Estimating a poverty line: An application to free basic municipal services in South Africa

Abstract

One of the key interventions aimed at improving the welfare of South African households has been local government's provision of a package of free basic municipal services to poor households. It is, however, not completely clear how different municipalities identify households that are eligible for these services. Evidence suggests that many municipalities currently provide services to all households with a monthly income of less than R1500 a month. This ‘free basic services poverty line’ is, however, low in comparison with a number of unofficial poverty lines used by policymakers and researchers in South Africa. This paper considers the impact of increasing the value of the free basic services line, in terms of the additional share and number of households eligible for support and the additional financial cost. We find that urban municipalities would face the steepest increases in their free basic services budgets with any potential increase in the free basic services poverty line.

Keywords:

• free basic services
• poverty line
• municipal services
• South Africa

1. Introduction

The eradication of poverty is one of the key priorities for the government and various other sectors of South African society. As part of this attempt, government has instituted a range of policy interventions designed to improve the welfare of households. These include significant increases in the delivery of services – including formal dwellings, piped water, sanitation and electricity. Indeed, data for the period 1993–2005 indicates significant increases in the delivery of all these public assets to poor households. Paralleling these deliverables has been a local government focus on providing poor households with a basic package of free municipal services, currently consisting of free basic water (6 kl per household per month), free basic electricity (5 kWh per household per month), and free basic sanitation and refuse removal.

However, one of the critical areas which remain somewhat opaque is how a municipality defines a poor household. At present, households are required to complete an application form so their status as an indigent household can be assessed. Implicit in this procedure is an assumption that poor households can be separated from non-poor households. Current evidence indicates that households with an income below R1500 per month are eligible for the Free Basic Services (FBS) package. This is effectively a decision as to where to set a household poverty line for South Africa. Put differently, there is an in-built assumption that the R1500 ‘FBS poverty line’ is a suitable and generally acceptable poverty line and that households below that line are deemed to be poor and eligible for FBS.

This paper is organised as follows. First we outline the standard, internationally acceptable methodologies used to derive a poverty line. Second, we present a number of unofficial poverty lines that have been used by researchers and policymakers since there is no official poverty line for South Africa sanctioned by the government. Third, we compare the FBS poverty line against the eligibility tests for other indigency-linked services offered by government, focusing in particular on the various social grants. Finally, we model, in a very basic manner, the potential number of households eligible for FBS when assuming different values for an FBS poverty line and provide some estimates of the possible financial implication of alternative lines.

2. Estimating a poverty line: Approaches and some key issues

There are three basic approaches in estimating poverty lines, absolute, relative and subjective, each of which views poverty, the experience of poverty and its most appropriate quantification differently (Ravallion, 1992). The absolute approach to poverty measurement constructs a line that evaluates in monetary terms the goods and services required to meet a set of absolute minimum living standards across various basic needs of individuals and households. The value of an absolute poverty line is fixed in real terms, with the only changes to the monetary value being adjustments to take inflation into account. By contrast, a relative poverty line is not anchored on minimum living standards or basic needs. Instead, it takes into account a given society's characteristics and attempts to identify those individuals whose standard of living is unacceptably low relative to the rest of society. Such a poverty line begins to measure the ability of households or individuals to engage adequately in their society and is often defined as a proportion of the mean or median income or expenditure. Finally, the subjective approach to poverty measurement relies on individuals' opinions as to what constitutes the minimum income or expenditure required by a household.

How to estimate a poverty line is not the only issue to consider when measuring poverty. Much has been written on the choice between expenditure and income as the optimal measure of welfare (see for example Chaudhuri & Ravallion, 1994; Deaton, 1997), but ultimately the choice is driven by the availability and quality of data in the particular country. A second issue is household size and structure. It is reasonable to expect that larger households have some level of ‘cost advantage’ over smaller households. In other words, there are economies of scale in consumption to the extent that a large household can attain the same level of welfare on a lower per capita expenditure than a small one. In addition, age and gender may affect household members' relative consumption levels. Infants and children, for example, consume substantially less than adults do. The implication for poverty measurement is that a household comprising four adults is arguably worse off than a household consisting of one adult and three small children even though the two households have the same level of expenditure. To account for this, equivalence scales are used, assigning adult equivalent values to the children in a household (e.g. a child equalling 0.75 or 0.5 adults) (Oosthuizen, 2008).

Theoretically, these two issues – the use of expenditure versus income data, and adjustments for household size and structure – are very important for policy analysis since neglecting to correct for them may result in misidentification of households and individuals as poor when they are non-poor and vice versa. However, in terms of poverty profiling, these issues may or may not be very serious and therefore there may be insufficient justification for the computational complexity that these adjustments entail. Woolard and Leibbrandt (2006) investigate the impact that varying assumptions on equivalence scales (a child equalling 1.0, 0.75 or 0.5 adults) have on the incidence of poverty for various groups and find that the choice of equivalence scale makes little difference to the ultimate identification of vulnerable households and the final poverty estimates derived.

3. Poverty lines for South Africa

Currently no official poverty line exists for South Africa, so policymakers, researchers and other institutions use a range of unofficial poverty lines to measure the incidence, depth and severity of poverty in the country. A selection of these lines is presented in Table 1, in 2008 prices (see Table A1 in Appendix A for the original poverty line values). Where the original poverty line is per capita, a household poverty line is estimated by multiplying the per capita value by the average household size (3.8 people) as recorded in the 2005/2006 Income and Expenditure Survey (Stats SA, 2008). The fourth column of Table 1 provides an indication of how the values of the various household poverty lines compare with the R1500 FBS poverty line.

