Philippines - Subic Bay Freeport Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No: 20071 IMPLEMENTATION COMPLETION REPORT (LOAN 37450) ONA LOAN IN THE AMOUNT OF US$ 40 MILLION TO THE REPUBLIC OF THE PHILIPPINES FORA PROJECT ID: P004609 L/C NUMBER: 37450 SUBIC BAY FREEPORT PROJECT February 22, 2000 Private Sector Development (PSD) Sector Unit East Asia and Pacific Region 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 (Exchange Rate Effective as of December, 1999) Currency Unit = Philippine Peso (P) P1.00=US$ 0.025 US$ 1.00 = P40.00 FISCAL YEAR January I - December 31 ABBREVIATIONS AND ACRONYMS APEC - Asia Pacific Economic Cooperation BCDA - Bases Conversion and Development Act BOT - Build Operate Transfer CAS - Country Assistance Strategy CBD - Central Business District COA - Commission on Audit DBP - Development Bank of the Philippines EIRR - Economic Internal Rate of Return EPZ - Export Processing Zone FIRR - Financial Internal Rate of Return GOCC - Government Owned and Controlled Corporation GOP - Government of the Philippines IATF - Inter-Agency Task Force ICAO - International Civil Aviation Organization IFMS - Integrated Financial Management System IPDP - Indigenous Peoples Development Plan IRR - Implementing Rules and Regulations PMO - Project Mangement Office PEZA - Philippine Export Zone Authority PNB - Philippine National Bank QAG - Quality Assurance Group SAR - Staff Appraisal Report SBF - Subic Bay Freeport SBIA - Subic Bay International Airport SBMA - Subic Bay Metropolitan Authority SEZ - Special Economic Zone TA - Technical Assistance Vice President: Jean-Michel Severino, EAP Country Manager/Director: Vinay K. Bhargava, EASPF Sector Manager/Director: Javed Hamid, EASPS Task Team Leader/Task Manager: Aloysius U. Ordu, EASPS/EACPF  FOR OFFICIAL USE ONLY CONTENTS Page No 1. Project Data 1 2. Principal Performance Ratings 1 3. Assessment of Development Objective and Design, and of Quality at Entry 1 4. Achievement of Objective and Outputs 5 5. Major Factors Affecting Implementation and Outcome 8 6. Sustainability 10 7. Bank and Borrower Performance 12 8. Lessons Learned 15 9. Partner Comments 16 10. Additional Information 18 Annex 1. Key Performance Indicators/Log Frame Matrix 22 Annex 2. Project Costs and Financing 23 Annex 3. Economic Costs and Benefits 25 Annex 4. Bank Inputs 26 Annex 5. Ratings for Achievement of Objectives/Outputs of Components 28 Annex 6. Ratings of Bank and Borrower Performance 29 Annex 7. List of Supporting Documents 30 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.   Project ID: P004609 Project Name: SUBIC BAY FREEPORT Team Leader: Aloysius Uche Ordu TL Unit: EACPF ICR Type: Core ICR Report Date: February 21, 2000 1. Project Data AName: SUBIC BAY FREEPORT LIC Number: 37450 Country/Department: PHILIPPINES Region: East Asia and Pacific Region Sector/subsector: TP - Ports & Waterways KEY DATES Original Revised/Actual PCD: 05/12/93 Effective: 08/17/94 08/17/94 Appraisal: 11/09/93 MTR: 03/06/96 03/06/96 Approval: 06/02/94 Closing: 06/30/99 06/30/99 Borrower/lmplementing Agency: SBMA/SBMA Other Partners: STAFF Current At Appraisal Vice President: Jean-Michel Severino Gautam Kaji Country Manager: Vinay K. Bhargava Callisto Madavo Sector Manager: Javed Hamid Vineet Nayyar Team Leader at ICR: Aloysius U. Ordu ICR Primary Author: John Cameron 2. Principal Performance Ratings (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=Highly Unlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible) Outcome: S Sustainability: L Institutional Development M Impact: Bank Performance: S Borrower Performance: S QAG (if available) ICR Quality at Entry: S Project at Risk at Any Time: No 3. Assessment of Development Objective and Design, and of Quality at Entry 3.1 Original Objective: The project objective was to attract private investors to the Subic Bay Freeport (SBF) by (a) improving infrastructure and access to the area for industrial, commercial, and passenger traffic, (b) maintaining the SBF asset base, including protecting the environment, and (c) strengthening the capacity of the Subic Bay Metropolitan Authority (SBMA) to manage and administer the facility.  The Bank's March 1993 Country Assistance Strategy (CAS) for the Philippines stated that the Bank would focus its efforts on macroeconomic issues, infrastructure provision, improving the private business climate, and poverty alleviation. The CAS noted that there was a need to strengthen public sector infrastructure institutions to increase their capacity to absorb foreign assistance and deliver services. On the Borrower's side, the Government's Republic Act No. 7227 of 1992 established the Bases Conversion and Development Authority (BCDA) to accelerate the conversion of military reservations into other productive uses. The declared policy of the government was to accelerate the sound and balanced conversion of the Clark and Subic military reservations into alternative productive civilian use. The project objective was consistent with both the Bank's CAS and the Government's development strategy. The objective and the means set out to achieve it were clear and realistic, and the project contributed significantly to development in the SBF, neighboring areas, and the Philippines in general. The project was risky for a number of reasons. First, SBMA was a relatively new institution that lacked project management, freeport, and international airport operational experience. Second, SBMA's task of managing and further developing the military base assets left by the United States was, in itself, a massive task. Third, the concept of freeport zones in the Philippines was new and the Government and its agencies had little experience in this area. Fourth, limitations in SBMA's charter and status as a Government Owned and Controlled Corporation (GOCC) reduced its operating autonomy and flexibility. These imposed rigid rules on staffing, compensation, procurement, investment, etc., that led to high employee turnover rates and poor morale. These factors made it difficult for SBMA to carry out its multiple responsibilities over a large and complex set of facilities. In essence, operating as a traditional public sector agency was extremely difficult for an entity that had to move quickly to compete with other freeports in the region. Despite these operating impediments, SBMA generated substantial investor interest and rapid growth in the SBF. But the very growth of the freeport and increasing complexity of investor relationships placed enormous strains on the organization, and raised fundamental questions about its basic role and core mission. 3.2 Revised Objective: Even though there was a substantial shift in funding to the airport from other infrastructure works (see below) there was no change in project objectives, as they were sufficiently broad that revision was not required. The objective of the project is to attact private investors to the Subic Bay Freeport (SBF), to be achieved by: (a) improving infrastructure and access to the area for industrial, commercial and passenger traffic; (b) maintaining the SBF asset base, including protection of the environment; and (c) strengthening the capacity of the SBMA to manage and administer the facility. 3.3 Original Components: The project components were aggregated into three broad areas: site improvement; institutional support, and environmental protection. The site improvement component comprised: (a) construction of 4 km of two-lane access road connecting Kalayaan Gate to Kalalake Bridge; (b) construction of the Kalayaan Security Gate; (c) construction of the Rizal Avenue Bridge and Main Entrance Complex; (d) conversion of hangar 8015 to an airport passenger terminal and apron strengthening; (e) airport pavement improvements and air traffic control systems; (f) repairs to piers and wharves; (g) construction of standard factory buildings on a 10 ha. site within SBF; and (h) procurement of security and miscellaneous equipment. - 2 -  Several programs were designed to strengthen SBMA's institutional capacitv, including: (a) a merchandise control system to monitor duty-free purchases; (b) technical assistance in preparing zoning regulations and a building design code for the SBF; (c) an automated financial management and billing system; (d) technical assistance to guide privatization transactions; (e) technical assistance to enhance SBMA's institutional capacity as freeport manager; (f) short-term training and technical assistance, and (g) support for facilities management. The environmental protection component comprised: (a) preparation of an environmental baseline survey; (b) institutional support to the newly-established Ecology Center, including provision for environmental monitoring equipment; and (c) support for an environmental management plan covering the organization and work plan for the Ecology Center. Building SBMA's capacity to manage SBF was a key project ingredient. To this end, $5.8 million (1 1% of total project cost) was allocated to institutional support and $1.1 (2% of total project cost) to environmental protection. While these interventions had a significant impact on SBMA's capacity as a freeport manager, the inflexibility of SBMA's structure and management, its limited staff capacity, and the imposition of govemment controls and regulations became major impediments to the successful implementation of all institutional aspects of the project. These problems are discussed below. 