A court decision to scrap legislation that opened up Indonesia’s electricity sector to foreign investors could hamper development, say observers who warn the move will also do little to alleviate chronic power shortages. Following last October’s election of President Susilo Bambang Yudhoyono on a pledge to stamp out corruption and cut red tape, desperately needed capital investment had begun to arrive. However, a law passed in 2002 to promote efficiency and full competition in the energy sector has been ruled in violation of the constitution on the grounds that electricity is a public commodity that must remain under state control.

The Constitutional Court said the Electricity Law went against Article 33 of the 1945 Constitution, which stipulates that branches of production that are important to the state must be controlled by the state. Business leaders argue that the government could still control important commodities without having majority stakes in the companies concerned through regulatory bodies.

Under the annulled law, PLN would have lost its power distribution monopoly within five years, after which private companies would be able to sell electricity directly to consumers. The ruling will now prompt the drafting of a new electricity law while the government has begun a damage control exercise to allay fears from prospective investors.

Despite ample resources of oil, gas and geothermal energy, Indonesia is often unable to meet electricity demand with state-owned PLN floundering in its bid to boost capacity. PLN needs to raise $30 billion over the next decade to add another 20 GW of new capacity.