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Cablegate: Decentralization in Kalimantan Charting Progress

VZCZCXRO9558
RR RUEHCHI RUEHCN RUEHDT RUEHHM
DE RUEHJA #0847/01 1190923
ZNR UUUUU ZZH
R 280923Z APR 08
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 8839
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUEHKO/AMEMBASSY TOKYO 1883
RUEHBJ/AMEMBASSY BEIJING 4984
RUEHBY/AMEMBASSY CANBERRA 2405
RUEHUL/AMEMBASSY SEOUL 4547
RUEHRL/AMEMBASSY BERLIN 0575
RUEHLO/AMEMBASSY LONDON 0874
RUEATRS/DEPT OF TREASURY WASHDC
RUEHBS/USEU BRUSSELS
RUEAIIA/CIA WASHDC
RUEKJCS/SECDEF WASHDC
RHEHNSC/NSC WASHDC
RHHMUNA/USCINCPAC HONOLULU HI
RHHJJAA/JICPAC HONOLULU HI
RUEKJCS/JOINT STAFF WASHDC

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.


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Hume

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