Document of The World Bank

FOR OFFICIAL USE ONLY Public Disclosure Authorized Report No. 12773-PB

STAFF APPRAISAL REPORT

Public Disclosure Authorized PHILIPPINES

SUBIC BAY FREEPORTPROJECT

MAY10, 1994 Public Disclosure Authorized

Industry and Energy Operations Division

Public Disclosure Authorized Country Department I East Asia and Pacific Regional Office

This documenthas a restricteddistribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwisebe disclosedwithout World Bank authorization. CURRENCY EQUIVALENTS (as of December 31, 1993)

Currency Unit = Peso i 1 = US$0.035 US$1 = P 28.4

WEIGHTSAND MEASURES

ha hectare km kilometer m meter m2 square meter m3 cubic meter MGD million gallons per day MW megawatt

ABBREVIATIONSAND ACRONYMS

ADB - Asian Development Bank ASEAN - Associationof South East Asian Nations BCDA - Bases Conversionand DevelopmentAuthority BOT - Build-Operate-Transfer CDA - Comprehensive Development Area CIF - Cost, Insurance and Freight COA - Commission on Audit DBM - Departmentof Budget and Management DENR - Departmentof Environmentand Natural Resources DFI - Direct Foreign Investrnent DOJ - Department of Justice EPZ - Export Processing Zone GEF - Global Environment Facility GOCC - GovernmentOwned and ControlledCorporation GOP - Government of Philippines IRR - ImplementingRules and Regulations JV - Joint Venture MOA - Memorandum of Agreement NPC - National Power Corporation PWC - Public Works Center SBF - Subic Bay Freeport SBMA - Subic Bay Metropolitan Authority SEZ - Special Economic Zone US - United States

FISCAL YEAR

January 1 to December31 FOR OFFICIAL USE ONLY PHILIPPINES

SUBIC BAY FREEPORT PROJECT

STAFF APPRAISAL REPORT

CONTENTS

Page No.

Loan and Project Summary ......

I. BACKGROUND: THE BASE CONVERSION PROCESS ...... 1

A. The Freeport Concept ...... 2 B. The Conversion Planning Process ...... 2

II. THE SUBIC BAY FREEPORT ...... 5

A. Endowments and Existing Facilities ...... 5 B. The SBF's Competitiveness and Development Prospects 7 C. The Conversion Strategy. 9 D. Status of SBF Development and Privatization .12 E. Off-SBF Development Program and Priorities .14 F. Lessons from Previous Bank Involvement .14 G. Rationale for Bank Involvement .15

III. THE PROJECT .16

A. Objective .16 B. Description .16 C. Cost and Financing .18 D. Implementation .19 E. Environmental Aspects .22

IV. THE BORROWER .23

A. Background .23 B. Organizational Structure .24 C. Financial Management and Control .25 D. Environmental Management.26 E. Training and Technical Assistance Needs .28

This project was prepared by Messrs./Mme. Shilpa Patel (Task Manager), John Arnold (Transport Economist-Consultant), Aldo Baietti (Financial Analyst), Jack Fritz (Environmental Specialist), Kishore Rao (Institutional Consultant) and Leonard Schiffman (Transport Engineer). Mrs. Merle Mendis-Dennis processed the report. Peer reviewers were Messrs. Peter Long and Hoon Mok Chung. The project was cleared by Mr. Vineet Nayyar, Chief, EAIIE and Mr. Callisto E. Madavo, Director, EAI.

This documenthas a rctricteddistribution and maybe usedby recipientsonly in the performanceof their |officialduties. Itscontents may not otherwise be disclosedwithout World Bank authorization.l Page No.

V. FINANCIALASPECTS ...... 29

A. Overviewof Past and Current Performance...... 29 B. InvestmentProgram and Financing Plan ...... 31 C. Future Financial Performance ...... 32

VI. PROJECTBENEFITS AND RISKS ...... 34

A. Benefits...... 34 B. Risks ...... 35

VII. AGREEMENTSAND RECOMMENDATION . .36

A. Agreements.36 B. Recommendation.37

ANNEXES

Annex 1 Descriptionof InfrastructureComponents ...... 38 Annex 2 Indicative Timetableof TA Activities ...... 40 Annex 3 MerchandiseControl System ...... 41 Annex 4 Zoning Regulationsand Design Code ...... 44 Annex 5 AutomatedFinancial Management and AccountingSystem ...... 46 Annex 6 PrivatizationsTransactions Assistance ...... 48 Annex 7 EnhancingSBMA's InstitutionalCapabilities ...... 50 Annex 8 FacilitiesManagement Support ...... 55 Annex 9 EnvironmentalBaseline Survey ...... 57 Annex 10 InstitutionalSupport to the Ecology Center .64 Annex 11 EnvironmentalManagement Plan (EMP) .66 Annex 12 Total Project Cost .72 Annex 13 DisbursementSchedule .74 Annex 14 Project SupervisionPlan .75 Annex 15 ImplementationSchedule .76 Annex 16 SBMA's FinancialStatements .78 Annex 17 Assumptionsfor Financial Projections.81 Annex 18 EconomicAnalysis .92 Annex 19 Selected DocumentsAvailable in the Project File .94

OrganizationChart

Map: IBRD No. 25499 and 25500R PHILIPPINES

SUBIC BAY FREEPORTPROJECT

Loan and Project Summary

Borrower: The Subic Bay MetropolitanAuthority (SBMA)

Guarantor: Republicof Philippines

Amount: US$40 million equivalent

Terms: 20 years, including5 years of grace, at the Bank's standard variable interest rate.

Proiect Objectives: The objective of the project is to attract private investors to the Subic Bay Freeport (SBF). This will be achievedby: (a) improvingexisting infrastructure; (b) improvingaccess to the area for industrial, commercialand passenger traffic; (c) maintainingthe SBF asset base, includingprotection of the environment; and (d) strengtheningthe capacity of the SBMAto manageand administer the facility.

ProjectDescription: The project consistsof three components. The first is site improvement,which includes improvementof land access (road, bridge and entry gates); airport improvements(runway repair, strengtheningof aprons and taxiway, airport communicationsand navigationequipment, and conversionof an existing building into a passengerterminal); port repairs; a pilot standard factory building development(6 buildings);and the provisionof miscellaneous equipmentfor security and maintenancepurposes. The second componentis technical assistanceand training to strengthenthe institutionalcapacity of the SBMA and to provide appropriatesystems for the implementationof freeport policies. The third is environmentalprotection, which includes the carrying out of an environmentalbaseline survey, the provisionof monitoringequipment and institutionalsupport to establish a sound environmentalinfrastructure at the SBF.

Benefits and Risks: The major project benefits are: (a) economicbenefits arising from increased economicactivity and employmentin the region, estimated to reach US$750 million over the next decade; (b) environmentalbenefits arising from increased protection of the forest lands and the bay; and (c) financial benefits to the SBMA arising from increasedrental and other income from the SBF. In addition, institutionalstrengthening at the SBMAwill result in significanthuman capital development.

The major risks are political in nature. A policy reversal regarding the SBF's freeport status would nullify its competitiveadvantages, and inflows of foreign investmentwould likely diminish. To mitigate this risk, assuranceswere obtained that the SBF's freeport status will be maintained,and appropriate remedies against a potential policy reversal are be includedin the proposed loan. Another risk relates to the relative lack of experience in freeport managementat the SBMA. To address this concern, the project will provide long-termn technical assistanceto provide the expertiserequired while training SBMA personnelon-the-job so that they gain the necessaryexperience. The risk of delays in project implementationhas been minimizedthrough intensiveproject preparation activity. The project itself is not expected to have adverse environmentalimpacts. There is a risk of future environmentaldegradation if satisfactorymaintenance practices are not followed. The project will address this concern.

ProjectCost:

Local Foreign Total ------US$ million Site Improvement 9.3 26.9 36.2 InstitutionalSupport 0.2 4.8 4.9 EnvironmentalProtection 0.0 1.0 1.0

Taxes and Duties 1.0 0.0 1.0

Total Cost 10.5 32.6 43.1 Physical Contingencies 1.5 4.6 6.0 Price Contingencies 1.0 1.9 2.9

Total Cost with Contingencies 12.9 39.1 52.0 Interest During Construction 0.6 1.5 2.1 Total FinancingRequired 13.5 40.6 54.1

FSinancng Plan: Local Foreign Total ------US$ million ------IBRD 0.9 39.1 40.0 SBMA's Internal Cash 12.6 1.5 14.1

TOTAL 13.5 40.6 54.1

EstimatedDisbursement:

IBRD Fiscal Year 1995 1996 1997 1998 1999 ------US$ million------

Annual 7.2 17.6 11.2 2.4 1.6 Cumulative 7.2 24.8 36.0 38.4 40.0

EconomicRate of Return: 12% to 37% dependingon project component.

Map: IBRD 25499 and 25500R. I. BACKGROUND:THE BASE CONVERSIONPROCESS

1.1 The Subic Naval Base was the largest U.S. militaryfacility operatingoutside the United States. Located 80 km northwestof Manila (see Map IBRD 25499), the baselands covered 15,130 ha, within the territorialjurisdiction of the City of Olongapo,the town of Subic in Zanbales, and the towns of Moron and Hermosa in Bataan. Approximately6,700 ha housed the area formerly leased by the U.S. Navy. Given its strategic location, and its role as the primary support for the U.S. Seventh Fleet operatingin the Westem Pacific and Indian Ocean, the U.S. had investedheavily in the Base. Estimates of the replacementvalue of the facilities range from US$8-10billion.

1.2 The earliest predecessor to the base was an unfinished SpanishNaval Station, acquired by the U.S. in 1898 followingthe SpanishAmerican War. FollowingWorld War II and the achievement of Philippinesindependence, a decisionwas made to establish a U.S. Naval Base at Subic. Much of the area occupied by the U.S. was previously occupied by the City of Olongapo. The control of the baselandswas governed by the 1947 Military Bases Agreementbetween the Philippinesand the United States. Following the expiration of that agreement and the failure to negotiate a longer withdrawal schedule, a 1-year terminationnotice was servedon the U.S. Navy to evacuatethe premises by December 31, 1992. The Navy evacuatedthe premises in two phases, turning over the central base area and related facilities on September 30, 1992, and the remaining facilities on November 24, 1992. During the transition period, most of the moveableassets were removed by the Navy.

1.3 The major concern of the Governmentwas the economic dislocationthat would ensue upon the Navy's withdrawal. The Subic Base directly employedover 37,000 Filipinos, and the nearby communities were almost exclusively dependent on the Base for their economic livelihood. The Presidential Task Force for the Bases ConversionProgram was set up in January 1992 to implementa base conversionand redevelopmentprogram. The creation of a freeport at Subic was an idea originally espoused by the local leadership and citizens of Olongapo City as far back as 1971. The idea was concretized through the introduction of three articles in the Bases Conversion and Development Act (RepublicAct 7227), signed in March, 1992; these articles establishedthe Subic Special Economicand Freeport Zone, and created the Subic Bay MetropolitanAuthority (SBMA) to operate, administer and manage it.

1.4 In early 1992, the Governmentrequested assistance from the World Bank to help develop a strategy for the conversionof the baselandsto civilianuse. This assistancewas provided in two phases. An initial Bank mission, fielded in March 1992, confirmedthe basic feasibility of the redevelopmentof the site as a mixed-use industrial, commercial and tourism facility under the favorable economic incentivesaccorded to it as a freeport. It also identified a number of areas where technical assistance (TA) was required to implementthe freeport regime, includingformulating the implementingrules and regulations for the SBMA; physical planning and formulation of a land and facilities use plan; and transportationfacilities planning. This TA was provided over the August 1992-January1993 period.' The Government subsequently requested Bank assistance in financing the critical infrastructure and equipmentneeds, as well as further TA for institutionalstrengthening and environmentalprotection, to jump-start the freeport and attract private investors. This assistanceis described in the present report.

The TA was financed by a grant from the PHRD Fund (Japan), and approximately 80 person-months of assistance was provided to the SBMA. A report entitled Philippines: Strategv for Conversion of the Subic Naval Base into a Special Economic Zone and Freeport, January 1993, contains the various analyses and studies undertaken as part of this TA. -2- The remainder of this chapter discusses the general principles guiding the conversion, followed by a descriptionof the facilitiesand proposed conversionstrategy for the area in Chapter II. The proposed project is described in Chapter III. Chapters IV and V present an assessmentof the borrower from both an organizationaland financialviewpoint. Chapter VI analyzesthe benefits and risks associatedwith the proposedproject, and Chapter VII containsa summaryof actionsto be agreed betweenthe borrower and the Bank in connectionwith the proposed project.

A. The Freeport Concept

1.5 The International Convention on the Simplificationand Harmonization of Customs Proceduresof 1979 (KyotoConvention) defines free zones as being "part of the territory of a State where any goods introducedare generally regarded, insofar as importduties and taxes are concerned, as being outsidethe Customsterritory and are not subjectto the usualCustoms control. " Export Processing Zones (EPZ) and Special Economic Zones (SEZ) are recent variants of the traditionalfreeport or free zone concept, the earliest example of which was Gibraltar (1704). Free zones were establishedto encourage trade between harbors among internationaltrade routes and can play an important role in attracting foreign investment. All free zones share certain basic elements. First, they are limited to a physically defined area, which in the case of an EPZ is usually an industrialestate, and in the case of a freeport, could be ports, cities, islands (BataamIndonesia or Labuan, Malaysia) or even entire countries (Hong Kong or Singapore). Second, they are consideredto be extra-territorial,physically or administratively located outside the national customs territory. Third, merchandise may be freely stored indefinitely within the zones, re-exported or imported into the host country's customs territory upon payment of applicable taxes and duties. However, free zones differ in the extent of the area covered by the zone; the activities and processes that are allowed to take place; and the end-user markets where free zone products may be sold.

1.6 Freeportsdiffer in several regardsfrom EPZs. First, they tend to cover larger areas, and therefore offer greater flexibilityto firms in terms of the location of their plants. Second, the range of permissibleactivities in a freeport tends to be broader than in an export processingzone (EPZ): firms can undertake any legal activity, and individualscan reside within it. Third, registered enterprises and residents can freely import all types of merchandiseand are not restricted to those used directly in the manufacturing process, as in an EPZ. Fourth, duty- and tax-free merchandise can be sold at the wholesaleor retail level and/or consumedfreely within the freeport area, unlike in an EPZ where retail sales or on-site consumptionof duty- and tax-freeproducts are not allowed. Finally, freeport enterprises are not required to export a certain percentageof their production, and are free to sell to the local market upon payment of any applicableduties and taxes by the importingparty.

B. The Conversion Planning Process

1.7 In contrast to a traditionalphysical facilitiesdevelopment, where facilities are designed to meet the desired use, an infrastructureconversion process changes the use of existing space based on an analysis of the highest use of the space. Militarybases are examplesof infrastructurethat has been developed to meet the highly specialized requirements of military applications, and whose unique characteristicspose several challengesto the process of conversion. They are generallylocated in remote areas, away from major populationcenters and transportationhubs. However, these disadvantagesare often offset by the fact that base complexestend to be self-contained,with most componentsof support infrastructurealready on-site. They generallycontain specialpurpose buildingsand structureswhich are more difficult to adapt to new uses. Older bases have often not observed the highest standards of environmentalpractices, and clean-up efforts are an important consideration. They are usually highly -3- secured facilities,with limitedpoints for entry and exit. Furthermore, since bases are not configured for use by individualcompanies, their layout may not be conduciveto immediatecivilian use.

1.8 Freeport RegimeRequirements. Convertingthe former U.S. Naval Base into a freeport has several implicationson physical planning. A freeport needs to be highly secure in order to prevent the leakage of duty-freegoods into the nationaleconomy. This translatesinto the need to separatetraffic for industry from traffic related to residents and visitors; provide additional entry/exit points to ease traffic flow; and allow for additional security inspectionprocedures required for effective control. The existing road network and transportationfacilities need to be enhanced to permit rapid processing of import and export shipments. The layout of the complexneeds to be flexible enough to accommodate diverse activities as they locate in the freeport.

1.9 CommunityGoals. Communitygoals and objectives are an important considerationin the base conversion strategy. Studies of successfulmilitary base conversion in the United States have clearly indicated the fundamentaland critical role played by the local community in determining base reuse plans. The issues of most concern to communityand regional leaders in the Subic area were: (i) replacingjobs lost by the Filipino base workers, as well as the indirectjobs in activitiesproviding goods and support services to base employees;(ii) utilizingthe conversionprocess as a catalystfor the economic diversificationand re-developmentof the region; (iii) integratingthe base with Olongapo City to reduce the disparitiesbetween base and off-basefacilities and infrastructure;(iv) protecting the unique natural environmentand resources of the base; (v) operatingthe freeport as a self-sustaining,profitable entity, without the need for continuingsupport from the national Government;and (vi) maximizingthe role of the private sector in operating and managingthe freeport's facilities, without giving any one private company disproportionatecontrol over freeport operations.

1.10 Tarzet Industries. A clear understandingof industry sectors likely to locate within the freeport is equally important for planning the conversion. The potential market response to the Subic freeport was developedthrough an overall assessmentof the competitivenessof various industries in the Philippinesrelative to its ASEAN neighbors,an evaluationof the competitivenessof the freeport concept relative to competing export processingzones, special economiczones and freeports elsewhere in East Asia, and an assessmentof investmentpatterns in the Philippines.2'This analysis indicatedthat a diverse group of industrial and service activitieswould be potentiallyattracted to the freeport (see para. 2.13). The needs of the target market would, in turn, dictate the physical, administrativeand promotionplanning process.

1.11 Physical Facilityand Infrastructure. A survey of the existingfacilities to determinetheir condition, quality and reuse potentialwas then undertaken. This evaluation indicatedthat: (i) the base's general-purposebuildings are suitable for use by light manufacturing,non-polluting operations, or for storage and warehousingpurposes; (ii) special-usefacilities are less suitablefor immediateconversion, and may require more extensive renovation and modification;(iii) most of the officers' quarters are adaptable for use as a hotel/motel or office space with minor modifications;(iv) raw land parcels are suitable for the developmentof industrialestates; (v) electricity and water supply are sufficientfor the short-term, but will need to be augmentedas demandincreases; individual meters will have to be installed to each building for appropriate billing; (vi) sewage treatment facilities are inadequate and additional

This analysis was undertaken as part of the Bank's initial mission (Philippines: Subic's Industrial and Tourism Conversion Strateey and Action Proeram, May 1992, Informal Bank Report), and followed up through the subsequent technical assistance provided to the authorities. The tight timeframe of the U.S. withdrawal meant that a very short transition period was available to the authorities to define and implement the conversion strategy. The resulting time pressure precluded the carrying out of a detailed market survey to identify the potential market response to the SBF. -4- liquid and solid waste disposalfacilities are needed; (vii) the airport facilitiesneed to be upgraded; port facilities need some repair but do not need to be developedin the near-term; and (viii) existing roads connecting Subic to Manila are sufficient up to volumes of a few thousand tons per day, but critical portions of the road need to be improved to accommodatecontainer trailer and tourist vehicular traffic.

1.12 Alternative DevelopmentScenarios. There are a number of trade-offs and potential conflicts between the various objectives and possibilitiesof the conversion. For example, limiting the freeport area to a small, secured area to reduce the potential leakageof duty-free goods into the national customs territory goes against one of the major stated interests of commnunityleaders, which is to integrate the freeport with the adjoining communityand ensure maximumaccess to freeport benefits. A set of redevelopmentprinciples against which to assess alternative conversion strategies was then developed, based on the various findings, objectives and requirements discussed above. Three developmentconcepts were evaluatedand rankedaccording to how well they fulfilledthese redevelopment objectives:

* maritimeindustry. This is the most obviousreuse concept given the site's former use as a naval facility. The advantage of this approach would be the utilization of existing buildings and facilities immediately, with minor modifications. The skilled workforce previously employed in the former U.S. Naval Base's ship repair and maritime-related activities would be absorbed by like industries. However, this approach would not maximize the long-term potential of the complex, and would not meet the objective of diversification of activity. The potential adverse environmental impact would be a threat.

- tourism and recreational complex. This concept capitalizes on Subic's attractive location and scenic beauty. The advantage would be the high employment generation potential of tourism, and the revitalization of Olongapo's entertainment industry. The disadvantage would be the potentially limited impact of tourism as a means to upgrade the capabilities and long-term potential of the workforce; in addition, this concept would not meet the objective of economic diversification. Tourism demand would also be an issue, given the attractiveness of other sites in the Philippines. Finally, existing facilities would require considerable upgrading in this scenario.

3 multi-sectoral growth pole. This concept meets the requirements for economic diversity and flexibility, and maximum use of existing structures. This approach would target compatible, non-polluting industries with a capacity to generate high levels of employment, as well as warehousing and logistics, tourism, recreation and convention center activities, and offshore financial services. The drawback would be the administrative complexity of promoting, regulating and securing the complex.

1.13 Selected Approach. Clearly, no one approach is likely to meet all the objectives and goals of different interest groups. The redevelopment approach selected was that of a multi-sectoral growth pole, since this concept best met the various redevelopment objectives retained. Recognizing the administrative complexity of applying the freeport regime over the large physical area of the freeport (as allowed for in R.A. 7227), a phased implementation is foreseen. At present, the freeport regime is to be implemented in the former base area, and the conversion strategy accordingly targets this area. The focus of the TA activities to date has been on defining a physical facilities and infrastructure plan which meets the requirements of target industries and which represents the best and highest use of existing assets, and a comprehensive policy and institutional framework for streamlined implementation of the freeport regime. -5- H. THE SUBIC BAY FREEPORT

A. Endowmentsand Existing Facilides

2.1 Physical Characteristics. The Subic Bay Special Economic and Freeport Zone, as establishedby R.A. 7227 (former U.S. Naval Base and surroundingmunicipalities) covers an estimated total land area of 60,000 ha, and water area of 9,525 ha. However, in the initial phase, the freeport conceptis limitedto the area occupiedby the former U.S. base (referred to as the Subic Bay Freeport - SBF). The SBF covers an area of around 15,000 ha, of which 6,658 ha house the former Naval Base, and is situatedin the northwesterncorner of BataanPeninsula, sandwichedbetween the area's two major natural features: the Zambales MountainRange and Subic Bay. The mountain range separates the SBF from the Central Luzon Plain, and protects the base from the monsoons and trade winds from the northeast. Subic Bay provides an excellent, well-protectedharbor which opens up to the South China Sea. The terrain around the SBF is mountainous,with relatively steep slopes extendingalmost to the water's edge. The developedareas have been carved out of hills or created by filling in low areas.

2.2 The broad-leafedevergreen rain forest in the SBF (3,500 ha) representsthe only relatively large area of undisturbedforest in Central Luzon. This type of forest, identified as Diptocarp, is the most commerciallyvaluable of the forests in the Philippines. The most common species is the Lauan family, which includes the famous Philippinemahogany, although U.S. Navy records indicate that there are many representativesof the more than 3,000 varieties of trees that have been identified in the Philippines. There are also mangroveswamps along low-lyingwaterfront areas. Many of the more than 10,000 species of floweringplants and ferns that have been identified in the Philippinesare also said to be found in the SBF area. The areas off-base are generallycoarse wild grasslands, mostly the result of slash-and-burnagriculture. There are about 760 different species of birds in the Philippines;rodents are numerous, including over 50 known species of rats. Several varieties of poisonous snakes exist. Saltwaterfish are abundant, and mollusksoccur in large numbers. However, an inventory of the flora and fauna found in the Subic forest is not available. Threatened or endangeredspecies in the Subic area include the green sea turtle and the hawksbill turtle. In addition to its international ecological significance,the forest is also the lifebloodof the SBF in terms of water availability,since it covers five water catchmentareas.

2.3 HistoricalSites. Few pre-WorldWar II structuresremain in the SBF. The SpanishGate, located in the Central Area, once guarded the western approachesto the old SpanishNaval Station, and dates from the 19thCentury. A museum/memorialin a 19thCentury Philippine-Spanishtheme is housed in a restored Spanish storage facility. Remnants of the earliest American constructionare a coaling station and bunkers that housed an anti-aircraftbattery prior to World War II. The Chapel in the Central Area was originally known as the St. Roques Parish Church of Olongapo, and occupies a site that has been used for religiouspurposes since 1885. No sites of archaeologicalsignificance have been discovered despite intensiveconstruction efforts in areas most likely to support human settlements.

2.4 ExistingBuildings and Structures. The facilitiesat the former SubicNaval Base complex were developed and operated to meet the unique needs of the military: the storage of large volumes of petroleumproducts and ammunition;specialized facilities for the needs of a largely transientpopulation; and tightly secured and limited accessto adjoiningOlongapo City. The Basehad nearly 2,000 buildings with a total covered area of around 970,000 m2 . These buildings include industrial structures for workshopsand storage, commercial-typebuildings for office and retail activities, specialareas/buildings for the airport, ammunition and fuel storage, residential areas for family housing and bachelor accommodation,as well as communityfacilities for education, health care and recreation. The vast majority of the buildings in the complex are less than 50 years old, and were designed and maintained in accordance with U.S. Navy standards. Many of the buildingsand structures require a high level of maintenance,and with the exceptionof certain specialbuildings such as hangars, warehousesand recently -6- built housingunits, the projectedremaining life of the structuresis 10-15 years. Table 2.1 presentsa summaryof the existingfacilities in the complex.

Table 2.1: Inventory of Eidsting facilities and Previous Use

Activity No. of Gross Land Previous Uses Bldgs. Floor Area Area (ha) (m2) Naval Station 473 213,760 326 administration,housing, commercial, recreation,temporary camps

Ship Repair 68 92,940 27 drydocks, ship repair and conversion Facility

Naval Supply 72 102,230 224 petroleum,oil, lubricantstorage facility, Depot warehouses

PublicWorks 900 343,866 1,161 administrative,housing Center

Naval Air 261 167,300 800 2.744 km runway, 260,000 ml apron Station parking

Naval Magazine 116 37,175 3,300 193 magazinesand 50,186 m2 of open pads

Naval Hospital 29 13,940 322 90 hospitalbeds

Grande Island - - 47 integrated hotel and recreational facility

Other - - 451 recreational facilities, miscellaneous

Total 1,919 971,211 6,658

2.5 Utilities. Electricalpower for the SBF is purchasedfrom the NationalPower Corporation (NPC). A private companyoperates the existingon-base generation plant (26 MW) which it has leased from the SBMA. The same privateoperator is constructinganother, larger plant (108 MW) on a BOT basis, expected to be commissionedin early 1994. The main supply of potable water is from the Binictican,Boton, Malawaan,Triboa and Binangarivers, filtered and chemicallytreated in an on-base water treatmentplant, with a capacity of 12 milliongallons per day (MGD). The water distribution systemis comprisedof antiquatedclearwell pumps with a maximumcapacity of 10 MGD, and several inter-connectedsub-systems located throughout the complex. The sewagecollection and disposalfor the complex consists of four separate systems, of which three provide primary and limited secondary treatmentprior to discharge in riversor the bay. The former U.S. Naval base producedsome 23 to 27 millionliters of domesticeffluent per day, of whicharound 20 millionliters weredischarged as untreated sewagedirectly into the bay. Sewagefrom adjoiningOlongapo City is also dischargedwithout treatment into SubicBay. These practicesare unsatisfactory,and are currentlyunder reviewby the SBMAwith a view to definingadequate solutions for the future. Solidwaste was disposedoff in a landfillon-base; however,this landfillwas closed in 1992 and the SBF's presentsolid waste is disposedoff in Olongapo City's landfill, which is reportedlyadequate for the next 10-15years. Nonetheless,the SBMAintends to reviewsolid wastemanagement practices and future needsin lightof the anticipatedeconomic activity -7- in the SBF. The former Naval base had a sophisticatednetwork of telecommunicationsfacilities for internationaland domesticvoice and data communications.The complex's local area networkof fiber optic and copper cableprovided a total subscriberline capacityof over 13,000 lines. However, most of the telecommunicationsequipment was removedby the U.S. Navy upon evacuation. The two remaining PABXs have a total capacity of 1,400 lines, which is adequatefor the SBF's very limited needs at present. Capacitywill, however,have to be increasedto keep pace with SBF development.

2.6 TransRortInfrastructure. The SBF port facilitiesare configured to handle a mix of containerand breakbulkcargo. The layout of the facilitiesdates from the early 1960sand does not lend itself to modern cargo handlingoperations. In addition,repairs are required at several wharves. The airporthas a single runwayand requiresweight limits on wide-bodiedplanes both landing and takingoff; the runway, taxiway and aprons require strengtheningin view of the anticipatedactivity. Passenger terminal facilitiesare inadequate:the present terminal buildingcan accommodateonly 79 passengers, based on the gross floor area per passengerused in the Civil Aviation Master Plan of the Philippines. The most convenientroute from Manilato the SBF is via the North Luzon Expresswayto San Fernando (57 kIn, 4-lane, good surface condition);from San Fernandoto the Layacjunction in Dinalupihan(48 Ian, 2-lane, fair surfacecondition); and, finally,the Bataan-Zambalesnational road (24 Iam,of which 12 km is a zig-zagportion with a maximumgrade of 6%, 3-lane sectionson critical curves, good surface condition).The Mabayo-Tala-Mabiga-Naparingroad is an alternativeroad, currentlyunder construction, starting near the Layacjunction in Dinalupihanand endingnear the southerngate of the SBF. Traffic forecastsindicate that an additionalroad connectingthe SBFto Metro Manilawill be required in the next 10-15years.

