Economy and Environment Program

for Southeast Asia

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#02-55 South Bridge Court
Singapore 048421
Tel: (65) 6438 7877
Fax: (65) 6438 4844
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RESEARCH REPORT

No. 2007-RR2

The Impacts Of Coal

Mining on the Economy
and Environment of South
Kalimantan Province,
Indonesia

Luthfi Fatah
Faculty of Agriculture
Lambung Mangkurat University
Jalan Jenderal Ahmad Yani
P O Box 1028 Banjarbaru 70713
South Kalimantan, Indonesia
Email: fatah@aciar.gov.au

This study investigates the impact of coal mining on the

economy and environment of South Kalimantan
Province, one of the most important coal producing
regions in Indonesia. It uses a Social Accounting matrix
to assess how the industry affects the provinces
economy and the livelihoods of its people. It also
investigates what policy options will best reduce its
negative environmental impacts at least cost to the
provinces economy.

The study, by Luthfi Fatah of Lambung Mangkurat

University, finds that mining is one of the most
significant parts of the provinces economy and that it is
steadily growing in importance. However, it also shows
that the industry disproportionately benefits the better-
off sectors of society and is having an unacceptable
impact on the environment. Fatah recommends that
policy makers slow the growth in coal mining through
regulation of small-scale mining. This should help the
environment. He also suggests that the government
boost investment in agricultural based activities to
improve the employment prospects of the poorer sectors
of society.
Published by the Economy and Environment Program for Southeast Asia (EEPSEA)
22 Cross Street #02-55, South Bridge Court, Singapore 048421 (www.eepsea.org)
tel: +65-6438 7877, fax: +65-6438 4844, email: eepsea@idrc.org.sg

EEPSEA Research Reports are the outputs of research projects supported by the Economy and
Environment Program for Southeast Asia. All have been peer reviewed and edited. In some cases, longer
versions may be obtained from the author(s). The key findings of most EEPSEA Research Reports are
condensed into EEPSEA Policy Briefs, available upon request. The Economy and Environment Program
for Southeast Asia also publishes EEPSEA Special Papers, commissioned works with an emphasis on
research methodology.

Library and Archives Canada Cataloguing in Publication

Luthfi Fatah

The Impacts of Coal Mining on the economy and Environment of South Kalimantan Province, Indonesia/
Luthfi Fatah

(Research report, ISSN 1608-5434 ; 2007-RR2)

Includes bibliographical references: p.
Co-published by the International Development Research Centre.
ISBN 978-1-55250-078-1

1. Coal mines and mining--Economic aspects- -Indonesia - -Kalimantan Selatan.

2. Coal mines and mining--Environmental aspects Indonesia- -Kalimantan Selatan.
3. Coal Trade- -ndonesia- -Kalimantan Selatan.
4. Coal mines and miningIndonesia- -alimantan Selatan-- Public opinion
5. Public opinion- -Indonesia - -Kalimantan Selatan
I. International Development Research Centre (Canada)
II. Economy and Environment Program for Southeast Asia
III. Title.
IV. Series: Research report (Economy and Environment Program for Southeast Asia); 2007-RR2.

TN113.155F37 2008 338.2'7240959836 C2008-980119-9

The views expressed in this publication are those of the author(s) and do not necessarily represent those of
the Economy and Environment Program for Southeast Asia or its sponsors. Unless otherwise stated,
copyright for material in this report is held by the author(s). Mention of a proprietary name does not
constitute endorsement of the product and is given only for information. This publication may be consulted
online at www.eepsea.org.
 THE IMPACTS OF COAL MINING ON THE
ECONOMY AND ENVIRONMENT OF SOUTH
KALIMANTAN PROVINCE, INDONESIA

Luthfi Fatah

October, 2007
Comments should be sent to: Luthfi Fatah, Faculty of Agriculture Lambung Mangkurat
University, Jalan Jenderal Ahmad Yani, P.O. Box 1028, Banjarbaru 70713, South
Kalimantan, Indonesia. Telephone/Fax: +62 511 477 2254, Mobile: +62 815 2830 7633
Email: fatah@aciar.gov.au

EEPSEA was established in May 1993 to support research and training in environmental
and resource economics. Its objective is to enhance local capacity to undertake the
economic analysis of environmental problems and policies. It uses a networking
approach, involving courses, meetings, technical support, and access to literature and
opportunities for comparative research. Member countries are Thailand, Malaysia,
Indonesia, the Philippines, Vietnam, Cambodia, Lao PDR, China, Papua New Guinea and
Sri Lanka.
EEPSEA is supported by the International Development Research Centre (IDRC); the
Swedish International Development Cooperation Agency (Sida); and the Canadian
International Development Agency (CIDA).
EEPSEA publications are also available online at http://www.eepsea.org.
 ACKNOWLEDGEMENTS
Many people have contributed to this research. Their contributions significantly
supported my ability to formulate this research report. My team and I would like to thank
the following bodies/persons:
First of all, we would like to thank the previous EEPSEA director Dr. David
Glover and the new director, Dr. Hermi Francisco, for all the encouragement, support and
help provided during this research, from the research proposal preparation up to the
completion of this report. They were both very helpful, friendly and very quick to
respond to our problems in preparing and conducting this research. In particular, I would
like to mention our appreciation to EEPSEA for the opportunity given to us in the form of
valued research funds. Not only did this support enable us to carry out this research but it
also led us to a situation where we could learn and network with others in the field of
environmental economics.
My team and I would also like to thank Dr. David James, a very skillful advisor
not only in terms of the content and quality of the research, but also in terms of providing
appropriate support. We very much enjoyed our interaction with him. We were fortunate
to receive his advice that really helped us overcome the contraints we faced in conducting
this research. He was always able to find alternatives or drive us to find appropriate ways
to deal with problems and contraints of the research.
Our thanks are due also to Catherine Ndiaye. She was very good in assisting us in
all administrative matters of the research. She was always easy to contact and very
communicative. She was very instrumental in helping us meet the requirements of this
research, including presenting our work at biannual workshops. Our thanks also go to
Ms. Ang Cheng Hiang, whom we have never meet, but who helped book our tickets to
attend EEPSEA workshops.
We greatly appreciate our students and colleagues in Lambung Mangkurat
University, Faculty of Agriculture our colleagues especially gave us valuable insights
during the seminar and workshop we had at the Faculty of Agriculture. We further thank
Dr. Bambang Joko Prihatmadi and Ir. Adib Mustafa, who presented their work on coal
and environment at our workshop. We would also like to thank our colleagues; Arutmin
Ir. Eddy Suprianto, MSc, and Ir. Rahmadi Kurdi from the Regional Agency for
Management of Environment. Both of them also presented their work at our workshop.
Our thanks also go to Ir. Yudi Ferrianta, MSi for his tremendous help in all activities of
this research. We also want to thank our students who helped us in data collection and
data tabulation. Their support was significant in helping us complete this research on
schedule.
Last but not least, we extend our appreciation to our other colleagues in EEPSEA
and in the university, and associates in the coal industry, who cannot be mentioned one
by one, for their significantly valuable contribution to this research.
 TABLE OF CONTENTS

Page
EXECUTIVE SUMMARY
1.0 INTRODUCTION 1
2.0 LITERATURE REVIEW 4
2.1 Methods of Coal Mining 4
2.2 The Impacts of the Coal Industry 5
2.3 The Coal Industry in South Kalimantan Province 7
3.0 RESEARCH QUESTIONS, OBJECTIVES AND SIGNIFICANCE 8
3.1. Research Questions 8
3.2. Research Objectives 9
3.3. Significance of the Research 9
4.0 RESEARCH METHODS 10
4.1 Variables Measured 10
4.2 Population and Samples 10
4.3 Method of Information Collection 11
4.4 Economic Valuation Methods and Biases 11
4.5 Procedures and Techniques for Data Processing and Analysis 12
5.0 RESULTS AND DISCUSSION 15
5.1 Database Compilation and SAM Construction 15
5.2 The Impact of Coal Mining on Economic Development 17
5.3 The Impact of Coal Mining on Income Distribution 24
5.4 Leakage of the Coal Mining Industry 26
5.5 Policy Simulations 28
5.5.1 Income Distribution 29
5.5.2 Value-added Generation 30
5.5.3 Employment 31
5.5.4 Output 31
5.5.5 Environmental impacts 33
6.0 CONCLUSIONS AND POLICY IMPLICATIONS 35
REFERENCES 37
APPENDIX 1. MIXED MULTIPLIER FORMULA 40
 LIST OF TABLES
Page
Table 1. Summary of Simulation Policies 14
Table 2. Sectoral Value Added in South Kalimantan
Province (2004) 18
Table 3. Sectoral Output And Employment In South Kalimantan
Province (2004) 20
Table 4. The Ratio of Output and Value Added as Production Indicators 23
Table 5. Backward and Forward Linkages of the Coal Mining Industry 24
Table 6. Income Distribution Effect of the Coal Mining Industry 25
Table 7. Leakage of Coal Mining in South Kalimantan 26
Table 8. Leakage of Economic Sectors In South Kalimantan Province 27
Table 9. Impacts of Policies on Income Distribution 30
Table 10. Impacts of Policies on Value-added Generation 30
Table 11. Impacts of Policies on Employment 32
Table 12. Impacts of Policies on Output 32
Table 13. Environmental Impacts of Large-scale Coal Mining for
Different Simulation Scenarios 34
Table 14. Environmental Impacts of Small-scale Coal Mining for
Different Simulation Scenarios 34

LIST OF FIGURES

Page
Figure 1. A Coal Mining Field 2
Figure 2. An Ex-Mining Hole with a Stockpile in the Background 5
THE IMPACTS OF COAL MINING ON THE ECONOMY AND ENVIRONMENT
OF SOUTH KALIMANTAN PROVINCE, INDONESIA
Luthfi Fatah

EXECUTIVE SUMMARY
The purpose of this research is to analyze the impact of the coal mining industry
on the economy as well as the environment of South Kalimantan Province, Indonesia.
The South Kalimantan Province is an area with abundant deposits of coal and contributes
16.36% to the national coal stock. Coal mining is a profitable business. It creates
employment, generates value, and improves the foreign investment of a country or
region. However, coal mining has its disadvantages including negative externalities. It
seems that in this business the public gets the dust and dirt, while the workers and
managers get the benefits and advantages.
This research uses a Social Accounting Matrix (SAM) to analyze the impact of
the coal mining industry on the economy and to do simulations to find alternative policies
on the coal industry that are suitable for economic improvement and environmental
sustainability.
The results show that the coal mining industry in South Kalimantan Province is
growing. Large-scale coal mining is more profitable economically than small-scale
operations, but in terms of environmental impact, the latter is a better choice as it exploits
less resources. The policy-maker needs to consider measures to reduce the level of coal
exploitation to save the environment and investment policies that support agricultural-
based activities where the employment rate is the highest. The first easy step is to impose
taxes on coal mining to slow down mining activites and then use this tax revenue as
transfer payments such as subsidies and direct transfers in kind (e.g. rice, farming
equipment, etc.) to support the needs of lower income households in the province.

