term one as the case of the Gwangyang Bay FEZ of Korea.
This study suggests the following as a short-term development strategy. First, the Vanino-Sovetskaya Gavan PSEZ needs to focus on building bulk cargo export terminal in the short term. This is necessary to facilitate exports of rich natural resources from neighboring areas of BAM railway. Second, to this end, it is necessary to first extend the BAM railway, which is currently connected only to the Vanino port, to Sovetskaya Gavan Port. Third, it is necessary to come up with methods for a gradual expansion of port infrastructure, which is required to develop a large-scale export cargo terminal. Fourth, attracting anchor companies is the highest priority to build industry clusters, focusing on ship repairing, ship building and fishery processing industries. Finally, the dramatic improvement of the customs clearance system is required to attract foreign investment. Korean and other foreign companies point out the customs clearance system as the main difficulty factor in doing business with Russian companies.
In the longer term, it is necessary for the Vanino-Sovetskaya Gavan PSEZ to be developed as a modern industrial district which meets the international standards as the direction of current development initiatives and development plans. In other words, it is required to foster high value-added industry cluster, such as construction of cargo terminals dealing with bulk cargo and container cargo, shipbuilding, fishery processing and wood processing.
5.2. Short-term development strategy suggestions
5.2.1. Focus on development of an export port for bulk cargo
Although the Vanino-Sovetskaya Gavan PSEZ plans to develop a bulk cargo export port and a container export port at the same time, the overall progress of the plan is slow. In particular, very few projects are now in progress in the case of Sovetskaya Gavan Port.
Chapter 02_ Khabarovsk Territory Investment Promotion Plan ∙ 087 Of course, trade volume in the Far Eastern Russian port has been on the rise (an annual average of 4.7%) since 2010, led by the Primorsky Territory and Khabarovsk Territory, and trade volume in the Vanino-Sovetskaya Gavan Port is also rising. However, the increasing trade volume is mostly attributed to coal and coke, bulky cargo mainly traded in the Vanino port. In the 2013 “Russian port infrastructure development strategy 2030”, the Far Eastern port development plans mostly mention development of export ports dealing with resources such as oil and coal.
[Table 2-2] Russian Far East Regional Trade Volume Status
Thousand tons, % Region 2011 2012 2013 Average annual growth rate Primorsky Territory 72,281 80,049 88,206 6.9 Khabarovsk Territory 28,068 28,656 31,772 4.2 Sakhalin Region 21,737 21,645 21,645 -0.1 Magadan Region 1,226 1,350 1,520 7.4 Kamchatskiy Krai 2,057 2,042 1,632 -7.4 Chukotka Autonomous 752 912 - - District Far East(Total) 126,122 134,654 144,775 4.7
Source : FEMRI, Kim, Chan-Ho(2014) was referred to.
Container cargo is not likely to increase considering trade volume growth of each item, Russia Port Infrastructure Development Strategy 2030, and the conditions of the industrial and economic development in Khabarovsk and the regions near BAM railway. Therefore, the early connection of the BAM railway to the Vanino-Sovetskaya Gavan Port and the development of a terminal focusing on the bulk cargo export are necessary in the short term.
[Table 2-3] Russian Far East Trade Volume by Item
Thousand tons, % Region 2011 2012 2013 Average annual growth rate Total 126,122 134,654 144,775 4.7 Coal, Coke 42,349 48,671 54,436 8.7 Timber 3,559 3,203 2,635 -9.5 General Cargo 7,758 11,151 9,923 8.5 (Except for large containers) Large container 9,901 10,001 11,805 6.0 Liquid bulk, LNG 55,143 55,661 61,405 3.7 other Logistics 7,411 5,967 4,570 -14.9
Source : FEMRI, Kim, Chan-Ho(2014) was referred to.
088 ∙ 2014 Knowledge Sharing Program II with Russia (Khabarovsk Territory) [Table 2-4] Development Plan in the Far East Port
Port Project Investor Type of cargo Refunishment Trade Port Posyet Trade port posyet Ltd. Coal Posyet Ldt. Nakhodka Facility maintenance of pier #8 Nakhodka ICC Ltd. Coal Petrochemical Complex NK Rosneft Ltd. Liquid bulk Construction Coal Pier Construction for Vostochny-Nakhodka marine Rostransmodernizatsiya Coal transportation center Vostochny development Oil wharf facilities Specialized sea oil kozmino petroleum development for Kozmino Ltd. Improving access routes for “SK” Small port Coal pier #31~35 Coal transshipment facilities Daltransugol Ltd. Coal of OAO Coal transshipment terminal Vanino Mechel-port Vanino Llc. Coal construction in Muchka Bay Freight vehicles Terminal Sahatrans Llc. Coal, timber construction in Muchka Bay Container Terminal Vladivostok Russia Troika Ltd. Container Construction
Source : Russian port infrastructure development strategy 2030. 2013, Kim, Chan-Ho(2014) was referred to.
