Nationalizing the strategic port could save jobs and build a national industry
It is high time for the Philippine government to build a domestic naval industry. © Hanjin Heavy Industries and Construction Philippines
Unable to service $1.3 billion in debt, the Philippine subsidiary of South Korean shipbuilder Hanjin filed for bankruptcy protection in January. It sought help from the Philippine government to rescue its Subic Bay facility, once the world's fifth largest shipbuilding yard, and save the jobs of its 3,000 workers.
The Duterte administration then announced Chinese interest in the purchase of the 300-hectare yard. Ceferino Rodolfo, managing head of the Philippines' Board of Investments, said last month that at least two Chinese companies had expressed an interest.
Without providing details, officials implied that the facility was being offered for a bargain price, having lost close to 80% of its value in the past two years alone. The identity of the two Chinese bidders has not been disclosed, reflecting government concern over a potentially negative public response. The authorities have mentioned no other potential bidders.
The Subic complex, once home to America's largest overseas naval base, is a highly strategic site facing the South China Sea. The U.S. Navy continues to enjoy regular access to the area with its prized deep-water port facilities, which also host visiting warships from Manila's traditional allies, including Japan and Australia.
Unsurprisingly, the Philippine military establishment has vehemently opposed a Chinese takeover of the site, reflecting lingering concerns about Beijing's intentions. Defense Secretary Delfin Lorenzana has instead advocated for Philippine Navy takeover of the facility than handing a strategic shipyard to the Chinese.
Since the launch of the Belt and Road Initiative in 2013, Chinese companies have become involved in the construction and operation of more than 40 ports in 34 countries. Two Chinese companies, China Ocean Shipping Company (COSCO) and the China Merchants Group, have taken over operations at a number of strategic port facilities across the world, from Piraeus in Greece to Darwin in Australia.
On paper, the acquisitions are purely for commercial purposes, with Chinese companies providing capital and logistics capacity for the sustained operation of several busy ports.
Yet, there are legitimate fears that China's intentions transcend purely commercial purposes and are intended for different ends, namely securing a grip on strategic assets and facilities on global shipping lanes.
In particular, the Philippines defense establishment is concerned about replicating the experience of Sri Lanka, where the state-affiliated China Harbor Engineering Company has secured a 99-year-lease over the Hambantota port under a controversial debt-for-equity settlement.
During a visit to Manila in November, Chinese President Xi Jinping signed a package of agreements, including on Philippine participation in the BRI. The Hanjin port facility takeover is likely part of China's broader efforts to secure access to key facilities in the Philippines under a Beijing-friendly presidency.
Duterte has warmly welcomed big-ticket Chinese investments, including the prospective entry of China Telecom into the heavily protected telecommunications sector. The State Grid of China already has a 40% stake in the Philippines' national grid.
Chinese companies have also stepped up investment in sensitive locations, including the Clark special economic zone, the former site of America's largest overseas air base, as well as in the vicinity of key military bases such as the Bautista air base, which lies close to several disputed features in the Spratly Islands.
Filipino strategists fear an "economic cabbage strategy," similar to what has occurred in the South China Sea, where Chinese entities surround and dominate an area layer by layer with an expansion of their investment footprint.
Subic, which lies less than 100 km northwest of Manila and just over 100 nautical miles from the contested Scarborough Shoal, is an enticing prospect for China. Under a previous administration, Manila proposed American positioning of equipment as well as upgrading military facilities in the area.
At least two Chinese companies had expressed an interest in the purchase of the 300-hectare shipyard. © Hanjin Heavy Industries and Construction Philippines
Duterte, however, has blocked the move, limiting American access to visits by its warships. Now, China has a historic opportunity to take over large portions of the area and monitor other countries' military activity in the area.
Leading legislators such as Senator Grace Poe have openly opposed any Chinese takeover of "critical and strategic national assets." Last month, senators, led by deputy senate President Ralph Recto, cited national security considerations in blocking a $400 million deal between the China International Telecommunication Construction Corporation and Philippine security agencies for the installation of 12,000 surveillance cameras across the country.
The Philippine defense establishment has instead proposed nationalization of the shipping yard to save the jobs and develop the industry.
Recognizing public sentiment and sensitive to the demands of the military, Duterte seems to have welcomed the suggestion. Under Phase 2 of the Philippine defense modernization program, the country is allocating $5.6 billion for new acquisitions, with growing focus on naval assets and platforms.
With defense spending rising and a generally healthy economy, it is high time for the Philippine government to build a domestic naval industry. The Duterte administration has consistently touted the need for an "independent" foreign policy and build-up of domestic steel and manufacturing sectors.
Conscious of the risks of nationalizing the industry, the Philippine government is considering some private non-Chinese investment in the yard, which will not only save jobs but also contribute to the development of domestic shipping for commercial and military purposes.
Neighboring countries such as Indonesia have already produced their own warships, with the Philippines among their clients. By taking over the Hanjin shipyard, potentially through a public-private consortium, Manila would acquire greater strategic self-reliance, build new employment opportunities, and gradually scale up a nascent military-industrial complex. Above all, it would protect strategic Philippines assets and facilities from potentially hostile actors.
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