1.0 INTRODUCTION
One of the worlds most plentiful energy resources is coal. The use of this
resource is increasing and likely to quadruple by 2020. This is matched by the increasing
demand for it, which in turn has spurred coal mining to grow rapidly in many parts of the
world. The world coal trade grew steadily from 386.90 million tons in 1990 to 468.20
million tons in 1995, and to an estimated 1,920.90 million tons in 2005 (Mimuroto 2002).
Coal occurs in many forms and qualities. Mainly there are two general categories:
(a) hard coal, which includes coking coal used to produce steel, and other bituminous and
anthracite coals used for steam and power generation, and (b) brown coal (sub-
bituminous and lignite), which is used mostly as onsite fuel. Coal has a wide range of
content characteristics including moisture content (240%), sulfur content (0.28%), and
ash content (540%). These can affect the value of the coal as fuel. Many environmental
problems also originate from these content characteristics.

1
 In Indonesia the coal resources are aplenty, particularly in Kalimantan and the
Sumatera Islands. Coal deposits also available in some other areas, such as in West Java,
Central Java, Papua and Sulawesi, in lesser amounts. National data shows that in 2004,
coal deposits were estimated to reach 57 trillion tons (PSE-UI Jakarta 2002). From the
amount as much as 19.3 trillion tons are possible and proven stocks. (Possible stock
refers to coal deposits surveyed to be available in an area, which may be mined but does
not belong to any particular mining company. Proven stock is the amount of stock
proven to be available in a particular locality and it belongs to a particular company.)
Production rate at the moment stands at 130 million tons per year (National Energy
Coordination Agency 2005). The provincial distribution of coal stock shows that East
Kalimantan stands as the highest. Its stock reached 35.38% of total national stock of coal
in 2005. South Sumatera stands at second place with 33.16%. South Kalimantan is at
third place with 16.36% (PSE-UI Jakarta 2002).
Coal mining is a profitable business. It creates employment, generates value-
added, and improves the foreign investment of a country or region. However, coal
mining has its disadvantages including negative externalities. Coal is a dirty business for
locals, with problems commonly including contamination of water, coal-dust permeating
the air and coating everything inside and outside houses, and health problems. Coal
mining also causes floods. Many mining areas are left without rehabilitation. As a
consequence, land and ecosystems are damaged. In Figure 1, we can see a coal mining
field. It shows how the land can become just a large empty open space with a deep and
long mining hole.

Figure 1. A Coal Mining Field

2
 Moreover, coal transportation vehicles contribute to an increase in the incidence
of road accidents and road damage. These heavy vehicles are also nuisance to the
communities living along the roads they use in terms of the dust and noise they create.
The South Kalimantan Province is one of the areas in Indonesia with abundant
deposits of coal. Contributing 16.36% to the national coal stock, South Kalimantan
stands at third place. With the governments policy in 1980 inviting direct foreign
investment in the coal industry in East Kalimantan and South Kalimantan and allowing
coal transportation vehicles to utilize public roads, the mining activity started to grow.
The coal business has boomed since 2000 in South Kalimantan.
In the South Kalimantan Province, there are three authorized coal mining
contractors (called legal miners): Arutmin Indonesia Ltd., Adaro Indonesia Ltd., and
Chung Hua Ltd. with licenses to operate. Legal miners are generally large-scale firms.
Besides these legal miners, there are many other small-scale coal miners without licenses.
These are called illegal miners. The number of illegal miners is growing. Almost every
district of South Kalimantan Province contains several illegal coal miners. In 1997, 157
individuals or businesses of this type were recorded. In early 2000, this number rose
sharply to 445. In 2004, the number arrived at 842 units of business. Illegal miners are
unique and cannot be treated the same as legal miners, particularly in the application of
rules and regulations.
Although the coal business seems to be profitable for both individuals and
businesses, the benefits of this activity to the region are unclear. The coal industry is an
industry of booms and busts, and hence the welfare of the community in the region is
usually closely tied to the health of the coal industry (Roenker 2002). In South
Kalimantan, this does not seem to apply. There is a marked difference in the welfare and
incomes of the communities living nearby the mines and along the coal transportation
roads and those of the coal miners who earn much more. The public get the dust and dirt
of the coal industry, while the workers and managers get the benefits and advantages
(Adaros community development fund provided to the community, 2002).
Actually, most of the coal mined in South Kalimantan is for export. Only less
than 10% is for domestic use including power for electricity generators, cement
manufacture and other industries (JATAM 2002). The mining method and the activities
to deliver the commodity to consumers have negative impacts on the environment. In
South Kalimantan, the strip mining method is commonly used. This method contributes
to land degradation and forest cover destruction. The transportation of coal from mining
areas to stockpiles also creates problems such as water contamination, air pollution and
deterioration of road transport services in terms of increased road damage, road accidents,
and road density leading to traffic jams. All these environmental distortions reduce
community welfare.
However, there is lack of research on the extent of such negative impacts. There is
no information on the effects of coal mining on economic development in the region.
There is also a lack of information on how and to what extent coal mining influences
income distribution among the various communities in the South Kalimantan Province
and whether or not the benefits are enjoyed by the communities in the region or if it also

3
benefits other regions. These are some of the concerns that have arisen with the growing
of coal mining activities, but there is not enough information on these concerns.

2.0 LITERATURE REVIEW

Coal is an organic sediment consisting of a complex mixture of substances,

including humic and sapropelic (Gammidge 2004). Humic is more common and
originates from peat deposits consisting mostly of organic debris deposited in situ
(autochthonous). Sapropelic is derived from re-deposited (allochthonous) resistant plant
fragments such as spores or aquatic plants. The sapropelic coals can be further subdivided
into: cannel coal and boghead coal. Cannel coal is made up principally of uniformly-
sized plant fragments e.g., spores, while boghead coal consists mainly of alginite (a coal
maceral derived from algae).
Coal mining is very expensive due to the fact that most coal deposits are
embedded deep in the crust of the Earth. It requires expensive mine construction and
involves human miners who must go deep into the mines risking their lives. Liability
insurance and the maintaining of safety standards within the mine environment add to the
cost of extracting the coal from the ground.
.
2.1 Methods of Coal Mining
Some of the most common methods of mining are: continuous mining, long wall
mining, room and pillar mining, and strip mining. In continuous mining, a large cutting
machine just moves around the perimeter of the mine shafts, shaving pieces of coal away
from the existing wall. The coal is then collected and taken to the surface. Long wall
mining is similar, but as the cuts into the wall of the mine grow deeper, systems of jacks
are implemented to keep the roof up structurally. In comparison to these two methods,
room and pillar is the safest. Rooms are dug underground, creating space to
maneuver in the mine. The coal removed from these rooms is sent up to the surface
where it is distributed. In order to keep the mine in a safe state, only 60% of the coal is
dug out as rooms. The remaining 40% is left in place to form structural pillars that
support the mining rooms. While this is a much less efficient method than the others, its
safety value is higher in that it has decreased coal mining accidents (EBLNF 2004).
For coal deposits located at ground level, strip mining is usually used as it is
relatively inexpensive and safe for the miners. However, strip mining upsets the ecology
of the region. The mining companies should restore the landscape to maintain the
environment. If this is not done, environmental problems such as floods and erosion will
take place (Jeantheau 2003). Coal used to be extracted by digging tunnels into the
ground. A new approach is to remove the "overburden" (the layer of dirt and rock on top
of the coal) take the coal out, and then put the overburden back. Of course there are trees
and animals entire ecosystems on top of that overburden. In spite of laws to ensure
the reclamation of strip-mined land, the ecosystem on a reclaimed piece of land is usually
not as rich as the original. Mountain-top removal is a variant of strip mining in which a
mountain peak is removed to get to the coal underneath. The common practice is to fill a
4
nearby valley with the removed dirt, burying any streams and habitat that is in the valley.
In South Kalimantan coal mining, this is the commonly used method for coal extracting.

2.2 The Impacts of the Coal Industry

Many environmental problems originate from the way coal is mined, which is a
big problem in the coal industry and coal-related activities. Generally, there always
exists a trade-off between financial benefits and environmental loss (Jeantheau 2003).
The strip mining method has significant effects on the environment in general and
a particularly devastating effect on people living near the operations. It adversely affects
rivers, streams, lakes and people's water supplies. A 2003 government study estimated
that 724 miles of streams have been buried and over 300,000 acres of forests have been
wiped out in Appalachia, USA, by the mountain top mining process (Roenker 2002). The
South Kalimantan coal industry uses the same method. The consequence of applying the
method without strict liability for reclamation and rehabilitation is degradation of
environment. The loss of forest cover not only results in land degradation, but can also
lead to floods, unbalanced ecosystems and rising temperatures.

