Document of The World Bank FOR OFFICIAL USE ONLY Public Disclosure Authorized Report No. 12773-PB STAFF APPRAISAL REPORT Public Disclosure Authorized PHILIPPINES SUBIC BAY FREEPORTPROJECT MAY10, 1994 Public Disclosure Authorized Industry and Energy Operations Division Public Disclosure Authorized Country Department I East Asia and Pacific Regional Office This documenthas a restricteddistribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwisebe disclosedwithout World Bank authorization. CURRENCY EQUIVALENTS (as of December 31, 1993) Currency Unit = Peso i 1 = US$0.035 US$1 = P 28.4 WEIGHTSAND MEASURES ha hectare km kilometer m meter m2 square meter m3 cubic meter MGD million gallons per day MW megawatt ABBREVIATIONSAND ACRONYMS ADB - Asian Development Bank ASEAN - Associationof South East Asian Nations BCDA - Bases Conversionand DevelopmentAuthority BOT - Build-Operate-Transfer CDA - Comprehensive Development Area CIF - Cost, Insurance and Freight COA - Commission on Audit DBM - Departmentof Budget and Management DENR - Departmentof Environmentand Natural Resources DFI - Direct Foreign Investrnent DOJ - Department of Justice EPZ - Export Processing Zone GEF - Global Environment Facility GOCC - GovernmentOwned and ControlledCorporation GOP - Government of Philippines IRR - ImplementingRules and Regulations JV - Joint Venture MOA - Memorandum of Agreement NPC - National Power Corporation PWC - Public Works Center SBF - Subic Bay Freeport SBMA - Subic Bay Metropolitan Authority SEZ - Special Economic Zone US - United States FISCAL YEAR January 1 to December31 FOR OFFICIAL USE ONLY PHILIPPINES SUBIC BAY FREEPORT PROJECT STAFF APPRAISAL REPORT CONTENTS Page No. Loan and Project Summary ............................ I. BACKGROUND: THE BASE CONVERSION PROCESS ........... 1 A. The Freeport Concept ............................. 2 B. The Conversion Planning Process ...................... 2 II. THE SUBIC BAY FREEPORT ............................ 5 A. Endowments and Existing Facilities ..................... 5 B. The SBF's Competitiveness and Development Prospects 7 C. The Conversion Strategy. 9 D. Status of SBF Development and Privatization .12 E. Off-SBF Development Program and Priorities .14 F. Lessons from Previous Bank Involvement .14 G. Rationale for Bank Involvement .15 III. THE PROJECT .16 A. Objective .16 B. Description .16 C. Cost and Financing .18 D. Implementation .19 E. Environmental Aspects .22 IV. THE BORROWER .23 A. Background .23 B. Organizational Structure .24 C. Financial Management and Control .25 D. Environmental Management.26 E. Training and Technical Assistance Needs .28 This project was prepared by Messrs./Mme. Shilpa Patel (Task Manager), John Arnold (Transport Economist-Consultant), Aldo Baietti (Financial Analyst), Jack Fritz (Environmental Specialist), Kishore Rao (Institutional Consultant) and Leonard Schiffman (Transport Engineer). Mrs. Merle Mendis-Dennis processed the report. Peer reviewers were Messrs. Peter Long and Hoon Mok Chung. The project was cleared by Mr. Vineet Nayyar, Chief, EAIIE and Mr. Callisto E. Madavo, Director, EAI. This documenthas a rctricteddistribution and maybe usedby recipientsonly in the performanceof their |officialduties. Itscontents may not otherwise be disclosedwithout World Bank authorization.l Page No. V. FINANCIALASPECTS .................................. 29 A. Overviewof Past and Current Performance................... 29 B. InvestmentProgram and Financing Plan ..................... 31 C. Future Financial Performance ........................... 32 VI. PROJECTBENEFITS AND RISKS ............ .. ............ 34 A. Benefits......................................... 34 B. Risks .......................................... 35 VII. AGREEMENTSAND RECOMMENDATION . .36 A. Agreements.36 B. Recommendation.37 ANNEXES Annex 1 Descriptionof InfrastructureComponents .................... 38 Annex 2 Indicative Timetableof TA Activities ...................... 40 Annex 3 MerchandiseControl System ............................ 41 Annex 4 Zoning Regulationsand Design Code ...................... 44 Annex 5 AutomatedFinancial Management and AccountingSystem ......... 46 Annex 6 PrivatizationsTransactions Assistance ...................... 48 Annex 7 EnhancingSBMA's InstitutionalCapabilities .................. 50 Annex 8 Facilities ManagementSupport .......................... 55 Annex 9 EnvironmentalBaseline Survey .......................... 