2.7 There are three main vehicularentry routesto the SBF. The first is through the Main Gate and MagsaysayBridge, connectingthe SBFto OlongapoCity. The second is throughthe Kalaklan Gate, whichconnects with the nationalroad to the left of OlongapoCity. The third is the KalayaanGate, connectingthe SBF to the national road at the outskirtsof OlongapoCity. These access points are inadequatefor the increasedtraffic flows into the SBF, and even with the limitedactivity taking place in the SBF at present, cause trafficback-ups during rush hour and on weekends. Withinthe SBF, there are 92 road sections with a total length of 79.6 kmn. All the roads are in good conditionwith the exceptionof the perimeter road going to KalayaanGate, and are not likely to require major investment for the next 5 years. There are 66 parking lots, all in good condition,distributed throughout the SBF; aggregateparking areas are capableof handling11,300 cars, whichis adequatefor the anticipatedactivity over the next 5-10 years.

B. The SBFs Competiiveness and Development Prospects

2.8 Over the last decade,the Philippineshas captureda very smallpart of the boom in direct foreigninvestment (DFI) comparedto its ASEANneighbors: around 5 % in 1990and 1991. DFI has also accountedfor a very small percentageof total private investmentin the country. In contrast to the marked export orientationof DFI in most other ASEANcountries, about 75 % of DFI in the Filipino manufacturingsector is in domesticmarket oriented industries. A noteworthy aspect of DFI is the increasing importanceassumed by Newly IndustrializingCountries of Asia as a source of foreign investment.The share of foreign investmentfrom HongKong, Taiwan, SouthKorea and Singaporehave been rising, particularlyin the last few years.

2.9 The low privateinvestor responseto the reformedincentive structure in the Philippines can be traced to the negative investorperception regarding sustainability of reform efforts and, more recently,poor conditionsof infrastructuralservices. Althoughthe accumulatedimpact of reforms taken so far (relating, inter alia, to the financial sector, trade policy, the tax system and investment incentives) has been significant,slow and piecemealimplementation, at timesaggravated by thejudiciary, has created a persistent perceptionamong potential investorsthat reformsin the Philippinesmight not have been ownedby the GOP and thus could not be effectivelyimplemented and mighteven be reversed. Foreign -8- investor confidence has been further eroded by recent short-falls in electricity supply, crumbling transportationand telecommunicationsinfrastructure, and continuingconcerns over the personal security of foreign executives. Many of these problems are well on their way to resolution. Nonetheless,the Philippines faces strong competitionin the region. In the Asian region, lower-end import-dependent operations, reliant on attractiveand stablepolicies, andproductive and stable workforces,are increasingly locating in emerging investment locations such as China, Indonesia and now Viet Nam. Higher-end activities, requiringcritical basic infrastructureand support services, educatedworkforce and competitive intermediategoods industries, are choosingMalaysia, Thailand and Singapore.

2.10 The SBF IncentivesRegime. The freeport concept holds the potential to offset many of the competitivedisadvantages of manufacturingin the Philippines. It can offer world class infrastructure in a secure and self-containedenvironment. The SBF also providesa numberof attractiveincentives for business:

* no restrictionon foreign or local ownershipof enterprises;

* duty-free imports and exports of raw materials, intermediateand finished goods;

* ability to import,store, process, manipulate,consume or re-exportmerchandise duty- and tax-free;

* no foreign exchangecontrols, and free markets for gold, securities and futures;

i unlimitedsales to the domesticeconomy, subject to payment of applicableimport duties and other charges;

* no taxes except for a 5 % corporate tax on gross income; and

* ability for the SBMA to issue work permits, with permanent resident visa provided for a minimuminvestment of US$250,000.

2.11 The SBF's CompetitivePosition. The marketpotential of the SBF depends on its ability to successfullycompete for internationalinvestment with the large and increasingnumber of SEZs, EPZs and freeports in the East Asian region. There are currently 62 operationalEPZs or industrialestates and another 40 under various stages of development in the region. Within the highly successful SEZ developmentin China, export-oriented,high technologybonded industrialparks and commercial free trade zones are being establishedalong the coast and in Hainan island. In additionto the long-established freeports of Hong Kong and Singapore, Malaysiaand Indonesia have designateda number of islands as freeports. The SBF will directly competewith these locationsas well as the large number of free zones in Mexicoand Latin America in attractingprivate investment. In addition,the liberalizationof Viet Nam poses a strong and immediatecompetitive threat.

2.12 The SBF offers several potential advantages over EPZs, and its incentives regime is comparable to that of the many freeport and commercial free zone projects under development. The advantageof the SBF lies less in its incentivesframework, and more in the ready availabilityof world class infrastructure, facilities and other amenities. Unlike freeports that are being developed from scratch, the SBF requires limitedfinancing and time for commercialization. The primary advantage to the prospectivemanufacturer of locatingin the SBF is that operationscan begin almost immediately. The SBF can also offer financial advantages,derived from the fact that the carrying cost of the facilities is very low: the fixed assets turned over to the SBMAat virtually zero cost create a huge capital base with minimalcorresponding outlays of either equity or borrowedfunds. Offsettingthese strategic advantages are certain constrainingfactors, such as the present lack of commercializedairport and port facilities.

_ ------_ -9- However, the SBMAis in a sound position to contract debt for facilitiesimprovements and many of the constrainingfactors can be alleviated.

2.13 Potential Investors. In light of the SBF's incentives framework, and the benefits and constraints of location in the SBF, several industrial and service activities were identified as potential locators in the SBF. These are:

* light manufacturing/assembly, including apparel, footwear, toys, textiles, jewelry, leather products, sporting goods, electronic components, electrical appliances and equipment, electro-mechanicaldevices. The SBF's comparative advantage is the availabilityof unskilledlabor and under-roof space at competitiveprices.

* light engineering, such as industrialand analyticalinstruments, industrial equipment and general components. The SBF's comparativeadvantage is the good (but diminishing) technicaland industrialskill availabilityand several specializedbuildings that would be suitable with minor modifications.

* information services, includingdata entry, image processing, voice center operations, multi-media and software development. The SBF's comparative advantage is the availability of basic literacy and keyboardingskills, telecommunicationspotential, and suitablebuildings, includingthe availabilityof good housing.

- warehousingand distribution. The SBF's basic transportationfacilities are well suited for cargo operations; significant warehouse space is available as-is; and telecommunicationspotential exists.

* tourism and recreation, including accommodation,duty-free shopping, retirement housing, business conventions and marina and other recreation. The SBF's major advantage is the natural beauty and clean environmentof the site. Several recreational facilitiesexist and are easily upgradeable.

3 fimancial services, such as offshore banking and other services, as well as offshore corporate registry. These activitiesare expected to develop in the medium-term,once manufacturingactivity picks up in the SBF, and as the telecommunicationspotential is developed.

2.14 In terms of the source and nationality of investment, the largest number of initial investmentsin the SBF is likely to come from Filipinofirms, investingprimarily in light manufacturing or tourism and retail trade projects of small size. Foreign investmentwill tend to concentrateon larger projects. Investmentfrom the East Asian NICs is expectedto increase. In particular, the SBF is likely to attract significant investmentfrom Taiwan (Taiwaneseinvestors are reportedly seeking to diversify their holdings away from China), once SBMA finalizes its negotiationswith a Taiwanese company to develop and manage an industrialestate within the SBF. The Export-ImportBank of Taiwan has already provided a loan on soft terms for site and services improvementsfor this green field site.

C. The Conversn Strtegy

2.15 The strategy for the conversionof the Subic Bay Naval Base complex, and development of the SBF, is based upon careful considerationof various factors (describedin Chapter I). The strategy is predicated on the maximum utilization of existing buildings and structures by private locators immediately,and the developmentof new buildingsand facilities by predominantlyprivate developers in the medium-term. This approach was chosen because it capitalized on the SBF's fundamental cost advantages:since buildings and facilitieswere turned over to the SBMA at no cost, the SBMAhas the -10- unique advantageof being able to under-cut the competitionin terms of lease rates for buildingsand facilities,thereby achievingrapid occupancy. The role of the SBMAis seen to be that of a facilitating, promotional,and regulatoryauthority, with limitedinvolvement in the developmentand operation of facilities. Thisnotwithstanding, it is recognizedthat the SBMAmay have to operatecertain facilitiesand undertakethe renovationand constructionof certain buildingsto catalyzeprivate sector interest and participation;however, this is viewed as an interimarrangement to be turned over to private operators as soonas possible. The privatizationapproach distinguishes between the SBF's "coreproductive assets" (assetssuch as land and existingbuildings for use by privatelocators directly, therebygenerating income for the SBMA),and "support facilities"(facilities such as the port and airport, demand for which is derived from users of core assets). The privatizationstrategy also differentiatesbetween areas for the developmentof private "businesscomplexes" and other areas reservedfor the developmentof individual buildingsby individuallocators. In order of priority, the privatizationof core assets would precede privatizationof supportfacilities, which would requirea certainmass of economicactivity to be in place prior to privatization.

2.16 Land Use Plan. The focus of SBMA's land use plan is a multi-usecomplex at a central locationon the waterfront(see Map IBRD25500). The revitalizedCentral Area will house commercial, trading, tourism-relatedand light industrial activities,while ensuring the conservationof important monumentsand historiclandmarks. An allocationof 284 ha of land has been made for light and medium industrydevelopment in severalpockets, includinglarger land parcels for the developmentof integrated industrial estates. Housing occupies 358 ha, encompassingexisting areas and densification or redevelopmentof selectedpockets for a plannedincrease of approximately6,000 dwellingunits. Around 2,000 ha of the Naval Magazinearea is reservedas a Nature Park; however, detailed,environmentally- friendlyland use proposalscould be developedfor this area. The conversionof the militaryairport into a civilianinternational airport requires285 ha. An area of 29 ha is reservedfor the future development of a cargo port in the former Naval Supply Depot. An allocationof 263 ha has been made for communityfacilities. Specialareas, such as the tank farm and areas reserved for the PhilippinesArmed Forces, occupy 193 ha. Some 146 ha are designatedas green buffers, while the remainder are Land Reservesto provide flexibilityin time and space. The 3,500 ha of intact tropical forest are scheduled for inclusionin the GlobalEnvironment Facility (GEF) Conservation of Priority ProtectedAreas project, negotiatedrecently (see para. 4.22). The publicationof SBMA's land use plan is a condition of effectivenessof the proposedproject. Agreementswere reachedat negotiationsthat this land use plan will be implemented.

2.17 Privatization. The SBF conversionstrategy foreseesan importantrole for the private sector in the future developmentand operationof the SBF. The outrightlease of the entire facilityto a private operator was rejected as a privatizationmechanism by the authoritiesat the very outset.3' The privatizationapproach distinguishes between different categories of assets. Existingassets can basically be classifiedinto two basic categories: core productiveassets and facilitieswhich will generateincome for the SBMA, and support facilities,which will provide services to support the income generating activities. In addition, a differentiationmust be made between areas zoned for general industrial, commercialor tourism use, and areas specificallydesignated as ComprehensiveDevelopment Areas (CDA). Existingbuildings within a CDA are expectedto be levelledor significantlymodified in the medium-term,to allow for the developmentof the CDA. This impliesthat they can only be leased on a short-term,non-renewable basis.

2.18 Severalprivatization mechanisms are availableto the SBMA. These range from outright divestiture;simple or capital leases for land and buildings;joint venturesfor the operationof utilitiesor in the form of propertydevelopment companies; build-operate-transfer (BOT) arrangements(whereby a privateentity would develop a project, operateit for a fixedperiod and then transfer the asset to SBMA);

This would have amountedto replacing one dominantcontrolling presence with another, which would have been politicallyunacceptable. -11- managementcontracting (where a private companyis hired by the SBMAto operate certain facilitiesfor a fee); and public or private offeringof shares. Given the diversity of SBF assets, a single privatization approach is not feasible. Thus, different mechanismshave been developedfor each major category of asset, as summarizedin Table 2.2. In most cases, with the exceptionof standardizedbuilding leases, the assistance of privatizationand financial advisors would be required.

Table 2.2: SBMA's Privatization Approach

Type of Property PrivatizationMode Procedures

ComprehensiveDevelopment Areas

General Use Buildings short-term, fixed lease with fixed lease term on first-come, first-served limitedrenewal basis

BusinessComplexes long-termlease, JV or revenue bidding process sharing

Non-ComprehensiveDevelopment Areas

Raw Land long-term lease or JV bidding process development

DevelopedLand long-term lease; lessee must fixed lease term on first-come, first-served construct building to SBMA basis standards

General Use Buildings long-termlease fixed lease term on first-come, first-served basis

SpecialUse Buildings long-term lease with technical bidding procedure provisions

Supportand SpecializedFacilities

Airport operatingagreement negotiatewith local or foreign operators

Port managementagreement bid and negotiation with local or foreign operators

Power long-term lease, management negotiationwith NPC or private company agreementor JV

Water/Sewerage BOT, JV or operating bidding process or negotiationwith private agreement operator

Telecommunications iV bidding process

SpecializedFacilities long-term lease, JV or revenue financial advisor on a commissionbasis sharing -12-

2.19 Institutional Aspects. The SBF's conversion strategy has significant institutional implications. The freeport regime is administrativelycomplex to implement;this complexityis compounded by the fact that the legislativebase of the freeport is contained in only three articles of R.A. 7227, in contrast to the detailedand comprehensivelegislation typically associated with freeport regimes. As a result, the SBMA has had and continues to expend much effort in clarifying some of the ambiguities of the legislation. Appropriatesystems are required to implementthe freeport regime, includingadequate customs proceduresand monitoringof SBFpurchases and sales for Treasury revenuepurposes. The SBMAis a very young organizationwhose focus and work program are evolving. In the early days of the U.S. withdrawal, its primary preoccupationwas the orderly transitionfrom U.S. Navy to civilian use. Having secured the premises, it has begun to implementthe broad conversionstrategy outlined above. However, it will need more experienced staff in freeport managementto undertake many of the tasks it has set for itself. The SBMA will continue to require multi-disciplinarytechnical assistance to refine its conversion strategy, implementits privatizationagenda, and develop its own institutionalcapabilities.

2.20 The conversion strategy also has significant implicationson the SBMA's environmental managementfunction. One of the major objectivesof the SBMAis the protectionof the environment. This implies that future industrial, commercialand tourism activity must be carefully vetted to ensure that it is environmentallybenign. The presently good environmentalconditions of the SBF must be preserved; this impliesthat a baselineof informationhas to be developedon existingconditions, appropriate standards have to be established,and complianceon the part of SBF locatorsmonitored on a regular basis. The SBMAwill need to urgently build up a sound environmentalmanagement infrastructure within its institution. Here, too, technicalassistance and other institutionalsupport is required.

D. Status of SBF Development and Privatization

2.21 Getting the SBF off the ground will involve efforts in three broad areas. The first is to operationalizethe freeport regime. This involvesdefining the SBF policy regimeand regulatoryprocedures and implementingan appropriateinstitutional framework to administerthe SBF. These aspectsare discussed in Chapter IV. The second is to implementthe physical conversionstrategy. In additionto privatization, this involves identifyingcritical areas for continuedSBMA investmentand management. The third is to undertake strategic planning for future SBF growth. This translates into the definition of a multi-year development program, including regular fine-tuning of the conversion strategy. As can be expected, effecting the SBF conversionwill take time, and must be viewed as an on-goingprocess. Quite apart from the time required to structure SBF developmentand privatizationdeals, the SBMA itself is in a start-up phase. Nonetheless, much progress has been achieved in these areas in the one year that the SBMAhas been operational, as described in the paragraphs below.

2.22 As of November, 1993, the SBMA had received over 500 expressions of interest from prospectiveinvestors. Of these, 32 proposalshad been accepted and are presently being implemented. Of the remainder, 16 proposals are under contract negotiationsand 42 are under active review. In terms of sectoralbreakdown, commercialactivities (including retailing and banking)take the lead at 50%, followed by 22% for manufacturing, 12% for hotels and restaurants, with the balance for support services and infrastructure, such as telecommunicationsand power. As expected, the vast majority of these initial investorsare Filipino(over 75%). However, the number of foreign investorsis expectedto increaseas the industrial estate (para. 2.23) is developed. Total employmentcreated as of November, 1993, is 5,195 employees. The projected investmentof these 32 firms at full development(in most cases, over the next 1-2 years) is over US$350million; employmentprojections stand at 12,800. In terms of value, over 90% of the investmentcommitments are from foreign investors. The projected investmentof the 58 proposals currentlybeing negotiated or activelyreviewed is around US$125million, whereas the projectedemployment is close to 4,000. Here, too, the vast majority of interested investors is Filipino (or Filipino subsidiaries of foreign firms). A significantevent has been the recent agreement between the SBMAand a major air freight and courier service to establish a regional hub at the Subic InternationalAirport. A large, world -13- class tenant such as this one provides an anchor for promotionalactivity, and holds the potential to attract higher-value,air freight-dependentactivities to the SBF.

2.23 Industrial Development. The areas slated for industrialdevelopment in the land use plan cover both green field sites and existing developed sites. For the former, the SBMA has been in active discussion with a Taiwanese company as well as the Taiwanese Government. A 262 ha site will be developed in three phases. The Export-ImportBank of Taiwan has provided a loan on concessionalterms to finance the site developmentcosts of the first phase. The SBMAexpects to enter into an agreementwith a privateTaiwanese company to develop, manageand promotethe estate, and some 75 firms have reportedly expressedan interestin locatingin the estate in the first phase. The first phase development(approximately 120 ha) is expected to be completedin 1997. For the latter, the SBMAhas entered into leases on existing buildingswith 8 firms (as of November, 1993). The problem now is that the SBF is rapidly running out of buildings that would be suitable for small-scale industrial activities. The buildings available require extensive reconfiguration and conversion; alternatively, new buildings need to be constructed in the designatedindustrial areas of the land use plan. The SBMA's experienceis that small investors, who are mainly local Filipinofirms, are interestedin immediateoccupancy and are unwilling, or unable financially, to undertakethe necessary renovationsor construction.

2.24 CommercialDevelopment. The commercialdevelopment to date has concernedthe leasing of existingbuildings to operatorsproviding support services to SBF residents and tourists. Amongstsuch services are banks and shops. Other activities include gas trading, message handling services and a laboratory. Warehousingand transhipmentservices are also taking place.

2.25 Tourism Development. Hotel development, includingone casino resort, has been quite spectacularin the SBF, attestingto the high interest in the site on the part of tourists. There has also been substantialinterest in restaurantand retail trade activities. Local tourism tends to be concentratedon week- ends, whereas foreign tourists (mainly from Taiwan) seem to be mainly of the package tour variety. Consideringthat the SBF has not actively promoted the site to the tourism industry, the growth in tourism (some 440,000 visitors since January 1993) is remarkable. In addition to these private-sector financed activities, the SBMAhas been involvedin the provisionof tourism-relatedservices (operatingsome of the recreationalfacilities, for example)pending their privatization. These serviceshave been provided primarily through ex-Baseemployees in a volunteercapacity. Facilitiesslated for privatizationin the 1994-95period includethe golf course and the marina.

2.26 Svecial Use Areas. One of the early and notablesuccesses of the SBMAhas concernedthe privatizationof the petroleum,oil and lubricantfacility, a 181 ha complexof undergroundstorage tanks and dedicated pier. This facility has been leased to a U.S. company on a 25-year, renewable lease. The privatizationarrangement was undertakenwith the help of financial advisors.

2.27 Utilities. The existing 26 MW power plant has been leased to a private operator, who operates the plant under an arrangementwith the NationalPower Company(NPC). The same operator is also constructinga 108 MW plant on a BOT basis on land that has been leased by the NPC from the SBMA. SBMA purchases power from NPC and is responsible for power distribution within the SBF; however, power distribution is high on the list of SBMA's privatizationpriorities. SBMA's agreement with NPC provides for satisfactionof SBF power needs from these plants in priority over provision of power to the national grid.

2.28 A Memorandumof Agreementwith the NationalTelecommunications Commission provides the SBMAwith a great deal of flexibilityto issue telecommunicationsfranchises within the SBF. More significantly,the SBMAcan enter into arrangementswith any local or foreign entity, and is not restricted to dealing with existing franchise owners. With the assistance of privatization advisors, the SBMA is currently in the process of evaluating bids for the creation of a joint venture for the provision of telecommunicationsservices within the SBF. SBMA's stake in the joint venture would be between20% and -14- 30%, subscribedto through the provision of existing telecommunicationsequipment and the franchise. In the initialphase, 2,000 new lines will be added to the SBF by mid-1994.

2.29 TransportInfrastructure. At present, the airport is beingoperated by SBMAemployees with assistancefrom staff secondedfrom the Air TransportationOffice. SBMA's strategy is to retain ownership and control of the airport in the short- to medium-term,but to enter into a managementcontract with a qualified operator. Several improvementsto the airport are required in terms of terminal facilities, navigationalaids and air traffic control equipment, as well as repairs to the runway, taxiway and aprons. These improvementsare needed urgently, in view of a recent agreement between the SBMA and an air freight service that intends to establish a regional hub at the Subic International Airport. General maintenance of the port facilities is undertaken by SBMA staff, who also operate the facilities on an occasional, as-neededbasis. Full privatizationof the port is not foreseen in the near-term, but the SBMA intends to enter into a managementcontract for port operations. In order to maintain the extensive port infrastructure, several repairs to the wharves and piers are required. The road network in the SBF is in good condition, and no major rehabilitationis required at this stage.

2.30 Residential. Although there has been substantialinterest on the part of investors in some of the housingunits in the SBF, no units have yet been leased on a long-termbasis. The SBMAis currently in the process of devising a housing privatizationstrategy. The basic approach is to package the housing units in lots, which would be offered to real estate managementcompanies for managementand individual leasing. It is expectedthat the first lots will be bid out by mid-1994.

E. Off-SBF Development Program and Priorities

2.31 The conversionstrategy to date has focussed on redevelopmentof the former U.S. Naval Base, which represents the first phase of freeport implementation. The Zone, however, is considerably larger (see para. 2.1) and encompassessurrounding municipalities. The SBF will not remain a restricted enclave in the long-term, and indeed, should not be viewed as such for planning purposes. It is linked to Olongapo City and is an integral part of the sub-region. An urban master planning exercise for the surroundingmunicipalities is currentlyunderway, financed by a TA grant from the Asian Developmentbank (ADB). This studyis expectedto provide: (i) an urban developmentstrategy for the area; (ii) infrastructural developmentplans for transportation,water supply,power and telecommunications,drainage and sanitation, and housing; and (iii) prefeasibility studies for critical infrastructural development projects required to support SBF development in the next five years. One such priority would be the improvementof the highwayinfrastructure connecting the SBF to Metro Manila.

2.32 The long-term vision for the developmentof the Central Luzon (one of the objectivesof R.A. 7227) is the establishment of 50-100 ha industrial estates along highways in the Central Luzon provinces, and shippingthe manufacturedgoods through the SBF port. This strategy is guided by the fact that the land availablefor industrialdevelopment is limitedin the SBF, whereas it possesses a good, natural harbor where port operations can be developed. The developmentof the Central Luzon provinces will provide livelihood for lahar-devastatedareas (as a result of the Mt. Pinatubo eruption) and ease the demographicand industrialcongestion in Manila. This strategy is also consistentwith the developmentof the Clark Air Field as a SEZ (per R.A. 7227). The infrastructuralrequirements of translating this vision into reality are many: the existingroad network in the region will have to be improved in order to facilitate the trucking of goods into the SBF; industrialestates will have to be developedoff-base; and the SBF port will have to be improved to handle modern cargo operations.

F. Lesons from Previous Bank Involvement

2.33 The Bank has played a major role in the Philippinesthrough a lending program involving some 140 operations, but has no direct experience in freeport or EPZ development in the country. -15- Experience from Bank involvement in similar activities in other countries4'indicates that EPZs are most successfulwhen they are part of a coherentincentives and trade policy regime; further, that key factors for success include appropriate location, the availability of suitable physical trade infrastructure, site development consistent with investor demand, and a policy environment that fosters private sector development. The country's trade, investmentand foreign exchangeregimes are now at par with those of its more dynamic East Asian neighbors; furthermore, the SBF's incentivespackage is comparable to that offered by its competitors in the region. The SBF's proposed regulatory framework, its location and physical infrastructure are consistent with the success factors commonly cited for EPZs. Project interventionsare designed to fill in the gaps in the regulatoryframework, particularlywith respect to the environment,and to ensure a phased developmentof the SBF.

G. Rationai for Bank Involvement

2.34 As described in the Country Assistance Strategy, discussed by the Bank's Board on February 3, 1994, the Philippinesis at a critical juncture in its economic history, and needs to seize the opportunityto break out of its low economicgrowth cycle. Foreigndirect investmentwill be very important if the Philippinesis to catch up with its more affluentneighbors. The SBF has the potential to kick-start this process. Improving the business environmentfor private enterprises is a key element of the GOP development agenda. The SBF provides a model base for the implementationof concerted and sound business-friendlypolicies. The SBF has already attractedconsiderable investor interest; however, certain institutionaland infrastructuralbottlenecks prevent the SBMAfrom realizing the full potential of the SBF's considerableasset base. In a competitiveenvironment such as that facing the SBF, rapid accommodation of interestedinvestors is essential: a lack of adequatefacilities or administrativedelays can create negative perceptions,dampen investor confidence,and generallyundermine the SBF developmentstrategy. At the same time, the SBMA must avoid a haphazard developmentof the SBF, guided by short-term financial considerationsrather than the long-termmaximization of economic,financial and environmentalbenefits, if it is to effectivelyact as the custodian of this importantasset.

2.35 The Bank can play a catalytic role in helping the GOP and the SBMA effect an orderly conversionof the facility, and its presenceprovides a measureof comfortto private investors. The proposed project touches on a multiplicityof sectors. The Bank has considerableexperience in and is well-equipped to deal with the issues related to all these sectors. The bulk of the proposed financing concerns infrastructure,for which the terms of Bankfunds are more appropriatethan the shorter maturity financethat would be available commercially. The overall financial needs of the SBF are large, and the available commercialfunding would be more effectivelychanneled if it supports commercialventures. Finally, the Bank has already been involved in the provisionof technicalassistance to the SBMAto help strengthenthe policy, regulatory and institutionalframework and define a conversion strategy for the baselands. The Bank's continuedinvolvement will help implementthis conversionstrategy, and, in particular, ensure that the emphasison environmentalprotection and institutionalstrengthening is maintained.

Export Processing Zones, Policy and Research Series 20. As discussed in Chapter I, a freeport can be considered an EPZ with free trade and other equal footing export policies.

-16- m. THE PROJECT

A. Objecive

3.1 The objective of the project is to attract private investorsto the Subic Bay Freeport (SBF). This will be achievedby: (a) improvinginfrastructure and access to the area for industrial,commercial and passenger traffic; (b) maintaining the SBF asset base, including protection of the environment; and (c) strengtheningthe capacity of the SBMAto manage and administerthe facility.

B. Description

3.2 The project consists of three components:

(a) Site Improvement. Several infrastructuralimprovements are required at the SBF, consisting of new construction, conversion of existing facilities for civilian use, selected repairs to existingfacilities, and replacementof critical equipmentthat was removedby the U.S. Navy upon evacuation. Detailed engineering studies and construction supervision for these componentswill also be included. A detailed descriptionof the improvementsis contained in Annex 1.

Land access to the SBF will be improvedthrough: (i) the constructionof a 4 Iam,two-lane access road from KalalakeBridge to KalayaanGate (see Map IBRD 25499). This road will link the main industrial area of the SBF (presently being developed) to the outskirts of OlongapoCity and the national highway, thereby diverting heavy traffic away from the tourism and commercialareas of the SBF as well as the narrow streets of OlongapoCity; (ii) the constructionof an 82 m, two-lane bridge with pedestrian walkway linking Rizal Avenuein Olongapoto the SBF. This bridge will be used for incomingtraffic to the SBF; outgoingtraffic will pass throughthe existingMagsaysay Bridge. This systemwill improve traffic flows in OlongapoCity as well as in the SBF; and (iii) constructionof security plazas at the Main Gate Complex(Rizal and MagsaysayBridges) as well as at Kalayaan Gate to process incomingand outgoingtraffic.

Air traffic access to the SBF will be improved through: (i) strengtheningof the runway in order to accommodatethe size of aircraft which are forecast for the next 10 years. The study and mitigationof a subsidenceproblem at the northeast end of the runway are also included; (ii) the reconstructionof the southeast taxiway, including its strengtheningand widening, in order to accommodateaircraft expected to be used by the freight hubbing operation; (iii) apron strengtheningat both the passenger and freight operations areas to accommodatethe forecast aircraft sizes; (iv) providing adequate airport communications equipment and air traffic control equipment suitable to provide a minimum Category 1 control; and (v) convertingone of the existing hangars into a passenger terminal to create adequate passenger handling capacity. An existing building will also be converted to a freight warehousefor freight carried on passenger aircraft.

