Document of The World Bank Public Disclosure Authorized Report No. 1 5956-PH
Public Disclosure Authorized REPUBLIC OF THE PHILIPPINES
SECOND SUBIC BAY FREEPORT PROJECT
STAFF APPRAISAL REPORT
October 30, 1996 Public Disclosure Authorized
Public Disclosure Authorized Infrastructure Operations Division Country Department I East Asia & Pacific Region CURRENCY EQUIVALENTS (as of September, 1996)
Currency Unit = Peso P I = US$0.039 US$1.00 = P 26.0
WEIGHTS AND MEASURES
ha. - hectare KV - Kilovolt-ampere (1,000 volt-amperes) KVA - Kilovolt-ampere (1,000 volt-amperes) Kw - Kilowatt (1,000 watts) KWH - Kilowatt Hour MLD - Million Liters Per Day
ABBREVIATIONS AND ACRONYMS
ADB - Asia Development Bank APEC - Asia Pacific Economic Cooperation ASEAN - Association of South East Asian Nations CAS - Country Assessment Strategy COA - Commission and Audit EIA - Environmental Impact Assessment ESMO - Environmental Sanitation Management Office FIRR - Financial Internal Rate of Return FMIS - Financial Management Information System FRC - Freehold Services Company GIS - Geographical Information System JAIDO - Japanese Industrial Development Organization LGU - Local Government Units MOA - Memorandum of Agreements MOU - Memorandum of Understanding NBF - Non-Bank Financed NPC - National Poxver Corporation NWRB - National Water Resources Board O & M - Operation and Maintenance OCWD - Olongapo City Water District OECF - Overseas Economic Cooperation Fund PACP - Property Acquisition and Compensation Plan PHRD - Policy and Human Resources Development POL - Petroleum, Oils and Lubricants PWG - Public Works Group SAR - Staff Appraisal Report SBF - Subic Bay Freeport SBFZ - Subic Bay Freeport Zone SBMA - Subic Bay Metropolitan Authority SCF - Standard Conversion Factor SOE - Statement of Expenditures
FISCAL YEAR January I to December 31 REPUBLIC OF THE PHILIPPINES
SECOND SUBIC BAY FREEPORT PROJECT
Loan and Project Summary
Borrower: SubicBay MetropolitanAuthority (SBMA)
Guarantor: Republicof the Philippines
ImplementingAgency: SubicBay MetropolitanAuthority (SBMA)
Beneficiary: Not applicable
Poverty: Not applicable
Amount: US$60 million
Terms: 20 years, includingfive years of grace, at the Bank's standard LIBOR-basedinterest rate for US$ Single CurrencyLoans
Commitment Fee: 0.75 percenton undisbursedloan balances,beginning 60 days after signing,less any waiver
Net PresentValue: US$118million
FinancingPlan: See paragraph3.25
Staff AppraisalReport: No. 15956-PH
Map: IBRDMap No. 28291
Project ID No.: 40981
Vice President: Nicholas C. Hope, Acting, EAP Director: JavadKhalilzadeh-Shirazi, EA1 DivisionChief: J. Shivakumar,EAlIN Task Manager: Aloysius Ordu
i
REPUBLIC OF THE PHILIPPINES SECOND SUBIC BAY FREEPORT PROJECT
Contents
1. BACKGROUND......
A. INTRODUCTION ...... 1 B. THE SUBICBAY FREEPORT ...... 3 C. THE FIRST SUBICBAY FREEPORT PROJECT ...... 3 D. LESSONS LEARNED FROM PREVIOUS BANK INVOLVEMENT ...... 4 E. RATIONALE FOR BANK INVOLVEMENT ...... 5
2. THE BORROWER ...... 6
A. INSTITUTIONAL ...... 6 B. SBMA's STRATEGY ...... 7
3. THE PROJECT ...... 10
A. PROJECT OBJECTIVES ...... 10 B. PROJECT DESCRIPTION ...... 10 C. COSTS AND FINANCING ...... 16 D. PROJECT MANAGEMENT AND IMPLEMENTATION ...... 17 E. PROCUREMENT AND DISBURSEMENT ...... 18 F. SUPERVISION, MONITORING, REPORTING, ACCOUNTS AND AUDITING ...... 21
4. PROJECT FINANCIAL ANALYSIS ...... 23
A. SBMA'S FINANCIAL POSITION ...... 23 B. FINANCIAL ANALYSIS OF PROJECT COMPONENTS ...... 26
5. BENEFITS AND RISK ...... 29
A. PROJECT BENEFITS ...... 29 B. SBMA OPERATIONS WITHOUT THE PROJECT ...... 29 C. ECONOMIC RATES OF RETURN AND SENSITIVITY ...... 30 D. PROJECT SUSTAINABILITY ...... 3 1 E. ENVIRONMENTAL AND SOCIAL IMPACTS ...... 31 F. RISKS ...... 32
This report was prepared by Messrs./Mmes. A. Ordu (Sr. Economist/Task Manager), A. Toft (Pr. Counsel), J. Arnold (Transport Economist), P. Long (Transport Engineer, consultant), P. Bulmer (Traffic Engineer, consultant), J. Irving (Sr. Power Engineer), C. del Castillo (Social Specialist), S. Cointreau-Levine (Solid Waste, consultant), F. K. Lee (Sanitary Engineer, consultant), M. Dijkerman (Institutional Specialist, consultant), A. Rychener (Financial Economist, consultant), C. Ohri (Procurement Specialist), K. Page (Analyst, consultant), and B. Brown, Task Assistant. It was cleared by Mr. Javad Khalilzadeh-Shirazi (Director, EAI) and Mr. J. Shivakumar (Chief, EAIIN). ii
6. AGREEMENTS REACHED AND RECOMMENDATION ...... 34
A. AGREEMENTS...... 34 B. RECOMMENDATION...... 35
ANNEXES
Annex 1: Profile of the Project Area.36 Annex 2: FreeportConcepts -- A Comparisonof Subicand Other Freeports.40 Annex 3: SBMA's OrganizationalChart .44 Annex 4: DetailedCost Table.46 Annex 5: PerformanceMonitoring Indicators .53 Annex 6: DisbursementSchedule Per Semester.58 Annex 7: Project SupervisionPlan .59 Annex 8: FinancialAnalysis of Project Components.61 Annex 9: EconomicAnalysis .74
MAP
IBRD Map No. 28291 1. BACKGROUND
A. INTRODUCTION
1.1 The Subic Bay Naval Base in the Philippineswas the largest U.S. military facility outside the United States. Following the expiration of the 1947 Military Base Agreement between the Philippines and the United States, the U.S. Navy evacuated Subic Bay in November 1992. The Government of the Philippines(GOP) set up a Presidential Task Force, establishedthe Subic Bay Metropolitan Authority (SBMA), and requested assistance from the World Bank to help the Task Force and SBMAto plan the conversionof Subic Bay to civilian use. This initial assistanceassessed the feasibility and developeda strategy for convertingthe baselandsinto an industrialestate/freeport and tourism complex; identified specific actions required to execute an orderly transition; and proposed areas for technical assistance. The Bank further arranged a Japanese-funded Policy and Human Resources Development(PHRD) Technical Assistance that assisted the GOP and SBMA: (i) to formulate the implementingrules and regulationsfor the freeport;(ii) to prepare a land use and facilities use plan for the site; (iii) to initiatetransportation planning; and (iv) to market and promote Subic Bay as an economic freeport. This culminatedin the approval of the Bank's first Subic Bay Freeport Project (Subic I, Loan 3745-PH) in June 1994 with a total project cost of US$52.0 million, of which the Bank loan amounted to US$40.0 million.
1.2 The proposed project would be the Bank's second intervention to assist the Philippines in converting the U.S. Navy's former Subic Bay Naval Base into a freeport. The first Subic Bay Freeport Project (Subic I: Loan 3745-PH, June 1994) consisted of infrastructure rehabilitation and upgrading, and technical assistance to strengthen the Subic Bay Metropolitan Authority (SBMA) and develop an environmental management plan.
1.3 The Subic freeport has boomed: investment levels and job creation are more than two years ahead of the level anticipated under Subic I. As of end-1995, 201 firms had made investment commitments of almost US$1.3 billion. The 123 firms currently operational have already created 11,821jobs. Employment creation is expected to be 39,733 at full operation of these firms. Investing firms represent manufacturing, tourism, services, warehousing, utilities, and banking. Table 1.1 shows the number of investors by sector, total investment commitments, and employment (actual/projected). By far the largest number of firms, about 54 percent, are Taiwanese. Other Asian firms include those from Singapore, Malaysia, Japan and the Philippines (about 13 percent) US/Canada (14 percent), Europe (12 percent), and others (seven percent).
1.4 SBMA has turned to the private sector to put much of the infrastructure inherited when Subic reverted to the Philippines in late 1992 into economic use. Most of the commercially exploitable space in the former Ship Repair Facility area has been leased to investors. SBMA has entered into long-term leases (25 years and over) for the golf course, the marina, industrial parks, the petroleum, oil and lubricant (POL) facility, recreational facilities, hotel buildings, and some residential properties. Only 1,400 ha. of unleased land remain within the 6,700 ha. "secured" naval station; a further 3,000 hectares is available in the Redondo Peninsula. -2 -
1.5 Base conversion is, however, far from complete. Several rehabilitation and construction projects are in progress. The conversion of the airport hangar into a passenger terminal is underway and this will be followed by the privatization of airport management. The development of a master plan for seaport improvement and privatization is ongoing. Significant opportunities remain for the development of Redondo Peninsula, Grande Island and the naval magazine area.
1.6 The freeport's rapid expansion has put great pressure on Subic's infrastructure and the Subic Bay Metropolitan Authority's management capacity and maintaining the Freeport's development momentum will mean moving a number of investments forward in time. Subic II is designed to meet these pressures by providing new water supply, power distribution and transport infrastructure and institutional support to SBMA and the Subic Bay Ecology Center.
Table 1.1: Economic Impact of the SBF Projected No. of Total Current Total Sub-Sector Firms Investment Employment Employment Manufacturing 81 $266.43 6,028 28,444 Operating 31 $70.10 6,028 13,441 Approved 50 $196.33 0 15,033 Tourism 35 $277.38 4,188 7,736 Operating 30 $221.40 4,188 5,573 Approved 5 $55.98 0 2,163 Services 43 $239.07 562 1,371 Operating 30 $231.58 562 1,121 Approved 13 $7.49 0 250 Warehousing 26 $140.52 496 1,780 Operating 17 $126.76 496 1,170 Approved 9 $13.76 0 610 Utilities 5 $342.76 395 250 Operating 4 $137.06 379 234 Approved 1 $205.70 0 16 Banks 11 $7.89 152 150 Operating 11 $7.89 152 150 Approved 0 0 0 0 Total 201 $1,274.13 11,821 39,733 Operating 123 $794.79 11,821 21,689 Approved 78 $479.34 0 18,044
Not1e: (i) "OperatingProjects" are thoseregistered by SBMAand have begun operations;(ii)"Approved Projects" are those registeredby SBMAand not yet operational,or are under construction;(iii)"Total Investment" is the declared total value of the projects upon application to SBMA in US$ millions; (iv) "CurrentEmployment" is the numberof regularand contractualemployees on each company'spayroll as of end 1995 (of the 11,821 actual jobs generated by locators, 1,505 were contractual positions); (v) "ProjectedTotal Employment"is the number of employees(regular and contractual)projected at full operation in investment applicationssubmitted to SBMA; (vi) "Manufacturing"includes investments registeredunder the Subic Bay IndustrialPark being developedby Taiwaneseinterests, which accounted for 39 companiesof the 72 projects; (vii) all figures are as of 12/31/95;some figures may not total due to rounding. Source: SBMA. -3 -
B. THE SUBIC BAY FREEPORT
1.7 The 15,130 ha. Subic Bay Naval Base, the largest US military facility outside the United States, was turned over to Philippine jurisdiction in November 1992. The Subic Bay Freeport (SBF) regime was created by the Bases Conversion and Development Act (R.A. 7227; March 13, 1992), which established a "Special Economic and Freeport Zone" encompassing the City of Olongapo, the municipalities of Subic, Morong, and Hermosa, and the lands occupied by the Subic Bay Naval base, and created SBMA with sole authority to operate the SBF and implement the freeport regime. A profile of the project area is in Annex 1. See also IBRD Map No. 28291. R.A. 7227 defined a freeport regime as a "separate customs territory" with the following characteristics:
* all goods and capital could be brought in and taken out, consumed, manipulated, and processed on a tax- and duty-free basis;
* SBF-registered enterprises and residents could engage in any activity not specifically prohibited by the law;
* SBF firms would have full access to the Philippine market, subject to full payment of customs duties and taxes as an importation into the customs territory;
* Freeport enterprises would pay a five percent assessment on "gross income earned" in lieu of all local and national taxes;
* Firms would be subject to no exchange controls, and would enjoy free markets in foreign exchange, gold, securities and futures, and liberalized domestic and offshore banking; and
* Investors with a continuing investment of at least US$250,000 would be eligible for permanent resident status and liberalized working visas.
C. THE FIRST SUBIC BAY FREEPORT PROJECT
1.8 In early 1992, the Government asked the Bank to help SBMA plan the conversion of Subic Bay to civilian use. This initial assistance assessed the feasibility and developed a strategy for converting the baselands into an industrial estate/freeport and tourism complex, identified specific actions required to execute an orderly transition, and proposed areas for technical assistance. Technical assistance was provided to SBMA to: (a) formulate the implementing rules and regulations for the freeport; (b) prepare a land use and facilities use plan for the site; (c) initiate transportation planning; and (d) market and promote Subic Bay as an economic freeport. This culminated in the approval of the Bank's first Subic Bay Freeport Project (Subic I, Loan 3745-PH) in June 1994 with a total project cost of US$52.0 million, of which the Bank loan amounted to US$40.0 million.'
'See the followingreports - (a) Strategyfor Conversionof the SubicNaval Base into a SpecialEconomic Zone and Freeport,January 1993,and (b) SubicBay FreeportProject, May 10, 1994 (SARNo. 12773-PH). -4 -
D. LESSONSLEARNED FROM PREvIOusBANK INVOLVEMENT
1.9 SBMA's priority has been to establish itself as an effective and well-structuredorganization, and significant progress has been made in a number of areas. Government procurement, compensationand other procedures are being followed. Progress has been made in establishinga more comprehensiveaccounting, finance, and budgetingsystem in line with Governmentregulations. A well-functioningEcology Center has been established,and SBMA's senior staff are no longer acting in an ex officio capacity. The staff have remained dedicated and energetic; the young management team is maturing and SBMA is becoming more systematic in its operations. Implementationof Subic I has been highly satisfactory,and private sector activity/interestremains buoyant in the freeport. About 59 percent of the loan funds have been disbursedwith over two years until loan completion. The outstandingbalance underthe loan has been fully committed.
1.10 The March 1996 Mid-TermReview of progressunder Subic I showedthat the project-while generally well implemented-had been constrained by SBMA's lack of familiarity with Bank procurement procedures. The proposed project includes technical assistance to strengthen procurement capability in the Office of the Project Director (see Chapter 3). Government-SBMA interactionhas not been as smooth as expected: the legislationcreating the freeport is broad, rather than detailed, and the Governmenthas on a number of occasionschanged regulationson such issues as the duty-free allowanceof non-residentsof the SBF.2
1.11 These issues were discussedwith Governmentduring the Mid-Term Review, which was an important step in developing a consensus between SBMA and Government departments on the practical constraints facing SBMAand the role of freeports in the Philippines. Agreementhas also been reached that the Governmentand SBMA will establish an inter-agencytask force to improve their dialogue and work together on revising the implementingrules and regulations for SBF. As Subic is seen as a prototype for further freeports,this dialogue will be of particular importance in developinga nationallegislative/regulatory package for freeports.
E. RATIONALE FOR BANK INVOLVEMENT
1.13 The Bank's catalytic role in supportingSBMA's institutionalstrengthening and provisionof the infrastructureservices needed to make the Subic Bay Freeport attractive to private investors is fully consistent with the Bank's lending strategy for the Philippines, as outlined in the Country AssistanceStrategy discussedat the BoardApril 4, 1996.
1.14 The Philippine CAS emphasizesinvestment lending operations to strengthen infrastructure (power, water supply, solid waste managementand transport) to promote economic growth vital to rapid poverty reduction. The CAS also emphasizes private sector participation in providing infrastructureservices, which is a major objective of the proposed project. The Freeport has, in a relatively short time, boosted the Philippines'reputation as an attractive investmentlocation that has attractedmajor internationalcorporations. Continued growth is expected with the completion of the three Taiwanese phases and JAIDO's industrial parks. Subic has become-as anticipated-a significantgrowth pole for the Philippineeconomy; it generatesimportant foreign exchangerevenues and creates jobs.
2 See Reviewof the SubicBay FreeportPolicy and InstitutionalFramework, Final Report May 1996. -5-
1.15 The Freeport's very success over the past two years has meant, however, that its need to provide infrastructure has grown more rapidly than anticipated. Without the investments proposed under this project water supply, electric power and transport constraints that could slow Subic's growth momentum and harm its competitive position would soon emerge. The proposed transport rehabilitation/upgrading investments are the most critical: without them an estimated 13,000 to 16,000 new jobs would be lost over the next five years (Chapter 5).
1.16 The proposed project includes a package of institutional strengthening measures designed to enhance SBMA's capacity to regulate and administer the freeport. Its water supply component (Chapter 3) also represents an important step toward SBMA's goal of privatizing services delivery and infrastructure provision. 2. THE BORROWER
A. INSTITUTIONAL
2.1 SBMA is a government-ownedand controlled corporationwhose mandate to convert the Subic Special EconomicZone (see IBRD Map. No. 28291) into a Freeport was legislated under the March 1992 Bases Conversionand DevelopmentAct (RepublicAct 7227), which created the Bases Conversionand DevelopmentAuthority (BCDA)with defined functions and powers, establishedthe Subic Special Economic and Freeport Zone, and created SBMA-and the Clark Development Corporation,which oversees conversionof a former U.S. airbase-as operating and implementing arms of BCDA. In practice, the BCDA has little oversightover SBMA,as both organizationsreport directlyto the Office of the President. The base conversionact created SBMAas the sole owner and developerof the 6,700 hectare "Secured Area" comprisingthe former U.S. Navy base. SBMA is directed by a 15-memberboard appointedby the Presidentof the Philippines.
2.2 As a government-ownedcorporation, SBMA is subject to control and oversight from central governmentunits includingthe Departmentof Budget and Management(DBM), the Commissionon Audit (COA) and the Civil Service Commission. DBM approvesSBMA's annual appropriationfrom the GOP budget and the number of its civil service positions,job descriptions, and salary grades. COA audits SBMA financial statements and ensures that receipts and expenditures are made according to GOP procedures. Oversight by the Civil Service Commission dictates that SBMA salaries must conformto salary caps legislatedunder the Salary StandardizationLaw. Taken together, the numeric and salary cap limitations impose, by far, the most critical impedimentsto SBMA's ability to carry out its organizationalmandate. R.A. 7227, however, empowers BCDA to create quasi-private subsidiaries with much greater financial autonomy to carry out its mandate of convertingformer military installationsto civilian use, and SBMA is exploring its legal ability to use this mechanism.
2.3 Most Freeports operate under detailed laws and regulations delineating the incentives they can offer investors-including the tax, trade, and financial regimes-the applicability of relevant national legislation, and the nature of transactions with the domestic economy. (See Annex 2 for a summary of the Freeport concept and a comparison of Subic with other leading freeports.) The legislative base for SBF, however, is contained in only three articles of R.A. 7227, leaving many issues to be worked out later. A Presidential Proclamation in September 1992 clarified SBMA's powers in terms of ownership and privatization of assets. SBMA itself further delineated the scope of its activities and the benefits of Freeport status through a set of implementing rules and regulations it issued in March 1993 after extensive discussions and negotiations with the government agencies exercising oversight.
2.4 SBMA began operations in 1993 with 298 approved civil service staff positions. In practice, however, SBMA employs slightly over 3,000 people, including casual laborers and consultants. Negotiations with DBM were concluded in June 1996; SBMA's organizational structure has been 7-
approved and corresponding civil service position allotment has been raised to 1587. SBMA's current organizational chart is presented in Annex 3.
B. SBMA's STRATEGY
2.5 The continuing growth in the Freeport is generating employment for the surrounding communities within the zone, drawing in new job seekers and their families and necessitating an expansion of basic infrastructure and services. The rapid growth of the SBF and the increasing complexity of investor relationships has placed an enormous management burden on SBMA, raising fundamental questions as to its organizational role. In essence, SBMA acts as promoter, proprietor and provider of Freeport services--and is an investor in infrastructure in its own right. While it has developed considerable competence as a promoter and proprietor, SBMA has not achieved the same degree of competence as regulator of the Freeport. SBMA recognizes the need to strengthen this aspect of its operations, and has drawn up a 1996-2005 strategic plan which accords a great deal of emphasis on the governance of the Freeport. The strategic plan sets out SBMA's vision and corporate objectives, SBF's target sectors, and the proposed development strategy. These are summarized below.
SBMA's Vision and Corporate Objectives
2.6 As a prelude to its second phase of development, SBMA has taken stock not only of its inherited infrastructure, but also its natural endowments and comparative advantage in devising its comprehensive strategy for the future. SBMA envisions the SBF and its environs as a major regional hub of broadly-based economic activity which will serve as a catalyst for national economic growth and will contribute to the integration of the Philippines in the global economy. Its desire is to create an environment attractive to service, manufacturing and tourism industries while imbuing it with core values of self-reliance, entrepreneurship, eco-industrial harmony and quality of life.
2.7 SBMA's corporate objectives include the achievement of rapid growth in terms of employment generation, investment, exports and skill creation. SBMA's vision and objectives are ambitious yet feasible. The SBF is endowed with natural assets (e.g., possession of a deep natural seaport), geography (proximity to Southeast Asian growth poles), and natural touristic beauty. Additionally, SBMA possesses an abundance of infrastructure not yet converted to civilian use. To achieve its objectives, SBMA must tap all these assets to strengthen the competitiveness of the SBF vis-a-vis other free trade regimes elsewhere.
SBF's Target Sectors
2.8 Based on the competitive strengths that have emerged in the development of the SBF to date and on the investment and employment trends that have become apparent in the global marketplace, SBMA proposes to focus its promotional efforts in attracting investors in three major sectors-- services, manufacturing and tourism. The service industry will be attracted to the SBF by the communications and speed capability, the English speaking work force, the quality of life, the existing nucleus of support industry, and the fast market access offered by the SBF hub facilities. Target sub-sectors include software, training, consultancy, telecommunications and broadcasting, backroom services, publishing, servicing and distribution, financial services, shipping and transport equipment repair. - 8-
2.9 Manufacturing industry will be attracted by the location of the SBF relative to the Asian marketplace; the cost competitiveness of producing in the SBF, the excellent linkages and speed of production, and the quality of life for senior and middle executives. Target sub-sectors include electronics assembly, components for the electronics and automotive industries, telecommunications hardware, and packaging including metalwork and plastics. Tourists will be attracted to the SBF because it offers a wide range of activities in one place, and suitable activities for a wide range of people. The natural environment, security and support services, and efficiency all add to the tourism product in the SBF. It is envisaged that the SBF will become a theme park over time--the theme being quality of life in an excellent environment. SBF as a tourism destination will appeal to local visitors seeking a multi-activity short term break, international visitors flown directly from regional destinations on specific package tours, two-location package tourists, meetings incentive conference and exhibition tourists.
