Philippines - Second Subic Bay Freeport Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-6992 PH MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN OF US$60.0 MILLION TO SUBIC BAY METROPOLITAN AUTHORITY (SBMA) WITH THE GUARANTEE OF THE REPUBLIC OF THE PHILIPPINES FOR A SECOND SUBIC BAY FREEPORT PROJECT October 30, 1996 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (as of September, 1996) Currency Unit = Peso P P 1 US$0.038 US$1.00 P 26.0 WEIGHTS AND MEASURES ha. hectare kV = Kilovolt-ampere (1,000 volt-amperes) LV = Low voltage ABBREVIATIONS AND ACRONYMS APEC - Asia-Pacific Economic Cooperation CAS - Country Assistance Strategy EIA - Environmental Impact Assessment EIRR - Economic Internal Rate of Return FIRR - Financial Internal Rate of Return IDA - International Development Association IRR - Implementation Rules and Regulations JAIDO - Japanese Industrial Development Organization MIS - Management Information System PHRD - Policy and Human Resources Development SBF - Subic Bay Freeport SBFZ - Subic Bay Freeport Zone SBMA - Subic Bay Metropolitan Authority FISCAL YEAR January 1 to December 31 FOR OFFICIAL USE ONLY REPUBLIC OF THE PHILIPPINES SECOND SUBIC BAY FREEPORT PROJECT Loan and Project Summary Borrower: Subic Bay Metropolitan Authority (SBMA) Guarantor: Republic of the Philippines Implementing Agency: Subic Bay Metropolitan Authority (SBMA) Beneficiary: Not applicable Poverty: Not applicable Amount: US$60.0 million Terms: 20 years, including five years of grace, at the Bank's standard LIBOR-based interest rate for US$ Single Currency Loans Commitment Fee: 0.75 percent on undisbursed loan balances, beginning 60 days after signing, less any waiver Net Present Value: US$118 million Financing Plan: See Schedule A Staff Appraisal Report: No. 15956-PH Map: IBRD No. 28291 Project ID No.: 40981 Vice President: Nicholas C. Hope, Acting, EAP Director: Javad Khalilzadeh-Shirazi, EAl Division Chief: J. Shivakumar, EAlIN Task Manager: Aloysius Ordu Ths document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF THE PHILIPPINES FOR A SECOND SUBIC BAY FREEPORT PROJECT 1. I submit for your approval the following memorandum and recommendation on a proposed loan to Subic Bay Metropolitan Authority (SBMA) with the guarantee of the Government of the Republic of the Philippines for US$60.0 million to help finance a Second Subic Bay Freeport Project. The loan would be at the Bank's standard LIBOR-based interest rate for US$ Single Currency Loans, with a maturity of 20 years, including five years of grace. 2. Country/Sector Background. The Subic Bay Naval Base in the Philippines was 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, established the Subic Bay Metropolitan Authority (SBMA), and requested assistance from the World Bank to help the Task Force and SBMA to 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. The Bank further arranged a Japanese- funded Policy and Human Resources Development (PHRD) Technical Assistance that assisted GOP and SBMA: (i) to formulate the implementing rules and regulations for the freeport; (ii) to prepare a land use and facilities use plan for the site; (iii) to initiate transportation planning; and (iv) to market and promote Subic Bay as an economic freeport. This culminated in the approval of the first Bank assisted 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. 3. 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 consisted of infrastructure rehabilitation and upgrading, and technical assistance to strengthen SBMA and develop an environmental management plan. 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 11,821 jobs. Employment creation is expected to be 39,733 at full operation of these firms which will far exceed the Subic I projections of 16,300 jobs. 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 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. Base conversion is, however, far from complete. Several rehabilitation and construction projects are in progress in preparation for the Asia-Pacific Economic Cooperation (APEC) meeting to be held in Subic Bay in November 1996. The conversion -2- 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. 5. The freeport's rapid expansion has put great pressure on Subic's infrastructure and SBMA'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. 