Posted to Nikkei East Asia (Feb 21, 2023): China tensions boost defense industry at Philippines' Subic Bay (By CLIFF VENZON)
Private equity company Cerberus reviving shipyard at former U.S. naval base
Cerberus Capital Management took over the bankrupt Hanjin shipyard at Subic Bay in 2022. (Photo courtesy of Subic Bay Metropolitan Authority)
SUBIC, Philippines -- Rising tensions with China are creating a business opportunity for Philippine officials looking to revive U.S. defense industry activity at the former American naval base in Subic Bay.
More than three decades after the withdrawal of American forces, Subic stands to benefit as the U.S. and the Philippines increase military cooperation in response to China's assertive policies in the South China Sea and toward Taiwan.
Rolen Paulino, head of the Subic Bay Metropolitan Authority (SMBA), which oversees the free-port zone created following the American departure, told Nikkei Asia that Subic's deep harbor and access to the South China Sea make it an obvious choice for military use.
"It's very strategic," he said. "It's only an hour away from Taiwan. It is about 30 minutes away by F-14."
The strengthening of U.S.-Philippine defense ties was underscored this month when President Ferdinand Marcos Jr. granted the U.S. access to four more Philippine military bases, bringing the total to nine. Manila has been alarmed by China's moves to reclaim and militarize islands in the South China Sea.
"We feel that it will help in making sure that there is safe passage in the South China Sea," Marcos said of the U.S. deal in an interview with Nikkei Asia in Tokyo on Feb. 12.
Subic Bay could be one of the new bases that the U.S. could access, according to Philippine officials. But Paulino said he could not confirm any plan, saying "higher level" officials would decide. "My level is to prepare the SBMA," he said.
The expanded defense deal was struck less than a year after U.S. private equity group Cerberus Capital Management took over the bankrupt Hanjin shipyard at Subic Bay, where the Philippine navy also has a base.
The rehabilitation of the shipyard has been described by Philippine officials as the "biggest public-private partnership" between the long-standing military allies. In January, U.S. officials from the Defense Department and Indo-Pacific Command visited the project.
SBMA officials said there were plans to resume ship repair and shipbuilding operations at the facility, which would cater to U.S. Navy ships, commercial ships and Philippine vessels. Paulino said 18 companies were setting up at the yard and predicted the project could generate between 5,000 to 10,000 jobs.
"I think they will be very, very aggressive this year," Paulino said of Cerberus.
Major U.S. defense contractor Vectrus is among the companies operating at the shipyard. It will provide logistical support -- such as storage, tents and generators -- to U.S. forces for their regular military drills in the Philippines, according to SBMA manager Karen Magno.
SBMA Chairman and Administrator Rolen Paulino: "When it comes to U.S. naval ships, they are a good client, they pay outright." (Photo by Cliff Venzon)
The full details of Cerberus' plans have not been made public. But the idea is to sublease the property to other companies, Magno said. U.S. real estate consultant CBRE is among the companies working on the project.
Subic played a critical role as a supply and maintenance hub for the U.S. military during the Vietnam War and the Cold War. In the future, the Pentagon could make use of Subic's commercial infrastructure, potentially reclaiming its status as a critical hub for Washington in times of crisis.
"The Philippine and U.S. navies ... could contract the commercial operators for supply, sustainment and repair services," said Gregory Poling, director of the Asia Maritime Transparency Initiative at the Center for Strategic and International Studies in Washington.
"This could, in theory, lead to Subic again becoming a major link in the U.S. Navy's logistics chain in the region, though that will happen through the contracting of local civilian companies much as now occurs in Singapore."
The U.S. and Japan, the latter of which is seeking its own visiting forces agreement with Manila, are keen to develop Subic. The Japan International Cooperation Agency is helping develop a new master plan for Subic Bay and is supporting the Philippine Coast Guard to establish a base there. Washington also has allocated $82 million to develop the five Philippine bases to which it has been given access.
Paulino, a former mayor of neighboring Olongapo, was among the local volunteers who helped develop Subic into a free port after the Philippine senate rejected its base renewal agreement with the U.S. in the early 1990s.
The zone now employs over 150,000 and hosts companies like Japanese electronics giant Nidec, Taiwanese computer manufacturer Wistron Infocomm, and the maker of U.S. shoe brands Vans and Keds.
Paulino said he was glad to see U.S. military operations return.
"I grew up with the presence of the U.S. Navy here. I don't see any problem with them," he said. "I see them as tourists. Because once they come here, definitely they will spend money."
New York-based Cerberus, which has approximately $60 billion in assets, acquired the Philippines' biggest shipyard for $275 million from creditors. It secured a 50-year lease and won tax breaks in return for a 17 billion peso ($307 million) investment.