Development Strategy
2.10 The key elements of SBMA's development strategy are to:
(a) invest in additional infrastructure and seek to attract support industries in order to increase the attractiveness of the SBF as a potential location for target industries. The infrastructure investments planned under Subic II are designed to address some of those needs, particularly in water supply, power distribution, and roads and bridges;
(b) use the momentum and quality already developed at the SBF to increase value added by SBF enterprises, spinning lower value added activities into the wider region over time. This is the SBF as an engine for growth;
(c) exert a unified planning and development role throughout the area covered by the metes and bounds of R.A. 7227 which defined the SBF zone, and solidify the role of the SBF through a series of institutional changes, backed by legislation where necessary;
(d) develop the Central Area of the SBF for mixed use (commercial, tourism and residential) in line with the master plan currently developed for the area; and
(e) restructure itself into three distinct units in order to effectively tackle three components of its mission: administrator of the freeport regime, exerciser of municipal authority and owner of the inherited assets in the secured area.
2.11 SBMA's strategy is to achieve efficiency in the delivery of services flowing from its inherited assets by devolving managerial control to the private sector through concession contracts. It's strategy for engaging the private sector as a development partner is thus a critical component of the corporate plan. To date the strategy has been to invite the private sector to participate directly with SBMA in various endeavors. Examples include the industrial parks, the golf course, the marina, telecommunications and--under the proposed project--water supply.
2.12 As regards its governance functions, SBMA has acknowledged the need to transform itself over time into a full-fledged regulatory and promotional authority, equipped to uphold the Freeport policy regime and to provide an attractive investment climate for the private sector. The institutional - 9- support componentof Subic II would strengthenSBMA's role as a Freeport administratorand public sector catalyst of private sector development. In particular, SubicII will enhance SBMA's regulatory capability while ensuring that it remains effective in promoting the Freeport. Completion of the corporateplan acceptableto the Bank--andthat plan's acceptanceby SBMA's Board of Directors--is a conditionof effectiveness. Agreementwas reached at negotiationsthat SBMAwould furnish to the Bank, at mid-termreview, a report on the progressachieved in carrying out the corporateplan. 3. THE PROJECT
A. PROJECTOBJECTIVES
3.1 Subic I's objective was to attract private investors to the Freeport by improving its infrastructure and strengthening SBMA's management capacity. The Freeport has, however, grown much more quickly than anticipated, putting unexpected strains on SBMA's management capacity and accelerating its need to evolve institutionally and provide infrastructure services. The proposed successor Subic II Project would aim to continue strengthening SBMA's capacity to regulate and manage the growth of the Freeport, and support further infrastructure development-including SBMA's initial venture into partnership with the private sector through a water supply joint venture.
B. PROJECT DESCRIPTION
3.2 The Second Subic Bay Freeport Project would utilize a US$60 million IBRD loan to support a US$108 million project to strengthen SBMA and its Ecology Center (five percent of project costs), provide treated water (36 percent), improve power distribution (29 percent), and improve transport infrastructure (31 percent). The Project would be carried out by SBMA over 3 1/2 years (January 1997-July 2000). Its components are described below:
3.3 Institutional Strengthening (US$4.6 million). The first Subic Bay Freeport Project included technical assistance to strengthen SBMA's institutional capacity in freeport administration and policy development including: (a) a merchandise control system to monitor duty-free purchases; (b) zoning regulations and a building design code for the SBF; (c) an automated computer-based, financial management system to track SBMA's revenues and ensure timely billing; (d) a privatization assistance fund for specialized advice on specific transactions, and (e) a team of freeport advisors to improve SBF administration.
3.4 While significant progress has been made in each of these areas, the March 1996 Mid-Term Review of Subic I showed that the Freeport's rapid growth requires further strengthening of SBMA's regulatory capacity for two reasons: (a) commercial/industrial growth has forced SBMA to concentrate more of its efforts than expected on promotion and property management, so that institution building has lagged, and (b) the growth itself has created a need for greater management competence in such areas as customs and taxation, banking and financial services, water supply, sewerage; labor, health and safety standards; environmental management and monitoring and the capacity to conduct social impact assessments, and human resources development and training. This component comprises:
(a) capacity building on freeport policy through a package of short- and long-term technical assistance in key areas including customs, taxation, and incentives; - 11 -
(b) human resources management assistance to assess SBMA's skills mix needs vis-&-vis its corporate objectives and develop staff training programs;
(c) commercialization, privatization, and planning support to further facilitate conversion through commercialization and privatization measures;
(d) studies of critical technical issues identified during implementation; to qualify, the studies must relate to issues affecting the competitiveness of the SBF and its attractiveness to investors;
(e) technical assistance support to SBMA's Foreign-Assisted Project Office for two advisors to strengthen its capability in procurement and financial management; and
(f) Support to SBMA's Ecology Center to strengthen the Center's capacity for environmental management, monitoring and regulation, and impact assessment through recruitment of two social development specialists to facilitate property acquisition for the water supply component, community outreach assistance to provide technical guidance, equipment, and on-the-job training in community outreach practices to the Ecology Center, and development of community-based forest management, community development, and training and infrastructure improvements in Pastolan Village.
3.5 Outline terms of reference for the above activities are in the project implementation plan.
3.6 Water Supply (US$32.6 million). This component is designed to increase the quantity of treated water available in the Secured Area, Olongapo City, and Subic Town through a public-private joint venture-Subic Water & Sewerage, Inc.-involving SBMA, Biwater International (a UK-based water supply firm), and a Filipino construction firm. Subic Water would also be responsible for sewage collection within its franchised area.
3.7 The 66 million liters a day (MLD) produced by the separate water supply and distribution facilities now operated by SBMA-for the Secured Area-and the Olongapo City Water District-serving Olongapo and Subic Town-are being fully absorbed. Demand is projected to rise to 230 MLD by 2010. Capacity will have to be raised an additional 175 MLD-including an allowance for drought years-to meet this demand.
3.8 Performance testing, trial production wells, and geophysical and geological investigations have shown that a well field in the vicinity of the confluence of the Pamatawan, Camachile, and Laglaboson Rivers could produce the required 175 MLD. A model was developed to guide the selection of locations for the individual wells and assess potential impact on other users (see Chapter 5, Environmental and Social Impact). SBMA has applied to the National Water Resources Board for a water permit for the proposed withdrawal, and initiated a program to monitor streamflow at the Pamatawan River near the proposed well field sites during the dry season.
3.9 Subic Water & Sewerage Inc. (Subic Water) will set the water rates for its domestic, commercial, industrial and institutional customers. Over the four years 1997-2000, capital investments by the joint venture will total about US$88.5 million, of which SBMA would finance installations worth US$32.6 million under Subic II. This private-public joint venture is a pilot initiative which may well be replicated in other parts of the country. - 12 -
3.10 There is no national regulatory board at present in the Philippines. As a transitional arrangement, SBMA intends to regulate for Subic Water until a National Water Regulatory Board is established. Although Bank financing of the water supply component under the proposed project is limited to the development of the well field, water treatment and raw and treated water transmission mains, the economic viability of the investment is impacted by the commercial viability of Subic Water. The Bank has reviewed the terms and conditions of the legal agreements covering the regulatory arrangements between SBMA and Subic Water, and found them satisfactory.
3.11 The component would involve:
(a) detailed engineering and the development of the Pamatawan well field. Twenty wells with an average capacity of 450m3/hour will be dug. Initially, 12 of the 20 wells south of the Pamatawan River will be equipped. Provision will be made to accommodate future connections for the remaining 8 wells;
(b) construction of approximately 7,600 meters of raw water transmission main from the Pamatawan well field to a water treatment plant at Castillejos. The routing of the raw water transmission main will be totally within the roadway right of way. No easement acquisition will be required (see Environmental and Social Impacts, Chapter 5);
(c) construction of electrical power transmission lines to the well field and treatment plant;
(d) construction of a water treatment plant and a booster station. The proposed treatment process consists of aeration, sedimentation, and chlorination. The booster station will deliver the treated water to the water distribution system through the treated water transmission main;
(e) construction of approximately 19,400 meters of treated-water transmission main from the treatment plant to a pool of storage reservoirs located just inside the Kalaklan Gate of the secured area. The routing of the transmission line will be within the highway right-of- way and will include eight river crossings;
(f) installation of a ground water monitoring network for monitoring the ground water table and water chemistry at the Pamatawan well field;
(g) reforestation in the Pamatawan River basin to improve the aquifer recharging process; and
(h) consulting services for a hydrological study of the Morong River and the Hermosa- Dinalupihan aquifer to identify water supply sources to meet the long-term water supply needs of Hermosa and Morong.
3.12 The assets and debts resulting from these investments will be owned entirely by SBMA; no on-lending is involved. Details of the water supply component, including the structure for privatizing the water and sewer facilities and outline terms of reference for the technical designs, construction supervision and studies are in the project implementation plan. Agreement was reached at negotiations that SBMA will conclude a water sales contract with Subic Water by December 31, 1998. Further, a condition of effectiveness is that the Subic Water Joint Venture Agreement shall have become effective in accordance with its terms. - 13 -
3.13 Power Distribution (US$26.1 million). This component would merge the Olongapo City Public Utilities Department (PUD) and SBMA's Power Services Department (PSD). There is considerable scope for combining resources to achieve efficiencies by sharing manpower and common facilities. Merging Olongapo's PUD and SMBA's PSD operational and administrative functions will relieve their space constraints by moving to a new headquarters building, establishing common storage, maintenance and training facilities, and rationalizing existing facilities. The merger will also strengthen commercial operations, and improve revenue opportunities and customer service. The proposed rationalization and consolidation of these two small power distributors under the proposed project will bring about significant economies of scale and are in line with the recommendations for power sector reforms in the Bank's November 1995 Power Sector Restructuring Report. Electricity demand in SBMA, while lower than it was when the Naval Base was in full operation, is growing rapidly as new industries come into operation. This has not, however, translated into a corresponding increase in revenues, as most facilities at the base lacked electric meters and it is estimated that more than half of water and power consumption is not billed. Meter installation in those facilities under Subic II is, thus, expected to lead to a significant increase in SBMA's revenues.
3.14 The National Power Corporation (NPC) now supplies 16 MW in Olongapo City and 10 MW to SBMA, and their joint demand is expected to increase about 14 percent a year to around 55 MW in 2002. If the respective hourly demands are combined to be metered as a single NPC consumer, studies show total demand will be lower by about ten percent. This growth rate is the basis for the design of the system reinforcement plans under Subic II.
3.15 About 200 km of the network is overhead, with 100 km underground. Most of the overhead network in the Secured Area is in good condition, with some sections requiring upgrading to carry the forecast area loads. About 20 km of new underground cable is required to replace sections which have deteriorated and to improve the environmental character of the system in waterfront areas. The switchgears are old and need to be replaced and an inventory of spare parts is needed to effect proper maintenance of existing equipment.
3.16 The two power distribution agencies have high non-technical losses that urgently need to be monitored and reduced. This will require a major review of metering requirements to (a) establish a method of accounting for administrative consumption (currently estimated to be about 40 percent of SBMA's total consumption), (b) provide individual meters on all domestic consumers in SBMA housing areas, and (c) undertake a systematic re-calibration and, if necessary, replacement of all consumer owned meters in the Olongapo franchise area. In addition, it will be necessary to upgrade the existing Olongapo computer billing system to process the bills for all consumers in the supply area and to provide basic information for management and monitoring of the loss reduction program.
3.17 The Olongapo distribution system is over 40 years old and shows signs of rapid deterioration. Many of its wooden poles have been attacked by termites and are in danger of collapsing during typhoons. Conductor sizes are generally too small, with high technical losses (estimated at about 15 percent of consumption) and serious voltage regulation problem. Most of the original power factor correction capacitors have failed and are out of service. The lack of adequate maintenance facilities makes repair work impossible, and when failures occur, the lack of replacements is increasing the incidence of overloading of adjacent equipment. While the situation has not yet reached intolerable levels, it is evident that as demand increases, serious failures are likely to become a chronic problem. The project would consist of: -14-
(a) construction of about 23 km of overhead and about 3 km of underground 69 kV sub- transmission circuits, together with the expansion of five existing 69/13.8 kV substations and the construction of one new 69/13.8 kV substation, to effect the interconnection of the Olongapo and SBMA franchise area;
(b) installation of about 20 km of 13.8 kV cables to replace damaged cables and to enhance the environment of prime waterside locations in SBMA's area; (c) rehabilitation and extension of about 50 km of 13.8 kV and 50 km of LV systems, including replacement of 4.1 kV system in Olongapo City;
(d) provision of facilities and equipment for the integrated power distribution network, including electric meters and meter test equipment, storage and maintenance facilities, administrative office, meter test and repair facilities, office equipment, and MIS and billing systems.
(e) engineering services for the supervision of installation, including strengthening the technical capability of the merged operations; and
(f) technical assistance, training, and management services to establish commercial operation in the integrated organization including billing, accounting and administration.
3.18 The assets and debts resulting from these investments will be owned entirely by SBMA; no on-lending will be involved. SBMA has agreed to enter into a contractual relationship with Olongapo City to establish a legal basis for SBMA to undertake investments in power distribution outside the secured area. A satisfactory power distribution contract between SBMA and Olongapo City was concluded and submitted to the Bank prior to negotiations. Details of the power distribution component, including outline terms of reference and the contractual agreement, are in the project implementation plan.
3.19 Roads, Bridges and Related Infrastructure (US$28.1 million). The roads and bridges under SBMA's jurisdiction need increased maintenance and must be expanded and upgraded to prevent traffic congestion from becoming a major constraint on Subic's continued development. While SBMA intends to carry out road maintenance and construction by contracting to the private sector, its ability to plan, supervise, and manage these functions needs strengthening.
3.20 Under the U.S. Navy maintenance and construction activities were carried out by force account, and SBMA did not inherit a functioning maintenance system. As SBMA's immediate priority was to get the Freeport functioning, little maintenance was carried out in the initial period and many roads are exhibiting signs of structural fatigue and failure. During project preparations consultants identified a limited program of emergency maintenance that is to be contracted out with SBMA funding.
3.21 SBMA's Public Works Group (PWG) has only recently obtained a recurrent budget to begin a routine maintenance program in 1996. The initial program is small and constrained by lack of adequate resources-funding is only P 4.8 million-but a critical institutional precedent of providing an annual recurrent budget for road and bridge maintenance has been set.
3.22 This component is designed to improve road capacity and access, retrofit and construct bridges, establish a maintenance program, and strengthen SBMA's capacity to procure and supervise - 15 - works to enable industrial and commercial development of the SBF. These would be accomplished through:
(a) road improvement, including (i) widening Rizal Highway to four lanes plus turning lanes from Kalalake Bridge to the SBMA Expressway, (ii) widening Argonaut Highway from the Industrial Park (Phase I) Access Road to Boton Road to three lanes, (iii) widening the link from Tipo Road to Binitican Bridge to four lanes, and building a new SBMA expressway extension from Binitican Bridge to join Argonaut Highway near Boton bridge, and (iv) improving signalization and channelization at key intersections in the SBF;
(b) rehabilitation and retrofitting (including design, construction and construction supervision of works) four existing bridges-Kalalake, Malawaan, Boton and Binitican-to meet the latest seismic design codes;
(c) provision for a new bridge to replace the Kalaklan bridge, including studies, detailed engineering, construction supervision and construction under the project;
(d) carrying out a road maintenance study and establishing a maintenance management system for roads and bridges and training of SBMA's PWG in its use and in the procurement and supervision of the contractors who would carry out both recurrent and periodic maintenance;
(e) a road alignment study for the SBFZ By-Pass to improve traffic flow in the long term in the freeport by ensuring that through traffic on the national highway between Dinalupihan and Castillejos would bypass the SBFZ;
(f) improvements in related infrastructure including (i) conducting detailed surveys of jurisdictional boundaries and installation of metes and bounds monuments, (ii) construction of a security fence along part of the SBFZ boundary, (iii) aerial photography and mapping of the SBFZ, and (iv) establishment of a geographical information system; and
(g) consulting services for detailed engineering and construction supervision for the civil works components and a TA Road Advisor to strengthen the PWG's capability to implement this component of the project.
3.23 Details of the Roads, Bridges and Related Infrastructure component, including outline terms of references are in the project implementation plan. Agreement was reached atnegotiations, that SBMA will review the conclusions and recommendations of the maintenance management study with the Bank by March 31, 1998, with a view to defining the routine and periodic maintenance works programs and corresponding budgets to be implemented during the remainder of the project. -16-
C. COSTSAND FINANCING
Project Costs
3.24 The estimated base cost of the proposed project is P 2,377 million (US$91.4 million equivalent) with total project costs, including contingencies,being P 3,068 million (US$108.0 million equivalent) with a foreign exchange component of about 60 percent or P 1,854 million (US$65.4 million). Physical contingenciesrepresent about 12 percent of base costs, while price contingenciesamount to about six percent in the US$ cost estimates. Physical contingenciesof 15 percent have been applied on base costs for civil works and equipmentand 10 percent on operating costs. Price contingencieswere appliedon base costs plus physical contingenciesas shown in Table 3.1 below. Table 3.2 summarizesthe cost estimates, details of which are presented in Annex 4. Constant purchasing parity exchange rate was used to convert US Dollar amounts to Peso equivalents.
Table3.1: Price Contingencies Contingencies: 1997 1998 1999 2000
Local Costs 7.0% 6.0% 6.0% 5.0% Foreign Costs 2.4% 2.4% 2.4% 2.4%
Table3.2: Project Cost Summary ------MillionPesos------MillionUS$------Components: Local Foreign Total Local Foreign Total % Base
A. InstitutionalStrengthening -InstitutionalSupport 18.6 87.0 105.6 0.7 3.3 4.0 4 -EcologyCenter 1.8 12.0 13.8 0.1 0.5 0.6 1 B. Water Supply 365.4 481.9 847.3 14.1 18.5 32.6 36 C. PowerDistribution 271.6 407.7 679.3 10.4 15.7 26.1 29 D. Roads and Bridges 275.4 455.9 731.3 10.6 17.5 28.1 31 Total Base Cost 932.8 1,444.5 2,377.3 35.9 55.5 91.4 100 PhysicalContingencies 111.5 170.0 281.5 4.3 6.5 10.8 12 Price Contingencies 169.4 240.0 409.4 2.4 3.4 5.8 6
Total Costs 1,213.7 1,854.5 3,068.2 42.6 65.4 108.0 118 Percent: 40 60 100 40 60 100
Financing
3.25 Total project costs will be financedas follows: a Bank loan of US$60.0 million is projected to cover 100 percent of the estimated foreign exchangeof investmentcosts plus 100 percent of local costs for consultantsfor the project. SBMAwill finance the remaining local costs. The Bank loan will be for a period of 20 years, includingfive years of grace, at the Bank's standard LIBOR-based interest rate for US$ Single CurrencyLoans. SBMAwill bear the foreign exchange rate risk of the loan. The loan will be guaranteedby the GOP. Agreementwas reachedat negotiationsthat the GOP will provide this guarantee. The financingplan is summarizedin Table 3.3 below. - 17-
Table 3.3: FinancingPlan (US$Million) ProjectYear 1997 1998 1999 2000 TOTAL Percent AnnualProject Costs Investmentcosts 6.0 36.8 36.2 10.5 89.5 82.9 Operatingcosts 0.1 0.2 0.2 18.1 18.5 17.1
TotalFinancing 6.0 37.0 36.4 28.6 108.0 100.0 Required BankLoan 2.2 14.0 24.2 19.6 60.0 55.6 SBMA 3.8 23.0 12.2 9.0 48.0 44.4
D. PROJECTMANAGEMENT AND IMPLEMENTATION
Overall Management and Project Implementation Plan
3.26 The detailed elements of the organization and management of Subic II are set out in SBMA's project implementation plan (PIP) which has been submitted to the Bank. As indicated in the PIP, the proposed project would be carried out by SBMA. Under Subic I, SBMA has developed a structure wherein the Deputy Administrator of Finance serves as Project Director supported by component managers. This arrangement has been generally satisfactory and SBMA wishes to maintain this structure for Subic II in order to take advantage of the knowledge already gained by core staff. Nonetheless, based on lessons learned, the following enhancements would be made to increase the effectiveness of project management.
3.27 The Deputy Administrator for Finance would continue to fill the role of Project Director for the purposes of policy interface with the Bank. An individual will be assigned to the foreign assisted projects office to function as Project Manager to perform the day to day tasks of project management and oversight. The project manager will implement the project in conjunction with managers assigned by SBMA to supervise specific components. Additional counterparts are required in the areas of human resources management, freeport policy, incentives and regulatory interface, community outreach and social impact. SBMA has finalized its proposed project staffing plan and structure as part of the PIP and this was agreed at negotiations. Provision has also been made for two advisors, one for procurement and the other for financial management. Agreement was reached at negotiations that SBMA will maintain a project management structure acceptable to the Bank for the overall implementation of the project, and will identify and assign personnel from its core staff to the Project.
Performance Monitoring Indicators
3.28 SBMA's PIP includes performance monitoring indicators for each aspect of the proposed project. In particular, there are three categories: (a) performance indicators relating to the institutional strengthening component; (b) indicators relating to other components--power distribution, water supply, and roads and bridges; and (c) general indicators of performance for the SBF as a whole. The general indicators cover SBMA's projections of investments, employment creation by investors, population, industrial buildings, and tourists for the period 1996-2005. The project-specific indicators - 18 -
cover the objectives of each component of the project, the major activities and inputs required, the expected outputs, and the results/impacts to be monitored during project implementation. Details of the performance monitoring indicators are in Annex 5.
Financial Management
3.29 SBMA would be responsible for financial management of the project. The new, integrated, PC-based Accounting/Management Information System (financed under Subic I), will allow SBMA to establish separate project accounts which would provide management with key financial indicators that are needed for effective monitoring of the project. Such indicators would include cost comparisons that would provide early warning of the need for any corrective actions relating to over/underruns, and compliance with legal agreement covenants. The cost accounting feature of the new financial management system will further permit SBMA to assess costs associated with maintaining its infrastructure. Knowledge of such costs would help SBMA to determine the tariffs that clients would be charged for water supply, power distribution and other services provided.
3.30 Based on the lessons learned from Subic I (see Chapter 1), a further innovation will be introduced to ensure effective implementation of Subic II. To ease the workload of the Deputy Administrator for Finance, the respective component managers will be made more accountable commensurate with their level of responsibilities. Accordingly, it is proposed that checks for payment of goods and/or services under the project would be signed by the component managers. The Deputy Administrator for Finance would then countersign those checks in his capacity as Project Director. This would afford component managers improved control as well as budget monitoring capacity while at the same time maintaining the Project Director's oversight of project activities.
E. PROCUREMENTAND DISBURSEMENT
Procurement
3.31 Procurement arrangements for the project are summarized in Table 3.4 below. The cost of items described includes respective pro rata shares of physical and price contingencies. Acquisition of land is the only project cost element entirely financed by SBMA and is under NBF. Land will be procured according to applicable GOP procedures which have been reviewed and are satisfactory to the Bank.
3.32 A majority of the Bank financed procurement for Civil Works, Goods and Services will follow ICB procedures in accordance with Bank Guidelines for procurement of January, 1995 and revised in January, 1996. Pre-qualification of contractors will be carried out for the laying of water supply transmission mains and essential roads and bridge civil works contracts. A margin of preference equal to 15 percent of the CIF bid price of imported goods, or the actual custom duty whichever is lower, will be allowed for domestic manufacturers. A few contracts of relatively small value such as bridge rehabilitation, reforestation, security fence and miscellaneous equipment - computers, office equipment, etc., will follow NCB procedures acceptable to the Bank, as these are unlikely to attract foreign competition. Miscellaneous works costing less than US$10,000 equivalent per contract with an aggregate value not exceeding US$50,000 may be procured with lump sum fixed price contracts on the basis of three quotations from qualified contractors. Some urgently needed miscellaneous equipment will be procured on the basis of national shopping as appropriate on the basis of a minimum three quotations for individual contracts of less than US$50,000 with an -19 - aggregate value not exceeding US$0.3 million. As per the recent Country Procurement Assessment report, NCB procedures are acceptable. However, SBMA has agreed to the use of appropriate Standard Bidding Document (SBD's) issued by the Bank for ICB and to the use of SBD for Smaller Civil Works. Consultancy services such as the detailed design, engineering, technical assistance, including project management, construction supervision and studies will be carried out in accordance with the Bank's Consultants Guidelines for the use of Consultants; the Bank's standard form of contract will be used for consultancy services. Further details of the procurement and implementation arrangements by component are in the project implementation plan.