6. Lessons Learned From Bank Involvement. SBMA's priority has been to establish itself as an effective and well-structured organization, and significant progress has been made in a number of areas. Government procurement, compensation and other procedures are being followed. Progress has been made in establishing a more comprehensive accounting, finance, and budgeting system in line with Government regulations. A well-functioning Ecology 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. Implementation of Subic I has been highly satisfactory, and private sector activity/interest remains buoyant in the freeport. About 59 percent of the loan funds have been disbursed with over two years until loan completion. The outstanding balance under the loan has been fully committed. 7. The March 1996 Mid-Term Review of progress under Subic I showed that the project-while generally very well implemented-had been constrained by SBMA's lack of familiarity with Bank procurement procedures. The proposed project includes technical assistance to strengthen SBMA's procurement capability. Government-SBMA interaction has, also, not been as smooth as expected: the legislation creating the freeport is broad, rather than detailed, and the Government has on a number of occasions changed regulations on such issues as the duty free allowance of non-residents of the Subic Bay Freeport (SBF). 8. These issues were discussed with Government during the Mid-Term Review, which was an important step in developing a consensus between SBMA and Government departments on the practical constraints facing SBMA and the role of freeports in the Philippines. Agreement has also been reached that the Government and SBMA will establish an inter-agency task force to improve their dialogue and work together on revising the implementing rules and regulations for SBF. As Subic is seen as a prototype for further freeports, this dialogue will be of particular importance in developing a national legislative/regulatory package for freeports. 9. Rationale for Bank Involvement. The Bank's catalytic role in supporting SBMA's institutional strengthening and provision of the infrastructure services 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 Assistance Strategy (CAS) discussed at the Board on April 4, 1996. The Philippine CAS emphasizes investment lending operations to strengthen infrastructure (power, water supply, solid waste management and transport) to promote economic growth vital to rapid poverty reduction. The CAS also emphasizes private sector participation in providing infrastructure services, which is a major objective of the proposed project. The Freeport has, in a relatively short time, boosted the Philippines' reputation as an attractive investment location that has attracted major international corporations. Continued growth is expected with the completion of the -3- Taiwanese-three phases-and JAIDO's industrial parks. Subic has become-as anticipated-a significant growth pole for the Philippine economy; it generates important foreign exchange revenues and creates jobs. 10. 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. 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 also represents an important step toward SBMA's goal of privatizing services delivery and infrastructure provision. 11. Project Objectives. 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 project would aim at further strengthening of SBMA's capacity to regulate and manage the growth of the Freeport, and supporting further infrastructure development -including SBMA's initial venture into partnership with the private sector through a water supply joint venture. 12. Project Description. The US$108 million project would 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: A. Institutional Strengthening (US$4.6 million) to enhance SBMA's institutional capacity to manage and regulate the freeport through: (a) capacity building on freeport policy through a package of short- and long- term technical assistance in key areas including customs, taxation and incentives; (b) human resources management assistance to assess SBMA's skills mix needs and develop staff training programs; (c) commercialization, privatization, and planning support to facilitate base conversion through commercialization and privatization measures; (d) studies of critical technical issues identified during implementation; (e) technical assistance support to the Foreign Assisted Project Office for two advisors to strengthen SBMA's capability in procurement and financial management; and (f) support to the Ecology Center to