The IKN Opportunity and Dream of Downstream Industries
For over a century the East Kalimantan (Kaltim) economy has not shifted from the extractive business sector. Now Kaltim is striving to realize its dream of exploring new economic resources through downstream industries.
A barge carrying coal crosses the Mahakam River, Samarinda City, East Kalimantan, Saturday (7/1/2023).
Barges going back and forth with tons of coal are easily found in Mahakam River passing through Samarinda city, East Kalimantan. Besides a gentle breeze, residents vacationing there inevitably have to enjoy the view of the “black gold”.
Like its conspicuous appearance in the river, the economic structure of East Kalimantan is also dominated by mining business, of which coal mines are part. Data from Statistics Indonesia (BPS) indicate that the fluctuating rates of East Kalimantan’s economic growth have always depended on this business sector.
In quarter II-2020, for instance, East Kalimantan’s economic growth was minus 5.46 percent year-on-year (yoy). The mining sector had the biggest negative share, which was 3.32 percent, as a result of a constant decline in coal price and a slowdown in export demand.
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Recently, along with coal price and export improvements, the East Kalimantan economy in quarter III-2022 was growing by 5.28 percent yoy. The largest source of economic growth was also the mining and mineral quarrying business, constituting 1.74 percent. It was followed by other sectors that did not even amount to 1 percent.
Coal mining is so dominant and influential in the East Kalimantan economy due to its quick revenue-yielding capacity. However, coal in the province is for the greater part directly sold abroad in its raw form. Owing to its dependence on exports, this sector also relies considerably on the global economy.
When the coal price and foreign demand are high, East Kalimantan’s economic growth is jacked up. On the other hand, when there is a conflict or world economic issue, the coal sector can undergo a slump and make the East Kalimantan economy sluggish.
People working in the mining and mineral-quarrying sector receive a high salary, while those in the agricultural sector have a low income.
Ironically, the coal-mining sector does not absorb a lot of workers. This was shown by a survey of the workforce in Indonesia in February 2022 released by the BPS. The mining and mineral quarrying sector was only capable of employing 71,542 workers, lower than the total absorbed by agriculture, forestry and fishery, which amounted to 93,832 workers.
A lecturer of the Economics and Business Faculty, Mulawarman University, Samarinda, Hairul Anwar, said the condition had given rise to disparity. He cited an example that investors in the mining sector need Rp 3 trillion (US$191.88 billion) to Rp 5 trillion to start their business. Meanwhile, in animal husbandry and agriculture an investment of only around Rp 500 billion is needed.
“It means the salaries in these sectors are lopsided. People working in the mining and mineral-quarrying sector receive a high salary, while those in the agricultural sector have a low income,” said the man commonly called Cody on Thursday (5/1/2023).
Coal mining activity in Karang Tunggal Village, Tenggarong Seberang District, Kutai Kartanegara Regency, East Kalimantan, Saturday (7/1/2023).
Consequently, continued Cody, despite East Kalimantan’s high GDP, it failed to reflect the region’s public welfare. The majority of people work in the agricultural sector while the highest income is enjoyed by those working in the mining and mineral quarrying sector, whose number is smaller.
Nevertheless, there is also the multiple effect of the mining and quarrying sector. For example, as mining workers earn a high income, they can easily buy the services of people around them such as laundry, lodging, catering and so forth. But the long multiple effect does not occur in agriculture and plantations with their lower income although they have a larger number of workers.
Downstream operation
Responding to the condition, head of the Office of One-Stop Investment and Integrated Service (DPMPTSP) of East Kalimantan, Puguh Harjanto, said the province was preparing downstream industries. Not only oil, gas and coal sectors are involved, but also agriculture and tourism. There is also the Special Economic Zone of Maloy Batuta for oil palm downstream industrial operation.
The downstream operation effort in East Kalimantan is expected to absorb a greater number of workers and the province will not merely sell raw materials of the natural resources. This is among others noticeable in the realization of East Kalimantan’s investments in 2022 worth around Rp 41.20 trillion.
Some investments were in coal processing, others in oil palm downstream industries. According to Puguh, this will be maintained so downstream industries of the natural resources will keep growing in East Kalimantan.
The high unemployment could be the result of people perceiving many opportunities and thus coming to the cities.
Yet Puguh also mentioned several notes that should be further analyzed by the provincial administration. In view of the entry of investments, Bontang and Balikpapan, East Kalimantan, are two cities enjoying quite large investment injections. But the rates of open unemployment in both cities are the highest in the province.
The BPS recorded that open unemployment in Balikpapan city in 2018 was 9.27 percent, which decreased in 2019 to 7.15 percent and rose again in 2020 to 9.00 percent, and the latest rate declined slightly in 2021 to 8.94 percent.
Bontang city even listed no change at over 9 percent in the past four years. Its open unemployment in 2018 was 9.41 percent. In 2019 it dropped a bit to 9.02 percent, in 2020 it again increased to 9.46 percent and in 2021 soared to 9.92 percent.
“This [resulted from] many factors. We need to further analyze. The high unemployment could be the result of people perceiving many opportunities and thus coming to the cities,” he said.
Coastal landscape of Balikpapan City, East Kalimantan, Thursday (29/8/2019).
His office needs to have coordination with regional organizations in East Kalimantan to analyze the causes of the high open unemployment. This will be the basis of determining its follow-up strategy, with the aim of ensuring that the investments in East Kalimantan will have a significant impact on the promotion of public welfare.
East Kalimantan Governor Isran Noor said the investments in the province had begun shifting to downstream operation. Among others, there is a coal gasification industry to produce methanol in East Kutai regency, which will shortly be built.
“This investment is in cooperation with the United States. It will process low-calorie coal into methanol,” said Isran.
On further observation, East Kalimantan has in fact relied on the extractive business sector for more than 100 years. Before Indonesia’s independence, in the 1830s, East Kalimantan had exported resin, rattan and other natural products. Later, in 1888, the first coal-mining company was set up in East Kalimantan with the operational pattern of mining coal and exporting the product.
Raw material exports
During World War II in 1939-1945, oil in East Kalimantan was exploited on a large scale. After independence, in the 1960s-1980s, East Kalimantan relied on the timber sector. At present, the provincial economy has again depended on coal.
Ironically, said Cody, all the trade in these sectors has been conducted only by selling and exporting raw materials, instead of making derivative products.
He indicated that downstream industries of East Kalimantan’s natural resources should be undertaken. Along with this, East Kalimantan should start to change its paradigm. It is because coal will someday be exhausted after continuous mining.
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Besides, when commodity prices are high, only investors enjoy a lot more income. The mining sector will also have an impact on the decline in environmental supporting capacity.
In his view, the development of the Nusantara Capital City (IKN) in East Kalimantan can offer an opportunity. The IKN is projected to invite around 1.5 million people. East Kalimantan should begin its preparations for the fulfillment of their consumption needs.
“The government’s task is to research which regions are suitable for what [agriculture]. People’s plantations and agricultural areas can be developed even further. Later they will only be directed toward industrial operation,” he added.
This article was translated by Aris Prawira.