Table 1: Comparison of selected poverty lines for South Africa (in 2008 prices)

Poverty line	Per capita poverty line 2008 prices	Household poverty line (based on average HH size of 3.8)	Share of FBS poverty line (zm) of R1500	Notes	Source
MLL (1993)	R429.28	R1 631.27	109%	Calculated using the 1993 values	Woolard & Leibbrandt (2001)
SLL (1993)	R575.42	R2 186.61	146%	Calculated using the 1993 values	Woolard & Leibbrandt (2001)
MLL	R2 213.89	R2 213.89	148%	MLL for a household of four people	Landman (2003)
MLL	R2 222.61	R2 222.61	148%	Based on the MLL for an average family in a metropolitan area	Martins (2003)
$1 a day	R139.20	R528.96	35%	$1 a day	Hoogeveen & Özler (2006)
$2 a day	R278.40	R1 057.92	71%	$2 a day	Hoogeveen & Özler (2006)
R322/Cost of basic needs	R515.20	R1 957.76	131%	Cost of basic needs approach – lower bound line	Hoogeveen & Özler (2006)
R593/Cost of basic needs	R948.80	R3 605.44	240%	Cost of basic needs approach – upper bound line	Hoogeveen & Özler (2006)
Sources: Woolard & Leibbrandt (2001), Landman (2003), Martins (2003), Hoogeveen & Özler (2006); own calculations.
Note: HH = household.

The Minimum Living Level (MLL) and Subsistence Living Level (SLL) are derived by the Bureau for Market Research in Pretoria (BMR, 2002).1 Both are estimated using data from BMR's in-house surveys of South Africa's major cities and selected urban areas. Herein lies a major drawback of these poverty lines – they exclude the rural areas of South Africa, where a disproportionate share of South Africa's poor, and in particular the ultra-poor, are located. A second worrying aspect of these poverty line estimates is that they are race-based and continue to present the MLL and SLL estimates according to, for example, a ‘black family of six in a township’. Apart from being ethically questionable, this approach is highly problematic in empirical terms. The point of departure for deriving a poverty line of any form is to examine the entire distribution of income or consumption, irrespective of social or racial category.

It should be noted that the various annual estimates for the MLL and the SLL are not readily available and we have to rely on secondary sources for estimates of these lines. When the values of the MLL and SLL from 1993 (Woolard & Leibbrandt, 2001) are inflated using the Consumer Price Index, household poverty lines of R1631 and R2186 are derived. These values correspond to 109% and 146% respectively of the FBS poverty line value.

More recent estimates of the MLL sourced from Landman (2003) and Martins (2003) yield higher household poverty lines for 2008. Landman (2003) uses a household poverty line for a household of four people. Adjusted for the impact of inflation, this MLL is approximately R2214 a month. Martins (2003) presents the MLL for an ‘average’ family in a metropolitan area without specifying the size of such a household. When this MLL is adjusted to 2008 prices, the result is an MLL of R2223 a month, which compares well to the Landman estimate. Both these MLLs are almost one and a half times the value of the FBS line.

One-dollar-a-day and two-dollar-a-day poverty lines are often used, especially in cases where analysts wish to make international comparisons. The one-dollar-a-day poverty line (based on its value in 2000 and updated to take into account the impact of inflation) yields a very low household poverty line of R529 in 2008. This is only about a third of the value of the FBS poverty line. The two-dollar-a-day line (adjusted for inflation) yields a household poverty line of R1058 in 2008, equivalent to about two thirds of the FBS line.

Hoogeveen and Özler (2006) estimate two poverty lines using the Cost of Basic Needs Approach. The point of departure is the daily energy requirement of 2261 kilocalories, as recommended by the South African Medical Research Council, which is used to estimate the food component of the lines. The non-food component is estimated on the basis of expenditure on essential non-food items (Stats SA & National Treasury, 2007). As a result, two poverty lines are estimated, a lower bound line of R322 per capita in 2000 prices (R515.29 in 2008 prices) and an upper bound line of R593 per capita in 2000 prices (R948.80 in 2008 prices). Adjusted for inflation and average household size, the R322 line yields a household poverty line of just less than R2000 in 2008. This is almost a third higher than the FBS poverty line. The R593 line yields R3605.44 per household in 2008, which is almost two and a half times the value of the FBS line.

Ultimately the range of possible poverty lines for South Africa, with the exception of the $1 and $2 a day lines, suggests that the FBS poverty line is comparatively low. Noting that the $1 and $2 a day lines are internationally benchmarked lines (rather than domestic, in-country poverty lines), it is evident that the FBS poverty line is set significantly below any feasible poverty line for South Africa.

4. FBS-comparable indigent support within government

The first decade of democracy has been characterised by a rapid widening and deepening of the state social security system. Social grants are targeted at the most vulnerable members of South African society, particularly the disabled, the aged and children. It has been widely accepted that the government's social security scheme remains its most potent poverty reduction tool, and in 2008 it announced further broadening of the social security net as part of its anti-poverty strategy. This included gradually equalising the qualifying age for the Old Age Pension (OAP) to 60 for both men and women by the 2010/2011 financial year and extending the eligibility for the Child Support Grant (CSG) to the age of 15 by 2009 (National Treasury, 2008:92).

