Jakarta – Indonesia's economy has been given a real boost by recent promises of financial reform. But a controversial ruling barring foreign investors from the country's struggling power sector could short circuit efforts to pull in vital overseas cash.

The decision by Indonesia's top court to scrap legislation opening up the electricity industry to international investment has alarmed experts who warn that the move will also do little to alleviate chronic power shortages.

Since new President Susilo Bambang Yudhoyono took office in October, pledging to stamp out graft and cut red tape to attract the massive capital investment needed to revive his country, the money has started to trickle in.

Then last week, a court ruled that a law passed in 2002 to promote efficiency and full competition in the power sector violates the Constitution because electricity is a public commodity that must remain under state control.

The decision was seen by analysts as a setback, not only for Dr Yudhoyono's grand plan, but also for efforts to drastically crank up power output in Indonesia as rising demand leads to more and more blackouts across the country.

Despite vast resources of oil, natural gas and geo-thermal energy, Indonesia's inefficient and graft-ridden state power company PLN is unable to meet the electricity demands of the huge archipelago's 214 million people.

Earlier this month, PLN president Eddie Widiono said the company needed to raise US$30 billion (S$49 billion) over the next 10 years to increase its generating capacity by a further 20,000 megawatts.

Also, Tempo weekly magazine said that since 1998, there has been no new electricity supply created on the islands of Java and Bali – home to more than half the country's people – to add to the current capacity of 18,000 megawatts.

Peak demand already exceeds 14,000 megawatts, with reserves often below 25 per cent, while areas outside Java and Bali have been hit by frequent blackouts.

The court's ruling is 'unfortunate and has potentially important consequences, most immediately for the coming infrastructure summit,' said a former World Bank expert. He was referring to a scheduled January meeting in Jakarta to be attended by business executives seeking investment opportunities in the infrastructure sector.

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 Constitutional Court ruled that competition was not always efficient and may not benefit the people. "It is not enough for the government to control and supervise, it must also own and manage," the court said, adding that the private sector could still take a supporting role.

Mr Luluk Sumiarso, the secretary-general of Indonesia's energy ministry, said he hoped the ruling, which will prompt the drafting of a new electricity law, would not close the sector entirely to overseas interests.

He said the government was working to allay fears from prospective investors. "Of course there was initial doubt among would-be investors but we will overcome this doubt," Mr Sumiarso said. "We will formulate regulations to allow the private sector to participate and at the same time we are drafting a new law, taking into account the Constitution."