Sep 192014
Reference ID Created Released Classification Origin
2009-01-22 09:34
2011-08-30 01:44
Embassy Manila

DE RUEHML #0145/01 0220934
O 220934Z JAN 09




E.O. 12958: N/A
SUBJECT: Clark and Subic Freeports Sound but Slowing

REF: a) Manila 85; b) Manila 86; c) 08 Manila 2740; d) Manila 108;
e) Manila 103

¶1. (SBU) Summary: The former American bases at Clark and Subic Bay
have become successful “special economic zones,” a designation for
areas with relatively attractive investment regulations. They
benefit from their excellent transportation facilities and the
country’s English-speaking, educated work force. Shipyards and
related services are the most important industries at Subic, while
Clark hosts business process outsourcing, semiconductors, and
tourism. Clark and Subic are examples of the successes and
challenges of the special economic zones. Nationwide, the zones
account for 80% of Philippine exports. Their friendliness to
capital has attracted billions of dollars of investment. However,
the integration of the zones into the global economy, the key to
their success, also renders them far more vulnerable to the impact
of the global economic slowdown than the rest of the Philippine
economy. They will see significant layoffs over the coming year.
Further, there is some question whether they truly benefit the
country in the long run. End summary.

From Ghost Towns to Export Centers

¶2. (U) When the United States closed the Clark Air Force and Subic
Naval bases in 1991, many observers predicted that the two would
become ghost towns. Instead, the GRP enacted the Bases Conversion
Development Act in 1992, turning the former bases into special
economic zones with their own more attractive legal and more
effective governance structures. Clark, Subic, and other special
economic zones now produce 80% of Philippine exports, and are the
most important areas of Philippine integration into the global
economy. The most dynamic sectors of the country’s economy dominate
the zones, including business process outsourcing, tourism,
shipbuilding and maintenance, garments, and electronics. The zones
remain sound and strong. Foreign investors are overwhelmingly happy
with how their businesses have been performing, and report that the
zone authorities play a highly constructive role. The industries in
the zones draw on the Philippines’ most significant advantages,
including its English-speaking, educated labor force and the
country’s proximity to global manufacturing supply Fchains.

¶3. (SBU) The praise of the special economic zones contrasts sharply
with foreign investor criticism of investment possibilities in the
rest of the Philippine economy. The domestic economy in the
Philippines is heavily protected, controlled by a handful of
dominant and politically-connected families, and generally
inefficient, marked in particular by low rates of both foreign and
domestic investment. There are serious legal and governance
deficiencies (ref A and B).

¶4. (SBU) Relative isolation from the global economy has sheltered
most of the Philippine domestic economy from the global slowdown
(ref C and D). Domestic businesses will be affected by the slowing
of growth in remittances as overseas Filipino workers lose their
jobs, and by the reduction in consumption resulting from layoffs in
the zones (see below) but otherwise, the domestic economy appears to
be rather insulated from international economic trends.

¶5. (SBU) Export zones like Clark and Subic, on the other hand, are
extremely vulnerable to the current global recession. In
particular, manufacturing at Clark and Subic is pro-cyclical; i.e.,
it thrived in the economic boom of the first two-thirds of this
decade and has been among the first to suffer from the falloff in
worldwide demand. While investors maintain that they are committed
to the zones for the long term, they also expect the next year or
two to be difficult, with projects delayed or canceled, and with
many workers losing their jobs.

Subic’s Shipping Focus Endures

¶6. (U) Subic Bay was not only the home of the U.S. Seventh Fleet,
but also the location of the yards that carried out repairs to U.S.
Navy vessels in the Pacific. This legacy has led to the emergence
of a number of businesses servicing world shipping. Most notably,
the Korean firm Hanjin Shipping, has built a major shipyard in Subic
that employs 20,000.

¶7. (SBU) Hanjin is Subic’s largest employer, but has suffered from
the impact of the downturn in shipping. Lease rates for cargo ships
have fallen to a fraction of what they were a year ago, causing

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shipping lines to cancel orders for new ships. A Hanjin engineer
told EconOff that contracts to build seven ships have been canceled
since September, and workers have been told to slow the pace of
their work on four other vessels. Over twenty undelivered ships
without buyers now sit idle in Subic Bay. The owner of a
neighboring business told us that other Subic companies expect
Hanjin to lay off up to half its workforce during 2009. Many dry
dock businesses have also sprouted around Subic, drawing on a
workforce with experience in repairing U.S. Navy ships. These
businesses have been somewhat more resilient during the crisis,
since ships that continue to sail must be serviced at least once
every two years, but still have suffered as the volume of global
shipping slides.