3.33 SBMA is the principal implementing agency responsible for carrying out the project, including all procurement. This is the second project and the staff of SBMA has benefited from the procurement experience gained in the earlier project. Consultants will be retained by SBMA to prepare designs and bidding documents; and additionally supervise all major road, water supply and power contracts. Provision has been made for appropriate technical assistance in procurement to strengthen the existing SBMA staff as proposed in paragraph. 3.27. For all TA activities financed by the proposed loan, SBMA will retain consultants according to terms of reference and selection procedures acceptable to the Bank, and an action plan and timetable for carrying out studies and the implementation of agreed recommendations.
3.34 Bank financed contracts above a threshold of US$0.5 million will be subject to the Bank's prior review procedures. The review process will cover about 95 percent of total works and goods contracts procured by ICB and NCB procedures. For consultancy contracts, the threshold for prior review will be set at US$100,000 for firms and US$50,000 for individuals. In any event, all TORs, including sole source selections of consultants regardless of the value of the contract, will be subject to prior review. The post review of contracts will be carried out on the basis of one (1) in four (4) contracts for goods and works.
3.35 Procurement information will be collected and recorded from comprehensive quarterly reports to the Bank by SBMA indicating revised time schedule for procurement actions including advertising, contract awards and completion time for individual contracts. - 20 -
Table3.4: ProcurementArrangements (US$ Million) ------Procurement Method------Items to be Procured ICB NCB Other NBF TOTAL
Land Acquisition 1.1 1.1 Works Water Component 13.8 5.5 19.3 (8.0) (3.3) (11.3) Power Component 15.0 4.8 .3 20.1 (9.9) (3.1) (13.0) Roads Component 18.6 7.7 3.2 29.5 (11.5) (4.7) (16.2)
Goods Water Component 3.3 3.3 (3.3) (3.3) Institutional Component 3.9 3.9 (3.9) (3.9) Consultants' Services EngineeringSupervision 8.0 8.0 (8.0) (8.0) Technical Assistance 4.0 4.0 (4.0) (4.0) Training 0.3 0.3 (0.3) (0.3) Operation and Maintenance 18.5 18.5
54.6 18.0 12.3 23.1 108.0 TOTALS (36.6) (11.1) (12.3) (60.0) Figuresin Parenthesesrepresent anount financedby the BankLoan. NME: Non Bank Financed.
Disbursements
3.36 It is assumed that the loan will become effective by January 1997, and that the project will be completed by June 30, 2000. The scheduled disbursements are shown in Annex 6. The Bank loan will be disbursed against the categories shown in Table 3.5 below.
3.37 Disbursements for all expenditures would be based on full documentation except for (i) contracts for works and equipment that cost less than US$500,000 equivalent, and (ii) contracts for consulting services for US$100,000 equivalent for firms and US$50,000 equivalent for individuals. Supporting documents for disbursements based on statements of expenditures (SOEs) would be kept by SBMA for review by external auditors and Bank supervision missions. As under Subic I, SBMA will open a US$ denominated Special Account in a commercial bank to facilitate payments for eligible expenditures. -21 -
Table 3.5: Disbursement Categories Amount Category (US$Million) % ExpenditureFinanced 1. (a) Civil WorksWater 10.0 60% (b) OtherCivil Works 26.3 60% 2. (a) EquipmentWater 2.9 100%of foreign, 100%local (ex- factorycost), and 70%, of local expendituresfor other items procured locally (b) OtherEquipment 4.2 Sameas (a) 3. (a) Consultantsfor Water 3.1 100% (b) OtherConsultants 8.1 100% 4. Unallocated 5.4 TOTAL 60.0
3.38 There are two conditions of disbursement against the water supply component, Categories l(a), 2(a) and 3(a): (a) obtaining a water permit from NWRB for the proposed abstraction of water from the Pamatawan well field; and (b) that SBMA will enter into a"heads of agreement" with Subic Water satisfactory to the Bank establishing the principal terms and conditions for the water sales agreement. The Account would have an Authorized Allocation of US$2.0 million; however, the Authorized Allocation shall be limited to an amount of US$1.0 million until the aggregate amount of withdrawals from the Loan Account plus the total amount of all outstanding special commitments shall be equal to or exceed US$30.0 million.
F. SUPERVISION,MONITORING, REPORTING, ACCOUNTSAND AUDITING
Supervision and Monitoring
3.39 The proposed project will require greater than average supervision resources. This is principally because of three significant and distinct investment sub-components: water supply, power distribution, and roads and bridges. Moreover, the progress on complex freeport policy and institutional issues will need close supervision. As regards the sub-components, water supply, for instance, cannot be supervised in isolation from Subic Water's on-going activities as this company would execute the operation and maintenance on behalf of SBMA as well as purchase the bulk water produced by the component. Similarly, for the power distribution component, Bank missions will have to monitor the activities relating to the proposed consolidation of power distribution in the OlongapolSBMA franchise area.
3.40 The key indicators of performance in SBMA's PIP-see paragraph 3.28-would be monitored closely during supervision missions to facilitate decision making by management, both SBMA and the Bank. Project supervision by the Bank will follow the supervision plan presented in Annex 7. Bank supervision will require an estimated 79 staff weeks over the life of the project. These estimates have taken into consideration provisions for supervision of the first project as both Subic I and II will be jointly supervised. Supervision would be carried out by Bank staff and consultants with expertise in infrastructure development (water supply, power distribution and roads and bridges), Freeport policy and institutional development, financial and environmental management. The teams - 22 - would also be complemented by a privatization specialist to assess progress with the conversion of utilities. SBMA will supervise the project on an ongoing basis through a designated project manager, assisted by technical and financial staff within the institution as required. Further details of the planned implementation schedule are in the project implementation plan.
3.41 A mid-term review of the project would be carried out after the second project year, estimated in December 1998. The review would be carried out jointly by the Government/SBMA and the Bank, with SBMA's project manager responsible for preparatory arrangements and coordination. The main purpose of the review will be to assess progress accomplished in carrying out the project and SBMA's Corporate Plan. Agreement to this effect was reached at negotiations.
Reporting, Accounts and Auditing
3.42 The integrated financial and management information system, currently under installation, will give SBMA the capacity to systematically report key indicators of progress of all foreign financed development projects. This will include provision for separate accounting for each individual project, including Subic I and II. The system will permit SBMA to generate progress reports tailored to the needs of the Bank and, in particular, visiting supervision missions.
3.43 SBMA's consolidated accounts (Balance Sheet and Profit and Loss Statement) will be audited annually by The Commission of Audit (COA), an arrangement which is acceptable to the Bank. Separate project accounts indicating the various sources of funds received and expended would be maintained ensuring that proper accounting and auditing procedures are followed. As part of the audit process, the project's annual financial statements, together with the auditor's report and opinion on the financial statements and the Special Account, and the auditor's separate opinion on the statement of expenditures would be sent to the Bank within six months of the close of each fiscal year. While provisional financial statements should be submitted to the Bank no later than a month after the closing of the fiscal year, the audit report should reach the Bank no later than six months after the close of each fiscal year. Agreement to this effect was reached at negotiations. Agreement was also reached that SBMA would carry out satisfactory procedures for monitoring the progress of the project in accordance with agreed performance indicators in terms of physical execution and financial reports and furnish the Bank semi-annual progress reports. 4. PROJECT FINANCIAL ANALYSIS
A. SBMA's FINANCIAL POSITION
Recent Financial Results
4.1 As a Government owned organization, SBMA follows standard GOP financial management procedures. Those include an accounting plan that must be approved annually by the Commission and Audit (COA), and procurement methods and financial management practices that are slow and cumbersome. While accounting entries are still done manually, an improved financial management information system, including automated billing, is being installed and will be operational by end- 1996.
4.2 In its three years of existence, SBMA has had little time to focus on fine tuning its in-house capacity to manage income and expenditures generated by infrastructure assets (including land) estimated to be worth P 22 billion (US$830 million). SBMA is, however, retaining consultants to help it design a cost accounting system with the capacity to account separately for individual development projects, including Subic I and II. This system will also permit SBMA to generate detailed monthly financial progress reports, including key financial indicators.
4.3 Although SBMA's income from operations has steadily increased over its first three years (Table 4.1) revenue growth has been slower than projected at appraisal of Subic I, largely because the Authority has not yet developed the infrastructuresuch as electric and water meters-needed for full cost recovery under its lease arrangements. These issues will be addressed under the proposed project (Chapter 3). Revenues, nonetheless, doubled in SBMA's second year of operations, and rose 37 percent in the third. Lease income from facilities, including residential housing, remains SBMA's main source of revenue. Overall revenues from operations, however, were not sufficient in any of the three years to cover operating expenditures, as SBMA's asset base is very large and the resulting, estimated annual depreciation charges represent about 50 percent of annual operating expenditures. Fixed assets are carried on the books at the value imputed as a result of a GOP authorized capital of P 20 billion, consisting of a P 1.0 billion in cash capital infusion from GOP and P 19 billion representing the estimated value of transferred assets from the former naval base. SBMA's income generating capacity at this juncture is significantly underdeveloped and its potential to raise additional revenue is considerable.
4.4 The current market value of SBMA's fixed assets taken over from the naval base is unknown, as none of them have been revalued (except those assets related to the water supply system). SBMA has opted to incur the expense of asset revaluation only if and when deemed necessary for corporatization. Water supply assets were revalued because negotiations for such an undertaking are in progress (Chapter 3). - 24 -
Table4.1: SBMA IncomeGeneration (PesoMillion) % over % over Income From: 1993 1994 1993 1995 1994
Leases 146.0 311.7 113 298.4 -4 Business Operations 27.2 66.2 143 224.9 240 Services (including Utilities) 19.6 32.5 66 124.6 283 Other 35.3 67.0 90 6.9 -92
Total: 228.1 477.4 109 654.8 37
4.5 SBMA's principal expenditures are for Depreciation and Salaries and Benefits, which together account for 70 percent of the total. Table 4.2 below indicates the latest trends. As SBMA has grown, Salaries and Benefits have increased the fastest, with the biggest portion of the increase attributable to additional staff rather than salary increases. This category of expenditure is expected to decline in line with the DBM-approved civil service allotment of 1,587 in contrast to SBMA's current staff of 3,000 (Chapter 2). The cost of power, although accounting for only 11 percent of expenditures, is also steadily increasing with the chief consumption going to the operations of the airport and the water treatment plant.
Table 4.2: Operating Expenditures and Loss (PesoMillion) Category of % over % over Expenditures: 1993 1994 1993 1995 1994
Salaries and Benefits 93.8 179.9 92 209.1 16 Depreciation 218.4 224.3 3 279.6 25 Power 48.1 55.8 16 85.3 53 Other 52.4 89.1 70 189.4 113
Total: 412.7 549.1 33 763.4 39 Less Income Tax 228.1 477.4 109 654.8 37
Operating Loss: 184.6 71.7 -61 108.6 52
Financial Projections
4.6 The projections in Table 4.3 represent SBMA's five-year 1996-2000 investment plan. The Subic I and II projects are an integral part of investments and account for about 80 percent of investments through 2000. SBMA's projected threefold increase in revenues over 1996-2000 is largely due to the impact of Subic I and II. Although in 1994 and 1995 revenues fell short of estimates by 12 and 34 percent, respectively, the projected increases are well within reach. During appraisal of Subic II, the ten-year estimates contained in the Subic I Staff Appraisal Report (SAR) were reviewed and revised in light of the experience gained during the first three years. With the assistance that will be provided under Subic II to manage power distribution and the contracting out - 25 -
of water supply operations and management to Subic Water, income from the sale of utility services will assume an increasing importance in SBMA's income statement. Other services represent chiefly income from operating the airport, distribution of power within the secured area to industrial and commercial investors, hotels and other tourism-related concerns and private households. It is anticipated that by end-1997 the majority of enterprises in the Taiwanese industrial park will begin operations. SBMA recognizes the need to maximize income from its assets and Subic II will provide electric meters and support an aggressive campaign to install them.
4.7 Although tariff calculations for power were done during appraisal on an indicative basis using incremental investments proposed under Subic II, the residual value of previous investments needs to be known to allow SBMA to recalculate tariffs to provide full cost recovery for the electricity it provides. SBMA, therefore, will undertake a major effort to increase efficiency in power distribution to its investors and private households. This will include a valuation of existing assets, installation of meters and corresponding tariff adjustments. This process has begun for water supply. Assets have been revalued and were contributed as a 20 percent share in kind to Subic Water, which will install individual water meters in residential quarters under Subic II. Table 4.3 below indicates SBMA's projected key financial indicators over the next five years.
Table 4.3: SBMA's Projected Key Financial Indicators 1996 - 2000 (US$ million) Key Indicators 1996 1997 1998 1999 2000
Revenue - From ExistingLeases 11.1 10.0 8.9 6.9 6.6 - Other Services 28.1 44.1 60.0 70.3 66.5 - Utilities(Subic II) 7.7 15.5 36.2 Total Revenue 39.1 54.1 76.6 92.7 109.3
OperatingExpenditures - Utilities(Subic II) 11.0 21.9 24.8 - Other 47.5 49.8 52.3 53.0 61.3 TotalOperating Expenditures 47.5 49.8 63.3 74.9 86.1
Net Income (Loss) (8.4) 4.3 13.3 17.8 23.2
Net SBMACash Surplus - (consolidated) 0.5 9.2 19.1 2.4 7.0
Net Equity 729.3 717.4 712.9 711.0 709.5 Long-termDebt 75.4 80.4 101.5 147.2 151.2
Ratios: - Debt Service Coverage(times) 7.47 2.51 2.64 1.99 2.86 Debt/Equity(%) 20.6 28.6 33.7 32.8 31.4
4.8 Given the dynamic situation with respect to potential privatization of SBMA's commercially oriented activities, medium-term projections are only indicative and were carried out under the assumption that SBMA retains control over its 1996 asset base through the year 2000. Because of the - 26 -
unique nature of SBMA's business as it evolves from a multi-purpose authority, combining commercial and regulatory activities, to a lean regulatory agency, traditional key financial indicators such as "current ratio" and "return on assets", which are mainly designed to measure commercial operating performance, are of little significance. More important are ratios that measure SBMA's capacity to absorb debt; for example, the debt service coverage and the debt equity ratios. As indicated in Table 4.3, these ratios remain very healthy throughout the life of the project. With 2.86 times and 31.4 percent, respectively, in the year 2000, for the debt service coverage and debt/equity, these ratios are well within internationally acceptable limits. Further, although the incremental project cash flow--see Annex 8, page 10--is not positive until the year 2003, as the costs of roads and bridges are included, SBMA's consolidated cash flow remains positive throughout the project period (see Table 4.3). Details of SBMA's cash surplus, projected revenue schedule and balance sheet are in Annex 8 (pages 11-13). While these figures suggest that SBMA's current financial health is satisfactory, SBMA needs to be vigilant to keep costs from rising faster than revenue generating activities. Therefore, it will be necessary to continue to carefully review the five-year investment plan with the Bank no later than March 31 of each fiscal year. Agreement to this effect was reached at negotiations. Agreement was also reached that SBMA will continue to maintain appropriate insurance coverage, or adequate reserves for, and proper maintenance of its facilities, and continue to maintain a debt/equity ratio of no more than 70:30; of a debt service coverage of at least 1:5 from 1996 onwards.
B. FINANCIALANALYSIS OF PROJECT COMPONENTS
4.9 A financial analysis has been undertaken for the water supply and power distribution components of the project. Additionally, an analysis has been undertaken of SBMA to enable an assessment of cash needed by SBMA to finance capital works, operating expenses, interest commitments and capital repayments of the project. The latter analysis is necessary as the roads and bridges and institutional strengthening components are not covered by either the water supply or power distribution financial analyses. The financial rate of return has been assessed for these two components but not for the overall project because a large part of the overall project cost is non- revenue generating.
4.10 Operation and maintenance of SBMA's utility services is managed by the Public Works Group (PWG). Within the PWG, the Utilities Department is split into three divisions: power services, water services and utility planning. The Utilities Department is staffed by 131 persons divided 57, 48, and 16 between water, power, and planning, respectively. Key staff of the Utilities Department were taken over from the U.S. military. However, owing to difficulties in procuring operating and maintenance equipment, the department is only performing maintenance services on an ad hoc basis. There is no routine, preventive maintenance being carried out on installations. Given the rapid economic expansion within the SBF, it is SBMA's intention to pool its resources, including operation and maintenance of utilities with those of Olongapo City to achieve economies of scale. At this juncture, the institutional arrangements have already been determined for the distribution of water (Subic Water), including utility ownership. Subic Water will absorb all of SBMA's personnel associated with operating the water supply installations. For power distribution, the City of Olongapo's Power Utility Department (PUD) will coordinate its operations with those of SBMA under a contractual agreement (See Chapter 3).
4.11 For the water supply component, the financial analysis is based on incremental investment and operating costs for the provision of treated water in bulk to the newly created Subic Water. - 27 -
Agreement was reached at negotiations that SBMA will conclude a water sales contract with Subic Water by December 31, 1998. For the power distribution component, the financial analysis is based on the incremental investment and operating costs and on tariffs currently charged by SBMA and Olongapo City. These rates will be reviewed following the completion of tariff studies and cost recovery options to be financed under the project.
4.12 The overall design of the service provision components (water, power and roads) is based on the population projections in Annex 1. Population growth of 8.7 percent a year has been assumed-compared to about 5.7 percent for other urban centers in the Philippines-to reflect the attraction of Subic's rapidly expanding economic activity to job seekers and their families.
Summary of Financial Analysis
4.13 Annex 10 provides details of the underlying assumptions for the financial analysis of the water supply and power distribution components of the project, including the bulk and retail water tariffs, power distribution tariffs for commercial and domestic consumers, the billing and collection efficiency for both water supply and power distribution, and interest costs. Below is a summary of the financial analysis.
4.14 Water Supply Component: Total investment capital cost of the water supply component, including physical contingencies, is estimated to be P 698 million (US$26.9 million). Incremental operating and maintenance costs are estimated at about P 200 million in 2000 rising to about P 400 million by 2010. (Power is estimated to make up about 80% of total operating costs.) Revenue generation from the sale of treated bulk water is based on proposed tariffs as outlined in Annex 8 and projected incremental consumption rates: (i) domestic 240 I/day; (ii) industrial 19 I/m2 of floor space; (iii) commercial (office) 2.5 1/m2 of floor space daily; (iv) commercial (retail) 15 1/m2 of floor space daily, and (v) hotels 2.5 I/m2 floor space daily. This projected demand is net of non-revenue water costs. Non-revenue water is estimated at five percent of total water pumped. System losses are expected to be zero. The analysis assumes that construction of the water installations will be completed by 1999 and that 2000 will be a full revenue producing year. Annex 8 shows the incremental costs and revenues.
4.15 Financial Rate of Return: Based on these assumptions, the FIRR for the water supply component is 14.8 percent. The analysis shows that this component should generate a positive cash flow (after interest) in its first full year of operation (the year 2000).
4.16 Power Distribution Component: Total investment capital cost of the power distribution component, including physical contingencies, is estimated to be P 581 million (US$22.3 million. To determine incremental unit costs per kWh, three activities were taken into consideration for operating and maintaining the transmission and distribution system: (a) operating the 69 KV lines including management of NPC billings; (b) costs of power purchases from NPC; and (c) personnel, administrative, and direct operating and maintenance costs (fuel and lubricants for vehicles including repairs) for the consolidated distribution activities of SBMA and Olongapo City. For purposes of determining gross incremental revenue from SBMA and Olongapo City's sale of power, a domestic consumer rate of P 3.18 per kWh was used, and P 4.6 per kWh was used for commercial consumers. It should be noted that SBMA now charges its customers a uniform rate per kWh of P 2.75 and Olongapo City P 3.50. Thus, while the new rate would represent a substantial increase for the secured area, it is considered well within the capacity of domestic consumers to pay, especially as these are mostly international clientele. The rate for domestic consumers in Olongapo City would be - 28 - nearly 10 percent lower than at present, thus increasing affordability and the potential customer base. Annex 8 shows the incremental costs and revenues.
4.17 The analysis of SBMA's power distribution proposals revealed important financial concerns which will play a critical role in the overall financial viability of the power distribution enterprise. The major concerns are: (i) the current high level of usage and live losses; (ii) the current high level of SBMA administrative usage; (iii) the current dependence of SBMA on NPC and their planned tariff increases; and (iv) the retail cap which SBMA can charge for power. If SBMA charges excessive rates, consumers will convert to their own generators. The analysis thus highlights the importance for SBMA to structure its tariffs to extract maximum revenue without inhibiting demand. It also highlights the importance of minimizing losses and bad debts and establishing a procedure for minimizing administrative consumption.
4.18 Financial Rate of Return: Based on these assumptions, the FIRR for the power distribution component is 18.7 percent. It is anticipated that this component will not show a positive net operating revenue until the third full year of operation (the year 2002). 5. BENEFITS AND RISK
A. PROJECT BENEFITS
5.1 The proposed project will increase the SBF's attractiveness to overseas investors and encourage existing investors to expand their operations. This should speed job creation, raise SBMA revenues, provide much-needed services to residents of Olongapo City and Subic town, and improve administrative efficiency/governance throughout the Subic Bay metropolitan area. It is estimated that as a direct result of project interventions SBF will create many new jobs most of which will occur in industry with the balance in tourism-related services, commerce and administration. Judging from similar development experiences in the sub-region, incremental export earnings per industrial employee/year of about US$12,000 can be expected. Thus, by the turn of the century, SBMA estimates that some US$600 million in export revenues would accrue to the Philippines. The type of light industrial activity likely to take place in SBF will typically attract value added ratios of around 40 percent, which would translate into net foreign exchange earnings of about US$240 million by the year 2000. This does not include income generated from such activities as tourism and commerce.
5.2 Direct benefits (annual incremental revenue) to SBMA from improved and expanded provision of services for water, and power will be significant. The project will also improve the administrative and operational efficiency of the power and water utilities which is a necessary step toward corporatization and eventual privatization of these utilities. The provision of cleaner drinking water to the population of Olongapo City and the associated improvements in the city's sewerage system, would have an immediate, beneficial impact on the overall health of the population.
B. SBMA OPERATIONSWITHOUT THE PROJECT
5.3 SBMA's water, power, and roads and related infrastructure installations and equipment were built to serve the needs of the U.S. Navy. The infrastructure was in relatively good condition when it was handed over to SBMA in November 1993. Since then, however, only perfunctory maintenance work has been carried out and more than half of water and power consumption is not billed as meters are not installed in most facilities in the former Naval Base. Without the road widening and extension under the project, the planned development of industrial estates on the southeastern side of the Freeport would be seriously constrained. This could reduce the number of jobs generated by the industrial sites by 13,000 to 16,000 over five years; given the stiff competition within the ASEAN region for industries seeking to locate in duty free zones, it is estimated that half the employment which would be lost if the roads were not developed would also be lost to the economy as a whole.
5.4 There is almost no domestic term financing in the Philippines, and it would be difficult for SBMA to assemble the integrated Subic II project package without a major multilateral lender such as the Bank. SBMA's alternative would have been to continue to undertake patchwork repairs and expansion work on an ad hoc basis. Although private firms have joined in a water supply/sewerage joint venture with SBMA, there is no indication that the private sector is ready to participate in major - 30- investments to upgrade other utilities and infrastructure. Without the Subic II project framework the urgent sewer works improvement under the water supply component would have been delayed to 2000, with negative environmental and health impacts.
C. ECONOMICRATES OF RETURN ANDSENSITIVITY
5.5 This project includes three key infrastructure components which are collectively necessary for the continued development and expansion of the SBF. From the perspective of the economic analysis, these three components (roads, water supply, and power distribution) cannot be evaluated separately as each component is a necessary part of a total development program if the SBF is to expand at the rate projected by SBMA (see Annex 5).