In order to prevent further rapid deterioration of the underdeck structure at the Alava, Rivera and Bravo Wharves and at Pier 1010 (see Map IBRD 25499), and to ensure their continued availabilityfor operations or commercialactivities, existing cracks and damage to the concrete piles and deck structure will be repaired and sealed. A cathodic protection system will be installedto protect the steel componentsat Pier 1010 and Bravo Wharf.

A pilot standard factory building development will be undertaken on a 10 ha site in the former PWC area (see Map IBRD 25499). Site development will include the basic infrastructure(roadways, water, electrical and sewer line connections). The initial phase will cover an approximateland area of 6 ha for 20,000 m2 of covered floor area. Three -17- basic configurations,providing multiples of 1,000 m2 space, have been designed. Six buildings will be constructedin total.

Miscellaneous equipment will be provided for security and maintenance purposes. Communicationsequipment and vehicleswill be providedfor security services. Electricity and water meters will be installed in existing buildings to permit appropriate billing for utilitiesto the tenants. Emergencyequipment (generators, emergency pumps, etc.) will also be provided.

(b) InstitutionalSupport. Several actions are foreseento strengthenthe institutionalcapacity of the SBMA and to provide the appropriate systems for the implementationof freeport policies. Agreements were reached at negotiations that for all the technical assistance activities,the SBMAwill retain consultantsaccording to terms of reference and a selection procedure acceptableto the Bank. It was also agreed that the timeframefor the carrying out of the studies and the implementationof the agreed recommendationswould follow the timetable shown in Annex 2.

In order to monitorduty-free purchasessuch that the appropriate taxes can be collected,5' a merchandisecontrol system will be designedand implemented. This computerizedsystem will link each duty-free retail outletto a central database. SBF visitorswill be issued a pass card in which purchases will be recorded. Any purchases above the prescribed limit will be assessedthe appropriateduties. The project will financethe design and implementation of the system, includinghardware, softwareand training to SBMAstaff in its use. Terms of reference are containedin Annex 3.

Technicalassistance will be providedto define appropriatezoning regulations and a building design code for the SBF. This will ensure a coherent future development,consistent with the agreed land use plan. Terms of reference are containedin Annex 4.

The SBMA's present billingsystem is largelymanual. In the future, with increasedactivity, an automated system will be required in order to accurately track SBMA revenues and ensure that billing takes place on a timely basis. The project will finance the design and implementationof this system. Terms of reference are containedin Annex 5.

Several SBMAfacilities are slated to be privatized within the next 2-3 years. The project will includea privatizationassistance fund for the provisionof specializedadvice on specific transactions. Among the major items foreseenat present are water and sewerage services and solid waste management. In the case of water and sewerage services, a technical consultant has already been hired to define the basic technical parameters, and project interventionswill concern assistance in the actual bidding process and negotiationwith the chosen supplier. For solidwaste management,terms of referencefor the necessaryservices are being prepared by the SBMA. A tentative description of the services required is in Annex 6. Agreementswere reachedat negotiationsthat an action plan and timetablefor the adequateprovision of water and sewerage and solid waste managementin the SBF would be provided to the Bank by December31, 1994.

In order to strengthenthe SBMA's institutionalcapabilities and improve SBFadministration, a team of 3 senior advisors will be providedunder the project. The role of this team will be two-fold: first, to provide the necessarytechnical skills and experiencecurrently missing from SBMAstaff and second, to provide on-the-job training to SBMAcounterparts. The

ExecutiveOrder 97A, issued subsequentto R.A. 7227, sets duty-freepurchase limits for Filipinosresiding outside the SBF. Any purchasesbeyond the prescribedlimits are subjectto applicabletaxes and duties. -18-

areas to be covered include planning and property development, customs and taxation policy and investment promotion. Terms of reference are contained in Annex 7.

Short-Term Training: The project will provide short-term consultancies as required for training and workshops in freeport-related topics. Terms of reference for this assistance are contained in Annex 7.

Given the sheer size of the SBF and the various facilities contained in it, and in light of the SBMA's key role as custodian of these assets, the facilities management function needs to be strengthened. The project will provide critical equipment required to operate and maintain utilities and other services until such time as they are privatized. It will also provide institutional support to adequately organize and structure the facilities management function at the SBMA. Terms of reference for this support are in Annex 8.

(c) Environmental Protection. An Environmental Baseline Survey will be carried out to establish the basic environmental conditions within the SBF and develop a baseline of information on the forest lands and the bay. Terms of reference are in Annex 9. The project will also provide environmental monitoring equipment for the newly-established Ecology Center in the SBF, as well as institutional support to assist in establishing a sound environmental management infrastructure in the SBF (Annex 10 contains terms of reference). An Environmental Management Plan covering the organization and work plan for the SBMA's Ecology Center (terms of reference are in Annex 11) has been submitted to the Bank for review. The adoption of an agreed Plan by the SBMA's Board and its publication is a condition of effectiveness.

C. Cost and Financing

Projet Cost

3.3 The base project cost is P 1,207 million (US$43.1 million equivalent), and total project cost including contingencies is P 1,596 million (US$52.0 million), with a foreign exchange component of about 75%, or US$39.1 million. Physical contingencies represent around 14% of the base cost, while price contingencies represent 18%. Table 3.1 sunumarizes the cost estimates; details are presented in Annex 12. Base costs are in December 1993 prices, and are derived from the most recent equipment, material and labor cost data available. A relatively higher level of physical contingency has been included to allow for possible cost overruns on certain items for which detailed engineering has yet to be finalized. Price contingencies are estimated on the basis of escalation factors of 7% for local costs and 2.5% for foreign costs.

Flnancing Plan

3.4 Table 3.2 summarizes the proposed financing plan for the project. Bank financing will account for about 74% of the total requirements of US$54.1 million, including interest during construction. The proposed Bank loan of US$40 will finance 100% of the estimated foreign exchange cost and will be at the standard variable interest rate for a 20-year term, including a five-year grace period. The SBMA will bear the foreign exchange and interest risks for the loan. The loan will be guaranteed by the GOP. Agreement was reached at negotiations that the GOP will provide this guarantee. -19-

Table 3.1: Summary of Project Costs

-Million Pesos--- -Million USS--- Component % of % Local Foreign Total Base Cost Local Foreign Total Foreign

Site Improvement 259 753 1012 84 9.3 26.9 36.2 74 lnsniutonal Support 5 133 138 12 0.2 4.8 4.9 97 Environiental Protecdon 0 28 28 2 0.0 1.0 1.0 100

Taxes and Duties 29 0 29 2 1.0 0.0 1.0 0

Total Cost 293 914 1,207 100 10.5 32.6 43.1 76 Physical Condngencies 41 128 169 14 1.5 4.6 6.0 76 Price Condngencies 66 154 220 18 1.0 1.9 2.9 70

Total Cost with Contingencies 400 1,196 1,596 132 12.9 39.1 52.0 75 Tomls may not Add up due to rounding. Table 3.2: Financing Plan (US$ million) % of 1994 1995 1996 1997 Total Total

Tobi Project Cost 11.8 27.0 8.5 4.8 52.0 96.1

Interest During 0.3 1.2 0.5 0.1 2.1 3.9 Construction 12.1 28.2 9.0 4.9 54.1 100.0 Toatl to be Ibm_cod

FUmd 1W: 4.7 23.3 7.6 4.4 40.0 73.9 World Bank 7.5 4.9 1.4 0.5 14.1 26.1 SBMA's Internal Cash 12.1 28.2 9.0 4.9 54.1 100.0 Total Ybhaancg totals may not add up due to rounding. D. Imple an

Projed aggement

3.5 SBMAis fully responsiblefor implementingthe project. The Deputy Administratorfor Administrationhas been appointedas the projectmanager for SBMA;he is assistedby a team of SBMAstaff drawn from the engineering,finance and corporateplanning departments. This team has participatedin projectpreparation and is thereforefully cognizantof detailedproject content. The team of resident, long- tenn advisors will also be availableto assist the projectmanagement team as appropriate.

3.6 SBMAhas currentlyhired consultantswho have assistedwith the preparationof the physical componentsof the proposedproject. To avoid implementationdelays, the same consultantswill continue to assistwith final designs and procurement. Agreementswere reached at negotiationsthat appropriately qualifiedconsultants would be hired for the supervisionof civil works. The SBMA's engineeringstaff would handle the procurementof goods and equipment;however, specialized assistance for the finalization of technical specifications for the communicationsequipment would be provided by appropriate consultants.§'These proposedarrangements are acceptableto the Bank.

Such assistance is foreseen in the existing grant from the PHRD Fund (Japan). -20-

3.7 Procurement arrangements for the project are summarized in Table 3.3. The cost of each item includes its pro rata share of physical and price contingencies. The portion of the project not financed by the Bank loan (NBF) would follow SBMA's procurement procedures. These follow COA rules and guidelines, and are satisfactory to the Bank.

Table 3.3: ProcurementArrangements (US$ million)

Component ------ProcurementMethod------ICB LCB Other NBF Total

Works

Land Access 4.6 1.7 0.4 6.7 (4.0) (1.5) (0.0) (5.5)

Airport Improvements 14.4 14.4 (12.4) (12.4)

Port Repairs 2.3 0.1 2.4 (2.0) (0.0) (2.0)

StandardFactory Buildings 7.0 0.4 7.4 (6.0) (0.0) (6.0) Goods

Airport NavigationalAids 6.5 6.5 (0.0) (0-0)

CommunicationsEquipment 2.5 2.5 (2.5) (2.5)

Vehicles 0.7 0.7 (0.7) (0.7)

Miscellaneous 2.9 0.5 0.1 3.5 (2.9) (0.3) (0.0) (3.2) Consultants

Advisors 2.8 2.8 (2.8) (2.8)

Studies 4.9 0.1 5.0 (4.9) (0.0) (4.9)

Total 34.4 1.7 8.2 7.6 52.0 (30.5) (1.5) (8.0) (0.0) (40.0) Figures in parenthesesrepresent amountsfinanced by the Bank loan. NBF: Not Bank Financedincludes taxes and duties. Other: local and internationalshopping; consultant services. -21-

3.8 About US$34 million equivalent of goods and works to be financed by the Bank under the proposed project would be suitable for procurement through international competitive bidding (ICB) according to the Bank's procurement guidelines and using the Bank's standard bidding documents. Contracts for goods valued at US$200,000 equivalent or more, amounting to US$6.1 million in the aggregate, would be procured on the basis of ICB. A margin of preference equal to 15% of the CIF bid price of imported goods, or the actual customs duty, whichever is lower, will be allowed for domestic manufacturers. Off-the- shelf, readily available goods, having a per item value of no more than US$200,000, would be eligible for procurement through local and international shopping with a minimum of three quotations, in an aggregate amount not to exceed US$500,000. Civil works contracts valued at US$2 million equivalent or more, amounting to US$28.3 million, would be procured on the basis of ICB. Minor civil works contracts valued at less than US$2 million equivalent, amounting to US$1.7 million in the aggregate, would be procured through local competitive bidding following procedures acceptable to the Bank. While it is unlikely that foreign contractors would be interested in such small contracts, there will be no restriction on their bidding on these contracts. Consulting services, amounting to US$7.7 million, will be awarded according to Bank guidelines. It is expected that some 350 person-months of consulting services will be required for the various activities of the project. Prior review of procurement documents will be required for consulting services which will result in contracts with an estimated value of US$100,000 or more for the engagement of firms and US$50,000 or more for the engagement of individuals. Prior review of bid documents and approval of contract awards will be mandatory for all contracts expected to cost the equivalent of US$200,000 or more, which will cover 90% of total contract value.

Disbursement

3.9 The estimated disbursement of the Bank loan is shown in Annex 13 and summarized in Table 3.4. This assumes that the loan will become effective by July, 1994. The project is expected to be completed by June 30, 1998. A loan closing date of June 30, 1999 has been established to allow for late payments. The scheduled disbursement follows the Bank's standard profile for industrial development projects in the Philippines. Retroactive financing not exceeding US$4 million equivalent of the proposed loan is recommended for eligible payments made prior to the date of loan signing, but after December 6, 1993. These expenditures would concern primarily consultant services for detailed engineering and institutional support.

Table 3.4: Estimated Loan Disbursement (US$ Millions)

------Bank Fiscal Year------1995 1996 1997 1998 1999 Annual 7.2 17.6 11.2 2.4 1.6

Cumulative 7.2 24.8 36.0 38.4 40.0

3.10 The Bank loan will be disbursed against: (i) 100% of foreign expenditures for imported equipment and materials; (ii) 100% of local expenditures (ex-factory) for locally manufactured items; (iii) 90% of civil works; (iv) 70% of other locally procured goods and services; and (v) 100% of total expenditures for consulting services. -22- 3.11 Disbursementsfor all expenditureswould be based on full documentation,except for: (i) contracts for works and equipment that cost less than US$200,000equivalent; and (ii) contracts for consulting services for US$100,000 equivalent for firms and US$50,000 equivalent for individuals. Supportingdocuments for disbursementsbased on statementsof expenditure(SOEs) would be kept by SBMA for review by external auditors and Bank supervisionmissions. SBMA will open a US$ Special Account in a commercialbank and an initialdeposit of US$1million (representingan average of about two months' small disbursements)would be made to facilitatepayments for eligible expenditures.

Monitoring,Reporting and Supervision

3.12 The Bank will monitor the physical progress of the proposed project as well as the borrower's financialand institutionalperformance. For this purpose, an averageof two supervisionmissions will be fielded per year during the active project phase. The missionswill review implementationof the project in additionto the more general freeport conversionstrategy. SBMA's institutionaldevelopment and financial situationwill also be an importantpart of such reviews. To measure the success of the conversion strategy, and SBMA/SBFperformance, the followingmonitoring indicators would be used: (i) number and amountsof private investmentproposals pending approval;(ii) numberand amountsof investmentproposals being implemented;and (iii) total employmentcreated. The project managerin SBMAwill serve as the key liaison between the Bank and the borrower, and will provide periodic progress reports on project implementation,to include the monitoringindicators. SBMA will also provide the Bank with its annual financial and auditor's reports.

3.13 Project supervisionby the Bank will follow the supervisionplan presented in Annex 14. Bank supervision will require an estimated 60 staffweeksover the life of the project, of which around 15 weeks will be at headquarters(to review, inter alia, procurementactions and progress reports)and 45 weeks in the field. Supervisionwould be carried out by Bankstaff and consultantswith expertisein infrastructure development(road engineer, port specialist), privatizationsupport (privatizationof utilities), institutional issues, and environmentalmanagement. SBMAwill supervisethe project on an on-goingbasis through the project manager, assisted by technical and financial staff within the institutionas required. The planned implementationschedule of the project is shown in Annex 15.

E. Enviromnmetal Aspects

3.14 An environmental analysis has been carried out for the proposed project, and the correspondingreport is currently being reviewed by the Bank. No resettlement of persons is required in order to implementthe project. There are no land acquisitionissues since all improvementswill take place within the SBF, exceptfor the OlongapoCity approach to the Rizal Avenuebridge, which has been certified by the Office of the City Mayor to be governmentproperty and free from all claims of any private entity. The project is unlikely to cause an adverse impact on the environment. Potential impacts related to constructionactivities (such as sediment runoffs) have been identifiedand mitigatingmeasures described. The report also discusses environmentalconcerns associated with future SBF operations and SBMA's environmentalmanagement functions. An EnvironmentalManagement Plan has been developed(see para. 3.2) to address the broader issues of environmentalmanagement in the SBF.

-23- IV. THE BORROWER

A. Background

4.1 The Subic Bay MetropolitanAuthority (SBMA)will be the borrower of the proposed loan and will have overall responsibilityfor the implementationof the project. The SBMA was establishedas a wholly-owned Government corporation through Republic Act 7227 (the Bases Conversion and DevelopmentAct), enactedby the Congressof the Philippinesin February 1992, and signed by the President of the country in March 1992 to acceleratethe conversionof militaryreservations into other productiveuses. This Act created the Bases Conversionand DevelopmentAuthority (BCDA) and defined its functions and powers; it establishedthe Subic Special Economicand Freeport Zone (Zone); it created the SBMA as an operating and implementingarm of the BCDA, charged with developingthe Zone into a self-sustaining industrial,commercial, financial and investmentcenter; and providedfunds for these purposes. In practice, the BCDA's involvementin the developmentof the SBF consistsof an oversightfunction, which it exercises through membershipin the SBMA's Board. Agreementwas reached at negotiationswith the GOP that it would take, or cause to be taken, all action required to enablethe SBMAto carry out the proposed project.

4.2 In contrast to the detailed and comprehensivelegislation underlying other freeport regimes, the entire legislativebase for the Zone regime is containedin only three articles in the Act (Sections 12, 13 and 14). Freeports typically have one or a series of laws clearly delineatingthe nature of the economic regime, the tax and trade regime, the financial regime, the application (or non-application)of relevant national legislation, and the nature of transactionswith the domestic economy. In the case of the Zone, these issues were not carefully worked out in the process of developing the legislation. Presidential ProclamationNo. 50 subsequentlyclarified the powers of the SBMAin terms of ownershipand privatization of assets. The scope of SBMAactivities and benefitsof freeport status were significantlyenhanced through the promulgationof ImplementingRules and Regulations(R&R) by the SBMAin March, 1993. These R&R had been extensivelydiscussed and negotiatedwith the relevantGOP bodies, notably the Bureausof Internal Revenue, Customs,Immigration and Deportation,and Boards of Quarantineand Investments,among others. More recently, Executive Order 97A has modified the freeport regime by subjectingduty- and tax-free importationprivileges of SBF residentsand enterprisesto certain limitationsand conditions. In effect, duty- and tax-free importationprivileges are restricted to the former U.S. Naval Base, which is but one part of the larger Zone (see para. 2.1); the role of Customsis significantlyenhanced; and duty-free limits have been establishedfor Filipinos residing outside the base. ExecutiveOrder 140, issued in December, 1993, places a moratorium on the establishmentof new duty-free shops pending a national review of duty-free shops.

4.3 The R&R are supplementedby detailed regulationsand procedures in the form of internal operatingprocedures manuals. For example, a manual has been drafted for Customs Procedures. SBMA has entered into Memoranda of Agreement(MOA) with certain GOP entities, includingthe Departmentof Environment and Natural Resources (DENR); Customs (through a Customs AdministrativeOrder); the NationalTelecommunications Commission; and the PhilippineAtmospheric, Geophysical and Astronomical Services Administration. The DENR MOA is being revised to better reflect the SBMA's responsibilities in environmentalmanagement as provided for in R.A. 7227. Similarly,several other MOA are pendingand under discussion. Nonetheless,there are very likely additional areas of ambiguity that have not yet come to light and which will require resolutionif and when the occasionarises. For example,although the SBMA has made efforts to establish adequaterelationships with local governmentunits, these have been mostlyad hoc and infornal, and issues of jurisdiction in the provision of local and municipal services may well need to be addressedin the future.

4.4 The SBMA is a wholly-ownedand controlled corporation(GOCC) of the GOP, with an authorizedcapital of P 20 billion, paid up in part through transferred assets and in part through budgetary transfers. The SBMAis providedconsiderable flexibility and autonomyto manageand operate the facilities within its geographic boundaries, and can, inter alia: (i) exercise administrative powers, rule making and disbursementof funds over the Zone; (ii) undertakeand regulatethe operationof utilities,shipping and other services and concessions;(iii) contract, lease, sell or otherwisedispose properties; (iv) raise, borrow funds -24- and secure debtsby pledgingassets; (v) accept investmentssubject to its rules and regulations;and (vi) adopt and implementenvironmental regulations.

B. Organ izaon Structure

4.5 SBMA managementis vested in its Board of Directors, which decides on all important matters related to SBF development and administration. The 15 members of the Board, including the Chairman,are appointedby the President. The Boardconsists of representativesof the former Base workers (5 members), the GOP (2 members, one of whom is a BCDA representative),the four municipalities containedin the Zone (4 members),the businesssector (3 members)and the Chairman. All Board members are appointedfor a term of 6 years. The Chairman may also serve as the chief executiveofficer, referred to as the Administrator. The Administratoris responsiblefor the overallperformance of the SBMA. Under the Administrator is a Senior Deputy Administrator, and 5 Deputy Administrators, responsible for Administration;Finance; Tourism, Trade and Business;Public Works; and Port Operations.

4.6 The SBMA reports to the Office of the President, according to the provisions of the AdministrativeCode of 1987 (EO 292, dated July 25, 1987). Althoughdesignated in R.A. 7227 as the operating and implementingarm of the BCDA, the precise hierarchicalrelationship between the two entities is ill-defined:both are adjuncts of the Office of the President, and enjoy a parallel reporting relationshipto this office. To date, the BCDA has maintained an arms-length relationship to the SBMA, and has preoccupied itself with the developmentof the other militarybases under its command(particularly Clark Air Field).

4.7 As a GOCC, the SBMA is subject to controls placed by the Department of Budget and Management(DBM), the Commissionon Audit (COA), and the Civil Service Commission. Principal responsibilitiesof the DBM over the SBMAinclude approval of annual SBMAappropriation from GOP, approval of plantilla (civil service) positions (including number, job description and salary grade), and approvalof the annual budget submittedby the SBMA. COA undertakesa general audit of SBMAfinancial statementsand ensures that receipts and expendituresare made accordingto GOP procedures (para. 4.12).

4.8 SBMAis organizedalong functionallines and its organizationalchart recognizesthe SBMA's goal of privatizing the operationof facilities rapidly (see organizationalchart). In its budgetary approval of 1994, the DBM approved 1,976 plantilla positions, and 2,100 contractual positions. Most of the contractualemployees work in areas that are slated for privatization,such as recreationalfacilities operators. With the exceptionof the Chief OperatingOfficer (Senior DeputyAdministrator), most senior management positions have been filled, albeit with relativelyinexperienced and junior managers. In practice, most of the importantinvestment promotion tasks are handled personallyby the Chairmanand his senior managers. Agreementswere reachedat negotiationsthat a suitablyqualified Chief OperatingOfficer will be appointed by June 30, 1995.

4.9 An unusualfeature at the SBMAis the large number of volunteerswho are active primarily in grounds and facilitiesmaintenance. The presence of these volunteers, many of whom are displacedex- Naval Base employees,is indicativeof the broad support for the SBF conversionprogram and the SBMA. However, while the volunteers filled a critical gap in the SBMA's staffing in the early days of SBF operation, their continued presence is neither feasible nor desirable. Recognizing this, the SBMA is encouraging the professionalizationof the volunteer workforce by assisting them to form companies or cooperativeswhich can provide services on a contractualbasis to the SBMA. In addition, the 1994 budget has considerablyincreased the number of plantillaand contractualpositions, which has enabled the SBMA to absorb many of these volunteers.

4.10 In general, the SBMA's organizationalstructure is well-suited to the range of activities involved in running the SBF. Staff are motivated, hard-working and infused with enthusiasm. Top managementis dynamic, and has been able to create and foster a sense of commitmentto the SBF concept amongst the staff. The SBMA is, furthermore,a young organization, both in terms of its recent creation

------25- and the relative youth of its staff. This presents certain definite advantages: there is no established "corporate mind-set" to hinder innovative initiatives. The challenge for the SBMA is to harness this enthusiasm and temper it with experience. Senior professionalscould provide the necessary skills and experiencecurrently lacking in the SBMA, while providing on-the-jobtraining to selected counterpartsto develop these skills in-house. In terms of organizationaldevelopment, the SBMA's main task will be to set up a managementstructure in which sound freeport administrationcan be institutionalized. Agreements were reachedat negotiationson a joint review of the SBMA'spolicy and organizationaleffectiveness, to take place by July 31, 1995, and to include an assessmentof: (i) the full impactof the various policiesand rules affectingthe core policies of the freeport regime; and (ii) the operatingautonomy of the SBMA,particularly with regard to staffing, compensationand procurement.

C. Financial Management and Control

FEmda Polce

4.11 AccountingSystems. The SBMAis required to adopt standard Governmentprocedures for accounting,budgeting, procurement and personnelmanagement. Accountingsystems, procedures and chart of accounts are approvedby COA. The SBMA's systemof accountsis fully operationalon a manualbasis, and plans are underwayfor its automationduring early 1995(see para. 3.2). Financialstatements have been prepared and reconciled for the start-up 1992 operations, and a full set of financial statementshave been prepared on a monthlybasis during 1993. A good attempt has been made to accuratelyreflect the financial conditionof the enterprise. Income categories are subdividedby major revenue sources such as rentals, utilities billed and revenues generatedfrom the provisionof services and concessions.

4.12 Audits. As with other GOCCs, COA performs annual financial and performance audits. In addition, 6 COA staff are stationedpermanently on SBMA premises and act partially as the SBMA's internal auditors. BecauseCOA may object to certain expenditures,which then becomethe personal liability of the concernedofficial, pre-audits are common. Audited financial statementsare to be issued within six monthsof the close of the fiscal year. The audit report for 1992was found to be satisfactory. Agreement was reachedat negotiationsthat the SBMAwill provide, within six monthsof the close of its fiscal year (i.e. by June 30 of each year), an audited report of its annual financial statements, and the Statement of Expenditures for the project, prepared by independentauditors satisfactory to the Bank. Provisional financial statementswill be provided one month after the close of the fiscal year.

4.13 Taxes. The SBMA is subject to a 35% corporate income tax rate. It is exempt from customs duties and taxes on all goods and services consumedwithin the SBF. Purchases from domestic vendersare zero-ratedfor value-addedtax (VAT) purposes,but VAT-registeredvenders have to specifically apply for the effective zero-ratingof their sales to the SBMA and SBF enterprises.

Financial Mt

4.14 Bookingof Assets. The major issue involvingthe proper accountingof SBMA's financial conditionis the booking of the various assets which have been turned over to the SBMAat little or no cost. The SBMAhas an authorized capital of P 20 billion, paid up in part through transferred assets and in part through budgetary transfers of iR 300 million per year for three years. The imputedvalue of transferred assets is thus P 19.1 billion. This amount has been allocatedto the various categoriesof fixed assets such as land, buildings and facilities, with adjustmentsto be made as and when facilitiesare actually appraised. The adjustmententry would be booked to the specific fixed asset with the difference charged as either an extraordinarygain or loss to the profit and loss account. Under this approach, the SBMA would reflect an indicativevalue for the properties, and conduct appraisalsonly if and when they are deemednecessary. In addition, the SBMAcan begin to depreciatethese assets based on their remaininguseful lives. Agreement was reached during negotiationsthat SBMAwill completethe revaluationof its assets in a manner acceptable to the Bank by December 31, 1995. -26- 4.15 Financial Planning. The SBMA assembles an annual operating and capital expenditure budget, as mandatedby DBM. It has recently begun to develop a fully integratedlong-term financial and investmentplan based on its developmentstrategy. Given the rapidly evolving environmentfacing the SBF, any planning exercise must, by necessity, be flexible, so as to permit the SBMAto be responsiveto market signals in a timely fashion. The Corporate Planning department is responsible for planning, and while a good start has been made to formalize the SBMA's developmentstrategy through a rolling, five-yearplan, much more work is required to fine-tunethe process and fully involve all SBMA operating departments. To this end, the project will provide technical assistance in the form of a long-term, resident expert (see para. 3.2 (b)). Agreementswere be reached at negotiationsto carry out a joint review of SBMA's rolling, five-year investmentplan on an annual basis no later than March 31 of each fiscal year until the project is completed; further, that SBMAwill carry out this plan.

4.16 Internal Control. The SBMA's internal control office is attached to the Office of the Administrator. Present internal control mechanismsare adequatefor the limitedactivity that the SBMAhas engaged in to date. However, increased activity in the SBF will lead to a correspondingincrease in the number and complexityof SBMAinterventions, calling for added attention to internal control mechanisms. In this, as in other key aspects of institutionalstrengthening, the project will finance technicalassistance to help the SBMA implementappropriate mechanisms (see para. 3.2 (b)).

4.17 ManagementInformation Systems. Althoughthe SBMAdoes not have a formal management informationsystem that is fully computerizedand integrated,the informationneeds of managementand staff are met through a variety of mechanisms. Financial reports are produced by the Accountingand Finance department on a monthlybasis. Specialdatabases are maintainedin certain SBMA operatingdepartments. Chief amongst these is the investor tracking system, in which data on the proposed activity, details of the investment proposal and status of the investmentapplication of potential investors are entered. These databases constitutea functioningmanagement information system which is frequentlyaccessed by senior managementfor internal control purposes. This system is satisfactory.

4.18 The SBMAintends to developa smart-cardsecurity systemfor the purposesof implementing the freeport regime, particularly with regard to movement of duty-free merchandiseto the Philippines economy. This system would track purchasesof duty- and tax-free goods in the SBF, and ensure that full taxes are paid on excesspurchases beyond the prescribed free limits. An indirect benefit of the system is to provide the SBMA (and SBF enterprises) with useful marketing informationon the characteristicsand purchasingpatterns of SBFtourists and visitors. This is an area that holds promise for future development as a self-supportinginformation service industry.

4.19 Insurance. The SBMA does not presently carry insurance for the facilities under its jurisdiction. However, investorsare required to provide adequate insurance for all leased facilities. Part of the problem in insuringall SBF assets is the sheer magnitudeof coveragethat would be required. An assessmentof insuranceneeds and requirementsof the SBF, identificationof possible service providers and evaluationof availablealternatives will be carried out duringproject timeframe. Agreementswere reached at negotiationsthat the SBMAwill provide appropriate insurance coverage or adequate reserves for, and otherwiseproperly maintain, all its facilities.