strengthen its capacity for environmental management, monitoring and regulation, and impact assessment through recruitment of two social development specialists to facilitate property acquisition for the water 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. B. Water Supply (US$32.6 million) to increase the quantity of treated water available in the secured area, Olongapo City and Subic Town through: (a) detailed engineering and the development of the Pamatawan well field; (b) the construction of approximately 7,600 -4- meters of raw water transmission main from the Pamatawan well field to a water treatment plant at Castillejos; (c) the construction of an electrical power transmission line to the well field and to the treatment plant; (d) the construction of a water treatment plant and a booster station; (e) the construction of approximately 19,400 meters of treated water transmission main from the treatment plant to a pool of storage reservoirs; (f) the installation of a ground water monitoring at the Pamatawan well field; (g) reforestation in the Pamatawan River basin; and (h) consulting services for a hydrological study to identify water supply sources to meet the long-term water supply needs of Hermosa and Morong; C. Power Distribution Component (US$26.1 million) to rationalize and consolidate the power distribution network of Olongapo-SBMA franchise area through: (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 69/13.8 kV substations and the construction of one 69/13.8 kV substation to interconnect the Olongapo and SBMA franchise areas; (b) installation of about 20 km of 13.8 kV cables; (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 common facilities for the proposed 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; and (f) technical assistance, training, and management services to establish commercial operation in the integrated organization including billing, accounting and administration; D. Roads. Bridges and Related Infrastructure (US$28.1 million) to improve road capacity and access 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) improvement of signalization and channelization at key intersections in the SBF; (b) rehabilitation and retrofitting of four bridges- Kalalake, Malawaan, Boton and Binitican-to meet the latest seismic design code; (c) provision for a new bridge to replace the Kalaklan bridge; (d) carrying out a road maintenance study and establishing a maintenance management system for roads and bridges and staff training in its use and in the procurement and supervision of the contractors who would carry out recurrent and periodic maintenance; (e) a road alignment study for the Subic Bay Freeport Zone (SBFZ) Bypass; (f) improvements in related infrastructure including (i) conducting detailed surveys of jurisdictional boundaries and installation of metes and bounds monuments, (ii) construction of a working 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 SBMA's capability to implement this component of the project. 13. Project Costs and Financing. The total project cost, including contingencies is US$108 million equivalent with a foreign exchange component of about 60 percent. Physical contingencies represent about 12 percent of base cost, and price contingencies include: foreign inflation at 2.4 -5- percent per year (1997-2000) and local inflation at 8.5 percent in 1996, seven percent in 1997, six percent per year in 1998-1999, and five percent in 2000. The project will be financed from two sources. A Bank loan of US$60.0 million is projected to cover 100 percent of the estimated foreign exchange of investment costs plus 100 percent of local costs for consultants. SBMA will finance the remaining local costs, amounting to US$48 million. The Bank loan will be for a period of 20 years, including five years of grace, at the Bank's standard LIBOR-based interest rate for US$ Single Currency Loans. SBMA will bear the foreign exchange and the interest rate risks of the loan. A breakdown of the costs and financing plan are shown in Schedule A. Amounts and methods of procurement and disbursements, and the disbursement schedule are shown in Schedule B. A timetable of key processing events and status of Bank Group operations in the Philippines are given in Schedules C and D, respectively; and Country at a Glance Table is in Schedule E. A map is also attached. The Staff Appraisal Report, No. 15956-PH, dated October 30, 1996 is being distributed separately. 