The huge expansion of the post-apartheid social security system is best illustrated by the increase in the number of grant beneficiaries since 1997. In 1997, just under 3 million individuals received social grants, with more than half being beneficiaries of the OAP. By April 2008, the total number of grant beneficiaries had increased to almost 12.4 million, a growth rate of more than 300%. In February 2009, the National Treasury projected that by April 2009 the number of beneficiaries would have increased by a further 1 million individuals to 13.4 million (National Treasury, 2008:95) (see Table 2).

Table 2: Social grants beneficiary numbers by type of grant: 1997, 2008 and 2009

Type of grant	August 1997	April 2008	April 2009	% of total, 2009
Old Age Grant	1 742 253	2 218 993	2 324 615	17.37
War Veterans Grant	11 495	1 963	1 649	0.01
Disability Grant	754 830	1 413 263	1 404 884	10.49
Grant in Aid	9 720	0	0	0.00
Foster Care Grant	42 917	443 191	487 510	3.64
Care Dependency Grant	3 815	101 836	105 909	0.79
Child Support Grant	400 599	8 195 524	9 061 711	67.69
Total	2 965 629	12 374 770	13 386 278	100.00
Sources: Pauw & Mncube (2007); calculated using data from National Treasury (2008, 2009).
Notes: The estimated number of beneficiaries for April 2009 is a projection provided by the National Treasury in the 2009 Budget Review. The Child Support Grant was introduced in 1998, the 1997 beneficiaries shown in the table therefore correspond to the Child Maintenance Grant.

While the CSG is the most significant grant in terms of the number of beneficiaries, the monetary values of the OAP and the Disability Grant (DG) are the largest. On 1 April 2009, the value of the OAP and the DG increased to R1010, and that of the CSG to R240 (National Treasury, 2009:91).

All social grants are means-tested, i.e. there is some household income threshold above which the grant will not be paid out. These thresholds differ for different grants. The threshold for adult grants depends on whether a single person or married couple lives in the household, with the threshold for a married couple generally being double that for a single person (SASSA, 2009). An asset threshold is also applicable.

In May 2008, the threshold for the CSG increased to R2100 a month for rural households and R2200 a month for urban households. The income threshold for the OAP, DG and War Veterans Grant increased to R2244 a month for single people and R4488 a month for married couples (Moodley-Isaacs, 2008; SASSA, 2009). At the time of writing, the income thresholds for adult grants were R2426 a month for a single person and R4852 for a married couple, and the household income threshold for the CSG was R2400 a month for both urban and rural areas (SASSA, 2009).

Table 3 shows the income thresholds used in the means tests for the CSG and the OAP in relation to the FBS poverty line of R1500 a month. In 2008, both the rural and urban income thresholds used to determine eligibility for the CSG were almost one and half times the value of the FBS poverty line. The income threshold for a single person to qualify for an OAP is almost exactly one and a half times the household income level taken into account for the provision of free basic services, while the income threshold used to determine whether two married people qualify for OAPs is almost three times the rand value of the FBS poverty line.

Table 3: Comparison of income thresholds for social grants and FBS poverty line, 2008

	Rand value	Share of FBS poverty line
CSG threshold – rural	R2 100	140%
CSG threshold – urban	R2 200	147%
OAP threshold – single person	R2 244	150%
OAP threshold – married couple	R4 488	299%
Sources: SASSA (2009), own calculations.

To summarise then, all thresholds used in the means tests to determine eligibility for government support in the form of social grants are considerably higher than the FBS poverty line, ranging from about 1.4 times to three times the FBS poverty line in 2008 prices. This preliminary comparison suggests that more households can be considered indigent or poor when using the means test income thresholds than when using the FBS poverty line.

5. Free basic services: Alternative estimates of coverage in 2008

This section of the paper models, in a very basic manner, the potential number of households eligible for free basic services, assuming different potential values of an FBS poverty line, including the current line of R1500 per household per month. The following six potential FBS lines are considered:

•	The 2008 FBS poverty line of R1500 a month.
•	Half the value of the 2008 FBS poverty line of R1500 a month, i.e. R750 a month.
•	An income level equal to two OAPs (R960 in 2008), which some municipalities use as threshold for indigent support (see Erasibo, 2005; PDG & Isandla Institute, 2009). In 2008, this amounted to R1920 a month or 1.28 times the FBS poverty line.
•	The income threshold used to evaluate an urban household's eligibility for the CSG. In 2008 this was R2200 a month (or about one and a half times the value of the FBS line).
•	Double the value of the 2008 FBS poverty line of R1500 a month, i.e. R3000 a month.
•	The income threshold used to evaluate eligibility for an OAP. This is R4488 a month for a household consisting of a married couple, almost three times the FBS poverty line.

All these poverty lines are in 2008 prices and the potential number of eligible households is estimated using total household expenditure from the 2005/06 IES (Income and Expenditure Survey), adjusted to 2008 prices.2 It should be noted that the number of potentially eligible households, however, is based on the estimated total number of households in South Africa (12 457 610) for 2005/06. The results are therefore only indicative, as the models do not take into account any changes in the number of households or household expenditure between 2005/06 and 2008.

Table 4 presents the number and proportion of households eligible for free basic services when the above potential FBS lines are used. Taking the current ‘official’ FBS poverty line of R1500 a month as the point of departure, 29% or 3.61 million of all South African households qualify for free basic services. The rural/urban divide is clearly evident, with almost 45% of rural households and only approximately 21% of urban households considered indigent according to this line. In terms of the absolute number of households, about 1.93 million rural households live on less than R1500 a month, while 1.68 million urban households are considered poor. This means that 54% of poor households live in rural areas, while 46% live in urban areas (see Table A2 in Appendix A for the share breakdown of poor households according to location and province for the different poverty lines).