D. EnvironmentalMnagnt

4.20 Recognizingthe importanceof sound environmentalmanagement for a site such as the SBF with its significantecological endowments, R.A. 7227 calls for the establishmentof an Ecology Center at -27-

the SBF to undertake all aspects of environmental management for the site.!' The main environmental protection functions that the Ecology Center is responsible for are:

* monitoring of parameters indicative of the state of environmental quality throughout the SBMA jurisdiction, as well as the measurement of the performance of the operators of environmental infrastructure and services (such as waste water treatment). With regard to individual facilities and industries located within the SBF, the Ecology Center would receive regular monitoring reports from the concerned operators, and carry out periodic inspections to verify these reports. While the bulk of the laboratory analyses will be undertaken by outside laboratories, a minimal in-house analytical capability is required for routine sampling and analysis.

* enforcement of the environmental quality goals and standards established by the SBMA is an essential function of the Ecology Center. To effectively conduct enforcement, it will be necessary to develop and adopt criteria by which the compliance status of facilities can be determined; to monitor compliance on a periodic basis; and to exhibit the political will to implement the recommended actions, including closure of the facilities if necessary.

* issuance of permits is another key function of the Ecology Center. The types of permits include Environmental Compliance Certificates, Authority to Construct, and Permit to Operate. In order to eliminate the confusion and bottlenecks that have developed in the administration of the permitting system at the national level, each SBF applicant will be assigned a "case officer" who will work with the applicant to ensure the timely processing of permit applications. This will provide applicants with a "one-stop" approach for the necessary paper-work.

* environmentalstandards, policies and regulations will be the responsibility of the Center. An Environmental Procedures Manual has been prepared as part of the extensive TA provided to the SBMA, and has been adopted. Agreementswere reached at negotiations that these procedures will be implemented.

* emergency response and remediation is another functional responsibility of the Ecology Center. This requires the development of emergency and contingency plans that anticipate the nature of such events. The proposed technical assistance (see para. 3.2) will help to develop this capability.

* administration of protected areas is coordinated by the Ecology Center, although the actual patrolling and surveillance activities are the responsibility of the SBMA's security forces.

* education in the area of the environment also falls within the domain of the Ecology Center. This function involves investor advisory services with regard to compliance with environmental rules and regulations, and also commnunityeducation with regard to environmental protection.

4.21 The Ecology Center has effectively started operations only in late 1993, and at present consists of some 20 staff. Building up an adequate environmental management capability at the SBMA will take time. A detailed organizational development plan has been produced as part of a comprehensive Environmental Management Plan defined by the SBMA (see terms of reference in Annex 1.1). This plan

Article 13(b) (10). wherebythe SBMA hasthe powersand functions'to adoptand implementmeasures and standards for environmentalpollution control of all areaswithin its territory. including,but not limitedto all bodiesof waterand to enforcethe same. For whichpurpose the SubicAuthority shall createan EcologyCenter." The SBMA is currently revisingits MOA with DENR to makeexplicit theseresponsibilities. -28- provides a blueprint for the implementationof sound environmentalmanagement practices at the SBMA. The adoption by SBMA's Board of an agreed plan and its publicationis a condition of effectivenessof the project. Agreementwas reached at negotiationsthat this plan will be implemented.

4.22 One early activity of the Ecology Center will be to oversee the carrying out of the EnvironmentalBaseline Survey. This survey will establishthe environmentalconditions of the site, describe the basic ecology and identifyany contaminatedareas, given the site's former militaryuse. Little published informationis currently availableon base conditions,and the BaselineSurvey will establish a database on the forest lands and the bay. If any contaminatedsites are identified, the Survey will indicate the types of follow-upstudies and analyses that will be required to clean-upthose areas. This survey is a key priority of the SBMA; terms of reference for the Survey are in Annex 9. Aside from the above functions, the Ecology Center will serve as the center for managementof the SBF forest (para. 2.16), together with the intact parts of the adjacent Bataan National Park. These forests are scheduled for inclusion in the GEF Conservationof Priority ProtectedAreas project, and the existingMOA between SBMAand DENR provides for SBMAmanagement of this area. The Subic-Bataanforests are particularly suitableto eco-tourismand this is likely to be one of the few uses to which protected forests can be put. The Ecology Center will also serve as a nationwidetraining center in park management.

E. Training and Technical Assistance Needs

4.23 Despitethe many achievementsof the SBMAin administeringthe SBF, there are some areas where technicalassistance and training are needed. One area of priority is to rationalizeand strengthenkey organizational functions. The planning capability at the SBMA requires improvement. The SBF's privatizationand developmentplan needs to be refined and reassessedon an on-goingbasis. Organizational support is required in investmentpromotion, evaluation and registrationprocedures to guard against potential darnpening of investor interest due to a lack of experience on the part of SBMA's staff. The SBMA's organizationalexpertise in the implementationof the freeport regime also needs strengthening,as does the facilitiesmanagement function. And, urgent expertiseis required in the area of environmentalmanagement and enforcement. As described in paragraph 3.2, the proposed project aims to assist the SBMA in filling these gaps and strengtheningits institutionalcapacities.

4.24 At present, the SBMAhas no in-housetraining capacity. Training workshopson a variety of subjects are required to upgrade the skills of its staff, and have been includedin the project. Examples of the type of activities to be undertaken include training workshops on freeport customs policy and administration;SBMA merchandise inspection procedures; investmentpromotion strategy and approaches for targeted sectors; and workshops on environmentalmanagement and enforcement approaches. In addition, staff will be trained in the use of new systems(merchandise control and accountingand billing) to be financedunder the project. -29-

V. FNANCIAL ASPECTS

A. Overview of Past and Current Performance

5.1 The SBMAcommenced financial operations during June 1992 or about 5 months before the base was officially turned over to the PhilippineGovernment. The SBMAwas establishedwith an initial capital base of P 20 billion, paid up through the transfer of all the land and facilitiesof the former Naval Base as well three additionalannual cash contributionsof P 300 million each which would be made by the GOP during SBMA's first three years of operation. The SBMAreceived its first equity contributiontotaling P 210 million soon after its establishment, P 123 million of which was immediatelyapplied for purchasing selected equipment from the departing US Navy. The remainingamount was retained for working capital in order to cover start-up expenses.

5.2 SBMA's actual financial performancefor the first 6 months of operationduring 1992 and preliminary year-end figures for 1993 are presented in Annex 16 and summarizedin Table 5.1 below.

Table 5.1: SBMA FinancialPerformance, 1992-93 (in ThousandUS$)

1992 1993 6-MonthsActual Preliminary

Total Revenues 209 8,143 Operating Expenses 893 6,940 Net Income 821 756 Cash from Operations -685 1,256

Operating Ratio 428% 85% Accts. Receivable/days 12 62 Current Ratio 9.55 4.84 Debt/EquityRatio 0.0% 0.0% Return on Assets -12% 0.0% Return Equity -12% 0.0%

5.3 Given its recent establishment,a financialanalysis of SBMA's past performanceis not very meaningful. During the initial months of operations, the SBMA performed many extraordinaryactivities related to the transfer of ownership and managementof the facilities. Much of its revenues during this period were realized through non-core activitiessuch as the lease of the power plant and the operation of tourism, sport and hotel facilities. Revenuesfrom privatized assets and leases comprised only a minority share of total revenues earned; and while steps have been taken to privatize many of the non-core facilities and to build up the lease base, this transition will take several years to complete. Until then, SBMA's financial performanceindicators will continueto reflect an evolving condition.

5.4 For the first six months of operations in 1992, the SBMA incurred a net loss of approximately P 23 million (US$821,000). Preliminary figures for 1993 indicate that the SBMA will realize a small profit for the 12 month period. This has been possible in part because the properties were -30- turned over to the SBMAat no cost and without any debt obligations. Also, the early profit performance is overstatedbecause the SBMAhas been utilizinga large number of unpaid volunteers for maintainingand securingmuch of the base facilities, the alternativecost of which has not been noted into the profit and loss accounts. The use of unpaid volunteers is diminishingas they are either absorbed into the SBMA or organized into companiesto provide services (para. 4.9). Accordingly,the cost of such services will have to be borne by the SBMAand incorporatedin its financial statements. In addition, the SBMAhas not yet begun a comprehensivemaintenance and repair program, the implicationsof which would also tend to understate its operating expensesduring the early start-up period.

5.5 Despite these caveats, SBMA's early profit performance is impressive, and significant achievementshave been made in establishinga revenue base of investor tenants and tourists during the later part of 1993 (paras. 2.22-2.25). Estimatesfor end-1993indicate that the SBMAwill realize close to R 150 million or over 60% of total revenues from leases of industrialand commercialspace.

5.6 Highlights of the SBMA's financial condition estimated as of end- 1993 are shown in Table 5.2 below.

Table 5.2: SBMA FinancialCondition, 1992-93 (in US$ Thousand)

1992 1993 6-Month Preliminary Actual

Assets Gross Fixed Assets 4,391 686,839 Less: Acc.Deprec. 136 579 Net Fixed Assets 4,254 686,259 Net WorkingCapital 2,406 12,761 Debt& Equity Paid-in Capital 7,552 698,924 Retained=ings -821 97 Long-termnDebt 0 0

5.7 The initial budgetary appropriationsprovided the essential capital base for launching the SBMAon a sound financialfooting during the start-upperiod. The equity providedby the state has enabled the SBMAto finance the acquisitionof equipmentmade available by the departing U.S. Navy, as well as sufficient working capital for operations. This has also meant that the SBMA has not had to borrow to financeany of the initialcapital requirements. The SBMAhas, through its own internal generationof funds, been able to realize a positivenet earning position for the 18-monthperiod. Given the delays experienced in receivingthe additionalappropriated contributions, the SBMAwill have to rely more on its own resources for maintaininga sound position in the future.

5.8 As indicatedin Chapter IV, SBMA's balance sheet does not reflect fully the immensevalue of the total properties and facilities which have been transferred to it through R.A. 7227 and more importantly,the need to allocate funds for the replacementof essentialassets. While steps have been taken to begin an appraisalprocess of selected fixed assets, the true financial positionof the organizationwill also be an evolutionaryprocess until all the properties can be accuratelyaccounted and valued. As an interim measure, the SBMAhas booked the i 19.1 billion which is authorizedunder R.A. 7227 in order to have a better reflection of the totalvalue of the properties and to begin a depreciationprogram for the replacement -31- of essential assets. This will also enablea more accurate analysisof financial performance, although many facilitieshave little alternatecommercial use besidesthe original militarypurpose for which they were built.

B. Investmet Progr and Financng Plan

5.9 Table 5.3 below summarizesSBMA's investmentprogram and financingplan for the 1994- 98 period.

Table 5.3: SBMA's FinancingPlan (1994-1998)

Peso US$ % Million Million

FinancingRequirements

InvestmentProgram 4,356 156 99 Increase in Working Capital 153 5 3 Increase in Cash (128) (5) (3)

Total 4,381 156 100

Sources of Funds

Cash Generation 2,036 73 46 Capital Increase 565 20 13 Proposed IBRD Loan 1,120 40 26 Other Borrowings 660 24 15

Total 4,381 156 100

5.10 The SBMAhas commencedan investmentprogram to upgrade the facilities of the SBF and prepare them for occupancyby potential investorsand tourists. Altogether,the SBMA is contemplatingan investmentprogram totaling around US$156million equivalentover the five year period between 1994 and 1998. Among the main componentsof this program are: (i) the proposed project as described in Chapter III totaling US$52million; (ii) site developmentof approximately120 hectares of an industrialestate area amountingto an approximate investmentof US$23.5 million; (iii) water and sewerage upgrading and expansion, inclusive of dredging of waterways for an estimated US$31 million; and (iv) minor facilities improvements,and the purchase of various equipment and vehicles. These investment figures exclude investmentsthat will be made by private investorsin manufacturingand commercialfacilities, commitments for which stood at US$350 million as of end-1993.

5.11 Of the total SBMA investments,approximately 46% will be financed through internally generatedfunds and the remaining54% will be financedthrough debt and the additionalequity contributions anticipatedby Government. The proposed loan will amount to 26% of the total financingfor the 1994-98 investmentprogram. -32-

C. Future Flancial Performance

5.12 Financial projections for the period 1994-2003are presented in Annex 17 along with a description of the underlying assumptionsand input variables. A summary of projected performance is shown in Table 5.4 below.

Table 5.4: SBMA's ProjectedKey FinancialIndicators, 1994-2003 (US$ Million)

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Income

Total Revenues 19.1 34.3 46.6 56.1 59.0 90.0 95.1 111.5 120.8 143.5 Operating Expenses 16.1 22.8 24.5 28.6 31.0 45.9 49.5 53.5 57.0 61.0 Net Income (10.7) (3.2) 2.7 4.4 3.1 12.9 13.5 21.4 25.3 37.6 Total Asses 714.3 748.6 773.9 787.9 791.9 812.2 824.4 844.1 867.3 905.1

Primary Ratios

Current Ratio 1.8 1.7 1.2 1.3 1.7 2.0 3.0 4.1 5.2 6.2 Debt/Equity Ratio (%) 2.0 6.0 8.0 9.0 9.0 8.0 8.0 7.0 6.0 6.0 Debt Service Coverage (times) 125.4 10.6 6.5 6.6 6.6 8.6 5.9 6.7 6.7 8.3 Operating Ratio (%) 84.0 67.0 53.0 51.0 53.0 51.0 52.0 48.0 47.0 43.0 Returnon Assets (%) -1.5 -0.4 0.4 0.6 0.4 1.7 1.8 2.9 3.6 5.5

5.13 While many of the performanceindicators show a very favorable future financial picture, the return on asset indicator becomes respectable only after the year 2000. Moreover, the profit performanceis initiallyaffected by the significantcharges to depreciationexpense resultingfrom the booking up of assets (para. 4.14). The financialinternal rate of return is significantlyaffected by the large asset base representingthis initialcapital imputation. Basedon actual capital outlaysto date, a 34 % return is achieved, versus 12% with the larger capital base. Consideringthat a significantportion of the large capital base does not generaterevenue (the SBF forest is one example; the Naval Magazinearea is another), the financialrate of return is very satisfactory. It should also be noted that this rate of return is estimated on the basis of direct revenues expected to accrue to the SBMA. The multiplier effect of key investments(such as the regional air freight hubbing operation), which has not been estimated, would tend to further reinforce SBMA's financial strength.

5.14 Revenues over the next 10 years are projected to increase from l2 535.6 million pesos (US$19million) during 1994 to more than P 4 billion (US$144million) in 2003. While buildingand land leases are expected to contribute a sizable share of this revenue, more than half of the revenue will be derived from revenues of privatized services, mostly in joint ventureswith private operators. Expensesare projected to increase from an estimated P 451 million (US$16 million) during 1994 to more than P 1.7 billion (US$61million) in 2003. Salaries and benefits, being by far the largest expensecategory in 1994, are expected to drop relative to the other expense categoriesas the SBMAprivatizes more and more of its facilities. Expensesfor the provisionof power, water and seweragewill increaseas usage by tenants in the SBF also increases. Since much of the future investmentswill continue to be largely financed through internally generated funds, interest expensewill remain a relativelysmall expense category throughoutthe projectionperiod. As shown, the debt to equity ratio above will reach a maximumof only 9% during the ten year period.

5.15 While not a manufacturingenterprise, the SBMArequirements for working capital will still be significant, largelydue to the fact that all security depositsof industrialand commercialtenants must be placed in trust accounts. The current ratio is expectedto remain 1.2 or higher over the 10 year period. To -33- ensurethat measuresare taken to maintaina strong financialcondition and satisfactoryliquidity, agreements were reached at negotiationthat the SBMAwill maintain; (i) a debt/equityratio of no more than 70:30; (ii) a current ratio of at least 1.2; and (iii) a debt service coverage of at least 1.5 from 1994 onwards. These targets will provide for the financialhealth of the SBMA,and are judged to be appropriate for the SBMA's particular situation.

-34-

VI. PROJECT BENEFITS AND RISKS

A. Benefits

6.1 The developmentof the SBF will yield significanteconomic benefits. Increased economic activity in the SBF will have spill-overeffects to the surroundingmunicipalities, and will replace the jobs lost as a result of the U.S. Navy evacuation. Furthermore, the job base will now be more diversified, thus less susceptibleto downturns in any one sector. The previousjob base was almost entirely dominatedby the entertainmentservice industry. The new job base, even for tourism-relatedactivities, targets a different audience. Job creation will clearly depend on the pace of SBF development. Over the next ten years, it is conservativelyestimated that the SBF will provide over 80,000 jobs, allocatedbetween industry (80%); tourism-relatedservices (7%); commerce(8%); and administration(4%). Based on experience of similar developmentsin the region, export revenues of US$11,600 per annum per industrial employee can be expected,which would amount to total export revenuesof US$750million for the SBFby 2003, and US$1.4 billion by 2008. Value-addedratios for the type of light industrialactivity likely to take place in the SBF are typicallybetween 35 % and 45 %, whichwould translateto net foreign exchangeearnings of over US$500 million by 2008. It should be noted that these estimates do not include earnings resulting from non- industrialactivities, such as tourism and commerce.

6.2 Also expected are significantspill-over effects to other parts of Central Luzon. As the SBF port develops, it will hold the potentialto becomea hub for the shipmentof goods from the Central Luzon, thereby decongestingManila harbor and reducingtransport delays. The SBFalso holdsthe potential to serve as the commercial and financial hub for the industrial development of the Central Luzon. The GOP recognizesthe importanceof the SBF for the "image"of the country vis-a-visforeign investors. If the SBF succeeds, it will demonstrateto the country itself, not to mention the rest of the world, that an investor- friendly, non-bureaucratic environment can exist in the Philippines. The economic value of such a perception should not be discounted.

6.3 The proposed project is designedto contribute to the general developmentof the SBF. It constitutes a small, but critical, portion of total expected investment in the SBF. The demand for infrastructure and other related investments, and thus, the economic viability of the proposed project, dependson the economicactivity that will take place in the SBF. In order to gauge the economicfeasibility of the major project-financed items, three scenarios of demand were constructed for major project components, with the exception of port repair, for which project actions are designed to prevent serious deteriorationof the structures over the next ten years. The expected scenario assumes a moderate growth in industrialand tourism activity; the optimisticscenario assumes a rapid growth, whereas the pessimistic scenario assumes slow growth and dwindlinginterest on the part of investors. The resulting economicrates of return are shown in Table 6.1 (see Annex 18 for details). As can be seen, the rates of return on all project components are satisfactory in both the expected and optimistic scenarios. Even under the assumptionof slow growth, most project componentsare economicallyviable.

6.4 There are significantenvironmental benefits that have not been quantified. Project-financed actions will have a positiveimpact on the environment. The BaselineSurvey will provide basic data against which future air, water and soil quality can be monitored. The implementationof sound environmental managementprocedures, assisted in part by project-financedtechnical assistance, will ensure that all SBF investmentis adequately screened for its potential impact on the environment, and that mitigative action plans are developed for any negative impacts. The establishmentof monitoringmechanisms, also largely financed by the project, will enable the SBMA to take quick, corrective action in the event that SBF enterprises are not in compliancewith the mandatedenvironmental standards. -35- Table 6.1: EconomicRate of Return of Major Project Components(%)

Demand Scenario Expected Optimistic Pessimistic

Land Access - bridge & main entry complex 37 43 27 - access road a/ 15 19 6

Airport - passenger terminal b/ 19 42 19 - pavement improvements c/ 15 21 9

Port - wharf repair 13 n.a. n.a. - cathodic protection d/ 12 n.a. n.a.

StandardFactory Buildings 20 26 13 a/ IncludesKalayaan Security Plaza. b/ Includesrelated cargo terminal, passenger apron and commnunications equipment. c/ Includesfreight apron, taxiway strengthening and air trafficcontrol equipment. d/ Averagefor Pier 1010and BravoWharf.

B. Risks

6.5 While the benefits of the proposed project are many, there are certain risks associatedthat shouldnot be minimized. Interviewswith potential foreign investors indicatethat the major perceived risk has to do with the political situation in the Philippines. A policy reversal regarding the freeport status of the SBF would nullify its competitiveadvantages, and inflows of foreign investmentwould likely diminish. Agreementswere reached with the GOP on a prior consultationprocess between the GOP and the Bank on any policy modificationwith regard to the SBF's freeport regime. Appropriateremedies against a potential policy reversal regarding the freeport status of the SBF have been includedin the proposed loan. Another risk relates to the relative lack of experience in freeport managementat the SBMA, as a result of which decisionsmay not be made in a timely and optimalfashion. To address this concern, the projectwill finance long-termtechnical assistance, whose role will be to provide the experienceand expertise in the short-term, while training SBMApersonnel on-the-job so that they gain the necessaryexperience under the guidanceof seasonedprofessionals. The risk of delays in project implementationhas been minimizedthrough intensive project preparationactivity. Anotherpotential risk is a delay in investor activity and occupancyof the SBF. This risk is minimizedby the nature of the incentive regime and the ready availability of world class infrastructure,as evidencedby the actual investmentand expressionsof interest received to date.

6.6 The project itself is not expectedto have adverse environmentalimpacts. However, there is a risk of future environmentaldegradation if satisfactorymaintenance practices are not followed. With respect to future investmentactivity in the SBF, the environmentalmanagement mechanisms and procedures that have already been institutedor that will be institutedin accordancewith the agreed action plan (see para. 4.21), will ensure that any negative environmentalimpacts are satisfactorilydealt with prior to investment approval. The environmentalrisks and the correspondingmitigation plans are discussed in detail in the EA report. -36-

VII. AGREEMENTS AND RECOMMENDATION

A. Agrements

7.1 The followingactions will be required prior to effectiveness:

(a) the publicationof SBMA's land use plan to guide future SBFdevelopment (para. 2.16); and

(b) the adoption by the SBMA's Board of an agreed EnvironmentalManagement Plan and its publication(paras. 3.2, 4.21).

7.2 Agreementswere reached at negotiationswith GOP on the following:

(a) the provisionof a guarantee on the proposed loan (para. 3.4);

(b) the GOP will take, or cause to be taken, all action required to enable the SBMA to carry out the proposed project (para. 4.1); and

(c) a prior consultationprocess with the Bank on any policy modificationswith regard to the SBF's freeport regime (para. 6.5).

7.3 Agreementswere reached at negotiationswith SBMAon the following:

(a) the implementationof the adopted land use plan (para. 2.16), the implementationof the EnvironmentProcedures Manual (para. 4.20) and the implementationof the Environmental ManagementPlan (para. 4.21);

(b) for all TA activities financed by the proposed loan, the SBMA will retain consultants accordingto terms of reference and a selectionprocedure acceptable to the Bank, and an actionplan and timetablefor the carrying out of these studies and the implementationof the agreed recommendations(para. 3.2);

(c) an action plan and timetable for the adequate provision of water and sewerage and solid waste managementservices in the SBF would be provided by December 31, 1994 (para. 3.2);

(d) the retaining of appropriately qualified consultants for the supervision of civil works financedby the proposed loan (para. 3.6);

(e) the appointmentof a suitably qualified Chief Operating Officer by June 30, 1995 (para. 4.8);

(f) a joint review of the SBMA's policy and organizationaleffectiveness to take place by July 31, 1995, and to include an assessment of: (i) the full impact of EOs and other rules affecting the core policies of the freeport regime; and (ii) the operating autonomy of the SBMA, particularlywith regard to staffing, compensationand procurement (para. 4.10);

(g) the annual provision of audited financial statementsto the Bank no later than six months after the close of SBMA's fiscal year, prepared by auditors satisfactoryto the Bank; and the provision of provisional financial statements one month after the close of the fiscal year (para. 4.12); -37- (h) the revaluationof SBMAassets in a manner acceptableto the Bank by December 31, 1995 (para. 4.14);

(i) a joint review of SBMA's rolling, five-yearinvestment plan on an annual basis no later than March 31 of each fiscal year, and its implementation,over the life of the project (para. 4.15);

(j) provision of appropriate insurance coverage, or adequate reserves for, and proper maintenanceof SBMAfacilities (para. 4.19); and

(k) maintenanceof a debt:equity ratio of no more than 70:30; of a current ratio of at least 1.2 and a debt service coverageratio of at least 1.5 from 1994 onwards (para. 5.15).

B. Remdation

7.4 Subject to the above agreementsand conditions,the proposed project would be suitablefor a Bank loan of US$40 million equivalent, for a period of 20 years, includinga grace period of 5 years, at the Bank's standardvariable interestrate. The borrower will be the SubicBay MetropolitanAuthority with the guaranteeof the Republicof the Philippines. - 38 - Annex 1 Page 1 of 2

PHILIPPINES SUBIC BAY FREEPORT PROJECT

Description of Infrastructure Components

1. Access Road: This 4 km, two-lane road connectingKalayaan Gate to KalalakeBridge is designedto avoid traffic congestion in OlongapoCity and provide access to the SBF for heavy traffic. The road provides a shorter and more direct route to the major industrial developmentarea of the SBF and a faster route to retail/commercialareas. It will also provide a shorter route for commuterstravelling to the SBF from residential areas located to the east of Kalayaan Gate. The road consists of 2 km through low area (a 200 m concrete viaduct over swampy area would be included) and 2 km through mountainousterrain (a climbing lane will be provided at locations with a steep grade). The road pavement will be asphalt, except for steep grade locationswhere PCC will be used.

2. KalayaanSecurity Gate: This will be the control point at the end of the Access Road for the checkingof trucks and tourist buses by the SBMAsecurity at entrance and by Customsat exit. The 1 ha plaza will contain four booths serving a total of eight lanes, a Customsand Security Building, and parking bays for articulatedtrucks prior to entry.

3. Rizal AvenueBridge and Main Entrance Complex: The constructionof the Rizal Bridge and Main Entry Complexwill increase the capacity for local traffic enteringand leaving the SBF. The Rizal Bridge will permit the establishmentof a one-waycirculation pattern which proceeds southweston Rizal Avenue, crosses over the Rizal Bridge, enters the SBF and then exits the SBF by crossing the existing Magsaysay Bridge. The Main Entry Complex will allow the bridges to operate at capacity without significantqueuing delays by providingsufficient parallel channelsfor the security checks at the entrance and customs checks at the exit. The complexwill provide a circulationpattern for the urban public transport (busesand jeepneys) whichbypasses both the security and customschecks while allowing for an efficient transfer to the internal transportation system. Rizal Bridge is an 82 m, two-lane reinforcedconcrete deck girder bridge with a 3 m sidewalkon one side. The bridge consistsof 5 spans (14-18-18-18-14)with a removable central span that can be lifted for dredging purposes. It will be similar in structure and alignmentto the former Rizal Avenue bridge (which was moved to its present location at MagsaysayAvenue). The Main Entry Complexwill consistof the bus circulationroads, the bus transfer stations and the customsplaza for checkingexiting vehicles. Two customsgates (four lanes) will be constructedinitially, but two additionalgates can be added later to meet traffic growth.

4. Airort PassengerTerminal and Apron: Existinghangar 8015 will be convertedto create adequatepassenger handling capacity at SubicInternational Airport. Existingoffice spacesof hangar will be used as supporting facilities, and the main hangar area will be used for passenger processing. A second level has been allowed for, for future expansion, but will not be constructedat this stage. The terminal facility as proposed will be adequateuntil the year 2000 (basedon traffic forecasts), and can be made adequateuntil the year 2003 with little additionalwork and inconvenience. An existingbuilding will also be converted into a freight warehousefor freight carried on passenger aircraft. The apron in front of the hangar will be strengthenedto accommodateaircraft of sizes up to 737s and A-300s. The various communicationsequipment will be replaced so as to provide reliable communicationsbetween the airport tower and the approach aircraft as well as between the tower and other parts of the airport. - 39 -

Annex 1 Page 2 of 2

5. Airport Pavement Improvements and Air Traffic Control System: In light of the anticipatedfreight hubbingactivity at Subic InternationalAirport, the runway will be strengthened(100- 125 mm AC overlay; minor repairs to PCC) in order to accommodatethe size of aircraft which are forecast for the next ten years. Study and mitigationof the subsidenceproblem at the northeast end of the runway are also included. The reconstructionof the southeasttaxiway including strengtheningand widening of the taxiway to 100 feet in order to accommodateMD-11 aircraft is also foreseen. The installationof an Area SurveillanceRadar systemand completionof the InstrumentLanding System will allow the airport to offer 24-hour, all-weatheroperations required for freight hub operations. Existing aprons are not designedfor planned heavier aircraft weights, and 150 mm PCC bonded overlay will be provided. In the air freight operations area, the apron strengtheningwill accommodateMD-i Is and similar sized aircraft with cargo and fuel loads consistent with a regional freight hubbing operation.