Figure 2. An Ex-Mining Hole with a Stockpile in the Background

Once the coal has been brought up from the mine, it has to be transported to the
facility that will use it to generate electrical energy, primarily coal burning electrical
power plants or to the area of transit, which is commonly called a stockpile. In the
stockpile area, the coal is collected to reach a specific quantity.
It could also be handled to acquire a certain form or quality. The problems that
arise here are air pollution caused by coal dust and land-use problems where the people

5
are not given proper and adequate compensation (EIA 2001). In Figure 2, we can see that
the amount of coal collected in a stockpile can reach as high as a hill. The figure also
shows a huge coal mining hole which is no longer used.
From the stockpile, the coal will be sent for export or inter-island trading. During
the transportation process, many problems can occur. These include road accidents, road
damage, traffic distortion, and air and water pollution particularly for the communities
living along the coal transportation routes.
Once the coal has arrived at the electricity-generation facility, the burning of the
coal produces substances that pollute the atmosphere. The chemistry of burning or
combustion involves the chemical reaction of the carbon of coal with oxygen gas. This
produces two oxides of carbon, carbon dioxide and carbon monoxide (CO). If the
combustion is complete with an excess of oxygen, then carbon dioxide is the product. On
the other hand, if there is a deficiency of oxygen in the combustion process, large
quantities of carbon monoxide will result. Carbon monoxide is a very toxic gas which
will tenaciously attach itself to hemoglobin molecules in red blood cells, thereby
preventing the hemoglobin from carrying the needed oxygen to cells in the body.
Respiration is carried out by most cells in the body. If oxygen does not reach the cells,
respiration is blocked and the cells die. Carbon monoxide toxicity can have mild
symptoms of irritability, headache, or nausea, but if the concentration is high, comatose
and death will result. Even though carbon dioxide, the major product in the combustion
of coal, can also be toxic depending on its buildup concentration, it is not as toxic as
carbon monoxide (Logan 1996).
Coal is the biggest source of mercury contamination in the air, and it is the worst
offender when it comes to the greenhouse gases that cause global warming. Emissions-
scrubbing technology is available to clean up 90-95% of the mercury, sulfur and nitrogen
emissions, but the current law in Indonesia only requires these scrubbers for new plants
or for major upgrades in mining capacity.
The existence of many coal miners, legal and illegal, large and small-scale, has
brought about many problems. Generally, nearby communities have been the major
victims of the local coal industry and its related activities. Hundreds and even thousands
of people have had to give up their land with unfair compensation. They did not want to
release their farming lands to coal mining. However, they were forced to do so by the
authorities, who in many cases, used various forms of intimidation, including accusing
farmers and other small landowners of opposing national development if they chose not
to give up their land (JATAM 2002).
Although coal operations supply many locals with jobs, the number and quality of
the jobs has decreased due to increased mechanization (Jeantheau 2003). In terms of
income distribution, the coal industry is more profitable for the people from outer regions
(other regions in Indonesia and other countries) since many industries belong to people
from Surabaya, Jakarta and even overseas. The nearby communities normally get only
the low income jobs such as drivers, security officers, and the likes, but not the executive
and managerial jobs because they lack the qualifications.

6
2.3 The Coal Industry in South Kalimantan Province
Since 1980, the General Directorate of Mining together with the Provincial
Mining Office of South Kalimantan has developed small-scale mines managed by three
village cooperative organizations. The purpose of this was to better distribute the income
among various households in South Kalimantan. So not only do large foreign and local
corporations operate in the coal business, but also the community through these three
organizations.
In 1989, the demand for coal rose very sharply, especially foreign demand. The
three village cooperative organizations and the big industries were unable to meet the
demand. The excess demand triggered the emerging of many unlicensed miners of
various scales, with various intensities of activities, owned by commercial firms, public
establishments or non-governmental organizations (NGOs). Sadly, many NGO workers
use their organizations to make a profit for themselves from this illegal business (JATAM
2002).
The coal mined in South Kalimantan mainly is for export. In general, there are
only two plants here that use coal as their power supply. These are the electricity
generator in the district of Tanah Laut and the cement factory in the district of
Banjarmasin. They use up only about 5.6% of total coal production in South Kalimantan.
The rest is exported to other regions in Indonesia, namely various provinces in Java
(mainly East Java and Jakarta) and to other countries such as Japan, Korea, India and
Russia (Adaros community development fund provided to the community, 2002).
The production process together with the distribution and marketing methods used
shape the type and intensity of the coal industrys impacts on the economy or
environment. The common method used in South Kalimantan Province is the strip
mining method, its variant being the mountain-top removal method. Both seem to
completely ignore environment preservation. In the mountain top removal method, the
mountain top and all its contents are removed to reach the coal underneath, and the
miners do not pay adequate attention to placing back the removed contents (overburden)
appropriately after extracting the coal. In many cases the practice is destructive in two
ways. First, it destroys the mountain and the forest covering the mountain. Second, it
destroys the valley (rivers, forest, wildlife, etc.) nearby when the overburden is just
dumped in it.
The coal mining industry chooses to apply the mountain top removal method for
several reasons, mainly because it is relatively cheaper than other methods, the land
reclamation law is not strictly enforced, and the negative effects of the method do not
affect the miners. The negative externalities, such as floods, increased temperature, and
erosion which affect the nearby community.
Economic gain by the province (as a multiplier effect) is not caused by industry
usage of coal, rather it is caused by the value-added factor due to export. This raises the
concern about who benefits the most from the coal industry. The value-added flows are
also unclear. Whether or not the benefit is utilized in and for the economy is ambiguous.
It appears that the benefit flows to other regions while the negative impacts and
externalities are experienced by the community in the region, where the coal mining
industries operate. More specifically, information on whether the coal industry

7
contributes to income generation in the province, other regions or other countries is not
available.
The dominant impacts of the coal industry originate from various activities that
relate to exporting the coal. This means many economic and environment problems are
caused by a series of activities, starting from coal mining in the field up to transporting
coal to ports for export. Many economic impacts have been traced here, including
whether or not coal for export can improve the economy in terms of value-added 1 , output,
employment, and production structure.
Normally, coal mining companies make their own roads and public roads are only
used for short distances. In South Kalimantan, the situation is different. The government
here lets the industry use public roads for a fee. The transporting of coal involves very
long distances over public roads in South Kalimantan. As the result, public transportation
services are seriously compromised. The coal trucks occupy almost half the road.
Generally, they are overloaded and damage the roads. In turn, the damaged roads become
a source of dust that pollutes the area.
The situation where many of the businesses are illegal and small-scale miners has
deep policy implications. Any strategy or policy to re-develop and re-manage the coal
mining industry becomes very difficult. The illegal miners cannot be forced to follow the
rules because they are not licensed or registered. Many regulations like land reclamation
and community development for people living around the mining area do not apply to
them.

3.0 RESEARCH QUESTIONS, OBJECTIVES AND SIGNIFICANCE

3.1 Research Questions

The research questions that are addressed in this research project are:
What is the extent of the impact of the coal mining industry on the economy of
South Kalimantan Province, especially on value-added, output, employment, and
sectoral interdependency in the economy?
What is the extent of the impact of the coal mining industry on income
distribution in South Kalimantan Province?
How much is the leakage of the coal mining industry in South Kalimantan?
What is the most favorable policy for the coal industry in South Kalimantan in
order to improve its economy and maintain its environment?

1
Economics term which refers to additional or added value in terms of increased utility we can get
from a product by doing something to/with it.

8
3.2 Research Objectives
The general objective of the research is to analyze the impact of the coal mining
industry on the economy and environment of South Kalimantan Province, Indonesia.
The specific objectives are:
To analyze the impact of the coal mining industry on the development of the
economy of South Kalimantan Province according to the following indicators:
o Value-added generated by the coal mining industry compared to other
industries in the economy.
o Output generated by the coal mining industry compared to other industries
in the economy.
o Employment provided by the coal mining industry compared to other
industries in the economy.
o Production structure and interdependency of the coal mining industry in
the economy.
To analyze the impact of the coal mining industry on income distribution in South
Kalimantan Province.
To analyze the extent of the leakage 2 the coal mining industry, in particular to
compare benefits received by the region and the outer regions (other regions in
Indonesia and other countries) from the coal mining industry.
To simulate several policies for the coal industry of South Kalimantan Province in
order to find the best strategy in terms of economic improvement and
environmental maintenance.

3.3 Significance of the Research

Without enough information, it is difficult for the authorities to design the right
policies for the coal mining industry and related activities. Meanwhile, rising foreign
demand and the abundant resources of coal in South Kalimantan keep the industry
growing. Indeed, the region receives additional income through royalties and
administrative fees for licenses. However, it is questionable whether or not the royalties
and fees are fair, compared to the benefits enjoyed by the coal mining companies. Even
if the royalties and fees were fair in terms of the amount, the surrounding communities do
not receive adequate compensation for all the negative impacts and externalities.
This research project contributes to the existing pool of information on the impact
of the coal mining industry on the economy of South Kalimantan Province, in terms of
value-added, output and employment generated by the industry, and production influence
of the coal industry on other industries in the economy. This research project also
provides useful information on the impact of the coal mining industry on income
distribution among the various households in South Kalimantan Province. Moreover this

2
Leakage is a situation where benefit from an activity in a region is received by other regions.

9
project will generate accurate information about the negative impacts and externalities of
the coal mining industry on the environment, in particular on water quality, air quality,
road damage, road accidents, and road density. Based on this information, this research
will simulate five alternative policies for the coal industry in South Kalimantan Province
to find the best one in terms of its contribution to economic improvement as well as to
maintaining the environment of the province.

4.0 RESEARCH METHODS

4.1 Variables Measured

As the indicators of South Kalimantan Provinces economy, variables that are
analyzed are:
Value-added, output and employment generated by the coal mining
industry, as compared with the same measures generated by other sectors
in the economy of South Kalimantan Province.
Backward and forward linkages between the coal mining industry of South
Kalimantan Province and other industries in the economy.
Income distribution among the various households in South Kalimantan
Province.
The amount of output and value-added of the coal mining industry that
leaks to other regions in Indonesia as well as to overseas countries.

4.2 Population and Samples

The research population was that of South Kalimantan Province. The analysis
focused on the impact of the coal industry on economic improvement, income
distribution, and leakage.
This research utilized a Social Accounting Matrix (SAM) to analyze five policy
simulation of policies to locate a leading policy in terms of economy and environment.
The sampling method was proportionate random sampling. The samples were chosen
proportionally based on the populations of 12 districts in South Kalimantan Province with
an average of 100 samples each district. At the district level, samples were chosen
randomly. The total number of samples collected was 1,200.
Industry data was collected from industry samples, which were purposively
chosen from the coal-related firms as the population. Forty samples were collected:
Large-scale mining firms (3 samples)
Small-scale mining firms (28 samples)
Other coal-related firms (9 samples)

10
4.3 Method of Information Collection
This research used primary and secondary data. Primary data included household
and industry data. These were collected through personal interviews. Two types of
questionnaires were prepared, one for the industry and one for households. For personal
interview purposes, 40 enumerators were recruited and trained. On average, every
enumerator had to interview about 30 household samples and one coal-related industry
sample. Both the industry and household questionnaires were made in two stages. First,
drafts of the questionnaires were tested on a small sample of 60 household respondents
and four coal-related industries. Then they were evaluated. Based on the evaluation
results, the questionnaires were revised. The revised versions were used for the actual
interviews of all the samples. The data collected through this survey included household
income and expenditure, and data on the coal industrys input-output structure for the
coal-related industry samples. The data was utilized to develop a SAM for South
Kalimantan Province, together with the 2000 Input-Output Table of South Kalimantan
Province, and the most recent data on the economic aspects of the province.
Secondary data was collected from various relevant institutions, including private
and public institutions. The secondary data was generally obtained from publications or
annual reports of the relevant institutions and included the recent data of South
Kalimantan Province in Numbers (2005), Input-Output Table 2000 (2003), and Gross
Domestic Regional Product of South Kalimantan Province (2005), industry input and
output structures, and employment provided by economic sectors in South Kalimantan
Province.
To complement the above, secondary data on several environmental aspects were
also collected from other sources. The main source was environmental engineers or
experts who were asked to provide their professional advice and opinions, and facts,
through a specially-designed workshop.