Table 4: Number and proportion of households eligible for free basic services using six different potential FBS lines

	R750/month		R1500/month		2 x OAP (R1920)		CSG threshold (R2200)		R3000/month		OAP threshold (R4488)
	No. of HH	%	No. of HH	%	No. of HH	%	No. of HH	%	No. of HH	%	No. of HH	%
South Africa	998 302	8.01	3 612 222	29.00	4 980 183	39.98	5 726 041	45.96	7 250 063	58.2	8 710 547	69.92
Urban	433 228	5.34	1 678 120	20.69	2 423 702	29.88	2 847 914	35.11	3 809 989	46.96	4 842 302	59.69
Rural	565 074	13.01	1 934 102	44.51	2 556 480	58.84	2 878 127	66.24	3 440 074	79.17	3 868 245	89.03
Western Cape	34 386	2.70	201 007	15.81	288 862	22.72	349 607	27.50	488 122	38.39	623 985	49.07
Eastern Cape	216 362	12.55	674 379	39.12	863 934	50.12	971 233	56.34	1 170 740	67.92	1 343 068	77.91
Northern Cape	26 069	8.89	98 010	33.42	133 992	45.68	151 990	51.82	191 145	65.17	223 363	76.16
Free State	64 845	7.21	275 149	30.60	373 974	41.59	419 844	46.69	531 019	59.06	651 526	72.46
KwaZulu-Natal	171 393	7.74	689 934	31.16	953 316	43.05	1 092 057	49.32	1 397 136	63.09	1 665 313	75.20
North West	93 649	10.32	298 861	32.93	421 890	46.49	471 136	51.92	572 362	63.07	676 019	74.50
Gauteng	147 549	4.97	544 542	18.35	829 213	27.94	993 377	33.47	1 337 669	45.07	1 735 644	58.48
Mpumalanga	104 843	11.92	305 333	34.71	418 243	47.54	473 239	53.80	583 955	66.38	682 399	77.57
Limpopo	139 204	10.70	525 008	40.37	696 758	53.58	803 557	61.79	977 916	75.20	1 109 231	85.29
Sources: Stats SA (2008), own calculations.
Notes: Households (HH) have been weighted using household weights based on the 2001 Census.

The provincial results show that the Western Cape and Gauteng are better off than the other provinces in terms of the share of households in these provinces spending less than R1500 a month. Only about 16% of Western Cape and 18% of Gauteng households qualify for free basic services. Limpopo is the poorest province, with more than 40% of households spending less than R1500 a month. The share of households living on less than R1500 a month varies from 31% to 39% in the remaining provinces. The picture looks slightly different when the absolute numbers of poor households in the provinces are considered. The largest absolute number of households living below the FBS poverty line is found in KwaZulu-Natal, with almost 700 000 households being poor according to this line. This province thus accounts for almost a fifth of indigent households in the country, according to this measure.

The smallest absolute number of poor households is found in the sparsely populated Northern Cape, with fewer than 100 000 households in this province qualifying for free basic services. It should be noted, however, that this corresponds to approximately a third of the households in this province.

If half the value of the current FBS poverty line (R750 per household per month) is used to identify households eligible for free basic services, the total number of poor households in South Africa declines to fewer than a million (8% of all households). The urban poverty rate at this line is only 5%, while the rural poverty rate is 13%. These rates correspond to 433 228 urban households and 565 074 rural households, respectively.

Less than 3% of households in the Western Cape and just less than 5% in Gauteng live on less than R750 a month. At this line, household poverty is highest in the Eastern Cape, at 12.6%. This province also accounts for the largest absolute number of poor households (216 362). In the North West, Mpumalanga and Limpopo, the household poverty rates are above 10% at this line. While only 7.7% of households in KwaZulu-Natal are poor according to this line, this corresponds to more than 170 000 households.

The second alternative poverty line that we consider here is R1920 a month, which is twice the value of the OAP in 2008. At this line the number of households qualifying for free basic services increases to just under 5 million or almost 40% of all South African households. Approximately 2.6 million (51%) of these households live in rural areas and 2.4 million (49%) in urban areas.

At the R1920 a month line, the largest absolute number of households that qualify for free basic services is found in KwaZulu-Natal, with 953 316 households or 43% of all households in the province living below this line. The poverty rate is highest in Limpopo, with almost 54% of households in the province being poor according to this line. This corresponds to just under 700 000 households. Again, the household poverty rate is lowest in the Western Cape (about 23%), with the absolute number of poor households smallest in the Northern Cape at 133 992.

In 2008, the income threshold used to determine eligibility for the CSG was R2200 a month per household in urban areas. According to our estimates, almost 46% of South African households or approximately 5.73 million households survive on less than that amount each month. The rural/urban split is almost fifty-fifty. The urban poverty rate, however, is only approximately 35%, while the rural poverty rate is 66%.

Using a R2200 a month poverty line, in KwaZulu-Natal more than a million households qualify for free basic services, almost half of all households in the province. At this line, the household poverty rate is highest in Limpopo, with almost 62% of households, just over 800 000, living on less than R2200 a month.