14. Project Implementation. The detailed elements of the organization and management of Subic II are set out in SBMA's project implementation plan which also includes performance monitoring indicators for each aspect of the project that have been agreed with the Bank. These include reduction of time for custom clearances, timely establishment of a policy unit on regulatory framework and framework for commercial dispute settlement, and issuance of a timetable for privatization of SBMA subsidiaries. The proposed project will 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 it for Subic II in order to take advantage of the knowledge already gained by core staff. Based on lessons learned, the following enhancements would be made to increase the effectiveness of project management. 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 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 project implementation plan and this was agreed at negotiations. Provision has also been made for two advisors to strengthen procurement and financial management. 15. Project Sustainability. The Bank-financed 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. In-migration has brought about rapid population growth, estimated at 8.7 percent a year, and increased demand for essential services. Water distribution is 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. The project would also 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 the Geographical Information System as well as continued support to the -6- 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. 16. Environmental and Social Impacts. The proposed project has been assigned a "B" rating for environmental purposes, 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. It shows that most of the project's environmental impact will be temporary as a result of 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 impact mitigation measures are included in the component design. 17. 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 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 to the Bank a satisfactory property acquisition and compensation plan for the water supply component. 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 negative environmental impact. 18. SBMA is committed to environmental protection under the legal agreements for Subic I, which required 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. 19. Project Benefits. The proposed project will increase the SBF's attractiveness to overseas investors and encourage existing investors to expand their operation. 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. -7- 20. Benefits from a development similar to SBF are substantial and they range from direct 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 benefits expected 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 for which it is difficult to isolate all benefits that accrue from this project including the benefits from a number of works to upgrade and maintain existing facilities. 21. Based on the underlying assumptions, the economic internal rate of return (EIRR) of the project is estimated at 30 percent. The analysis shows that the project is sensitive to variations in benefits and recurrent costs. In the base case, it is assumed that full benefits are obtained from increased employment and tariff revenues for electricity and water. If however, water and industrial development (employment) are as for the base case, and live losses (power) increase from eight percent to 30 percent, the EIRR falls from 30 percent to 20 percent. The EIRR is further reduced-to 17 percent-if live losses (power) are increased from eight percent to 20 percent, billing efficiency (power) is lowered from 95 percent to 80 percent, and industrial development (employment) is down by 20 percent. 22. Agreed Actions. During negotiations, agreement was reached that SBMA would: (i) maintain a project management structure acceptable to the Bank for the overall implementation of the project and would identify and assign personnel from its core staff to the project; (ii) retain consultants according to terms of reference and selection procedures acceptable to the Bank; (iii) provide semi-annual progress reports and annual audited statements satisfactory to the Bank; (iv) jointly review with the Bank its rolling five-year investment plan on an annual basis no later than March 31 of each year; and (v) jointly review with the Bank by December 1998 its corporate plan and progress accomplished in carrying out the project. The conditions of effectiveness are: (a) approval of SBMA's corporate plan by its Board of Directors, and (b) the Subic Water joint-venture shall have become effective in accordance with its terms. Finally, the conditions of disbursement against the water supply component are that SBMA would: (a) obtain a water permit from the National Water Resources Board for the proposed abstraction of water from the Pamatawan well field; 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. 