3.4 Revised Components: In October 1994 the Bank and Borrower agreed to amend the Loan Agreement to change the scope of the airport improvements to reflect the need to accommodate a major airfreight operator (Federal Express), which was to use the Subic Bay International Airport (SBIA) as its Asia hub. To accommodate the changes, the Loan Agreement was amended to reduce the Bank's share of expenditure for works from 90% to 75%. Other changes included a significant increase in expenditures to convert Hanger 8015 into a passenger terminal to accommodate the needs of the November 1996, Asia Pacific Economic Cooperation Summit (APEC), which was held at the SBF. The additional expenditure for the terminal was largely met by SBMA. The project underwent other significant modifications including: Site Improvement Component: Access road. and security gate construction was deleted from the project, but superior access improvements were undertaken by a Build Operate and Transfer (BOT) operator, financed by the Government and the private sector under separate arrangement. The Main Entrance Complex component was completely funded by SBMA. Airport apron strengthening was upgraded and completed by the project at increased cost, and airport pavement improvements and the air traffic control systems were upgraded and completed at a greatly increased cost. Pier and wharf repairs, construction of factory buildings, and procurement of security and miscellaneous equipment were all cancelled. Additional project expenditures on airport works resulting from the agreement with Federal Express included perimeter fencing ($0.67 million), runway, taxiway, and apron lighting ($4.7 million), standby generators and transformers ($0.71 million), and design modifications and additional works to accommodate wide-bodied aircraft. Institutional Capacity Component: The merchandise control system sub-component was removed from the project as SBMA undertook to design and implement this system, as part of a broader cybercity development for the SBF, using its own resources. In the event, SBMA proved unable to carry out this task. Technical assistance to prepare zoning and building regulations was substantially upgraded to become preparation of a master plan for the central SBF area, and the planned automated financial management and billing system was also significantly upgraded to become an Integrated Financial Management System -3 -  (IFMS). Technical assistance to guide privatization transactions was not altered, but project funds were not used. Technical assistance to enhance SBMA's institutional capacity to manage the freeport was implemented as planned, but at increased cost. The short-term training and technical assistance and technical assistance to improve SBMA's management of facilities were not altered, but project funds were not utilized. During the early stages of implementation it was agreed that the project would fund a master plan for SBIA. This was completed. Environmental protection: The environmental baseline survey and institutional support to the newly-established Ecology Center were implemented as planned. The environmental monitoring equipment was, however, not procured as SBMA did not attach priority to this procurement, relying instead on the monitoring equipment used by the consultants retained to carry out the environmental baseline survey. These project revisions were major. They effectively changed the project's focus from general infrastructure construction, rehabilitation, and institutional development to upgrading the SBIA. Comparing projected and final costs for airport improvements demonstrates these changes. In the SAR airport improvements accounted for 40% of project costs ($20.9 million of a total $52 million). Final project expenditure on the airport was 87% of project costs (approximately $45.3 million of a total of $52.2 million). A revised financial and economic analysis undertaken by the Bank in 1994 for the runway, taxiway, radar, passenger terminal, apron, and communications systems concluded that the airport would be unlikely to recover this increased level of investment. However, Bank management agreed with SBMA on the importance of Federal Express's investment in Subic, as it was expected to provide SBF with greater visibility, assist SBMA in attracting high-value manufacturing dependent on air freight, and generally assist with drawing potential investors to the freeport. 3.5 Quality at Entry: The SAR identified five potential project risks. First, risks associated with the political situation in the Philippines. The perceived political risks involved possible government policy modifications in SBF's freeport regime. The loan included appropriate remedies to mitigate this risk. However, the SAR failed to foresee the potential risk or impact of a change in SBMA leadership and administration on the project, or on potential freeport investors. A change in leadership did occur, in 1998, and was extremely disruptive to SBF. Most of the major infrastructure works funded by.the project were completed before the leadership change, however, and it had little impact on the site improvement component. However, one key institutional component, the IFMS had not been completed and the change in leadership and associated disruption effectively prevented it from being completed and commissioned. The second perceived risk was SBMA's lack of experience in freeport management. The project addressed this concern by providing significant technical assistance and training. Prior to project start-up, the Bank provided SBMA considerable technical assistance. This assistance confirmed the validity of the strategy to convert the naval base into a freeport, legitimizing the vision of SBMA's chairman and giving him a boost in his marketing efforts to foreign investors. This pre-project support was most valuable and it assisted SBMA in: (a) developing a comprehensive base conversion strategy; (b) drafting a land use master plan; (c) undertaking detailed transport engineering analyses; (d) carrying out the privatization of key assets and utilities; (e) rationalizing its organizational structure and institutional framework, and (f) developing rules and regulations for SBF operations. This comprehensive TA enhanced SBMA's capacity to implement the project. Delays in project implementation were identified as a third risk. The project disbursement record shows that implementation delays were not a significant problem, particularly in the early stages of the -4 -  project. The fact that the airport consumed such a large portion of project funds meant there were few major contracts, and SBMA's Federal Express and APEC obligations created significant time pressure that helped speed disbursement. Project implementation delays did occur in other smaller parts of the project largely because of the lack of institutional capacity. The Rizal Avenue Bridge and IFMS delays clearly demonstrate this point. Delay in investor activity was the fourth risk identified in the SAR. The proposed investor incentive regime and first-class infrastructure were designed to help minimize this risk. A downturn in regional economic activity from the 1997Asian financial crisis had an adverse impact on SBF and the rate at which new enterprises located there. Future environmental degradation if satisfactory maintenance practices were not followed was identified as the final risk. This has not been a problem in the SBF to date. Further strengthening of SBMA's capacity to implement project environmental provisions was identified by the ICR Mission as necessary to protect SBF's environment in the long term. This has been incorporated in the Subic II Project. In summary, qualitv at entrv is rated satisfactory. The Bank provided significant and effective inputs into developing the capacity of SBMA to implement projects and project objectives were consistent with the Bank's CAS and government development priorities. Peer reviewers and the Bank decision makers endorsed the project design, its scope and components. (The Quality Assurance Group, QAG, did not exist at the time of project approval.) 4. Achievement of Objective and Outputs 4.1 Outcome/achievement of objective: As noted, the project objective was to attract private investors to the SBF by providing infrastructure and institutional strengthening support to SBMA. Although significant changes were made to infrastructure works funded by the project, this objective did not change. The SBIA improvements, the major part of the project, have had a positive impact on the development of SBF. The development of the airport has directly resulted in significant investments by investors in airfreight services and tourism-related facilities. It has also indirectly supported other investors who have made use of the infrastructure developed by the project to support their enterprises. An economic analysis of the airport facilities shows a positive net present value at a discount rate of 10%. In view of the direct physical, financial, and economic impact of investments, the project is assessed as satisfactory on the basis that it has achieved its objective with only a few shortcomings. Additionally, and importantly, SBMA has been able to complete some of the original components using other funding sources. 