# **Free Basic Services**

With regard to free basic services (FBS) on water, electricity, sanitation and refuse removal, since we cannot directly identify the value of free basic services actually received as described in Box 2, we model two extremes. In the benchmark scenario we assumed that free basic services are allocated equally among households who (i) are connected to the electricity grid and (ii) are indigent (those with incomes of less than two old age pensions or about R 24,000 per annum). This scenario is closer to a targeted cash transfer program, since there are municipalities that deliver these services as cash rebates targeted to the poor. In the sensitivity scenario, we assumed that all household connected to the national electricity grid equally benefit from inverted block tariffs and received an equal share of the government subsidies for free basic services (this is closer to an untargeted indirect subsidy).<sup>44</sup> The results show that if FBS were targeted nationwide, there would be clear advantages for the poor, since FBS would be more progressive. In fact, when free services are treated as pure cash transfers, they are progressive in absolute terms (figure 12A). In contrast, if FBS were delivered as indirect subsidies, a larger share of the benefit is concentrated in the top deciles and, while still progressive, they are only progressive in relative terms (figure 12). Targeting in all municipalities would help improve effectiveness in reaching the poorest households.<sup>45</sup> In monetary terms, combining direct cash transfers with FBS helps boost the market income of the poorest decile by 11-fold.

<!-- Start of picture text --> Figure 12. Incidence and concentration curves for free basic services<br>A. Concentration curves for free basic services B. Incidence of free basic services<br>100% Lorenz for Market Income 250%<br>90% FBS as a transfer<br>200%<br>FBS as a subsidy<br>80%<br>Population Shares 150%<br>70%<br>100%<br>60%<br>50%<br>50%<br>0%<br>40%<br>30%<br>20%<br>10%<br>0% FBS as a transfer FBS as a subsidy<br>0 1 2 3 4 5 6 7 8 9 10<br>Source: Own estimates based on IES 2010/2011.<br>Share of market income<br><!-- End of picture text -->

# **In-Kind Transfers: Education and Health**

In assessing how education and health spending benefit the poor, we have to caution that our analysis does not address the quality of such spending. We use government expenditure data on the various forms of education and health services to estimate unit costs of these programs. The analysis thus assumes that the actual benefit received by individuals is equal to the amount spent per capita. As the quality of school infrastructure, teachers, and health clinics and hospitals vary across the country then this is a clear limitation of the analysis.

A few words of caution are thus warranted to explain how our findings on targeting may not translate into a commensurate actual impact on the poor. Despite good policy and relatively high spending levels in relation to GDP for education and health, actual performance and outcomes in these sectors have been disappointing. For example, in education South Africa achieves test scores in reading and mathematics at grade 6 that are below the South and East Africa region average test scores, even though many of these comparator countries spend the same or less on education per capita.<sup>46</sup> The 2011 International Math and Science Study (TIMSS) showed large improvements in scores for grade 9 learners relative to 2002, but South African students are still ranked in the bottom 5 out of 42 countries. Moreover, the TIMSS showed that the average scores on math and science for South

> 44 Reflecting lack of data, the analysis cannot capture the fact that some municipalities increase tariffs on consumption beyond the basic service amount and to the extent that the poor consume more than the minimum the value of the FBS is therefore reduced.

> 45 We obtain qualitatively the same results when measuring with respect to consumption.

> 46 Presidency of the Republic of South Africa 2014; SACMEQ 2011.

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