5.6 Benefits from a development similar to SBF are substantial and they range from direct visible benefits such as increased employment and output to improved living standards and conditions. In this project there will be two basic benefits: (i) an increase in development (and output) in planned industrial parks and surrounding metropolitan areas; and (ii) the maintenance of existing businesses and population in the SBF and surrounding metropolitan areas. For the economic analysis, only estimated benefits from the increase in development were included. If the project were not to proceed and existing businesses left SBF because of poor infrastructural services it is unlikely that they would relocate outside the Philippines. Benefits from an increase in development have been measured in terms of an increase in the number of people employed and their subsequent wages and water and electricity sales from the facilities to be built under this project. It should be noted that a facility such as SBF provides a total service so it is difficult to realistically isolate all benefits which may accrue from this project which includes a number of works to upgrade and maintain existing facilities.
5.7 Annex 9 provides details of the underlying assumptions for the economic analysis of the project, including an assessment of the employment benefits, benefits from the sale of water and electricity and other assumptions used in the analysis. Based on these assumptions, the economic intemal rate of return (EIRR) of the project is 29.6 percent.
5.8 The analysis in Annex 9 also illustrates the project's sensitivity to variations in benefits and recurrent costs. A range of possibilities incorporating maximum and minimum expectations, are covered. For the "maximum", or the base case, it is assumed that full benefits are obtained from increased employment as outlined and tariff revenue for electricity and water. If however, water and industrial development (employment) are - as for the base case, and live losses power increase from 8 percent to 30 percent, the EIRR falls from 29.6 percent to 20 percent. The EIRR is further reduced-to 17.1 percent-if live losses (power) are increased from 8 percent to 20 percent, billing efficiency (power) is lowered from 95 percent to 80 percent, and industrial development (employment) is down by 20 percent. The other scenarios explored are in Annex 9. The analysis assumes that affordability is not a problem for water and power. In the unlikely event that tariffs for both water and power have to be increased simultaneously, affordability will become a problem for a maximum of 30 percent of the population of Olongapo, the segment that lives below the poverty line.
5.9 Crossover (switching) values for the project are also provided in Annex 9. These indicate a combination of changes in benefits and costs required to reduce the net present value (NPV) to zero (or, alternatively, the rate of return to 12 percent, the estimated opportunity cost of capital in the Philippines). Given the conservative assumptions used in the analysis the project is not particularly sensitive to changes in revenue and costs. If benefits are reduced 25.3 percent and expenses maintained at the base level the NPV falls to zero at a discount rate of 12 percent. If benefits are - 31 - maintained at the base rate recurrent expenses need to be increased by 41 percent to obtain a zero NPV. Benefits need to be reduced by ten percent and recurrent expenses increased by 24.7 percent simultaneously to obtain zero NPV.
5.10 Affordabilit. A demographic analysis of Olongapo City's population shows that some 20 percent of its families cannot afford water and electricity . The project's power and water supply components are expected to generate savings from metered billing in the Secured Area, more efficient administration, and economies of scale that will lead to lower tariffs for small consumers-the base rate for small consumers is projected to drop from P 3.72 to P 3.18 per kWh-and should increase affordability. Both Subic Water and the consolidated power utility will look closely at making power and water available to the entire population of Olongapo City through appropriate rate structures. The project provides for tariff studies for both water and power distribution. The discussion on power tariffs in the financial analysis should be noted in the overall economic context of the project.
D. PROJECT SUSTAINABILITY
5.11 The Bank's Subic I Project was designed to rehabilitate essential infrastructure to attract private investors and provide institutional support to provide the basis for sustainable growth. The major part of SBF's development is being undertaken by the private sector, which has led to increased inflows of investment, rental and lease income for SBMA, and employment in the Freeport area. It has also brought rapid population growth, estimated at 8.7 percent a year, and increased demand for essential services. Water distribution is already in the process of being privatized. The project would further assist SBMA to respond to the increased demand for services through privatization support which would enhance efficiency, improve cost recovery and provide sustainability. At the same time, the project would enhance SBMA's managerial, administrative and regulatory capabilities, to create a viable and sustainable institution. The protection of the environment, necessary for sustainable development of the SBF, also continues to be a key concern of SBMA. Environmental sustainability would be addressed through ongoing master planning of the SBF (to take account of the faster than expected growth), and the proposed project interventions, including the creation of GIS as well as continued support to the Ecology Center. Finally, the improvements in the road network, together with those initiated under Subic I will continue to enhance the development of the SBF.
E. ENVIRONMENTALAND SOCIAL IMPACTS
5.12 The proposed project has been given a "B" rating and an Environmental Impact Assessment (EIA) has been carried out by SBMA's Ecology Center, established under Subic I. The EIA was reviewed by the Bank and was found to be satisfactory.
5.13 The EIA shows that most of the project's impact will be temporary as a result ofphysical construction (as in the roads and bridges and the renovation of power transmission lines), and will result in some loss of cover vegetation, tree cover, and some disturbance to the urban population as power lines are rehabilitated. The impact of the well field serving the water supply component has been carefully assessed and satisfactory mitigation measures are included in the component design.
t Philippines:Power Merger Studies of OlongapoCity and SBMA.March 1996,Chapter 3. - 32 -
5.14 The main environmental issue in this component is preventing the withdrawal of large volumes of water from the aquifer from lowering the water table and affecting local wells. To mitigate this risk the design calls for the wells to be spread out over a sufficiently large area to avoid creating a deep cone of depression in the water table. The project will also finance the planting of about 100,000 trees in the Pamatawan watershed to prevent erosion and maintain the local ecosystem. There may be some decrease in groundwater levels, and financial provisions were made under the project to replace the irrigation pumps of farmers with deeper-drawing models. The well field will not involve resettlement, although land acquisition and compensation for lost assets, including crops, are anticipated. SBMA has completed and submitted a property acquisition and compensation plan (PACP) for the water supply component. This has been reviewed by the Bank and found to be satisfactory.
5.15 The power distribution component will be confined largely to refurbishing and extending transmission lines. National environmental codes for power transmission are precise and designed to mitigate adverse effects. No resettlement is anticipated. The roads component will have no lasting environmental impact.
5.16 SBMA is committed to environmental protection under the legal agreements of Subic I, which requires the formulation of an environmental management plan, including the management of Subic Forest and its small population of Aeta indigenous inhabitants. SBMA is drawing up an expanded environmental management plan to include an indigenous peoples development plan, which includes provisions for the development of community-based forest management, community development and training, infrastructure improvements, and studies to formalize the Aetas' rights to Subic Forest. These arrangements are consistent with Bank guidelines.
F. RISKS
5.17 There are financial risks and other risks that need to be mitigated in this project. Perhaps the greatest risk relates to the financial viability of SBMA's bulk water supply and power distribution components. The financial analysis (Chapter 4) highlighted the importance of addressing: (a) the adequacy of both water and power tariffs; (b) billing and collection efficiency; and (c) usage and live losses. In the case of bulk water, the financial analysis is sensitive to the tariff charged by SBMA to Subic Water. For instance, the FIRR of 14.8 percent is based on a tariff of P 9.5 per cubic meter. If this tariff is reduced by 15 percent to P 8.0 per cubic meter, the FIRR falls to around 4.5 percent. This risk has been taken into account in the draft commercial agreement between SBMA and Subic Water and will be closely monitored by the Bank.
5.18 As regards the power distribution component, the financial analysis assumes that usage and live losses and billing efficiency will improve significantly between 1996 and the year 2000. Sensitivity analysis show that the FIRR will be reduced from 18.7 percent to 6.8 percent if the usage and live losses were increased to 15 percent. A similar result was obtained if the billing efficiency or the tariff level is reduced. These risks are being reviewed as part of the tariff studies and cost recovery options to be financed under the project.
5.19 Other risks: There is some risk that the development of the Freeport policy regime from the Secured Area to the wider freeport boundaries may encounter political resistance that could lead to slippages in implementing the revenue-generating water, and power components that would increase costs and require higher tariffs that would affect affordability. This is considered unlikely, however, as the central Government has repeatedly reaffirmed its commitment to Subic's development and the - 33 - project will promote institutional linkages with neighboring government units through water districts and the joint power distribution arrangement. In addition, the creation of an intergovernmental task force to revise the implementing rules and regulations for eventual signature by the President should strengthen SBMA's role as the administrator of the freeport zone.
5.20 The possibility of losing SBMA leadership, in the form of its visionary chairman or his managerial front line, also poses a risk to the project. The inclusion of additional institutional strengthening elements into Subic II is designed to address this need. It is essential that the strength of the institution not be dependent upon the presence of a small group of individuals.
5.21 Continued flow of lahar (mud flows) from Mt. Pinatubo presents an additional risk to the project. Flows precipitated by rains have blocked road access to the SBFZ for domestic tourists and freeport shopping clientele on occasion. This is being mitigated by raising the San Fernando- Dinalupihan road and building a high dike to stop lahar flows. In the longer term, completion of the Northern Expressway-Tipo link will offer an alternate route. SBMA further expects to mitigate this risk by improving air links and attracting a high speed ferry company to provide service between Subic and Manila. A third airline recently began operations out of Subic, and the ferry is expected to become operational shortly. The risks of lahar flows interfering with the physical components of the project, i.e., water supply, is very low as a result of careful design and site selection.
5.22 While a slowdown in the Freeport's industrial/commercial development could affect project sustainability, its infrastructure components are designed to lift the constraints that could lead to endogenous problems. Slowing regional trade or world trade, or diminished confidence in Philippine economic and political stability could, however affect Subic's growth. This would most likely reduce the job-seeking population inflow below the forecast 8.7 percent; this could affect cost recovery, as a one percent drop in the growth rate would lower annual utility revenues five to ten percent. Road and bridge improvements are also based on projected traffic levels that are dependent on forecast industrial development in the SBF. SBMA and Subic Water are, however, continually monitoring population growth in Olongapo and, given that detailed design of components will not be undertaken until spring 1997, adjustments in the light of most recent experience are possible. 6. AGREEMENTS REACHED AND RECOMMENDATION
A. AGREEMENTS
6.1 During negotiations,agreement was reachedwith the Governmentthat it will:
(a) providea guaranteeon the proposedloan (para. 3.23).
6.2 Agreementswas reachedat negotiationsthat SBMAwill:
(a) conduct its affairs so as to ensure that major coTporatedecisions with respect to its corporate structure, its management structure, each investment plan and plans specifyinggeneral civilian uses and related economic activitiesto be promoted in the SBF area, are consistent with the Corporate Plan; and furnish to the Bank, at mid- term review, a report on the progress achieved in carrying out the Corporate Plan (para. 2.12);
(b) take all measuresnecessary to ensure that all persons whose property and other assets are adversely affected under the water and power components of the Project are compensated in accordance with the provisions of the Property Acquisition and CompensationPlan or the Principles for Property Acquisition and Compensation (para. 5.14);
(c) maintain a project management structure acceptable to the Bank for the overall implementationof the project; including the assignment of experienced personnel from its core staff to the project (para. 3.27);
(d) review the conclusionsand recommendationsof the road maintenancestudy with the Bank by March 31, 1998, with a view to defining the routine and periodic maintenancework programs and correspondingbudgets to be implemented during the remainderof the project(para. 3.23);
(e) not assign, amend, abrogate or waive the power agreement between SBMA and OlongapoCity withoutthe Bank's agreement(para. 3.18);
(f) retain consultants according to terms of reference and selection procedures acceptable to the Bank for all TA activities financed by the proposed loan, and an action plan and timetable for the carrying out of studies and the implementationof agreed recommendations(para. 3.33); - 35 -
(g) undertake to obtain a water permit from NWRB for the proposed abstraction of water from the Pamatawan well field, and conclude a water sales contract with Subic Water by December 31, 1998 (paras. 3.12, 4.11);
(h) carry out satisfactory procedures for monitoring the progress of the project in accordance with agreed performance indicators in terms of physical execution and financial reports and furnish the Bank semi-annual progress report (para. 3.43);
(i) jointly review with the Bank, December 1998, its Corporate Plan and progress accomplished in carrying out the project (para. 3.41);
(j) jointly review with the Bank its rolling, five-year investment plan on an annual basis no later than March 31 of each fiscal year, and its implementation, over the life of the project (para. 4.8);
(k) provide annual audited financial statements to the Bank no later than six months after the close of its fiscal year, prepared by auditors satisfactory to the Bank; and provide financial statements one month after the close of the fiscal year (para. 3.43); and
(I) continue to maintain appropriate insurance coverage, or adequate reserves for, and proper maintenance of its facilities, and continue to maintain a debt/equity ratio of no more than 70:30; of a current ratio of at least 1.2 and a debt service coverage ratio of at least 1.5 from 1996 onwards (para. 4.8).
6.3 Conditions of effectiveness are:
(a) approval of SBMA's Corporate Plan by its Board of Directors (para. 2.12); and
(b) the Subic Water joint venture Agreement shall have become effective in accordance with its terms (para. 3.12).
6.4 Conditions of disbursement against the water supply component are that SBMA will:
(a) obtain a water permit from NWRB for the proposed abstraction of water from the Pamatawan well field (para. 3.38); and
(b) enter into a "heads of agreement" with Subic Water satisfactory to the Bank establishing the principal terms and conditions for the water sales agreement (para. 3.38).
B. RECOMMENDATION
6.5 Subject to the above agreements and conditions, the proposed project would be suitable for a Bank loan of US$60 million, for a period of 20 years, including a grace period of five years, at the Bank's standard LIBOR-based interest rate for US$ Single Currency Loans. The borrower will be SBMA, with the guarantee of the Republic of the Philippines. - 36 - Annex Page 1 of 4 REPUBLIC OF THE PHILIPPINES SECOND SUBIC BAY FREEPORT PROJECT
Profile of the Subic Bay Area
The Subic Bay Area
1. Subic Bay is located on the western part of the main island of Luzon. The proposed project area is the geographic area whose metes and bounds were established by R.A. 7227, covering an estimated total land area of 60,000 ha, and water area of 9,525 ha. It includes the Secured Area (the former Naval Base), Olongapo City and Subic Town in Zambales Province, and the Municipalities of Morong and Hermosa in Bataan Province (see IBRD Map No. 28291). Olongapo has a long history of linkages to the Secured Area and strong relationship with SBMA prevails. Since the base conversion began, SBMA has taken steps to build alliances with the other local government units (LGUs) in the greater SBF zone. The launching of such a consultative initiative is significant and will improve SBMA's chances of serving as a sub-regional catalyst. Below are some of the key features of the proposed project area.
2. The Metropolitan Area of Subic Bay is rapidly changing and urbanizing. The effects of rapid urbanization are apparent in the industrial, commercial and residential growth, and in the increase in the number of squatter settlements surrounding the urban centers. The city of Olongapo is now 100 percent urban, however, the other municipalities of Subic, Morong, and Hermosa still maintain varying combinations of rural and urban development. This profile presents an overview of the area's characteristics which are of significance to this project.
3. The Secured Area. The fenced-in Secured Area encompasses the former U.S. Naval Facility which has formed the core of the Subic Bay development and was the main focus of Bank support in the first phase (Subic I). This approximately 6,000-hectare area is enclosed on its northern and southern boundaries by fences erected by the U.S. Navy and contains SBMA's offices, duty-free shops, hotels, seaports, airports, recreational facilities, residential housing and with physical life estimated from 10 to 15 years. The entire secured area is owned by SBMA and SBMA exercises its full authority over this portion of the Freeport. The area spans both Zambales and Bataan provinces.
4. Reverted Lands. The remaining 7,000 hectares of military facility that was turned over to SBMA in 1992 consists of two distinct areas. The Philippine Military Base (PMB) running along the southern and eastern edge of the secured area and the joint U.S. and Philippine Military Training Area (MTA) on the Redondo Peninsula. As former military reservations, the land is owned by SBMA, but the areas were not serviced by roads and not fenced by the U.S. Navy. As a result, SBMA does not exercise its full authority over the areas and existing private property exists within the area. The majority of the PMB lies within the province of Bataan and the existing municipal boundaries of Hermosa and Morong overlap with the PMB.
5. The construction of the Manila-Subic Tollway (see IBRD Map No. 28291) will traverse the PMB and open the area to development and potential squatting and customs leakage. Subic II will assist SBMA by extending the fence and establishing boundary markers to exercise its full authority over the PMB, including this area within the Secured Area. The completion of Subic II will permit the inclusion of this area within the "separate customs territory". The securing of the MTA at this AnnexI Page 3 of 4 time is not included in the Subic II project. The MTA lies entirely within the municipality of Subic and the province of Zambales.
6. Olongapo City. The adjoining city of Olongapo has a territory of 18,500 ha and is located in the province of Zambales. As a first-class municipality, Olongapo City is largely independent of its province and responsible for its development planning, property tax collection, utilities provision and operates an independent police force. The City is inextricably linked with the Secured Area and there are substantial economies of scale in closer integration of the infrastructure services. These have been taken into account in the design of Subic II.
7. Remaining Areas within SBMA's Metes & Bounds. The remaining areas of SBMA were fixed by Republic Act 7227 which established SBMA boundaries as co-terminus with the former U.S. facility as defined by the U.S.-Philippine Bases Agreement of 1947. The remainder of the municipality of Subic lies within this area as does the southern portion of the municipality of San Antonio. All of the municipalities have a Major-Council form of government. As second-tier municipalities, responsibility for governance functions are shared with the provincial government. Development planning occurs at the municipal level, while property tax assessment and collection can occur at the provincial level. Utilities may be provided by local districts or provincial franchises and collectives. Education, health, and social welfare services are provided by the municipality, but there are no independent municipal police forces. While the full jurisdiction of SBMA extends to these areas, SBMA does not exercise its authority over these areas.
8. Hermosa and Morong. The municipalities of Hermosa and Morong are mentioned in Republic Act 7227 as constituent elements of the Freeport, but the majority of their territory lies outside the metes and bounds of SBMA as defined by Presidential Proclamation. Under Republic Act 7277, "the President is likewise authorized to create Special Economic Zones" covering Hermosa and Morong upon recommendation of the Bases Conversion and Development Authority (BCDA). These municipalities are located within the province of Bataan.
9. CastilleJos. Dinalupihan and San Marcelino. Under Republic Act 7227, the Presidential authority to create Special Economic Zones also extends to the neighboring municipalities of Castillejos, Dinalupihan and San Marcelino, but these municipalities are not mentioned as constituent elements of the Freeport. The raw water source identified under Subic II lies in this area. Dinalupihan lies in the province of Bataan while Castillejos and San Marcelino are located in Zambales.
Socioeconomic Characteristics
10. The Population. At the end of 1995, the secured area had an estimated population of 6,170. These are mostly expatriates and key officials of SBMA. While a national census was performed in 1995, the results have not yet been tabulated. As a result, the existing population estimates are based on projections prepared on the basis of the 1990 census and do not take into account the effects of the eruption of Mount Pinatubo and the withdrawal of U.S. forces in 1992. Olongapo's 1995 population is estimated at 212,786 and the population growth is the slowest in the region. Subic Town has an estimated population of 52,730 and is growing rapidly due to internal migration and a high rate of natural increase. The estimated population of Hermosa is 32,980, while Morong is relatively small at 17,060. In total, the secured area and the four municipalities included in the Freeport contain about 322,000 people. (Surveys undertaken by the Population Commission found the 1993 populations of San Marcelino and Castillejos to be 29,225 and 27,541, respectively. The 1995 population of - 38 - AnnexI Page 3 of 4
Dinalupihan is estimated at 68,918. These additional municipalities have a combined population of 126,000 persons.)
Projected SBFZ Population by Community Estimated ------Projected------Population 1995 2000 2005 2010 Secured Area 6,170 11,000 20,000 34,000 Olongapo 212,780 375,000 450,000 450,000 Subic 52,730 93,000 167,000 285,000 Morong 17,060 30,000 54,000 92,000 Hermosa 32,980 58,000 104,000 178,000 Total 321,720 567,000 795,000 1,039,000
11. Although a precise estimate of the current population of the SBFZ is difficult to establish, projection of the future population of the area is vital as the basis for projecting future demand for infrastructure services. Following a review of the widely differing population estimates for the area, the project preparation team concluded that conventional models of population projections would be meaningless in the special circumstances of the SBFZ. This is because wide swings in the population have occurred over the past few years to match the region's falling and now rising economy due to the closure of the U.S. Naval Base and the subsequent development of the freeport. While the SBFZ accounts for less than half a percent of national population, the SBFZ has accounted for 4.6 percent of new industrial employment and 2.8 percent of all new employment in the country from 1993 to mid- 1995. At the present time, there is still substantial slack in the local labor market - the 1995 survey of Olongapo City found an unemployment rate of 27 percent. While the Olongapo City labor supply is increasing by 7,600 annually, continued employment generation will exhaust this supply and encourage substantial in-migration.
12. Previous studies of urban migration in the Philippines have found that each additional urban employment opportunity leads to the short-term migration of 1.7 individuals. On this basis, the annual creation of 20,000 jobs within the Freeport in the typical Filipino context would have resulted in annual in-migration of 21,000 on top of a natural increase of 7,000 - resulting in an annual population growth rate of over eight percent.
13. The population projections prepared for this project were derived from the employment generated by the complete conversion of the U.S. Naval Facility. This intense economic development provides the basis for projecting an overall population growth rate of 8.7 per annum for the period 1995-2010. This rate of growth compares favorably with the annual growth rates of 5.5-6.5 percent in the other secondary urban centers of the Philippines, and is reasonable because of the economic activity and scale of foreign direct investment in the SBF - approximately US$1,250 annually per capita. The above table shows the projected population for the Secured Area and the adjoining LGUs.
14. Education and Literacy. Reliable current information is not available for the Subic Bay Metropolitan Area, but the average household size for Olongapo was five persons in 1990 with a high percentage of population in the 0-15 age bracket. This population has a relatively high degree of - 39 - Annex1 Page 4 of 4 literacy: ten years of schooling for about 98 percent of the population. This reflects the adequate numbers of learning institutions, the high value placed on education, and the success of adult and community education programs. Even the poorest segments of the Subic Bay area population, the refuse pickers at the New Cabalan landfill site had a significant level of primary education and could read and write in Tagalog.
15. Labor Force and Employment. Preliminary social impact assessment cites a labor participation rate of 53 percent and an employment rate of 89 percent for the metropolitan area. These figures are based on the 1990 Population Census, defining the economically active population as those between the ages of 15 to 64. The unemployment rate was 5.7 percent for the metropolitan area.
16. The informal sector has grown in the urban areas reflecting the formal sector's inability to absorb the growing labor force. Women and children from the poorer households account for 70 percent of this informal sector and this is a survival strategy. Although operating on the margins of the formal economy, the informal sector is nevertheless an integral part of the economy. In many instances it has developed strong supply and service links to the formal sector and operates in a highly competitive market using locally available resources and unskilled and semi-skilled labor.
17. Urban Poverty. One of the most visible dimensions of urban poverty is the existence of squatter settlements on public land. The growth of these settlements can largely be ascribed to the influx of skilled and unskilled migrants from the countryside and the lack of work opportunities. The host cities cannot absorb the influx of migrants, nor are they equipped to provide minimal housing and basic services. It is estimated that 90 percent of the urban poor are illegal settlers. Insecurity of tenure, fear of eviction and relocation, and fear of fire are constant preoccupations which add to the stigma of being poor and living in marginal conditions. The Presidential Commission on the Urban Poor estimates the income of the urban poor families at less thanI 5,000 a month (US$200). The minimum wage is P 4,000 a month. In the metropolitan area the urban poor are located on the margins of the cities and around garbage dumps or landfill sites from which they derive a livelihood as scavengers. 40- Annex 2 Page I of 4 REPUBLIC OF THE PHILIPPINES SECOND SUBIC BAY FREEPORT PROJECT
Freeport Concepts -- A Comparison of Subic and Other Freeports
1. The rapid development of the Subic Bay Freeport is also impressive when contrasted to the development experiences of most freeports worldwide. Freeports are recent variants of the traditional freeport or free zone concept which have been in existence for several centuries. Free zones were established to encourage entrepot trade, mostly within harbors among international trade routes. Early examples of free zones include Gibraltar (1704), Singapore (1819), Hong Kong (1848), Hamburg (1888), and Copenhagen (1891). Today, free zones are found in virtually every trading country; leading examples include the 240-foreign-tradezones in the U.S., free zones and freeports in every trading center in Europe, and commercial free zones in Africa, Middle East and Latin America. Freeports are free zones that cover a larger physical area, such as cities (e.g., Hamburg); islands (examples include Batam Island, Indonesia and Labuan Island, Malaysia); or entire countries (Hong Kong, Singapore or Mauritius.)
