EAST KALIMANTAN ECONOMIC DEVELOPMENTS

UNCLAS SECTION 01 OF 04 JAKARTA 012031

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SUBJECT: EAST KALIMANTAN ECONOMIC DEVELOPMENTS



1. Summary: Economic and political leaders in East
Kalimantan praised the Government of Indonesia's (GOI)
decentralization policy during a four-day embassy trip
through the resource-rich province on the Indonesian part of
Borneo. However, the same leaders criticized strongly the
execution of that policy, citing Jakarta's unwillingness to
grant required electricity and water project permits and
inflexibility on land acquisition. Conservation NGOs said
illegal logging remains a major threat to biodiversity on
the island. The GOI's biofuels campaign will also threaten
forests, they say. Nonetheless, conservation groups
expressed guarded optimism about protecting biodiversity as
local people begin to recognize the economic benefits of
sustainable development. Chevron executives are
enthusiastic about two offshore natural gas projects that
may potentially increase East Kal reserves exponentially.
Business leaders, expatriate consultants and oil executives,
and NGO conservationists offered strong praise for the mayor
of Balikpapan as a man of strategic vision and good
governance. French, Australian, and Chinese companies
predominate among foreign investors in East Kalimantan, and
local leaders expressed puzzlement that more American
companies are not looking to invest in the resource-rich
province. End summary.

Resource-Rich East Kalimantan
--------------


2. (SBU) During a September 19-22 trip to East Kalimantan,
Sulemiman Gafur, head of the Regional Development Planning
Agency in Samarinda, outlined for us the province's immense
natural resources and its development challenges. With 20
million hectares of land, East Kalminatan is the second
largest province in the country. The province's 2.9 million
people generated an economic output of Rp 156 trillion (USD
16.4 billion),or USD 5,655 per capita, in 2005. Seventy
percent of the province's GDP comes from oil, gas, and
mining activity. The country's two largest coal mines are
in the province. East Kal exports reached about Rp 100
trillion (USD 10.9 billion) in 2005, about 13 percent of
Indonesia's total exports, according to Gafur. However, the
province received only Rp 2.8 trillion (USD 306 million)
from Jakarta for its budget. Throughout our travels, almost
all of our interlocutors brought up the glaring disparity
between East Kal's contributions to national revenue
compared to the amount the province receives in budget funds
from Jakarta.


3. (SBU) Despite its huge resource base, over 100,000 people
in East Kal are unemployed. The number of citizens living
in poverty increased from around 300,000 in 2004 to about
500,000 in 2005, mostly due to fuel price hikes that year.
In what was a theme throughout the entire trip, Gafur said
the entire province is suffering from an acute lack of
electricity and poor transportation infrastructure. He said
the provincial government would like to build a 200-MW
nuclear power plant given the province's tectonic stability.
As with all their infrastructure needs, Gafur said lack of
funding from Jakarta is the key obstacle to increasing
electric capacity.

Balikpapan Avoids Oil Curse
--------------


4. (SBU) The commercial capital of Balikpapan does not share
in the abundance of natural resources found in the rest of
East Kalimantan. Nonetheless, the consensus expressed by
our interlocutors is that skilled political leadership and
good governance by the mayor of Balikpapan, Imdaad Hamid,
has overcome this liability. Provincial business leaders
and expatriates uniformly praised the business climate in
Balikpapan, while admitting the rest of the province faces
the same investment climate problems plaguing the rest of
the archipelago nation: corruption, bureaucratic
inefficiency, and poor infrastructure.


5. (SBU) Mayor Imdaad said his goal is to make his city a
"little Singapore", which he defines as a business services
center for the many natural resources companies in the
province and a destination for business conferences and
meetings. A planned industrial zone and modernized port
able to handle container cargo ships are central to the

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mayor's hope to draw in light manufacturing and export
assembly. He also hopes to make the city a regional center
for business services, including telecommunications and
logistics services.


