Kutai Barat faces many challenges in the years ahead because it is the least developed region originating from Kutai district. Before the original district of Kutai was divided into three districts, it was the richest region in the province of East Kalimantan. Most of this income came from the district’s natural resource base. In fact, Kutai has a long history of natural resource use and extraction. The modern founder of the Kutai sultanate (Sultan Mohammad Sulaiman, 1845–99) had a great talent in commercial activities, leasing out Kutai’s lands for coal exploitation and plantations (Magenda 1991). Revenues also came from taxes levied on forest products transported down the Makaham River and royalties received from coal and plantation activities. Shortly after coal and oil were discovered in the sultanate in the late 1890s, a new sultan (Sultan Alimuddin, 1902–20) had to sign a treaty with the Dutch relinquishing certain rights over taxes. The treaty also stipulated that the Ulu Mahakam area, now known as Kutai Barat, would be governed by the Dutch. With the acquisition of the Ulu Mahakam area, the Dutch were able to control traffic along the Mahakam River and restrict the activities of the Kutai sultanate. With the imposition of these restrictions, the sultan received an annual salary of 25 000 guilders in addition to 50 per cent of oil royalties and 10 per cent of forest royalties (Magenda 1991).

During the timber boom of the late 1960s and 1970s,^[10] the Kutai government again benefited from the exploitation of forest resources in the Mahakam region (Manning 1971; Magenda 1991). While the central government profited the most from extensive logging via taxes obtained from the HPH licence fee, a 10 per cent export tax, and a forest product royalty, the Kutai government still received a great deal from their own state-run timber companies (Perusahaan Daerah); as well as from taxes from timber and log pond retribution (Magenda 1991).

Before Kutai was divided into three districts, the district had a regional income of approximately Rp184 billion (or approximately US$18.4 million)^[11] in 1997/98. This was more than double the income of other districts in the region. For instance, Pasir only had a regional income of approximately Rp68.7 billion, while Berau had a regional income of Rp55.2 billion (Kalimantan Timur 1998a). Since oil and gas were found in Kutai, the district's economy has been largely dominated by the oil and natural gas industry^[12] (42.24 per cent), followed by the forestry and agriculture sector (25.24 per cent), the processing industry sector (13.72 per cent), the building sector (8.55 per cent), and the trade, hotel and restaurant sector (8.25 per cent) (Bupati Kutai 2000).

In light of the above, a considerable percentage of district revenue was generated from taxes obtained from the mining and forestry sectors in the years 1997/98 (Kalimantan Timur 1998a). For instance, Kutai received approximately Rp83.9 billion from the mining sector and Rp26.7 billion from the forestry sector. Again this was more than other districts received over the same period of time: Pasir only received approximately Rp4.6 billion from the forestry sector and Rp12.9 billion from the mining sector in the year 1997/98. Pasir did, however, generate more revenue (Rp1.4 billion) from the plantation sector than Kutai because the majority of the East Kalimantan’s plantation estates fell within this district (ibid.).

After Kutai was divided, the provincial government expected Kutai Barat to generate the least revenue in the area because it was the least developed and most isolated region in the Kutai area. A paper released by the Bupati of Kutai Kartanegara shortly after Kutai was divided into three districts projected that Kutai Barat would generate just US$2.1 million in revenue in 2000, while Kutai Kartanegara and Kutai Timur were expected to generate US$5.6 million and US$6.2 million, respectively (Bupati Kutai 2000). This clearly highlighted the financial problems Kutai Barat was expected to experience in the new era of regional autonomy. The district government was also concerned that regionally generated revenues would not be sufficient to establish a new district, capital city and the entire associated infrastructure (personal communication, head of the Regional Development Planning Agency, Kutai Barat branch, July 2000).

Realising this, the governments of Kutai Kartanegara and Kutai Timur pledged to provide Kutai Barat with Rp3 billion in order to finance some of the infrastructure needed to establish a new district. The funds were to be used to establish the necessary government offices as well as the houses for the Bupati, Assistant Bupati, the District Secretary, and heads of district government agencies (Kaltim Post,16 November 1999).

The local government of Kutai Barat also began to make plans to be fiscally independent. The Bupati was keen to attract new investment to the region and to generate regional income from the district’s natural resource base. He was also supportive of existing industries such as PT Kelian Equatorial Mining (PT KEM)^[13] — a large open-cut gold mine located in the sub-district of Long Iram, which had long attracted criticism from national and international NGOs.^[14]

PT KEM is one of the largest gold plants constructed in the world and it had the potential to generate substantial revenue for the district. Between 1995 and 2000, the company had paid a total of Rp85 billion to the central government and Rp144 billion to the East Kalimantan provincial government.^[15]Most of this revenue came from corporate income tax and land rent tax. Regional autonomy gave the Kutai Barat government the opportunity to receive a large proportion of these taxes. In fact the Bupati had already had several discussions with the mine about how taxes would be distributed between the Kutai Barat government and the provincial and central governments (personal communication, PT KEM management, July 2000). Nevertheless, problems existed because NGOs and some local communities did not support the mine’s activities. Revenue generated from the mine was also limited by the fact that the company planned to close down its operations in 2004. The planned closure was causing local government officials and communities much concern as the region only had the potential to benefit from tax payments for two to three years. The district government would then be left with the consequences of the company closing down, unemployment and environmental damage^[16] caused by mining activities.