2. Free zones and their variants continue to be internationally recognized Customs concept,I and share certain basic elements: (a) They are limited to a physically defined area. In the case of export processing zones (EPZs), this is usually an industrial estate; commercial free zones generally encompass a port area, freeports may be ports, cities, islands or even entire countries. (b) They are considered to be extra-territorial, physically or administratively located outside the national customs territory, where customs duties and taxes do not apply, and regulatory controls are simplified and kept to a minimum. (c) 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 import duties and taxes. Free zones differ in the extent of the physical area covered by the zone, what activities and processes are allowed to take place, and the end-user markets where free zone products may be sold.
3. Modern freeports closely resemble the classical free zone concept, but offer several unique advantages:
* They tend to cover larger areas, and therefore offer greater flexibility to firms in terms of the location of their plants. The Labuan and Batam Island freeports, for example, completely encompass entire islands. Freeport, Bahanas covers a number of the Bahamian islands. The freeports of Singapore and Hong Kong encompass entire countries.
* The range of permissible activities within freeport areas are much broader. Firms can undertake any legal activity including manufacturing, warehousing, transshipment, and re-packaging activities, among others. Individuals can reside within freeports, permanently or temporarily.
1TheInternational Convention on the Simplificationand Harmonizationof CustomsProcedures of 1979 (KyotoConvention) defines free zones as being 'partof the territoryof a State whereany goodsintroduced are generallyregarded, insofar as importduties and taxesare concerned,as beingoutside the Customsterritory and are not subject to the usual Customs control. In commercial free zones, goods are admitted pending subsequent disposal; goods admitted to industrial free zones may be subjected to authorized processing operations." -41- Annex2 Page 2 of 4
* All types of merchandise can be introduced duty- and tax-free within the freeport by registered enterprises or individual residents; enterprises can freely import in any merchandise in any quantity, and are not restricted to that directly used in the manufacturing process as in the case of EPZs.
* Duty- and tax-free merchandise can be sold at the retail or wholesale level and/or consumed freely within the freeport area. This is in contrast to EPZs or even commercial free zones which do not permit retail sales or on-site consumption of duty- and tax-free products.
* Unlike EPZ enterprises who are usually required to export at least 80 percent of their production, freeport enterprises are free to sell any amount to the export market, local market or to consumers located temporarily or permanently within the freeport. Sales to the domestic customs territory are unrestricted so long as all applicable import duties, taxes and other charges are fully paid by the importing party.
4. There are very few fully functioning freeports in existence; leading examples are profiled in the table below. Singapore, Hong Kong, Gibraltar, Macao are true freeports with low or no direct and indirect taxes, low or no import duties and charges, no foreign exchange controls, liberalized banking policies and very few controls on the types of economic activity permitted. Newer freeports such as Freeport, Bahamas; Labuan Island, Malaysia; Penang Island, Malaysia; province of Quintana Roo, Mexico; and Batam Island, Indonesia offer a much more competitive package of incentives, including low or no income taxes; duty- and tax-free importation of all goods including consumables; no foreign exchange controls; liberalized domestic and offshore banking; liberalized immigration and residency controls; and simplified business registration and other regulatory controls.
5. Several other freeports are under development at various locations. Assisted by Singapore, the Indonesian government is transforming Bintan and Karimun islands in the Riau island group into freeports, falling under the authority of the Batam Industrial Development Authority. Malaysia has reinstated freeport status to Penang island, which enjoyed the privilege for many years until the 1980s, to take advantage of the Indonesia-Malaysia-Thailand Growth Triangle initiative. An entrepot zone is also being developed in Kuantan on the east coast of Peninsular Malaysia, and a huge bonded area in Shenzen, PRC.
6. Similar mechanisms have long been in operation in the PRC, and are expanding. The PRC introduced the Special Economic Zone (SEZ) concept in 1979 as part of its "open door policy" which consciously used the SEZs as proving grounds for market-oriented economic reforms. There are currently 11 SEZs, in addition to Open Coastal Cities and Areas. Although patterned after the freeport concept, SEZs contain several important differences. (a) They cover a much larger territory than any EPZ and most freeports, including major population centers. (b) They provide a greater range of permissible activities, embracing not only manufacturing, but also tourism, commercial activities, and real estate development. In fact, non-manufacturing activities (tourism and commercial real estate development in particular) dominate economic activity and account for a large part of foreign direct investment. (c) The SEZs are more of an administrative rather than policy concept. SEZs offer numerous differential incentives within their territory -- they do not provide a uniform set of incentives to enterprises located within their territory as in the case of EPZs, free zones and freeports. (d) Strict controls are placed on sales of SEZ goods into the Chinese customs territory, even upon full payment of import duties and taxes. Profile of Leading Freeports and Special Economic Zones
llainan Island SEZ Shenzen SEZ Xiamen SEZ Zuhair SEZ Batam Freeport Labuan Freeport Size 34,000 sq. km. 2,020 sq. km. 1,516 sq. km. 1,266 sq. km. 416 sq. km. 92 sq. km. Population 6.9 million 2.76 million 1.2 million I million 150,000 n/a Cumulative 7,000firms; 8,000firms; 2,400 firms; 5,600firms; n/a n/a FDIStock USS10.8billion US$8.1billion US$7.1billion US$6billion Exports USSI billion US$7.8billion US$2.4billion US$1.6billion n/a US$283million Infra- * 2 airports * I airport * I airport * I airport * 12 industrialparks * 2 industrialparks structure * 1,200MW power supply * extensiveroad& * 2 ports, 1Oberths * 2 ports * 28 hotels * internationalairport * 15,00km highways rail network * goodroad & rail * 2 industrialdistricts * internationalairport * 20 hotels * 2 ports,20 berths * 8 ports,92 berths network * 800 MW power . 80 MWpower supply * 2 ports . 30 sq. km. free zone at * 2 bondedzone * 3 Taiwaninvestment supply * 2 ports * highspeed data telecom YangPu port districts zones * 48 sq.km.Henggin * teleports linksvia teleports * 6 economicdevelopment * 7 science& * 2 industrialdistricts EconomicDevelopment * offshorefinancial center zones technologyparks Area 9.8sq.km. Technology Development Zone Main * 15% flat tax rate . Same * Same * Same * 3% effectiveincome . 3% flat tax on net income Incentives * 2 year holidayplus 50% tax rate * tax deductions& allowanc reductionfor 3 years . 100%foreign * 50%personal income tax thereafter ownership break t. * 50% reductionin income * duty-freeimports, * 100%foreign ownership tax ratefor 70%exporters exports * duty-freeimports, exports and high tech industries * unrestrictedsales to * unrestrictedsales to * I 00%duty /tax exemption Indonesianmkt Malaysianmarket on inputs& materialsused in * national dutiesonly on * specialincentives for exportsor soldwithin SEZs foreigncontent offshorebanking * 50h/oduty/tax exemption on * automaticland lease * liberalwork & residence materialssold in zones extensions permits withoutfurther processing * no foreignexchange or * subsidizedland rents & * priorityin obtainingBank currencycontrols servicefees of Chinaloans for foreign * liberalwork& JVs residencepermits * exemptionfrom building propertytaxes withinSEZs * foreignexchange retention for exporters * no tax on profits remittances
NoIt: Data is as of end-1994. The PRC is currently contemplating scaling back some incentives for coastal SEZs in favor of inland locations. Sourc: TSG, compiled from official publications. Si - 43 - Annex2 Page 4 of 4
7. In addition to these freeports and SEZs are the large number of EPZs and commercial free zones worldwide. Current estimates put the total number of industrial estates (lEs) and private and publicly owned EPZ industrial estates at over 200 in some 50 countries. In East Asia, there are at least 70 EPZs in operation, and another 25 under development. In the Philippines alone, the four public EPZ projects have been joined by some 11 private industrial estate-EPZs. Under the newly enacted Economic Zone legislation, some 35 locations around the country are expected to be developed into so-called ecozones; two locations have been provided freeport status similar to the Subic Bay Freeport (SBF).
8. There are several implications of these zones for the Subic Bay Freeport: (a) although the SBF is an innovative development in the Philippine context, the freeport is not a new concept. Free zones and their variants have well-accepted international definitions, and several, especially in East Asia, have been successfully operating for many years. (b) Many of the Asian freeports and SEZs pose significant competition to the SBF as they offer a superior package of incentives. - 44 - Annx 3 Page 1 of 2
REPUBLIC OF THE PHILIPPINES SECOND SUBIC BAY FREEPORT PROJECT
SBMA's Organizational Chart NEW ORGANIZATION OF SBMA
BOARD OF DIRECTORS I , | CORPORATEBOARD J~~~~~~~~~ SECRETARY OFFICE OF THE ADMINISTRATOR/ SR. DEPUTY ADMINISTRATOR
|OFFICE OF THE LEGAL CORPOIRATE COUNSEL STRATEGIC PLANNING OFFICE
PROJECT MANAGEMENT OFFICE IT C
[INTELLIGENCE & INVESTIGATION OFFICE |MANAGEMENT INFORMATION SYSTEM OFFICE
[PUBLIC AFFAIRS OFFICE ENVIRONMENTAL PROTECTION OFFICE
MINISTRATION| FINANCE PUBLICWORKS & TRANSPORTATION & TRADE & TOURISM GROUP GROUP TECHNICAL SERVICES COMMUNICATIONS GROUP LFAE GROUPOP U
H UMANRESOURCES IINANCIAL PLANNING I ENOINEERINODEPARtMENT| SEAPORTOP!RTONSDET. | PROMOTONS&MKTG.DEPT. |U.OR I MANAGEMENTDEPT. I I EUDOETDEPT. I I RECRUnMENT CTR.
LANDTATEE TREASURYDEPT. UTILTIESDEPARTMENT AlRPORTDErARTMENT INVESTMENTPROC.NDEPT. |EALT
DEPT. | q RE31TrATION & LOCATOR SECURITYd DEPT. I ACCOUNTINGDEPT. I H LANDTRMSPORTATION AANCEAI DEPT. i |WDorc
FIRE DEPARTMENT
D TPROCUREENTA PROERTY I DEPARTMAENT I
PASSPROCESSING &CONTftOE IiX
CORP.SUPPORT S9CS. - 46 - Annex 4 Page I of 7
REPUBLIC OF THE PHILIPPINES SECOND SUBIC BAY FREEPORT PROJECT
Detailed Cost Table PHILIPPINES Second Subic Bay Preeport Project Table 1. institutional Support Detailed Costs (US$)
Ousntities Unit Base Cost (1000) Totals Tncludinq Contingencies (10001 _Unit 1997 1998 1999 2000 Total Coat _197_ 1998 A ~~2000Fo~i i 1997 199 1999 2000 Tota~l I. Imyeutaent Costs A. ImstitutiomaI Streogthening /a T/A Freeport Policy sme 21 21 21 9 72 18,000 378.0 378.0 378.0 162.0 1,296.0 382.5 391.7 401.1 176 0 1,351.4 T/A (national) Freeport Policy PM 6 6 6 6 24 5,000 30.0 30.0 30.0 30.0 120.0 30.4 31.1 31.8 32.6 125.9 T/A Human Resource Mgmt PM 8 4 - - 12 18,000 144.0 72.0 - - 216.0 145.7 74.6 - - 220.3 T/A (local) Coemunity Outreach/social PM 6 - - - 6 8,000 30.0 - - - 30.0 30.4 - - - 30.4 T/A CoemmercjalisationPlanning PM 6 6 6 6 24 18,000 108.0 108.0 108.0 108.0 T/A (local) Comsnercialisation 432.0 109.3 111.9 114.6 117.4 453.2 Planning pm 9 9 9 9 36 5,000 45.0 45.0 45.0 45.0 180.0 45.8 46.6 Miscellaneous Studies lb Lumnpsum 47.8 48.9 188.8 -agk.~Q0.. - - O ... .. il.1 - - Subtotal Institutional Strengthening 735.0 1,133.0 561.0 345.0 2,774.0 D. Support to PAP Office 743.8 1,174.1 595.3 374.9 2,888.1 T/A Project M4gmtAdvisor PM 9 6 6 3 24 18,000 162.0 108.0 108.0 54.0 432.0 163.9 111.9 114.6 58.7 449.1 T/A (local) PM Advisor PM 12 12 12 12 48 5,000 Support 60.0 60.0 60.0 60.0 240.0 60.7 62.2 63. 7 65.2 251.8 Staff PM 12 12 12 12 48 2,700 ...... 2.A 32.4.~L...... 3A 3.....2.4A12 3....2.8L Subtotaloffice 33.6... 34.j,4 --...I.2 ..... L.0 Support to rkp ~~~~~~~254.4200.4 200.4 146.4 801.6 257.5 207.7 212.7 159.1 836.9 C. I/S - Equipment Office Equipment HR Mgmt 1,umpsum 71.0 71.0 71.0 71.0 284.0 82.6 84.6 86.6 88.7 Off ice Equipment Planning /c 342.6 - year 1 1 1 1 4 50,000 so5g ...... L. .. 0. 0 50.0 ... 20.0Q,...... 592 6i.....0 __f.iZ..... 2i.. Subtotal I/S - Xquipmeut 1..21-0 12...1.0.2. 1...21.0. Total __I.A_Q __..J"... 144A2 147.7L 151A-.2 583.9.t 1,110.4 1,454.4 882.4 612.4 4,059.6 1,142.1 1,526.0 955.6 685.2 4,308.9
\a Institutional Advisor. \b Includes local and international consultants. ~cCoeMuter, photocopier. supplies, etc. Tue Oct 29 16:36,31 1996 PHILIPPINBS Second SubiC Bay Preeport Project Table 2. Strengthening of Ecology Center Detailed Costs (US$ )
Totals Including Ouantities Unit Base Cost ('0001 Contingencies (P000) Unit 1997 1998 1999 2000 Total Cost 1997 1998 1999 2000 Total 1997 1998 1999 2000 Total
I Investmnt Costs A. Institutional Straotheoiog T/A Ecology Center pM a - _ _ 8 18,000 144.0 - - - 144.0 145.7 - - - 145.7 T/A (local) Ecology Center pM 4 - - - 4 S,O00 20 0 - _ - 20-0 20-2 _ _ 20-2 Subtotal Institutional Strenth.ning 164.0 - - - 164.0 166.0 - - - 166.0 B. Equipsant Miscellaneous Equipment Luumpsum 200.0 - - - 200.0 232.8 - - - 232.8 C. Social Ipact Asasasmat /a Road and Bridge Rehab Lumpsum 20.0 - - 20.0 23.3 - - - 23.3 Deep Water Wells Lumpsum 75.0 - - - 75.0 87.3 - - - 87.3 Generator 10 KVA Unit 1 - _ 1I 15.000 15.0 - - 15.0 17.5 - - - 17.5 T/A for School pm 1 1 1 1 4 5,000 55 0.0 0 5 20-0 5L 5.2 __513 5L4 21 0 Subtotal Social Impact aseass.t 115 .0 -o 5 0 5.0 130 0 133.1 5.2 5-3 5 4JA1490 Total Investaa nt Costs 479.0 5.0 5.0 5.0 494.0 531.8 5.2 5.3 5.4 547.7 II. Recurrent Costs A. Social De..lopent 1 Development Specialist Lumpsum 5 .909894 9.9 36-8 9.5 10.3 11.0 1L.8 425L° Total Recurrent Costs 85 9.0 9-4 9.9 36.8 9,5 10.3 11.0 11-8 42A 5 Total 487.5 14.0 14.4 14.9 530.8 541.3 15.4 16.3 17.3 590.3
\a Implementation of the Indigenous People Action Plan as well as monitoring of RAPS.
Tue Oct 29 16:36:41 1996
0 PHI LIrPPINHS Second Subic Bay Preeport Project Table 3. Water Supply Component Detailed Costs (US$) Cuantiries Unit Base Cost (0001 Totals Including Contingencies 1l000I Unit 1997 198 192000 Totl Cast 1998 i999 20 SntalTo9L 200 Q Total I. Inestamt Costs A P-ataa Wlitfield /a Land Acquisicion Ha ls - - - 10 40,000 720.0 - - - 720.0 728.6 - Well Construction /b - - 728.6 Unit - 20 - - 20 80 .000 - 1,600. 1,600.0 Equipment /c - 1,906.8 - - l,906.8 Lumpau, - 330.0 330.0 - Groundwater Monitoring Network /d 660.0 - 393.3 402.7 - 796.0 Lumpsun _ 100.0 - 100.0 _ 119.2 - Watershed /s 119.2 HaHeforestation _ 75 100 - 175 2,500 - 18-.5 250.0 - Subtotal Pamatawan lellfiald 437.5 - 223.4 305...1 - 5 720.0 2,217.5 580.0 - 3,517.0 728.6 2,642.7 707.8 - 4,079.1 B. Trtammission Mim. Booster Stat. Tretmt Plat Land Acquisition /f Ha _ 2 _ 2 40.000 - 80.0 - - 80.0 - 82.9 - Civil Work Transmission /g 82.9 Luspsum - 1,745.0 2,S24.0 - 4,269.0 - Civil Works Water Treatment /h 2,079.5 3,080.1 - 5,159.6 Lumpsum - 124.0 586.0 - 710.0 - 147.8 8quipment /i 715.1 - 862.9 Lumpsum - _ 1 985 0 - 1.985.0 Subtotal Transmision - - 2-422-A - 2.422.4 Main, BoosOter Stat. Tretat Plant - 1,949.0 5,095.0 - 7,044.0 C. Treoatd Hater Transmissi.o Main - 2,310.2 6,217.6 - 8,527.8 Civil Work TM Castillejos/talakan LuMpsum C..CosutantsSer-ices - 4,800.0 4,714.3 - 9,514.3 - 5,720.3 5,753.0 - 11,473.3 International Consultants /j me 12 30 30 - 72 18,000 226.0 540.0 040.0 - 3,296.0 213.6 Local Consultant /k 559.6 573.0 - 1,1351.2 %O - 40 72 41 153 S,100 204.0 367.2 209.1 780.3 206.4 Local Consultants /1 380.5 221.9 - 808.9 me 02 82 00 _ 244 3,000 246.0 246.0 240.0 - 732.0 249.0 254.9 254.7 Support Staff - 758.6 Lusp:um 24.8 35.0 35.0 Of fice Rental and Equipment - 94.8 25.1 36.3 37.1 - 98.5 Luspsum 407.2 - - - Subtotal Consultants flrvicas 40.2 412.. 1 - - - 4121 1,098.0 1,188.2 1,024.1 - 3,310.3 1,111.2 1,231.3 S. Mater Loss Copensation 1,086.7 - 3,429.2 Comensation for Loss of Crops /m Lu psum - 320.0 - - 320.0 Water Loss Mitigation In - 331.6 - - 331.6 Luspsum - 200.2 - 200.2 - 238.6 Replacement of M4otor Pumps /o - - 238.6 Lunpsum - 30.0 - 30.0 - 3 - ,, 1L.- 6 Subtotal .latar Loss Compensation - - S20.2 30 0 ----- 550,2 - 5702 366. - 60ID Total Investment Coats 1,818.0 II. Escurrnt Costs 10,674.9 11,443.4 - 23,936.3 1,839.8 12,474.7 13,801.7 - 28,116.3 A. 0 1N Wellfield, treat. plant & min line Lumpsum - - - S.65.S0 8.654. Total RCUrrest Costs 0 - - - 102344.0 20.144.0 Total - -654-0 8,654.0- 10.344.0 10 344l0 1,818.0 10,674.9 11,443.4 8,654.0 32,590.3 1,839.8 12,474.7 13,801.7 10,344.0 38,460.3
\a See Preparation Report. Volume II, Appendix S. \b Table 1, Item 1.0 (10MM. \c Table 1. Item 3.0. \d Item *.0. \e Potential area for reforestation in Pamatawan Watershed 3,700 ha, \f Table 1. Item 1.0 (90%). \9 Table 1, Item 4.0. \h Items 5.0,0.1 and 0.2 \i Items 5.3 thru 5.10 \j Includes Water Supply Bngineer, Hydrogeologist and Hydrologist. \k Includes Water Supply Engineer, Hydrogeologist and Hydrologist. \1 Includes Construction Technicians/Inspectors, Surveyors and Draftsmen. \. Por 40 Ha at Peso 200.000/Ha. S \n Cost of Deepening existing wells. \o Replacement of 40 pumps at Pesos 18,050.
Tue Oct 29 16:36;33 1996 0 O : PHILIPPINES Second Subic Bay Freeport Project Table 4. Power Distribution Component /a Detailed Costs (USS ) Ouantities Unit Base Cost ('000) Totals IncludinQ Contingencies Unit I 000) 1997 1998 1999 2000 Totl Cost 1997 1998 1999 200 Ttl 1997 1998 19 200 Toc.l I. XnDV-tm t Costs k. I9 kV Transmission System 69 kV TransmiSSion System Lumpsum 117.0 585.0 1,053.0 69/13.8 Xcv Substations 585.0 2,340.0 136.2 697.2 1,285.0 731.0 2,849.4 Luepsum 250.5 12.62.5 2254.5 Subtotal 69 kV Teansmissio 1.2152.5 S.010-0 29.15 1.492.6 2 L7512 1I565I1 6.100.6 Systm 367.5 1,837.5 3,307.5 B. Distributiom System 1,837.5 7,350.0 427.7 2,189.8 4,036.3 2,296.2 8,949.9 13.8 kV Pehabilitation Lumpsum 183.0 915.0 1,647.0 LV Construction & Consumer 915.0 3,660.0 213.0 1,090.4 2,009.9 1,143.4 4,456.7 a Services Lupsum 1.5 72,.5 1.390.5 Subtotal Oistribution System 772.5 3,0900 1. 920.6 1.696.9 96 3 5 1762. 6 Vl 337.5 1,667.5 3,037.5 1,687.5 6,750.0 392.8 C. Operatio- snd Construetio. Support 2,011.0 3,706.8 2,108.7 8,219.3 o Operational 6 Conms. Equipment Lumpsum 85.0 425.0 765.0 Stores and Logistics 425.0 1,700.0 98.9 506.5 933.6 531.1 2,070.1 a LUmpSUm 51.0 255.0 459.0 255.0 Environmental Enh. & Safety 1,020.0 59.4 303.9 560.1 318.7 1,242.0 Lumpsum 14.5 .172.-5 130.5 72.5,. Subtotal Oper-tion d Construction Support 290.0 16.9 86.4 159. 90.6 353.1 150.5 752.5 1,354.5 752.5 3,010.0 175.2 D. Technical Assistance Lumpsum 896.8 1,652.9 940.3 3,665.2 E. Land Acquisition 112.0 560.0 1,008.0 560.0 2,240.0 113.3 580.3 1,069.6 608.5 2,371.8 Lumpsum 270.0 - - F. Component - 270.0 273.2 - - - 273.2 Management Lumpsum 8.0 Total In.wstment Costs 4LQ 72.0 40.0 160.0 8.1 41.5 76.4 43.5 169.4 1,245.5 4,077.5 8,779.5 4,877.5 II. Recurrent Costs 19,780.0 1,390.3 5,719.4 10,542.0 5,997.2 23,648.9 A. 0 & MCcoSts Lumpsum - - - 6,346.0 Total Recurrat Costs 6.,346. - - - 7.585.3 7 585i3 _ _ Total - - 6 346.0 6.346.0 -_- _.- 7.585.3 7 585I 3 1,245.5 4,877.5 8,779.5 11,223.5 26,126.0 1,390.3 5,719.4 10,542.0 13,582.5 31,234.3
\a See Preparation Report, Volume IV, Appendix 5.