When a potential poverty line of R3000 is considered, twice the value of the current FBS line, 58.2% of all households in South Africa, just over 7.25 million, qualify for free basic services. While the rural household poverty rate remains considerably higher than the urban rate, at this line the absolute number of households qualifying for free services becomes higher in urban areas. Just over 3.8 million, or 47%, of urban households live on less than R3000 a month. In contrast, almost 80% of rural households, or 3.44 million, are considered poor when this line is used. In three provinces, the Eastern Cape, KwaZulu-Natal and Gauteng, more than a million households spend less than R3000 a month. The poverty rates are 68% for the Eastern Cape, 63% for KwaZulu-Natal and 45% for Gauteng. Limpopo remains the province with the highest poverty rate, with just over three quarters of households (approximately 980 000) living on less than R3000 a month.

The highest potential poverty line considered here is the income threshold used to test a married person's eligibility for the OAP. At this line of R4488 a month, almost 70% of South African households qualify for free basic services. This corresponds to 8.71 million households. While almost 90% of rural households and 60% of urban household are considered poor, there are almost a million more poor households in urban areas at this line. The highest absolute number of poor households is found in Gauteng (1.74 million), with the province accounting for almost a fifth of all poor households in the country. Again the household headcount rate is highest in Limpopo Province, with more than 85% of households spending less than R4488 a month.

One of the key implications of adjusting the value of the FBS line relates to the total cost to the state of providing the package of free basic services (see Table 5). For example, by reducing the qualifying income threshold to only R750 a month, the state would ‘save’ an amount equal to the cost of providing free basic services to approximately 2.61 million households.

Table 5: Number and share of households eligible for free basic services when using five different potential FBS lines compared with 2008 FBS poverty line of R1500

	R750–1500		R1500–1920		R1500–2200		R1500–3000		R1500–4488
	Change in no. of HH	% point change	Change in no. of HH	% point change	Change in no. of HH	% point change	Change in no. of HH	% point change	Change in no. of HH	% point change
South Africa	2 613 920	20.99	1 367 961	10.98	2 113 819	16.96	3 637 841	29.20	5 098 325	40.92
Urban	1 244 892	15.35	745 583	9.19	1 169 794	14.42	2 131 869	26.27	3 164 182	39.00
Rural	1 369 028	31.50	622 378	14.33	944 025	21.73	1 505 972	34.66	1 934 143	44.52
Western Cape	166 620	13.11	87 855	6.91	148 601	11.69	287 115	22.58	422 979	33.26
Eastern Cape	458 017	26.57	189 556	11.00	296 855	17.22	496 361	28.80	668 689	38.79
Northern Cape	71 941	24.53	35 982	12.26	53 979	18.40	93 135	31.75	125 353	42.74
Free State	210 303	23.39	98 825	10.99	144 696	16.09	255 871	28.46	376 378	41.86
KwaZulu-Natal	518 541	23.42	263 382	11.89	402 123	18.16	707 201	31.93	975 379	44.04
North West	205 212	22.61	123 029	13.56	172 275	18.99	273 501	30.14	377 158	41.57
Gauteng	396 993	13.38	284 671	9.59	448 835	15.12	793 127	26.72	1 191 101	40.13
Mpumalanga	200 490	22.79	112 910	12.83	167 906	19.09	278 622	31.67	377 066	42.86
Limpopo	385 804	29.67	171 751	13.21	278 550	21.42	452 908	34.83	584 223	44.92
Sources: Stats SA (2008), own calculations.
Notes: Households (HH) have been weighted using household weights based on the 2001 Census.

On the other hand, if the value of the FBS poverty line is increased to R1920 a month, an additional 1.37 million households qualify for support in the form of free basic water, sanitation, electricity and refuse removal. If the FBS line is set at R2200 a month, the value of the income threshold used in the means test in urban areas for the CSG, the proportion of households qualifying for free basic services is almost 17 percentage points higher. This means that 2.11 million additional households would qualify for support.

Doubling the value of the FBS line to R3000 per household per month means that 3.64 million more households would qualify for free basic services than at present. Increasing the line further to R4488, the value of the income threshold for the OAP means test for a married person, results in more than 5 million additional households qualifying for support.

For all potential FBS poverty lines, the share of households that are poor is larger in rural than in urban areas. At the highest alternative value of the FBS line, R4488 a month, the proportion of rural households living below that line is almost exactly double the proportion of rural households living below the current R1500 a month FBS poverty line. This means that an additional 1.93 million rural households qualify for free basic services.

Changing the level of the FBS poverty line has a smaller impact on the share of urban households eligible for free basic services. These results, however, mask the fact that, because more South African households live in urban areas, each consecutive increase in the value of the potential FBS poverty line has a larger impact in these areas when the additional absolute numbers of households that qualify for free basic services is considered.

A reduction of the current value of the FBS line to R750 a month would lead to a 15 percentage point reduction in the proportion of urban households qualifying for free basic services, from 20.7 to 5.3%. In addition, the absolute number of poor households declines by 1.24 million.

If the FBS line is adjusted to the highest value of R4488 a month, the income threshold used to test a married person's eligibility for an OAP, urban municipalities will have to provide free services to an additional 3.16 million households. This represents an increase of 39 percentage points in the proportion of urban households qualifying for support.

The financial implications of the above are clear. Increasing the value of the FBS poverty line would have a much larger impact on urban than rural municipalities. If the FBS poverty line is increased to the highest potential amount suggested here, R4488 a month, about 1.93 million additional rural households qualify for free basic services, and more than 3 million additional urban households.

