18 August 1986

Her Excellency
Corazon C. Aquino
President
Republic of the Philippines
Malacañang, Manila

Dear Mrs. President:

We respectfully submit herewith the study of a joint committee of Makati Business Club and Management Association of the Philippines on fair compensation for the U.S. bases in the country. We endorse the findings of the study for the President’s consideration in designing strategies for any negotiations with the U.S. government on allowing the continuing presence of bases in the Philippines.

The study estimates the commercial opportunity costs of the base location in our country at US $1,232 million per year. This calculation does not take into account the increased costs of operating the military forces serviced by the bases, if in another location perforce farther the Luzon from the theater of their operations in the China Sea; the increase in battle groups required by this farther distance; and the incremental strategic value of a Philippine location. The addition of these factors which we could categorize as “military opportunity costs” would substantially increase the calculated annual value of these bases to the U.S. government.

On the foregoing limited calculation of annual value, the study finds that our government could reasonably propose that the U.S. government assume Philippine external debt of US $9.43 billion with a definite ten-year lease, 1985 to 1994. The study emphasizes that the amount of negotiated debt assumption would be substantially increased when the military opportunity costs are factored into the calculation. We suggest that such military opportunity costs be calculated by appropriate military planners in the New Armed Forces to complete the study.

FAIR COMPENSATION FOR AMERICAN BASES IN THE PHILIPPINES

For a growing number of people, there are three major problems to having U.S. bases in the Philippines: (1) They represent a loss of national sovereignty; (2) They act as a magnet for nuclear attack; and (3) the nation is ill compensated for allowing foreign bases on our land.

We recognize the force of the first two issues – loss of sovereignty and the nuclear magnet arguments – but comprehensive discussion of these two aspects is beyond the competence of the business oriented authors of this paper.

This paper addresses the third issue – that of inadequate compensation. In order to establish a basis for negotiation on this topic, we first appraise the annual value of the bases to the U.S. government from the standpoint of their commercial “opportunity cost”. Then we suggest that this annual value be capitalized, as a long-term lease of base lands, and the same amount of foreign debt transferred to the U.S. government, as prepaid rental on the bases for the agreed lease period.

VALUE OF THE BASES TO THE UNITED STATES

We assess the value of the bases to the U.S. as being influenced by:

1. The replacement costs incurred for relocating the bases.

2. The additional costs incurred in redeploying bases to other locations have two components:

(a) Bases operations and maintenance costs, and

(b) Increased costs to operate the serviced military forces

3. The incremental strategic value of locating the bases in the Philippines, as against some other location such as Okinawa or in Micronesia. This is difficult for non-military people to quantify, but the incremental strategic value of a Philippine base location is undeniable.

PHYSICAL ASSETS

Clark Air Base Proper has a total land area of 129,705 acres, of which the U.S. bases facility covers 63,440 acres. Reported value of military facilities at Clark, exclusive of land value, is $972 million (1).

At Subic Bay Naval Complex, the U.S. facility land area covers 30,380 acres. Reported value of the military facilities at Subic, exclusive of land value, is $1.182 billion (2).

REDEPLOYING THE BASES

Redeployment options in the Pacific region include existing bases in Japan, Okinawa, Guam, Hawaii; new or expanded bases in Saipan, Tinian, Palau; and new host nations in the South China Sea area. Other options that have been discussed also include Singapore, Darwin, Cockburn Sound, and Taiwan.

Estimates of costs of new military construction range from $2 billion for expansion of existing bases to between $8 to $12 billion for new base construction and moving expenses. Expanding existing bases in Japan, Guam or Hawaii may cost less than a new base construction in other sites, but land acquisition will be a big problem, with real estate obtained at a premium, if available. We thus believe new base construction is the more likely alternative to the Philippine bases for the U.S., and $10 billion as the probable cost to build such a new base.

Operations and maintenance costs in the Philippines are estimated at only one-seventh of that in Japan, and one-eight of that in the U.S. Thus, annual salaries paid to local employees, which amounted to almost $83 million in 1985 could increase by $498 million if the bases were located in Japan, and by $580 million in a U.S. territory.

HIGHER COSTS OF OPERATIONS OF MILITARY FORCES
(Military Opportunity Costs)

Operating costs of military forces would increase because of longer distance of alternative base-sites to operating or on-station areas in the South China Sea.

Additional battle groups likewise become necessary because force requirements to perform the same tasks in a given area increase with distance from base. New forces would have to be added to retain the same level of operational effectiveness. For example, base redeployment to Japan or Guam may require the procurement of four to six navy battle groups at a cost of $60 billion upwards (5).

