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)
CLIFF VENZON, Nikkei
staff writerFebruary 21, 2023
14:40 JST
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.
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