6. (SBU) The city of 540,000 is noticeably tidier and
lacking the shanty-towns found in urban areas elsewhere in
East Kalimantan and the rest of Indonesia. Unlike in
Jakarta, residents have unbroken sidewalks almost everywhere
in the city. Several new shopping malls cater to the many
Indonesians who earn good wages working for the foreign
extractive industries companies, as well as the 3,000
expatriates who are based there. The relative tidiness and
order of the city is due to the spill-over wealth from the
many foreign companies and the comparatively strict control
on inward internal migration. The mayor has long
established a policy that migrants to Balikpapan must
register with the police on arrival and post a Rp 3.5
million bond (approximately USD 385),equivalent to almost
one-quarter of the median yearly wage per capita, to reside
in the city. Migrants have a few months to show they have
legal, formal employment or face forfeiting the bond and
being forcibly removed. As a result of this policy,
unemployment is low and only six percent of the population
lives below the USD 2 per day poverty line, according to the
mayor.

Electricity and Water: Keys to Growth
--------------


7. (SBU) Despite the city's progress, a lack of electricity
and water stymie the Mayor's vision for Balikpapan. Leaders
in the provincial capital Samarinda and the tiny but
extraordinarily resource-rich district of Kota Negara made
similar plaintive cries about electricity. Imdaad said that
his plans for the industrial estate and modernized container-
ship port are dependent on getting a secure supply of
electricity and water for potential foreign investors.
Equally, his other strategy to attract conventions and
business tourism also hinge on adequate infrastructure. He
said state electricity company PLN will not hook up 14 new
hotels in various stages of construction to the electricity
grid. They must, therefore, get their power from diesel
generators, costing around Rp 10 million (USD 1,100) per day
in the case of a new 200-room, five-star hotel. By our
calculations, the hotel must sell 10 rooms per day just to
keep the lights on. Likewise, PLN is also denying access to
the power grid to three luxury seaside apartment complexes
under construction. City residents fortunate enough to be
hooked up to the state electricity company's grid endure a
daily five-hour blackout. Imdaad claimed that over 1,000
small businesses in the city have gone bankrupt due to lack
of power.


8. (SBU) While leaders throughout the province criticized
Jakarta's speed in approving power and water projects, Bank
Indonesia regional manager Causa Iman Karana told us that
local government managers are also deeply ambivalent about
leading the projects. He said they feared becoming targets
of the central government's anti-corruption authorities if
they took on the responsibility to oversee infrastructure
construction, a traditional source of graft and corruption
in Indonesia. Even if the city could get all the
electricity it wanted, Causa and a Dutch business consultant
told us that the planned Balikpapan industrial zone is
attracting few investors given Jakarta's insistence that
leases run for only five years, rather than the 30 years
standard for similar projects internationally. Without the
industrial zone, our interlocutors expressed a consensus
that it was unlikely that the port modernization will
attract investor interest. Samarinda Chamber of Commerce
officials told us that GOI planners in Jakarta would allow
only three-year leases for their industrial zone project,
which they say has also attracted little interest.


9. (SBU) Mayor Imdaad said he hopes the GOI will soon
approve 80 MW of electricity projects, which will double the
present 40 MW installed capacity. He seems particularly
preoccupied with ensuring that the city has enough power to
host a successful Asian Games in 2008. He said he hopes the
desire to avoid national embarrassment in the eyes of its
regional neighbors will prod Jakarta to move forward on

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infrastructure. Unlike in Samarinda or the rest of East
Kalimantan, Imdaad said Balikpapan is willing to forego any
state subsidy because business and industrial users there
are so eager and willing to pay for electricity. Imdaad
said he got a personal guarantee from the local PLN manager
that a decision on their power projects should be coming by
year end.

Upstream Regulator Complicates Investment
--------------


10. (SBU) While many in the province are preoccupied with
the central's government's unresponsiveness on electricity
and piped water, petroleum executives focus their
frustration on the GOI's upstream regulator, BP MIGAS. A
senior Chevron manager in East Kalimantan told us that BP
MIGAS makes investment in East Kalimantan more difficult in
two ways: slow work plan approvals and an apparent policy of
spreading around new acreage blocks to smaller and new
sector entrants. The Chevron official said the oil major
plans to invest USD 500 million in East Kal in the next
three years if BP Migas will approve development plans for
the Bangka and West Seno fields.