23. Project Risks. There are financial 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 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 15 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 five percent. This risk has been taken into account in the commercial agreement between SBMA and Subic Water and will be closely monitored by the Bank. The analysis also shows that the power distribution component is sensitive to increases in usage and live losses, reductions in billing efficiency and reductions in tariff. These risks are being reviewed as part of the studies on tariff and cost recovery options to be financed under the project. -8- 24. 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 which 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 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 should strengthen SBMA's role as the administrator of the freeport zone. 25. The continuity of high caliber leadership beyond 1998, the term of the current SBMA Chairman, 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. 26. 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. 27. 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. 28. Recommendation. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank and recommend that the Executive Directors approve it. James D. Wolfensohn President by Gautam S. Kaji Washington, D.C. October 30, 1996 Attachments -9- Schedule A REPUBLIC OF THE PHILIPPINES SECOND SUBIC BAY FREEPORT PROJECT Estimated Costs (US$ Million) Components: Local Foreign Total A. Institutional Strengthening -Institutional Support 0.7 3.3 4.0 -Ecology Center 0.1 0.5 0.6 B. Water Supply 14.1 18.5 32.6 C. Power Distribution 10.4 15.7 26.1 D. Roads and Bridges 10.6 17.5 28.1 Total Base Cost 35.9 55.5 91.4 Physical Contingencies 4.3 6.5 10.8 Price Contingencies 2.4 3.4 5.8 Total Costs 42.6 65.4 108.0 Percent: 40 60 100 Financing Plan (US$ Million) Project Year 1997 1998 1999 2000 TOTAL Percent Annual Project Costs Investment costs 6.0 36.8 36.2 10.5 89.5 82.9 Operating costs 0.1 0.2 0.2 18.1 18.5 17.1 Total Financing 6.0 37.0 36.4 28.6 108.0 100.0 Required Bank Loan 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 - 10- Schedule B (Page 1 of 2) REPUBLIC OF THE PHILIPPINES SECOND SUBIC BAY FREEPORT PROJECT Procurement and Disbursement A. Summary of Proposed Procurement Arrangements -------------------------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 Engineering Supervision 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) Figures in Parentheses represent amount financed by the Bank Loan. NBF: Non Bank Financed. -11- Schedule B (Page 2 of 2) B. Disbursement Arrangements Amount Category (US$ Million) % Expenditure Financed 1. (a) Civil Works Water 10.0 60% (b) Other Civil Works 26.3 60% 2. (a) Equipment Water 2.9 100% of foreign, 100% local (ex- factory cost), and 70% of local expenditures for other items procured locally (b) Other Equipment 4.2 Same as (a) 3. (a) Consultants for Water 3.1 100% (b) Other Consultants 8.1 100% Unallocated 5.4 TOTAL 60.0 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 - 12 - Schedule C THE REPUBLIC OF THE PHILIPPINES SECOND SUBIC BAY FREEPORT PROJECT Timetable of Key Project Processing Events (a) Time taken to prepare the project: 14 months (b) Prepared by: SBMA with consultant assistance (c) First Bank mission: March, 1995 (d) Appraisal mission departure: N/A (e) Negotiations: September, 1996 (f) Planned date of effectiveness: January, 1997 (g) List of relevant PCRs and PPARs: N/A This report was prepared by the following: 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. Schedule D -13- Page 1 of 2 STATUS OF BANK GROUP OPERATIONS IN PHILIPPINES A. STATEMENT OF BANK LOANS AND IDA CREDITS /a (As of September 30, 1996) Amount (USS million) Loan or (less cancellations) Credit Fiscal Undis- Number Year Borrower Purpose IBRD IDAb bursed One hundred and sixty-two Loans and seven Credits closed. 