Clark Airstrip: Manila’s New International Airport?
——————————————— ——-

¶8. (U) The former Clark runway is now the Diosdado Macapagal
International Airport. Given its relative closeness to Manila
(about 50 miles) and room for expansion and the addition of new
runways, the GRP intends to make Clark the new international airport
for Manila within the next decade (ref E). For the moment, Asian
budget carriers dominate flights into Clark, but the director of the
airport told us that a new passenger terminal and a high-speed light
rail connection between Clark and Manila within five years will make
it possible for Manila travelers to reach the airport in under an
hour. While the airport initially served businesses located in the
Clark zone, such as the Asian hub of United Parcel Service (now
slated to move to China), most of the airport’s traffic now serves
passengers from parts of Central Luzon outside the zone.

Texas Instruments

¶9. (SBU) In 2007, Texas Instruments announced a $1 billion
investment in a new factory in Clark, its second large facility in
the Philippines. The construction has been proceeding on schedule,
but it neared completion just as the world electronics market began
to slow. We understand that the company remains committed to its
Clark factory, but in light of the slowdown, and the recent layoff
of several hundred employees in Baguio, the opening of the Clark
facility will be delayed.

Korean Investors and Tourists Have a Central Role
——————————————— —-

¶10. (SBU) Within the past two months daily flights have been
introduced to Korean airports. In addition to Hanjin, several
tourism projects, retirement properties, luxury hotels, nightclubs,
English study programs, and golf courses in the zones cater to
Korean visitors, especially during the winter months of November to
February. A manager at the Mimosa Country Club at Clark told us
that the golf course has been practically empty this winter, as the
depreciation of the Korean won by about one-third has kept most
Korean visitors away. The zone’s Holiday Inn, a majority of whose
clientele is Korean, has also suffered a spike in its vacancy rate.

Export Zones Have Attracted Smugglers

¶11. (SBU) The smuggling into the Philippines via the tariff-free
Subic Freeport was an important political issue during 2008.
Petroleum and used automobiles were the most profile smuggled goods.
Zone officials told us that smuggling has declined sharply over the
past few months as oil prices have fallen and an executive order
banning the importation of used vehicles has been more rigorously

A Single Clark/Subic Zone?

¶12. (U) A new 58-mile expressway linking Subic, Clark, and the city
of Tarlac opened in April 2008, cutting the travel time by road
between the two economic zones from three hours to around 45
minutes. With that, there are initiatives to market the zones as a
single magnet for business, with the intention of eventually
unifying the zones. The leadership of the zones has already created
a joint “Clark Subic Marketing Agency” to promote the zones to
investors, and they are investigating the idea of incorporating the
land along the new expressway into the zones, and perhaps combining

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Clark and Subic Feel the Recession

¶13. (SBU) Despite the prospects for growth, this year is likely to
be difficult for Clark and Subic. Businesses at both zones are
feeling the effects of contracting demand, in the form of lost
business and cancellation of existing contracts, particularly at the
Hanshin shipyard in Subic. According to the head of the Labor
Department at the Subic Bay Metropolitan Authority, there were 800
layoffs in Subic between October and December, and as of January,
another 1,500 workers are on mandatory annual leave. Other
businesses have resorted to various measures to reduce labor costs
while avoiding layoffs, such as suspending operations for up to two
months this winter, or reducing workers to 30-hour weeks. Operators
of several American-owned businesses in the zones told us that their
workforces embodied investments of time and training. One manager
explained that a majority of his workforce had been with his company
since it opened in the Philippines in 1998, and that if he had to
lay people off, it would take years to rebuild and retrain his
workforce once the economy improved.

Special Economic Zones: an Economic Model?

¶14. (SBU) Clark and Subic illustrate both the success and the
vulnerability of Philippine economic zones. The firms that have
invested there view their experiences as successes, and they intend
to stay for the long term, as demonstrated by their desire to hold
on to their skilled work forces despite the present slowdown. The
Clark and Subic zones remain fundamentally sound, and are examples
of what the Philippine economy would be capable off if it were less
closed and protected. Clark and Subic have been hit by a downturn
that was not of their own making. While the next year to 18 months
will be difficult, they look set to be successful over the long

¶15. (U) As a 2008 World Bank Study (Rising Growth, Declining
Investment: The Puzzle of the Philippines) noted, the 44 special
economic zones were “conceived as a substitute for a good investment
climate.” As such, they have been successful. However, their
impact on the Philippine economy has been, perhaps, less than
originally expected. The direct benefit to the Philippines as a
whole seems to be mostly the consumption generated by the salaries
paid in the zones, making these jobs somewhat analogous to those of
overseas Filipino workers. In effect, the zones may serve as yet
another escape valve of the political economy of the Philippines
(ref C), allowing the low investment, oligopolistic domestic economy
to delay or avoid reform — making a good investment climate for the
country as a whole less necessary and less likely.



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