The results for the provinces are also presented in Table 5. If an increase of the FBS poverty line to R4488 a month is considered, the share of poor households increases the most in Limpopo, by almost 45 percentage points. This corresponds to 584 223 additional households. The largest impact in terms of the additional absolute number of poor households is found in Gauteng, where an increase in the FBS poverty line to R4488 a month would result in 1.2 million additional households qualifying for free basic services.

6. Fiscal implications of alternative estimates of a FBS poverty line

As discussed above, increasing the number of households eligible for free basic services has significant fiscal implications. In this section we offer a very basic illustration of the financial impact of increasing the FBS poverty line.

Below, we provide estimates of the differences in the total cost to the state, based on the number of households eligible for free basic services when different possible values of the FBS poverty line are used. These estimates have been calculated using the cost of providing the complete FBS package to households living in the City of Cape Town, according to estimates for the 2008/09 financial year published in the City's budget documentation. To arrive at the total cost per household of providing free basic services, the cost of providing each service has been divided by the number of beneficiary households to provide an estimate of the unit cost of providing each specific service. The total cost per household is then simply the sum of the unit costs for each of the basic services (see Table A3 in Appendix A for the actual estimates). Table A4 in Appendix A shows estimates of the total cost to the state of providing the FBS package when the alternative poverty lines are used. These estimates are again given for South Africa as a whole, as well as for urban and rural areas and for the nine provinces. It should be noted that the cost of providing free basic services differs enormously between municipalities, and the exercise here is just a very rudimentary illustration of the potential financial impact of adjusting the value of the FBS poverty line.

Tables 6 and 7 summarise the additional costs of providing free basic services when higher poverty lines are used (or, in the case of the R750/month line, the potential ‘savings’ to the state). The estimates suggest that reducing the FBS poverty line to R750 a month per household would result in a ‘saving’ of more than R3 billion at the aggregate level. On the other hand, if the FBS poverty line is increased to R4488 a month, municipalities would have to budget for an additional R6 billion to provide services to eligible households. This corresponds to an increase of more than 140% in the current budget (with the current budget being the total cost of providing free basic services when the R1500 FBS line is used to identify eligible households).

Table 6: Additional cost of using five different potential FBS lines instead of the 2008 FBS line of R1500

	R750/month	2x OAP (R1920)	CSG threshold (R2200)	R3000/month	OAP threshold (R4488)
South Africa	−R3 118 406 620	R1 631 977 354	R2 521 785 948	R4 339 944 194	R6 082 302 083
Urban	−R1 485 156 514	R889 479 923	R1 395 563 884	R2 543 319 956	R3 774 869 484
Rural	−R1 633 250 165	R742 496 954	R1 126 221 944	R1 796 624 357	R2 307 432 599
Western Cape	−R198 777 815	R104 810 931	R177 280 826	R342 528 469	R504 613 362
Eastern Cape	−R546 413 875	R226 139 831	R354 147 538	R592 159 150	R797 746 454
Northern Cape	−R85 825 386	R42 926 013	R64 397 341	R111 110 329	R149 545 723
Free State	−R250 891 837	R117 898 619	R172 621 743	R305 253 566	R449 018 668
KwaZulu-Natal	−R618 619 723	R314 214 392	R479 732 751	R843 691 044	R1 163 626 562
North West	−R244 818 000	R146 773 955	R205 523 956	R326 286 097	R449 949 375
Gauteng	−R473 612 184	R339 612 563	R535 460 286	R946 200 690	R1 420 984 030
Mpumalanga	−R239 184 117	R134 701 916	R200 311 548	R332 395 748	R449 840 144
Limpopo	−R460 263 695	R204 898 585	R332 309 673	R540 319 244	R696 977 800
Sources: Stats SA (2008), City of Cape Town (2009); own calculations.

Table 7: Percentage increase (decrease) in total cost of providing free basic services when using five different potential FBS lines instead of the 2008 FBS line of R1500

	R750/month	2x OAP (R1920)	CSG threshold (R2200)	R3000/month	OAP threshold (R4488)
South Africa	−72.36%	37.87%	58.52%	100.71%	141.14%
Urban	−74.18%	44.43%	69.71%	127.04%	188.56%
Rural	−70.78%	32.18%	48.81%	77.86%	100.00%
Western Cape	−82.89%	43.71%	73.93%	142.84%	210.43%
Eastern Cape	−67.92%	28.11%	44.02%	73.60%	99.16%
Northern Cape	−73.40%	36.71%	55.08%	95.03%	127.90%
Free State	−76.43%	35.92%	52.59%	92.99%	136.79%
KwaZulu-Natal	−75.16%	38.17%	58.28%	102.50%	141.37%
North West	−68.66%	41.17%	57.64%	91.51%	126.20%
Gauteng	−72.90%	52.28%	82.42%	145.65%	218.73%
Mpumalanga	−65.66%	36.98%	54.99%	91.25%	123.49%
Limpopo	−73.49%	32.71%	53.06%	86.27%	111.28%
Sources: Stats SA (2008), City of Cape Town (2009); own calculations.

Above, we have shown that increasing the value of the poverty line would not result in substantial increases in the number of rural households qualifying for free basic services. The evidence in Tables 6 and 7 shows that if we increased the poverty line to R1920 per household per month the additional cost to the state would be about R743 million, or an increase of about 32% in the current budget for rural areas. If the highest of the potential poverty lines is used (R4488), the additional cost increases to R2.3 billion and the total budget becomes double the current FBS budget for rural areas.