11. (SBU) Chevron said that BP MIGAS's slowness in approving
work plans is costing the company money as offshore rig
rental costs have tripled in the last two years to a cost of
USD 600,000 per day. The central government's local content
policies for construction of deepwater platforms also hurt
foreign oil companies. These structures require special
expertise that simply does not exist in Indonesia, the
company said, and the requirement to use under or poorly-
skilled Indonesians costs time and money. The GOI's
apparent but undeclared policy to give new exploration
leases to new entrants is diversifying away the GOI's risk
of becoming too dependent on a few key players. However, it
also means that newcomers face a steep and expensive curve
in beginning exploration and production. With a worldwide
shortage of skilled petroleum engineers and technicians,
exploration and production costs are increasing rapidly.
Higher costs cut the GOI's profits since the foreign
companies are entitled to recover their production costs.


12. (SBU) Chevron also said it needs to educate BP Migas
about the longer lead times required for offshore, deepwater
projects compared with the less complex onshore ones. What
takes six-to-twelve months onshore takes three-to-five years
in deepwater, and, Chevron executives say, the GOI needs to
open tenders now for deepwater projects if it wants to see
any production by 2009. The Chevron official said that the
company's East Kal operations also compete internally within
Chevron for investment capital with their offshore
operations in West Africa which have potential reserves ten
times the size of Indonesia's.

NGOs: Orangutans, Logging, and Biofuels Don't Mix
-------------- --------------


13. (SBU) Most of our interlocutors said illegal logging
remains the major threat to East Kalimantan native species,
including orangutans, and fuels much of the corruption and
poor governance in the province. The GOI's recently
announced plan to boost biofuel production to ten percent of
the national energy mix has the potential to further
increase the pressure on native forests and animals,
according to local conservationists. They worry that the
powerful political figures in the province, who are behind
much of the illegal logging, will use the pretext of the
biofuel plan to increase deforestation. The GOI's plan
clearly outlines that only idle, previously cleared land is
to be used for the six million hectares of new Crude Palm
Oil (CPO) plantations. According to the regional planning
agency, seven new CPO plantations are planned as part of the
biofuels campaign.


14. (SBU) The American citizen primatologist and manager of
the Borneo Orangutan Survival (BOS) Foundation's Orangutan
Reintroduction Project said the organization is having an
increasingly tough time finding suitable areas into which
they can reintroduce rehabilitated orphaned orangutans due
to the voracious appetite of illegal loggers. In the wild,
orangutans need two square kilometers of dense rainforest to

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provide sufficient food and shelter, according to BOS. The
organization said it currently has 1,800 hectares undergoing
reforestation but it will be years before they can support
primates (Note: 100 hectares equals a square kilometer).
BOS staff expressed fear about the potential impact on
forests from the GOI's biofuels campaign. However, the
organization is not against CPO production as long as the
plantation owners and small farmers respect the forestry
laws.


15. (SBU) BOS officials said several large plantation and
mining companies, including PT Kem and Kaltim Prima Coal
(KPC),wish to donate unused virgin rainforest land to BOS
but the central government has refused to change the status
of the land to protected forest. Decentralization has also
meant that it is much easier for local and provincial
governments to change a protected forest area to one zoned
for economic development. "Decentralization has not been
kind to the orangutan," the BOS manager said. Borneo
currently has an estimated 50,000 to 60,000 orangutans,
according to BOS, but poachers and farmers kill between
1,000 and 5,000 orangutans each year. Since orangutans can
only produce one offspring every six or seven years, BOS
staff agreed the future of the primates on Borneo is not
promising.


16. (SBU) While the future of the orangutan may be bleak,
The Nature Conservancy (TNC) East Kalimantan program manager
was upbeat on the prospects for sustainable development of
most of the remaining rainforest and protection of the most
important tracts of land in terms of biodiversity. He said
the group has an ambitious plan, dubbed "the Heart of
Borneo" project, to conserve 3.6 million hectares of land in
Kalimantan. Because they are not able to buy up land, as
they do elsewhere in the world, they have to focus on
raising an environmental consciousness among the local
people so that they see the economic benefits of good forest
stewardship. Nonetheless TNC said the illegal logging will
only intensify in the lead up to the 2008 provincial
election because it is so lucrative and an important source
of campaign funding. "Forests are very liquid," said the
program manager, smiling sadly. TNC said they have also
embarked on a new strategy to involve Muslim and Christian
religious leaders on the island in conservation efforts.
"No religion sanctions the violation of nature," the program
manager said, adding that TNC hopes to persuade local people
that all religions make it a spiritual duty to conserve the
forests.
HEFFERN