Decentralization in Kalimantan charting progress

UNCLAS SECTION 01 OF 03 JAKARTA 000847 SIPDIS SIPDIS SENSITIVE DEPT FOR EAP/MTS AND EEB/IFD/ODF USAID FOR ANE/AA WARD E.O. 12958: N/A TAGS: ECON PGOV PREL ID SUBJECT: Decentralization in Kalimantan charting progress Ref: Jakarta 837 ¶1. (SBU) SUMMARY: Decentralization in Kalimantan is delivering results for residents of South and East Kalimantan, although many economic challenges remain. In Banjarmasin, GDP per capita has steadily increased during the post-2001 decentralization era, but remains below national averages. In Tarakan, which local leaders call "Little Singapore," economic and human development indicators have increased dramatically in recent years and the prospects for further development are strong. Provincial and local leaders view decentralization positively, but recognize the central government continues to have considerable influence, particularly in economic matters. End summary. South Kalimantan: economic potential and problems -------------- -------------- ¶2. (SBU) South Kalimantan, with roughly seven percent of all of Kalimantan's land mass and just over three million residents, is a resource-rich province whose economy is led by mining (23% of GDP) and agriculture (21% of GDP). Despite these natural resources, South Kalimantan GDP per capita in 2006 was Rp 10.3 million ($1,144; Rp 9,000/USD),compared to Rp 14.8 million ($1,644) nationally. Although the GDP per capita is still low by national standards, South Kalimantan GDP per capita has risen considerably since 2000 when it was Rp 6.2 million ($689). The UN Human Development Index places South Kalimantan well below Indonesia's overall score - in 2005, 62.1 compared to 72.8 nationally. Unemployment in South Kalimantan has steadily risen over the past three years and is projected to be near 9% for 2008, just below the national average (9.3%). In 2007, South Kalimantan economic growth was 6.01%, weaker than national averages. Inflation was 7.78% in 2007 and it remains high in 2008, largely due to food prices. In Banjarmasin, South Kalimantan's capital, 2008 inflation is projected to be 8.6%. In the other three Kalimantan provincial capitals, 2008 inflation is projected at 10-12%, also largely due to high commodity prices. ¶3. (SBU) Food prices are driving inflation in South Kalimantan, however it is a less critical social-political issue than compared to Java as Kalimantan is a substantial rice exporter to Java (40% of Kalimantan's overall rice production is sent to Java). In the first quarter of 2008, food prices accounted for 70% of the inflation increase. South Kalimantan is a microcosm for many of the economic development challenges related to decentralization in Indonesia. Poor infrastructure, land use regulations, and other central - local government coordination issues complicate economic development in South Kalimantan. Although mining, particularly coal, is the primary industry, government officials place much prospect in palm oil. Currently, there are about 250,000 hectares in South Kalimantan used for palm oil, but provincial government officials stated that there is nearly 600,000 more hectares still available (total South Kalimantan land mass is 3.75 million hectares). There are 11 million hectares in Kalimantan for potential palm oil plantations, according to central bank statistics. Placed in perspective, there are 7.8 million hectares in Sumatra (which produces over 70% of Indonesian palm oil) and 4.5 million hectares in Malaysia. Decentralization: progress, but power still in Jakarta -------------- -------------- ¶4. (SBU) Popular support for decentralization is strong in South Kalimantan. Over 75 percent of South Kalimantan residents said that they are better off during the decentralization era, according to Australian public opinion firm Roy Morgan, which polled 2,300 residents. The central government still wields significant authority over provinces and districts, particularly in its distribution of resources. South Kalimantan Governor Rudy Ariffin said that he travels to Jakarta three to four times per month in order to meet with Parliament members, Cabinet ministers, and other central government officials. Although the South Kalimantan governor can lead larger strategic projects in the region (e.g., JAKARTA 00000847 002 OF 003 proposed Trans-Kalimantan highway),budget flows from the central government indicate the strong role of the districts (kabupaten) and cities (reftel). In 2007, the central government disbursed roughly Rp 7 trillion to districts and cities, whereas only Rp 1.3 trillion went to the provincial government. ¶5. (SBU) Economic decentralization is still a work in progress. Significant decision-making and resource authority remain in Jakarta. For example, only four percent of coal revenue is retained by the local government, according to central bank representatives in Banjarmasin. Governor Ariffin cited electricity as a top concern. The four provinces of Kalimantan produce 240 million of the 280 million metric tons of coal per year in Indonesia; South Kalimantan alone produces 80 million metric tons of coal per year. Yet in South Kalimantan, there is a projected electricity crisis by 2010 if electricity capacity is not significantly increased. Tarakan: Little Singapore? -------------- ¶6. (SBU) Tarakan, a small island city in northern East Kalimantan near the Malaysian border, is a compelling decentralization success story. With about 180,000 residents and limited natural resources, Tarakan's economy is largely driven by the trade, hotel, and restaurant sectors (over 40% of GDP). Since the increased regional autonomy funds began in 2001, Tarakan has doubled its per capita income (2001 - Rp 8.2 million per capita; 2006 - Rp 15.8 million; growth projections remain positive). From 2002 to 2006, Tarakan has averaged over 8 percent economic growth. Social, health, and education indicators are also strong. The UN Human Development Index ranked Tarakan as the fourth best city or district in East Kalimantan. In 1999, Tarakan was well below Indonesia's overall Human Development Index ranking, but is now scoring above the national average. ¶7. (SBU) City leaders market Tarakan as a "Little Singapore." Tarakan has used the increased funds through regional autonomy since 2001 to encourage investment and raise standards of living. Among its many awards, Tarakan was named the "Best City" in 2005 by the Jawa Pos Pro-Autonomy Institute and has been recognized for its innovation in government. During their briefing to Embassy officials, city government leaders presented numerous ways, from tax incentives to regulation streamlining, that they are encouraging investment. Tarakan is also emphasizing investment in education, including the recently established University of Borneo. Educational officials stated that the city government spends over 20 percent of its budget on education. Provincial Proliferation: North Kalimantan Province? -------------- -------------- ¶8. (SBU) The Indonesian Ministry of Home Affairs is now considering a proposal to establish a North Kalimantan province, that would be the fifth province in Kalimantan. Tarakan city officials said that the principal goal to establish a new province would be to improve public service delivery in northern East Kalimantan. East Kalimantan is over one and half times the size of Java and many in northern East Kalimantan believe that resources are focused in the political and economic hubs of Samarinda and Balikpapan. East Kalimantan GDP per capita was Rp 67.6 million ($7,511) in 2006, over four times the national average. The North Kalimantan proposal appears to be stalled in Jakarta, but there is support in Tarakan and other parts of East Kalimantan, according to multiple contacts in Tarakan. One possible indicator for this proposal's success will be the May 18 East Kalimantan gubernatorial race. Tarakan Mayor Jusuf Serang Kasim, supported by Golkar, is engaged in a tight political race with Samarinda Mayor Nusyirwan Islamial, supported by PDI-P. Jusuf's candidacy is based on the success of Tarakan. Although the North Kalimantan decision will be made by the central government, Jusuf's potential provincial leadership could move along the proposal. JAKARTA 00000847 003 OF 003 Hume