4.2 Outputs by components: The main physical components noted in the SAR to be funded by the project were: Site Improvement Component a. Access road connecting Kalayaan Gate to Kalalake Bridge: Access road built by BOT operator in a location superior to that planned in SAR. Highly satisfactory outcome b. Kalayaan Security Gate: Built as part of BOT for the Kalayaan access road. Highly satisfactory outcome -5 -  c. Rizal Avenue Bridge and Main Entrance Complex: Bridge completed as part of the project 2.5 years behind schedule; entrance complex funded by SBMA. Satisfactory outcome d. Airport Passenger Terminal and Apron: Facilities planned in the SAR expanded to accommodate APEC requirements, which were excessive to the needs of tourism for Subic Bay. Satisfactory outcome e. Airport pavement improvements and air traffic control system: Works expanded from those planned in SAR by adding airport perimeter fencing, runway lighting, taxiway and aprons, and standby generators and transformers. Other modifications and additions were made to accommodate wide-bodied aircraft. Satisfactory outcome f. Seaport repair: Deferred pending privatization of seaport. SBMA vigorously pursued privatization strategy but this was thwarted by forces outside its control. The bidding process for the seaport privatization was challenged in the court and the lawsuit has not been resolved. As a consequence the seaport has not been privatized and the wharves have not been maintained. Unsatisfactory outcome g. Standard factory buildings: Cancelled because prospective investors preferred to design and build their own facilities and industrial parks. Satisfactory outcome h. Security and miscellaneous equipment: Cancelled, and funds channeled to airport. Unsatisfactory outcome Overall, the Site Improvement Component is rated satisfactory on the basis that most of the proposed works were completed with minimal delays. Institutional Componen a. Merchandise control system: SBMA proved unable to design and implement this system. The lack of such a system was a major factor in allegations of smuggling that contributed to the GOP's issuance of Executive Order 140 of November 1993 imposing a moratorium on the establishment of new duty free shops and the removal of the $200/year non-resident duty-free purchase privilege in January 1996. These decisions curtailed the freeport regime. Rated unsatisfactory. b. Zoning regulations and design code: Comprehensive master plan for the central area developed, including detailed building construction and design codes for sub-zones within the central area. Rated satisfactory. C. Automated Financial Management and Billing System: Upgraded at substantially increased cost to an Integrated Financial Management System, but implementation remained incomplete at project close. Implementation to continue under Second Subic Freeport Project (Loan 4111- PH) (Subic II). Rated highly unsatisfactory. d. Privatization transactions: not implemented under the project and funds reallocated to other subcomponents. Rated unsatisfactory. e. TA to enhance SBMA's institutional capabilities: Implemented at increased cost but very few of the freeport advisor's proposals have been integrated into SBMA's current operations. Rated unsatisfactory. f. Short-term training and TA: Not implemented as part of the project. Rated unsatisfactory. g. Facilities management: Not implemented, as part of the project as original design was determined to be inadequate. Rated unsatisfactory. h. Airport master plan: Master plan completed. Rated satisfactory. Even though the institutional support provided during project preparation was of a high quality, the freeport advisors retained under the project did not have significant impact as their advice was not accepted by the SBMA chairman and senior management. A major part of the problem was that the project design -6 -  underestimated the institutional burden that the rapid growth of SBF would impose on SBMA. Overall, the Institutional Development Component is rated as unsatisfactory on the basis that many components were not completed or the outcomes were unsatisfactory. Environmental Components a. Environmental baseline survey: Completed as planned. Rated satisfactory. b. Procurement of monitoring equipment: Not procured. Rated unsatisfactorv. c. Institutional support to establish an environmental management infrastructure: Completed as planned. Rated satisfactory. The purpose of the environmental component was to strengthen SBMA's (Ecology Center) capacity to manage and administer the SBF in environmentally sound ways, including monitoring of air and water quality; enforcement of environmental standards; issuance of Environmental Compliance Certificates; administration of protected areas; and public awareness. There is no doubt that there were adequate project resources to achieve this outcome, but a lack of commitment from SBMA and a shortage of experienced staff, over time, weakened the Ecology Center's effectiveness in carrying out its prime function. To address these concerns, SBMA and the Bank have committed to strengthen the Ecology Center through continued support under Subic II. Despite the shortcomings of the Environmental Component, the Ecology Center was instrumental in introducing many sound operational practices into SBMA including land acquisition, improving SBMA's relationship with the surrounding indigenous population, and developing a working partnership with all local communities. The component is therefore rated satisfactory. 4.3 Net Present Value/Economic rate of return: The overall financial and economic rate of return for the project was not provided in the SAR. Instead, the economic rate of return for each group of subcomponents was prepared for expected, optimistic, and pessimistic scenarios. The SAR does not reveal the percentage of total costs on which the estimates were based. The expected returns shown in the SAR were: (a) Land access: Bridge and main entry complex 37%, access road 15%; (b) Airport: Passenger terminal 19%, pavement improvements 15%; (c) Port: Wharf repair 13%, cathodic protection 12%, and (d) Standard factory buildings 20%. The revised projected expected economic rates of return were 7.5% for the runway, taxiway, and radar, and for the passenger terminal, apron, and 15.2% for communications systems. The actual growth of SBF, and the consequential economic benefits have been substantial. Section 10 (Additional Information) outlines this expansion. In particular, about 300 investors were attracted to the freeport, including manufacturing, utilities, banking, tourism and other service enterprises. Acutal investments, employment, exports, and tourist numbers rose as indicated in Annex 7 (Supplementing Economic Activity Data). The rapid growth (1994-1996) put pressure on Subic's infrastructure and SBMA's management capacity. At the request of the borrower, the Second Subic Bay Freeport Project (Subic II, Loan 4111 -PH) was 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. Unfortunately, it is not possible to isolate the portion of the SBF growth resulting from the project (Subic I). Consequently the financial and economic analysis which follows evaluates returns from the airport only. This is reasonable because 87% of project costs were spent on the airport. The calculations for the financial and economic analysis for the ICR included loan funds and counterpart funds for the runways, taxiways, aprons, and lighting included in the project and loan funds - 7 -  only for the terminal building. This procedure was followed because the total actual expenditure was distorted by the APEC requirements for the terminal. The financial and economic analysis for the ICR included 85% of the total project funds spent on the entire project. (This calculation excludes SBMA's contribution to the terminal.) In addition to the project funds, the financial and economic analysis includes additional capital expenditure needed to bring the airport into line with the contractual arrangements agreed between SBMA and the airport's major user, Federal Express. The total cost of these additional works is estimated to be $5.5 million. These costs are not included in the 85% of funds spent on the project noted here. The financial and economic rates of return from the airport project are estimated to be 9% and 11% respectively. Because the SAR does not provide an overall assessment of the project or the airport in totality and because of a lack of background material, the ICR is unable to provide comment as to the differences between the SAR and ICR economic analysis. However, the ICR estimates are higher than the revised airport projections (1994) because revenue from Federal Express is estimated to be higher in the ICR analysis. Historic data shows that the 1994 projections of income from Federal Express of $1.75 million fixed per annum were too conservative. The ICR estimates revenue from Federal Express to be $3.2 million in 2000 and rising. The ICR financial and economic analysis is quite sensitive to changes in SBIA's projected traffic growth. For example, a reduction in annual growth from 10% to 5% reduces the financial internal rate of return (FIRR) and economic internal rate of return (EIRR) from 9% and 11% to 5 % and 8% respectively. Conversely, increasing growth from 10% to. 1 5% raises the FIRR to 12% and the EIRR to 14%. Two major groups of factors will impact SBIA growth. First, factors external to SBMA and government control, such as regional economic growth, and second, factors internal to SBMA control. Key considerations here include SBMA's business management capacity, the maintenance of the airport and its ancillary facilities, the maintenance of reliable support services such as power, water, and roads, and finally, the stability within a growth-oriented SBMA. 4.4 Financial rate of return: See paragraph 4.3 above. 