EAST KALIMANTAN ECONOMIC DEVELOPMENTS

UNCLAS SECTION 01 OF 04 JAKARTA 012031 SIPDIS SIPDIS DEPT FOR EAP/MTS AND EB/ESC/IEC DEPT PASS OPIC, EXIM, TDA DOE FOR CUTLER/PI-32 AND GILLESPIE/PI-32 COMMERCE FOR USDOC 4430 E.O. 12958: N/A TAGS: ECON ENRG EINV SENV PREL TBIO ID 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 JAKARTA 00012031 002 OF 004 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 JAKARTA 00012031 003 OF 004 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 JAKARTA 00012031 004 OF 004 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