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