4.5 Institutional development impact: See paragraph 4.2 above. 5. Major Factors Affecting Implementation and Outcome 5.1 Factors outside the control of government or implementing agency: Asian Financial Crisis: The 1997 Asian Financial Crisis and the devaluation of the peso were the major external factors affecting SBF development during project implementation. The significance of the crisis is difficult to gauge, but it is clear that demand for space in the two major industrial developments, the Taiwanese Industrial Park and the Japanese Technopark has weakened. Available data also shows less traffic through SBIA. Within Stage 1 of the Taiwanese Industrial Park, 86 hectares are useable. In 1996 the entire 86 hectares was fully committed, but development on about 46 hectares has been cancelled. A similar picture applies to the Japanese Technopark, which has an occupancy rate of about 25%. Both industrial parks have had few, if any, inquiries since early 1998. The Japanese Technopark had budgeted to be fully occupied by 2000, but clearly this is not going to happen. Manufacturing firms, retail outlets, restaurants, and concessionaires ate among the domestic and foreign investors that have left SBF. The number of visitors, which had increased from just over 1 million in 1993 to over 2.6 million in 1997, fell sharply in 1998 to 1.25 million. At the end of 1997 SBMA estimated that - 8 -  about 40,700 people were employed in the SBF, up from about 6,700 in 1993. This dropped to about 27,600 at the end of 1998-a decline of about 30% in one year. Some part of this decline in employment can be attributed to the completion of major works in SBF and the resulting laying off of construction workers. SBMA has been affected significantly by the recent decline in expansion of the SBF and the general economic conditions. Using midyear exchange rates and SBMA's audited financial statements, total revenue declined from $61 million in 1997 ($5.1 million per month) to $48 million in 1998 ($4.0 million per mnonth). The average monthly billings for the first six months of 1999 (using an exchange rate of peso 40 to $1) were $3.6 million. Average monthly airport billings for 1997, 1998 and 1999 were $0.44 million, $0.34 million, and $0.27 million-a decline of about 40%. Average monthly billings from land, buildings, and long-term residential leases declined from $2.7 million in 1997 to $2 million in 1998, and $1.7 million in 1999. This data indicates that some investors have terminated their leases and that SBMA is reducing rentals. Losses of key investors are apparent in the retailing sector (where a number of firms downsized their operations); and many hotels continue to operate at low capacity. The impact of the Asian financial crisis on existing investors may also be gauged by SBMA's accounts receivable. As of December 31, 1997 total receivables were $18.8 million and as of December 31, 1998 and June 30, 1999 they had climbed to $24 million and $26 million respectively. In 1996, accounts receivable (as at December 31) was equal to 2.7 months of average total monthly revenue, but by June 30, 1999 accounts receivable had increased to 7.2 months of average monthly revenue. 5.2 Factors generally subject to government control: The Philippines elected a new national government in May 1998, and one of its first acts was to replace the SBMA chairman/administrator and his management team. The original administration refused to recognize the validity of the new appointments, leading to major civil disturbances within the SBF. Once these serious problems had been resolved, the new SBMA administration replaced many key management, administrative and technical SBMA staff, resulting in a short-term weakening of SBMA's institutional capacity. This undermined investor confidence in the SBF and exacerbated the serious problems already present from the Asian financial crisis. The new administration was unable to reassure existing investors early on of its capacity to manage SBF. As a consequence, existing and probably prospective investors were particularly concerned about the new team's capacity to effectively manage the SBF. These issues are considered to have had substantial impact on the project. Ad hoc policy changes and reversals impacted the stability of the SBF business environment. Over the life of Subic 1, the government implemented a number of policy and administrative actions that diluted the integrity of the policy framework and introduced ambiguity into the freeport investment environment. For example, there were a series of policy reversals on the application of duty-free retailing privileges pertaining to the zone and eventually all privileges were removed for non-residents of the zone. During the Subic I project the government did not act to reaffirm Subic Bays integrity as a freeport. Following the mid-term review in 1996, the Bank helped foster closer collaboration between SBMA and national government agencies. An inter-agency task force did revise the implementing rules and regulations (IRR) and fostered fruitful collaboration. In the major area of taxation, for example, the task force examined the rationale for amending SBF's taxation policies and making Subic investment incentives comparable to those available under the Philippine Export Zone Authority (PEZA), but the government failed to carry out any amendments to the policy regime or the IRR. Work on these matters was not completed in advance of the May 1998 presidential elections, and came to a halt due to the disruptive nature of the SBMA administrative transition. The effect has been to leave investors in some doubt as to the government's commitment to SBF's status as a premier investment zone. -9-  5.3 Factors generally subject to implementing agency control: Appointment of key staff: Recent aides memoire from Subic I supervision missions are replete with details of the inadequacy of key SBMA personnel in terms of both the number of approved civil servants- plantilla- and their skills. It is clear that the lack of qualified staff has had a substantial impact on SBMA's ability to manage its business and assets effectively, implement the project, and absorb the potential benefits of the TA provided by the project. This is evidenced by the inability of SBMA and its advisors to implement the IFMS subcomponent of the project, the delays and mistakes associated with the construction of the Rizal Avenue Bridge, and generally poor financial management and control within SBMA. SBMA failed to heed advice to appoint a Bank-financed specialist to assist in strengthening its organizational structure and locating and training key personnel. If SBMA had adequate staff, the IFMS subcomponent would have been completed on schedule. 5.4 Costs andfinancing: Total project costs are estimated to be approximately equal to those planned in the SAR ($52.2 million actual compared to SAR planned expenditure of $52 million). Estimated actual costs compared to SAR estimates within the three project components are: site improvement 105% of the SAR estimate, institutional support 93%, and environment support 87%. There was, however, significant reorganization within the site improvement component. In the SAR, airport improvement costs ($20.9 million) made up 48% of the site improvement component and 40% of total project cost. The estimated actual cost, excluding the airport master plan ($44.5 million), is 97% of the total component cost and 85% of the total project cost. SBMA's contribution to the project was estimated in the SAR to be 26% of the estimated site improvement cost and 23% of total project costs. Their actual contribution to the site improvement component was approximately $14.4 million or 31% of the total component cost and 28% of total project costs. SBMA's contribution to the institutional support and environmental component was budgeted to be minimal, and the actual data confirms this position has not changed. All SBMA's over-budget expenditure is associated with airport works. Disbursement delays were not significant during project implementation, with the major airport works being completed on schedule. 