6. Saport Rpair: Pier 1010, also known as the Marine Terminal, is a trestle type reinforced concrete structure on piles, 70m wide and 225m long. The Alava Wharf is a reinforced concrete structure, 700m in length, supported by compositepiles. The present elevation of the deck shows someuneven settlements,requiring in-depthinvestigation. The Rivera Wharf has a concretedeck with a total length of iOOOm.Behind the wharf is a sheet pile retaining wall whichprovides direct access to the back-up area. The Bravo Wharf is a reinforcedconcrete structure supportedby steel tubular piles. Given the present and anticipateduse of these facilities, it is not appropriate to renew the wharves or strengthenthem beyondtheir current capacity. However, maintenancework is requiredto prevent further rapid deteriorationof the underdeck structure, and to ensure their continuedavailability for operations or commercialactivities. The subsidenceproblem at Alava and Rivera Wharves would be studied, but not rectified. The fendering systemswould be repaired, but not renewed. The piles would be patched, but notjacketed, and the decking would be patched, but not resurfaced. Pier 1010 would receive a more comprehensivemaintenance because of its anticipated use for cargo handling activities; repairs are required mainly to the fendering system. A cathodic protection system will be installed to protect the steel componentsat Pier 1010 and Bravo Wharf.

7. Standard Factory Buildings: A pilot standard factory building development will be undertaken on a 10 ha site in the former PWC area. Site development will include the basic infrastructure(roadways, water, electrical and sewer line connections). The initial phase will cover an approximateland area of 6 ha for 20,000 m2 of covered floor area. Three basic configurations,providing multiplesof 1,000 m2 space, have been designed. 6 buildings will be constructedin total. The rate of constructionwould be adjustedto the demandfor this space; however, site developmentof the entire area would take place in 1994.

8. Security and MiscellaneousEguipment: Water and electricity meters will be provided to permit appropriate billing of utilities. Several lots of miscellaneousequipment will be purchased. These include: (i) 8 all-terrainvehicles (2 for the Ecology Center and 6 for Security Services); (ii) 5 16'- 20' 'patrol' boats and 1 aluminum banca with outboard; (iii) trucks and specialized equipment for facilities maintenance; (iv) communicationsequipment for SBMA's security forces (radios, batteries, antenna); (v) electrical equipment such as portable generators, flood lights, and other emergency equipment;(vi) laboratoryequipment for the Ecology Center; and (vii) office equipmentsuch as overhead projectors and computers. - 40 - Annex 2

PHILIPPINES Subic Bay FreeportProject

IndicativeTimetable of TA Activities

Item Expected Start Discussionof Comments Recommendations

Merchandise 9/94 6/95 Installationand Control System verificationexpected to be completed 5/96

Automatedand 12/94 3/95 System installation Billing expectedby 12/95

Zoning 9/94 3/95 Regulations

Privatization 9/94 -- Specific studies and Transactions actions to be jointly agreed

Long-term 10/94 -- Duration of assignment advisors 1' is 2 years

Short-term 3/95 -- Specific activities to be training jointly agreed

BaselineSurvey 9/94 10/95

1/ Includes facilities management and environmental advisor.

- 41 - Annex 3 Page 1 of 3 PHILIPPINES SUBIC BAY FREEPORT PROJECT

Merchandise Control System

Terms of Reference

Backgrogn

1. One of the unique features of the Subic Bay Freeport regime is the ability for freeport residents and visitors to directly purchase imported consumer goods on a tax- and duty-free basis within the SecuredArea of the SBF. An unlimitedamount of such goods may be taken from the SBF to destinations outside of the Philippineswithout payment of any duties or taxes. Goods entered into the customs territory of the Philippinesare subject to full payment of applicableduties and taxes as regular imports into the country. However, under certain conditions,SBF residents and Philippineresidents may import SBF merchandiseinto the domesticcustoms territory on an importtax- and duty-freebasis. GOP policies allow adult SBF residentsliving outsidethe SecuredArea to introduceinto the domesticcustoms territory up to US$100/monthof SBF retail purchases on a duty- and tax-free basis; Philippine residents are provided an import duty- and tax-free allowanceof US$200/year/adultresident.

2. There is an urgent need for an SBMA merchandisecontrol and identity card system to track purchases of duty- and tax-free goods in the SBF, and to ensure that full taxes are paid on excess purchases entering the domesticcustoms territory.

Purpse

3. The purpose of this consultancyis to design, install and operate a merchandise control and identitycard system for the SBMA. The consultantis expectedto build, operate and maintainthe system for the SBMA for a period of two years, and train SBMAstaff to do the same thereafter.

System Requirements

4. The principal systemobjectives are to (i) monitorpurchases of SBF residentsresiding inside and outsidethe SecuredArea, Philippineresidents, and non-residentsof duty- andtax-free goods; (ii) facilitate the assessmentand collectionof customsduties and taxes of purchases exceedingthe monthlyand yearly duty-free allowance; (iii) monitorpurchases of SBF residents to detect unusual or excessive purchases on a periodic basis; (iv) produce reports on a real-time basis to allow the SBMA to enforce limits on purchases through a system of post-audits checks; and (v) allow for remittance of customs duties and taxes assessedon dutiablepurchases to be remitted to the Departmentof Finance electronically.

5. The system must meet the following minimum specifications: (i) build upon the existing merchandisecontrol system and security checkingprocedures; (ii) be revenue-generatingand financially self-sustainingover the long-run; (iii) containmultiple system backup, redundancyand recoveryfeatures; (iv) provide for statistically based, randomized physical checking and inspections procedures to be followed by SBMA security which will back-up and support the computerizedmerchandise control system. The system shall be based upon the Open SystemsConcept, preferably utilizing PC-LAN or UNIX, and using a relationaldata base managementapproach. - 42 - Annex 3 Page 2 of 3

6. The system must be able to adequatelytrack and differentiateamong purchases of duty- and tax- free goods which are consumed within the SBF, re-exported, or imported into the Philippinecustoms territory. The system must also clearly differentiate among several categories of SBF residents and visitors, and facilitate tracking of their purchasesof SBF merchandise. Possible categories include: (i) CategoryA: SBF residents residing inside the SecuredArea, who are allowed to purchase and consume unlimitedamounts of goods and services on a duty- and tax-free basis; (ii) CategoryB: SBF residents residing outside the SecuredArea who are given a duty-free allowanceof US$100/month/adultresident; (iii) Category C: Philippine residents intending to purchase and bring back duty- and tax-free merchandisefrom the SBF into the Philippine customsterritory; (iv) CategoryD: Philippine residents not intendingto bring back duty- and tax-free merchandisepurchased in the SBF into the Philippine customsterritory. CategoryB and C permit holders would have more extensiveexit checkingprocedures to ensure that purchases remitted to the Philippine customs territory are within duty-free allowances; Category A and D permit holders would have faster exit formalities.

7. The ID card system shall be integrated with the merchandisecontrol system, and shall use ID cards equipped with a magnetic strip and bar code which shall identifythe card and the cardholder, SBF residents and visitors. The principal systemobjectives are to (i) provide a provide a central databankof personal information on all ID cardholders (permanentresidents and visitors), to facilitate issuance of identitycards; (ii) allow for ID passes to be issued at multiplepoints within the SBF and OlongapoCity, as currentlyenvisaged, without compromising the need for informationto be updated on a real-timebasis; (iii) generate a unique ID number that is verifiable; (iv) interface with the MerchandiseControl System and other SBMAapplications. Each cardholdershall be provided a ID card number, which shall identify the cardholderto all SBMA applicationsystems. The ID number shall be generated using a specially designed algorithm, and shall be equipped with a check-digitwhich shall ensure 100 percent accuracy against transpositionas well as single digit errors.

Descriptionof Services

8. The consultantwill undertakethe followingtasks:

(i) design a computer-basedMerchandise Control and IdentityCard Systemconsisting of the followingcomponents:

- Point-of-Sale (POS) terminals equipped with magnetic card readers located within all duty-free retail shops;

- Central ComputingCenter within the SBMA which will (a) contain a purchase transactionsdatabase which will be updated on a real-timewith purchase information, (b) a personal information data base containing informationon SBF residents and visitors, capable of storing both text and image data; (c) facilities to process and issue temporary and permanent identity cards to SBF visitors and residents, respectively;

- Local Area Network connecting the POS terminals, the Central ComputingCenter, Visitors Center, Investors' Center, and various entry and exit points, allowing for the exchangeof text and image data on a real-timebasis; and, - 43 - Annex 3 Page 3 of 3

Randomizedphysical checking and merchandise inspection procedures for residents and visitors exiting the SBF to augment and support the computer-basedmerchandise control system.

(ii) procure, install and test computer and communicationshardware and software for the system which is expectedto consistof the following(although the consultantcan suggest a hardware configurationconsistent with the proposed approach): (a) POS terminals and file servers in various duty-free retail shops; (b) optical drive, database servers, LAN supervisorsin the central computingcenter; (c) magneticswipe stations and terminals at various vehicular and pedestrian entry and exit gates; (d) card issuers and PC terminals at various card issuancepoints within and outside the SBF.

(iii) operate and maintainthe systemjointly with SBMAinformation systems staff for a period of two years;

(iv) develop systems operating plan, manuals and other tools to train SBMA staff in operation, maintenance,modification and expansionof system, and train SBMAstaff to take over these functionsafter the end of the operating contract;

(v) develop a financial and operatingplan which outlinesequity and in-kind contributionsto be made by the consultant;funding and other resourcesand commitmentsrequired of the SBMA.

Personnel Requirementsand Oualifications

9. It is envisagedthat the consultingteam will consist of three technical specialistsbased in Subic for a fixed term of two years, supplementedby a team of specialists to undertake various short-term engagements,on an as needed basis. All consultantswill be fluent in English. The exact composition of the consultingteam is to be proposed, but it is expectedthat the long-termteam will includean overall manager and an MIS specialist. Both specialistsmust have an extensivetrackrecord of designing and managingsimilar MIS systems,especially in the area of security and merchandisecontrol systems. The institutionalcontractor must have an extensivetrackrecord and proven capabilitiesin applicationsystems development and maintenance; network and communicationsconsultancy; facilities managementand equipmentmaintenance. Experience with designing, installingand operating similar systemselsewhere is a definite asset.

Consultants' Inputs

10. The estimated level of effort for the consultancyis 92 person-months,consisting of 72 person- months of long-term technical assistance activities, and 20 person months of short-term technical assistance activities. The project will have a term of two years; the long-term consultingteam will be required to be in place within one month of awardinga contract and remain in Subic for the duration of the contract. A major emphasiswill be placed on the project trackrecord and institutionalcapabilities of the consulting and information systems organization, and the technical design and managementand financial plan outlined in the proposal. - 44 - Annex 4 Page 1 of 2

PHILIPPINES SUBIC BAY FREEPORTPROJECT

Zoning Regulationsand Design Code

Terms of Reference

Backgrond

1. The centerpieceof the effort to convert the Subic Bay Naval Base into the Subic Bay Freeport was the formulationof a comprehensiveland use masterplan. The masterplan, which has been adopted by the Subic Bay MetropolitanAuthority (SBMA), regulates land use within the SBF by designating various land parcels for light industrial, commercial, tourism/recreational,residential and other uses. Technical assistanceis required to help the SBMAdevelop zoning standards, formulatea legally binding zoningordinance, and develop a buildingconstruction and designcode, to implementand enforce the land use plan.

rnsed Consultancyand Description of Services

2. The SBMA is seeking the services of a specialized consultant to develop zoning standards, ordinance and a building and architecturalcode. The consultantshall provide the following services:

- prepare zoning standardsto regulate industrial,tourism, recreational and other physical development within the Subic Bay Freeport. These standards must be based upon guidelines set forth in the land use masterplan, and reflect the "best practices' in industrialparks, and freeports worldwide. Zoning standards should specify maximum building coverage ratios; site set-backs; maximum floor area ratios; permissible uses within areas; prohibited uses and operational prohibitions; easement rights; parking; landscaping;height restrictions; etc.

- prepare additional protective covenantswhich will govern conversion and rehabilitation of buildingsand facilities, and constructionof new buildings and facilities; specification of procedures to be followed to approve and enforce plans (including standards for signage within the SBF; specifiedbuilding materials; exterior painting standards; open storage and loading areas; constructionregulations and materials; resurfacing of paved areas; mechanicalservice controls; temporarystructure construction;utility connections.

- codify these standards into Architectural Planning Criteria to be adopted by an Architectural Review Committee of the SBMA, and prepare a zoning regulations ordinance for adoption by the SBMA Board which would be binding on existing and future SBF occupantsand locators. These regulationsmust incorporateand be consistent with generally accepted standardsin the Philippines.

- specify additionalmeasures (if any) to ensure consistent and fair implementationof the land use plan. - 45 -

Annex 4 Page 2 of 2

Personnel Requirementsand Oualifications

3. The consultingteam shall consist of two individuals: a real estate planner and a real estate lawyer. The real estate planner shall have extensive experience with the design, planning, sale, managementand development of mixed use complexes, and office and industrial parks. The ideal candidatewould have 'hands-on" experiencewith formulatingand enforcingzoning standards,protective covenants and other regulations as a part of a real estate development and managementcompany. Experience in the Philippinesor similar countries would be desirable. The real estate lawyer shall have extensive experience in drafting zoning ordinance, building codes, and protective and architectural covenantsfor mixed use developments. Relevant experiencein the Philippinesis required.

Level of Effort and Term of Engagement

4. This consultancyhas a total level of effort of five person-months. The work shouldbe completed within three months of contract signature.

- 46 -

Annex 5 Page 1 of 2

PHILIPPINES Subic Bay Freeport Project

Automated Financial Management and Billing System

Terms of Reference

Background

1. Like all Government owned and controlled corporations, the SBMA is required to adopt standard procedures and systems for accounting and financial reporting. These are audited annually by the Commission on Audit. Since it first began financial operations in June 1992, the SBMA has made significant progress in setting up a general accounting system along these lines. The system is now fully operational on a manual basis. However, the system needs to be enhanced in order to increase the efficiency of financial management operations and decision making. First, there is a need to automate the general ledger system along with a number of subsidiary modules for billing and collections, purchasing, inventories, fixed asset accounting, and payroll and personnel management. The billing and collection system is of particular importance because customer accounts are growing quickly and the SBMA bills for a number of services including among others, telephone, water and sewerage, security, and facilities leases.

2. Second, the automated system should be designed along profit and cost centers so that each main service operation of the SBMA can accurately assess their contribution to the overall profitability of the organization. Accordingly, this second objective must be incorporated in the design of the automated financial system.

Proposed Consultancy

3. The proposed consultancy seeks to engage a qualified firm for assisting the SBMA in automating its accounting and financial reporting systems. The Consultant will be asked to perform the following major tasks:

Review of the SBMA's operations and existing manual systems and determination of recommended enhancements for the automated systems. The consultant will also review the need for a LAN network, particularly for the billings module.

Development of specifications for an automated general accounting systems with various modules including, billing and collections, purchasing, inventories, fixed asset accounting, and personnel management.

Review of off-the-shelf accounting packages and recommendations for the most appropriate program. In this regard, the consultant will specifically pay attention to packages commonly used by industrial estate management firms and real estate development enterprises. - 47 -

Annex 5 Page 2 of 2

Selection and modificationsto accountingsoftware for use by the SBMA.

Successfulinstallation and testing of the system.

Developmentof procedures and training of the SBMAAccounting and Finance staff on the proper use of the systems.

Specifications of equipment requirements, evaluation of bids and supervision of installationof needed computerhardware.

ConsultantInpts

4. The consultant should have experience in accounting and financial management systems development and implementation. Experience in automatingaccounting and billings systems for real estate development and industrial estate managementfirms would also be extremely beneficial. In addition, the firm should have experience in establishingautomated networks. The estimated level of effort is 15 staff-months. - 48 - Annex 6 Page 1 of 2

PILIPPINES SUBIC BAY FREEPORT PROJECT

Privatizations Transactions Assistance

Tentative Description of Services

Background

1. The strategy followedby the SubicBay MetropolitanAuthority (SBMA)in convertingthe Subic Bay Naval base into the Subic Bay Freeport (SBF) emphasizedrapid privatization of core asets and facilities, and an expandedrole for private managementand operationof various facilities. Already, the SBMA has privatized the existing petroleum, oil and lubricant facility through a long-term leasing arrangementwith a major U.S. oil company. Telecommunications,water/sewerage, waste management, transportation and other services are slated for privatization or private managementshortly; private managementof airport and port facilities is under consideration.

Purpose of Consultancy

2. Despite considerable progress in drawing up regulations and criteria to guide privatization transactions,the SBMAneeds urgent technicalassistance to undertakevarious technical analyses, develop viableprivatization options and approaches,review privatizationproposals submittedby interestedparties, and negotiate final deals with winning proponents. More generally, the SBMA needs a source of impartial and unbiased advice on these issues.

Descriptionof Services

3. The PrivatizationTransactions Fund (US$500,000equivalent) will cover a series of short-term technical engagementsactivated on an 'as needed' basis. Althoughspecific assignmentswill be defined by the SBMA, likely engagementsinclude:

- study of the telecommunicationsneeds of the SBF; assessmentof alternative hardware and software configurations;identification and assessmentof alternative privatization approaches for operation and maintenanceof telecommunicationsfacilities and delivery of services; evaluationof bids;

- evaluation of technical proposals for the water and sewerage needs of the SBF; assessmentof financial implications;drafting tender documents;evaluation of bids;

- assessmentand revision, if necessary, of terms of reference for solid waste management services; evaluation of proposals for the private provision of solid waste management services in the SBF; financial advisoryservices to the SBMA with regard to solid waste managementprivatization; - 49 - Annex 6 Page 2 of 2

evaluation of alternate approaches for management and operation of the Cubi Point airport, identificationof preferred approach to privatization, developmentof relevant documentation,etc.

study of approachesto privatize cargo and passengerport facilities and services;

assessmentof insurance needs and requirementsof the SBF, identificationof possible service providers, evaluationof availablealternatives;

preparation of detailed documentationfor privatization of major assets (eg, airport facility, industrialparks, etc) and negotiationwith service providers.

Personnel Oualificationsand Requirements

4. The consultants must have a solid trackrecord of successfully undertaking privatization transactions and must have knowledge of the range of possible privatization options Oease and management contracts, buy-back arrangements, BOT and its variants, equity sharing arrangements, divestment) and various bidding and valuation approaches. Experience with mixed use facilities and privatizationof public services is a requirement. Identificationof various technicalspecialists (industrial parks, hotels and resorts, ports, airports, urban transport, etc) to be used for specificstudies is required. - 50 - Annex 7 Page 1 of 5

PHILIPPINES SUBIC BAY FREEPORTPROJECT

EnhancingSBMA's Institutional Capabilities

Terms of Reference

Background

1. The Subic Bay Freeport (SBF) regime was created by the Bases Conversionand Development Act (RA 7227) of March 13, 1992, which also establishedthe SubicBay MetropolitanAuthority (SBMA.) The SBMA is a public corporation vested with the authority to undertake development of the SBF, regulate the activities of enterprises and individuals operating within SBF boundaries and ensure compliancewith RA 7227 and other Philippinelegislation, and promulgateregulations for the operation and developmentof the SBF. The World Bank provided specializedtechnical assistance to the SBMA since inception,until January 1993. World Bank consultantsassisted in developinga comprehensivebase conversion strategy; drafting a general land use master plan; undertaking detailed transportation engineering analyses; assisting in the privatization of key assets and facilities; rationalizing the organization structure and strengthening the institutional framework; and developing implementing regulationsand proceduresfor operationalizationof the freeport regime. The conversionstrategy adopted by the SBMAstresses the rapid privatizationof core and support facilitiesand the transformationof the SBMA into a regulatory and facilitatingentity.

2. Unlike freeports and special economiczones in other countries which are establishedthrough a series of specializedlegislation, the entire basis for the SBF is contained in three articles in RA 7227. Clarifying the resulting policy gaps and deficiencieshave been the focus of SBMA efforts. In March 1993, the SBMApromulgated Implementing Rules and Regulations(covering taxation, customs, labor, immigration, foreign exchange, banking, environment and other major components of the freeport regime), supplementedby detailed procedures manuals in critical freeport policy areas.

3. The SBMAhas also made progress in establishinga working organizationalstructure, defining staff responsibilitiesand providing key services and undertakingmany activities. Investmentpromotion activities undertakenby the organizationhave been quite successful, generating numerous foreign and local direct investmentsin excess of i 8.6 billion to date engaged in a wide range of manufacturingand service activities. The SBMA is rapidly privatizing the operation of many existing facilities and is operating others directly on an interim and transitional basis. It is also in the process of working with other Philippine Governmentagencies to operationalizethe freeport regime.

Purpose of the Consultancy

4. Despite these considerable achievements, the SBMA requires immediate assistance from a qualifiedorganization or organizationsto rationalizeand strengthenkey organizationalfunctions, in order to fulfill its mandate articulated in RA 7227. Previous analyses of SBMA organizationalcapabilities indicate several areas where further institutionalstrengthening is required. First, the planning capability - 51 - Annex 7 Page 2 of 5 is deficient, and a comprehensiveprivatization and developmentplan is an urgent priority. Second, investmentpromotion and investmentapplication evaluation/registration procedures are poorly defined and undertaken in an ad hoc manner. The lack of experience in this critical area is dampeninginvestor interest. Third, there is a lack of organizationalexpertise in the implementationof critical components of the freeport regime.

5. The overall purpose of this consultancyis to providelong- and short-term technicalassistance to the SBMA to enhance its capabilitiesto achievethe rapid conversion of the Subic Bay Naval base, and the developmentof a successfulSubic Bay Freeport.

DescriDtionof Services

6. Long-Term Technical Assistance Activities. The consultants will assist the SBMA in the operationalizationof the Subic Bay Freeport regime, and the developmentof the freeport complex. Principal long-termtechnical assistancetasks to be undertakenshall includethe following:

i. Work with the SBMAAdministrator and Senior Deputy Administratorin implementing the organizationalrestructuring of the SBMA, identifyingprincipal staff positions, and training senior staff in freeport policy administration; infrastructure development and master planning; promotiontechniques and investor services; investmentevaluation and registration approaches;and environmentalpolicy and enforcement. In addition, assist in identificationof specializedsources of technical services and goods.

ii. Assist the Senior Deputy Administrator and GOP technical working committees in formulatingthe developmentof additionalSBF regulations,and operationalizationof the freeport regime, especially in the Customsand taxation areas. Assist in training SBMA staff to enforce SBF customs, taxation, foreign exchange, immigration and other regulations. Assist SBMA legal department in finalization of Customs Procedures Manual, and in developmentof additionalregulations with other GOP agencies. Liaise with relevant Philippine Government agencies involved in administeringthe freeport regime.

iii. Assist the Corporate Planning Departmentin the preparation of a comprehensivemulti- year action strategicplan for developmentof the Subic Bay Freeport; detailedaction plan for development of SBMA's organizational capabilities, services and systems; comprehensiveapproach to privatization and commercializationof core and support facilities and assets; supervisionof approaches to deepen and operationalizethe general land use masterplan; develop a realistic capital investment and facilities maintenance program commensuratewith the overall developmentstrategy. Ensure implementation of proposed land use plan, and develop capabilities of SBMA staff in undertaking systematic infrastructureplanning, engineeringand design activities. - 52 - Annex 7 Page 3 of 5

iv. Collaboratein preparationof privatizationapproaches for core and support facilities, and develop a standardizedleasing approachfor existingfacilities and buildings. Coordinate efforts of specializedconsultants and financial advisors. Participatein negotiationswith potential investorsof business complexesand specializedfacilities.

v. Work with the Deputy Administrator in charge of the investment evaluation and investment promotion departments, in streamlining and systematizing investment evaluation process. Assist in developmentof a workable negative list and utilize other approachesto ensuretransparency and predictabilityin investmentapplication processing and registrationprocedures. Facilitatedevelopment of a pro-activeinvestment promotion effort, and design and implementationof an investor tracking system. Organize and develop the capabilitiesof a "one-stop"registration center, and an investor services and aftercare division. Assist in the development of world class investment promotion materials. Developposition descriptions and conductspecialized training courses in these areas. Establishrelevant data base and library capabilities.

7. Short-Term Technical Assistance Activities. In addition to these technical activities to be provided by a long-term team of technical advisors, the consultant shall provide short-term technical assistance activities. These specializedactivities shall be identifiedjointly with SBMAstaff and will be provided on an "as-requested"basis over the life of the project. Examplesof activitiesto be undertaken include the following:

training workshops on freeport customs policy and administration, freeport customs control concepts and inspectionand examinationprocedures for SBMAstaff and Customs personnel, based upon practices in other freeports and the customsprocedures adopted by the SBMA. Topics to be coveredcan includeSBF merchandisecontrol and inspection procedures, transfer procedures, administration of the special retail sales regime, examinationprocedures for commercialtransactions and tourist traffic, among others.

workshops on SBF enterprise investment applicationevaluation procedures, including formulationof a negativelist, applicabilityfor detailed environmentalimpact assessment, and other topics designedto streamlinethe investmentevaluation process based upon the best practice worldwide.

workshop on investmentpromotion strategy and approaches for targeted sectors and activities. The investmentpromotion approaches will differentiatebetween investments by developers in comprehensivedevelopment area facilities, and individual locators. Other topics include application of a comprehensive investor tracking system, and promotiontools and materials.

inputs into development of country- and sector-specific marketing plans including identificationof potential investors,facilitation of SBMAoutbound investment missions, and similar activities. - 53 - Annex 7 Page 4 of 5 PersonnelRequirements and Oualifications

8. In&mMttXTeam. The long-termconsulting team will consist of three technical specialists,all fluent in English. The ideal profile of the team members shall be as follows, although the team leader can be any one of the specialists so long as the proposed candidate possesses the relevant skills and experience indicatedbelow:

Planningand Properq Develogmentand ManagementSpecialist. The PlanningSpecialist will be a seasonedprofessional with at least ten years experience in special economic zone and freeport developmentissues in an East Asian context, and senior management experience in administrationof an integrated industrialand tourism real estate complex. He/she will have specializedexpertise in conductingstrategic plans, developingindustrial and transport infrastructure development plans, privatizing building, transport infrastructure and other assets, developing leasing rates and other commercialization approaches,and implementingland use plans of industrialfree zones or similar facilities. Experience in multi-usereal estate development, with expertise in land planning, land development, real estate financing, and lease rate setting is critical. Experience with developing or restructuring public real estate issues is important, especially in a developingcountry context. He/she will have in-depthpractical knowledge of competing East Asian freeport projects. He/she will demonstrate practical skills in institution- building and organizationaldevelopment.

Freegort Policy Specialist. The Freeport Policy Specialistshall have at least five years of experiencein the formulationand implementationof export processingzone, free zone and freeport policiesand procedures,with an emphasison investmentincentives, taxation and customs policy and procedures. He/she shall have extensive experience in the design, evaluationand implementationof these policies in successfulfreeport projects in developingcountries worldwide. The ideal candidatewould have a Customsbackground, with experience in regulating free zones, especiallythose with large land border areas with the domestic customs territory. Prior experience with Customs and investment incentivesissues in the Philippineswould be an advantage.

InvestmentPromotion and Investor Services Specialist. The InvestmentPromotion and Evaluation specialist will have extensive experience in the design, evaluation and implementationof foreign direct investment promotion programs and organizations worldwide. Practical experienceworking with promotion organizations;or developers and operators of free zones would be required. The specialist should have practical experiencewith streamlining investment evaluation procedures to ensure transparencyand predictability,and establishingone-stop administrative approval centers. He/she should also have practical experiencein developingpromotion and marketingplans; undertaking image-building,investment generation, and investor services and aftercare activities; designing and using computer-basedinvestor tracking systems. He/she should possess evidentorganization development and people-management skills. The ideal contactwould possess extensivecontacts with relevant agencies and private corporations in East Asia and the United States. - 54 - Annex 7 Page 5 of 5

9. InstitutionalCapabilities. The institutionalcontractor shouldpossess an extensivetrack record in the design and implementationof free zone policies and projects. Experience in the assessmentand institutionalstrengthening of free zone regulatory and developmentbodies and investment promotion organizationsis required in leading free zone locationsworldwide. The contractor should demonstrate relevant capabilitiesin undertakingsimilar projects in the past, the ability to managethe activitiesof field personnel engaged in a long-term project, and deployingshort-term specializedconsultants on a timely basis. The contractormust evidence staff and consultingresources to be able to provide the specialized short-term technical assistanceactivities specified in this Terms of Reference.

Level of Effort and Term of Engagement

10. The total level of effort for the project is 90 person-months,consisting of 72 person-monthsof long-termtechnical assistance activities, and 18 person-monthsin short-termtechnical assistance activities. The project will have a term of two years; the long-termconsulting team will be required to be in place within one month of awarding a contract and remain in Subic for the duration of the contract.

- 55 - Annex 8 Page 1 of 2

PHILIPPINES SUBIC BAY FREEPORT PROJECT

Fadlities Management Support

Terms of Reference

BackgMad

1. The Subic Naval Base was the largest U.S. military facility operatingoutside the United States. The baselands covered over 15,000 ha, and approximately6,700 ha housed the area formerly leased by the U.S. Navy. Followingthe expirationof the 1947 MilitaryBases Agreementbetween the Philippines and the United States, and the failure to negotiate a longer withdrawal schedule for the U.S. Navy, the facility was turned over to the Republicof the Philippineson November24, 1992.

2. The Subic Bay Freeport (SBF) regime was created by the Bases Conversion and Development Act (RA 7227) of March 13, 1992, which also establishedthe SubicBay MetropolitanAuthority (SBMA.) The SBMA is a public corporationvested with the authority to undertake development of the SBF, regulate the activities of enterprises and individuals operating within SBF boundaries and ensure compliancewith RA 7227 and other Philippinelegislation, and promulgateregulations for the operation and developmentof the SBF.