6,264.95 171.18 10.45 Of which SALs, SECALs and Program Loans 1903 1981 Republic of the Philippines SAL 1 199.96 2266 1983 Republic of the Philippines SAL II 302.25 2277 1991 Republic of the Philippines Environment & Natural Res. Mgt. 66.00 2469 1985 Republic of the Philippines Agriculture Sector Inputs 150.00 2787 1987 Republic of the Philippines Economic Recovery Program 300.00 2956 1988 Republic of the Philippines Program for Govt. Reform 200.00 3049 1989 Republic of the Philippines Financial Sector 300.00 3149 1990 Republic of the Philippines Debt Management Loan 200.00 3539 1993 Republic of the Philippines Economic Integration Loan 200.00 1.852.21 66.00 0.00 3099 1989 Republic of the Philippines Health Development 70.10 3.85 3146 1990 Republic of the Philippines Municipal Development II 40.00 3.86 3204 1990 Republic of the Philippines Coconut Farms Development 120.95 67.52 3242 1990 Republic of the Philippines WS/Sewer/Sanitation I 58.00 21.78 3261 1991 Republic of the Philippines Communal Irrigation II 46.20 26.95 3263 1991 Republic of the Philippines Earthquake Reconstruction 125.00 18.62 *3360 1991 Republic of the Philippines Env. & Natural Res. Mgt. 158.00 30.08 3430 1992 Republic of the Philippines Highway Management 150.00 112.65 3435 1992 Republic of the Philippines Engineering & Science Educ. 61.00 23.72 3439 1992 National Electrif. Adm. Rural Electrification 91.30 71.62 3455 1992 Republic of the Philippines Municipal Development III 68.00 53.19 2392 1992 Republic of the Philippines Second Vocational Training 36.00 19.75 2506 1993 Republic of the Philippines Urban Health & Nutrition 70.00 65.68 3523 1993 Dev. Bank of the Philippines Telephone System Expansion 134.00 96.98 3603 1993 Republic of the Philippines Tax Computerization 63.00 45.08 3607 1993 Republic of the Philippines Irrigation Operation Support II 51.30 37.28 3626 1993 Philippines National Power Corp. Power Transmission & Rehab. 54.55 11.68 3700 1994 National Power Corporation Leyte Cebu Geothermal 147.00 40.73 3702 1994 Philippines National Oil Co. Leyte Cebu Geothermal 64.00 20.49 3745 1994 Subic Bay Metropolitan Authority Subic Bay Freeport 40.00 11.65 3746 1994 National Power Corporation Leyte Luzon Geothermal 113.00 61.72 3747 1994 Philippine National Oil Co. Leyte Luzon Geothermal 114.00 87.33 3852 1995 Republic of the Philippines Womens Health & Safety 18.00 17.68 3938 1996 Land Bank of the Philippines Rural Finance 11 50.00 32.64 3939 1996 Land Bank of the Philippines Rural Finance II 50.00 36.00 3940 1996 Land Bank of the Philippines Rural Finance 11 50.00 32.90 **3996 1996 National Power Corporation Transmission Grid Reinforcement 100.00 100.00 **3997 1996 National Power Corporation Transmission Grid Reinforcement 150.00 150.00 "4019 1996 Metro. Water Works & Sewerage Sys. Manila 2nd Sewerage 57.00 57.00 Total 8,511.76 277.18 1,368.88 of which has been repaid 2,921.21 11.76 Total now held by Bank and IDA 559 2f5.8R Amount sold 31.35 Of which repaid 31.35 Total Undisbursed 1283.5 85.43 1,368.88 /a The status of the projects listed in Part A is described in a separate report on all IBRD/IDA-financed projects in execution, which is updated twice yearly and circulated to the Executive Directors on April 30 and October 31. Amounts are presented net of cancellations. /b Principal amounts in US$ equivalent at date of negotiations, and undisbursed amounts in equivalent are valued at exchange rate applicable on the date of this statement. Indicates SAL/SECAL Loan and Credits. Not yet effective. Schedule D -14- Page 2 of 2 B. STATEMENT OF IFC INVESTMENTS (As of September 30,1996) Undisbursed Original Gross Commitments Including IFC IFC Parti- Held partici- Fiscal Loan Equity cipant Total by pants Year Obligor Type of Business - US$ million - IFC portion 1963/73 Private Dev. Corp. of the Philippines a/ Financial Services 6.52 4.36 8.48 19.36 - - 1967/89 Manila Electric Company Infrastructure 30.64 3.64 2.96 37.24 16.30 - 1970 Paper Industries Corporation s/ Timber, Pulp & Paper - 0.81 1.40 2.21 - 1970/72 Mariwasa Manufacturing Company 2/ Cement & Construction Mat. 0.38 0.26 0.55 1.19 - - 1970/87/ Philippine Long Distance Telelephone Co. Infrastructure 88.50 0.03 40.00 128.53 41.55 7.80 88/90 1971/77 Philippine Petroleum at Mining and Extraction 6.20 2.07 - 8.27 - - 1972 Marinduque Mining & Ind. Corporation a/ Mining and Extraction 15.00 - - 15.00 - - 1973 Victorias Chemical Corporation a/ Chemical & Petrochemicals 