6. Sustainability 6.1 Rationale for sustainability rating: Rationale for Sustainability Rating: Two major infrastructure items were funded by the project: airport improvements and the Rizal Avenue Bridge. Maintenance of the bridge is covered by the maintenance plan currently being prepared by SBMA as part of the Subic II project, but the project made no provision for developing a comprehensive airport maintenance plan. This is considered a major weakness. The SBIA provides SBMA significant cash flow, but these returns are sensitive to adequate maintenance and there are already indications that vital operational aspects of the facility are deteriorating due to lack of comprehensive maintenance. While SBMA does carry out airport maintenance, it has acknowledged that there is an urgent need to upgrade its maintenance practices. During the course of ICR preparation SBMA undertook to prepare an airport maintenance plan satisfactory to the Bank [See Section 10 (B)]. It was agreed that the plan would include (a) an overall airport maintenance plan prepared in accordance with internationally accepted standards, (b) a plan to strengthen its airport maintenance crew, facilities, and technical assistance, (c) a schedule of maintenance events to be performed by the - 10-  maintenance crew, (d) a cost estimate for establishing the crew and implementing the operations, and (e) a maintenance monitoring program. It was also agreed that SBMA would utilize the services of the roads maintenance consultant retained under Subic II to assist with this task, and that it would be funded and supervised by the project. In the analysis undertaken by the Bank in 1994, when the viability of the additional expenditure on SBIA was assessed, the lack of an experienced airport management team to deal with commercial matters, safety, operations, and maintenance was raised. SBMA's lack of negotiating experience was also noted as a problem, as Federal Express had negotiated an extremely favorable agreement. It is apparent that SBMA did not appoint professional airport managers, and this has probably had a detrimental impact on the viability of SBIA. As noted above, the institutional components of the project were regarded to be unsatisfactory and the Subic I project delivered few institutional benefits. It is anticipated that the Subic II project will sustain and build on the few institutional benefits achieved in Subic 1. Despite these shortcomings noted, project sustainability is rated as likely because of SBMA's current airport contractual arrangements, including the lease with Federal Express, which has recently been extended to 2007, the further institutional strengthening expected under Subic 11, and the airport maintenance plan being prepared by SBMA according to the Bank's requirements. Project sustainability would have been enhanced had all institutional components been concluded in a satisfactory manner. 6.2 Transition arrangement to regular operations: SBMA is benefiting from the substantial institutional strengthening aspects of Subic 11, which is expected to extend to 2002. This will significantly enhance SBMA's capacity to manage its asset base. At the time of the preparation of the ICR, Subic II is being retrofitted with monitoring key performance indicators and these will be used to evaluate future performance. 7. Bank and Borrower Performance Bank 7.1 Lending: The Bank's performance in project identification, preparation and appraisal is rated satisfactory. As noted, the project as designed was consistent with the government's development strategy and with the Bank's country assistance strategy. As a direct result of extensive preparation, the skills mix of the appraisal team, and the Bank's commitment to the project, appraisal was comprehensive. It is worth noting here that there was a crisis situation that was created when the Philippine Congress declined to renew the bases agreement and the US Navy had to leave Subic Bay with a few months notice. The entire strategy and plan for Subic was created within a period of months, under difficult circumstances. In contrast, most military base conversions in the US and elsewhere are preceded by careful planning for a period of two years or more. The conversion of Subic also came after the widespread looting of the other US base at Clark, which further heightened concerns. The conversion of Subic Bay to a freeport would not have happened as successfully as it did without Bank assistance. Total expenditure on project identification, preparation, appraisal, and negotiation was $0.7 million. The appraisal document contained some weaknesses including failure to (a) recognize apparent staffing weaknesses in SBMA, (b) recognize the weaknesses of SBMA's privatization strategy; (c) include performance and monitoring indicators, (d) include a detailed financial and economic analysis of the - 11 -  project, and (e) include detailed and consistent project cost estimates. As noted, the project was altered quite considerably soon after implementation commenced. Many infrastructure items were cancelled and substantial funds were reallocated to development of the airport. These changes were not considered to be a restructuring of the project. However, perhaps such significant modifications should have undergone greater scrutiny, including a revision of the loan agreement requiring the borrower to implement certain practices to ensure the airport was managed and maintained at a level consistent with other commercial international airports. SBMA's preferred approach to the development of the freeport was to use joint ventures between itself and other investors and service providers to provide infrastructure and services within the SBF. This approach is consistent with government policy (Executive Orders 50 and 62) but it is contrary to the Bank's privatization strategy and has the potential to create serious and complex conflicts of interest. This problem has already surfaced within the SBF, and SBMA is ill equipped to resolve it. It is noteworthy that in the early days of project design, the scope of privatization was not entirely clear and the priority was successful takeover, protection, and operation of facilities. Over time, the Bank repeatedly and forcefully challenged SBMA on its joint venture approach. But there was little leverage available to force change short of suspending disbursement of loan funds. 7.2 Szupervision: The supervision plan in the SAR allowed for 45 staff weeks over a period of about 40 months. Supervision intensity was planned to be heavier in the earlier stages of the project and lighter toward the end. Total supervision in the five calendar years 1995 to 1999 was 118.1 staff weeks or 2 1/2 times that planned in the SAR. Approximately 40% of this time was spent in 1995, with the remaining 60% spread and reducing over the subsequent years. A review of mission aides memoire indicates a strong Bank presence from a consistent team of personnel with an appropriate skills mix. The aides memoire reviewed for the ICR are detailed and they provided the Borrower with sufficient advice to correct implementation problems. It is apparent that subsequent missions always followed up on prior agreements or observations. The status of compliance with covenants was regularly reported in the aides memoire. SBMA breached the negative pledge provision of Section 9.03 (b) of the General Conditions applicable to Bank loans by pledging certain of its assets to creditors and giving that pledge priority over the Bank's loan. This held up the signing of the Second Subic Bay Freeport Project (Loan 411 1 -PH) by about 8 months, and the Bank considered suspending disbursements under Subic I in an attempt to urge SBMA to expedite resolution of the problem. SBMA took appropriate steps to resolve the problem by reaching agreements with the creditors, the Philippine National Bank (PNB) and the Development Bank of the Philippines (DBP), to eliminate the liens and replace them with a sovereign guarantee from the Department of Finance (in the case of the PNB) and to pay a higher interest rate on its loan with the DBP. The covenant governing SBMA's debt coverage ratio also created problems. The calculation of this ratio was based on a reasonable forecast of SBMA's revenues and expenditures. Supervision missions had difficulty relying on the forecasts supplied by SBMA, as its budgeting procedures were inadequate. It is apparent that the Bank made every effort to assist SBMA to resolve the negative pledge issue and it offered support in budget preparation. As a consequence, despite the problems discussed, Bank supervision performance is rated satisfactory. 7.3 Overall Bank performance: The Bank's oveiall lending and sxpteNision pesformanze is sated salisiaexiory. `The basis aitWis evaluation is: (a) the identification of a project consistent with Government and Bank development - 12 -  strategies; (b) the assistance provided the Borrower during project preparation; (c) the Bank's rapid response to the Borrower's request to redirect project funding as priorities changed; (d) the intensity and skills mix of supervision missions, and (e) general client contact through the Resident Mission. Borrower 7.4 Preparation: SBMA was essentially a new agency at the time the project was prepared, and it relied heavily on the general TA and technical skills provided by the Bank. This TA made a significant contribution to the new administration's capacity to utilize the assets of the former naval base. SBMvA was committed to a privatization strategy, but its flawed approach created many conflicts-particularly as the SBF expanded. It is apparent that SBMA's short-term priority was to enhance and harness the value of existing infrastructure through new physical investment (SBIA for example) and to conclude joint agreements with service providers. Thus, SBMA did not share the Bank's sense of urgency about the need to convert the agency into an effective administrative and regulatory institution, and it clearly did not make this a priority during project implementation. Despite these flaws and SBMA's limited institutional capacity during project preparation, SBMA contributed positively to project preparation. In particular, it worked closely with the task team in formulating implementing rules and regulations for the freeport, which clarified many of the ambiguities and other deficiencies in the enabling legislation. SBMA developed and adopted a land use plan for the main base area, taking into account existing facilities and proposed activities of the SBF. It established an environmental management plan and adopted an environmental procedure manual to govem environmental review and monitoring of prospective SBF investors. The agency committed significant inputs from its limited resource pool and assigned a dedicated team of its staff to work with the Bank's task team in preparing the project and it promptly completed the critical steps and actions needed to facilitate appraisal and project readiness for implementation. As a consequence, the Borrower's contribution to project preparation is rated satisfactory. 