Important economic issues and challenges

1. Low investor confidence

The most important challenge facing the province in terms of economic development is the decline in foreign investment and the continued low investor confidence. This is mainly a nationwide problem, for which solutions will have to be found at the national level. It is of course possible for Central Kalimantan to promote itself as an attractive investment location independently of national developments and efforts in this respect are made. Since the competitive advantages of the Province are mainly in primary sectors, the establishment of a favourable environment for investment in these sectors is of paramount importance. These sectors are also the ones mist affected by government regulation and therefore the building of a transparent and efficient regulatory framework should have priority.

The legal and regulatory framework surrounding foreign investment is under revision as part of the ongoing delegation of authority to Provincial Governments. At present, the rules are not clear, although the objective is to simplify the regulations and provide additional incentives for investment.

2. Forestry

The main challenges with respect to forestry is to reconcile environmental considerations such as the need to preserve biodiversity and carbon absorption capacity with the requirements of a large-scale forestry industry and to ensure that sustainable forest management practices are observed. Past experience has illustrated the difficulties of this task, underlining the importance of effective regulation. At present, while the regulatory framework in principle provides the authorities with the necessary means to enforce appropriate management practices, lack of resources prevent effective implementation. For instance, monitoring of clearcuts using satellite imagery is a well-established practice in many countries and the Provincial Forestry Department is capable of applying the technique. However, it lacks the necessary resources to acquire imagery and the necessary equipment. Effective regulation alone is not sufficient, however, to ensure sustainable forest management. There is also a need to build awareness of these practices and make them an integral part of forestry company behaviour. Long-term security of tenure for forestry concessions, combined with a reduction in the size of concessions and area related concession fees established by auctions may help in providing an incentive for logging companies to plan their logging for the long term.

While at least in principle the monitoring and enforcement of regulations with respect to legal concessions can be achieved through increased resources for the regulatory agencies, the situation with regard to illegal logging is more complicated. The difficulties in monitoring the vast province are overwhelming and may stifle all traditional approaches. the Government's interest in tackling the problem through a participatory approach, making local communities stakeholders with an interest in ensuring sustainability, should be seen against this background.

3. Fires

In 1997/98, the world's attention was drawn to Kalimantan, when widespread fires produced smoke that spread as far as Malaysia and Thailand. The smoke created health hazards and impeded air transport throughout Southeast Asia. The fires were caused by a combination of factors. Traditionally, the population of Kalimantan has burned off forest in order to clear areas for cultivation. As long as this burning takes place in dense forest, the fires burn out quickly and do not spread. However, with a large portion of the original forest cover removed, the remaining vegetation is more susceptible to burning and the fires spread. Moreover, if the monsoon rains, which normally last from August to November, are delayed, due to the effects of the El Nino Southern Oscillation, the fires tend to spread over very large areas. In Central Kalimantan the problem is made worse by the clearing of one million hectares of peat swamp for the "Mega Rice Project", which never succeeded in establishing rice cultivation. The peat swamps continue burning for a very long time and the fires only die out after sustained rainfall. A similar problem exists with shallow coal seams, mainly in East Kalimantan Province. In 2002, a minor el Nino effect led to similar problems, although somewhat less serious than in 1997.

Following the 1997 experience, several projects aiming to make fire fighting more effective and reduce the incidence of fires were initiated. Attention was focusedon East Kalimantan Province, where the incidence of fires was most important, and Sumatra (see http://www.unep.org/unep//per/for fire/indotext.htm#marker4 for a description of the activities of the United Nations Environment Programme). The projects appear, however, to have had a limited effect so far, and more massive efforts are likely to be necessary in order to solve the problem.

The fires clearly have serious effects both in terms of public health and C02 releases. According to a recent article in Nature[1], the C02 releases from Indonesia's peatlands in 1997as a result of burning peat and vegetation were equivalent to 1340 percent of the mean annual global carbon emissions from fossil fuels and contributed greatly to the largest increase in atmospheric C02 content detected since records began in 1957. The smoke from the fires also impedes transportation (the airport .at Palangka Raya was closed for more than two months in 2002) and affect most economic activities.

It is clear that the fires contribute to the lack of investor confidence. It is not likely that any major international company, or its financiers, would commit itself to invest in an area where operations would have to close down for several months at a time in order to avoid the exposure of its employees to health hazards. This would be the case for mining as well as for any other activity requiring major foreign investment. Accordingly, action to reduce the incidence of fires is needed not only from the point of view of the health of the population or the impact on global climate change which are extremely important issues in themselves  but also to ensure continued economic growth and employment.

4. The impact of large-scale mining

The development of a large-scale mine in Central Kalimantan will result in major changes to the provincial economy. Incomes and employment will increase and there will be opportunities for starting up new businesses. The financial resources of the Provincial government will grow as, a result of increasing tax income, and it will in principle be possible to accelerate the process of economic development. Infrastructure would be improved. For instance, none of the ports can accommodate ships of more than 3,000 tonnes dwt at the moment, and exports of products such as copper concentrate would require an expansion of port capacity.

The mine development will, however, also lead to problems. During construction, the local labour market may not be able to provide all the manpower needed and it may be necessary to recruit some of the labour from outside the Province. Similarly, once the mine is in operation, skilled personnel may have to be recruited from other parts of Indonesia. Unless developments are carefully monitored and adequate actions taken, frictions between the local population and newcomers could occur, particularly if social infrastructure cannot meet the sudden increase in demand. As has been seen in most areas where large-scale mining development occurs, the incidence of various kinds of social problems is likely to increase. The abrupt increase in regional income could also result in rising prices for certain items and increasing real income differences.

Accordingly, the Provincial Government needs to take measures to ensure that the contribution of mining to the development of the Province is positive, that benefits are maximized and that negative impacts are controlled and reduced. It will be particularly important to promote linkages between mining and other economic activities by encouraging local sourcing of inputs as far as possible. This applies both to the needs of the mines itself and for the needs of its employees. Local companies need to acquire the capacity to meet those needs and to be able to compete with outside suppliers. The mining company can play a constructive role in this context. Examples in other countries, such as South Africa, where the programme to empower black-owned enterprises through subcontracting to large mining companies has been quite successful, show that a proactive approach by mine operators can have a positive impact on the supply capacity of local companies. The support of the relevant government authorities is necessary if such programmes are to succeed. At the same time, the Provincial Government needs to take measures to avoid the Province's economy becoming solely dependent on mining. The improvement in infrastructure that is a necessary element of large-scale mining development and the additional Government income will provide opportunities to strengthen the competitiveness of other sectors and increase their production capacity. This requires careful planning of infrastructure development and promotion of investment, since the necessary capital in many cases cannot be mobilized locally.

Next .... Conditions for and constraints on project implementation