1.85 0.35 - 2.20 - - 1974 Filipinas Synthetic Fiber Corporation s/ Textiles 1.50 - - 1.50 - - 1974 RFM Corporation a/ Food & Agribusiness 1.20 - - 1.20 - - 1974179 Maria Cristina Chemical Industry Mining and Extraction 1.55 0.64 - 2.19 0.44 - 1975 Philippines Polyamide Ind. Corporation a/ Textiles 7.00 - - 7.00 - - 1976 Philagro Edible Oils, Inc. a/ Food & Agribusiness 2.65 0.19 - 2.84 - - 1977 Sarmiento Industries a/ Timber, Pulp & Paper 3.50 - 3.50 - - 1977/85 Acoje Mining Co. Inc. a/ Mining and Extraction 2.50 1.22 - 3.72 - - 1978 Cebu Shipyard & Engineering Works ai Manufacturing 2.10 - - 2.10 - - 1979/90 General Milling Corporation Food & Agribusiness 4.00 1.73 5.73 1.73 - 1980 Consolidated Ind. Gas, Inc. a/ Chemicals & Petrochemicals 4.50 - - 4.50 - - 1980 Philippines Associated Smelting Mining and Extraction - 5.00 - 5.00 - - and Refining Corporation (PASAR) al 1980 Ventures in Industry & Business Financial Services - 0.24 - 0.24 - - Enterprise, Inc. (VISES) a/ 1980/83/ All Asia Capital Trust Financial Services 30.16 2.77 6.00 38.93 27.73 10.00 89/90/95 1981 Loans to Small & Medium Scale Financial Services 18.50 0.64 - 19.14 - - Enterprises (SMSE) gt 1981/92 Davao Union Cement Corporation Cement & Construction Mat. 16.00 0.85 - 16.85 - 1982 NDC-Guthrie Plantations, Inc. a/ Food & Agribusiness 11.00 - - 11.00 - - 1986/91/92 Pure Foods Corporation a/ Food & Agribusiness - 4.46 - 4.46 - - 1987 BPI Agribank Financial Services - 0.98 - 0.98 - - 1988 First Philippine Capital a] Financial Services - 4.20 - 4.20 - - 1989 Hambrecht & Quist Financial Services - 2.28 - 2.28 2.28 - 1990 First Philippine Fund a/ Financial Services - 29.73 - 29.73 - - 1990 The Manila Fund (Cayman) g/ Financial Services - 7.00 - 7.00 - - 1991 Automated Microelectronics p/ Manufacturing 9.00 2.80 - 11.80 - - 1991 Avantex Mill Corporation Textiles 11.25 2.33 - 13.58 8.31 - 1991 Best Chemicals Chemicals & Petrochemicals 6.50 2.30 - 8.80 2.03 - 1991 Hopewell Energy Infrastructure 10.00 1.10 - 11.10 0.95 - 1991 Makati Shangri-La Hotel Hotels and Tourism 29.50 - 29.50 59.00 4.57 - 1993 Bacnotan Cement Corp. Cement & Construction Mat. 18.00 9.24 - 27.24 12.63 1993 Hopewell Power Infrastructure 60.00 10.00 40.00 110.00 70.00 - 1993 Mactan Shangri-La Hotel Hotels and Tourism 12.00 - 12.00 24.00 - - 1993 Northern Mindanao Power Infrastructure 12.50 4.50 21.00 38.00 13.96 0.24 1993 Pilipinas Shell Petroleum Oil Refining 50.00 - 85.00 135.00 11.63 - 1994 Hambrecht & Quist Financial Services - 2.50 - 2.50 2.50 0.10 1995 Walden AB Ayala Management Financial Services - 0.05 - 0.05 0.05 0.02 1995 Walden AB Ayala Ventures Financial Services - 3.75 - 3.76 3.75 1.85 1996 All Asia Capital Growth Financial Services - 4.00 - 4.00 4.00 - 1996 All Asia Capital Managers Financial Services - 0.04 - 0.04 0.04 - 1996 Asian Ventures Limited Financial Services - 0.01 - 0.01 0.01 1996 Pangasinan Electric Corporation Infrastructure 30.00 - 196.00 226.00 30.00 226.00 Total Gross Commitments b/ 504.00 116.07 442.89 1062.96 Less Cancellations, Terminations, Repayments & Sales 292.16 73.45 181.38 546.99 Total Commitments Now Held c1 211.84 42.62 261.51 515.97 267.67 246.01 Pending Commitments A. Magsaysay 8.00 3.00 26.50 37.50 Total Commitments Held & Pending Commitments 219.84 45.62 288.01 553.47 Total Undisbursed Commitments 41 2.21 ZQ. 4 .01 a] Investments which have been fully cancelled, terminated, written off, sold redeemed or repaid. b/ Gross commitments consist of approved and signed projects. c/ Held commitments consist of disbursed and undisbursed investments. -15 - Schedule E Philippines at a glance Page I of 2 Lower. POVERTY and SOCIAL East middle- Philippines Asia Income Development dlamond* Population mid-1995 (millions) 67.5 1,709 1,154 GNP per capita 1995 (US$) 1,134 840 1,700 Life expectancy GNP 1995 (billions USS) 76.5 1,436 1,962 Average annual growth, 1990-95 Population (%) 1.9 1.3 1.4 Labor force (%) 2.6 1.4 1.7 GNP per - \ Most recent estimate (latest year available since 1989) capita Poverty: headcount index (% of population) 41 Urban population (% of total populaffon) 54 32 56 Life expectancy at birth (years) 65 68 67 Infant mortality iper 1,000 live births) 40 35 36 Access to safe water Child malnutrition (% of children under 5) 30 17 Access to safe water (% ofpopulation) 81 67 73 Illiteracy (%A of population age 15+) 10 ' 16 .. - Philippines Gross primary enrollment (% of school-age population) 112 116 104 - Lower-middle-income group Male 113 119 105 Female 111 115 101 KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1975 1985 1994 1995 Economic ratios* GOP (billions US$) 15.0 30.7 64.2 74.1 Gross domestic investmentlGDP 30.9 14.8 23.5 21.8 Openness of economy Exports of goods and non-factor services/GDP 21.0 24.7 33.0 35.1 Gross domestic savings/GDP 24.8 16.5 17.8 14.7 Gross national savings/GOP 24.7 14.9 19.0 19.3 Current account balance/GDP -6.2 -0.1 -4.4 -2.5 Savings Investment Interest payments1GDP 0.8 3.1 2.5 2.5 Total debtlGOP 28.0 86.7 60.0 54.9 Total debt servicelexports 14.4 31.6 20.4 14.0 Present value of debt/GOP .. .. 