This study assesses the prospects for increasing private sector participation in the Indonesian urban water supply sector. The analysis concentrates on capital investments and particularly on the "build, operate, and transfer" (BOT) model. Issues arising in three policy areas are addressed: financial, legal, and public policy and administration. The study found two main types of private investment in water supply in Indonesia: supply-led projects and "enclave" projects. The former are initiated by firms with a vested interest in water supply projects from a management, design, or construction base, e.g., a bulk water supply firm. The latter feature water as part of a larger development e.g., a tourist development, industrial estate, or a private housing complex. However, private initiatives in water supply have been limited, with most international financing resources drawn to larger-scale projects, of both the supply-led and enclave types. Domestic financing appears primarily attracted to enclave projects. Lessons learned from the transport, electricity, and other sectors indicate that proactive initiatives by the GOI are required to stimulate private sector activity in the urban water supply sector. Basic requirements are for a favorable policy and regulatory framework for private sector activity. More specific needs include an unambiguous legal framework, provision of guarantees for securing long-term financing, and satisfactory resolution of questions regarding ownership of physical assets and public or private control over changes in tariff levels and appeals on these charges. To date, the most successful example of private capital investment seems to be in telecommunications.