3. The facilitiesat the former Naval Base Complexwere developedand operatedto meet the specific needs of the military. The Base had nearly 2,000 buildingswith a total covered area of around 970,000 m2 . These buildings include industrialstructures for workshopsand storage, commercial-typebuildings for office and retail activities, special areas/buildingsfor the airport, ammunition and fuel storage, residential areas for family housing and bachelor accommodation,as well as community facilities for education,health care and recreation. The vast majority of the buildings in the complex are less than 50 years old, and were designed and maintainedin accordancewith U.S. Navy standards. Many of the buildings and structures require a high level of maintenance,and with the exceptionof certain special buildings such as hangars, warehousesand recently built housing units, the projected remaining life of the structures is 10-15 years.

4. Facilities managementis currently under the purview of the Public Works Department, which includesdivisions responsible for Engineering,Utilities, Maintenance,Transportation and Environment. The seaport and airport are presently operated by the Port Authority. The SBMAis actively pursuing a policy of privatizationof various facilities, either through outright lease or through managementand operating contracts. Thus, several services are being provided by the SBMAat present in a transitional capacity. These include electricity distribution,water and sewerage services, solid waste management, operation of the port and airport, and telecommunicationsservices. - 56 - Annex 8 Page 2 of 2

Puose of the Consultancy

5. The SBMA requires assistance in the managementof its large set of assets. It also intends to build up its own institutional capacity in interfacing with clients to determine their requirements, particularlywith regard to structures and utilities. The overall purpose of this consultancyis to provide long-termtechnical assistanceto the SBMAto enhanceits capabilitiesto achievethe rapid conversionof the Subic Bay Naval base, and the developmentof a successfulSubic Bay Freeport.

Description of Services

6. The consultantwill assist the SBMA in:

- planning and managingthe maintenanceactivities for all structures and infrastructure;

- evaluating investor proposals and requirements with regard to the use of buildings, utilities and infrastructure;

- overall managementof the constructionsupervision for the planned factory buildingsand other structures to be built by the SBMA;

- developing standard procedures and programs for maintenance and construction supervision and strengthening the capabilities of the Public Works Department in performing these functions;

- providinghands-on, on-the-jobtraining to counterpartstaff to achieve skillstransfer and to strengthenlocal capability; and

- providing input into the technical evaluationof terms of reference, proposals, bidding documentsand tenders receivedwith regard to the privatizationof services and facilities.

PersonnelRequirements and Qualifications

7. The Facilities Engineer will be a seasoned professional with at least ten years experience in facilitiesmanagement in an East Asian context, and senior managementexperience in the maintenance and development of large, integrated facilities. He/she would have demonstrated experience in developingand scheduling maintenanceactivities, and planning and contracting for the constructionof buildings, roadways, utilities and other infrastructure. He/she would have an engineering degree, preferably in civil or structural engineering. He/she would also have experience in evaluating the site requirementsfor industrialuses (water, electricity, sewerage, solid waste management).

Term of Engagement

8. The term of the engagementwill be one year, renewablefor an additional year. The Facilities Engineerwill be expectedto reside in the SBF. He/she will be required to be in place within one month of contract award. - 57 - Annex 9 Page 1 of 7 PHILIPPINES SUBIC BAY FREEPORTPROJECT

EnvironmentalBaseline Survey

Terms of Reference

Background

1. Due to the nature of the Subic Bay Freeport (SBF), its unique location, past militaryuse and intendedfuture developmentas a freeport and light industrialcenter, a BaselineSurvey is required to determineecological and environmentalconditions as well as to identifypotential contamination sites. Little published informationis currently availableon base conditionswith the exceptionof a few recent investmentstudies. The BaselineSurvey will establishthe basic environmentalconditions within the SBF area, locate all areas of contaminationas well as develop a databaseon the forest lands and the bay. In identifyingcontamination sites additionalstudies may be recommendedto determinethe extentand specify clean-up efforts. This survey is an immediatepriority for Subic Bay MetropolitanAuthority (SBMA), and must be undertakenprior to any large-scaleindustrial or commercialactivity in the SBF. The survey is estimated to be carried out over a period ranging from six months to one year and requires approximately40 man-monthsof effort, in additionto separate soil, water and air samplingand analyses carried out by private contractors.

2. At the height of its use as a US naval base, the facilityhad some 14,000 dependentsand 37,000 local Philippinoworkers in an operating area of approximately10,000 ha. The facility was used as a staging point for the US Navy over a period of 96 years until the fall of 1992 when the lease was not renewed by the Philippinegovernment. The Subic baselandsspan 24,000 ha of which 14,000ha is consideredvirgin forest. The SBMAhopes to develop a freeport withlight manufacturing. Towards that end, development has already taken place in the form of a hotel, several restaurants, some light electronics assembly and several other ventures already under construction. In addition, a Taiwanese venture is consideringthe acquisitionof some 300 ha for light manufacturing.

3. Two Americanenergy firms are conductingoperations at SBF, Coastal Petroleum(at the POL facilities) and ENRON (at the power supply facility). Coastal Petroleum undertook an environmentalsurvey of conditionsat the POL Tank Farm and Pier with the results currently under review. The informationdeveloped by this study concerningthe environmentalconditions of the POL Tank Farm and Pier must be incorporatedinto the BaselineSurvey report. In addition,ENRON carried out an EIA in conjunctionwith its 108 MW power plant currentlyunder construction. The data contained in this study also provides further informationon the base's environmentalconditions.

4. The Subic Bay Freeport is located within one of the last virgin forest areas in the Philippines. All activities within the Subic Bay area must consider the impact on and the eventual protection of this forest area includingits native inhabitantsand its flora and fauna. Coral reef areas are known to exist in Subic Bay itself, althoughtheir conditionor extent has not been establishedafter Mt. Pinatubo eruption. In addition,wetland areas have been identified in numerouslocations throughout the bay area as well. Due to the present lack of heavy industry and lack of substantialvehicular traffic, the air appears to be in near pristine condition. - 58 - Annex 9 Page 2 of 7

5. Presently, the SBMA is not in a position to conduct the various studies necessary to determine the baseline environmentalconditions in Subic Bay due to a lack of available experienced personnel. In order to complete the necessary studies, the SBMA will need to contract with environmentalconsulting firms. Completionof these studies is absolutelyimperative at this time prior to widespreaddevelopment of the area. This survey will also identifyareas of contaminationincluding those detailedbelow as well as develop an initialbaseline of informationon the forest lands and the bay. The following sections detail specific efforts that must be undertaken. Additional studies may be necessaryto determine the extent of contaminationand what approaches are required for remediation.

Terms of Reference

6. The consultant will carry out a baseline assessment to include but not be limited to gathering the following information and performing an analysis of the environmentalcondition of the SBF. The survey is divided into two phases for convenience, the first will ambient and ecological baseline conditionsand the second will review the operation of the base to determine the impact naval operations have had on the environment.

EcologicalBaseline Conditions

7. Little information exists in summary form on the environmentalconditions within the Freeport area, however there are several documentswhich includepartial analysis. The Services Group prepared an extensivereport for SBMAdetailing land use plans and the basic institutionalframework for the freeport. This report included an Annex detailing environmentalpolicy and procedures to govern businessesin the Freeport area (Guidelinesfor EnvironmentalProtection: Rules and Regulations). The World Wildlife Fund developeda report for the conservationand managementof the Subic Bay Forest areas in June 1992. The Enron EIS is another source of informationon the local environment. Still other studies have been prepared (Coastal and the WHO) regarding the environmentalnature of the Freeport area; these will be identified and provided to the consultants.

S. The consultantshall gather and analyze the following:

1. Review of Existing Documents: Several documents have been produced in relation to proposed industrial development in the SBF providing an overview of environmental conditionsin the area. These documentsinclude EIAs, investmentstudies, guidelinesand special studies. These documents need to be collected and reviewed with relevant informationabstracted and summarizedin a separate chapter.

2. MeteorologicalBaseline Conditions: The BaselineSurvey must includedata on relevant meteorologicalconditions in the SubicBay area to include, at a minimum,the following: - 59 - Annex 9 Page 3 of 7

Mean and Average AnnualAmounts of Precipitation Mean and Average Monthlyamounts of Precipitation Low and High Annual Amountsof Precipitation Low and High MonthlyAmounts of Precipitation Mean and Average Annual Lake EvaporationRates Mean and Average MonthlyLake EvaporationRates Area Wind Rose Data and Average Wind Velocitiesby Direction Mean and Average Monthly Temperatures

This informationis necessary for siting industrialor commercialindustries, gauging the effectiveness of various treatment scenarios, to determine potential quantities and environmentaleffects due to air emissions,and to gauge the effects of potentialpollution accidents. Much of this informationhas been developedfor a variety of purposes and can be found in the Enron EIS as well as other documents.

3. Ambient Air Ouality: In order to establisha baseline of air quality within the Subic Bay area, the BaselineSurvey requires the establishmentof an ambient air qualitymonitoring network andprogram. This networkshould includesampling locations within the Central Business District; the North and South Industrial Areas; the Boton Industrial Area; the POL Area, the Cubi Point Air Terminal and Mixed Development Area; the Naval Magazine Area; the Kalayaan, Binictican, Cubi Point Housing Areas; and the City of Olongapo. This sampling effort must include all ambient air quality parameters establishedby the PhilippineDepartment of Environmentand Natural Resources(DENR) and described in the TSG Final Draft Report, Strategy For ConversionOf The SubicBay Naval Base Into A Special Economic Zone and Freeport, January 1993. A sampling program needs to be developedwhich will ascertain 24 hour and monthlymaximum and average concentrations. Along with the general air quality parameters, general meteorologicalconditions, wind directionand velocity, and temperaturemust be recorded at the time of sample collection.

4. Water Ouaitjy: The BaselineSurvey must includewater quality informationfor the eight rivers located within the Freeport area and whether these rivers and the Bay have been classified for use. Should water quality informationnot exist, initial monitoring of the rivers, bay, and selectivepoints for groundwatermust be undertaken. General sampling points need to be establishedand samplescollected in each river within the Freeport area, selected locations for groundwater, as well as in selected locationsof Subic Bay. The basic water quality parametersthat need to be determinedare listed in Tables 4-1 through 4-4 of the TSG Strategy for Conversionreport, Volume II, Annex G: Environmental Procedures Manual.

5. Forest Resources: The BaselineSurvey must develop an initiallist of known endangered or threatened species of plants and animals known or suspected to exist within the Freeport forest area. This studyshould also attemptto identifyareas where these species are known, or are suspected,to exist. It is anticipatedthat this effort will only involve - 60 - Annex 9 Page 4 of 7

a review of existing information and will not involve any actual intrusive studies. In addition, an analysis of the potentialfor future acid rain damage should be done based on increasedsulfur dioxide emissionsfrom the power plants.

6. Marine Resources: The BaselineSurvey must also includean initialreview of the marine resources of SubicBay. This effort should includethe general identificationand location of coral reef areas, shellfish beds, marine life breeding or spawningareas, and locations of submergedaquatic vegetation. Maps giving informationon underwaterfeatures should also be provided. This survey should establishbasic tidal flow patterns for Subic Bay. Informationon the five wastewateroutfalls and the areas around river mouths needs to be provided as well.

7. Wetlands and Mangroves: The Baseline Survey must include an initial wetland and Mangrove survey within the baseland areas. This effort should only involve the basic identificationand location of these areas based on a review of known informationwith limited field reconnaissance.

EnvironmentalOuality

9. Due to the prior use of the Subic Bay area, the BaselineSurvey must identifypotential areas of significant contaminationor the presence of toxic materials. This effort should be based on a detailed review of past land uses and activities within the developed areas of the Freeport from informationobtained from the U.S. Governmentor from other knowledgeablesources. Since this part of the assessmentwill identifysites of contamination,soil, groundwaterand sediment sampleswill need to be taken.

10. A recent report prepared by the WHO entitledSubic Bay EnvironmentalRisk Assessment and InvestieationProgramme provides the outline for a samplingand analysisprogram of the baselands with an emphasis on discovering sites of contamination. This report should be consulted for the identificationof potentialsites of contamination.

11. The investigationshould concentrateat a minimumin the followingspecific areas:

8. HistoricalReview of Past Land Uses and Activities: The United States Governmentmust be petitionedunder the Freedom of InformationAct to describe all past land uses at the Subic Bay Naval Base facility. This study shouldconsider advertisingin local Olongapo newspapersas well as newspapersin Pearl Harbor, Hawaiifor individualsknowledgeable about the activitiesthat were conductedat the Naval Base with particular emphasison the use of hazardousor toxic materials. Such individualswould consistof former personnel stationed at the base and former local workers. Information gathered in this manner would then be analyzed by the consultant to determine where possible sites of contaminationare known to exist. - 61 - Annex 9 Page 5 of 7

9. The Naval Ship Repair Facility: Heavy industrialactivities are known to have occurred at the Ship Repair Facility with the concurrentuse of toxic and hazardous materials. The Baseline Survey must include an initial investigationof the Ship Repair Facility area includingsediments within the adjoiningbay area to determinewhether significantlevels of contaminationmight exist. This effort will includethe collectionof samples consisting of surface soil, subsurface soil, and sediment, as well as any observed residues. This investigationshould not, however, be viewed as an effort to identifythe total extent of any contamination. The basis of the analyticalreview of samples collected in this area should be scans for toxic heavy metals and scans for volatile and semi-volatileorganic compounds.

10. Active Waste Disposal Landfill: Coupled with the informationon historical land use and activities, the Baseline Survey must identify and locate all present and former waste disposal areas. A groundwater monitoring network must be established around the present landfill and both groundwater and surface water must be initially sampled to determine whether significant contaminationis escaping into the environment. The present landfill operations must also be reviewed for adequacyregarding environmental protection. The landfill area must be investigated by at least three groundwater monitoring wells to be located in the perceived downgradientdirection and one in an upgradient location. Groundwater elevations must be established along with hydrogeologicflow regimes. Full priority pollutantscans mustbe includedas part of this initial phase of sampling.

11. Former Waste Disnosal Areas: A former waste disposal area has been identified in the proposed Industrial Estate Area, NSD North. This area has been tentatively identified as existingnorth of Rizal Highway, east of the North Boundary.Security Road, and west of Argonaut Highway. An investigationmust be undertaken to determine whether contaminationmight exist that would pose a threat to human health or the environment. Informationregarding any other waste disposal areas must be gathered as part of the historical survey described above. Each waste disposal area should be investigatedby at least three groundwatersampling points located in perceived downgradientlocations and one in an upgradient location. Groundwaterelevations must be establishedalong with hydrogeologicflow regimes. Full priority pollutant scans must be conductedunless specific information exists regarding types of wastes disposed within each area. In addition, a general scan for the potential presence of radioactivityshould be conducted during the investigation.

12. Former Explosive Ordnance Disposal (EOD) Area: The former EOD area located at CamayanPoint must be surveyed to determine the potential presence of contamination resulting from the past activities that might pose a threat to human health or the environment. The area must be investigated for the presence of semi-volatileorganic compounds(specifically nitrotoluene compounds) and total petroleumhydrocarbon.

13. Pistol and Rifle Ranges: Four present and former pistol and rifle ranges have been known to exist at the Subic Bay Naval Base and could potentiallybe a source of lead - 62 - Anex 9 Page 6 of 7

contaminationto the environment. These ranges must be surveyedto determinewhether lead is contaminatingsurface water runoff.

14. Former Motorpools and Vehicle Maintenance Facilities: All former motorpool and vehicle maintenance facilities must be surveyed for the potential presence of contamination. Many of these facilitiesused various solvents for parts cleaning and had oil change pits or collectiontanks. The analyticalparameters for these samplingefforts must include scans for volatile and semi-volatileorganic compounds.

15. POL Facflities: Coastal Marine Petroleum is operating the principal fuel storage and transfer facility within the Freeport. Prior to initiating operations it carried out an assessmentof potential contamination. This report must be reviewed by the consultant and updated if necessary. None of the undergroundfuel storage tanks in the Freeport area have been tightnesstested or surveyedfor possible leaks. An assessmentshould be made as to whetherspecific underground fuel storage tanks in the Freeport must undergo tightnesstesting via a non-pressuremethod. Leakingtanks must be identifiedso that the SBMA can take them out of service.

16. Tank Truck Fuel Loading Rack Area: The tank truck fuel loading rack area must be surveyed for the presence of potentiallysignificant groundwater contamination. Two groundwatermonitoring points should be locatedin perceiveddowngradient locations and one in a perceivedupgradient location. A groundwaterflow regime must be established and samples must be collectedand analyzedfor total petroleumhydrocarbons.

17. Power Facl,it: The Enron Corporation has taken over operations at the old 27 MW power plant facility. This facility is equipped with several above-groundfuel storage tanks and associatedpipelines. The SBMAmust require Enron to survey the facility for the potential presence of significantsoil and groundwater contamination. In addition, sludges and other wastes arising from fuel refining operationsneed to be tracked. The results of this survey shouldbe includedas part of the BackgroundSurvey.

18. PCB Invntory: All electrical transformersor liquid capacitorsremaining from the U.S. occupation of the Naval Base must be sampled to determine the potential presence of PCB leakage. Where visual evidence indicates potential leaks of dielectric fluids, the soils must be sampledfor potential PCB contamination.

19. Lead in Drinking Water Survey: SBMA must develop a program to survey all water cooler units within the former Naval Base area. In addition, a representativesample of buildingsand residentialhousing units must be surveyedto determine present lead levels within the drinking water supply.

20. DDT and PesticideSurvey: A survey must be undertakenat selected areas of the former Naval Base to determine any potential threat to human health or the environmentfrom elevated levels of pesticides. This survey should focus on any areas where quantitiesof pesticideswere stored or mixed or appliedsuch as at the golf course. In addition, - 63 - Annex 9 Page 7 of 7 representativeareas throughoutthe former base and its housing areas should be monitoredto determine any levels that might pose a threat to human health or the environment. Surface soil samples shouldbe collectedfrom these locationsand scanned for the presenceof the various pesticideslisted in the general water quality standards of the Philippines.

21. Former FirefightingTraining Area: Firefightingactivities involve the lightingof fuel and the subsequenteffort to extinguishthe fuel fire. Such a training area existed at the Cubi Point Airfield and may potentiallyhave associated contamination. Historical records must be reviewed to determine whether any other firefightingtraining areas exist in the Freeport area and they must be investigatedfor possible contamination. Surface and subsurface soil samples must be collected and analyzed for the presence of total petroleum hydrocarbons.

22. SubicBay Water OualityModel: In order to have an on going effort to assessthe quality of bay water and impacts from river flows and watershed runoff, the feasibility of developinga water qualitymodel shouldbe investigated. Water qualitymodels exist for a variety of water bodies to determine the fate of pollutants, the level of biological activity and to predict long term impacts. Several proven models are available in the public domain from the US EPA. The consultantwill identifythe appropriatemodel, its source and describe the human and microcomputerresources necessaryto operationalize it within the Ecology Center.

23. Review of Coastal Corporation Spill Prevention Strategies: The Coastal Corp. is planning to develop an oil spill cleanup capability for Southeast Asia operating from Subic. The consultantwill review these plans and determinethe environmentalcosts and benefits.

BaselineSurvey Format

12. The final report must includean ExecutiveSummary detailing the generalfindings of the survey effort.

13. The body of the report must provide details on the actual efforts undertakento develop the findings. It must contain an analysis giving trends and approaches for improved resource management. Where samplingis conducted,a detailedmap of sample location, a descriptionof sampling technique, details of field observations and conditions, and sample preservation techniques must be described. An estimateof further work required to determine the extent of contaminationmust be made as well. Field blanks and laboratoryblanks must also be developedand analyzed. Copies of all actual analyticalresults must be includedas appendices. Where borings are made or monitoringwells installed, boring logs must be kept and included as appendicesas well.

14. Finally, the report must include conclusions and recommendationswhich can be realisticallyimplemented in the short term. In addition,detailed recommendationsfor followup activities includingtheir scope must be described. - 64 - Annex 10 Page 1 of 2

PHILIPPINES SUBIC BAY FREEPORTPROJECT

InstitutionalSupport to the Ecology Center

Terms of Reference

Background

1. The degree of success for developmentof Subic is in large part dependenton how well environmentalmranagement of the freeport area is carried out. Currently, environmentalconditions around the base can be consideredgood but there are a series of issues which need to be addressed in the short term in order to maintain the present level of environmentalquality. These issues, which are being addressedin the contextof an EnvironmentalManagement Plan (EMP), are:

- Staffing and institutionaldevelopment of SBMA's environmentalaffairs unit, the Ecology Center;

- Drafting, monitoringand enforcing a range of environmentalregulations that will safeguarddevelopment;

- Providing integratedwastewater treatmentservices for the SBF and Olongapo;

- Providing and maintainingwater supplies for both the SBF and Olongapo;

- Providing integratedsolid waste managementservices for both the SBF and Olongapo;

- Assuring that security be provided to safeguard the forest preserve;

- Hazardouswaste management,including ship's waste.

2. The Ecology Center is responsiblefor managingthe environmentalaffairs of the SBF. Althoughcurrently staffed with 20 people, it is expected that at full development,the staff will number some 60 to 80 individuals. The Ecology Center is responsiblefor:

- monitoringof air and water quality, biologicalproductivity and diversity, and other parameters indicativeof the state of environmentalquality throughout the SBF;

- enforcementof the environmentalquality goals and standards establishedfor the SBF;

- issuanceof EnvironmentalCompliance Certificates, Authorities to Construct, and Permits to Operate required for facilitiesoperating within the SBF;

- revision, as required, of standards,policies and regulations; - 65 - Annex 10 Page 2 of 2

emergencyresponse and remediationin the event of any event or accident that threatens the SBF environment;

administrationof protected areas, such as the Subic watershed and Subic Bay;

public awareness and education.

Scope of Work

3. The EnvironmentalSpecialist will assist the Administratorand Senior Deputy Administratorin implementingand environmentalmanagement program sustainableover the long term. He/she will identifyprincipal Ecology Center staff positions, establish administrativeand budgeting procedures, and develop training activities. He/she will work with Senior Deputy Administratorand SBMAlegal department to enhance existingenvironmental regulations, and monitoringand enforcement procedures. He/she will establisha separate forest managementprogram to preserve the SBF's forests includingprograms for staff recruitmentand training. He/she will liaise with SBMAand Olongapocity staff to assure smooth operatingenvironment regarding water supply, wastewater treatment and solid waste managementfor the entire sub-region. He/she will be expected to provide leadershipin areas of environmentalresearch, site-specificremediation studies and cost recovery for environmentalinvestments. He/she will develop a program for long-termmonitoring and managementof the Subic Bay marine environmentand airshed to assure long-term sustainability. He/she will monitor large scale environmentalstudies such as the BaselineSurvey carried out by specializedconsultants. He/she will establish an environmentaldata base, library and analytical capability. Finally, he/she will establish an adjudicationprocess wherebypolluters have recourse to state their position in a dispute with the SBMA.

Oualification

4. The EnvironmentalSpecialist will be a seasonedprofessional with at least ten years of relevant experience in the developmentand managementof environmentalmanagement and enforcementprograms, preferably in an Asian context, managinga team of professionals. He/she will be familiar with both tourism and light industrialdevelopment as well as both "green' and 'brown' issues. The candidate must possessan extensivetrack record in environmentalmanagement with specificexperience in the establishmentof regulatory, monitoringand enforcementprocedures.

Term of Engagement

5. The initial contract will be for one year, renewablefor an additionalyear. The EnvironmentalSpecialist is expectedto reside in the SBF, and take up his/her duties within one month of contract signature.

- 66 - Annex 11 Page 1 of 6

PHILIPPINES SUBIC BAY FREEPORT PROJECT

Environmental Management Plan (EMP)

Terms of Reference

Study Aoroach

1. The degree of success for development of Subic is in large part dependent on how well environmentalmanagement of the port area is carried out. Currently, environmentalconditions around the base can be consideredgood but there are a series of issues which need to be addressedin the short term in order to maintainthe present level of environmentalquality. These issues, which are discussed in detail in these Terms of Reference, are:

- Staffingand institutionaldevelopment of SBMA's environmentalaffairs unit, the Ecology Center;

- Drafting, monitoring and enforcing a range of environmental regulations that will safeguard development;

- Providing integratedwastewater treatment services for the base and Olongapo;

- Providing and maintainingwater supplies for both the base and Olongapo;

- Providing integratedsolid waste managementservices for both the base and Olongapo;

- Assuringthat security be provided to safeguardthe forest preserve;

- Adequatemanagement of ENRON's effluentsto assure no deteriorationin air quality;

- Hazardouswaste management,including ship's waste; and

- Environmentalanalysis of proposed infrastructural investmentsunder the project, to include a bridge, 10 factory buildings and a 4 kilometer road.

InstitutionalDevelopment of SBMAfor EnvironmentalManagement

2. Currently the Ecology Center of the SBMA has the principal responsibilityfor managingthe environmentalaffairs of the Freeport. They are staffedwith approximately20 people, four professionals but only one with adequate training and long term experience. The rest of the staff is primarily concerned with refuse pickup and cleanup around the base proper. The Ecology Center staff report directly to the unit responsiblefor infrastructurearound the base such as water supply, roads, power and buildingmaintenance. It therefore does not have an independentoversight responsibilityrequired to - 67 - Annex 11 Page 2 of 6 manage environmentalaffairs objectively. Nevertheless, the Ecology Center is responsiblefor overall environmentalquality from the standpointof monitoringrather than enforcement.

3. The Ecology Center also has responsibility for review of EIAs as they are carried out by prospectiveinvestors. For example, they are currently reviewing the EIA submitted for the new 108 MW ENRON Power Plant due to come on line in 1994. However, because of the technical nature of the project, the EIA is being reviewed by DENR staff for issuance of an EnvironmentalCompliance Certificate. They are also about to review due diligence work carried out by the Coastal Corporationto establish whether contaminationexists on the tank farm. Staff limitations at this time prevents a comprehensiveapproach to the review of EIA as well as other types of environmentalmanagement activities.

4. A staff of between 60 and 80 is recommendedwith fully one third at professionalranks. These would include environmentalengineers, scientists, lawyers, foresters, marine biologists, soil scientists and two or three professionalmanagers. Field staff should includetechnicians and air and water quality monitoringspecialists. Only at this level can the Ecology Center assure that all the environmentalneeds of the Freeport are met.

5. The EMP should discuss the above staffing needs and propose a phased plan for the recruitment of specialists and their training. It should provide an organizationalchart along with specificjob descriptionsassigning priorities for each based on current and future needs

EstablishingRegulations. Monitoring and EnforcementProcedures

6. Environmentalrules and regulations for the Freeport are outlined in the draft Environmental Procedures Manual, prepared as part of the Strategy for Conversionof the Subic Bay Naval Base into a SpecialEconomic Zone and Freeport, January 1993. However, implementationof its provisionshas not taken place, again due to staff limitations. To date the Ecology Center has had to rely on the DENR for substantiveinput. The lack of staff has also limited the Ecology Center's ability to establisha fine and fee structure, guidelinesfor industrialpre-treatment of waste streamsprior to discharge into the sewer system, to develop a list of prohibited materials and industrial processes, hazardous waste handling guidelines,procedures for handlingof ship's wastes and to deal effectivelywith emissionsfrom the power plant.

7. Specific monitoring procedures and protocols do not exist at the SBMA but will need to be developedas new industriescome on line. Protocolsfor measuringambient concentrationsof pollutants, water based and air based, already exist at the national level through DENR. These shouldbe reviewed and adopted for use in the Freezone if appropriate. Programs of monitoring(frequency, species,etc.) shouldbe developedalong with appropriatefines for non-compliance.These programs must be carefully crafted so as not to discourageinvestors from locating in the zone.

8. In the EMP, a comprehensive list of short run and mid-term program activities will need to be identified based on current needs within the freeport. - 68 - Annex 11 Page 3 of 6

IntegratedWastewater Treatment Services

9. Because of the juxtaposition of Olongapo and the base, an integrated wastewater treatment program is recommended. This approach would provide for treatment of all wastewater in the area so that the Bay and its tributaries would remain free of pollution. Currently, wastewatercoming from the base is discharged directly into the Bay through a 1000 foot outfall located in a area where hotels and other tourist type facilitiesare to be developed. There is also no wastewatertreatment in Olongapowith sewered districtsdischarging directly into the rivers but with the majority of the populationusing septic tanks. These septic systemsare full most of the time and residentssimply dig an adjacent tank when full. Little cleaning of septic systems actually takes place. There is little information on groundwater contaminationaround Olongapofor those areas most suspect, near the landfill and in dense areas with overflowingseptage.

10. Residentialareas of the baselands,largelyunoccupied, have their own wastewatertreatment plant but which has not been in operationsince the Navy vacated. Therefore no wastewatertreatment exists in an area with a population of some 250,000. An integrated wastewatertreatment approach needs to be implementedconsisting of a treatment plant serving the base and the sewered areas of Olongapo as well as provide for septic tank evacuationand subsequenttreatment of collectedwastewaters.

11. Such a plant should be centrally located within reach of septage collectionvehicles, Olongapo sewers and baseland sewers. Prior to implementationof such a scheme, regulations on industrial pretreatmentneed to be developedso that industriesdischarge only organic laden wastes to the plant. In addition, the integrationof wastewatertreatment and water supply systemoperation under one private contractorneeds to be evaluated.