Tue Oct 29 16:36:36 1996
tA 0N> PHILIPPINES Second Subic Bay Freeport Project Table S. Roads, Bridges and Rel. Infrastructure /a Detailed Costs (US$)
quanti ties Unit Base Cost ('000) Totals Including Contingencies ('0001 U 1997ni t 1998 1999 2000 Cost 1 9997 19 _ 1997 1998 1999 20 0 Total I. Investuent Coats A. Widecieg of Highways /b Rical Highway Lumpsum 234.4 2,578.4 1,875.2 - 4,688.0 272.8 3,072.8 2,288.4 - 5,633.9 ArgonauL Highway Lumpspu 72.0 791.5 575.6 - 1.439.0 83.7 943.2 702.4 _ 1.729.4 Subtotal Widening of Highways 306.4 3,369.9 2,450.8 - 6,127.0 356.5 4,016.0 2,990.8 7,363.3 B. Bxpremssay Extension /c SBP Expressway Lumpsum - 2,144.0 2,144.0 1,072.0 5,360.0 - 2,555.1 2,616.4 1,339.6 6,511.1 Argonaut to Airport Lumpsue - 1.392.4 1.392.24 369638 10.2 - 1.,659.4 1.699 2 4.228.54.l2.Q Subtotal Bapres..ay Ratensien 3,536.4 3,536.4 1,768.2 8,841.0 - 4,214.4 4,315.6 2,209.6 10,739.6 C. Bridge Re.hbilitation - Retrofit /d Kalalake, Boton B Malawan Bridges Luepsum - - 300.0 200.0 500.0 - 366.1 249.9 616.0 *. [-l.kls Bridge Intsrs.ctiee/Security Plaza /a Intersection and Security Plaza Lumpsum - 690.0 1,265.0 345.0 2,300.0 822.3 1,543.7 431.1 2,797.1 B. RBads., Draie & Bridges Rittesanc. If Maintenance Mget Systee Lumpsum 90.0 504 9 - 5'4.9 104.7 601.7 - - 706.4 Core Area Road Reha Luepsuu - 860.0 - - 860 o - 1,024.9 - - 1,024.9 Secondary Roads Rehab Lumpsum - 590.0 - - 595.0 - 709.1 - - 709.1 Periodic Maintenance Lumpsoe - Q.S 800.0 b.O ...AQ0.0 .4 976. 3 499. 8 2.429.5 Subtetel Rods., Drains & Bridges Meieteeeeca 90.0 2,759.9 800.0 400 0 4,049.9 104.7 3,289.1 976.3 499.8 4,069.9 P. SBF Bypass - Dinaluphian/Castille3us /g mm - 11 - - 11 18,000 - 198.0 198.0 - 205.2 - - 205.2 G. Related Infrastructure /h Metes, Bounds i Airport Mapping Lumpsum 74.8 673.2 - - 748.0 75.7 697.6 - 773.1 38 Security Fencing Lumpsue 261.8 2,355.8 - - 2,617.5 304.6 2,807.4 - - 3,112.0 GIS System Lumpsum 30.0 270.0 - - 300.0 30.4 27928 - - 310.2MLZ Subtetal Related Infrstructure 366.6 3,299.0 - 3,665.5 410.7 3,784.8 - - 4,195.5 B. SPN D*sigo and Conatruction /i Bira Argonaut Highway Construction Lumpsum 10.0 165.0 120.0 - 300.0 15.2 171.0 127.3 - 313.5 SBF EBpreasway/Argunaut Lumpsum . 176.0 176 0 88.0 440.0 - 182.4 186.8 95.6 464.8 Bridges Retrofit Lumpsum - 7.5 13.8 3.8 25.0 - 7.8 14.6 4.1 26.4 Kalaklan Bridge Design Luepsum 16.5 99.0 11 5299.0 330.0 16..i7 102.6 122 6 107.6 3A Subtetal SPM Design end Construction 31.5 447.5 425.3 190 8 1,095 0 31.9 463.7 451.3 207.3 1,154.1 1. Inetitstio-al Support /j T/A Supervision Package 1 & 2 Lumpsum 105.0 - - - 105.0 106.3 - - - 106.3 Component Iepl. Teae /k Lumpsue .... 72.f. 9.1. -- 7 23t91 3 177.092 80.7 247.8 253i 7 842i0_29.8 Subtotal Institutional Support .. il.it7 -239.1 239.1 .. _.._2I 902.0 186.9 247A8 253S 259.8 948A 2 Tetal lnvestat Coate 979.1 14,539.7 9,016.6 3,143.1 27,678.4 1,090.7 17,043.3 10,897.4 3,857.6 32,889.0 II. Recurrent Costs A. 0 & B costs 0 M costs Lumpsum - l f .O lQSO.O 150L0 450.0 - 171.0 ,,125J 1 ,12791 3 525A Tetel Recurrent Costs - 150.0 l5.O lSO.O 450.0 - 171.0 ,125j -Z7Ll ,52I5A Total 979.1 14,689.7 9,166.6 3,293.1 28,128.4 1,090.7 17,214.3 11,072.5 4,036.9 33,414.4
\e See Preparation Report, Volume 5, Appendix 10 \b Volume 5, Appendix II, Table 3 as modified by appraisal team and SBMA. \c Final Report Addendum, Table 7, modified by appraisal team and SBMA. \d Volume 5, Appendix 11, Table 3, Final Report Addendum, Table 6, plus Appraisal teas estimates. Xe Appraisal team and 5BMA estimates. \f Volume 5, Appendix II, Table 2. \g Final Report Addendum, Table 7. \h Final Report, Addendum page 23. \i Final Report, Addendum page 23. \j Volume 5. Appendix SI, Table 7. 0 \k Roads Bridges/Coestr-ction Engineer, SBM4A Counterpart, Systems Analyst and support. (lQ
Tue Oct 29 16:36:38 1996 0i PHILIPPIN3S Second Stubic Bay Freeport Project Project Cost S _ rzy
(Paso '0001 (USS '000) I t Total % Total Foreign Base Foreign Base Local Foreian TotaL Exchange Costs _JLca Poreign Total Exchanae -CostLs
A. Institutional Strengthening 1. Institutional Support 18,593.1 86,956.5 105,549.6 82 4 715.1 3,344.5 4,059.6 82 4 2. Ecology Center 1.7841 1.2016J. 13.800.8 87 1 68.6 .. 3462.2 530.8 87 1 Subtotal Institutional Strengthening 20,377.2 98,973.2 119,350.4 83 5 783.7 3,806.7 4,590.4 83 5 B. Water Supply 365,440.3 481,907.0 847,347.3 57 36 14,055.4 18,534.9 32,590.3 57 36 C. Power Distribution 271,554.4 407,721.6 679,276.0 60 29 10,444.4 15,681.6 26,126.0 60 29 D. Roads and Bridges 275.420L2 455.918.2 732.338.4 62 31 10.593.1 17.S35.3 28.128.4 62 31 Total BASELINE COSTS 932,792.1 1,444,520 2,377,312 61 100 35,876.6 55,558.5 91,435.1 61 100 Physical Contingencies 111,495.4 169,967.3 281,462.7 60 12 4,288.3 6,537.2 10,825.5 60 12 t. Price Contingencies 169.364.6 240.QI0.5 4099375.1 59 17 2.386,A 3,361-3 5L747.5 Ss 6 Total PROJrCT COSTS 1,213,652 1,854,498 3,068,150 60 129 42,S51.2 65,456.9 108,008.1 61 118 Wed Oct 30 10:53:50 1996
O - 53 - Annex5 Page 1 of 5
REPUBLIC OF THE PHILIPPINES SECOND SUBIC BAY FREEPORT PROJECT
Performance Monitoring Indicators REPUBLIC OF THE PHILIPPINES SECOND SUBIC BAY FREEPORT PROJECT
A. Performance Indicators - Institutional Strengthening Component Objectives Inputs Processes/Activities Expected Output/Impact Indicators Timing Strengthen SBMA's 1. Consultancy * review of customs * streamlined movement of * introduction of computerized * 1/97 - 6/98 capacity to regulate services in customs concepts and goods and services between merchandise controls, removal of and manage the controls, procedures in other freeport and customs territory documentary controls over duty- growth of the documentation, freeports * reduced leakages of duty-free free shops Freeport. procedures, taxation * analysis of existing goods into domestic customs * revision of the freeport customs and investment rules and territory procedures manual incentives. regulations, * enhanced competitiveness of * reduction in amount of time for including effective SBF firms customs to clear import & export tax rate calculations * rationalized incentives for consignments * review of tax and freeports in the Philippines * establishment of framework for incentives policies resolution of pending issues in other freeports relating to taxation and investment and special incentives with concerned national economic zones government agencies * training and exposure visit to other freeports 2. Consultancy * identification of * clear delineation of * establishment of a freeport policy * 1/97 - 9/98 services on freeport regulatory & regulatory and oversight unit within SBMA to undertake regulatory oversight skills not responsibilities with national regulatory & oversight functions framework present in the government agencies * issuance of DOJ opinions on SBMA video transmission, printing & publishing freedoms in SBF; SBMA authority over air traffic rights * review of oversight * enhanced definition of * establishment of framework for & commercial freeport framework in line commercial dispute resolution dispute resolution with legislation and framework applied international best practices elsewhere o2 * development of * delineation of functions, * issuance of SBMA framework appropriate responsibilities& authority agreementwith LGUs including o framework for with neighboring LGUs provision of utilities services interface with LGUs Objectives Inputs Processes/Activities Expected Output/Impact Indicators Timing 3. Consultancy . analysis of core . division of SBMA into . development of plan to restructure * 1/97 - 6/98 services in functions, services separate entities for major the SBMA privatization and & organizational functions: administrator of * development of SBMA criteria to SBMA structure freeport regime; exerciser of assume equity positions in organizational * change municipal authority; owner & projects development management developer of assets within the . issuance of timetable for analysis including Freeport privatization of SBMA plan to unbundle * greater role for private sector subsidiaries organization in provision of services within * implementation of privatization . analysis of the freeport transactions alternative mechanisms for commercialization of SBMA functions & properties * expert transactional support __
%Ae - 56 - Annex 5 Page 4 of 5
B. Performance Indicators - Other Components PROJECT OUTCOMESAND OBJECTIVES INPUTS OUTPUTS IMPACTS Power Component To consolidate and * US$19.8 million * Construction of 23 * Reduce SBMA's rationalize power from the IBRD loan km of o/head and 3 administrative distribution services in and SBMA funds. km of underground consumption of the SBMA and 69 kV sub- electricity from 40% Olongapo City franchise Funds would be used to transmission circuits; to 10% by 2000; areas. procure equipment . Expansion of five * Reduce usage and (including electric existing 69/13.8 kV live losses from 24% . Strengthen meters), works, substations; to 12% by 2000; commercial consultants, and training . Construction of one * Provide 100% meter operations, and and technical assistance. new 69/13.8 kV coverage to domestic improve revenue substation; consumers in the opportunities and a Installation of 20 km SBMA housing areas customer service by of 13.8 kV cables; by 2000; ensuring reliability * Rehabilitation and * Replace 100% of in distribution of extension of 50 km of consumer-owned power supply. 13.8 kV and 50 km of meters in the LV systems. Olongapo franchise areaby 2000. Water Component To increase the quantity US$33.3 million from the * Development of 20 * Meet projected water of treated water IBRD loan and SBMA wells with average demand by user: available in the Secured funds. capacity of * Domestic - 49.5 to Area, Olongapo City and 450m3/hour; 87.3 million liters/ Subic Town. Funds would be used to * Construction of day (MLD), procure equipment, 7,600 meters of raw Commercial - 13.8 to consulting services for water transmission 72.8 MLD, & overall project main; Institutional - 3.1 to management, detailed * Construction of 4.7 MLD by 2000; design, construction electric power * Increase incremental supervision, and transmission lines to water sales of about hydrological studies. the Pamatawan well 33 million cubic field and treatment meters by 2000; plant; * Reduce non-revenue * Construction of water water to 5% of total treatment plant and a water pumped by booster station; 2000; * Construction of * Reduce system losses 19,400 meters of for bulk water close treated water to 0% by 2000; transmission main; * Provide 100% water * Installation of a meter coverage to ground water consumers in the monitoring network; SBMA housing areas * Reforestation of the by 2000. Pamatawan River Basin; and * Identification of water supply sources. - 57 - Annex 5 Page 5 of 5
Roadsand Bridges A. Road widening& * US$27.6million * WideningRizal and * Increasingnetwork intersection from the IBRD loan ArgonautHighways, capacityto meet improvementin the and SBMAfunds. & the link from Tipo projectedtraffic vicinityof the port, * Fundswould be used Road to Binitican growth from airport and new to procure Bridge; expandedairport, industrialareas of equipment,civil * Extendingthe port, and the new the Freeport. works,Technical Freeport expressway; industrialareas; B. Preservingthe Assistance(Roads * Retrofitting4 existing * Improvingnetwork bridges in the Advisor),consulting bridges--Kalalake, user benefits by Freeportfrom services,staff Malawaan,Boton, reducingtravel time severancefollowing trainingand studies. Binitican; from increasedlinks seriousseismic * Constructinga new speed and reduced occurrence. Kalaklanbridge; intersectiondelays; C. Providesuperior * Establishinga road * Improvingvehicular accessroute into the maintenance and pedestriansafety core area of the managementsystem; by improvedtraffic Freeport. * Carryingout a road managementand D. DevelopSBMA's alignmentstudy for pedestrian maintenance the FreeportBy-Pass; segregationat major planningand and intersectionsand management * Improvingrelated bridges; capability. infrastructure. * Providegreater service life and traffic capacityto existing distressedbridges in the SBF; . Enhance SBMA's abilityto procure and supervise maintenanceworks by private contractors.
C. The SBF's General Indicators of Performance Indicator Unit 1996 1997 1998 1999 2000 2005 Cumulativeinvestment US$ mill 1,530 1,870 2,200 2,600 3,000 5,400
Jobs createdby investors '000 16 24 30 38 45 83
Area population '000 236 241 246 251 256 423
Industrialbuildings m2 '000 220 340 440 560 670 1,220
Intemationaltourists '000 60 85 110 135 160 330 -58- Annex6
REPUBLIC OF THE PHILIPPINES SECOND SUBIC BAY FREEPORT PROJECT
Disbursement Schedule Per Semester (US$ Million) Bank Fiscal Year Semester Ending Disbursement Cumulative
1997 31-Dec-96 0.0 0.0 30-Jun-97 1.8 1.8 1998 31-Dec-97 8.1 9.9 30-Jun-98 8.1 18.0 1999 31-Dec-98 18.0 36.0 30-Jun-99 6.0 42.0 2000 31-Dec-99 9.0 51.0 30-Jun-00 5.0 56.0 2001 31-Dec-00 4.0 60.0 - 59 - Annex 7 Page 1 of 2 REPUBLIC OF THE PHILIPPINES SECOND SUBIC BAY FREEPORT PROJECT
Project Supervision Plan
Bank's Supervision Input into Key Activities
1. Over and above the regular time needed for day-to-day supervision at HQ in particular for procurement review, comments on progress and audit reports as well as related correspondence, the table below indicates that about 79 staff weeks of Bank supervision are required. No distinction is made between Subic I and II in terms of total staff weeks; however, in terms of activity, I or II denominates the respective phase.
Expected Skill Estimated Date Activity Requirement Weeks
January 1997 Work Progress I Freeport Specialist 18 Environmental Aspects 1,11 environmental Specialist Detailed Engineering II Financial Analyst/Economist Launching Studies II Task Manager Review of New Financial and MIS, I & II July 1997 Construction Progress I Engineers as needed 8 Procurement progress II Task Manager Review of 5-Year Rolling Financial Analyst Investment Plan I & II December 1997 Implementation and Studies Engineers 8 Progress I & II Freeport Specialist Sociologist June 1998 Institutional Progress &II Institutional Specialist 4 Task Manager December 1998 Mid-Term Evaluation II Task Manager 18 Overall Implementation I Engineers Freeport/Institutions Specialist Financial Analyst Environmental Specialist/ Sociologist June 1999 Overall Implementation Engineers as needed 10 Progress I & II Financial Analyst/Economist Task Manager November 1999 Final Supervision I Task Manager 8 Overall Implementation Engineers Progress II Financial Analyst/Economist June 2000 Implementation Completion Generalist 5 Report I - 60 - Annex 7 Page 2 of 2
SBMA Contribution to Supervision
2. SBMA is the executing agency for the project. As such, it will contribute a manager as well as several technical assistance personnel to supervise project implementation. Moreover, it will regularly report on progress by means of periodic reports as well as by audited, annual financial statements (Balance Sheets and Income Statements). - 61 - Annex 8 Page 1 of 13
REPUBLIC OF THE PHILIPPINES SECOND SUBIC BAY FREEPORT PROJECT
Financial Analysis of Project Components
1. This annex provides details of the financial analysis undertaken for the water supply and power distribution components of Subic II. The financial rate of return has been assessed for these two components but not for the overall project because a large part of the overall project cost are non- revenue generating. For the water supply component, the financial analysis is based on incremental investment and operating costs for the provision of treated water in bulk to the newly created Subic Water. For the power distribution component, the financial analysis is based on the incremental investment and operating costs and on tariffs currently charged by SBMA and Olongapo City. These rates will be reviewed following the completion of tariff studies and cost recovery options to be financed under the project. Constant 1996 prices were used in the financial analysis.
Tariffs
2. Bulk Water Tariffs: SBMA has not reached agreement with the joint venture retail distributor of water, Subic Water, on bulk water rate tariffs apart from the fact that the rate must be viable for SBMA. The key variable in the financial analysis of the bulk water component was thus the bulk water tariff. The major concern is that tariffs be structured which ensure that the bulk water supply enterprise of SBMA is financially viable and that the bulk rate will provide Subic Water with sufficient margin to allow it to operate profitably. The financial analysis concludes that a bulk rate of about P 9.5/m3 would be needed for the bulk supply enterprise to be viable and to generate sufficient revenue to repay the project loan. Power makes up about 80 percent of the operation and maintenance costs of bulk water so the analysis is sensitive to changes in the price of power. The price of power used was P 4.6/kWh and the selection of this rate is discussed below. If the price of power is reduced by 30 percent to P 3.18/kWh then the price of bulk water may be reduced to P 8.0/m3.
3. Tariffs for bulk water vary significantly in the Philippines. In Davao City for example the bulk/wholesale rate as of the February 29, 1996 was P 17.00/m3 compared to the highest usage rate of P 12.00/m3 for domestic and commercial and industrial users. Smaller users have a lower rate. By comparison, the bulk rate in Cebu City is + 4.96/m3 but this is considered to be low.
4. Retail water tariffs: Retail tariffs have been assessed by Subic Water and their initial proposals are shown in the table below. These tariffs will be subject to review once SBMA's bulk water tariff is determined.
5. The top portion of the table below shows the projections of the total water demand by user for the years 2000, 2005, and 2010 for the Subic Water supply area. Based on these projections and the proposed water tariff information shown in the bottom portion of the table, an average retail rate of about P 14/m3 is determined. This is approximately in line with the commercial and domestic rates for retail water in Davao City. -62- Ann 8 Page 2 of 13
Projected Water Demand for the Secured Area, Olongapo City and Subic -Projected Total Water Demand (Mid)- Type of Demand 1995 2000 2005 2010 Domestic 49.5 87.3 116.1 140.2 Commercial and Industrial 13.8 72.8 82.4 84.0 Institutional 3.1 4.7 5.6 6.0 Total 66.4 164.8 204.1 230.2
Proposed Water Tariff Location: Domestic Commercial Industrial Institutional Avg. Tariff
- Minimum 8.30 24.90 41.50 8.30 20.66
- Maximum 9.45 27.39 45.65 12.45 36.80 Qkngaj Q.. iZx-Minimum 6.05 12.10 12.10 6.05 8.00
-Maximum 7.11 14.22 14.22 7.11 8.00
6. Power Distribution: Two tariffs are included in the financial analysis; one for commercial enterprises, and the other for domestic consumers. Future tariff rates have not been determined by SBMA although a new tariff structure is in prospect which will differentiate between domestic, commercial, industrial, and institutional users. The tariff used in the financial analysis for domestic consumers, P 3.18 per kWh, is based on the tariff levied elsewhere in the Philippines and SBMA's estimate of investors' and other consumers' willingness to pay. The tariff used for commercial enterprises (P 4.6 per kWh) equates to US$0.18 per kWh. This is high by international standards and it roughly equates to the cost of power if it were generated on site by the consumer. These rates are needed for the power enterprise to be viable.
7. Bulk power purchases from the NPC account for approximately 75 percent of the estimated cost of distributing power in the project area so the analysis is sensitive to changes in the price of bulk power. The NPC rate used in the analysis is P 2.3 8/kWh which is in-line with the agreement between the World Bank and NPC in which the NPC projects that the average selling rate will increase from P 1.73/kWh in 1995 to P 3.0/kWh in 2000.
8. In the Philippines the Energy Regulatory Board (ERB) generally regulates wholesale and retail tariffs; the latter varies between suppliers because of the method used for determining tariffs. ERB regulations relating to the fixing of retail power charges do not apply to SBMA because of the special status of the organization so the tariffs proposed in the analysis can be charged without ERB approval. Olongapo City power distribution is regulated by ERB but when integrated with SBMA the power distribution business in Olongapo City will have the same status as the rest of SBMA's power business. - 63 - Annex 8 Page 3 of 13
Billing and Collection Efficiency
9. Water supply, Water demand is projected to rise by about 64 million cubic meters per annum by the year 2010 and it is anticipated that this additional requirement can be met by the proposed works which will be financed under the project. The financial analysis shows, on average, that by the year 2000 incremental water sales of about 33 million cubic meters will be achieved with a value of about US$12 million. By the year 2010 this is expected to rise to 57 million cubic meters. Under the project it is anticipated that twenty wells will be drilled of which twelve will be equipped in the first instance. The remaining wells will be equipped as demand requires. It is assumed that accounts will be issued for incremental water sales and that all billings will be collected by SBMA as Subic Water will be the only enterprise which draws on SBMA's bulk supply.
10. The current metering and consequential collection for water delivered is low (see Chapter 3). As a result, one of SBMA's principal targets will be to install meters to all existing water users as quickly as possible and to install meters simultaneously with new water connections. This action will be essential for the viability of Subic Water.
11. Power supplvy The basis of the power component is to rehabilitate and rationalize the power distribution network and to buy power for SBMA's distribution network from the NPC. The financial analysis includes assumptions on the growth of power in the SBF and Olongapo City and these are in- line with projected industry and population growth trends. In addition, the analysis includes important assumptions relating to usage and live losses and billing efficiency. The assumptions included in the model estimate that usage and live losses will equal 12 percent and that billing efficiency will equal 85 percent in 2000. These cost items are projected to decline to eight percent and 95 percent respectively by the year 2004. SBMA's non-revenue producing administrative consumption is projected to decline from 10 percent in 2000 to 4 percent in 2005. These improvements in efficiencies are crucial for the viability of the power component.
12. Current losses in both the SBF and Olongapo City are significant. In the SBF the number of consumers who are actually metered is minimal and the administrative consumption is very high at approximately 40 percent of the total SBMA consumption. In Olongapo City in 1994 systems losses were over 30 percent and this does not include billing efficiency. The problem of monitoring and reducing non technical losses needs to be addressed with a degree of urgency if the projections in the financial analysis are to be achieved. As identified, this will require a major review of metering requirements to: (i) establish a method of accounting for administrative consumption (currently estimated at about 40 percent of total SBMA consumption); (ii) provide individual meters to all domestic consumers in all SBMA housing areas; and (iii) undertake a systematic recalibration and, if necessary, replacement of all consumer-owned meters in the Olongapo franchise area. In addition, it is necessary to upgrade the existing Olongapo computer billing system to process the bills for all consumers in the supply area and provide basic information for management and monitoring of the loss reduction program. In line with these requirements, SBMA is planning to install a primary metering system in 1996 for industrial consumers, including those whose requirements are above 300 KVA. Once this new system has been installed, the tariff will be restructured. For the bulk of residential consumers in SBF, SBMA is installing individual metered connections to replace the single meters used for groups of houses under the Naval administration. - 64 - Annex 8 Page 4 of 13
Interest Costs
13. Because SBMA is the borrower under the project and because the power distribution network and bulk water supply facilities will be totally owned and controlled by SBMA, no on-lending charge has been factored into the interest charges included in the financial analysis. However, as the GOP is guaranteeing the loan and is charging SBMA a one percent guarantee charge this charge has been added to the current IBRD rate of 6.94 percent. A commitment fee of 0.75 percent for undisbursed loan balances has also been included in the analysis of the water and power components. The financial analysis also shows interest charges at constant prices.