5.2.2. Port infrastructure expansion by non-administrative agency port development scheme
With the aim of developing itself as a logistics cluster, the Vanino-Sovetskaya Gavan PSEZ is planning port infrastructure expansion which is necessary to foster port logistics and industries, but the actual progress of the plan is not satisfactory. The plan includes the expansion of port infrastructures, such as building various port transshipment termi- nals (coal, grain, iron ore, fisheries, etc.), cold storage and storage warehouses.
Therefore, the Vanino-Sovetskaya Gavan PSEZ is required to attract private and foreign investment by adopting non-administrative agency port development scheme. Korea also adopted non-administrative agency port development scheme to improve the operational efficiency of port facilities by helping actual demanders (ship owner, owner of goods, shippers, etc.) promptly obtain facilities. This is a way to activate the operation while ensuring the construction of private pier or small port facilities through an institution of port law.
Chapter 02_ Khabarovsk Territory Investment Promotion Plan ∙ 089 [Table 2-5] Korea non-Administrative Agency Port Construction Status ① By year Total Before 90s 91 - 00 01 - 08 number of case 2,554 463 956 1,135 Amount 118,734 4,233 41,216 73,285 (100 million won)
② By Facility welfare Freight, Ship education mainten- outer mooring handling passenger total distribution, supply and ance facility facility equipment facility sale facility facility controlling and etc. tower number 2,554 104 318 482 86 554 107 490 413 of case Amount (100 118,734 979 80,571 11,396 659 11,451 507 3,391 9,600 million won)
Source : Ministry of Land, Transport and Maritime Affairs and Port Construction Policy Bureau
Port facilities which are created by the non-administrative agency port development scheme should be a national belonging upon completion, but some facilities are not vested. The non-administrative agency port development scheme is BTL (Build Transfer Lease) development approach. The BTL scheme is a construction method which uses funds from the private sector to complete public facilities, and the government pays the rent to use the facilities. In this case, the government just pays an annual rent to use facilities without massive budget spending, and relatively stable and high profits are guaranteed for the private enterprise by investing in public facilities. The non-admin- istrative agency port development scheme implementation status in Korea is as follows: 11.8734 trillion won has been invested until 2008 for 2,555 cases including the outer harbor facilities, mooring facilities, handling facilities and other various facilities (See [Table 2-5]).
5.2.3. Early attraction of repair shipyard anchor companies by consignment management
Russia has state-of-the-art military vessel technologies, but marketability of commer- cial vessel has been rated as unsatisfactory due to lack of construction experiences and repair skills. The repair and shipbuilding industry in the Russian Far East region targeting fishing vessels in the Northern Pacific ocean can have market potential if developed with the fishery processing industry, and the Vanino-Sovetskaya Gavan PSEZ is located in a favorable area.
090 ∙ 2014 Knowledge Sharing Program II with Russia (Khabarovsk Territory) Therefore, it is essential to attract anchor companies which are in charge of establishing and managing the base shipyard for early vitalization of shipbuilding-repairing cluster in the Vanino-Sovetskaya Gavan PSEZ which has a location advantage and potential for development. To this end, it is strongly suggested to consider establishment of shipyards with consignment management by companies in other countries such as Korea which have the technology and management know-how. A successful case of shipyard consignment management can be found in the Oman shipyard which is established and operated by Korea’s Daewoo Shipbuilding & Marine Engineering Co., Ltd.
Daewoo Shipbuilding & Marine Engineering Co., Ltd. and the Oman government have signed a consignment management (Operation & Management) agreement in 2006 for constructing and operating the Oman shipyard (ODC, Oman Drydock Company). The main content of this agreement is that Daewoo Shipbuilding provides consultation for design, construction of shipyard and equipment purchase for 10 years, and after the completion, Daewoo Shipbuilding appoints a chief executive officer (CEO) and performs consignment management. ODC currently holds some facilities including a dry dock which can perform 2 VLCC work at the same time, 5 piers with a total length of up to 2.8km, 14 zip cranes with 40t capacity, etc. OCD also achieved the 200th delivery of repaired ship in March 2014 after the April 2011 launch (http://www. geojeoneul.com/news/).