12. In the EMP, the contractorwill study the feasibility of the above approachand suggest an implementationstrategy including an approximate budget for capital and operatingcost and its impact on water and sewer charges.

IntegratedWater Supply Services

13. Olongapo's water supply system is severely overtaxed originally built after WW II for a populationof 40,000 and now serving250,000. Althoughfiltered and chlorinated,the city's water supply is not considered safe and needs to be upgraded. The base has a more modern water supply system capableof providing some 10 million gallons per day and currently only supplying4 million gallons per day to the base and some connectedareas of central Olongapo. An integrated systemwhereby the base's plant can provide for Olongapo's water supply needs shouldbe developed.

14. In the EMP, the contractorwill assess the potential for integratingthe city's water supply system with that of the base as well as possibilityof linking it to the wastewatertreatment system operatedby a private contractor. - 69 - Annex 11 Page 4 of 6

IntegratedSolid Waste Treatment

15. Solid waste producedon base is picked up by the municipalityfor disposal at the town's landfill. Solid waste managementon the base was turned over to Olongapowhen the base's landfill was closed in 1992. The town's landfill which acceptsapproximately 250 to 300 cubic meters of solid waste per day can be characterizedas dump where little of today's landfill managementpractices are applied. Although the landfillhas a leachatecollection system consistingof a holding tank without treatment whichusually overflowsduring the rainy season. Municipalofficials feel that the landfill still has some 20 years of life. A study on re-engineering the existing landfill and the identification of potential sites for future development needs to be undertaken. Solid waste loads will increase as industries move into the Freeport. In addition,sites for sludge disposal and non-hazardouswaste (demolitiondebris) need to be identified and developedas well. Collectionand transport of solid waste appears to be well managed although a visit to the municipal garage revealed a large number of vehicles which are not adequately maintained.

16. In the EMP, the consultant will carry out a review of procedures and practices to determine If privatization of solid waste management is practical and cost effective and how It may be Implemented.

Forest and Wetlands Preservation

17. The preservation of baselands forests and wetlands is vital to maintaining the ecology and attractivenessof the region. Current efforts to preserve the forest have been largely successfulthrough the efforts of the military and thousands of volunteers. The ban on tree cutting and prohibitionagainst allowing people into these areas needs to be supported. The developmentof the Naval magazine area shouldbe postponeduntil a plan for the entire base has been adopted. It is important to maintain these areas in pristine conditionfor as long as possiblediscouraging any attemptsto propose projects with short term gains at the expense of long term sustainabledevelopment.

18. The organizationof units responsible for forest and wetland area preservation need to be well thought out so that the long term viability of these areas is assured. In the EMP, a plan for the organization responsible for forest and wetlands protection needs to be outlined.

Power Plant Pollution Control

19. Current emission levels from the 27 MW Enron power plant are unknown yet there is a continuousplume coming from the plant visible for many kilometers. At this time it is clearly an environmentalblot on an otherwise pristine landscape. Reasons for the plume include combustionof Bunker 'C rather than diesel fuel and the age and condition of the diesel engines. However, the new 108 MW Enron facility will also burn Bunker "C" containing3.5 percent sulfur. When the new facility is complete, the small plant will be modernizedbut continuedoperation is planned. - 70 - Annex 11 Page 5 of 6

20. An EIA has been carried out and is currently under review awaiting an Environmental ComplianceCertificate to be issued by the DENR. Since the Ecology Center is so thinly staffed with no skills in the 'brown' sector, DENR has responsibilityfor environmentalmanagement at this point in time. The EIA indicatesthat emission standardsare violatedbut ambient standards are met and this is permissibleaccording to Philippinelaw. The determinationthat ambient standards are not violated is based on dispersionmodelling which is not adequatelydiscussed in the EIA. In addition, a stack height of 50 meters is mentioned as optimal making the EIA rather suspect in terms of its final conclusion. Nevertheless, constructionof the new plant has started because it has been designated a "fast track" project although a Permit to Construct has not been issued.

21. The central issue is the planned use of Bunker 'C" in the new plant which could quintuplethe present levels of emissions. The fuel is supplied by NPC under an arrangement prohibiting the use alternative fuel. This situation should be addressed immediately and therefore needs to be fully discussed in the EMP.

HazardousWaste Management

22. The managementof hazardous wastes which potentiallyexist in the Freeport and those wastes whichmight be createdthrough light industrializationwill need to be managedusing up to date techniques for storage, transport and disposal. At this point, any industrial ventures which produce significant quantities of hazardous wastes are prohibited in the baselands. Nevertheless, there may be small quantitiesof wastes generated such as spent solvents, ship's wastes and hospital wastes. These should be treated away from the baselands at a central facility serving this part of the Philippines. Therefore hazardous waste managementcapability should be limited to storage and transport of small quantitiesof these materials and not final disposal. In event that major sources of hazardous materials are identified, a special program will have to be devised to dispose of this material. To have a major emergencyand waste disposal capabilitywithin Subic would be costly and invite certain criticism.

23. In the EMP, a plan for handling hazardous materials and ship's waste needs to be developed.

EnvironmentalReview of Investments

24. Three capital projects are to be made in conjunctionwith this project, they includethe widening of a bridge, the constructionof approximatelyfour kilometers of road and the constructionof 10 light factory buildings. Each will require an environmentalanalysis with a focus on mitigation of negative environmentalimpacts. Constructionof the bridge and 10 buildingswill require a less detailed analysis than the road. Issues of erosion, wetlands, roadside residents and squatters, traffic flow and safety will need to be addressed. At the time of the writing of these TORs, we have been told that no resettlement of any residents is necessary since the proposed route is within the base in an unhabited area. If, however, private land is to be acquired, then the procedure for compensationneeds to be reviewed and described in the EMP. If the compensationis judged to be insufficientbased on the purchase of similar land for public projects, then the compensationstructure will have to be modified. - 71 - Annex 11 Page 6 of 6

25. In the EMP, the consultantwill review the environmentalimpact of these investments.

Repr

26. The contractorwill deliver a report addressingeach of the above issues. In addition, a plan will be provided whichgives recommendationsand establishespriorities for the variousprogrammatic actions, with schedule and budget. This report will be delivered in two phases, the first within one month of the contract date and the second within six monthsof the contract date.

27. The first phase report will provide a general overview of all issues and pose generic approaches to be developedfurther in the second phase. This documentis not to exceed 35 pages and will serve as an environmentalsummary for the Bank's project documentation. During the second phase a more detailed report will be prepared, expandingon the issues containedin the summary. This documentwill provide a road map for environmental management of the Freeport and will have concrete recommendationsfor capital investmentand long term institutionaldevelopment. - 72 - Annex 12 Page 1 of 2

PHILIPPINES SUBIC BAY FREEPORT PROJECT Total Project Cost

- Million Pesos- %of MiUon USS % Local Foreign Total Base Local Foreign Toal Foreign

A. SITE IMPROVEMENT 259.3 753.1 012.4 83.9 9.26 26.90 36.16 74.4

Land Access 64.5 73.8 143.2 11.9 2.30 2.81 5.12 55.0 Airpport Improvements 95.5 380.5 476.0 39.4 3.41 13.59 17.00 79.9 Port Repairs 26.3 27.0 53.9 4.5 0.96 0.97 1.92 50.2 Standard Factory Buildings 53.9 110.8 164.7 13.6 1.92 3.96 5.88 67.3 Miscellaneous Equipment 11.9 144.1 156.0 12.9 0.43 5.15 5.57 92.4 Engineering/Supervision 6.7 11.9 18.6 1.5 0.24 0.42 0.66 64.0

B. INSTITUTIONAL SUPPORT 4.9 133.4 138.3 11.5 0.18 4.77 4.94 96.5

Merchandis Control System 0.0 56.0 56.0 4.6 0.00 2.00 2.00 100.0 Zoning Regulations 2.4 0.4 2.8 0.2 0.09 0.01 0.10 14.3 Accounting an Billing 2.5 4.5 7.0 0.6 0.09 0.16 0.25 64.3 PrivatizationTrmesactions 0.0 14.0 14.0 1.2 0.00 0.50 0.50 100.0 L-T Freeport Advisors 0.0 40.3 40.3 3.3 0.00 1.44 1.44 100.0 S-T Tmining and TA 0.0 11.2 11.2 0.9 0.00 0.40 0.40 100.0 Facilities Management 0.0 7.0 7.0 0.6 0.0 0.25 0.25 100.0

C. ENVIRONMENT 0.0 27.5 27.5 2.3 0.00 0.98 0.98 100.0

Baseline Survey 0.0 18.2 18.2 1.5 0.00 0.65 0.65 100.0 Ecology Center Support 0.0 9.3 9.3 0.8 0.00 0.33 0.33 100.0 0.0 D. TAXES AND DUTIES 29.1 0.0 29.1 2.4 1.04 0.0 1.04 0.0

TOTAL COST 293.2 914.1 1207.3 100.0 10.47 32.64 43.12 75.7

PHYSICAL CONTINGENCIES 41.1 127.5 168.5 14.0 1.47 4.55 6.02 75.6 PIUCE CONTINGENCIES 65.5 154.4 219.9 18.2 0.96 1.89 2.85 70.2

TOTAL PROJECT COST 399.8 1195.9 1595.7 132.2 12.90 39.09 S1.99 74.9 SUBICBAY FREEPORTPROJEICT Totl Projed Cod with Cmwgu

MillionPewos % of MillionUSS 1994 1995 1996 1997 TotWl Total 1994 1995 1996 1997 Total Forign

A. SITE IMPROVEIENT 308.7 677.4 213.0 145.7 1344.9 34.3 10.6 22.2 6.7 4.4 43.3 32.6

Land Accec 9.0 35.7 73.9 16.2 205.0 12.8 0.3 1.2 2.3 2.6 6.4 3.5 Airport Improvemcnta 226.3 402.5 0 0 629.3 39.4 7.3 13.2 0 0 20.9 16.6 Port Repairs 0 26.S 45.7 0 72.4 4.5 0 0.9 1.4 0 2.3 1.1 Standard Factory Buildings 0 70.3 92.7 59.5 222.6 14.0 0 2.3 2.9 1.8 7.0 4.7 Miucellana Equipmeat 50.1 142.1 0.7 0 193.0 12.1 1.7 4.7 0 0 6.4 5.9 Engineering/Supcerviion 22.6 0 0 0 22.6 1.4 0.3 0 0 0 0.3 0.5

B. INSTITUTIONAL SUPPORT 22.9 101.2 46.2 6.7 177.0 11.1 0.3 3.3 1.5 0.2 5.3 5.6

Merchandise Control System 7.2 53.9 16.5 0 77.5 4.9 0.2 1.8 0.5 0 2.5 2.5 Zoning Regulations 1.3 2.1 0 0 3.4 0.2 0 0.1 0 0 0.1 0.0 Accounting a*d Billing 0 7.1 1.9 0 3.9 0.6 0 0.2 0.1 0 0.3 0.2 I PrivatizationTransations 1.5 6.4 3.6 1.3 18.3 1.1 0.1 0.2 0.3 0.1 0.6 0.6 w L,T Freeport Advisom 10.3 23.1 12.3 0 46.2 2.9 0.4 0.3 0.4 0 1.5 1.5 S-T Training and TA 0 4.3 4.6 4.9 13.7 0.9 0 0.1 0.1 0.1 0.4 0.4 Facilitics Managenent 2.1 4.4 2.4 0 3.S 0.6 0.1 0.1 0.1 0 0.3 0.3

C. ENVIRONMENT 9.2 21.9 3.1 0 34.2 2.1 0.3 0.7 0.1 0 1.1 1.1

Baseline Survey 6.4 16.0 0 0 22.5 1.4 0.2 0.5 0 0 0.7 0.7 Ecology Center Support 2.7 5.9 3.1 0 11.3 0.7 0.1 0.2 0.1 0 0.4 0.4

D. TAXES AND DUTIES 3.3 20.3 9.3 6.3 39.6 2.5 0.1 0.7 0.3 0.2 1.3 0

TOTAL 344.0 821.3 271.7 158.7 1595.7 100.0 11.8 26.9 3.5 4.8 52.0 39.1

OQ : (D D I X

O F 0~ - 74 -

Annex 13

Philippines Subic Bay Freeport Project

Disbursement Schedule (US$ million)

Bank Fiscal Year Semester Ending Disbursement Cumulative Profile %!'

1995 December 31, 1994 1.2 1.2 3 June 30, 1995 6.0 7.2 18

1996 December 31, 1995 8.0 15.2 38 June 30, 1995 9.6 24.8 62

1997 December 31, 1996 6.4 31.2 78 June 30, 1997 4.8 36.0 90

1998 December 31, 1997 1.6 37.6 94 June 30, 1998 0.8 38.4 96

1999 December 31, 1998 0.8 39.2 98 June 30, 1999 0.8 40.0 100

Follows the profile for Philippines Industrial Development. - 75 - Annex 14

PHILIPPINES SUBIC BAY FREEPORTPROJECT

Project SupervisionPlan

Bank's SupervisionInputs into Key Activities

1. The staff inputs indicated in the table below are in additionto the regular supervisionneeds at headquarters for the review of progress reports, procurement actions, correspondence, etc. Bank supervisionover the life of the project is estimatedat 60 staff weeks, of which 45 staff weeks would be in the field and 15 staff weeks at headquarters.

2. An indicativesupervision program is shown in Table 1:

Table 1: Indicative Supervision Program

Approxunate Activity Expected Slkll Requirements Staff Input Date September1994 Detailed Engineering InstitutionSpecialist 10 EnvironmentalAspects Project Engineer LaunchingStudies EnvironmentalSpecialist InstitutionalProgress Financial Analyst/Economist February 1995 ConstructionProgress Project Engineer 4 Finances Financial Analyst/Economist Studies Progress July 1995 OrganizationalReview FinancialAnalyst/Economist 6 Studies Progress InstitutionalSpecialist November 1995 Works Progress Airport Specialist 6 EnvironmentalAspects EnvironmentalSpecialist March 1996 Works Progress Project Engineer 2 July 1996 StudiesProgress Financial Analyst/Economist 4 Works Progress Port Engineer September1996 InstitutionalProgress InstitutionSpecialist 2 June 1997 Works Progress Financial Analyst/Economist 6 Overall Review Project Engineer December 1997 Overall Progress InstitutionalSpecialist 5 PCR Financial Analyst/Economist

Borrower'sContribution to Supervision

3. All project actions will be coordinatedby the SBMA. Regular progress reports will be provided by the SBMA, as will Part 2 of the Project CompletionReport. Provisionalfinancial statementswill be provided on a semi-annualbasis, and auditedfinancial statementswill be provided annually. Philippines Subic Bay Freeport Project Implementation Schedule

0 akae Draz ti n 1994 1995 1996 ___1997 # Task Name Durabo Start End Q2 Q3 Q4 QI Q2 Q3 Q4 Qi Q2 Q3 Q4 QI Q2 Q3 Q4 I Access Road 19.95 m Jan/02/95 Aug/29/96 - - - 2 Detailed Engineermg 4.00 m Jan/02/95 May/02/95 3 Tendering 4.00 m May/03/95 Aug/31/95 4 Award 0.00 m Aug/31/95 Aug/31/95 A 5 Construction 7.00 m Jan/01/96 Jul/31/96 6 Kalayaan Seeurit Gate 1.00 m JuV31/96 Aug/29/96 m 7 Rizal Bridge 9.75 m JuVOI/94 Apr/25/95 - -- _ 8 Detailed Enginwering 4.00 m Jul/01/94 Ocrt31/94 9 Tendering 2.75 m Nov/01/94 Jan/23/95 101_Award 0.00 w Jan/23/95 Jan/23/95 a II Costruction 3.00 m Jan/23/95 Apr/25/95 12 Main Entrance Complex 12.75 m Jul/01/94 Jul/25/95 ...... - 13 Detailed Engineering 4.00 m JuVO/I/94 Oct/31/94 _ Ml 14 Tendering 2.75 m Nov/01/94 Jan/23/95 15 Award 0.00 m Jan/23/95 Jan/23/95 A 16 Consuction 6.00 m Jan/23/95 Jul/25/95 .4 17 Airport Terminal 19.95 m Jul/O1/94 Feb/28/96 _ I8 Detailed Enginmering 3.00 m Jul/01/94 Sep/30/94 19 Tendering 4.00 m Sep/30/94 Jan/31/95 20 Award 0.00 m Jan/31/95 Jan/31/95 A 21 Construction 12.00 m Mar/01/95 Feb/28/96 _ 22 Airport Pavement 20.02 m Apr/01/94 Dec/01/95 23 Detailed Enginring 3.00 m Apr/01/94 JulOI/94 24 Tendering 3.00 m JulOI/94 Sep/30/94 25 Award 0.00 m Sep/30/94 Sep/30/94 26 Construction 14.00 m Oct/03/94 Dec/01/95 27 Port Repairs 31.98 m Sep/01/94 May/01/97 _ 28 Detailed ngineeing 4.00 m Sep/01/94 Dec/30/94 29 Tendering 4.00 m Jan/02/95 May/02/95 30 Award 0.00 m May/02/95 May/02/95 a 31 Constunction 12.00 m Nov/01/95 Oct/30/96 32 Cathodic Protection 6.00 m Oct/31/96 May/01/97 _ 33 Standard Factory Buildings 18.00 m Sep/01/94 Mar/01/96 U - 34 Detailed Engineering 2.00 m Sep/01/94 Nov/01/94 35 Tendering 4.00 m Nov/01/94 Mar/02/95 36 Award 0.00 m Mar/02/95 Mar/02/95 A 37 Constuction 12.00 m Mar/02/95 Mar/01/96 38 Equipment 24.00 m Apr/01/94 A/01/96 _

Prin,ed: May/09/94 Miestonc A Summary _ Page I lFxed Delay ------Philippines Subic Bay FreeportProject Implementation Schedule

a 1994199 1996 1997 TaskName Duratio Stan End Q2 Q3 Q4 QI Q2 Q3 Q4 Ql Q2 Q3 Q4 Ql Q2 Q3 Q4 39 Air Traffic Control 8.00 m Apr/01/94 Nov/30/94 40 Communications 10.99 m Oct/03/94 Aug/31/95 _ _ 41 Security 4.00 m Oct/03/94 Jan/31/95 42 Airport Communications 8.00 m Jan/02/95 Aug/31/95 43 Vehicles 6.00 m Oct/03/94 Apr/03/95 44 Miscellneous 17.98m Oct/03/94 Apr/01/96 45 Boats 4.00m Oct/03/94 Jan/31/95 46 Heavy Equipment 8.00 m Nov/01/94 Jun/30/95 47 OGal Eqipment 6.00 mi Oct/03/94 Apr/03/95 48 Electical Equipment 6.00 m Jan/02/95 Jul/03/95 49 Laboratory Equipment 6.00 m Jan/02/95 JuL03/95 50 Office Equipment 12.00 m Apr/03/95 Apr/01/96 _ 51 Water and Electicity Me 12.00 m Dec/01/94 Nov/30/95 52 Merchandise Control System 23.00 mn Jul/0194 May/31/96 53 Short Listing 3.00. Jul/01/94 Sep/3041 54 Award 0.00 m S*30M Se304 L 55 InstWlation 12.00 m S*30M Oct/02/95 `4 56 Veriftion 8.00 m Oct/02/95 May/31/96 57 Accounting nd Billing 15.00 m Sep01/94 Dec/01/95 58 Short Listing 3.00 m ŽSeptl/94 Dc/A01/94 * 59 Award 0.00 m Dec./01/94 Dec/01/94 60 Installation 8.00 m Dec/01/94 Aug/0295_ 61 Verification 4.00 m Aug/02/95 Dec/01/95 62 ZonungRegulations 6.00 m Sep01/94 Mar/02/95 63 Privatization Transactions 36.00 m Sep/01/94 Sep01/97 * 64 La"-termAdvisors 27.00 m Jul/01/94 Oct/01/96 65 Short-term TA and Training 27.00 m Mar/01/95 May/30/97 66 Facilities Management 27.00 m Jul/01/94 Oct/01/96 67 Baseline Survey 17.00 m JulO1/94 Nov/30/95 68 Short Listing 3.00 m JuU01/94 Sep/30/94 69 Award 0.00 m Sep/3094 I 70 Study 14.00 m Sep/30/94 Nov/30/95 71 Ecology Center Support 27.00. Jul/01/94 Oct/01/96 - m - -

______==_ ___ otji

Printed: May/09/94 Milestone A Summary Page 2 Fixed Delay - 78 - ANNEX16 Page 1 of 3 SUBIC BAY METROPOLITANAUTHORITY

INCOMESTATEMENT

in (000) Pesos 1992 1993 6-Months Actual Preliminary GENERALLEASE REVENUES

Land Leases 0 7,116 Revs.from Industrial & Commer. Space 0 138,910 Revs. from housing 0 0 Others 0 0 Total GeneralLease Revenues 0 146,026

OPERATING,SERVICE & OTHERINCOME

Tourism & RecreationalFaciliites 135 27,156 Public Works Services 0 19,559 Security Services 194 8,649 Airport & Port Facilities 43 5,740 Power Plant PersonnelServices 4,892 0 Interest Income 540 8,917 ExtraordinaryIncome 0 1,129 Miscellaneous 42 10,826 Total Other Revenues 5,846 81,976

TOTAL REVENUES 5,846 228,002

OPERATINGEXPENSES Salaries& Benefits 11,597 93,803 Grounds& Maintenance Exp. 11,632 1,952 Sales& Promotional Expense 271 2,246 Water Power & Sewarage 0 48,097 CommunicationsExp. 22 2,032 Supplies & Materials 1,033 14,651 ProfessionalServices 0 28,718 Miscellaneous 460 2,811 Subtotal 25,015 194,310

NETOPERATING PROFIT (19,169) 33,692

Depreciation 3,821 12,529 Interest 0 Subtotal 3,821 12,529

NET OPERATINGMARGIN (22,990) 21,163

Income Taxes 0 0 NET PROFIT/(LOSS) (22,990) 21,163 79 - ANNEX 16 Page 2 of 3

SUBIC BAY METROPOLITAN AUTHORITY

FLOW OF FUNDS STATEMENT

in (000) Pesos 1992 1993 6-Months Actual Preliminary

INTERNAL CASH GENERATION Net Income Before Int (22,990) 21,163 Disposal of Assets 1,503 Add: Depreciation Exp 3,821 12,529 Operating Cash Flow (19,169) 35,195 Add: Beg Cash Position 0 75,411 Working Cap Inc/(Dec) (6,054) (44,329) CASH BEFOREDEBT SERVICE (13,115) 154,935

DEBT SERVICE Interest Charges 0 0 Repayment of Notes 0 0 Principal Repayments 0 0 Total Debt Service 0 0 CASH AFTER DEBT SERVICE (13,115) 154,935

CAPITAL INVESTMENT REQUIREMENTS Construction Projects 0 0 Capitalized Interest 0 0 Annual Capital Invest. 0 0 Equipment Purchases 122,943 8,396 Add: Cash Ending Bal. 75,411 365,217 CASH AFTER CAPITAL EXPEN. (211,469) (218,678)

FUNDS FROM LOANS & CONTRIBUTIONS Other Loans 0 0 Working Capital Loans 0 0 Funds From Loans 0 0

Appropriated Contributions 211,469 258,397 TOTAL CASH SUR/(DEF) 0 39,719

Short-term Investments 0 39,719 - 80 - ANNEX 16 Page 3 of 3 SUBIC BAY METROPOLITAN AUTHORITY

BALANCE SHEET

in (000) Pesos

1992 1993 ASSETS 6-Months Actual Preliminary

FIXED ASSETS Properties and Facilities 0 19,101,686 Equipment 122,943 129,795 Less: Acc. Depreciation 3,821 16,215 Net Fixed Assets 119,122 19,215,266 Works In Process 0 TOTAL FIXED ASSETS 119,122 19,215,266

CURRENT ASSETS Cash 75,411 365,217 Short Term Investments 0 39,719 Accounts Receivable 196 39,578 Spares and Material Inv. 1,850 5,964 Prepaid Exp. 8 3 TOTAL CURRENT ASSETS 77,465 450,481

TOTAL ASSETS 196,587 19,665,747

LIABILITIES & NET WORTH

EQUITY

Paid In Capital 210,969 19,569,865 Addnl Cap Contributions 500 0

Retained Earnings (22,990) 2,717 Beginning 0 (22,990) Net Income (22,990) 25,707 Extraordinary Income 0 0

TOTAL NET WORTH 188,479 19,572,582

CURRENT LIABILITIES Accounts Payable 5,315 18,007 Notes Payable 0 0 Adv. & Security Deposits 2,793 75,158 Current Portion of Debt 0 0 TOTAL CURRENT LIABILITIES 8,108 93,165

TOTAL LIABS. & NET WORTH 196,587 19,665,747 SUBIC BAY METROPOLITANAUTHORrTY

INCOME STATEMENT 14-Feb-94 in (000) 1904 1905 19906 1997 1908 1999 2000 2001 2002 2003

GENERAL LEASE REVENUES Revenues rorm Industril Areas 45,018 111,711 184.990 231,868 231,38 254,505 254,05 279,055 279,955 307,9f1 Revs, *Orn CommercIal Spaco 50,426 116.862 142,634 156,898 156,898 172,587 172.587 189,846 189,084 208,331 Leseo Rove. tom Housing 24,000 59,400 99,000 130.680 130,.60 143,748 143,748 158.123 158,123 173,035 Revs, *om Touriam Aroas 44,933 82,377 115,327 120,860 120,860 139,546 139,50 153,501 153,501 168$,51 Totd General Lease Revenues 164.377 372,349 541.952 645,806 645,806 710,386 710,386 781,425 761,425 859,5e7

OTHER REVENUES Revs, trom Privtized Servicts 132,506 304,645 506.836 685,907 717,420 1,470,121 1,566,431 1,821.797 1,962,130 2,345,389 Revs. trnm Spec. Facil. & Concessions 236.500 257,950 226,325 232,320 272,250 299,475 209,475 329,423 329.423 62,365 Intredt From ShrtTwrm Investments 2,111 25,100 23,063 0 0,222 29,263 78,374 177,492 298,388 437,448 Total Othr Revenues 371,217 587,701 756,824 918,227 9095.892 1,798,859 1,943,279 2,328,712 2,589,940 3,145.202

TOTAL REVENUES 535,594 960.051 1,28.776 1,564,032 1,641,697 2,509,245 2,653,666 3,110,136 3,371.365 4,004.760

OPERATING EXPENSES Salwies & Benefits 207,000 232,565 156,772 176.133 201,655 226,559 254,539 285,975 300,683 321,730 Grounds & Maintenanre Exp. 40,000 48,150 54,383 61,252 65,540 70,128 75,037 50,289 85,090 910123 Sales & Promotional Expenses 10,000 16.050 20,036 24,501 26,216 28,051 30.015 32,116 34.364 38 760 ao Water, Power and Seweage 75,000 191,911 306.458 377.239 403,646 790,1609 845,480 n04,664 967,001 1.035,750 Communiation Expenses 3,000 5,350 5.725 7,350 7,865 8,415 9,004 9.635 10,309 11,031 Supplies and Materials 30,000 37,450 40,072 49.002 52,432 56,102 60,020 64,231 68,727 73,538 Other Services 50,000 42,800 34,347 24.501 26,216 14,026 15.007 18,058 17,182 18,385 Miscellaneous 36,000 64,200 68,694 79,628 85,202 91,1606 97,547 104,376 t111,82 119,500 Subtotal 451,000 638,475 688.485 7000.6 868,771 1,284,615 1,380,559 1,497,343 1,5060.47 1,708,626

NET OPERATING PROFIT 64,5e4 321,576 612.291 764,426 772,927 1,224,630 1,267,006 1.612,703 1,774,518 2,290,143

Dopreciatlon 382,000 395,585 436,754 403,343 541,674 571,276 591,675 e02.784 603,76 603,7609 Interest 2,613 16,418 67,774 90,387 109,493 110,000 108,300 102,792 96,332 89,720 Subtotal 384,613 412,003 504,528 583,730 651.167 681.386 700,035 705,576 700,101 603,480

