BALIKPAPAN - DECENTRALIZATION CHAMPION, MODEL FOR EAST

UNCLAS SECTION 01 OF 03 JAKARTA 002833 SIPDIS STATE FOR EAP/MTS TREASURY FOR IA - BAUKOL USAID FOR ANE/AA WARD 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/BERLINGUETTE SENSITIVE SIPDIS AIDAC E.O. 12958: N/A TAGS: ECON PGOV EINV KCOR ENRG ID SUBJECT: BALIKPAPAN - DECENTRALIZATION CHAMPION, MODEL FOR EAST KALIMANTAN REF: A) JAKARTA 2828; B) 06 JAKARTA 12031 JAKARTA 00002833 001.2 OF 003 ¶1. (SBU) SUMMARY AND INTRODUCTION: Balikpapan, the commercial hub of East Kalimantan, represents the opportunities - and challenges - of decentralization in Indonesia. A twelve-fold increase in central government budget transfers has led to new public service initiatives and economic opportunities. Balikpapan political and economic leaders universally praise the reform-minded mayor. Infrastructure obstacles remain in Balikpapan and more broadly in East Kalimantan, yet investment continues to flow. The uneven results from decentralization, continued infrastructure problems, and limited local government capacity will continue to be challenges for economic growth in East Kalimantan. ¶2. (U) Two emboffs traveled to Balikpapan, East Kalimantan on October 2-4. We met with the Balikpapan mayor, planning board (BAPEDA) head, local business leaders (including Volvo industrial truck offices),and the district council deputy chairman. Emboffs also spoke with the rector and 70 students from the University of Balikpapan during a public outreach event (see reftel A). Balikpapan: Commercial Hub of East Kalimantan -------------- ¶3. (U) The city of Balikpapan occupies a strategic economic position as a major port of East Kalimantan, the resource-rich, expansive province in Indonesian Borneo. Balikpapan, a 503-square-kilometer district with 583,000 residents, is a relatively small, yet economically dynamic city with a GDP per capita just over $3,000 (compared to $1,369 nationally in 2006). Balikpapan's economy is 70% secondary sector (industry),30% tertiary sector (services). Six percent of the city's population lives below the poverty line, but the Mayor Imdaad Hamid outlined new programs that will give free schooling, health care, and job training to the poor. Balikpapan now receives Rp 1.2 trillion ($133 million; this report uses an exchange rate of Rp 9000/USD) in budget transfers from central government, twelve times the amount before decentralization in 2001. Mayor Imdaad has capitalized on these extra funds and is widely regarded as a clean, reform-oriented leader who offers leadership to Balikpapan, a city he wants to be the Singapore of Indonesia. ¶4. (U) The Balikpapan city leadership is leveraging these additional financial resources with a strong strategic vision to create benefits from decentralization. Mayor Imdaad said infrastructure, human resource development, and environmental conservation are his top three priorities. The regional planning board head noted that Balikpapan has a 30 MW electricity deficit and problems continue with the state-owned power company PLN (see reftel B). The mayor wants to make Balikpapan a vocational city, serving and benefiting from foreign investment and its strategic economic position in the region. Mayor Imdaad outlined a program where 20% of education resources go to universities, 30% for high-skilled working training, 20% for medium-skilled, and 30% for low-skilled. Displayed on colorful maps, Mayor Imdaad said that 51% of Balikpapan land will be preserved for environmental conservation, permitting land and business development only on the remaining 49%. In the city's 2006-2011 strategic plan, Mayor Imdaad said alleviating poverty and eradicating corruption are top priorities as well. Investment: Obstacles, But Money Still Coming -------------- ¶5. (SBU) The city's strategic plan emphasizes attracting investment capital. Toward that end, in July 2007 the Balikpapan investment board opened a one-stop shop for business licensing and start-up processing. Making Balikpapan more attractive to new business is important, said local political and business leaders, because oil-and-gas sector investment opportunities are declining. They noted, however, that biofuel investment projects (particularly palm oil) show promise. Nonetheless, potential investors are likely to JAKARTA 00002833 002.2 OF 003 remain wary about investing here since key infrastructure remains inadequate, particularly water, roads, and electricity (see reftel B). The 30 MW electricity deficit in Balikpapan is representative of larger problems throughout East Kalimantan. Economic and political leaders are discussing a high-profile bridge project that would traverse the bay south of Balikpapan. It would reduce ground travel distance by 100 kilometers. However, investors have shown little enthusiasm for infrastructure projects outside of Java. Despite the infrastructure obstacles, particularly outside of the larger coastal cities, investors come to Balikpapan for opportunities in sectors such as biofuels and extractive industries. Several economic leaders mentioned the prospects for new gold mines in northern East Kalimantan province. Decentralization: Uneven Results throughout Indonesia -------------- -------------- ¶6. (U) Balikpapan Mayor Imdaad leads the Indonesian Council of Mayors, representing 99 cities throughout Indonesia (compared to the roughly 340 kabupaten or districts). Regarding the broader decentralization process in East Kalimantan, Mayor Imdaad regarded the 2004 decentralization law as "good enough." He characterized the financial and political power sharing arrangements as sufficient. However, decentralization has enjoyed uneven success throughout East Kalimantan, Indonesia's second largest province according to land mass, yet with only 2.9 million people. Seventy percent of East Kalimantan's GDP comes from oil, gas, and mining activity. Vast resource disparities exist throughout East Kalimantan, from coastal oil and gas rich districts to remote, barren districts with no natural resources and severely limited local government capacity. Corruption scandals have marred East Kalimantan, particularly the incarceration of the East Kalimantan Governor on corruption and graft charges related to a one million hectare palm oil plantation. ¶7. (U) A recently established district in July 2007 increased the total number of districts to fourteen in East Kalimantan. Residents of Tanah Tidung District, which encompasses the southern part of Nunakan District and the northwestern part of Malinau District, will elect a permanent government in early 2008. Political leaders are discussing the creation of another new district, Nunakan Barat, which would cover all of what is now Nunakan except for the island capital city of Nunakan. Political and business leaders are conducting a feasibility study for potential investment and economic opportunities in the proposed new region. Nunakan city, the island capital of the larger Nunakan district would be regarded as a kota, a city. A politically savvy Balikpapan business man said that the Kutai Timur district head, a seasoned politician with local and national experience, will likely run for East Kalimantan governor. Comment: Challenges for Decentralization Continue -------------- -------------- ¶8. (SBU) As during our previous trip (reftel B) East Kalimantan continues to have growing pains as it takes more economic and political decision making authority from Jakarta. Decentralization's challenges and opportunities in Indonesia are well-represented in East Kalimantan. Balikpapan, Tarakan (a small district in northern East Kalimantan),and other districts have leveraged additional financial resources to improve education, health, and other public services. However, local government capacity continues to be uneven throughout the rest of the province. Other areas such as Malinau and Nunakan have either squandered budget transfers from Jakarta or do not have the capacity to absorb the additional resources and put them to productive uses. In the worst cases, local government officials - including the former governor - have engaged in corrupt acts. East Kalimantan will continue to rely on its lucrative extractive industries. Like much of the rest of Indonesia, East Kalimantan leaders are also hoping the worldwide biofuel frenzy will provide new opportunities for JAKARTA 00002833 003.2 OF 003 N