5.2.4. Attracting fishery processing companies by guaranteeing investment stability
The situation in the Russian Far East and the North Pacific region is experiencing clash of interests between the fisheries resources right of Russia and fishing right of foreign countries including Korea. Particularly in December 2014, the amended Fisheries Act of Russia included mandatory investment in the fishery products processing facility in the Russian territory to ensure stable fishery quota and stable operation of the joint venture which is invested by foreigners12). As a result, foreign companies' difficulties are escalating because Russia is linking fishery quota and fishery product processing facility investment in the North-pacific region. Korean companies are watching invest- ment in the fishery products processing industries in Russia because of uncertainty of short-term investment. Of course, investors still maintain the intent of fishing and investing in fishery product processing facilities in Russia due to factors such as medium and long-term stabilization of price in Korean market, securing stable fishery resources, potential profits by making use of fishery processing technology.
Accordingly, the requirements of fishery products processing companies in Korea can be summarized as follows. First, the Russian government should eliminate uncertainty
12) In the ‘Legislative Measure of Procedures of Foreign Investment in Strategic Base Company (for consideration of Russian defense and national security)’ which come into effect on December 6, 2012, FDI Procedure Act and Regulations on the Fisheries Act are amended.
Chapter 02_ Khabarovsk Territory Investment Promotion Plan ∙ 091 through the institutionalization of a foreign private company's availability of sole long-term lease for port land or land purchase. Unstable situations frequently occur following a position change of partner companies in Korea-Russia joint venture due to the nature of private land near port area. Second, due to the lack of skilled manpower in the Russian Far East, institutionalization of measures to ensure hiring third country's labor force until they acquire necessary skills is required. Third, Korean companies want incentives such as tax or export tax, to be competitive in price compared with China and EU imports processed products. Finally, Korean fishery processing companies are demanding the Korean government's effort to ensure stability of investment in Russia. This means the Korean government needs to consider that investing in Russian fishery processing industry will have effects of stabilizing fishery product price in Korea and enhancing added value by overseas expansion.
5.2.5. Improvement of Russian customs clearance system
Russia’s complicated import and export customs clearance and arbitrariness of customs workers in charge have been pointed out as the biggest barrier to attracting foreign investment. The inspection rate is excessively high at 44% (about 20 times higher than Korea), and after import declaration is received, goods cannot be exported until copies of all relevant documents are sent to the Russian Federal Customs Committee and it confirms the final clearance decision. In addition, the following factors are pointed out as difficulties with the customs sector for Korean enterprises: arbitrary customs system which operates differently depending on the person in charge, the fact that documents have to be written only in Russian, and a practice that clearance fee needs to be paid in a deposit beforehand and is deducted afterwards (Korean clearance fee is postpaid).
[Table 2-6] Rankings of Major Countries and Russia Trade Clearance Европа и Росси Индикатор Центральна ОЭСР Китай Индия Корея я я Азия Документы для экспорта 9 7 4893 (количество) Время на экспорт 22 25 11 21 16 8 (в днях) Стоимость экспорта 2,615 2,109 1,070 620 1,170 670 (US$ за контейнер) Документы на импорт 10 8 4 5 11 3 (количество) Время на импорт 21 26 10 24 20 7 (в днях) Стоимость импорта 2,810 2,339 1,090 615 1,250 695 (US$ за контейнер) DB 2014 Рейтинг 157 - - 74 132 3
Source : The World Bank(2013).
092 ∙ 2014 Knowledge Sharing Program II with Russia (Khabarovsk Territory) In “Doing Business 2014”, overall ranking of Russian customs system is 157th out of 189 countries, 5 notches up from 162th in 2013. This means maritime import and export costs in Russia are higher than Eastern European and Central Asian countries’ average costs and significantly higher compared to the average cost of OECD countries which is $1,070/$1,090. The number of documents required for export and import in Russia is 13 and 12 each, and it takes a total of 22 and 21 days to export going through processes including document preparation, export clearance, domestic transportation, and required work at the port.
Korea has been operating an electronic clearance system called UNI-PASS. This is an electronically processed system such as on-line or the internet, which allows companies and individuals to handle custom declaration, import and export declaration, online tax payment procedures, etc. This electronic clearance system offers One-Stop service covering various requirements confirmation such as import and export customs declara- tion and inspection. Accordingly, the service features of the customs system in Korea can be evaluated as follows. First, it is the world's first 100% electronic clearance system. Second, it is the fastest system in 179 World Customs Organization (WCO) member countries. Third, the system performs a role of a trade and logistics information hub, which connects industry and government.
