VZCZCXRO4321
RR RUEHCHI RUEHDT RUEHHM
DE RUEHJA #2031/01 2720629
ZNR UUUUU ZZH
R 290629Z SEP 06
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 0677
RHMFIUU/DEPT OF ENERGY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHDC
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUEHKO/AMEMBASSY TOKYO 0032
RUEHBY/AMEMBASSY CANBERRA 9962
RUEHBJ/AMEMBASSY BEIJING 3662

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