4.4 Economic Valuation Methods and Biases

The Social Accounting Matrix (SAM) model that used in this research assumed
that the production structure is fixed. Generally, for impact analysis using the standard
accounting multiplier, there are two more assumptions imposed. Firstly, income
elasticity is assumed to be unity (1), and therefore the income effects on expenditures are
eliminated. Secondly, supply of all sectors in the economy is unlimited (Bautista 2000).
In reality, as in South Kalimantan Provinces economy, income elasticity is not unity, and
the supply of all sectors is not unlimited, so the use of the accounting multiplier will be
biased.
To overcome this problem, the Mixed Multiplier analysis was used in this study
instead. Income elasticity information was incorporated into the model and therefore the
income assumption was released. The limited supply assumption was also released to
accommodate the fact that not every sector in an economy has unlimited supplies of
resources. Usually primary sectors, including the coal industry, are considered to have
limited supplies (Pyatt and Round 1985, Stone 1985, Lewis and Thorbecke 1992, Rich, et
al. 1997, and Townsend and McDonal 1997).

11
 There was difficulty in choosing an appropriate tool or method to connect the
various environmental aspects to the coal industry. In this research, a linear simple
regression model was applied separately to each environmental variable as the dependent
variable and the coal mining industry as the independent variable. In this way, the
environmental outcome as an impact of the coal mining industry was assumed to stand
alone for each environment variable. In fact, road damage could, for example, have
contributed to the number of road accidents. This fact was ignored in the modeling.

4.5 Procedures and Techniques for Data Processing and Analysis

As the base table, the Input-Output Table of South Kalimantan 2000 was used.
This was updated with recent economic and industry data to form the updated tables with
2004 as the base year. The 2004 Input-output Table of South Kalimantan Province was
then combined with the household income and expenditure data collected from the
survey. The result was a 2004 Social Accounting Matrix of South Kalimantan Province.
SAM as a model of analysis has some advantages. This model can be constructed
wide enough to represent the whole economic system of an observed region, while at the
same time providing detailed information for the investigation of a particular sector of the
economy. This model possesses the capacity of combining a wide range of data and
organizing it in a complete, consistent and compact framework. The model also has the
ability to analyze transaction flows between various sectors in the economy while also
being able to examine the flow of income and its distribution within various household
categories. SAM can be used for issues related to income distribution among households,
as well as for issues related to inter-sectoral linkages among various industries within an
economy (Thorbecke 2000).
The use of SAM as an economy-wide planning model can provide a base to
compose conclusions. SAMs comprise inter-sectoral flow analyses of production as well
as of government, financial and household sectors. It represents the structure of
production and also explains the distribution of value-added among production factors
and the distribution of income among households (Zarate-Hoyos 2000). The SAM
technique can capture the distributional effects of a planned change in exogenous
accounts such as government, capital, and the rest of the world on various socio-
economic household groups (Nokkala and Kola 2000). This capacity is important to help
understand the income disparity in a region.
SAMs have been applied in various research fields in different countries. In the
US, Adelman and Robinson (1986) used SAM for investigating the impacts of various
exogenous factors on agriculture, with the focus on the link between agricultural and non-
agricultural sectors. Roberts (1992) used SAM to investigate the roles of agriculture in
the economic development of the UKs economy. Reininga (2000) constructed a SAM
for the Netherlands to examine its consistency and suitability as a database for economic
policy analysis. Sanz and Perdiz (2000) used SAM multipliers to measure the inequality
among different groups of Spanish households. Nokkala and Kola (2000) analyzed the
effects of the EU structural and agricultural policies on rural areas of different economic
structures in Finland, using SAM.

12
 SAMs have also been broadly utilized in developing countries to assess the
distributive effects of policies on households (Midmore and Harrison-Mayfield 1996).
Pyatt and Round (1985) documented several examples of SAM models that have been
applied to the policy analyses of several countries. More recently, Zarate-Hoyos (2000)
used a SAM model to examine the aspects of labour migration from Mexico to the US.
Bautista (2000) made use of SAM multipliers to assess the effects of agricultural growth
on income and equity. Malan (2001) discussed the problem of income distribution in
South Africa using a SAM. Indeed, SAM analysis has been useful in gathering insights
for development strategy formulation particularly when addressing the issues of growth
and distribution (Cohen 1986).
For this research, three types of SAM-based analyses were used. These were the
mixed multiplier analysis, linkages analysis, and leakage analysis. The mixed multiplier
(MM) analysis used SAM as database to calculate a formula called the multiplier. The
formula of the mixed multiplier is as follows:

1
MM = I1 Cnc O1 I1 Q
R
I 2 O2 ( I 2 Cc )

The complete description of this formula is given in Appendix 1.

The MM was used to investigate the impact of the coal mining industry on value-
added, output, and employment generated by the industry compared to other industries in
the economy, and to analyze the impact of the coal mining industry on income
distribution. The multiplier was also used for simulation.
Both forward and backward linkages were used to analyze the production
structure and interdependency of the economy. Leakage analysis is a SAM-based analysis
that was used to investigate the structure of household income received from coal mining
industries and their related activities, and to find out how much of the income leaked
overseas and to other regions outside the South Kalimantan Province.
To obtain data (facts and opinions) about the environmental impacts of the coal
mining industry, a specially-designed workshop was held in Banjarbaru on 28 December,
2006. For the workshop, several engineers and experts in environmental knowledge were
invited to discuss and share their opinions on the above topic. The main results of the
workshop reflected some of the coefficients that could indicate the link or connection
between coal-related activities and the environment. Later, the information from the
workshop was combined with the simulation results using the SAM-based mixed
multiplier analysis. The simulations proposed were to establish the most preferred policy
in terms of economic improvement and environment maintenance.
To incorporate the policies into the model, they needed to be quantified. For this
purpose, four accounts in the constructed SAM were used as policy tools. These were: 1)
government, 2) tax, 3) subsidy and 4) capital/investment. The policy influences were
interpreted as shocks given to particular accounts in each simulation through the policy

13
tool accounts, either in terms of percentage addition to or subtraction from their initial
values (Table 1).

Table 1. Summary of Simulation Policies

No. Policy Government Tax Subsidy Investment/

Expenditure Capital
1 Stricter regulation of +5% on -10% on
the small-scale miners government small-
and small- scale
scale coal coal
industry industry
2 Enforcing more +15% on +10 on
stringent codes of government coal
mining management and coal industry
practices on all miners industry
in the region
3 Redistributing royalties +20% on +15% on
and other revenues to coal lower
lower income families industry income
in the region households
4 Implementing land +5% on land +15% on +10% on
rehabilitation programs rehabilitation coal forest and
industry agriculture
5 Introducing mine -5% on land 10% from
rehabilitation bonds rehabilitation coal
industry

The effects of the policy simulations were captured using several variables, which
were categorized into three groups of variables. These were: 1) variables of economic
impacts, 2) variables of industrial impacts, and 3) variables of environmental impacts.
The variables that were used to indicate economic impacts were income distribution,
value-added generation, and employment. The variables for industrial impacts were
outputs of industry. Meanwhile for the environment impacts, the results of the SAM-
based analysis were combined with the information collected from the workshop. As
described earlier, the main results of the workshop revealed some of the coefficients that
could indicate the link or connection between coal-related activities and the environment.
With this information, the environmental impacts of the policy could be described.
The policy of stricter regulation of small-scale miners was incorporated into the
mixed multiplier SAM, by assigning shock in the form of a 5% increase in government
expenditure and a 10% decrease in tax on small-scale coal miners as a consequence of a
drop in their numbers due to the stricter policy enforcement.

14
 To simulate the policy of enforcing more stringent codes of mining management
practices on all miners in the region, shock was defined as a 15% increase in government
expenditure, together with a 10% increase in tax on the coal industry. Government
expenditure includes expenses in supporting police enforcement activities and coal
industry management.
The policy of redistributing royalties and other revenues to lower income families
in the region was interpreted as a 20% increase in tax imposed on the coal industry,
together with a 15% increase in subsidy to lower income households.
To simulate the policy of implementing land rehabilitation programs, shock was
defined as a 5% increase in government expenditure on land rehabilitation, 15% increase
in tax on the coal industry, and a 10% increase in investment on rehabilitation and
development of forests and agriculture.
Lastly, the policy of introducing mine rehabilitation bonds was incorporated into
the mixed multiplier matrix by assigning a 10% increase of capital acquired from the coal
industry to pay for the bonds and a resulting 5% decrease in government expenditure on
the coal industry as a result of miners being more careful. (A mine rehabilitation bond is
the amount that has to be paid by a company when it starts to mine coal. If the company
follows the rules and conducts the mining properly, the mining bond can be claimed
back. But if it breaks any of the rules, then the bond cannot be claimed back. The
government will use the bond money to rectify the damage caused by the mining
company.)

5.0 RESULTS AND DISCUSSIONS

This section presents data and relevant discussions based on such data, field
observations, and insights from the workshop that was specially designed to acquire
expert input on the estimation of the coefficient of coal mining industry impacts on the
environment. This section is divided into several sub-sections to meet the terms of
research objectives.
The sub-sections are:
Database Compilation and SAM Construction
The Impact of the Coal Mining Industry on Economic Development
The Impact of the Coal Mining Industry on Income Distribution
Leakage of the Coal Mining Industry
Policy Simulations

5.1 Database Compilation and SAM Construction

The database developed in this research was a Social Accounting Matrix (SAM)
one. Actually SAM is not only useful as a database but is also a useful tool for analysis.