[Figure 2-12] Electronic Customs Clearance Services Map
Import and export Cargo management customs clearance system system
Import customs system Imported cargo Transshipment management cargo management Export customs system Exported cargo Customized logistics Tariff collection system management information system
Information management Administration system Single window System Information system
Risk management Knowledge Customer relationship system management system Inter-agency data transmission single window Groupware management (CRM) Integrated Survey monitoring information system system Human resources Performance management Ex post facto Traveler`s check Customs dearance single window management review system system (HRM)
Source : Yang, Dong-Seok(2015).
Thus, this study proposes that Russia improve its customs clearance system by referring to international practices like Korea and adopting advanced customs clearance system in the following two directions. One is improving the overall clearance system of some specific areas such as the Vanino-Sovetskaya Gavan PSEZ on a trial basis. The other is improving the most troublesome feature of the clearance system for foreign companies (e.g., tariff on import and export).
Chapter 02_ Khabarovsk Territory Investment Promotion Plan ∙ 093 References
Geojeoneul, “Oman Shipyard of Daewoo Shipbuilding & Marine Engineering Co., Ltd, Repair performance achieved 200 vessels” (http://www.geojeoneul.com/news), 2014.8.
Government of Khabarovsk Territory(2014), Vanino-Sovetskaya Gavan PSEZ initiative and development, introduction data..
Government of Khabarovsk Territory(2014), Vanino-Sovetskaya Gavan PSEZ initiative and development.
Gwangyang Bay Free Economic Zone (http://www.gfez.go.kr/).
Jeong, Jun-Ho, Sunbae Kim, Changuk Byeon, 2004, “Spatial Structure of Industrial Cluster and Regional Innovation Governance”, KIET.
Kim, Chan-Ho, 2014, “Port Development and Investment Status in Russian Far East”, KIET investment climate in The Far East seminar internal material.
Kim, Sun-Bae, 2001, “Industrial Policy Issues for Building a Regional Innovation System in Korea,” Regional Studies (지역연구), Vol. 17, No. 2, Korean Regional Science Association, pp. 79-97.
Kim, Sun-Bae, 2003, “Innovation system building measures towards innovation-driven economy,” Science and Technology Policy, STEPI.
Lee, Sung-woo(2014), “Port Development Plan in Russian Far East,” KIET investment climate in The Far East seminar internal material.
Nomura Research Institute(2011), Concept of Formation and Development of the Port Special Economic Zone in Sovetskaya Gavan, Nomura Research Institute Project Paper.
Russian Federal Government, 2013, 「Russian port infrastructure development strat- egy 2030」.
Sovetskaya Gavan Autonomous District Executive Office, 2014, “Sovetskaya Gavan PSEZ)”, Seoul Investment Seminar presentation.
The Ministry of Land, Transport and Maritime Affairs and Port Construction Policy, “Korea non-administrative Agency Port construction Status “, internal data.
World Bank(2013), Doing Business 2014.
Yang, Dong-Seok, 2015 “Improvement of Russian customs clearance system,” KIET investment climate in The Far East seminar internal material.
Yonhap News Agency, “Oman Shipyard of Daewoo Shipbuilding & Marine Engineering Co., Ltd, Performance in the Middle East showed”, 2014. 3. 6
094 ∙ 2014 Knowledge Sharing Program II with Russia (Khabarovsk Territory) 2014 Knowledge Sharing Program II with Russia (Khabarovsk Territory) www.ksp.go.kr 2014 Knowledge Sharing Program II with Russia (Khabarovsk Territory)
Improvement on the Investment Environment of Khabarovsk Territory
Ministry of Strategy and Finance Government Complex-Sejong, 477, Galmae-ro, Sejong-si, Korea 30109 Tel. 82-44-215-7732 www.mosf.go.kr
Korea Institute for Industrial Economics & Trade 370, Sicheong-daero, Sejong-si, Korea 30147 Tel. 82-44-287-3114 www.kiet.re.kr
Korea Trade-Investment Promotion Agency 13, Heolleung-ro, Seocho-gu, Seoul, Korea 06792 Tel. 82-1600-7119 www.kotra.or.kr
ISBN 978-89-5992-805-7 ISBN 978-89-5992-803-3 (set)