NET OPERATING MARGIN (300,018) (00,428) 107,753 180,696 121,780 543,264 566,071 907,217 1,074,417 1,602.854

Income Taxes 0 0 37,717 63,244 42,.16 190,142 198,440 317,526 376,048 560,929 NET PROFIT/(LOSS) (300,018) (00,428) 70.048 117.453 79,144 353,122 368,531 589.6091 6098.371 1,041,725

xl

oFH -j SUBIC BAY METROPOUTANAJTHORITY

FLOW OF FUNDS STATEMENT 14-Feb-94 in (000) 1994 1005 1006 1997 1098 1990 2000 2001 2002 2003 INTERNAL CASH GENERATION Not Income he4rolntermst (297,406) (74,000) 137,820 207,840 1U8036 403,212 476,802 092,483 704,703 1.131.445 Add: Deprecaton Expense 382,000 395.585 436,754 493,343 541.674 571,278 591,675 602,784 603,769 603,700 Operaing CashFlow U4,594 321.576 574,574 701,183 730,311 1,034.488 1.068,566 1,295,267 1,308,472 1,735,214 Add: Beg Cah PomlUon 230,532 56,375 7o.8N 85,811 99,951 108.596 160.577 173,332 187,168 190,606 Working Cap Inc/(Dec) (95,853) (27,354) (5.579) (76,406) (11,039) (91568) (17,173) 17,350 (22.234) (54,102) Escrow for Secuity Deposit 89266 70743 56454 44200 12944 144591 24070 78078 43538 105507 CASH BEFORE DEBT SERVICE 327,713 334,502 603,508 319,190 828.356 1,090,061 1.222,246 1,375,162 1,564,336 1,883,355 DEBT SERVICE Interest Chwges 2,613 16,418 87.774 90,387 109,493 110,090 108,360 102,792 98.332 $9.720 Repayment of Notes 0 15,250 25,369 33,107 15,587 16,678 26,451 28,303 25,237 27,003 Principal Repayrmnts 0 0 0 0 0 0 74ee67 74,667 111,333 111,333 Tot Dcbt Srvice 2,613 31,66 93,143 123,494 125,079 122,768 209,478 205,702 232,902 228,057 CASH AFTER DEBT SERVICE 325,101 302,893 510,365 695,696 703,277 963,293 1,012,768 1,169,400 1,331,434 1,655,208 CAPITAL INVESTMENT REQUIREMENTS Corutrucrion Project 543,394 1.103.383 1,160,169 773,081 410,974 404,987 39,394 0 0 0 1 Capitalized Interest 9,650 35,168 20,719 14,241 0 0 0 0 0 0 co Annual Capial Inwvet. 553,044 1,138,570 1,180,888 787,321 410.974 404,987 39,394 0 0 0 EqulpmentPuchaves 132,311 59,039 58,462 27,159 8,376 14,925 2,380 0 0 0 Add: Cash Ending Balance 56,375 79,809 85,811 99,951 108,596 160,577 173,332 187,168 19906w6 213,578 CASH AFTER CAPITAL EXPENDITURES (416,629) (974,526) (814.796) (218,735) 175.330 382.604 797,681 982,232 1.131,828 1.441,720

FUNDS FROM LOANS A CONTRIBUTIONS Othw Loans 0 0 0 0 0 0 0 0 0 0 IECDF 100,000 125,000 285,000 150,000 0 0 0 0 0 0 IBRD 260,000 630,000 125,000 105,000 0 0 0 0 0 0 Working CapIal Loans 15.250 25,369 33,107 15,587 16,678 26,451 28.303 25,237 27,003 28,894 Funds From Loans 375,250 780,389 443,107 270,587 16,678 26,451 28,303 25,237 27,003 28.894 Appropriated Conlributions 233,000 182,134 150,000 0 0 0 0 0 0 0 TOTAL CASH SURPLUS/(DEFICIT) 191.621 (12,022) (221,889) 51,851 192,008 409,258 825,984 1.007,469 1,158,831 1,470,613

k Cah Stpluk: Cah Avalbbi For DiBtrbution 191,621 0 0 51,851 192,008 409,256 825,984 1,007.489 1,158,831 1.470,813 Ditributions to Govt. 0 0 0 0 0 0 0 0 0 0 Purchas of Secuites 191,621 0 0 51,851 192,008 409,256 825,984 1,007,469 1,158,831 1,470,613 It Cash D dcIt Scbed Sect,ue 0 12,022 197,194 0 0 0 0O 0 0 0 Gov.rnmentConrliiuons 0 0 24,495 0 0 0 0 0 0 0

Fd :>

OQ 0 I'3 -4 SUBIC BAY METROPOLITANAUTHORITY

BALANCE SHEET 14-Feb-04 hi (o0o) 1004 1995 10se 1007 100 1900 2000 2001 2002 2003 ASSETS

FIXED ASSETS Land 11460000 11460000 11460000 11460000 11460000 11460000 11460000 11460000 11460000 11460000 Properties and FUcit 7,640,650 6,228,231 0,352,333 10,526,743 11,200824 11.710,797 12,115,784 12.155,178 12.155.173 12.155.178 Equipment 201.335 320.374 378,836 405,90f 414,372 429,297 431,657 431,657 431.657 431,857 Lses: Accumujted Depreciation 398,267 793,852 1.230.606 1,723,W94 2,265.823 2.836.,8s 3,428.574 4.031.358 4.635.127 5.238.806 Not FkxedAssets 18,972,718 10.214.753 10,060,503 20,e66,780 20,908,572 20,763,105 20,578.8e7 20.015,477 19.411,708 16,807,939 Works In Proes_s 543,394 1,103,383 1.160.150 773,081 410,974 404,987 39,304 0 0 0 TOTAL FIXED ASSETS 19.516.112 20,318,136 21,120,732 21,441,870 21.310.548 21,16,182 20,618,262 20,015.477 19,411,708 18,607,03

CURRENT ASSETS C_h 50,375 79,809 85,811 090,51 108.506 160.577 173,332 187.168 100.60 213.576 Short Tem IrInvetmebnts 320620 388.346 247.607 343,608 548,620 1,102.407 1,952,521 3,036.068 4,238.438 5,814,616 Accounts Receivable 67.416 121,812 165,214 132,812 139.726 212,151 225,632 263,012 286.442 339,661 Spores and Mst.rs Inv. 30,500 50,739 66,214 51,050 55,593 S8,171 04,343 100,947 108,014 115,575 TOTAL CURRENT ASSETS 483,917 640,707 564.s40 628s3se 8s52.3 1,503,367 2,445.820 3,506,090 4,832,400 6,483,432

TOTAL ASSETS 20.000,029 20,0s5,843 21,685.578 22,070,257 22,172,081 22,731,541 23,064,0s0 23,603,573 24,244,207 25,201.371

UABILmES A NET WORTH

EQUITY

Psid In Capis 19,607.800 10650.000 20,024,495 20,024,405 20,024,495 20,024,405 20,024,495 20,024,495 20,024,495 20,024,406 Addiionai CspIW Conlritbiton 233,000 182.134 174,495 0 0 0 0 0 0 0

Retained Earnings (298.558) (388.980) (316.040) (201,487) (122.343) 230,778 599,310 1.180.001 1,u87,372 2,929,097 Boginning 1,400 (20,558) p88,98W) (318,940) (201,487) (122,343) 230,77S 500,310 1,189,001 1.87.372 Not Income (300,018) (90,428) 70,040 117,453 70,144 353.122 308,531 580,601 608.371 1,041,725 Dividencit 0 0 0 0 0 0 0 0 0 0

TOTAL NET WORTH 10.380.308 19,481.014 10,705.555 10,823,008 19,902,152 20,255,273 20,623.85 21,213.406 21.011 .7 22,05.502

BORROWINGS Interest Fr" Loan 0 0 0 0 0 0 0 0 0 0 IBRD 100.00 225,000 510o00o 600,000 660.000 5O5.000 6o00000 660,000 623,333 580,.e7 IECOF 260,000 690,000 1,015,000 1,120,000 1,120,000 1,120,000 1.045.333 070.667 806,000 621,333 Lass: Currnt Portion 0 0 0 0 0 74,6e7 74,667 111,333 111,333 111,333 TOTAL BORROWINGS 3e0,000 1,115,000 1.525,000 1,760,000 1.780,000 1.705,333 1.630,687 1.519.333 1,408,000 1,290.667 CURRENT LIABILMES Accounts Payable 75,167 106,413 114,414 00.951 108.590 160,577 173,332 124,770 133,071 142.385 Notes Payabla 15,250 25,369 33,107 15,587 16,876 26,451 28,303 25,237 27.003 28,804 Adv. A Schity Deposlts 180.305 251,047 307,502 351,711 34,855 500.247 533,317 o09,395 652,9s3 758.500 Ctwrcnt Potion o Debt 0 0 0 0 0 74,607 74,67 111,333 111,333 111,333 TOTAL CURRENT UABILITIES 270,721 302,820 455,023 407,249 489,930 770,941 800,610 870,744 024.340 1,041,113

TOTAL UABIUTIES A NET WORTH 20,000,029 20,0581,843 21685.578 22,070,257 22,172,081 22,731,841 23,064.000 23,6035,73 24,244.207 25,201,371 Su 0 x

I) SUBIC BAY METROPOLIfANALITHORffY

BORROWING SUMMARY 14-Feb-94 in (000) 1994 1995 1990 1997 1908 1909 2000 2001 2002 2003

LOANS IBRO

Opening Balance 0 260,000 80.000 1,015,000 1,120,000 1,120,000 1.120,000 1.045,333 970,867 800,000 Additonr 26000 630,000 125,000 105,000 0 0 0 0 0 0 lntwert Expense 975 10,781 57,150 76,059 84,000 84,000 81.200 75,600 70,000 64,400 Capiaized lntweet 8.775 32.344 14,288 4,003 0 0 0 0 0 0 Total Inteust 0.750 43,125 71,438 80.003 84,000 84,000 81,200 75,600 70,000 64,400 Arnortizaon 0 0 0 0 0 0 74,607 74,867 74,6U7 74,607 Closing Balance 260,000 890,000 1,015,000 1,120,000 1,120.000 1,120,000 1,045.333 070,6e7 890.000 $21,333 IECDF

Opening Balance 0 100,000 225,000 510,000 600,000 000,000 600,000 000,000 000,000 623,333 Addition 100.000 125,000 285,000 150,000 0 0 0 0 0 0 lntwoet Expense 875 2.844 0,431 10,238 23,100 23,100 23,100 23,100 22,458 21,175 1 Capitalized Interest 875 2.844 6,431 10.238 0 0 0 0 0 0 00 Total Intweet 1,750 5,688 12,803 20,475 23.100 23,100 23.100 23.100 22,458 21,175 1 Arnortizabon 0 0 0 0 0 0 0 0 30,007 36,607 Ciosing Balance 100,000 225,000 510,000 060,000 500,000 80,000 000,000 0,000 623,333 a0.607 Other Loans

Opening Balance 0 0 0 0 0 0 0 0 0 0 Addition 0 0 0 0 0 0 0 0 0 0 Intrest Expenseo 0 0 0 0 0 0 0 0 0 0 Capitalized Intuest 0 0 0 0 0 0 0 0 0 0 Total lntrst 0 0 0 0 0 0 0 0 0 0 Amnortizaton 0 0 0 0 0 0 0 0 0 0 Closing Balance 0 0 0 0 0 0 0 0 0 0 ALL LOANS

Opening Blance 0 360,000 1,115,000 1,525,000 1,780.000 1,780,000 1,780,000 1,705,333 1,030,607 1.519,333 Additioro 300,000 755.000 410,000 255,000 0 0 0 0 0 0 Interest Expense 1,850 13,625 63,581 80,297 107.100 107,100 104,300 98,700 92,458 85.575 Capitized Expense 9,050 35,188 20,719 14,241 0 0 0 0 0 0 Total Interest 11,500 48,813 84,300 100,538 107,100 107,100 104.300 98,700 92,458 85,578 Amortizadon 0 0 0 0 0 0 74,e67 74,8e7 111,333 111,333 Closing Balanc 300,000 1.115.000 1,525,000 1,780.000 1.780,000 1,780,000 1,705,333 1,030,607 1.519,333 1,408,000

x

o .-j

-85- Annex 17 Page 5 of 11

PHLIPPINES SUBIC BAY FREEPORT PROJECT

Assumptions for Financial Projections

Model Descriptionand ProgrammingLogic

1. A fully integratedmodel was developedto project SBMAfinancial activity includingthe investments that will be financed by the proposed Project. The model accepts as inputs revenue assumptionsfrom leases of industrial, commercialand recreationalfacilities as well as from SBMArun services and joint ventures of privatized facilities. Also, operating cost assumptionswere made for SBMAactivities for operatingand maintainingthe various facilitieswhich will be retainedby the SBMA. Other inputsto the model includeassumptions for financing,inflation and financial managementpolicies. Year-end 1993balance sheet accounts, adjusted for the bookingof P 19.1 billion in paid up capital was used as the starting position.

2. The model was programmed to simulate SBMA's activity as a Government owned industrial estate development and managementactivity, according to acceptable financial management principles. As such, the total funds availablethrough internaland externalfinancing sources are allocated based on specified priorities, with internally generated funds going first to meet requirements for increasesin working capital, fulfillingobligations to fund trust liabilities,and debt service obligationsand secondly, to meet any additionalrequirements. The estimatedexternal sources of funds, both borrowings and appropriationsfrom Governmentas equity contributionsare added as independentvariables in order to bridge any financinggap. Annual cash surplusesare reinvestedin short term securities, while deficits are deducted against this same account to the extent there are sufficientfunds to cover the draw. The final source of funds available to the SBMA would be additional contributions to equity from the Government. However, since these are not assured, revisionsto other assumptionsare consideredfirst, such as scaling down the investmentprogram.

SignificantAccounting Principles

3. The model incorporates several important accountingprinciples, which influence the interpretationof SBMA's financial statements. These include:

(a) Booking of P 19.1 Paid-up Capital. Most facilitiesof the former US Naval base were turned over to the Governmentno cost. However, in order to better reflectthe true value of these facilities on SBMA's financial statements, a more appropriate value of i 19.1 billion for such facilitieswere booked to the accounts. RA 7227 provided the basis for this estimationsince it specifiedthat the amount representedthe Government's equity as paid up capital and representingall the properties and facilities turned over to the SBMA. Since this amount is still an estimate, the SBMA has adopted the policy of performing appraisals of each fixed assets estimate and then booking any adjustmentsas either gains or losses from the revaluation. Under this approach the SBMA can reflect an indicative value for the properties previously unaccounted for and to begin to depreciatesuch assets based on their remaininguseful lives. Annex 17 -86- Page 6 of 11

(b) Security Deposits Held in Trust. The SBMA is required by law to place any security depositsmade by its tenants into a trust account. Whilethe SBMAcan earn incomefrom these accounts, it may not use these funds for its own purposes. Accordingly, all funds received by the SBMAfrom projectedsecurity deposits have correspondingliability and cannot be allocatedto other uses other than to fund the trust account.

(c) Accountingfor Foreign ExchangeRisk. It is assumedthat the SBMAwill be subject to minimalforeign exchangerisk exposure since most of its revenuesare earned in foreign exchange. Accordingly,no provisionsare made for foreign exchangeloss provisionson the dollar denominatedborrowings.

(d) Accountingfor Revenuesand Expenses. SBMArevenues and expenses are accounted on the accrual basis for which collections and payment, respectively, are governed by assumedfinancial managementparameters based on actual experiences.

Assumptionsto the FinancialProjections

General Projection Parameters

- Projection Period: 1994 to 2003

- Currency: Thousandsof Pesos in current prices.

- ExchangeRate: US Dollar denominatedinputs were converted at an exchange rate of 28 Pesos to US$1.

- Price and Cost Escalation Rates: Revenues, consisting of primarily buildingand land leases, were increased10 percent every two years beginningwith 1995. Operating and investment costs were increased at 2.8 percent and 7.0 percent for local and foreign inputs, respectively.

Income and Other Taxes: As a Government-ownedand controlled corporation, SBMA is subject to incometaxes of 35 percent with no provisionsfor carrying forward losses. This is not expectedto have a material effect on the derived results. It is assumed that the SBMAwill be exempt like all other enterprises operatingwithin the SBF from tariff or other import duties on equipmentand goods operated and consumed within the area.

Depreciation: For projectionpurposes, approximately40 percent of the IR19.1 billion to be booked to SBMAbalance sheet representingthe existingfacilities on the base were assumed as depreciableassets such as buildings and equipment. These, includingnew investmentsto be made by the SBMA over the projection period, are depreciated at 5 percent per year. Annex 17 -87- Page 7 of 11

General Lease Revenue

Occupancy Schedule: Occupancy is defined as the total lease out area divided by the total available area. The followingare the occupancyschedules assumed for the major industrial, commercial,tourism and housingfacilities:

INDUSTRIALFACILITIES 1994 1995 1996 1997 2007 20 40 60 - - Existingbuildings (%) Areas Developed for Land Lease (%) 10 30 60 80 Standard Factory Buildings(%) 20 50 90

Areas developedfor land lease refer to the 120 ha (first phase) to be developedwith financingfrom the Taiwanese Government. Of this 120 ha, it is assumed that 80 percent (96 ha) will be the total net industrial area.

OTHER FACILITIES 1994 1995 1996 1997 2007

35 75 90 - - CommercialAreas

Tourism Areas 30 50 70 - No. of Houses Leased Out 400 900 1,500 1,800

- The maximumoccupancy rates for industrial,commercial, and tourism have to be refined after a thorough evaluationof the conditionof existing facilities. It is further assumed that 100 percent occupancycannot be attained due to the regular turn-over of tenants.

- Lease Rates. The following lease rates in constant terms are assumed for the various developed and undevelopedareas. These are comparable to actual lease rates already achieved by the SBMAfor existing space as well as lease rates of other industrialestate parks within the country. Annex 17 -88- Page 8 of 11

Pesos/SM/month Pesos/SM/annum

Industrial Facilities Existing Buildings 60.00 720.00 Industrial Land 7.50 90.00 Standard Factory Bldgs. 60.00 720.00

CommercialAreas 125.00 1500.00 Tourism Areas 100.00 1200.00 ResidentialAreas (per unit) 5000.00 60000.00

Revenues from PrivatizedSupport Services

4. The SBMAis in the process of negotiatinga number of agreementsfor privatizing some of the key facilities of the base. These will be privatized in a number of ways ranging from simple operatingand managementcontracts to capital long term leases. It is not anticipated,however, that the facilitiesand correspondingland will be sold outright. The followingare the assumptionsto the various support services to be privatized.

(a) Port Operations. SBMArevenue is assumedto be a function of future shippingtraffic at SBF. In 1994 it is projected to amount to P 6 million. This is assumed to increase by 25 percent per annum until 1999. From 2000 to 2007, a revenue of P 20 M is assumed.

(b) Airport Operations. Similarly,the SBMAwill earn revenuesfrom air traffic in the form of landing fees and leasing of hangers in the airport area. This revenue is estimated at P 1 million for 1994 and is assume to double for 1995 and 1996. A 50 percent increasedis assumedfor period 1997 through 1999, then levelingoff at iP 15 million by the year 2000.

(c) Power Plant. The SBMAhas concludedan agreementwith ENRON to lease its existing power plant for approximatelyiP 18.63 million per year for a 5-year period. In the meantime, ENRON will be building a 100MW plant, for supplyingpower to the SBF freeport and neighboringmunicipalities. The existingplant will be scrapped at the end of the 5-year lease period due to obsolescence. -89- Annex 17 Page 9 of 11

(d) Power Distribution. The followingconsumption (kwh/SM/year is assumed by type of activity:

Commercial 120 Industrial 420 Tourism 180 Residential(per unit) 4,000

A retail price of P2.75/kwh was assumed,multiplied by the occupancyrate for each category of space.

(e) Water & Sewerage. The total water consumptionfor the zone was projected based on occupancyrates. The followingconsumption factors (m3/SM/year) were assumed:

Commercial 20 Industrial 81 Tourism 54 Residential(per unit) 30

A retail price of P 6.00/m3 was assumed.

(f) Teleconmmunications.The SBMA is in the process of entering into negotiationsfor the privatizationof the telecommunicationswithin the SFB. The revenues expectedfor the SBMAon a possiblejoint venture were estimated based on the actual proposals received by qualifiedbidders.

5. Revenuesfrom SpecializedFacilities and Concessions. The SBMA is in the process of granting concessions for a number of facilities, particularly those for recreational purposes. The following are the assumptionsused for projected revenues from these concessionsas well as other specializedfacilities.

(a) POL Depot. The SBMAhas already entered into an agreement with Coastal Petroleum for the lease of the oil and lubricanttank farm. The agreementspecifies US$4.1 million per year from 1994 to 1997 and US$5.2 million thereafter. Annex 17 90~ Page 10 of 11

(b) Binictican Valley Golf Course. Upon privatization, the golf course is expected to generate P 30 million per year for the SBMAto commence in 1995.

(c) Marina. The marina will be leased out to an operator and is expected to generate P24 million per year commencingin 1994.

(d) SBMAOperated Hotels and Housing. The SBMA is presently operating a number of quarters as hotels and week-end housing. The revenues for these facilities has been significantduring 1992 and 1993 but it is expected to decline since these will be turned over to private operators in the near future.

(e) Other Tourism Concessions. It is assumed that concessionsfor the beaches and other recreational facilitiessuch as the mini golf, riding stables, swimmingpools, sport fields and theaters will generate roughly P 10 million per year for the SBMA.

(f) Security Services. The SBMA is presently providing security for its tenants on a fee basis. During 1994, it is assumed that it will earn P 9 million from these services. However, after 1995, this service will be provided by a private operator on a for profit basis.

(g) Equipment Rental. The SBMA has been earning some income from the rental of miscellaneousequipment to its operators. The revenue from this activity is assumed to amount to P 2 million per year.

6. Operating Expenses. The following are assumptions made for operating expenses projected for the SBMA:

(a) Salariesand Benefits. It is anticipatedthat personnel levels will decline significantlyin the near future as most of the facilities are privatized to private operators. The SBMA would then principallybe involvedin managingand maintainingthe common areas of the freeport. Accordingly, operatingexpenses are assumedto increaseto a high of P 217 million by 1995 then drop to about 60 percent of that amount in the following year. Thereafter, salaries are assumedto rise gradually till the year 2000 and subsequently level off at P 175 million.

(b) Grounds and Maintenance. It is assumedthat most of the routine maintenanceof the facilitieswill be the responsibilityof the individualprivate operators. Accordingly,the SBMA will be responsible for only the common areas under this expense category. Major repairs will be treated as capital expendituresand are reflected in the SBMA five year investmentprogram. Operatingexpenses for the upkeep of ground are assumedto rise to a high of P 50 million in constant terms by 1997 and remain at that level thereafter.

(c) Sales and PromotionalExpenses. These are assumedto reach P220 million by 1997 and remain constant at this level thereafter. - 91 - Annex 17 Page 11 of 11

(d) Water. Power and Sewerage. Most of this expense category consists of power cost which would be purchased by ENRON at wholesale prices for distribution to tenants within the SBF.

(e) Other and Miscellaneous Operating Expenses. Assumptions were made for other expenses for communications, supplies and materials, professional services and miscellaneous based on past experience.

7. Financing Sources

(a) Proposed Bank Loan. Approximately US$40.0 million will be made available by the Bank for the Project. This will have a 20 year maturity and 5 year grace period and will carry an interest rate of approximately 7.5 percent. The entire loan will be disbursed over a four year period commencing in 1994.

(b) IECDF Proposed Loan. The SBMA has entered into an agreement with the Taiwanese Government for the financing the development of an industrial park in the North NSD area. The proposed loan for an estimated US$23.5 million will be made available for 25 years maturity, 7 years grace and at an annual interest rate of US$3.5 percent.

(c) Government Appropriated Contributions. RA 7227 provides annual contributions from the Government in the amount of P300 million for the first three years of SBMA's operations. As of year end 1993 however, the SBMA had only received R335 million instead of the required P 600 million. Accordingly, the remaining P 565 million is being staggered over the 3 years from 1994 to 1996.

(d) Revolving Line of Credit. It is assumed that the SBMA will establish a line a credit with its local bankers to finance working capital requirements, particularly for inventories of spare parts and materials that are not financed under the Project loans. The line of credit is of a short-term nature to be repaid within one year of draw down. Further, it is assumed that the line of credit will carry an interest rate of 10 percent per year.

8. Financial Management Parameters

(a) Cash Position. Based on days of operating expenses at approximately 45 days throughout the projection period.

(b) Accounts Receivable. Based on months of annual revenues at 1.5 months during 1994- 1996 and 1 month thereafter.

(c) Inventories of Spare and Materials. Based on days of annual direct costs at 45 days during 1994-1996 and 30 days thereafter.

(d) Accounts Payable. Based on months of operating expenses at 2.0 months during 1994- 1996 and 1.5 months thereafter.

(e) Short-term Securities. Funds held in trust and excess liquidity are held in short term investments such as government securities with annual yield of 12 percent.

- 92 - Annex 18 Page 1 of 2 PHILIPPINES SUBIC BAY FREEPORT PROJECT

Table 1: Projection of Employment Within the SBF

1993 1995 1998 2003 2008

Expected Scenario

SBMA 2,035 2,490 3,115 3,530 3,885 Administration 1,600 1,940 2,440 2,630 2,760 Port and Airport 35 50 75 100 125 Utilities 400 500 600 800 1,000 Tourism 2,700 2,770 3,790 5,690 7,070 Commercial, Retail 570 1,200 2,630 5,500 9,550 Industrial 1,000 9,000 27,500 65,000 120,000 Transhipment 20 840 955 1,085 895 TOTAL 6.325 16.30 37 80.805 141.400

Pessimistic Scenario

SBMA 2,035 2,415 2,890 3,215 3,550 Administration 1,600 1,870 2,230 2,340 2,460 Port and Airport 35 45 60 75 90 Utilities 400 500 600 800 1,000 Tourism 2,700 2,360 2,400 3,040 3,590 Commercial, Retail 570 960 1,910 3,300 5,640 Industrial 1,000 6,000 18,750 37,500 70,000 Transbipment 20 720 735 755 30 TOTAL 6.325 12.455 26.685 47.810 83.100

Optimistic Scenario

SBMA 2,035 2,565 3,370 3,880 4,340 Administration 1,600 2,010 2,680 2,960 3,190 Port and Airport 35 55 90 120 150 Utilities 400 500 600 800 1,000 Tourism 2,740 3,180 4,890 10,120 17,540 Commercial Retail 570 1,460 3,400 7,550 10,360 Industrial 1,000 12,000 36,000 89,000 120,000 Transbipment 20 980 1,205 1,645 1,70 TOTAL cm 20,185 48.865 112.195 154.030 - 93 - Annex 18 Page 2 of 2 PEILIPPNES SUBIC BAY FREEPORT PROJECT

Table 2: Economic Rates of Return on Major Project Components (in percent)

Scenarios Expected Pessimistic Optimistic

Airport Passenger Terminal, Cargo Terminal, 19.4 18.7 41.5 Passenger Apron & Communications Equipment - Costs up 20% 16.0 15.5 36.4 - Costs down 20% 24.0 23.1 48.6

Airport Pavement Improvement, Freight 15.4 9.1 20.8 Apron, Strengthening of Taxiway & Air Traffic Control Equipment - Costs up 20% 10.3 4.2 15.3 - Costs down 20% 22.1 15.3 28.1

Rizal Bridge & Main Entry Complex 36.8 26.9 42.7 - Costs up 20% 32.7 23.5 37.9 - Costs down 20% 42.5 31.4 49.3

Access Road &Kalayaan Security Plaza 14.5 6.1 18.5 - Costs up 209% 11.7 3.9 15.4 - Costs down 20% 18.2 9.0 22.8

Wharf Repairs - Alava, Rivera, Bravo & Pier 13.4 n.a. n.a. 1010 - Costs up 20% in 2000 17.2 n.a. n.a. - Costs down 20% in 2000 8.9 n.a. n.a.

Cathodic Protection - Bravo 11.5 n.a. n.a. Pier 1010 12.3 n.a. n.a.

Standard Factory Buildings 20.0 12.9 25.6 - Costs up 20% 15.5 9.2 20.4 - Costs down 20% 26.3 17.9 33.0 - 94 - Annex 19

PHLIPPINES SUBIC BAY FREEPORT PROJECT

Selected DocumentsAvailable in the Project File

1. Philippines:A Strategy for Conversionof the Subic Naval Base into a Special Economic Zone and Freeport.

2. EnvironmentalIssues SummaryReport.

3. PreliminaryEngineering Studiesfor InfrastructureComponents.

4. Projections of EconomicActivity in the SBF, Demand Scenarios, and EconomicEvaluation of Project Components.

5. RepublicAct 7227, PresidentialProclamation 50, Executive Orders 97, 97A and 140. Subic Bay MetropolitanAuthority OrganizationalChart

| Bard of Drctors |Office of the Corporate| l l ~~~~~~BoardSecretary l | Office of the | Administratio

AffairsOffice Public P M D Intelligenceand D DOfficeof the Department D |EInvestigationOffice fr/iorMIS and CorporatePlanning A

inenlCnrlOfcl- Office of r e Senior MSDprmn Dntepnalmntr RegistrationAdministratorDepar t DDeputy D Depaeame P CorporatePlanning

I Departmentin

Administrtor | Office of the Deputy | |Offic of the DeputyAdministrator | |Offic of the DeputyAdministrator | Office of the DeputyAdministrato|| Offic of the Deputy Port Operations l Adninistratorfor Administration for Finance LTlourism,fo Trade and Business for PublicWorks L for

HRD Budget Promotionand Marketing Engineering & Maintenance SeaportOperation ManaemnDepartment Department B Departnment Department Department

Medical lTreasury l|Enterprise/Resident | |Constructionad|| ArotOetin r l Division l Deparlment l RegistrationDepartment | DevelopmentDiiin Departmen

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Legal l |Financial Management| SBF Residen Utilities l Department l Division l Division l Department l

ManagementDepartment | X Department l InvestmentuiesDeveomnf Prcssing DivisonwjOWatPoer Procuremnent& Properly | jnvestmentProcessing|_ Water l : | ManagementDepartment | 1 Division l l Division

Security I BusinessDevelopment Telecommunications Departent… Division Division

Fire Tourism Transportation -Department------Department Division

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