15
To develop a SAM, we used the Input-Output (IO) Table of South Kalimantan (BPS
2000). This was used as the basic table. The research method for updating the IO Table
was the non-survey method. The basic table was updated using the RAS method (a
mathematical method) using recent South Kalimantan regional income and gross
domestic product (GDP) data (BPS 2005). The most recent official data that was
available during the research period was for the year 2004. Therefore the Input-Output
Table generated using this method was the Input-Output Table of South Kalimantan
Province for 2004.
The basic IO Table of South Kalimantan Province for the year 2000 had 50
sectors. In this table, coal mining was separated from other sectors in the economy.
However, it did not differentiate large-scale coal mining operations from small-scale
ones. Using the data from several sources, the table was updated to 2004. Supporting
data for this process included the 2005 data on the regional income and GDP, South
Kalimantan in Numbers report (BPS 2005) and the 2005 annual report of the regional
mining department (Department of Mining and Energy Province of South Kalimantan,
2005).
The next process was to construct a SAM. To do this there were two surveys
carried out, an industrial survey and a household survey. The industrial survey used coal
mining firms as samples. This was required in order to separate the coal mining sector
into two different sectors: small-scale and large-scale. The household survey was useful
for constructing details of the Institutions (Institutions is one group of accounts in SAM,
besides Sectors and Factors) income and expenditure. Combining the 2004 IO Table
with data from these two surveys brought into being a 2004 SAM of South Kalimantan
Province. This SAM consisted of 51 sectors similar to the IO Table except that in the
SAM, coal mining consisted of small-scale and large-scale bodies, eight types of
institutions, two factors, and five exogenous accounts. In total, the SAM had 66
accounts. Initially, the coal mining sector was planned to be divided into three sectors;
small-scale, large-scale, and coal-related business which covered heavy vehicle rental.
However, in the field, this could not be done, as heavy vehicle rental companies did not
only serve coal mining activities, but also leased their equipment to plantations and for
road construction, real estate development, and so on.
In this research, the SAM was utilized in two ways. Firstly, it was used as a
database to develop a formula called the mixed multiplier. Based on this formula, we
analyzed the income distribution. Also using the mixed multiplier formula, the simulation
of several alternative policies was run. Secondly, SAM was used directly as a tool of
analysis. The whole interdependency in the economy was captured in the SAM, and this
made it possible to analyze the value-added generated by various sectors in the economy.
The SAM also enabled us to understand the output produced in each sector of the
economy as compared to others. It also helped us to see the leakage in the economy. We
could see how much the proportion of output of particular sector in the economy that
went into outer regions was.
For the purposes of this research, the SAM accounts were reduced in number.
The reason for this was that the details of some sectors were not relevant. For instance,
general information on the agricultural sector income and expenditure was adequate.
There was no need to go into deep detail for rice, maize, other crops, land fishery, sea

16
fishery, etc. The other reason was that in calculating the mixed multiplier, the
spreadsheet could only process a matrix of up to 53 rows and 53 columns. Based on these
reasons, the SAM was aggregated and the final form of the 2004 SAM of South
Kalimantan Province had 38 accounts. These consisted of two factor accounts, 23
accounts of sectors, eight accounts of institutions, and five exogenous accounts.

5.2 The Impact of Coal Mining on Economic Development

Survey results showed that in South Kalimantan Province, there were 12 large-
scale coal industries, 54 small-scale coal industries and 16 coal-related industries
(including heavy equipment rentals, transportation, human resources management and
finance). The coal industries operated in almost all areas of South Kalimantan Province,
except for three kabupatens (districts); Banjarmasin, Barito Kuala, and Banjarbaru.
Majority of the large-scale coal industries operated with a permit called the Coal Mining
Exploration Project Agreement (CMEPA), which is in Indonesian is called a PKP2B
(Perjanjian Karya Pengusahaan Pertambangan Batubara) permit. The small-scale coal
industries included small firms as well as individuals and cooperatives. These operated
with Mining Authorization (MA) permits, which in Indonesia are called KP (Kuasa
Pertambangan) permits. Besides these legal miners, there are many other small-scale
coal miners without licenses these are called illegal miners. The number of illegal
miners is growing. Almost every district of South Kalimantan Province contains several
illegal coal miners. In 1997, 157 individual or group businesses of this type were
recorded. In early 2000, this number rose sharply to 445. In 2004, the number increased
to 842. Illegal miners are unique and cannot be treated the same as legal miners,
particularly in applying rules and regulations.
In a SAM database, value-added is factorial income. This income is received by
factors of production (labour and capital) in all economic sectors in South Kalimantan
Province. The total value-added generated in South Kalimantan Province was IDR
25,949,476 million in 2004. This consisted of IDR 8,595,542 million generated by
labour and IDR 17,353,933 million as a return to capital. This means that in South
Kalimantan Province, capital is a more dominant contributor to value-added generation.
This has some influence on income distribution. As the capital is mostly owned by the
haves, this means that the haves can create more value-added in the economy.
Value-added generated from the coal industry reached IDR 2,966,456 million in
the same year. This is the third largest contribution among sectors in the South
Kalimantan Province economy contributing 11.4% to total value-added in the province.
The highest contribution of 19.1% was from agriculture, followed by industry (15.4%).
Complete details of sectoral value-added of the South Kalimantan Province economy is
provided in Table 2.
Not surprisingly, large-scale coal mining had higher value-added than the small-
scale one; almost twice as high. This figure implies that the intensity of small-scale
mining is quite high. Considering that all potential areas in South Kalimantan Province
have been allocated through CMEPA permits for all large-scale companies, the fact that
the value-added generated from small-scale mining is almost half that from large-scale
operations is something that the authorities need to pay attention to. What can be inferred

17
is that if some areas can legally allocated for the small-scale companies, the value-added
generated from coal mining could be improved.

Table 2. Sectoral Value-added in South Kalimantan Province (2004) (IDR million)

Sector Code Labor Capital Factor Share (%)

Agriculture 3 1,236,979 3,717,640 4,954,619 19.1

Oil Mining 4 23,070 1,330,775 1,353,845 5.2
Large-scale Coal 5 660,261 1,230,779 1,891,040 7.3
Mining
Small-scale Coal 6 231,984 843,432 1,075,416 4.1
Mining
Other Mining 7 24,899 142,088 166,987 0.6
Digging 8 19,941 300,838 320,779 1.2
Agro-industry 9 94,521 1,170,781 1,265,302 4.9
Industry 10 1,789,931 2,215,489 4,005,420 15.4
Metal, machines, 11 12,187 193,259 205,446 0.8
transportation
appliances, and other
processing industries
Electricity 12 62,699 12,991 75,690 0.3
Drinking Water 13 11,348 648,548 659,896 2.5
Construction 14 687,533 1,102,449 1,789,982 6.9
Trading 15 590,238 20,392 610,630 2.4
Accommodation 16 6,876 315,845 322,721 1.2
Restaurant 17 104,512 886,858 991,370 3.8
Road Transportation 18 273,426 123,266 396,692 1.5
River Transportation 19 6,373 586,838 593,212 2.3
Ocean Transportation 20 153,735 169,101 322,836 1.2
Air Transportation 21 88,733 63,899 152,632 0.6
Transportation 22 20,679 154,591 175,270 0.7
passenger services and
warehousing
Communication 23 32,682 760,878 793,560 3.1
Services 24 2,306,767 187,285 2,494,052 9.6
Undefined activities 25 1,554 0 1,554 0.0
Outer regions 38 154,614 1,175,911 1,330,526 5.1
Total 8,595,542 17,353,933 25,949,476 100.0
Source: SAM of South Kalimantan 2004
Note: Undefined activities = all activities that do not fit under the other classifications
If we compare the small-scale and the large-scale operations in terms of their
intensity, we find out that the small-scale ones are more capital intensive. This is quite
surprisingly as usually the reverse is true. The measure used is the capital:labour ratio.

18
For the small-scale company, this value is 3.6, while for the large-scale one, it is 1.9. The
reason for this is because most small-scale miners operate in relatively new areas and this
requires the use of heavy machinery (high capital outlay); thus they cannot reach optimal
capacity like their large-scale counterparts.
The total output of all the economic sectors of South Kalimantan Province is IDR
69,125,971 million (Table 3). The highest contribution comes from the manufacturing
(industry) sector which produces output valued at IDR 11,024,693 million. This is about
15.9% of the total output. The agricultural sector with IDR 9,706,105 million rupiahs
stands at second place, contributing 14%. Large-scale coal mining stands third with
12.5% valued at IDR 8,640,060 million. Actually, if the large-scale and small-scale
industry of coal mining is combined, their share of the total output will be the highest at
18% valued at IDR 12,419,188 million (Table 3). This fact indicates that coal mining is
dominant in the South Kalimantan economy. Mining activities can be seen almost
everywhere in the province. One can see long convoys of trucks on many main roads,
coal mining exploration activities in many areas, stockpiles near the sea port, and even
read about coal mining activities almost every day in the local newspapers. These pertain
to on-going activities. Evidence of coal mining is also apparent in what is left behind
after operations are abandoned large open lakes, cut down forests, large open spaces of
neglected land, big holes on the roads, floods and climate change (higher temperatures).
If we have a look at investment in the region, we see how dominant coal mining
really is in the South Kalimantan economy. From the total investment in South
Kalimantan Province valued at IDR 5,493,183 million, 30.3% was invested in the coal
industry. Large-scale coal mining absorbed 24.2% (IDR 1,331,010 million) and small-
scale mining absorbed 6.1% or IDR 332,752 million. Although this value is less than
investment in industry which has a value of IDR 2,253,617 million, the coal mining
sector is still leading considering the fact that the industry sector is grouped together with
several sub-sectors, including textiles, clothing and husks, plywood and wood sawmills,
wooden goods, bamboo and rattan furniture, paper, printing and publications, chemicals,
rubber and plastic, and non-metal digging.
As can be seen from Table 3, in terms of investment the three most dominant
sectors in the South Kalimantan economy respectively are, industry, coal mining and
agriculture. Each of the other sectors in the economy has less than 1% investment share
in the total investment in South Kalimantan Province.
Total employment in South Kalimantan reached 1,468,590 in 2004 out of a total
population of 3,250,100. This implies that about 45% of the population works. Among
all sectors in the economy, agriculture has the highest employment with 741,298 people.
This is about 51% of the working population, implying that the agriculture sector is still
dominant in the province. The other sectors with large employment shares are trading
(15%), and services (11%). Although coal mining sector is quite dominant in terms of
value-added and output, this sector together with other mining activities absorb only
about 2% of the working population. There are only 33,738 people working in this
mining sector. The sectoral employment of South Kalimantan Province can be seen in
detail in Table 3.

