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Cablegate: Balikpapan - Decentralization Champion, Model for East

VZCZCXRO7797
RR RUEHCHI RUEHDT RUEHHM
DE RUEHJA #2833/01 2781026
ZNR UUUUU ZZH
R 051026Z OCT 07
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 6604
RUEATRS/DEPT OF TREASURY WASHDC
RHMFIUU/DEPT OF ENERGY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHKO/AMEMBASSY TOKYO 0928
RUEHBJ/AMEMBASSY BEIJING 4389
RUEHBY/AMEMBASSY CANBERRA 1337
RUEHUL/AMEMBASSY SEOUL 4236
RUEAIIA/CIA WASHDC

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

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