In contrast, increasing the value of the FBS poverty line has a significantly larger financial impact in urban areas, particularly at the higher poverty line values. If the FBS line is increased to R1920 a month, the additional cost to urban municipalities would be around R890 million, which constitutes an increase of almost 45% in the cost of providing free basic services. If the R4488 line is used to identify eligible households, the total cost of the provision of these services to urban areas increases by almost R3.8 billion – a massive 189% (see Tables 6 and 7).

The results according to province show that decreasing the value of the FBS poverty line to R750 a month would decrease the total cost of providing basic services by between 66% and 83%. In terms of actual rand amounts, the biggest saving would be in KwaZulu-Natal, where the total budget required to provide free basic services would decline by almost R620 million.

Increasing the value of the FBS poverty line would have the largest financial impact in Gauteng, followed by KwaZulu-Natal. If the FBS poverty line is set at R4488 a month, the total additional cost to municipalities in Gauteng of providing free basic services would be more than R1.4 billion – which constitutes a more than 200% increase in the current budget. The additional cost in KwaZulu-Natal would be almost R1.2 billion or a 140% increase in the current budget.

7. Policy recommendations

Many municipalities currently use a household income level of R1500 to identify households eligible for free basic services. This line is low in comparison with other unofficial poverty lines, including the income thresholds used in the means tests for social grants. The evidence presented above demonstrates that the share and the number of households eligible for free basic services both increase substantially when higher alternative FBS poverty lines are considered, including the income thresholds used in the means tests for social grants. This also suggests that while many households are not considered ‘poor enough’ to qualify for free basic services, individuals living in these households do qualify for a social grant. This highlights the need to develop a more consistent way of identifying households or individuals qualifying for various forms of government support. More specifically, a standardised system of means testing should be introduced to identify households eligible for free basic services. This threshold should not only be standard across municipalities but should also be more closely linked to the thresholds used by government to assess eligibility for social grants.

Increasing the value of the FBS poverty line would, of course, have significant fiscal implications for the municipalities responsible for providing the free basic services. For example, if the FBS poverty line is set at R2200, the value of the income threshold used in the urban area means test for the CSG in 2008, instead of at the R1500 line, more than two million additional households would qualify for support. While a detailed investigation of alternative sources of revenue falls outside the ambit of this report, one possible policy option to consider is to improve the targeting of free services to households that are considered indigent. Accurate empirical evidence is not available, but it does appear as though the policy is not implemented consistently across all municipalities. For example, the City of Cape Town provides free basic electricity to all domestic users who use less than 450 kWh a month (City of Cape Town, 2011). The implication of this is that all users below that threshold receive free basic electricity, irrespective of their income level. One policy option is therefore to improve (and standardise) the targeting of free basic services to ensure that only those households genuinely considered indigent according to a FBS poverty line receive these services. The savings associated with better targeting could then be used to provide free services to more households (identified using a higher line than the current FBS line). However, targeting in itself can be costly and these costs would have to be considered.

To test the feasibility of the above, a pilot project could be introduced in selected municipalities to evaluate (1) the costs and savings associated with better targeting of free basic services and (2) the costs associated with increasing the FBS poverty line to make it more comparable to other thresholds used to identify household or individual eligibility for other forms of government support.

8. Conclusion

The South African Government has instituted a range of policy interventions in an attempt to improve the welfare of households in the country. One of the key (and most successful) interventions has been the increase in the delivery of public services to poor households, particularly local government's provision of a package of free basic services, consisting of water, electricity, sanitation and refuse removal, to poor households. It is, however, not completely clear how different municipalities identify the poor households that are eligible for these basic services. Evidence suggests that many municipalities currently consider all households with a total income of less than R1500 a month to be poor and therefore eligible for the FBS package. Currently, there is no official poverty line sanctioned by the South African Government, and when the FBS line of R1500 a month is compared to the range of unofficial poverty lines used by policymakers and researchers it is evident that it is significantly lower than any feasible poverty line for the country.

We therefore consider the impact of increasing the value of the FBS poverty line by modelling, in a very basic manner, the potential number of households covered when different values of the FBS poverty line (including the current R1500 a month line) are assumed. A lower variation of the line is also considered. As expected, the share and number of households that qualify for free basic services both increase with the application of higher potential values of the FBS poverty line, irrespective of province and settlement. In addition, the proportion of households qualifying for free basic services remains higher in rural areas, and in provinces with a larger concentration of households living in rural areas, such as the Eastern Cape, KwaZulu-Natal and Limpopo. When the absolute number of households qualifying for free basic services at the alternative poverty lines is considered, the picture looks slightly different. The absolute number of households in urban areas eligible for these services increases by a much larger magnitude with each increase in the value of the potential poverty line.

This, of course, also has financial implications for the municipalities providing these services. At the aggregate level, the cost of providing these services to the additional number of eligible households varies from R1.63 billion, when R1920 (twice the value of the OAP) is used as the poverty line, to more than R6 billion, when R4488 (the income threshold for a married person's eligibility for the OAP) is used.

Urban municipalities would face the steepest increases in their FBS budgets, with the aggregate additional expenditure varying from R889.5 million when the R1920 line is used to R3.78 billion when the R4488 line is used. The additional expenditure in rural areas varies from R742.5 million to R2.3 billion.