Hanjin, a South Korean engineering and construction group, invested $2.3 billion to develop the 300-hectare yard, which built over 120 cargo ships and employed over 30,000 people. The company failed to pay off around $1.3 billion in debts, including $412 million from Philippine banks.
Paulino alluded to Hanjin's problems in welcoming defense-related enterprises to the yard. "When it comes to U.S. naval ships, they are a good client, they pay outright," Paulino said. "Of course, you will always prioritize the good payers."
The January 2019 Hanjin bankruptcy exposed the yard to a high-stakes ownership change. When two unnamed Chinese groups expressed interest in the yard, the Philippine defense establishment torpedoed their potential bid by raising national security concerns.
"Although it is a commercial shipyard, nothing can prevent the owners from making it into a de facto naval base and a maritime facility for other security purposes," former Philippine Navy chief Alexander Pama said at the time.
Cerberus began exclusive talks with Hanjin's Philippine creditor banks in mid-2019 and sealed the takeover in early 2022.
Negotiations took place during a turbulent period for U.S.-Philippine relations. In early 2020, former President Rodrigo Duterte -- who had forged warmer ties with China -- threatened to terminate the 1998 Visiting Forces Agreement, which facilitates the entry of U.S. troops into the Philippines. The termination, which would have impaired the allies' 1951 Mutual Defense Treaty, was rolled back by Duterte in mid-2021.
https://asia.nikkei.com/Business/Aerospace-Defense-Industries/China-tensions-boost-defense-industry-at-Philippines-Subic-Bay
The full details of Cerberus' plans have not been made public. But the idea is to sublease the property to other companies, Magno said. U.S. real estate consultant CBRE is among the companies working on the project.
Subic played a critical role as a supply and maintenance hub for the U.S. military during the Vietnam War and the Cold War. In the future, the Pentagon could make use of Subic's commercial infrastructure, potentially reclaiming its status as a critical hub for Washington in times of crisis.
"The Philippine and U.S. navies ... could contract the commercial operators for supply, sustainment and repair services," said Gregory Poling, director of the Asia Maritime Transparency Initiative at the Center for Strategic and International Studies in Washington.
"This could, in theory, lead to Subic again becoming a major link in the U.S. Navy's logistics chain in the region, though that will happen through the contracting of local civilian companies much as now occurs in Singapore."
The U.S. and Japan, the latter of which is seeking its own visiting forces agreement with Manila, are keen to develop Subic. The Japan International Cooperation Agency is helping develop a new master plan for Subic Bay and is supporting the Philippine Coast Guard to establish a base there. Washington also has allocated $82 million to develop the five Philippine bases to which it has been given access.
Paulino, a former mayor of neighboring Olongapo, was among the local volunteers who helped develop Subic into a free port after the Philippine senate rejected its base renewal agreement with the U.S. in the early 1990s.
The zone now employs over 150,000 and hosts companies like Japanese electronics giant Nidec, Taiwanese computer manufacturer Wistron Infocomm, and the maker of U.S. shoe brands Vans and Keds.
Paulino said he was glad to see U.S. military operations return.
"I grew up with the presence of the U.S. Navy here. I don't see any problem with them," he said. "I see them as tourists. Because once they come here, definitely they will spend money."
New York-based Cerberus, which has approximately $60 billion in assets, acquired the Philippines' biggest shipyard for $275 million from creditors. It secured a 50-year lease and won tax breaks in return for a 17 billion peso ($307 million) investment.
Hanjin, a South Korean engineering and construction group, invested $2.3 billion to develop the 300-hectare yard, which built over 120 cargo ships and employed over 30,000 people. The company failed to pay off around $1.3 billion in debts, including $412 million from Philippine banks.
Paulino alluded to Hanjin's problems in welcoming defense-related enterprises to the yard. "When it comes to U.S. naval ships, they are a good client, they pay outright," Paulino said. "Of course, you will always prioritize the good payers."
The January 2019 Hanjin bankruptcy exposed the yard to a high-stakes ownership change. When two unnamed Chinese groups expressed interest in the yard, the Philippine defense establishment torpedoed their potential bid by raising national security concerns.
"Although it is a commercial shipyard, nothing can prevent the owners from making it into a de facto naval base and a maritime facility for other security purposes," former Philippine Navy chief Alexander Pama said at the time.
Cerberus began exclusive talks with Hanjin's Philippine creditor banks in mid-2019 and sealed the takeover in early 2022.
Negotiations took place during a turbulent period for U.S.-Philippine relations. In early 2020, former President Rodrigo Duterte -- who had forged warmer ties with China -- threatened to terminate the 1998 Visiting Forces Agreement, which facilitates the entry of U.S. troops into the Philippines. The termination, which would have impaired the allies' 1951 Mutual Defense Treaty, was rolled back by Duterte in mid-2021.
https://asia.nikkei.com/Business/Aerospace-Defense-Industries/China-tensions-boost-defense-industry-at-Philippines-Subic-Bay
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