54.6 Present value of debtlexports .. .. 143.1 .. Indebtedness 1975-84 1985-95 1994 1995 1996-04 (average annual growth) - Philippines GOP 3.9 3.2 4.4 4.8 5.5 Lower-middle-income group GNP per capita 1.3 1.7 2.9 3.8 3.5 -Lw-mdJ-ncm ro, Exports of goods and nfs 95 8.7 19.8 11.9 10.6 S: -'JRE of the ECONOMY (% 1975 1985 1994 1995 Growth rates of output and investment (%) ,gricultuie 30.3 24.6 22.0 21.7 -o Industry 34.6 35.1 32.5 32.1 " Manufacturing 257 25.2 23.3 23.0 10 Services 35.0 40.4 45.5 46.2 o so 91 e2 93 e4 es .10 Private consumption 64 5 75.0 74.2 740 0 - General govemment consumption 10.7 7.6 10.7 11.2 Imports of goods and non-factor services 27.1 21.9 40.1 44.0 -101 -a-GDP (average annual growth) 1975-84 1985-95 1994 1995 Growth rates of exports and imports (%) Agriculture 2.7 2.0 2.6 0.9 20 Industry 4.2 3.1 5.8 7.2 Manufacturing 2.9 3.1 5.0 6.8 Services 4.4 4.0 4.2 4.9 1o Private consumption 3.8 3.5 3.7 3,8 Genet a govemment consumption 1.0 3.2 6.1 3,6 0 Gross donestic investment 2.8 8.0 5.5 4.4 5 90 92 93 4 95 lmpurn goods and non-factor services 6.1 12.3 13.6 16.6 Gioui :ional product 3.7 4.0 5.3 5.5 -Exports -impons Note 1995 data are preliminary estimates. * The diamonds show four key indicators in the country (in bold) compared with its income-group average. It data are missing, the diamond will be incomplete -16- Schedule E Page 2 of 2 Philippines PRICES and GOVERNMENT FINANCE 1975 1985 1994 1995 Inflation (%) Domestic prices (% change) 20 Consumer prices 6.8 23.1 9.1 8.1 15 Implicit GDP deflator 9.4 17.6 10.0 7.4 10 Government finance s (% of GDP) o Current revenue .. 12.1 20.6 19.6 0 9 92 96 94 95 Current budget balance .. 2.4 3.2 3.1 -GDPdef -CPI Overall surplus/deficit .. -1.9 -0.5 -0.5 - TRADE 1975 1985 1994 1995 Export and import levels (mill. US$) (millions USS) Total exports (fob) .. 4,629 13,483 17,370 30.00 Coconut oil .. 347 639 989 25,coo Sugar .. 185 77 74 Manufactures .. 2,539 10,615 13,868 20000 Total imports (cif) .. 5,111 21,333 26,333 15000 Food .. 256 815 1,060 10 000 Fuel and energy .. 1,452 2,040 2,461 Capital goods .. 769 6,868 8,029 0 Export price index (1987=100) .. 81 120 132 so go 91 92 53 94 5 Import price index (1987=100) .. 63 117 126 -Expors irmports Terms of trade (1987=100) .. 127 103 105 1 Exports n imports BALANCE of PAYMENTS 1975 1985 1994 1995 (millions USS) Current account balance to GDP ratio (%) Exports of goods and non-factor services 3,000 6,864 20,044 26,532 o Imports of goods and non-factor services 4,116 5,961 25,712 32,804 so so o .2 3s Resource balance -1,116 903 -5,668 -6,272 Net factor income -126 -1,317 1,782 3,493 -2 Net current transfers 318 379 936 880 -3 Current account balance, before official transfers -923 -35 -2,950 -1,899 Financing items (net) 912 867 4,752 2,544 Changes in net reserves 11 -832 -1,802 -645 .e Memo: Reserves including gold (mill. USS) 1,463 1,098 7,121 7,775 Conversion rate (locai/USS) 7.2 18.6 26.4 25.7 EXTERNAL DEBT and RESOURCE FLOWS 1975 1988 1994 1995 (millions US$) Composition of total debt, 1995 (mill. US$) Total debt outstanding and disbursed 4,171 26,640 40,006 39.433 IBRO 238 2,420 4,855 5,002 IDA 17 84 174 183 Total debt service 457 2,534 4,637 5,294 B IBRD 26 285 717 790 5800 s o IDA 0 1 3 3 728 Composition of net resource flows F 3303 Official grants 72 139 284 290 11095 Official creditors 185 382 214 -631 E Private creditors 348 776 1.755 819 13822 Foreign direct investment 98 12 1,289 1,189 Portfolio equity 0 0 269 1,201 World Bank program Commitments 114 104 578 168 A - IBRD E - Bilateral Disbursements 94 276 305 403 B - IDA 0 - Other multilateral F - Private Principal repayments 12 110 359 415 C - IMF G - Short-term Net flows 82 166 -55 -12 Interest payments 14 176 360 378 Net transfers 68 -10 -415 -390 International Economics Department 10122/96 MAP SECTION  홑 IaRD 28291 긱낚：   Hg -1G169 -el :QNTod