The key policy recommendations include the need to develop a standard poverty line or income threshold to identify households eligible for government support, and the need to assess how best to finance the provision of free basic services to larger numbers of households.

Notes

¹The BMR is university-based survey unit, which has been undertaking these measures since 1980.

²It should be noted here that household size in not taken into account. Currently, when the ‘official’ FBS poverty line is applied a household is considered eligible for free basic services simply if total household income is less than R1500 a month, irrespective of the number of people living in that household.

Appendix A

Table A1: Original poverty line values

Poverty line	1993 prices	2000 prices	2004prices	March 2006prices	Per capita poverty line 2008 prices	Household poverty line (based on average HH size of 3.8)	Share of FBS poverty line of R1500
Minimum living level (per capita)	R164.20			R352.01	R429.28	R1 631.27	109%
Supplemental living level (per capita)	R220.10			R471.85	R575.42	R2 186.61	146%
MLL			R1 713		R2 213.89	R2 213.89	148%
Minimum living levels		R1 389.13		R1 822.54	R2 222.61	R2 222.61	148%
Per adult equivalent HH subsistence level	R251.10				R656.47	R2 494.59	166%
$1 a day		R87		R114.14	R139.20	R528.96	35%
$2 a day		R174		R228.29	R278.40	R1 057.92	71%
R322/Cost of basic needs		R322		R422.46	R515.20	R1 957.76	131%
R593/Cost of basic needs		R593		R778.02	R1 020.76	R3 878.88	259%
Sources: Woolard & Leibbrandt (2001), Landman (2003), Martins (2003), Hoogeveen & Özler (2006); own calculations.
Note: HH = household.

Table A2: Breakdown of poor households by location, using six different poverty lines

	R750/month	R1500/month	2x OAP (R1920)	CSG threshold (R2200)	R3000/month	OAP threshold (R4488)
South Africa	100.00%	100.00%	100.00%	100.00%	100.00%	100.00%
Urban	43.40%	46.46%	48.67%	49.74%	52.55%	55.59%
Rural	56.60%	53.54%	51.33%	50.26%	47.45%	44.41%
Western Cape	3.44%	5.56%	5.80%	6.11%	6.73%	7.16%
Eastern Cape	21.67%	18.67%	17.35%	16.96%	16.15%	15.42%
Northern Cape	2.61%	2.71%	2.69%	2.65%	2.64%	2.56%
Free State	6.50%	7.62%	7.51%	7.33%	7.32%	7.48%
KwaZulu-Natal	17.17%	19.10%	19.14%	19.07%	19.27%	19.12%
North West	9.38%	8.27%	8.47%	8.23%	7.89%	7.76%
Gauteng	14.78%	15.07%	16.65%	17.35%	18.45%	19.93%
Mpumalanga	10.50%	8.45%	8.40%	8.26%	8.05%	7.83%
Limpopo	13.94%	14.53%	13.99%	14.03%	13.49%	12.73%
Sources: Stats SA (2008), own calculations.
Notes: The households have been weighted using household weights based on the 2001 Census.

Table A3: Estimated cost of providing free basic services to households in City of Cape Town, 2008/09

	Number of HH receiving FBS	Cost of FBS provided	Cost per HH
Water	847 000	R259 814 000	R306.75
Sanitation	811 000	R154 278 000	R190.23
Electricity	424 000	R135 834 000	R320.36
Refuse	477 000	R179 333 000	R375.96
Cost per HH of provision of free basic services			R1 193.30
Sources: City of Cape Town (2009), own calculations.
Note: HH = household.

Table A4: Cost of providing free basic services when using five different FBS poverty lines

	R750/month	R1500/month	2x OAP (R1920)	CSG Threshold (R2200)	R3000/month	OAP Threshold (R4488)
	No. of HH	No. of HH	No. of HH	No. of HH	No. of HH	No. of HH
South Africa	R1 190 974 346	R4 309 380 965	R5 941 358 319	R6 831 166 913	R8 649 325 159	R10 391 683 048
Urban	R516 840 527	R2 001 997 041	R2 891 476 963	R3 397 560 925	R4 545 316 996	R5 776 866 525
Rural	R674 133 759	R2 307 383 925	R3 049 880 879	R3 433 605 869	R4 104 008 282	R4 614 816 524
Western Cape	R41 023 023	R239 800 838	R344 611 770	R417 081 664	R582 329 307	R744 414 200
Eastern Cape	R258 120 033	R804 533 908	R1 030 673 739	R1 158 681 446	R1 396 693 059	R1 602 280 363
Northern Cape	R31 100 830	R116 926 216	R159 852 229	R181 323 557	R228 036 546	R266 471 940
Free State	R77 360 371	R328 252 208	R446 150 827	R500 873 952	R633 505 774	R777 270 876
KwaZulu-Natal	R204 472 004	R823 091 727	R1 137 306 119	R1 302 824 478	R1 666 782 771	R1 986 718 290
North West	R111 723 293	R356 541 292	R503 315 247	R562 065 248	R682 827 389	R806 490 667
Gauteng	R176 026 482	R649 638 666	R989 251 228	R1 185 098 952	R1 595 839 356	R2 070 622 696
Mpumalanga	R125 077 866	R364 261 983	R498 963 899	R564 573 531	R696 657 730	R814 102 126
Limpopo	R166 070 491	R626 334 186	R831 232 771	R958 643 859	R1 166 653 430	R1 323 311 987
Sources: Stats SA (2008), City of Cape Town (2009; own calculations.
Note: HH = household.