19
Table 3. Sectoral Output and Employment in South Kalimantan Province (2004)
Sector Code Output Employment Ratio of Investment
IDR Share People Share Emp/Out IDR Share
million (%) (%) million (%)
Agriculture 3 9,706,105 14 741,298 50.5 0.076 819,916 14.9
Oil mining 4 1,513,169 2.2 872 0.1 0.001 256,262 4.7
Large-scale coal mining 5 8,640,060 12.5 24,966 1.7 0.003 1,331,010 24.2
Small-scale coal mining 6 3,779,128 5.5 8,772 0.6 0.002 332,752 6.1
Other mining 7 192,711 0.3 941 0.1 0.005 49,433 0.9
Digging 8 394,529 0.6 754 0.1 0.002 73,141 1.3
Agro-industry 9 4,801,572 6.9 7,000 0.5 0.001 6,719 0.1
Industry 10 11,024,693 15.9 132,558 9 0.012 2,253,617 41
Metal, machines, transportation appliances, 11 2,513,448 3.6 903 0.1 0 39,189 0.7
and other processing industries
Electricity 12 243,416 0.4 3,555 0.2 0.015 7,631 0.1
Drinking water 13 676,433 1 643 0 0.001 726 0
Construction 14 3,395,520 4.9 45,810 3.1 0.013 42,819 0.8
Trading 15 6,891,976 10 219,943 15 0.032 90,543 1.6
Accommodation 16 6,126,139 8.9 2,562 0.2 0 873 0
Restaurant 17 1,326,910 1.9 38,945 2.7 0.029 13,237 0.2
Road transportation 18 1,372,918 2 35,256 2.4 0.026 35,346 0.6
River transportation 19 614,443 0.9 822 0.1 0.001 3,897 0.1
Ocean transportation 20 1,166,827 1.7 19,823 1.3 0.017 22,474 0.4
Air transportation 21 259,377 0.4 11,441 0.8 0.044 7,664 0.1
Transportation passenger services and 22 212,687 0.3 2,666 0.2 0.013 2,549 0
warehousing
Communication 23 841,065 1.2 4,214 0.3 0.005 5,636 0.1

20
 Sector Code Output Employment Ratio of Investment
IDR Share People Share Emp/Out IDR Share
million (%) (%) million (%)
Services 24 3,430,114 5 164,237 11.2 0.048 97,659 1.8
Undefined Activities 25 2,729 0 607 0 0.222 89 0
69,125,971 100 1,468,590 100 5,493,181 100

Source: SAM of South Kalimantan 2004

21
 The production structure of South Kalimantans economy indicates the dominance
of the agricultural sector. This is implied by the fact that agriculture has a higher share
for value-added, output and employment compared with other sectors in the economy,
except for industry. Using two indicators available, value-added and output, the
production structure can be described as the ratio of value-added over output (VA/O).
This ratio indicates the value-added generated given a certain value of output produced.
This ratio is useful for policy-makers when they want to choose a sector to produce more
value-added in the economy.

Table 4 shows that the highest VA/O is drinking water with 0.976.
Communication stands at second place with 0.944 and oil mining is third with 0.895.
The VA/O ratio for large-scale coal mining is only 0.219. This is actually worse than
small-scale mining which has a ratio of 0.285. This implies that if a decision-maker
wants to choose a sector that produces the highest value-added, coal mining would not be
a good choice. The value-added generated per unit output of coal mining is much lower
than the value-added generated from drinking water, communication or oil mining
activities. If we observe the production structure through backward and forward linkages
using a SAM-based formula, the result is as given in Table 5. Backward linkage is a
linkage between a particular sector and other sectors in the economy in that input for the
former generates demand for output from the latter. If a sector has a high backward
linkage, this means that the sector has a strong influence on the development of other
sectors.

Large-scale coal mining backward linkage is very strong (0.2125) with sector
No.11, which incorporates the following industries: metal, machines, transportation
appliances, other processing industries and the leasing of heavy equipment. Coal mining
is very much dependent on this sector as heavy equipment is a necessity in the business
for every exploration procedure, opening new mining fields and handling of the coal
either in the fields, stockpiles or at the sea-ports. The other sectors that large-scale coal
mining has high backward linkage with are ocean transportation and road transportation.
The backward linkage coefficients for these sectors are 0.0462 and 0.0406, respectively.
It is easy to understand the linkage of large-scale coal mining with these sectors. As coal
is mostly sent to other regions, both for export and for inter-province trading, road
transportation and sea transportation is certainly needed. A similar structure of backward
linkages applies to small-scale coal mining. The highest linkage is with metal, machine,
transportation appliances and other processing industries. It has a backward linkage
coefficient of 0.1088. The next highest linkages are with transportation sectors, both
ocean and road (Table 5).

22
Table 4. The Ratio of Output and Value-added as Production Indicators

Sector Code Output Value Added Va/Out

(Out) (Va)
IDR Million IDR Million
Drinking water 13 676,433 659,896 0.976
Communication 23 841,065 793,560 0.944
Oil mining 4 1,513,169 1,353,845 0.895
Other mining 7 192,711 166,987 0.867
Transportation passenger 22 212,687 175,270 0.824
services and warehousing.
Digging 8 394,529 320,779 0.813
Restaurants 17 1,326,910 991,370 0.747
Services 24 3,430,114 2,494,052 0.727
Air transportation 21 259,377 152,632 0.588
Undefined activities 25 2,729 1,554 0.569
Construction 14 3,395,520 1,789,982 0.527
Agriculture 3 9,706,105 4,954,619 0.51
River transportation 19 614,443 293,211 0.477
Industry 10 11,024,693 4,005,420 0.363
Electricity 12 243,416 75,690 0.311
Road transportation 18 1,372,918 396,692 0.289
Small-scale coal mining 6 3,779,128 1,075,416 0.285
Ocean transportation 20 1,166,827 322,836 0.277
Agro-industry 9 4,801,572 1,265,302 0.264
Large-scale coal mining 5 8,640,060 1,891,040 0.219
Trading 15 6,891,976 610,630 0.089
Metal, machines, 11 2,513,448 205,446 0.082
transportation appliances,
and other processing
industries
Accommodation 16 6,126,139 322,721 0.053
Total 69,125,971 1,330,526 0.019

Source: SAM of South Kalimantan 2004

23
Table 5. Backward and Forward Linkages of the Coal Mining Industry
Sector Code Backward Forward
Large Small Large Small
scale scale scale scale
Agriculture 3 0.0020 0.0016 0.0000 0.0000
Oil mining 4 0.0000 0.0000 0.0000 0.0000
Large-scale coal mining 5 0.0003 0.0002 0.0003 0.0004
Small-scale coal mining 6 0.0002 0.0001 0.0001 0.0001
Other mining 7 0.0000 0.0000 0.0001 0.0001
Digging 8 0.0000 0.0000 0.0000 0.0000
Agro-industry 9 0.0096 0.0077 0.0000 0.0000
Industry 10 0.0077 0.0062 0.0005 0.0006
Metal, machines, transportation
appliances, and other processing
industries 11 0.2125 0.1088 0.0000 0.0000
Electricity 12 0.0028 0.0023 0.0003 0.0003
Drinking water 13 0.0000 0.0000 0.0000 0.0000
Construction 14 0.0014 0.0012 0.0000 0.0000
Trading 15 0.0067 0.0054 0.0000 0.0000
Accommodation 16 0.0001 0.0001 0.0000 0.0000
Restaurant 17 0.0000 0.0000 0.0000 0.0000
Road transportation 18 0.0406 0.0326 0.0000 0.0000
River transportation 19 0.0045 0.0036 0.0000 0.0000
Ocean transportation 20 0.0462 0.0371 0.0000 0.0000
Air transportation 21 0.0028 0.0022 0.0000 0.0000
Transportation passenger services and
warehousing 22 0.0005 0.0004 0.0000 0.0000
Communication 23 0.0069 0.0055 0.0000 0.0000
Services 24 0.0112 0.0090 0.0000 0.0000
Undefined activities 25 0.0000 0.0000 0.0000 0.0000
Source: Processed from SAM of South Kalimantan 2004

5.3 The Impact of Coal Mining on Income Distribution

To see the impact of coal mining on income distribution in South Kalimantan
Province, the mixed multiplier was utilized. The multiplier describes how much
household incomes increase as a result of an increase in a particular sector in the
economy. In this research, the focus of attention is the coal mining industry, both large-
scale and small-scale. The multiplier values are depicted in Table 6.
As can be seen from Table 6, the highest multiplier effect (value of 0.321) of
large-scale coal mining is on the household incomes of very high income non-farmers.
Interestingly, the large-scale coal mining multiplier for large (and rich) land-owner
farmer households is lower than the multiplier for the household of low income non-
farmer. This implies that coal mining work generates more income for non-farmer
24
households. This conforms to our observation in the field. We found that very few
people living near the mining fields, who were mostly farmers, worked for the coal
mining companies. Most of the workers came from other villages or provinces. Farmer
families thus receive less benefit from coal mining activities.

Table 6. Income Distribution Effect of the Coal Mining Industry

Large- Small-
scale scale
Household Category Code mining mining
Landless farmers 37 0.052 0.050
Small land-owner farmers 38 0.092 0.090
Large land-owner farmers 39 0.184 0.179
Low income non-farmers 40 0.251 0.243
Middle income non-
farmers 41 0.227 0.220
High income non-farmers 42 0.306 0.299
Very high income
non-farmers 43 0.321 0.328
Total 1.433 1.410
Source: Multiplier effect of SAM of South Kalimantan 2004
Note: The figures above indicate the multiplier values.

It is also obvious from the multiplier values that for the same household category,
the higher the household income, the higher the multiplier. This means that coal mining
generates more income for the higher income households. This applies for both farmer
households and non-farmer households.
The multiplier values for small-scale coal mining follow the same pattern as for
large-scale mining. As illustrated in Table 6, the small-scale coal mining industry shows
a higher multiplier effect on the incomes of non-farmer households than for farmer
households. It also has the same effect as large scale mining on higher income
households as compared with lower income households.
The fact that most poor people are farmers combined with the fact that coal
mining is biased towards non-farmer households infers that promoting coal mining
activities in the development of South Kalimantan Province in not an appropriate policy
if the purpose is to reduce income inequality. Based on the multiplier analysis described
above, it is obvious that coal mining activities will generate additional income for the
higher income non-farmer households.

25
5.4 Leakage of the Coal Mining Industry
It is inevitable that economic transactions of South Kalimantan take place with
other regions. These regions are called outer regions. These could be other provinces
in Indonesia or other countries. There are some inputs that are bought from outer regions
and some outputs sold to outer regions. This process has some influence on the flow of
benefits generated by these transactions. The excess of benefits flowing towards outer
regions is referred to as leakage.
How much is the leakage of the coal mining industry in South Kalimantan? To be
able to answer that question, we need to analyze the coal mining industry to compare the
benefits received by the region and the outer regions. For this purpose, the 2004 SAM
database of South Kalimantan Province was used to determine the leakage (Table 7).