Summary of Financial Analysis - Water Supply Component
14. Costs: Total investment capital cost of the water supply component, including physical contingencies, is estimated to be P 698 million (US$26.9 million.) Incremental operating and maintenance costs are estimated at about P 200 million in 2000 rising to about P 400 million by 2010. (Power is estimated to make up about 80 percent of total operating costs.)
15. Revenue: Revenue generation from the sale of treated bulk water is based on proposed tariffs as outlined above and projected incremental consumption rates: (i) domestic 240 I/day; (ii) industrial 19 1/m2 of floor space; (iii) commercial (office) 2.5 U1m2of floor space daily; (iv) commercial (retail) 15 1/m2 of floor space daily, and (v) hotels 2.5 1/m2 floor space daily. This projected demand is net of non revenue water costs. Non revenue water is estimated at five percent of total water pumped. System losses are expected to be zero. The analysis assumes that construction of the water installations will be completed by 1999 and that 2000 will be a full revenue producing year.
16. Financial Rate of Return: Based on these assumptions, the FIRR for the water supply component is 14.8 percent. The analysis shows that this component should generate a positive cash flow (after interest) in its first full year of operation (the year 2000).
Summary of Financial Analysis - Power Distribution Component
17. Costs: Total investment capital cost of the power distribution component, including physical contingencies, is estimated to be P 581 million (US$22.3 million). To determine incremental unit costs per kWh, three activities were taken into consideration for operating and maintaining the transmission and distribution system: (a) operating the 69 KV lines including management of NPC billings; (b) costs of power purchases from NPC; and (c) personnel, administrative, and direct operating and maintenance costs (fuel and lubricants for vehicles including repairs) for the consolidated distribution activities of SBMA and Olongapo City.
18. Revenue: For purposes of determining gross incremental revenue from SBMA and Olongapo City's sale of power, a domestic consumer rate of P 3.18 per KWH was used, and P 4.6 was used for commercial consumers. It should be noted that SBMA now charges its customers a uniform rate per kWH of P 2.75 and Olongapo City P 3.50. Thus, while the new rate would represent a substantial increase for the secured area, it is considered well within the capacity of domestic consumers to pay, especially as these are mostly international clientele. The rate for domestic consumers in Olongapo City would be nearly 10 percent lower than at present, thus increasing affordability and the potential customer base. - 65 - Annex 8 Page 5 of 13
19. Financial Analysis: The analysis of SBMA's power distribution proposals revealed important financial concerns which will play a critical role in the overall financial viability of the power distribution enterprise. The major concerns are: (i) the current high level of usage and live losses; (ii) the current high level of SBMA administrative usage; (iii) the current dependence of SBMA on NPC and their planned tariff increases; and (iv) the retail cap which SBMA can charge for power. If SBMA charges excessive rates consumers will convert to their own generators.
20. The analysis thus highlights the importance for SBMA to structure its tariffs to extract maximum revenue without inhibiting demand. It also highlights the importance of minimizing losses and bad debts and establishing a procedure for minimizing administrative consumption.
21. Financial Rate of Return: Based on these assumptions, the FIRR for the power distribution component is 18.7 percent. It is anticipated that this component will not show a positive net operating revenue until the third full year of operation (the year 2002).
Financial Risks
22. The bulk water supply enterprise will only have one customer, Subic Water, so the collection of revenue should not be a major task. On the other hand, SBMA's bulk water supply enterprise will not have a spread of clients (or risk) and if Subic Water is unable to meet its financial commitments, SBMA's water enterprise will be vulnerable. The financial viability of the enterprise is very sensitive to the tariff charged by SBMA to Subic Water. In the financial analysis a tariff of P 9.5 per cubic meter was used, and this produced a financial rate of return of 14.8 percent as indicated. If this tariff is reduced by 15 percent to P 8.0 per cubic meter, the financial rate of return falls to 4.5 percent. This analysis shows that great care needs to be exercised in establishing the bulk water tariff.
23. SBMA's proposed power supply enterprise faces greater financial risk than the bulk water supply enterprise because of usage and live losses, billing efficiency and wholesale tariffs levied by NPC. The financial analysis assumes that usage and live losses and billing efficiency will improve significantly between 1996 and 2000. If this does not occur, the enterprise will not be viable. A sensitivity analysis was undertaken on the base data prepared in the financial analysis. In one alternative, usage and live losses were increased to 15 percent, and this reduced the financial rate of return from 18.7 percent to 6.8 percent. A further analysis increased live losses to 20 percent and this resulted in a negative return. An analysis of billing efficiency produced similar results. For example, if the billing efficiency in the model is reduced to 85 percent, the financial rate of return falls to one percent. Tariff levels are also critical. If the commercial and industrial rate used in the model is reduced from P 4.6 to P 4.0 per kWh, the financial rate of return falls to zero. -66 - Annex 8 Page 6 of 13
REPUBLIC OF THE PHILIPPINES SECONDSUBIC BAY FREEPORT PROJECT
Financial Analysis - Bulk Water Supply Component
Cder.-dw 1 111117n' 1 1m | 2000 001 2002 2003 2004 |200 200 | 2007 2006 | 709 2010-15
CAPITALCASH FLOW 0 Irre4w0lt costs(so ) 1818a0 12031.9 13006.2 9On o.i,sbons tS000) .IBRD10n 1098.0 7660.2 933a.5 - SS corrboorl 720.0 4377.7 3667.7 I"8 i1a.l 1237.9 1300 2 OPERATOAL CAS# FLOW
-NIt ir=Iy.r(i6A3yr) 31.40 34.25 37.09 39.94 42.78 45.63 47.52 49.41 51.30 53.19 55.07 -Dry year(rvipa" 39.e5 4250 45.34 41.19 51.03 53.aa 55.77 57.e6 59.55 61.44 63.33 erolaitYebrrt PM3 14.94 14.75 14.75 14.65 14.55 14.32 14.20 14.10 14.00 13.90 13.69 WhoWsaleswtw4bryern(phn3) 9.5 9.5 9.5 9.5 9.5 9.5 9.5 9.5 9.5 S.5 9.5 Onti an>s (P.rnil) -Nomfi ruinfalywar 298.3 325.4 352.4 379.4 409.4 433.5 451.4 489.4 487.4 505.3 523.2 - Dryyew 376.7 403.5 430.7 457.8 484.8 511.9 529.8 547.9 56S.7 583.7 601.6 _d. t OhtDAM co. nonil or (P nOt) *Ad.nistration 12.6 13.7 14.5 16.0 17.1 18.3 19.0 19.8 20.5 21.3 n3o Psonost 7.9 a.s 9.3 10.0 10.7 11.4 11.9 12.4 12.8 13.2 13.9 -Power,wg tbet.pIpg.6OMk9Wm3 A 0P 4.0 95.3 104.0 112.6 121.3 129.9 138.5 144.3 150.0 155.7 161.5 167.2 -Pow, planttoS9FIOC 0.5WV8*3@P 4.6 72.2 78.8 85.3 91.9 96.4 104.9 109.3 113.8 118.0 122.3 126.7 -Chnwicals 6.9 7.5 S.2 6.S S.4 10.0 10.5 10.9 11.3 11.7 12.1 - Equdprhd 12.8 13.7 14.8 16.0 17.1 18.3 19.0 19.8 20.5 21.3 22.0 -Non-r*~~ pr5d,,M wmto 5.0 5.5 5.8 8.4 8.8 7.3 7.8 7.9 8.2 8.5 8.8 Total 212.4 231.7 250.9 270.2 259.4 308.7 321.5 334.3 347.1 359.9 372.8 IncrmmeritalO8Mctdry year(P. rbi) 282.9 282.2 301.4 320.7 339.9 359.2 372.0 384.7 397.5 410.3 423.1 Nol ooen rr2 (P.n* Norl minfli yewr s5.9 93.7 101.4 109.2 117.0 124.8 129.9 135.1 1403 14f.4 150.8 - Dryye.r 113.8 121.8 129.3 137.1 144.9 1527 157.9 163.0 166.2 173.4 178.5 Ave,raop.M.(P.ni (on drlyyewrin4) 92.8 10.6 108.4 116.2 124.0 131.7 136.9 142.1 147.3 1524 157.8 9s1ave oo anon v. (S MO) 3570.5 3a70.6 4188.7 4419.2 4757.3 5067.0 5265.8 5464.9 5663.7 5862.5 69.8 lJrrg (0 000) IBRDcordonnnt feh 127.5 70.0 -Ro irDirnt 87.2 695.4 1430.9 1436.9 1430.9 1341.1 1245.3 1149.5 1053.7 957.9 862.1 766.3 670.5 574.8
Totajir4entot 214.7 78S.4 143e,9 1438.9 1436.9 1341.1 1245.3 1149.5 1053.7 557.9 582.1 768.3 670.5 574.8 Totaliteres @ 156 pdcos 214.7 747.5 1370.3 1338.2 1206.8 1191.1 1080.1 973.7 571.9 773.8 680.1 590.4 504.5 422.3
Op ntrngre daftwrirddre .214.7 -747.5 -1370.3 2232.3 2563.7 2977.5 3389.0 3793.7 4195.4 4492.0 4784.a 5073.3 5358.0 sa37.4 IBRDcaptal nvymrs 1208.4 1208.4 1208.4 1206.4 1206.4 1206.4 1206.4 1206.4 1206.4 tm casheS(So flaw -214.7 -747.5 -1370.3 2232.3 2563.7 1771.1 2182.8 2587.2 298a.9 3285.5 3578.4 3286.9 4151.5 4430.9 Cimistin. ec,h flaw 3) -214.7 -962.2 D2332.5 -100.2 2483.5 4234.9 6417.2 9004.4 11993.4 15278.9 18857.3 22724.2 26875.7 31306.8 - 67 - Annex 8 Page 7 of 13
REPUBLIC OF THE PHILIPPINES SECOND SUBIC BAYFREEPORT PROJECT
Financial Rate of Return - Bulk Water Supply Component Period Year Incremental Capital Net cash Discounted Revenue Costs investment flow cash flow ($ mill.) ($ mill.) ($ mill.) ($ mill.) ($ mill.) 1 1997 1.818 -1.818 -1.623 2 1998 12.038 -12.038 -9.597 3 1999 13.006 -13.006 -9.258 4 2000 12.227 8.656 3.570 2.269 5 2001 13.268 9.397 3.871 2.196 6 2002 14.306 10.137 4.169 2.112 7 2003 15.347 10.878 4.469 2.022 8 2004 16.385 11.617 4.767 1.925 9 2005 17.426 12.359 5.067 1.827 10 2006 18.117 12.851 5.266 1.695 11 2007 18.807 13.342 5.465 1.571 12 2008 19.498 13.834 5.664 1.454 13 2009 20.188 14.326 5.862 1.344 14 2010 20.876 14.817 6.060 1.240 15 2011 20.876 14.817 6.060 1.107 16 2012 20.876 14.817 6.060 0.988 17 2013 20.876 14.817 6.060 0.883 18 2014 20.876 14.817 6.060 0.788 19 2015 20.876 14.817 6.060 0.704 20 2016 20.876 14.817 6.060 0.628
FIRR= 14.8 % - 68 - Annex 8 Page 8 of 13
REPUBLIC OF THE PHILIPPINES SECOND SUBIC BAY FREEPORT PROJECT
Financial Analysis - Power Supply Component
CJend ryzn I"? | m Is"|m 200 2001 | 2002 |2003 |2004 |2005 |200e 2007 | 0S|2009 2010.15
CAPITAL CASH FLOW rax inr t pen ao.,ty A(A2000) 1373.8 5519.1 9934.4 5519.1 rorn dso bosems4 S,000) T-Rhoan 78323. 391769 7052.2 391749 SBP contnbution Saoo 1E01.2 2802.2 11O12
- 1373a8 551911 5519.1 134.4
OPERtATIONALCASH FLOW nestonsee VAr 13125 164.8 190.9 2042 211.1 215.2 216 21752 25 21.0 2.7
I sawePSD 124.8 1372 151.0 19.1 162.7 200.9 221.0 243.1 2674 294.2 323. Ohagpo PUD 150.3 16S.4 181.9 200.l 220.1 242.1 268.3 293.0 322.3 354.5 389.9 Total 275.1 302.5 332.9 395 2 402.8 443.0 49753 536.1 589.7 948.7 713.0 Asverge reumption Dletem ( Comerial consum rs 46 4. 4. 4.6 71 71 71 71 71 71 -Ooeticconsumers 2 3 25 25 25 25 25 25 25 25 25 25 SBMA 1D a a 4 4 4 4 4 4 4 4
Inorenrenhalo.Re.(Ps7 12.0 10.0 26.6 2.7 1.3 1 .8 1902 29.0 202 23.0 rBMlig fncieny hS.0 87.5 90.0 92.5 95.0 95.0 95.0 rBs o 95 D 95.0 95.0 A-one Weailsalina oftts (PhW.h) Cmrclconsuners 4.6 4.S 4.e 4. CS4 4.o 4.6 4.6 4J6 4.a 4.8 DoMestic oftsume 3.18 3.18 3.18 3,18 318 3.18 3.18 3.181 3.18 3.18 3.18 =nrmttOe (,Pmillon) 77n.9 9a.9 1094.0 1265.6 1429.7 1572.3 172986 1902.8 203.0 2302.4 2532.4 Averae retail once rev coected (PMAVh) 4.21 4.21 4.22 4.23 4.23 4.23 4.23 4.23 4.23 4.23 4.23 I EY. IP i ion) -wrolesalepoere ostper 45h 2.38 2.38 2.38 2.38 2.38 2.3a 2.38 2.36 2.38 2.38 2.38 -PrcahasefromNPC 654.7 720.2 792.3 871.6 958.7 1054.3 1156.8 1275.9 1403.5 1543.9 1698.1 -Personnel expnses 137.5 151.3 166.4 183.0 201.3 221.4 243.9 287.9 294.7 324.2 356.6 Adnisratrativ-e sp-res 27.5 30.3 33.3 38.6 40.3 44.3 48.7 53.6 58.9 64.a 71.3 DeprWeiation 57.1 57.1 57.1 57.1 57.1 57.1 57.1 57.1 57.1 57.1 57.1 Total 876.e 966.9 1046.1 1146.3 1257.4 1377.1 1509.2 16S4.5 114.2 1990.0 21U3.1 N9t098!8tj0tr9el8e (P nim-) -98.0 -35.0 44.9 117.3 172.3 195.2 220.4 248.3 278.6 312.4 349.3 Net operatingrevenewe(S000) -3768.5 -1348.5 1727.8 4511.5 8826.9 7507.9 8477.2 9548.8 10724.8 12016.7 13434.6 (rflr9 (S '000) l 0BRDcoitm f 111.7 82.3 29.4 I-BR interes 62.2 373.3 633.2 1244.3 1244.3 1181.4 1078.4 996.5 912.5 929.8 748.5 663.6 50.7 497.7 Total interet 173.9 4s5.6 962.6 1244.3 1244.3 1181.4 1078.4 995.5 912.5 826.8 746.6 63.8 580.7 497.7 Totalinterest8 1998prlces 173.9 444.9 918.0 1158.9 1131.7 1031.5 935.4 843.2 754.8 870.1 581.0 511.2 436.9 365.7
Oeratina reVewe ater iterest -173.9 -444.9 -918.0 -4927.3 -2478.2 698.1 3576.1 5763.7 8753.1 7807.1 8959.9 10213.5 11579.8 13069.2 BRDc otbanlol vrn1 1044.8 1044.8 1044.8 1044.8 1044.8 1044J. 1044.8 1044.8 1044.8 Not6L6b i9Ew0002 -173.9 -444.9 -918.0 -4927.3 -2478.2 -348.7 2531.3 4736.9 5708.3 5762.3 7915.1 9168.8 10535.1 12024.4 CunuyLtivy cmow t0009 -1739 418.8 -1536.8 -8444.2 4942.3 -6291,0 4759.7 -2020.7 3S87.6 10449.9 1355.0 27533.8 38068.8 50093.2 - 69 - Annex 8 Page 9 of 13
REPUBLIC OF THE PHILIPPINES SECOND SUBIC BAY FREEPORT PROJECT
Financial Rate of Return - Power Supply Component Period Year Incremental Capital Net cash Discounted Revenue Costs investment flow cashflow ($ mill.) ($ mill.) ($ mill.) ($ mill.) ($ mill.) 1 1997 1.374 -1.374 -1.227 2 1998 5.519 -5.519 -4.400 3 1999 9.934 -9.934 -7.071 4 2000 29.956 33.725 5.519 -9.288 -5.902 5 2001 35.534 36.880 -1.346 -0.764 6 2002 42.078 40.350 1.728 0.875 7 2003 48.675 44.164 4.511 2.041 8 2004 54.987 48.360 6.627 2.676 9 2005 60.475 52.967 7.508 2.707 10 2006 66.522 58.045 8.477 2.729 11 2007 73.184 63.635 9.549 2.745 12 2008 80.501 69.776 10.725 2.753 13 2009 88.555 76.539 12.017 2.754 14 2010 97.401 83.967 13.435 2.749 15 2011 97.401 83.967 13.435 2.454 16 2012 97.401 83.967 13.435 2.192 17 2013 97.401 83.967 13.435 1.957 18 2014 97.401 83.967 13.435 1.747 19 2015 97.401 83.967 13.435 1.560 20 2016 97.401 83.967 13.435 1.393
FIRR= 18.7 % - 70 - Annex 8 Page 10of 13
REPUBLIC OF THE PHILIPPINES SECOND SUBICBAY FREEPORT PROJECT
Financial Analysis - Subic Bay Metropolitan Authority Cash Flow
C'-wwo 1t ¶ 16 o 21 6 2 10 26a 2_ 2W67 2 2. 2I .15
CAM&A.CAS PLOW
fi26.6 W42. go0.6 oo01 &A -W.** 1616.0 12037.9 130082 .P-e_elb 13273. 0611.1 964A 510.1 * ft.Re_*&54dg~ 1028.6 16448.5 102A 3610.1 - 0o.hgeeb *. 025 6.50 6 6.0 5064. 3648111 24110.:. 4. 1IBflR.lW0001 4273.1 222.1 22215.1 06628 CAPITALCASH FLOW 1 -.15117 *12748.0 .1O6001 43112.0
OPRA7T04 CASH PLOW
.6.Awd.. 122257 13206.0 14306.7 SU647.1 14 17420.1 16116.7 1o7.3 16497.6 2010A 20670. . Pe_e3n.5144p.. 256551 30022 42077.7 48572 54U07.1 1474.9 65622.3 7314.1 SOS1O2 61SSSJ 074014 .R-fb 4 b-- E 4.WW c.*. Toel 42182.7 48616 SOMA 640222 713711 771JO.0 64836.0 919614 o6nWo.0106743A 116277.8
662 0W.7 1015 7.0 10877. 116174 t1260.1 1260A 133423 13034.1 14325.0 14816.8 P_rehn68.o- 327241 36660.3 402.1 44103.7 4as82 52566.0 56U042 028383 3776A4 7n6sn.7 086.5 .Rf&4dg. 150I0 IS100 100.0 1 0. 10. ¶50.0 100.0 ¶60.0 6.00 160.0 110.0 1000.0 1S0.0 . E5dm n. 565 6.0 0.4 0. 10J 10.J 10.J 11J 11J 1160 125 12.5 12.5 125 Tetd IS 10.0 1664 42540.7 441 5S47.7 063021 101386 6076 7105.0 771401 62772.0 91677.1 06485.7 OERgATINCfl.CASHFL(SOWO 4J -1560 .1054 .77J 2632s 57367 06157 112326 12413.3 13S11 140512 16226.0 168.7 192310
CASH FLOW BEFOREITERESTW D) .14072 .12D .0 10I S .740SJ 23630 5757 06S1.7 112322 124133 13* A1 148512 16.0 1686.7 191331
.18* D SW41 223A 484 -109RD 3302 21442 3067.5 411.0 4110 42102 00061 3J 6 3306.0 3007.3 27068 24S06 2106.1 180. TOWWed 723 2w8 40161 48110 48110 42102 30615 3806 32062 3007. 27061 2405A 2105. 16044 TdWkftb6d@lU6pw 7332 2312.3 2646. 42012 4102.7 3736A4 33601 206.7 273 24203 2135.1 1652A4 118.7 1325.7
C.. ehUe .23631 -15202 .1406 7671.1 .1728 16663 8421 J 1762 0677.0 11M11 12716.1 14272.0 t02M2 160062
1SR0 M" I7071 176S 70s U77 1767 1277.5 27n715 3771S 3717
FM¢=h W WM.22631 -16220.3 .1480 -.7A711 -171 .17012 641.3 4361 SOSA 73642 6S63 10606.1 11491.A 14218A
CunvAellysenh *tw (SV= .23021 -170732 424n83 .40154.7 *41MA 4-8 64 1420421 -376860 -SIMA6 .244013 -16472.7 487.7 46.7 20626 SUBIC BAY METROPOLITAN AUTHORITY FinancialProjections 28 April 1995 4:16PM
FLOWOF FUNDSSTATEMENT 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 In ThousandsPesos
BEGINNINGCASH POSITION 634,360 93,733 136,550 168,402 196,697 219,704 237,922 256,419 265.470 276,672
INTERNALCASH GENERATION 387,210 1,085,826 972,833 1.092,582 551,386 640,100 737,341 818,694 880,981 1,087,186 Net IncomeBeore Interest and OtherLo (127,804) 1234,049) (134.1411 82,772 148,812 224,960 321,619 391,912 452.457 691,113 less: AmortizedIncome 36,153 73.060 106.310 133,860 134,465 141,381 142,738 144,230 145.872 147.679 add: Receiptsfrom Long-termLease of 252,000 1,012,500 787,500 675.000 add: Receiptsfrom Golf Course 28,000 5,000 5,500 6,050 6.655 7,321 8,053 8,858 9,744 10.718 add: Receiptsfrom Water & Sewerage 5,913 5,000 1.250 1.250 1,250 1,250 1,250 1,250 1,250 1.250 add : DepreciationExpense 283,292 370,717 452.912 513,274 554,806 572,426 577,603 579,487 579.487 579,487 WorkingCapital Increasel(Decrease) l18,037) (283) (33,878) (51,903) (25.672) (24,476) (28,447) (18,582) (16.084) (47.704) OPERATINGCASH POSITION 1,021,571 1,179,559 1.109,383 1,260,984 748,083 866,054 982,138 1,082.676 1,154,770 1,373,008 ... DEBTSERVICE 63.098 229.346 294,581 364.175 376.201 371.340 289,809 272.674 263,963 255.099 Interest Charges 53,897 108.124 165.889 203,118 214,890 206,110 188,056 169,540 159.107 148.430 Repaymentof Notes Ptincipal Repayments 102,500 102,500 131.250 131,250 136,049 74,243 77,243 80,618 84,118 Other Fees/Charges 9,201 18,722 26.192 29,807 30,061 29,181 27,509 25,891 24,239 22,551 FUNDSAFTER DEST SERVICE 958,472 950,213 814,802 896,810 371,882 494,714 692,329 810,002 890,807 1,117.909 0.e FUNDSFROM LOANS & CONTRIBUTIONS IBRO(World Bankl Loan 530,277 341 692 44,231 IECDFIExirnbank) Loan 434,526 181,963 PhilippineNational BankLoan 602,249 IBRDLoan 2 176,963 680,438 369,788 42,000 - Notes Payable GovernrnentAppropriations 51,023 Grants & Subsidies 23,568 710 TOTAL LOANS& CONTRIBUTIONS 1,541,643 701,329 724,668 369,788 42,000
TOTALAVAILABLEFUNDS 2,500,115 1,651,541 1,539,470 1,266,597 413,882 494,714 692,329 810,002 890,807 1,117,909 CAPITALINVESTMENT REQUIREMENTS IBRD-FundedProjects 689,360 444,200 57,500 IECDF-FundedProjects 434,526 181,963 lORDLoan 2 235,950 907,260 493,050 56,000 Other Construction Projects 314,208 496,666 165.937 80,067 75,709 75.355 EquipmentPurchases 767,751 144,210 TOTAL CAPITALOUTLAYS 2,205.845 1,502,990 1,130,687 573,107 131,709 75,355
FUNDSAFTER CAPITAL OUTLAYS 294,270 148,551 408,783 693,490 282,173 419,360 692.329 810,002 890.807 1,117,909
MINIMUM REQUIREDCASH BALANCE 93,733 136,550 168,402 196,697 219,704 237,922 256,419 265,470 276,672 288,816
TOTAL CASHSURPWUSJiDEFICIT) 200,537 12.002 240,381 496,794 62,469 181,437 435,910 544,532 614,134 829,094
IF: 1. CASH SURPLUS 8 Cash Available 200,537 12,002 240,381 496,794 62,469 181,437 435,910 544,532 614,134 829,094 _ Dividendsto Government 53.027 98,241 134,556 260,066 - Purchaseof Securities 200,537 12,002 240,381 496,794 62,469 181,437 382,883 446,292 479,579 569,027 0 2. CASH DEFICIT Cash Required Saleof Securities AdditionalFinancing Required SUBIC BAY METROPOLITAN AUTHORITY Financial Projections 28 April 1995 4:16PM
REVENUE SCHEDULE (Cash) 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 In Thousands Pesos
LAND & BUILDING LEASE REVENUES 523,488 1,329,217 1,182,759 1,175,739 559,848 586,656 600,399 634,929 670,861 725,698 REVENUES FROM EXISTING LOCATORS 201,936 172,600 152,700 139,050 112,975 103,225 89,850 95,500 100,675 100.675 Industrial Concerns 88,312 69,950 54,725 43,625 19,150 10,875 6,650 7,225 7,850 7,850 Commercial/Tourism Concerns 85,792 79,650 80,050 80,725 78,075 77,450 77,325 81,850 85,825 85,825 Others 27,832 23,000 17,925 14,700 15,750 14,900 5,875 6,425 7,000 7,000 REVENUES FROM INDUSTRIAL FACILITI 22,512 48,267 86,036 122,515 153,559 171,052 177,864 185,120 192.847 223.157 Lease ol ExistiiiU Duildings 18,816 26,838 42,874 45,660 48,628 51,789 55,156 58,741 62,559 66,625 Land Lease of Undeveloped Areas 3.696 7,029 16,163 26,454 38,690 53,022 56,469 60,139 64.048 68,211 Land Lease of Subic Bay Industrial P 14,400 27,000 50,400 66,240 66,240 66,240 66,240 66,240 88.320 REVENUES FROM COMMERCIAL ACTIVI 20,160 70,290 129,302 210,183 262,439 279,498 297,665 317,013 337,619 359.564 Lease of Existing Buildings 20,160 38,340 61,248 65,229 69,469 73,985 78,794 83,915 89,370 95.179 Land Lease of Commerical Areas 31,950 68,054 144,954 192,970 205,513 218,871 233,098 248,249 264,386 REVENUES FROM HOUSING UNITS 278,880 1,038,060 814,721 703,991 30,875 32,882 35,019 37,296 39.720 42,302 Short-term Lease of Housing Units 26,880 25,560 27,221 2B.991 . 30,t75 32.882 35,019 37,296 39,720 42.302 Long-term Lease of Housing Units 252,000 1,012,500 787,500 675,000 Housing Joint-Venture