We are not competent to estimate the additional costs of operating the military forces to be serviced by the relocated bases, nor the capital investments for additional military forces required, nor the dollar equivalent of the incremental strategic value of a Philippine base location to the U.S. Hence, no attempt is made to include these in our calculations below. It may be desirable to refer this matter to competent military planners for their quantification in U.S. dollar terms of these considerations.

CAPITALIZED VALUE OF ANNUAL COMMERCIAL OPPORTUNITY COSTS

If the Philippine government were to negotiate with the U.S. a front end amount to be paid for the annual rental of the bases, on a purely financial basis, the calculation would be as follows:

a. Estimate the annual interest cost, at U.S. Treasury bill rates, of the funds to be used for redeploying the U.S. base facilities in the Philippines. The capital costs of such a move were estimated above at US $10 billion for new base construction. The current U.S. Treasury bill rate of 7.34% p.a. applied to this amount results in $734 million per annum.

b. The increased cost to operate and maintain the base facilities and to service military equipment, sixfold of the present payroll of Filipino workers (6 times), is $498 million per annum.

c. Obtain the present value of stream (a) – annual financial charges on new base construction – over the lease period. The applicable interest rate to derive the present value of this stream is 7.34% which is the same rate used to calculate the interest cost on the capital investment in the new bases.

d. Calculate the present value over the lease period of stream (b) – increased annual base payroll costs, using not nominal but the real interest rates, i.e. the real cost of money, which is the nominal interest rate less the rate of inflation. Historically, real interest rates have fluctuated between two and three percent (2% and 3%). We shall use 2.5%.

e. The present value of the annual bases rental will of course be larger as the lease period is longer. The present values at different lease periods are shown in Annex III. To illustrate, it would be $5.3 million for a 5-year lease period, $9.4 million for a 10-year lease, and $12.7 million for 15 years, using only the commercial “opportunity costs”, and without considering increased costs of military forces operations, enlarged battle forces, or incremental military strategic value of a Philippine location for the bases.

ASSUMPTION OF EXTERNAL DEBT BY THE U.S. GOVERNMENT

The purpose of this exercise was to present a calculation of the amount of the country’s external debt that could be assumed by the U.S. government as fair compensation for use by the bases for a definite number of years. We believe that reckoning of this period could begin from 1985, the start of the current lease term, on the basis that the present lease payments were not negotiated at arms’ length between the Marcos administration and the U.S. government, and is patently unfair to the Filipino people.

We again emphasize that the calculation of the annual value to the U.S. of the bases here is based only on commercial opportunity costs and did not, repeat not, take into account increased costs of operations of military equipment that would have to be serviced by the bases, nor the capital and operating costs of the increased military forces that a new base location (farther than the Philippines from their theater of activities) would require. These other costs which we could categorize as military opportunity costs should be calculated by competent military planners and inputted by addition to the present estimate, substantially increasing the amount of external debt that could be negotiated for assumption by the U.S. government, in exchange for definite term of base lease.

The Joint Study Committee

Annex 1

Annex 2

1. U.S. Congressional Research Service
   
2. Average of estimates ($8 to $12 billion)
   
3. 7.34% p.a. of total estimated replacement cost.
   This is based on the interest on 10-year U.S. Treasury bonds
   Prevailing as of August 4, 1986.
   
4. This is the estimated increase in manpower cost if the bases are redeployed. In 1985, $83 million in salaries were paid to Philippine nationals. This is expected to increase by seven times to $581 million per year at the equivalent salary levels for Japan, an alternative base site. The incremental cost in case of relocation is therefore $498 million per year.
   

Annex 3

NOTES AND REFERENCES

1. Data on land area came from the U.S. Air Force, Inventory of USAF Military Real Property, 30 September 1981. Data on value of military facilities came from HQ USAF, 21 February 1986. Both items were cited in Alva M. Bowen’s Philippine Bases: U.S. Redeployment Options, a Congressional Research Service paper dated 20 February 1986.

2. Office of Chief of Naval Operations, 21 February 1986. Cited in A.M. Bowen, Philippine Bases: U.S. Redeployment Options.

3. Enrique Esteban, Where Do We Go From Here? Prospects for Reorienting Philippine American Economic Relations. Also see William Sullivan, “Relocating Bases in the Philippines”, The Washington Quarterly, Spring 1984 issue.

4. A. M. Bowen, Philippine Bases: U.S. Redeployment Options, Congressional Research Service, 1986.

5. ibid.

6. ibid.

7. ibid.

All other sources/references listed in the Annexes.