Table 7. Leakage of Coal Mining in South Kalimantan Province

Aspects Large-scale Mining Small-scale Mining
IDR million IDR million
Income from outer regions 6,265,661 2,763,786
Expense to outer regions 3,339,410 2,117,771
Output or Input Total 8,640,060 3,779,128
Percentage to Output (%) Percentage to Output (%)
Income from outer regions 72.52 73.13
Expense to outer regions 38.65 56.04
Source: Calculated from SAM of South Kalimantan 2004

The total output of large-scale coal mining in South Kalimantan Province is IDR
8,640,060 million. From this amount, more than 70% is sold to outer regions. The
income from outer regions created through this transaction stands at IDR 6,265,661
million. The total output from small-scale coal mining is lower at IDR 3,779,128. Its
output sold to outer regions reaches the value of IDR 2,763,786 million or 73.13% of its
total output value.
The fact above indicates very significant transactions between the coal mining
industry in South Kalimantan with outer region. Both the large-scale and small-scale
coal miners sell more than 70% of their products to other regions. This indicates a large
income flow inwards from the outer regions.
If we observe the income that flows out to outer regions for large-scale coal
mining, it is IDR 3,339,410 million (Table 7). This is almost 40% of the total input of the
sector. The small-scale coal mining expenditure for outer regions is even higher in terms
of percentage to total input. The percentage reaches 56% or in absolute value is IDR
2,117,771 million. These figures describe the leakage situation of the coal mining
industry in South Kalimantan Province. The values of 40% for large-scale coal mining
and 56% for small-scale coal mining expenditure flow to outer regions are strong and
significant.
26
 Small-scale coal mining appears to use more inputs from outer regions than large-
scale coal mining. The reason for this is that the value is a proportionate rather than an
absolute one. In absolute value, certainly large-scale mining is higher. Actually coal
mining is not the only sector that has large leakage. There are some other sectors that
have even higher levels (see Table 8).

Table 8. Leakage of Economic Sectors in South Kalimantan Province

Sectors Code Outer Regions (IDR Million) Total Input (IDR Million) % to Input
Metal, machines, 11 2,111,679 2,513,448 84.015
transportation
appliances, and
other processing
industries
Electricity 12 147,050 243,416 60.411
Small-scale coal 6 2,117,771 3,779,129 56.039
mining
Road 18 557,999 1,372,918 40.643
transportation
Large-scale coal 5 3,339,410 8,640,060 38.65
mining
Air transportation 21 79,165 259,377 30.521
Agro-industry 9 1,366,198 4,801,572 28.453
Ocean 20 323,680 1,166,827 27.74
transportation
Agriculture 3 2,444,196 9,706,104 25.182
Industry 10 1,956,986 11,024,693 17.751
Services 24 579,358 3,430,114 16.89
Other mining 7 763 192,711 0.396
Digging 8 466 394,529 0.118
Oil mining 4 - 1,513,169 0
Drinking water 13 - 676,433 0
Construction 14 - 3,395,520 0
Trading 15 - 6,891,976 0
Accommodation 16 - 6,126,139 0
Restaurant 17 - 1,326,910 0
River 19 - 614,443 0
transportation
Transportation 22 - 212,687 0
passenger
services and
warehousing
Communication 23 - 841,065 0
Undefined 25 - 2,729 0
activities
Source: Calculated from SAM of South Kalimantan 2004

27
 The highest leakage is for sector no. 11, which is the metal, machine,
transportation appliances and other processing industries. This sector has to spend almost
85% of its input on outer regions. This means that the sector imports almost 85% of its
total input. It has to be noted here that the term import means not only buying things
from overseas, but also from other provinces in Indonesia.
The sector with the second largest leakage is electricity. This sector pays
IDR 147,050 to outer regions for its input. Although this amount is small in terms of
absolute value, the percentage based on its total input is very significant; about 60%.
The coal mining sectors stands at the third and the fifth positions, with road
transportation at fourth place. The main reason for road transport having high leakage is
because many of the vehicles used are bought from or owned by people in outer regions.
Road transportation and coal mining have a close relationship in terms of transactions
with outer regions. Both these sectors have an obvious dependency on outer regions for
capital, human resources and equipment.

5.5 Policy Simulations

Policy simulations were done to investigate the impacts of five different
alternative policies in coal mining management on the economy and environment of
South Kalimantan Province. The aim was to find the most favorable strategy in terms of
economic improvement and environment maintenance.
The simulations were run in a SAM-based mixed multiplier model. Four accounts
were used as policy tools based on the policies being investigated. These were:
Government, Tax, Subsidy and Capital/investment.
The indicators which were used to help identifying the most favorable strategy
were: Income distribution, Value-added Generation, Employment, Output, and
Environmental Impacts.
The five alternative policies investigated were:
Stricter regulation of small-scale miners.
Enforcing more stringent codes of mining management practices on all miners
in the region.
Redistributing royalties and other revenues to lower income families in the
region.
Implementing land rehabilitation programs.
Introducing mine rehabilitation bonds.
Descriptions and purposes of these policies have been discussed in the sub-section
4.5 on Procedures and Techniques for Data Processing and Analysis.
Based on the mixed multiplier values derived from the 2004 SAM of South
Kalimantan Province, the simulations were run. The simulation results were based on the
five indicators mentioned above. The changes in income distribution, value-added
generation, and output could be seen directly from the mixed multiplier model.

28
 For employment, the employment:output ratio was used as the coefficient. Every
increase in output would be reflected by the coefficient and changes in employment could
be predicted. For the environmental impacts, the coefficients were calculated based on
data collected from the specially-designed workshop on The Impacts of Coal Mining on
the Economy and Environment of South Kalimantan Province Indonesia. Data from the
workshop provided ratios for several environmental impacts as follows:
Dust concentration (g/m3)
Noise (dBA, which is decibel adjusted)
Erosion (ton/ha/year)
Land degradation (ha/year)
Mining holes and disposal (ha/year) (Disposal is amount of earth that is
removed from an area used for coal mining)
Vehicle density (unit/day)

5.5.1 Income Distribution

The impacts of the policies on income distribution are summarized in Table 9
below. Generally policies that directly focus on the poor are the best way to improve
income equality in South Kalimantan Province. To reduce the gap in incomes among
households in South Kalimantan Province, we need to improve incomes of the poor at a
speed that is faster than the improvement in incomes of the rich. Among the seven
different households specified in the 2004 SAM of South Kalimantan Province, the
poorest households are landless farmers and low income non-farmer households.
Therefore, to reduce inequality in South Kalimantan Province, incomes for these two
household categories need to be increased more than the other five household categories.
In Table 9, we can see that the highest multiplier (0.093) for landless farmer
households is given by Scenario 3. This scenario is applying the policy of redistributing
royalties and other revenues to lower income families in the region. The second biggest
multiplier for landless farmers is Scenario 4, which is implementing land rehabilitation
programs. Scenario 1 (stricter regulation of small-scale miners) even results in a negative
multiplier value. This means that this scenario, if applied, will reduce landless farmers
incomes. If we observe the multipliers for low income non-farmer households, the result
is similar. The largest multiplier for this household category is produced by Scenario 3,
followed by Scenario 2. Therefore, for the purpose of improving income distribution
among households in South Kalimantan Province, the best alternative policy to apply is
the third alternative policy (Scenario 3).
This policy will improve the income of the poor households the most.
Distributing revenue from coal mining activities to the poor in the area will help to reduce
the income gap. Additional tax applied to coal mining followed by a subsidy for poor
households is very effective way to distribute income. This will give the poor some
latitude to improve their lives.

29
Table 9. Impacts of Policies on Income Distribution
Household Category Code S1 S2 S3 S4 S5
Landless farmers 26 -0.013 0.093 0.015 0.008 0.002
Small land-owner farmers 27 -0.004 0.023 0.032 0.027 0.014
Large land-owner farmers 28 -0.009 0.045 0.054 0.064 0.027
Low income non-farmers 29 -0.076 0.162 0.065 0.036 0.012
Middle income non-farmers 30 -0.011 0.056 0.078 0.067 0.033
High income non-farmers 31 -0.015 0.076 0.106 0.090 0.046
Very high income non-farmers 32 -0.081 0.013 0.099 0.048 0.016
Total Household Income -0.069 0.370 0.538 0.427 0.212
Source: Calculated from Multiplier Matrix of SAM of South Kalimantan 2004
Note: S = Scenario

If we take a look at total multiplier effects for all household categories, Scenario 3
is still the best alternative because it gives the highest value compared to the other
scenarios. It has a total multiplier value of 0.538 for all households. This means that it is
good not only for improving the income of poor households, but also good for all
households in the economy.

5.5.2 Value-added Generation

To study the impacts of policies on value-added generation, the five scenarios
were run using the SAM-based mixed multiplier model and the results are as in Table 10.
In general, Scenario 3 is the best alternative policy for the purpose of acquiring the
highest value-added from economic activities in South Kalimantan Province.

Table 10. Impacts of Policies on Value-added Generation

Sector Code S1 S2 S3 S4 S5
Labour 1 -0.027 0.139 0.193 0.168 0.082
Captial 2 -0.070 0.346 0.482 0.421 0.202
Factor (Total Value Added) -0.097 0.485 0.675 0.589 0.284
Source: Calculated from Multiplier Matrix of SAM of South Kalimantan 2004

Scenario 3 gives the highest value-added multiplier both for labour and capital.
The values are 0.193 and 0.482 respectively. To explain why the value-added multiplier
for labour in this scenario is high, we refer back to the policy tools represented in the
scenario. The policy tool in this scenario is to provide a 15% subsidy to lower income
households. As many of the lower income households are the suppliers of labour, the
subsidy will benefit labour more. Meanwhile, the high multiplier effect for capital in this
scenario can be explained as follows: imposing tax on coal mining will make coal supply
shrink due to the impact of price increase. This will push inefficient firms out of
30
production. The firms with a strong capital structure will survive and in turn, receive
higher returns on their capital.

5.5.3 Employment

The policy simulations show that Scenario 3 gives the best multiplier effect for
total employment in South Kalimantan Province. The detailed multiplier values for each
scenario can be seen in Table 11.

The multiplier for Scenario 3 is 0.036. This means that this scenario will increase
employment by 3.6%. The highest contribution to this increase will be from agriculture.
This does not seem to be related to the policy, because the policy involves a tax on coal
mining together with a subsidy the low income households. The agriculture sector is not
a direct focus of the policy. However, if we recall that agriculture is a sector which most
of the poor people rely on and have the required skills for, then it will be understandable
if employment in agriculture increases.

5.5.4 Output

The scenarios of the five alternative policies of managing coal mining in South
Kalimantan Province also have some effects on the output of different categories in the
economy, including Factors, Sectors, Institutions, Corporations and Outer Regions. The
change in total output represents the effect of change in exogenous accounts (as an
implementation of a particular policy).

