The Philippines unveils long-term investment plan for armed forces

Fuelled by rapid economic expansion and industrialisation, regional competitors across Asia are becoming increasingly active in making territorial claims in what is now a high-stakes competition to secure increasingly scarce strategic resources. Territorial disputes have intensified in recent years, as numerous countries vie for control over large swaths of the Pacific Ocean and the valuable energy and fishery resources they contain, as well as the busy trade routes that criss-cross the region.

Sea Dispute

One of the most visible and high-profile examples of this increasing competitive activity is the recent creation by the Chinese of man-made islands in the heavily contested West Philippine Sea, also referred to as the South China Sea, put there in a bid to solidify their claims to the surrounding water. While the Philippines, along with allies including the US, has not recognised these declarations, Chinese expansion into these waters has continued throughout 2015, in line with the nine-dashes that appear on Chinese maps, marking out the area of water that China asserts comes under their sovereignty.

In contrast to many rival claims from Japan, the Philippines, Malaysia, Vietnam, South Korea and Taiwan, which generally mirror international maritime claims outlined in the UN Convention on the Law of the Sea that designates an exclusive economic zone extending 370 km off any given country’s coast, China’s nine-dash map policy covers approximately 90% of the 3.5m-sq-km West Philippine Sea/South China Sea on Chinese maps and comes close to a number of coastlines belonging to other nations. The Philippines and Vietnam, both ASEAN members, have been the most vocal in their disputes with China in recent years and have also formerly protested the presence of the Chinese in disputed waters to the UN. Tensions with the Philippines in particular have escalated substantially since 2011 over ownership of the Reed Bank, located 144 km off the Philippine island of Palawan, as well as the Scarborough Shoal in the West Philippine Sea. The Reed Bank lies just to the east of the Spratly Islands, which are also claimed by Brunei Malaysia, Taiwan and Vietnam.

As a result of these disagreements, tensions have flared in recent years, giving rise to what is rapidly becoming one of the region’s pre-eminent threats to stability, with multiple standoffs occurring between rival vessels. Most recently, the UN dealt a blow to China’s assertions in October 2015 when the Permanent Court of Arbitration (PCA), in the Hague, sided with a 2013 petition by the Philippines and rejected Beijing’s claim that the disputes were about territorial sovereignty. The PCA agreed to additional hearings to decide the merits of the Philippines’ arguments. Whatever the ultimate decision by the courts, it remains unclear how much of an effect the proceedings will have on China’s expansion into the area, given that the country has stated it would neither participate in nor accept the case.

Deterrent

In light of these ongoing developments, the Philippines is being forced to re-evaluate the size and composition of its naval forces, as well as other branches of the armed forces. After years of rolling out some of the smallest defence budgets in the region, the Philippines has begun to increase military spending in response to the increasingly assertive postures of other regional powers, as well as to boost internal security. The current administration, under the presidency of Benigno Aquino III, signalled this shift in policy as far back as 2012, when it rolled out a revised edition of the Armed Forces of the Philippines (AFP) Modernisation Act (originally laid out in 1995), to kick off a 15-year long drive to bring the country’s military inventory up to scratch. The act committed over P75bn ($1.7bn) for the first, and current, five-year phase of development, which includes the acquisition of a squadron of fighter jets worth P18.9bn ($419.6m) and two frigates worth P18bn ($400m).

Funding for modernisation comes on top of general defence spending, which itself has been increasing in recent years. The national defence budget for 2015 grew by 16.9% on the year prior, to P144bn ($3.2bn), according to the Department of Budget and Management. This ranked defence spending as the third-largest departmental allocation of the year, behind education, and public works and highways, and up from fourth in 2014. In 2016 total defence spending from within the state budget, including unprogrammed appropriations and military pensions, is set to increase to P174.6bn ($3.9bn), while spending on the AFP Modernisation Programme, allocated from the core Department of National Defence budget, is set to increase from P15bn ($333m) to P25bn ($555m), with a further P10bn ($222m) provided through unprogrammed funding.

Military Industrial Complex

Although much of the spending for these projects will go towards expensive big-ticket items, including fighter jets and naval vessels, the country is also looking to boost its domestic military industrial capabilities in order to make the country more self sufficient, as well as to carry over the financial benefits of increased defence spending to domestic companies. A key component of efforts to boost domestic arms-manufacturing capacity is the proposal of the new Government Arsenal Defence Industrial Estate (GADIE) to be based on a 340-ha site, 120 km west of Manila. The estate would be located near an existing munitions production facility in Bataan, in the Central Luzon region, and be operated by the state-owned Government Arsenal (GA), a firearms and ammunition manufacturer.

Categorised as a special economic zone for foreign investors, the estate seeks to attract manufacturers who will supply the military’s needs primarily relating to ammunition and small arms. A master development plan, released by GA in 2015, details a two-part development strategy for the industrial estate, the initial phase of which involves the construction of a brand new Defence Industrial Estate, and the second phase will see the upgrade of existing facilities. The first phase includes the development of separate administrative and housing zones with new administration buildings, a hotel, commercial space, a hospital, a sports complex and 30 ha of staff and executive housing. Two more manufacturing zones will also be built: the Non-Explosive Zone housing a rifle manufacturing plant, brass rolling mill, KIA motor plant and others; and the Explosive Zone for the manufacture of medium and high-calibre ammunition and a melt loading facility for explosives and other projects. Improvement and expansion activities taking place in the second phase will focus on existing GA ammunitions manufacturing facilities.

To attract more partnerships and investment from foreign firms, the estate will also be eligible for tax breaks but will operate under the jurisdiction of the Department of Defence rather than the Philippine Economic Zone Authority. As of 2015 weapons and munitions manufacturers from Canada, the US, South Korea and South Africa were considering setting up operations in GADIE, according to a senior government official with GA, speaking to the press in 2015. These included Rheinmetall Denel Munition of South Africa, a unit of South Korea’s S&T Holdings, US-based Colt’s Manufacturing and Canada’s Waterbury Farrel.

Aiming High

Another offshoot of the arms industry which is also receiving increased interest, is the country’s fledgling aerospace sector. While current operations remain limited, the Aerospace Industry Association of the Philippines released a roadmap in 2014 which projects that, with the right support, it could become a significant contributor to the economy. According to the roadmap, the aerospace sector is capable of generating up to $10.3bn in cumulative revenues between 2013 and 2022.

As of 2014, the primary contributions of Philippine aerospace manufacturers to the global industry were limited to supplying flight components and galley equipment. Led by the country’s three significant producers – MOOG, B/E Aerospace and Jamco Aerospace – these products consisted chiefly of primary and secondary flight controls for Boeing 787 aircraft, along with the same type of components for the Airbus A350XWB. Philippines-based companies turned out $592m worth of these products in 2014, up from $385m the previous year. The government is also participating in the sector’s development by setting up training programmes, encouraging local businesses to conform to aerospace standards, providing financial incentives, clearing administrative bottlenecks and implementing other reforms. It is suggested in the roadmap that the Philippines could become a major participant in an industry that is expected to deliver more than 35,000 planes worldwide by 2032 and 12,820 aircraft to the Asian-Pacific region alone. By boosting capacity and offering an array of components, the Philippines aerospace industry hopes to generate annual revenues of $1.43bn by 2022.

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The Report: The Philippines 2016

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