57 Annex 10 InstitutionalSupport to the EcologyCenter .64 Annex 11 EnvironmentalManagement Plan (EMP) .66 Annex 12 Total Project Cost .72 Annex 13 DisbursementSchedule .74 Annex 14 Project SupervisionPlan .75 Annex 15 ImplementationSchedule .76 Annex 16 SBMA's FinancialStatements .78 Annex 17 Assumptionsfor Financial Projections.81 Annex 18 EconomicAnalysis .92 Annex 19 Selected DocumentsAvailable in the Project File .94 OrganizationChart Map: IBRD No. 25499 and 25500R PHILIPPINES SUBIC BAY FREEPORTPROJECT Loan and Project Summary Borrower: The Subic Bay MetropolitanAuthority (SBMA) Guarantor: Republicof Philippines Amount: US$40 million equivalent Terms: 20 years, including5 years of grace, at the Bank's standard variable interest rate. Proiect Objectives: The objective of the project is to attract private investors to the Subic Bay Freeport (SBF). This will be achievedby: (a) improvingexisting infrastructure; (b) improvingaccess to the area for industrial, commercialand passenger traffic; (c) maintainingthe SBF asset base, includingprotection of the environment; and (d) strengtheningthe capacity of the SBMAto manageand administer the facility. ProjectDescription: The project consists of three components. The first is site improvement,which includes improvementof land access (road, bridge and entry gates); airport improvements(runway repair, strengtheningof aprons and taxiway, airport communicationsand navigationequipment, and conversionof an existing building into a passengerterminal); port repairs; a pilot standard factory building development(6 buildings);and the provisionof miscellaneous equipmentfor security and maintenancepurposes. The second componentis technical assistanceand training to strengthenthe institutionalcapacity of the SBMA and to provide appropriatesystems for the implementationof freeport policies. The third is environmentalprotection, which includes the carrying out of an environmentalbaseline survey, the provisionof monitoringequipment and institutionalsupport to establish a sound environmentalinfrastructure at the SBF. Benefits and Risks: The major project benefits are: (a) economicbenefits arising from increased economicactivity and employmentin the region, estimated to reach US$750 million over the next decade; (b) environmentalbenefits arising from increased protection of the forest lands and the bay; and (c) financial benefits to the SBMA arising from increasedrental and other income from the SBF. In addition, institutionalstrengthening at the SBMAwill result in significanthuman capital development. The major risks are political in nature. A policy reversal regarding the SBF's freeport status would nullify its competitiveadvantages, and inflows of foreign investmentwould likely diminish. To mitigate this risk, assuranceswere obtained that the SBF's freeport status will be maintained,and appropriate remedies against a potential policy reversal are be includedin the proposed loan. Another risk relates to the relative lack of experience in freeport managementat the SBMA. To address this concern, the project will provide long-termn technical assistanceto provide the expertiserequired while training SBMA personnelon-the-job so that they gain the necessaryexperience. The risk of delays in project implementationhas been minimizedthrough intensiveproject preparation activity. The project itself is not expected to have adverse environmentalimpacts. There is a risk of future environmentaldegradation if satisfactorymaintenance practices are not followed. The project will address this concern. ProjectCost: Local Foreign Total ------------------US$ million Site Improvement 9.3 26.9 36.2 InstitutionalSupport 0.2 4.8 4.9 EnvironmentalProtection 0.0 1.0 1.0 Taxes and Duties 1.0 0.0 1.0 Total Cost 10.5 32.6 43.1 Physical Contingencies 1.5 4.6 6.0 Price Contingencies 1.0 1.9 2.9 Total Cost with Contingencies 12.9 39.1 52.0 Interest During Construction 0.6 1.5 2.1 Total FinancingRequired 13.5 40.6 54.1 FSinancng Plan: Local Foreign Total -------- US$ million ------- IBRD 0.9 39.1 40.0 SBMA's Internal Cash 12.6 1.5 14.1 TOTAL 13.5 40.6 54.1 EstimatedDisbursement: IBRD Fiscal Year 1995 1996 1997 1998 1999 --------------------US$ million------------- Annual 7.2 17.6 11.2 2.4 1.6 Cumulative 7.2 24.8 36.0 38.4 40.0 EconomicRate of Return: 12% to 37% dependingon project component. Map: IBRD 25499 and 25500R. I. BACKGROUND:THE BASE CONVERSIONPROCESS 1.1 The Subic Naval Base was the largest U.S. military facility operatingoutside the United States. Located 80 km northwestof Manila (see Map IBRD 25499), the baselands covered 15,130 ha, within the territorialjurisdiction of the City of Olongapo,the town of Subic in Zanbales, and the towns of Moron and Hermosa in Bataan. Approximately6,700 ha housed the area formerly leased by the U.S. Navy. Given its strategic location, and its role as the primary support for the U.S. Seventh Fleet operatingin the Westem Pacific and Indian Ocean, the U.S. had investedheavily in the Base. Estimates of the replacementvalue of the facilities range from US$8-10billion.