7.5 Government implementation performance: The civil unrest and court challenges that followed the newly elected government's decision to change the SBMA administration in 1998 effectively closed SBMA for a period of three months. This closure, and the unprecedented period of duress and uncertainty that followed, had a major detrimental impact on the SBF. It is apparent that the national govemment made little effective attempt to intervene to quell the unrest and mitigate the significant damage caused by the protracted leadership struggle and subsequent uncertainty it created in the investor community. Ad hoc policy changes and reversals were noted earlier as having an impact on the stability of the SBF business environment. The Govemment implemented a number of actions that diluted the integrity of the policy framework and introduced ambiguity into the freeport investment environment. Govemment implementation perfornance is rated unsatisfactory. 7.6 Implementing Agency: Major project works associated with the development of the airport proceeded rapidly and disbursement rates were high. But the success with the completion of the airport on schedule may have glossed over other implementation and institutional development problems. After the SBIA expansion and development program, the two largest project works were the Rizal Avenue Bridge and the IFMS. Both these components suffered significantly because of poor project management skills, particularly the IFMS. The fundamental cause of these problems, and others noted in other project components, was a lack of - 13-  adequately skilled and trained staff. The Bank made numerous attempts to bring this important matter to SBMA's attention, and it offered to finance additional assistance, but these representations were effectively unheeded. As a consequence, most of the technical assistance provided under the project failed to deliver its full potential, as the institution lacked absorptive capacity and key staff were overextended on daily operational matters because of a lack of competent support personnel and senior officers. The leadership struggle and the resulting change to the administration further exacerbated SBMA's management problems. Most of SBMA's key senior staff were replaced after the 1998 leadership change and as a consequence there was little, if any, institutional memory left within SBMA. Fortunately most major project works for Subic I had been completed or were close to completion by then. The exception was the IFMS. It is clear that the disruption to the project resulting from the civil disturbances and management changes had a significant impact on the ability of SBMA to complete the installation of the new system prior to the loan closing date. The project design did recognize the rapid growth that occurred at SBF (see Annex 7) but it underestimated the institutional burden that this rapid growth would place on SBMA. As a consequence it may not have provided sufficient resources to circumvent the institutional problems noted in the ICR. However, because: (a) 87% of the value of the project involved the upgrading of the airport and this was accomplished most successfully; (b) the Rizal Avenue Bridge was completed, albeit two years behind schedule; (c) most other project infrastructure components were carried out using alternative resources; (d) the environmental protection component was completed in a manner considered satisfactory, and (e) institutional weaknesses are being addressed under the Subic II project with the full cooperation of SBMA, SBMA's implementation performance is rated satisfactory. 7.7 Overall Borrowerperformance: Even though the project's major institutional initiatives were largely not achieved, and government implementation performance was assessed as unsatisfactory, most of the infrastructure development program was completed under the project or satisfactory alternative provisions-such as the BOT access road-were put into place. Consequently the overall performance of the Borrower is rated as satisfactory. 8. Lessons Learned On the basis of this evaluation the project provides the following key lessons: a. In converting existing infrastructure into a freeport, a well planned technical assistance program staffed with appropriate expertise and skills mix is a prerequisite in advance of lending. This was most valuable in the case of Subic, confirming the validity of the conversion strategy and legitimizing the vision of the first chairman of SBMA. b. Existing infrastructure is a major asset for the rapid establishment of a freeport. It is almost always cheaper and better to convert existing infrastructure than starting a "greenfield" project. However, it is difficult, if not impossible, to instill the needed institutional capacity in a newly established freeport administration within a very short timeframe. Future lending operations for freeports and economic zones should focus more attention on the institutional strengthening of the freeport authority. c. Freeport administrators must operate within well defined and understood regulations and - 14 -  guidelines. Planners need to establish what roles can be better undertaken by the private sector without undermining the revenue stream and overall benefits for the administration and country. d. Limitations in SBMA's charter and status as a Government Owned and Controlled Corporation reduced its operating autonomy and flexibility. Operating as a traditional public sector agency is extremely difficult for an entity that must move quickly to compete with freeports worldwide. SBMA was constrained by Government regulations and procedures from being able to act commercially in a number of key areas of its operation and charter. Also, a better legal framework is required so that building institutional capacity is not so difficult and restricted by rules. e. In any major infrastructure project, it is critical to include a formal program for developing and financing a comprehensive maintenance program and the development of a competent and professional facility management team. f Better results will occur where public and private roles are distinct and mutually complementary. Alignment of the administration with service providers, investors, and other investors within the freeport creates problems and an environment in which complex conflict of interests cannot be resolved. The Bank must be alert to potential pitfalls in any privatization strategy. g. Good governance practices and monitoring procedures that will minimize corrupt practices or practices perceived as corrupt should be established at the outset of a project. h. Institutional capacity to implement the proposed program must be carefully evaluated, and technical assistance provided where necessary. Financial management and project systems should be kept simple. Realistic institutional development goals should be set, and loan covenants should be enforceable, if necessary. More emphasis should be placed on staffing and staff training than was done in Subic I. i. Proposals to alter the project should be evaluated rationally and objectively; if they add to project complexity there should be confidence that the organization has the skilled personnel needed to implement them. In Subic I, the Bank might have done better to agree to the changes in the infrastructure program only on the proviso that certain commitments were made by SBMA in the area of institutional development and management of SBIA. j. Finally, the experience of the Ecology Center's Social Development Unit confirms that a private sector development project can benefit and be significantly enhanced by the inclusion of a strong social development component. 9. Partner Comments (a) Borrowver/implementing agency: For the most part, SBMA is in agreement with the ICR for Subic I as submitted. The following comments are offered for your consideration. These comments are only meant to clarify and not to be defensive or lay blame elsewhere. 