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Manila set to block Chinese bidders from largest shipyard

National security concerns over Subic Bay outweigh warmer bilateral ties

A newly-built ship is seen at Hanjin Heavy Industries' shipyard in the Subic Bay Freeport Zone in January 2018. (Photo courtesy of HHIC-Phil)

MANILA -- The Philippine government is set to exclude Chinese bidders from acquiring the country's largest shipyard, situated at the entrance to the highly sensitive South China Sea, amid concerns over Beijing's growing military presence in the region and its potential threat to national security.

The shipyard collapsed in January after South Korea’s Hanjin Heavy Industries and Construction and its Philippine unit defaulted on $1.3 billion in loans. A number of foreign bidders have declared their interest in acquiring the facility, including at least two from China.

Nikkei Asian Review has learned that Manila's Department of Trade and Industry has adopted the Philippine defense ministry's position that a Chinese takeover of the financially troubled shipyard could compromise national security, according to sources in the government.

"The issue of national security and sovereignty takes precedence over anything else," a trade official told Nikkei. "If an appropriate government agency, which in this case is the Department of National Defense, has already signified reservations, then we take that into consideration."

The remarks are another sign that President Rodrigo Duterte's administration has begun to push back against Chinese encroachment in Philippine-claimed areas of the South China Sea, and mark a setback for Beijing as it tries to deepen ties with strategic Philippine industries.

Chinese companies have recently clinched telecom and infrastructure deals, and are poised to secure more as Duterte makes a four-day visit to Beijing from Wednesday to attend the Belt and Road Forum for International Cooperation.

But earlier this month, Manila publicly rebuked Beijing over the ongoing presence of Chinese ships near the Philippine-controlled Spratly Islands, as Duterte's political opponents attack his China-friendly policies ahead of midterm elections in May.

"I think that there was a need to maintain administrative unity and limit criticism from popular groups since elections are coming up," said Alvin Camba, a doctoral candidate at Johns Hopkins University who watches Chinese investment in the Philippines.

While the government's position does not formally bar Chinese companies from bidding for the shipyard, another official told Nikkei that "it will be difficult for them to get it."

Philippine government officials stressed that Chinese investments in the local shipping industry were still welcome, just not in Subic Bay. 

The shipyard is located in Subic Bay, which until 1992 was home to one of the biggest U.S. deepwater naval bases in the region. A key hub for U.S. forces during the Vietnam war and cold war, its importance has been underlined more recently amid rising tensions over Beijing's disputed claims to more than 80 percent of the South China Sea.

The Philippine Navy indicated that it would be prepared to take a stake in the shipyard to guarantee its independence, with Navy spokesperson Jonathan Zata welcoming the trade department's position.

"If a government agency has taken note of our recommendation, we are happy to fulfill our mandate of protecting our country's maritime interests," he told Nikkei.

Two unidentified, state-backed Chinese shipyards approached the trade department in January regarding Hanjin Heavy Industries and Construction Philippines, and Chinese shipbuilders were in touch with trade officials until last month.

The companies were told to talk to the banks instead, the trade official said, adding that the government's position has been made clear to creditors.

Five Philippine banks have agreed to convert $412 million in debt into equity, making them part-owners of the shipyard once a process is completed. But Chinese companies appear nowhere in sight as the search for a white knight begins.

"At least five" foreign companies have visited the shipyard, said Jomi Deveras, a senior vice president at Rizal Commercial Banking, one of the local creditors.

Asked whether a Chinese group had come forward, Deveras said: "Not that I am aware of."

While multiple foreign interests had expressed interest in the shipyard, Rosario Bernaldo, the receiver administering the rehabilitation process, said no Chinese companies "have approached me" so far.

Dutch shipbuilder Damen Group, France's Naval Group and casino tycoon Enrique Razon are among those believed to be considering a bid, as well as unidentified American, Japanese and European companies.

The search for the shipyard's white knight has been largely a private sector initiative, but the Philippine government has been keen to play a role in the rescue given the yard's economic and strategic importance.

"We cannot not consider it,'' Nestor Tan, chief executive officer of BDO Unibank which is also part of the five-bank consortium, told Nikkei, referring to the government's position. "It will definitely be a factor in the decision [in choosing a white knight]."

Hanjin has invested $2.3 billion in the 300-hectare facility since 2006, making it the largest foreign investor in the Subic Bay Metropolitan Authority, a special economic zone.

The shipyard had delivered 123 vessels through 2018, making the Philippines one of the largest shipbuilding nations. It employed over 30,000 during its heyday before reducing staff to a few hundred for maintenance work when it closed in February.

Defense Secretary Delfin Lorenzana said in January that Duterte was open to a state-backed rescue of Hanjin, in which the Philippine Navy would own a stake. But Finance Secretary Carlos Dominguez said he wanted the private sector to resolve the debt default issue before the government made a move.

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