The analyses carried out as part of the PolyUrbanWater’s baseline assessment in the urban area of Sahirajo in Sleman/Indonesia show the special challenges associated with a water supply system that is still predominantly rural in nature but is now becoming more urban. A large proportion of households in this city are supplied with raw water from private wells through largely uncontrolled extraction. This situation is not unique to Sahirajo but is characteristic of Indonesia on the whole where the low level of water supply from the water utility is a fundamental challenge to urban development and sustainable water management. With urbanization now gaining momentum in Sahirjao, there is an associated increased water consumption of new apartment blocks, hotels and commercial facilities, and this is exacerbating the risk of increasing groundwater extraction having a detrimental impact on the renewable nature of groundwater resources leading to a drop in overall groundwater levels. This trend is already being observed in the vicinity of new buildings and will need to be counteracted primarily by improved water supply through the responsible local authority. However, this authority faces a complexity of institutional challenges, particularly with regard to the financial sustainability of an efficient water supply for which regulatory enforcement and nudges must persuade water consumers to connect to a tariff-based central water supply system.