1. Institutional Development Component rating of unsatisfactory. In reference to the ICR's section on Quality at Entry, the Bank recognized the turbulent change in SBMA's leadership and ensuing trauma as contributing to the inability to complete the IFMS project. At the implementation level, the lack of - 155-  institutional capacity is cited as contributing to the rating. Contributing factors include: the unforseen impact of the change in SBMA administration (loss of records and replacement of personnel); the change in scope from a simple billing system to a full blown IFMS with simultaneous implementation of all modules; and the inexperience of SBMA project implementors. The ICR in particular, mentions at the end (Lessons Learned) that financial management and project systems should be kept simple. The non-institutionalization of freeport advisors' proposals were largely due to the attitude of the previous administration to ignore the proposals (i.e. strategic planning). 2. Number Employed at SBMA. The figure of 40,700 estimated at the end of 1997 is a figure used by the previous administration. When the new administration took over in September of 1998, this figure could not be confirmed. The conclusion was that either construction workers were included or that the workers leaving the Freeport were not being deducted from the employment generated. The 27,600 reported by the new administration at the end of 1998 is a real number. Therefore the 30% decline in one year is erroneous. 3. Decline in Residential Leases. Part of the reason for the decline in residential leases is that both previous and new administrations allowed SBMA department heads and above to occupy SBMA residential units. Much of the remaining units are in bad state of repair. Also, the payment for the units leased for 25 years during the previous administration were collected within 90 days of the lease period and considered as current income. Therefore no lease payments are collected in future years. 4. Increasing Accounts Receivables. Some of this increase is also due to additional billings which were not billed (but should have been billed) during the previous administration. 5. Replacement of Key Personnel. The Bank needs to be more understanding on this issue. When key personnel displayed their almost blind loyalty to the previous Chairman as evidenced by the protracted takeover difficulties, the move to replace key personnel was a "no other choice" decision. Note that those at lower levers were retained and in fact made permanent employees by the current administration. 6. Lessons Learned: Institutional Development. As a development institution, the Bank's ultimate impact is on the establishment and sustainable support for institutions, particularly in their infancy, as in the case with the SBMA. The project is one of the few in development finance which involves privatization and defense conversion in the emerging markets such as the Philippines. The extent of the challenges and problems which confronted both the SBMA and the Bank made evident the complexities of the tasks of both institutions. What may be emphasized in hindsight, is the need for more importance on non political-risk analysis on the part of the Lender and the Borrower, given the traumatic leadership change experienced by SBMA. The Bank identified the institutional challenges facing SBMA, specifically in its lack of institutional capacity, and how it manifested itself in the project's implementation as one of the constraints facing SBMA. At the same time, the ICR is oriented to view this in the context of the implementation and less in the larger implications for SBMA as an institution. 7. Sustainability: Rational for Sustainability Rating. The ICR points out the role of the SBIA Maintenance Plan as critical to its sustainability to financially contribute to the SBMA. The ICR would benefit from a statement that such a maintenance plan was already in existence, and that what was needed - 16 -  was for it to be brought to the international standards corresponding to those of the International Civil Aviation Organization (ICAO). (b) Cofinanciers: Not applicable. (c) Other partners (NGOs/private sector): Not applicable. 10. Additional Information A. Impact of the Subic Bay Freeport Annex 7 contains eight tables that provide an assessment of the impact that the development of Subic Bay into a freeport has had on the local and national economy. It is clear that the project supported the development of the SBF but the ICR has not attempted to assess what portion of these benefits has accrued as a direct result of the project. The key economic indicators taken from the tables for the SBF include: a. The total actual investment by investors into operational facilities from 1992 to November 1999 was $2.3 billion of which 46% was invested in service facilities, 9% in transhipment facilities, and 15% each in manufacturing, tourism, and utilities facilities (see Annex 7 Table I). b. The export value of goods produced at Subic went from $24 million in 1994 to $1,012 million in 1999 (see Annex 7 Table II). c. The total number of employees in the SBF increased from 6,758 in 1993 to 26,809 as at December 15, 1999 (see Annex 7 Table III). d. Bureau of Internal Revenue collections of Corporate Income Tax increased from Peso 35 million in 1994 to Peso 161 million in 1998 (see Annex 7 Table IV). e. The total number of domestic tourists visiting the SBF increased from 24,000 in 1992 to 1.2 million in 1998 and the number of foreign tourists increased from effectively zero in 1992 to 96,000 in 1997 (see Annex 7 Table V). It is clear that the project supported the development of the SBF and it is evident that the development of the freeport has had a major impact on the economy of the immediate vicinity, particularly Olongapo City, and on the nation generally. Even though the Bank was not involved with many of the private infrastructure developments in Subic, it is clear that the Bank's presence and involvement in the development of the SBF provided investors with significant support and comfort. It is likely that this presence influenced many investors' decision to locate in the freeport. SBMA's enthusiasm and professionalism in attracting investors to the freeport should not be underestimated. It is clear that the agency did an excellent job in attracting large-scale investors into the freeport; perhaps at the expense of its own institutional development. - 17-  Two events had a major adverse impact on the development of the SBF: first, the Asian financial crisis; and second, the disruptive and extended SBMA leadership struggle of 1998. It is clear that these events did affect the development of the freeport, but data indicates that the SBF rebounded quickly into further growth. Perhaps the key indicator demonstrating this is the export value of goods produced within SBF as indicated above. Annex 7 Table II shows that in 1996, the total value of goods produced was $328 million and this increased by 62% to $530 million in 1997. Growth in terms of export value of goods produced between 1997 and 1998 was effectively static but it rebounded in 1999 with an 82% growth factor from the 1998 level of production of $555 million. Employment (see Annex 7Table III) in the SBF peaked in 1997 with about 41,000 employees but this fell to 28,000 in 1998 and 27,000 in 1999. It is clear that the Asian financial crisis impacted employment levels but it is also clear that much of the major infrastructure development was completed around the time of the decline in full time employment. The employment levels of 1997 are unlikely to return until existing industrial parks are full and there is another round of major industrial development. B. Subic Airport Maintenance Plan (See SBMA's letter dated December 27, 1999 attached) - 18-  OFFICE OF THE CHAIRMAN Bldg. 229, Room 201 Waterfront Road G,#,sb m Subic Bay Freeport Zone, Philippines 2222 Tel. Nos.: (63-47) 252- 4893/4895 Fax No.: (6347) 252 - 3014 December27, 1999 rIlIE W,ORLD B.\NR; Mr. Aloysius Ordu AN 0 s 200 Task Manager, Subic II Resident Mission PhilippinesLy /d The World Bank 23rd Floor Taipan Place Ortigas Center, Pasig City Ref.: Subic II: SBIA Maintenance Dear Mr. Ordu, Background. The Subic Bay International Airport formally began its commercial operation on April 30, 1995. Upon completion of reconstruction, upgrades and the installation of navigational, meteorological equipment, SBMA immediately assumed operational and maintenance responsibility for all of the equipment, structures and facilities. Recently, we have carefully reviewed our current facilities maintenance programs and in particular our airport maintenance practices and records. In-depth discussions with our airport operations group show that since the completion of the airport under Subic I, preventive maintenance inspections and maintenance related repairs are being undertaken on navigational aids equipment, structures, other airport faciiities, runway, aprons and grounds. However, we feel very strongly that there an urgent need to upgrade these practices. Current Practices. All navigational aids are being maintained based on the recommendations of the respective manufacturers in conformance with ICAO standards (Airport Services ManualiPart 9 Airport Maintenance Practices) These equipment are being operated and maintained by ATO-ANS assisted by the SBIA Electronics Section. Visual aids are being operated and maintained by our SBIA Electrical Section. The Civil/Structural Section of SBIA is maintaining the paved and unpaved areas including