AMBASSADOR VISITS CLARK AND SUBIC ECONOMIC ZONES

UNCLAS SECTION 01 OF 02 MANILA 002637

SIPDIS

SIPDIS

E.O. 12958: N/A
TAGS: PGOV PREL ECON EINV EAID RP
SUBJECT: AMBASSADOR VISITS CLARK AND SUBIC ECONOMIC ZONES

REF: MANILA 2257


1. SUMMARY: During June 15-16 visits to two former U.S.
military bases, the Subic and Clark special economic zones,
Ambassador Kenney highlighted continuing U.S. involvement in
both regions. Managers of these economic zones briefed the
Ambassador on recent infrastructure projects and investment
in both zones. During visits to three U.S. companies,
managers at Fedex, AOL and Asian Aerospace discussed their
experiences investing in Clark and Subic. Visits to a Peace
Corps Volunteer site, an orphanage, and a USAID-supported
HIV/AIDS project underscored continuing U.S. support for
projects in nearby communities.

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Rising Asian Investment
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2. During the Ambassador's visits to the Subic Bay
Metropolitan Authority (SBMA) and the Clark Development
Corporation (CDC),managers touted several major
infrastructure projects and rising investment from the East
Asia region. Following the 1991 closure of U.S. military
bases, the GRP has offered investment incentives to develop
these special economic zones that collectively host more
than 900 companies with roughly 100,000 employees. Subic
Administrator Armand Arreza noted several recent projects to
develop a cruise ship terminal, expand port capacity and
improve the transportation link with Clark. As China
finances the construction of a railway link between Manila
and Clark, a Chinese firm recently committed to invest $300
million to produce glass products in Subic and a Korean firm
was awarded a $30 million contract to develop tourism
facilities in Clark. These are in addition to the major $1
billion Korean investment in a shipbuilding facility in
Subic announced in February 2006. The Japanese-funded Clark-
Subic Expressway will sharply reduce travel time between the
two former bases when it is completed in 2007. During a
lunch at Subic Bay Yacht Club hosted by SBMA, local leaders
expressed enthusiasm for increased port visits by U.S.
military vessels, noting the substantial economic benefits
provided by these visits.


3. Delays in restoring promised tax incentives in Clark
have underscored differences in the pace of development in
these two economic zones. Following an August 2005 Supreme
Court decision to nullify longstanding tax incentives in
Clark (see Reftel),the House took until May 31, 2006 to
approve legislation to restore the incentives. The CDC
Chairman expressed optimism that the Senate will approve
this legislation by mid-August but commented that the issue
has served as a "sword of Damocles" hanging over the CDC,
discouraging further investment. The Ambassador emphasized
that restoration of tax incentives is vital to maintain the
credibility of the CDC with potential investors.

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Fedex Confronts Relocation Challenges
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4. During the Ambassador's visit to Fedex's Regional Hub in
Subic, Fedex managers discussed future challenges it will
face in relocating its Asia Pacific hub from Subic to
Guangzhou by 2008. Regional Hub manager, Beng-Wee Tan,
expressed concern that currently positive relations with
SBMA and local officials may deteriorate as the relocation
date approaches. Although this decision was announced in
2005, SBMA officials tend to treat the relocation as still
hypothetical, suggesting that SBMA may not fully appreciate
the finality of Fedex's decision. Mr. Tan also noted that
Chinese restrictions on importation of equipment and
transfer of workers would pose additional challenges. When
the relocation is complete, Roughly 200 workers will be
transferred to maintain Fedex's Philippine operations in
Manila, while the remaining 580 jobs will be replaced by
Chinese workers in China.

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AOL and Asian Aerospace
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5. At the AOL Member Services center in Clark, the
Ambassador observed an enthusiastic staff of consultants who
provide technical support and monitor chat rooms for 23.5
million subscribers. AOL's emphasis on human resource
development has helped this facility maintain a 10% worker
attrition rate, far lower than 40% attrition rates typical
for the booming call center industry. Employee perks,
including a recreation area, subsidized cafeteria, and a new
gym contribute to an exuberant working atmosphere. The
Amcit General Manager explained that AOL is working with
other call center consulting firms to expand into voice-

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based technical support.


6. During a tour of the Asian Aerospace aircraft
maintenance facility, CEO Peter Rodriguez outlined their
business strategy for military and civilian aircraft
maintenance. A Philippine affiliate of Lockheed-Martin and
other U.S. manufacturers, Asian Aerospace recently completed
the US-funded refurbishment of a C-130 cargo plane that was
turned over to the Philippine Air Force on April 28, 2006.
During the briefing and in a letter to the Ambassador, Mr.
Rodriguez expressed his interest in helping to provide
maintenance services for the U.S. fleet of Hercules aircraft
currently serviced in Singapore. Asian Aerospace also
aspires to become a regional maintenance hub for cargo
aircraft.

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Peace Corps and USAID Projects
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7. In visits to a Peace Corps Volunteer site, a USAID-
funded HIV/AIDS project and the American Cemetery in Clark,
the Ambassador highlighted continuing U.S. engagement in
communities near Clark and Subic. At the Lubao Reception
and Study Center for Children, a Peace Corps Volunteer is
coordinating staff development and developing programs for
special needs children. Angeles City Mayor Carmelo Lazatin
joined the Angeles AIDS Council in briefing the Ambassador
on the Angeles City Reproductive Health and Wellness Center
and their work in combating the spread of HIV/AIDS in
Angeles City and surrounding areas. The center conducts HIV
surveillance and HIV/AIDS prevention programs, targeting
high-risk groups, notably sex industry workers. Angeles
City is one of 10 HIV/AIDS sentinel surveillance sites
supported by USAID. During a visit to the Clark American
Cemetery, the Ambassador met American Citizen Services
Wardens who also chair the cemetery committee created by
locally resident U.S. veterans to maintain this final
resting place for 2,030 fallen American soldiers.

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Media Coverage
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8. During news media encounters in Lubao, Subic, Angeles
and San Fernando, the Ambassador emphasized continuing U.S.
engagement through private investment and community
development projects. The visit to the isolated Reception
and Study Center for Children helped to publicize the need
for foster parents and adoptive families. During a radio
interview near the end of the trip, the Ambassador answered
a wide range of questions, underscoring successful examples
of U.S. investment, Peace Corps support for the Lubao
orphanage and USAID involvement in HIV/AIDS prevention
programs.

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Comment
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9. The visits highlighted several dynamic and successful
examples of U.S. investment at AOL and Fedex, as well as the
high quality of maintenance and servicing available for U.S.
aircraft through Asian Aerospace. The tours of both zones
showed that Clark continues to lag behind the Subic Freeport
Zone in its level of development. Although Subic managers
articulated a clearer vision of their future development
strategy, both briefings tended to stray from realistic
strategy into wishful projections for future growth. The
relocation of Fedex and delays in restoring Clark's tax
incentives have underscored the challenges these investment
zones will continue to face in competing for new investors.

KENNEY