REVENUES FROM SUPPORT OPERATION 122,373 193,714 361,920 544,781 672,752 853,412 1,061,058 1,153,933 1,234,702 1.486,840 Port Operations 40,320 72,000 144,000 198,000 217,800 239,580 333,815 367,196 403.916 561,231 Airport Operations 26,950 59,250 59,250 70,050 70,050 81,570 101,730 77,668 120,960 120.960 Lease of Power Plant 19,600 17,500 17,500 Power Distribution 29,590 39,964 139,920 275,481 383,652 524,762 617,388 700,257 700,257 794,249 Water & Sewerage 5,913 5,000 1,250 1,250 1,250 1,250 1,250 1,250 1,250 1,250 Telecommunications 6,250 6,875 7.563 8,319 9,151 SPECIALIZED FACILITIES & CONCESSIO 251,825 237,246 256,401 333,131 357,337 359,800 369,220 377.873 386,988 397,923 Petroleum, Oil and Lubricant Depot I 114,800 102,500 102,500 131,250 131,250 131,250 131,250 131,250 131,250 131,250 Golf Course Concession 28,000 6,000 5,500 6,050 6,655 7,321 8,053 8,858 9,744 10,718 Marina Concession 2,541 2,471 6,026 35,418 40,528 23,336 25,984 27,189 28,110 30,032 Grande Island IF.U. JUAN) 2,604 2,525 SBMA-Operated Hotels/Houses 60,480 81,000 94,500 108,000 121,500 135,000 135,000 135,000 135.000 135,000 Other Tourism Concessions 42,000 41,250 45,375 49,913 54,904 60,394 66,434 73,077 80,385 88,423 Merchandise Control System Toll Revenues (SBMA-Tipo Expressw Security Services Others 1,400 2,500 2,500 2,500 2,500 2,500 2,500 2,500 2,500 2,500 °Q INTEREST INCOME 6,862 18,384 23,962 38,090 60,397 63,200 70,517 85,832 103.684 122,867 t Short-term Investments 2,654 10,675 11,155 20,770 40,642 43,141 50,398 65,714 83.565 102.749 ° Interest Earned on Security Deposits 4,208 7,709 12,807 17,320 19,754 20,059 20,118 20,118 20,118 20,118 _ gTOTALREVENUES 904,547 1,778,561 1,825,043 2,091,740 1,650,333 1,863,069 2,101,193 2,252,567 2.396,235 2,733.328 SUBIC BAY METROPOLITANAUTHORITY Financial Projections 28 April 1995 4:16PM
BALANCE SHEET In Thousands Pesos
ASSETS 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
CURRENTASSETS Cash 217.089 398,632 546,657 684,418 719.703 740,876 759,373 768,423 779,625 791,769 Cash Available for Ope 93,733 136,550 168,402 196,697 219,704 237,922 256,419 265,470 276,672 288,816 Security Deposits & Ad 123,356 262,082 378,265 487,721 499,999 502.953 502,953 502,953 502,953 502,953 Short-term Investments 266,877 278,879 519,260 1,016,054 1,078.523 1,259,960 1,642.844 2,089,136 2,568,714 3,137,742 Receivables 109,131 138,187 189,517 257.217 296,149 331,605 371.292 396,521 420,466 476,648 Inventories 30,383 44,427 58,827 71,324 81,072 88.310 95,566 97,970 101,311 104,976 Sub-Total 623,481 860,125 1,314,261 2,029,013 2,175,447 2,420,751 2,869,074 3,352,049 3,870,116 4511 1351
LONG-TERM INVESTMENTS Holdings in SBDMC 14,000 14,000 14,000 14,000 14,000 14,000 14,000 14,000 14,000 14,000 I Sub-Total 14,000 14,000 14,000 14,000 14,000 14,000 14,000 14,000 14,000 14,000
FIXED ASSETS Land and Land Improveme 15,222,007 16,222,007 15,222,007 15,222,007 15,222,007 15,222,007 15,222,007 16,222,007 15,222,007 15.222,007 Building and Structures 4,118,940 5,557,035 6,798,315 7,886,502 8,459,609 8,59f,317 8,666,672 8,666,672 8,666,672 8.666,672 Equipment 1.157,322 1,419,032 1,461,532 1,461,532 1,461,532 1,461,532 1,461.532 1,461,532 1,461,532 1,461,532 LESS: Accumulated Depre 729,307 1,100,024 1,552,936 2,066,210 2,621.016 3,193,442 3,771,045 4,350,532 4,930,018 5,509,505 Net Fixed Assets 19,768,963 21.098,051 21,928,918 22.503,832 22,522,132 22,081,415 21,579.166 20,999,680 20,420,193 19,840,706 Wo_ks in Process 1.438.095 1.241.280 1.088.187 573.107 11.709 75.356 0. 0 0 Sub-Total 21,207.057 22.339.330 23.017,105 23,076,938 22,653.841 22.156.769 21.579,166 20.999.680 20.420,193 19,840,7061
,UTOTALASSETS 21.844,538 23,213,455 24,345,367 25, 11992 24,843,288 24.691,520 24,462,241 24.i65,729 24.304,309 24365841
UABIUTIES & CAPITAL 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
CURRENTLIABILITIES Payables and Accrued Exp 93,733 136,580 168,402 196,697 219.704 237,922 256,419 265.470 276,672 288,816 Notes Payable 0 0 0 0 0 0 0 0 0 0 Deterred Credits 12,905 12,905 12,905 12,905 12,905 12.905 12,905 12,905 12.905 12 905 Sub-Total 106,638 149,454 181,307 209,601 232,609 250,827 269_324 278 374 289_577 301 720
LONG-TERM LIABIUTIES IBRO (World Bank) Loan 687,777 1,029,469 1,073,700 1,073,700 1,073,700 1,035,075 993,575 949,075 901,200 849.825 IECDF IEximbank) Loan 456,310 638,274 638,274 638,274 638,274 605,531 572,788 540,044 507,301 474,558 Philippine National Bank Lo 532,181 429,681 327,181 195,931 64,681 0 0 0 0 0 World Bank Loan 2 0 176,963 857,400 1.227,188 1,269,188 1,269,188 1,184,575 1,099,963 1,015,350 930,738 Deferred Credits (Pre-paym 464,099 1,413,539 2,101,479 2,649,919 2,523,359 2,396,799 2.270,239 2,143,679 2,017,119 1,890,559 Trust Liabilities 127,526 266,252 382,425 491,891 504,169 607.123 507,123 507,123 507,123 507,123 | Sub-Total 2.267,893 3,954,178 5,380,459 6,276,902 6,073,370 5.813.715 5,528,300 5,239,884 4.948.094 4,652,803
CAPITAL National Government Equit 19,100,000 19,100,000 19,100,000 19,100,000 19,100,000 19,100,000 19,100,000 19,100,000 19,100,000 19,100,000 Paid-inCapital 817,815 817,815 817,815 817,815 817,815 817,815 817,815 817,815 817,815 817,815 Grants & Subsidies 23,568 24,279 24,279 24,279 24,279 24,279 24,279 24,279 24,279 24,279 Additional Capital Contribu 0 0 0 0 0 0 0 0 0 '" Retained Earnings *471,376 -832,271 -1,158,493 -1,308,646 -1,404,785 -1,415,116 -1,362,089 -1,263,849 -1,129,293 -869,227 Beginning *280,474 -471,376 -832,271 -1,158,493 -1,308,646 .1,404,785 -1,415,116 -1,362,089 -1,263,849 .1,129,293 0 Net Income -190,902 -360,894 -326,222 -150,153 .96,139 -10,331 106,054 196,481 269.112 520,132 -r Dividends 0 0 0 0 0 0 53,027 98.241 134.556 260.066 w r Sub-Total 19,470,007 19,109,823 18,783,601 18,633,448 18,537,309 18,526.978 18,664.617 18,847470 19,066,639 19.411.317 o
|ITOTAL LIABILITIES & CAPITAL 21,844,538 23,213,455 24,345,367 26,119,952 24,843,288 24,591.520 24,462 241 24 365 729 24,304,309 24:365 841 - 74 - Annex 9 Page 1 of 6
REPUBLIC OF THE PHILIPPINES SECOND SUBIC BAY FREEPORT PROJECT
EconomicAnalysis
1. This project includes three key infrastructure components which are collectively necessary for the continued development and expansion of the SBF. From the perspective of the economic analysis, these three components (roads, water supply, and power distribution) can be evaluated separately, however, in combination they provide a larger benefit to the development of the SBF industrial zone as well as the surrounding metropolitan area. As each component is a necessary part of a total development program if the SBF is to expand at the rate projected by SBMA. As the general indicators of performance for the SBF show in the table below, SBMA projects a very significant investment program during the period 1996-2005. These indicators are in line with the development of the SBF to-date.
General Indicators of Progress for the SBF, 1996 to 2005
Indicator Unit 1996 1997 1998 1999 2000 2005 Cumulativeinvestment US$ mill 1,530 1,870 2,200 2,600 3,000 5,400
Jobs createdby investors '000 16 24 30 38 45 83
Totaljobs '000 64 71 83 94 113 206
Value added/employee US$ '000 20 23 26 30 33 50
Areapopulation '000 236 241 246 251 256 423
Industrialbuildings m2 '000 220 340 440 560 670 1,220
Officespace built m2 '000 33 45 60 80 100 210
Hotelrooms No. 75 1,050 1,350 1,650 2,000 4,000
Internationaltourists '000 60 85 110 135 160 330
Benefits
21.Benefitsfrom a development similar to SBF are substantial and they range from direct visible benefits such as increased employment and output to improved living standards and conditions. In this project there will be two basic benefits: (i) an increase in development (and output) in planned industrial parks and surrounding metropolitan areas; and (ii) the maintenance of existing businesses and population in the SBF and surrounding metropolitan areas. For the economic analysis, only estimated benefits from the increase in development were included. If the project were not to proceed and existing businesses left SBF because of poor infrastructural services it is unlikely that they would relocate outside the Philippines. Benefits from an increase in development have been measured in - 75 - Annex 9 Page 2 of 6 terms of an increase in the number of people employed and their subsequent wages and water and electricity sales from the facilities to be built under this project . It should be noted that a facility such as SBF provides a total service so it is difficult to realistically isolate all benefits which may accrue from this project which includes a number of works to upgrade and maintain existing facilities.
Employment Benefits
3. The table below provides an estimate of the employment by industry for four phases of future development in the SBF. It is shown according to phased land development and it is expected that the project will provide sufficient infrastructural facilities to allow each of four phases to be developed.
Employmentby Industry
SBDMCPhase 1 SBDMCPhase 2 SBDMCPhase 3 JAIDO
Completion due 1999 2000 2002 2002 Enterprise
Electronics 3,900 1,200 2,200 1,600 Garments 2,000 2,200 200 1,500 Manufacturing 3,400 2,400 1,600 5,500 Other 200 100 TOTAL 9,500 5,800 4,000 8,700
4. The benefits from the expanded capacity in the industrial parks is the value added to the economy from those activities which could not otherwise be accommodated in the industrial park. The value added from these industries could not be computed directly as there is no explicit plan as to what precise outputs would be produced and what inputs would be required. Since this is an export processing zone and the investors are all foreign companies, the production of most of the inputs will be foreign. The only value added to the Philippines is from the employment in these industries, taxes, and services provided to the industries and their employees. The value added from employment was computed by taking the average compensation paid of US$3,000 and deducting the opportunity cost of US$1,400. The latter is the estimated average urban wage for areas outside of Manila in 1996. The number of employees was estimated by taking the projected growth in employment and deducting 66 percent assuming that these people could have found employment elsewhere in the Philippines. The total benefits derived from improved direct employment was multiplied by 1.25 to take into account the employment in complementary service industries.
Benefits From Sale of Water and Electricity
5. Tariff revenues from the sale of all electricity and water from installations financed under the project have been taken into account as a proxy for benefits. This implies that increased consumption of water and power is fully explained by projected changes in the income of customers. - 76 - Annex 9 Page 3 of 6
Other Assumptions Used in the Analysis
6. Prqject analysis: All project costs and benefits have been included in one analysis of the project as the further development of SBF is considered to be contingent on each of the components. None of the components were evaluated separately.
7. Project costs: Consultant's services, accounting for about 15 percent of total project costs, have been included in economic costs, although direct benefits cannot be fully captured in quantitative terms. The cost of unskilled labor has been shadow priced at 50 percent given the lingering unemployment rate in the SBF- Olongapo area of close to 30 percent as a result of the closing of the former naval base and about 20 percent in the Philippines in general. Investment costs have been shadow priced at 95 percent of their financial value and all other operational inputs, including bulk power purchased from NPC, have been shadow priced at 90 percent of the financial price. This reflects the estimated labor content of all input items.
8. PrQject life: The estimated economic life of all project components is 20 years.
9. Replacement costs: Post project replacement costs of transformers, pumps and related equipment and vehicles have been included.
10. Cost of capital: The opportunity cost of capital used in the analysis is 12 percent.
11. Residual values: No residual values were added at the end of the projected economic life of the project.
12. Contingencies: Physical contingencies of 15 percent were used for civil works and equipment, but all price contingencies were excluded.
13. Economic rates of return and sensitivity. The base case for the economic rate of return is assessed using a billing efficiency for the power component of 85 percent in 2000 rising to 95 percent in 2004. Usage and live losses are assessed on the basis of 12 percent in 2000 falling to eight percent in 2002. This billing efficiency and live losses assumption is a considerable improvement over that currently being achieved. The sensitivity analyses presented below assess the impact on the return from the project if these improvements are not achieved. The returns from the water component are not adjusted on the bases of billing efficiency or losses because the bulk water will only be sold to one utility distribution organization, billing efficiency should be 100 percent. The sensitivity analysis also assesses the impact of a reduction in the number of people employed resulting from the project.
EIRR Base case 29.6%
Sensitivity analysis
* Water and industrial development (employment) - as for base case Power-live losses up from 8% to 20% 24.8% * Water and industrial development (employment) - as for base case Power-live losses up from 8% to 30% 20.0% * Water and industrial development (employment) - as for base case Power-live losses 8% billing efficiency down from 95% to 80% 24.5% - 77 - Annex9 Page 4 of 6
* Water and industrial development (employment) - as for base case Power-live losses 8% billing efficiency down from 95% to 70% 19.6% * Water and power- as for base case * Industrial development (employment) - employment down by 30% 26.8% * Water - as for base case Power - live losses up from 8% to 20% Power - billing efficiency down from 95% to 80% Industrial development (employment) - employment down by 20% 17.1%
Crossover values
* Benefits - benefits down 25.3% * Costs - Costs up 41% * Benefits and costs Incremental benefits down 10% and incremental costs up to 24.7%
Net Present value
At 12% US$118 million
14. The data above illustrates the project's sensitivity to variations in benefits and recurrent costs. A range of possibilities incorporating maximum and minimum expectations, are covered. For the "9maximum",or the base case, it is assumed that full benefits are obtained from increased employment as outlined and tariff revenue for electricity and water. The analysis assumes that affordability is not a problem for water and power. In the unlikely event that tariffs for both water and power have to be increased simultaneously, affordability will become a problem for a maximum of 30 percent of the population of Olongapo, the segment that lives below the poverty line.
15. Crossover (switching) values for the project are also provided above. These indicate a combination of changes in benefits and costs required to reduce the net present value (NPV) to zero (or, alternatively, the rate of return to 12 percent, the estimated opportunity cost of capital in the Philippines). Given the conservative assumptions used in the analysis the project is not particularly sensitive to changes in revenue and costs. If benefits are reduced 25.3 percent and expenses maintained at the base level the NPV falls to zero at a discount rate of 12 percent. If benefits are maintained at the base rate recurrent expenses need to be increased by 41 percent to obtain a zero NPV. Benefits need to be reduced by 10 percent and recurrent expenses increased by 24.7 percent simultaneously to obtain zero NPV.
16. Affordabilitv. A demographic analysis of Olongapo City's population shows that some 20 percent of its families cannot afford water and electricity . The project's power and water supply components are expected to generate savings from metered billing in the Secured Area, more efficient administration, and economies of scale that will lead to lower tariffs for small consumers-the base rate for small consumers is projected to drop from P 3.72 to P 3.18 per kWh-and should increase affordability. Both Subic Water and the consolidated power utility will look closely at making power and water available to the entire population of Olongapo City through appropriate rate structures. The project provides for tariff studies for both water and power distribution. The discussion on power tariffs in the financial analvsis should be noted in the overall economic context of the project.
Philippines:Power Merger Studies of OlongapoCity and SBMA,March 1996,Chapter 3. REPUBLIC OF THE PHILIPPINES SECOND SUBIC BAY FREEPORT PROJECT
Economic Analysis
Calendar years 1997 | 199 1999 2000 2001 2002 2003 2004 2005 2006 2007 2009 2009 2010-15
Investment costs ($S000) - Institutonal strengthening 1072.2 1399.0 855 6 599 1 - Bulkwater supply 1727.1 11436,0 12355.9 -Power dstribution 1305.1 5243.1 9437.7 52431 - Roads & bridges 987 0 15624.2 9755 9 3372.6 - Ecologycentre 499 2 4 8 4.8 4.8 Total Investmentcosts (S000) 559006 33707.0 32409.8 9219.6
Project beneftts Industrial benefts - Est new jobs in SBMAarea 2375 6200 10025 17025 21650 24825 28000 28000 28000 28000 28000 28000 - Atributable to project- (33%) 784 2046 3308 5618 7145 8192 9240 9240 9240 9240 9240 9240 -Total industrial benefds 1568 4092 6617 11237 14289 16385 18480 18480 18480 18480 18480 18480 00 WatersuPIo ($000) 12227 13268 14306 15347 16385 17426 18117 18807 19498 20188 20876 Powerdedribution ($000) 29956 35534 42078 48675 54987 60475 66522 73184 80501 88555 97401 Total benefits (S000) 1568 46275 55418 67620 78311 87756 96381 103119 110471 118479 127224 1367"
Recurrent costs (V000) -Ecologycentre 6 6 6 6 6 6 6 6 6 6 6 6 6 6 -Water supply 7670 8326 8981 9637 10291 10948 11383 11818 12253 12689 13123 - Powersupply, bulk power 22664 24930 27426 30169 33185 36496 40146 44166 48582 53443 58781 - Powersupply, other 5573 5935 6329 6763 7243 7768 8347 8984 9683 10454 11302 -Roads(maintenance) 135 135 135 135 135 135 135 135 135 135 135 900 135 Total recurrent costs 6 141 141 36048 39332 42877 46710 50860 55353 60017 6110 70660 T7492 83348
Net projectbenefits (VOSO) -5597 -33849 -30988 1007 16066 24743 31601 36897 41028 43102 45362 47019 48731 53406
IA
0E - 79 - Annex 9 Page 6 of 6
REPUBLIC OF THE PHILIPPINES SECOND SUBIC BAY FREEPORT PROJECT
Economic Rate of Return Period Year Incremental Capital Net benefitsDiscounted Benefits Costs investment net benefits ($S000.) ($'000) ($'000) ($'000) ($'000) 1 1997 6 5591 -5597 -4997 2 1998 141 33707 -33849 -26984 3 1999 1568 141 32410 -30984 -22054 4 2000 46275 36048 9220 1007 640 5 2001 55418 39332 16086 9128 6 2002 67620 42877 24743 12535 7 2003 78311 46710 31601 14295 8 2004 87756 50860 36897 14902 9 2005 96381 55353 41028 14795 10 2006 103119 60017 43102 13878 11 2007 110471 65110 45362 13040 12 2008 118479 70660 47819 12274 13 2009 127224 77492 49731 11397 14 2010 136758 83348 53409 10929 15 2011 136758 83348 53409 9758 16 2012 136758 83348 53409 8712 17 2013 136758 83348 53409 7779 18 2014 136758 83348 53409 6945 19 2015 136758 83348 53409 6201 20 2016 136758 83348 53409 5537
EIRR= 29.6 % 118710
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