Table 12 shows that the highest output multiplier of 4.260 is given by Scenario 3.
In second and third place stand Scenario 4 and Scenario 2 respectively. The highest total
output multiplier of Scenario 3 is mainly due to the high multiplier effect of sectoral
output and output from outer regions. This means that imposing the scenario (that is,
imposing a 20% tax on coal mining and providing a 15% subsidy for low income
households) will increase output for all account categories in South Kalimantan Province;
Factors, Sectors, Institutions, Corporations and Outer Regions. Factors will increase
output by 0.675, sectors by 1.934, institutions by 0.648, corporations by 0.150 and outer
regions by 0.853.

31
Table 11. Impacts of Policies on Employment

Sectors Code EmpS1 EmpS2 EmpS3 EmpS4 EmpS5

Agriculture 3 -0.002 0.011 0.019 0.017 0.002
Oil mining 4 0.000 0.000 0.000 0.000 0.000
Large-scale coal mining 5 0.000 0.001 0.001 0.001 0.001
Small-scale coal mining 6 0.000 0.000 0.000 0.000 0.000
Other mining 7 0.000 0.000 0.000 0.000 0.000
Digging 8 0.000 0.000 0.000 0.000 0.000
Agro-industry 9 0.000 0.000 0.000 0.000 0.000
Industry 10 0.000 0.002 0.003 0.002 0.001
Metal, machines,
transportation appliances,
and other processing
industries 11 0.000 0.000 0.000 0.000 0.000
Electricity 12 0.000 0.000 0.000 0.000 0.000
Drinking water 13 0.000 0.000 0.000 0.000 0.000
Construction 14 0.000 0.001 0.001 0.001 0.001
Trading 15 -0.001 0.004 0.006 0.005 0.003
Accommodation 16 0.000 0.000 0.000 0.000 0.000
Restaurant 17 0.000 0.001 0.001 0.001 0.001
Road transportation 18 0.000 0.001 0.001 0.001 0.001
River transportation 19 0.000 0.000 0.000 0.000 0.000
Ocean transportation 20 0.000 0.001 0.001 0.001 0.000
Air transportation 21 0.000 0.000 0.000 0.000 0.000
Transportation passenger
services and warehousing 22 0.000 0.000 0.000 0.000 0.000
Communication 23 0.000 0.000 0.000 0.000 0.000
Services 24 0.000 0.001 0.001 0.001 0.001
Undefined activities 25 0.000 0.000 0.000 0.000 0.000
Total Employment -0.005 0.023 0.036 0.031 0.010
Source: Calculated from Multiplier Matrix of SAM of South Kalimantan 2004
Note: EmpS = Employment Scenario

Table 12. Impacts of Policies on Output

Scenario Output Factors Sectors Institutions Corps Outer

S1 -0.593 -0.097 -0.280 -0.070 -0.022 -0.123
S2 3.009 0.485 1.443 0.355 0.108 0.618
S3 4.260 0.675 1.934 0.648 0.150 0.853
S4 3.582 0.589 1.710 0.428 0.130 0.726
S5 1.834 0.284 0.887 0.212 0.064 0.387
Source: Calculated from Multiplier Matrix of SAM of South Kalimantan 2004
32
5.5.5 Environmental Impacts

The environmental impacts of the alternative policies for coal mining

management in South Kalimantan Province is divided into two categories: environmental
impacts caused by large-scale coal mining and environmental impacts caused by small-
scale coal mining. The rationale is that the impacts on environment measured by
particular ratios are associated with the level of output of the coal mining industry (either
small-scale or large-scale). The ratios show how bad the environment impacts are for a
given level of output. The simulation scenarios take into account the output levels of all
sectors in South Kalimantans economy, including the coal mining industry which in turn
will reflect the environmental impacts.

The simulation results for large-scale coal mining are portrayed in Table 13. From
the table, we can observe that in terms of environment indicators, the most favourable
scenario is Scenario No. 1, that is, stricter regulation of small-scale miners.

Scenario 1 gives negative multiplier values for three environment indicators. This
means that applying the policy in the scenario will cause a shrink in output which in turn
will reduce these sources of environmental disturbances or pollutants such as dust. The
reduction is -0.0000060g/m3 for each IDR million of total output of large-scale coal
mining. For noise, the multiplier value is -0.0000001 and for vehicle density, the value is
-0.000003. These negative values indicate that the implementation of Scenario 1 will
reduce noise and dust as well as vehicle density. These findings show that an effective
way to conserve the environment is through reducing resource exploitation. Scenario 1 is
also better than the other scenarios in terms of reducing erosion, land degradation, and
mining holes and disposal. Although the values for these indicators are not negative, they
are lower than those of the other scenarios. This means that applying Scenario 1 will still
cause some erosion, land degradation, and mining holes and disposal, but the rate of
destruction will be far lower compared to the other scenarios. In general, therefore,
Scenario 1 is the best alternative policy for coal mining management if the purpose is to
maintain environmental quality.

Scenario 3, which is economically the most favourable strategy, is no longer

leading in terms of environment indicators. In fact, it gives the highest environmental
impacts for all indicators. This fact implies that Scenario 3 implementation has a serious
trade-off. Economically it is profitable, but environmentally it is destructive.

The simulation results for small-scale coal mining are very similar to those of
large-scale mining (Table 14). The best alternative policy is Scenario 1. Like for the
large-scale coal mining, this scenario gives three negative multiplier values for dust
concentration, noise, and vehicle density. This means that implementation of Scenario 1
can help to reduce environmental problems in terms of these three indicators. For the
remaining three indicators: erosion, land degradation, and mining holes and disposal,
Scenario 1 gives the smallest multiplier effect meaning that the rate it causes these three
impacts is the lowest among all the scenarios.

33
Table 13. Environmental Impacts of Large-scale Coal Mining for Different Simulation Scenarios

Large-scale Coal Mining Unit of measurement EnvS1 EnvS2 EnvS3 EnvS4 EnvS5
Dust Concentration g/m3/IDR million -0.0000060 0.0000564 0.0000649 0.0000618 0.0000398
Noise dBA/IDR million -0.0000001 0.0000008 0.0000009 0.0000008 0.0000005
Erosion Ton/ha/year/IDR million 0.0000002 0.0000015 0.0000017 0.0000016 0.0000010
Land Degradation ha/year/IDR million 0.0000014 0.0000130 0.0000149 0.0000142 0.0000091
Mining Holes and Disposal ha/year/IDR million 0.0000016 0.0000151 0.0000174 0.0000165 0.0000107
Vehicle Density Unit/day/IDR million -0.0000030 0.0000285 0.0000328 0.0000312 0.0000201

Source: Calculated from Multiplier Matrix of SAM of South Kalimantan 2004

Note: EnvS = Environmental Scenario

Table 14. Environmental Impacts of Small-scale Coal Mining for Different Simulation Scenarios

Small-scale Coal Mining Unit of measurement EnvS1 EnvS2 EnvS3 EnvS4 EnvS5
Dust Concentration g/m3/IDR million -0.0000058 0.0000176 0.0000183 0.0000187 0.0000130
Noise dBA/IDR million -0.0000001 0.0000002 0.0000002 0.0000003 0.0000002
Erosion ton/ha/year/IDR million 0.0000002 0.0000005 0.0000005 0.0000005 0.0000003
Land Degradation ha/year/IDR million 0.0000013 0.0000040 0.0000042 0.0000043 0.0000030
Mining Hole and Disposal ha/year/IDR million 0.0000016 0.0000047 0.0000049 0.0000050 0.0000035
Vehicle Density unit/day/IDR million -0.0000029 0.0000089 0.0000092 0.0000094 0.0000066

Source: Calculated from Multiplier Matrix of SAM of South Kalimantan 2004

34
 Scenario 3, however, unlike in the case of large-scale mining, has the largest
multiplier only for erosion, and even this value is the same as for Scenarios 2 and 4. The
higher multiplier for small-scale coal mining is found in Scenario 4. This also means that
when applying Scenario 3, which is economically the best policy, small-scale coal mining
will give better results in terms of environmental impacts than large-scale operations.

6.0 CONCLUSIONS AND POLICY IMPLICATIONS

Of the five hypothetical policies whose effects we simulated, two stand out.
Scenario 3 (redistributing royalties and other revenues to lower income families in the
region), is economically the most favourable strategy. But it results in increased
environmental destruction. Scenario 1 (regulation of small-scale miners) produces the
largest favourable environmental impacts for all indicators but has some negative
economic effects. Thus, an initial analysis does not reveal a win-win solution but
rather a trade-off between an economy-friendly policy and an environmentally-friendly
one.
However, the social accounting matrix allows us to look in more detail at these
impacts. After all, it is not only the direction of the impacts but their magnitude that
matters. On the whole, the negative impacts of Scenario 1 are relatively mild and may be
an acceptable price to pay for significantly improved environmental performance.
Although coal mining dominates the economy of South Kalimantan in terms of
value added and output, this sector, together with other mining activities, absorbs only
2% of the working population. The contraction of the industry that Scenario 1 would
produce will affect a very small number of workers. In addition, the analysis shows that
the higher the household income, the higher the multiplier from coal mining. (I.e. coal
mining generates more income for the higher income households.) So the households
most affected by the contraction would be the relatively rich ones.

Coal mining produces little value added per unit of output, compared to other
activities in the province. Furthermore, Table 5 shows that, although Scenario 3 gives the
highest value added multiplier for labor, capital and total, in a comparison between labor
and capital, Scenario 1 gives better results. This Scenarios contraction of coal output
affects the value added of capital more than labor. As in the case of output, the poor are
less affected than the rich. The reverse is true for Scenario 3, which would increase value
added, but more for capital than for labor, thus exacerbating income inequality.

An assessment of these policies effects on income distribution yields similar

results (Table 4). The total multiplier effect in terms of income decrease for the poor is
0.002 + 0.012 = 0.014. The total income decrease for the rich (large landowning farmers,
high income and very high income non- farmers) is 0.009 + 0.015 + 0.016 = 0.040. The
decrease in income for poor households is less than that experienced by the rich.

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 In the real world, win-win policies are scarce. More often we must be willing to
make hard tradeoffs between desirable but incompatible outcomes. Of the policies
assessed, Scenario 1 (regulation of small scale mining) seems preferable. It produces the
best environmental performance of the five options investigated. It does have economic
costs but these would be borne by those most able to afford them. And in the long run,
the province may able to attract investment into new activities, ones that provide healthier
and less dangerous jobs. Implementation of this policy could be a first step in that
direction.

36
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 APPENDIX 1. MIXED MULTIPLIER FORMULA

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