This paper explores the impact of overall macroeconomic development policy on water service delivery policy and urban poverty in South Africa. It scrutinises ambiguous definitions of urban in the literature, which tend to obscure the extent of urban poverty in this country. This is crucial given that a large proportion of the urban poor live in informal settlements, which are sometimes lumped with rural areas. Informal settlements are generally characterised by limited essential services such as housing, water supply, storm-water facilities and sanitation services. Water services, like other social services, retain the racial imprint of apartheid. Consequently, water policy in South Africa attempts to address water issues from an equity perspective. By analysing the effects of the tariff subpolicy within the water policy, the paper recommends that free basic water should be made available only to poor households.