drainage and buildings. Inspection, repairs and maintenance are being performed periodically on a shift/daily/weekly/monthly/quarterly/semi-annual/annual frequency following suggested schedules found in manufacturers' manuals. Observations and repairs are manually recorded on printed forms. These are used for maintenance planning and scheduling, parts inventory and budgeting. No computers are currently used for documentation, maintenance scheduling, parts utilization and inventory, equipment history, cost tracking. -19-  Other services such as PM of escalators/elevators, x-ray machines, CCTV and janitorial services are contracted out. Maintenance of unpaved areas, pest control is also programmed to be contracted out. Opportunities for Improvement. When we compared the current airport maintenance practices with the MMS that was developed and recently completed by SMEC for the Freeport's roads and bridges under Subic 11, it is very clear that the airport's maintenance practices need to be brought to world class standards. We are aware of the Airport Maintenance Practices prepared by the International Civil Aviation Organization (ICAO) covering navigational aids, visual aids, electrical systems, pavements, drainage, fire protection systems, unpaved areas, vehicles etc. Computerization, maintenance personnel skills assessment and upgrading are other areas for improvement. Objective. Recognizing the need to develop and adopt a comprehensive, computerized airport maintenance management system, it is our immediate objective to prepare a proper Maintenance Management Plan for our airport. This will include a long-term pavement rehabilitation and maintenance program to meet actual traffic volumes and aircraft sizes and loads. This plan intends to enhance our current methods and practices as well as upgrade the skill levels of our maintenance personnel. We also intend to acquire state of the art maintenance tools, test equipment and critical spare parts inventory. As minimum guidelines, we will use the ICAO standards. Commitment. In this regard, we are pursuing the utilization of our Roads MMS consultant SMEC, who developed the excellent computerized roads maintenance management system for us, for the purpose of assisting us develop and prepare this comprehensive maintenance management system using funds from Subic 11. It is our intent to extend the consultancy services of SMEC for this purpose. We have already discussed the general scope for this consulting service with SMEC, and they have indicated both their interest and their capability in carrying out this project. As always, we anticipate that you will support us in accomplishing this goal to protect our investment, improve our operations, maintain a high degree of systems reliability, extend the service lives of the facilities and more importantly ensure the safety of those who use our airport. All these will enhance Subic Bay Freeport's competitiveness as we face the challenges of globalization in the new millennium. Sincerely yours, FELICITO MO Chairman-Administrator CC: Antonio Rex Chan Roberto T. Feliciano, Head FAPO-PMO Disraeli F. Santiago, PM Subic 11 -20-  Annex 1. Key Performance Indicators/Log Frame Matrix Outcome / Impact Indicators: - ndicator ?4trx Pra*d-In last P$R - i tUaLSt*: ; -- SBMA Financial Indicators Income ($million) 1/ Total revenues 59.0 48.1 Operating expenses 31.0 39.5 Net Income 3.1 0.2 Total assets 791.9 54.9 2/ Primary Ratios Current ratio 1.7 2.6 Debt/equity ratio (%) 9.0 17.3 Debt Service Coverage 3/ times 6.6 1.6 Employment Indicators 4/ SBMA 5/ 3,115 1,478 Other 34,875 26,155 1/ SAR projections for 1998. Actuals taken from SBMA's 1998 audited financial statements. Peso values converted to dollars atjune 30, 1998 rate of Peso 42.1 to $1. 2/ Assets not revalued according to Vigors Valuation prepared during project. 3/ Adjusted for certain loan principal repayments. 4/ SAR projections for 1998 from Expected Scenario from SAR-total jobs. Actuals for 1998. 5/ 1998 actual data excludes employees and contractors of SBMA-owned Freeport Services Corp. Output Indicators: SBMA Revenues ($ million) 1994 19 18 1995 34 28 1996 47 41 1997 56 68 1998 59 48 End of project - 21 -  Annex 2. Project Costs and Financing Project Cost by Com onent (in US$ million e uivalent) Site Improvement 43.80 45.89 105 Institutional Support 5.80 5.39 93 Environment 1.10 0.96 87 Taxes & Duties 6/ 1.30 Total Baseline Cost 52.00 52.24 Physical Contingencies 100.5 Total Project Costs 52.00 52.24 Total Financing Required 52.00 52.24 6/ Appraisal estimate of taxes and duties not available in appraisal component cost estimates. Project Costs b Procurement Arran ements (A raisal Estimate) (US$ million e uivalent) 1 Works 28.30 1.70 0.00 0.90 30.90 (0.00) (0.00) (0.00) (0.00) (0.00) 2. Goods 3.20 0.00 0.00 6.50 9.70 (0.00) (0.00) (0.00) (0.00) (0.00) 3. Services 0.00 0.00 7.70 0.10 7.80 (0.00) (0.00) (0.00) (0.00) (0.00) 4. Miscellaneous 2.90 0.00 0.50 0.10 3.50 (0.00) (0.00) (0.00) (0.00) (0.00) Total 34.40 1.70 8.20 7.60 51.90 (0.00) (0.00) (0.00) (0.00) (0.00) - 22 -  Project Costs by Procureme Arrangements (Actual/Latest Estimate) (US$ million equivalent) ~~ ~~ Ito ~~~Procurement Method Expenditure t Premet th N.B.F. Total Cost E~~~C Othee 1. Works 30.27 0.92 0.00 14.19 45.38 (0.00) (0.00) (0.00) (0.00) (0.00) 2. Goods 1.68 0.00 0.00 0.01 1.69 (0.00) (0.00) (0.00) (0.00) (0.00) 3. Services 0.00 0.00 5.16 0.01 5.17 (0.00) (0.00) (0.00) (0.00) (0.00) 4. Miscellaneous 0.00 0.00 0.00 0.00 0.00 (0.00) (0.00) (0.00) (0.00) (0.00) Total 31.95 0.92 5.16 14.21 52.24 (0.00) (0.00) (0.00) (0.00) (0.00) "Figures in parenthesis are the amounts to be financed by the Bank Loan. All costs include contingencies 2'Includes civil works and goods to be procured through national shopping, consulting services, services of contracted staff of the project management office, training, technical assistance services, and incremental operating costs related to (i) managing the project, and (ii) re-lending project funds to local government units. Project Financing by Component (in US$ million equivalent) Percentage of Appraisal Component Appraisal Estimate Actual/Latest Estimate Bank Govt. CoF. Bank Govt. CoF. Bank Govt. CoF. Site Improvement 33.20 10.60 31.45 14.43 94.7 136.1 0.0 Institutional Support 5.70 0.10 5.38 0.01 94.4 10.0 0.0 Environment 1.10 0.00 0.96 0.01 87.3 0.0 0.0 Taxes and Duties 7/ 1.30 0.0 0.0 0.0 7/ Actual expenditure for taxes and duties not available. -23 -  Annex 3: Economic Costs and Benefits PRESENT VALUE OF FLOWS ECONOMIC ANALYSIS FINANCIAL ANALYSIS Appraisal Latest Estimates Appraisal Latest Estimates SAR EIRR Land access - Bridge & entry 37 - Access road 15 Airport - Passenger 19 terminal 8/ - Pavement 15 Improvements 9/ Port - Wharf repair 13 - Cathodic 12 protection Standard factory 20 buildings ICR 10/ Benefits ($mm) n.a. 62.6 n.a. 62.6 11/ Costs ($mm) 12/ n.a. 59.2 n.a. 67.7 Net Benefits ($mm) n.a. 3.4 n.a. -5.1 EIRR / FIRR n.a. 11% n.a. 9% 8/ Revised estimate preparred in 1994 after increase in commitment 15.2% 9/ Revised estimate prepared in 1994 after increase in commitment 7.5% 10/ Present values of economic and financial benefits and costs not shown in SAR I I/ USS over 25 years 1995 to 2019 in 1999 dollars 12/ USS over 25 years 1995 to 2019 in 1999 dollars - 24 -  Annex 4. Bank Inputs (a) Missions: Stage of Project Cycle No. of Persons and Specialty Performance Rating (e.g. 2 Economists, I FMS. etc.) Implementation Development Month/Year Count Specialty Progress Objective Identification/Preparation U U 1992 1993 U U Appraisal/Negotiation 1994 8 TE, FE, U 1995 4 TE, PL, U Supervision 1995 7 PL, U 1996 18 FE, EN, PM, IE, PE, TE, PL HS HS 1997 9 PE, PM HS HS 1998 12 EN, FE, PE, AT S HS 1999 10 EN, FE, EV, IE, PE, AT, PM S S ICR 1999 3 FE, IE, PM U S Data in table derived from FACT: Financial and Cost Application, Task Management Report. Project preparation and apprasial data do not reflect work output. Specialised staff skills: AT: Anthropologist EV: Environmentalist EN: Engineer FE: Financial Economist PE: Procurement Expert IE: Institutional Expert PM: Project Management U: Unidentifiable PL: Planning Expert TE: Transport Economist HS: Highly satisfactory S: Satisfactory US: Unsatisfactory - 25 -  (b) Staff: Stage of Project Cycle Actual/Latest Estimate No. Staff weeks US$ (,000) Identification/Preparation 186.1 580.1 Appraisal/Negotiation 42.8 130.0 Supervision 118.1 591.4 ICR 5.0 25.0 Total 352 1326.50 * Data in table derived from FACT: Financial and Cost Application, as of July 12, 1999. ** ICR Team Estimate - 26 -  Annex 5. Ratings for Achievement of Objectives/Outputs of Components (H=High, SU=Substantial, M=Modest, N=Negligible, NA=Not Applicable) Rating Macro policies O H OSUOM O N * NA FSector Policies O H OSUOM O N * NA 2 Physical O H *SUOM O N O NA X Financial O H OSUOM O N * NA F Institutional Development 0 H O SU * M 0 N 0 NA Environmental OH *SUOM ON O NA Social 2 Poverty Reduction 0 H * SU 0 M 0 N 0 NA EGender OH OSUOM ON *NA MOther (Please specify) O H OSUOM O N * NA 2 Private sector development 0 H * SU 0 M 0 N 0 NA F Public sector management 0 H O SU O M 0 N * NA MOther (Please specify) O H O SU OM O N * NA - 27 -  Annex 6. Ratings of Bank and Borrower Performance (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HU=Highly Unsatisfactory) 6 1 Bank performance Rating