Municipal reform and the political economy

National Treasury (Treasury) has spent years documenting why municipalities fail. It is now changing the incentives, management structures, and funding channels through which essential urban services are delivered.

THE DIAGNOSIS IS SETTLED

South Africa (SA)'s municipal crisis is not short of diagnoses. Treasury's financial monitoring, funded-budget assessments, and recovery work have repeatedly identified the same downward spiral: unrealistic budgets; weak billing and collection; diversion of cash from bulk purchases and maintenance; deteriorating infrastructure; declining payment discipline as services worsen; and a lack of principal accountability. The Auditor-General's (AGSA) latest local government audit outcomes show that these are not isolated accounting defects. Rather, they are embedded weaknesses in the systems that finance and manage service delivery.

Treasury's 2025 Strategy to Address Municipal Performance Failures is the latest update of a framework first developed in 2009. Its central message is that municipal failure cannot be repaired by technical support alone. Political leadership, managerial accountability, credible revenue administration, funded budgets, reliable information, asset management, and consequences for non-compliance must operate together. The Department of Cooperative Government and Traditional Affairs (CoGTA)'s review of the 1998 White Paper on Local Government runs in parallel, asking whether the functions and institutional architecture are properly aligned with municipal capability. That process matters, but the immediate policy shift is Treasury's move from diagnosis and support towards incentives, enforceable conditions, and alternative delivery channels.

The purpose is not financial discipline as an end in itself. Section 152 of the Constitution requires municipalities to provide services sustainably. A municipality that cannot collect revenue, account for assets, pay bulk suppliers, or maintain infrastructure cannot meet that obligation.

AUDIT EVIDENCE LINKS GOVERNANCE DIRECTLY TO SERVICES

The AGSA's 2024/2025 local government audited outcomes and material irregularities as of January 2026, published in June, sharpen the case for intervention. Only 39 of 257 municipalities achieved clean audits. Another 117 were unqualified with findings, 86 were qualified, five were found adverse, eight were disclaimed, and two audits are outstanding.^[1] The metros performed particularly poorly: none of the eight achieved a clean consolidated audit; three were unqualified with findings and five were qualified (Figure 1).^[2]

The most revealing result is the stagnation inside the apparently respectable 'unqualified with findings' category. Of these 117 municipalities, 94% had repeat material non-compliance with key legislation, 82% submitted materially misstated financial statements, and 75% submitted materially misstated performance reports. This is not a marginal compliance problem; it shows that weak controls and unreliable information have become normalised (Figure 2).

The service delivery consequences are also very visible. Out of the 257 municipalities, revenue and receivables^[3] were materially misstated before audit by 162 municipalities. This often occurs due to incorrect billing and poor debt management. Asset records were materially misstated in 129 municipalities, weakening maintenance and renewal planning. Infrastructure audits found problems in 101 projects: 72 were delayed by an average of 25 months, 70 had cost-management failures or losses, and 30 produced poor-quality work. The Auditor-General also identified 116 municipalities with unfunded budgets, 174 whose short-term debts exceeded available cash, and 62 with going-concern uncertainty. Average creditor-payment time was 113 days, while repairs and maintenance averaged only 3% of asset value.

These findings describe a mechanism by which weak governance produces weak financial information; weak information produces poor decisions; poor revenue and expenditure management crowd out maintenance; and infrastructure failure becomes a daily cost for households and businesses.

THE METRO TRADING SERVICES REFORM CHANGES THE OPERATING MODEL

Treasury's Metro Trading Services Reform (MTSR) programme is the most operationally advanced element of the local government reform agenda, supported by Operation Vulindlela. It covers municipal services (water and wastewater, electricity, and solid waste) in all eight metros.

The intervention works by making funding conditional on a new operating model. Each service must be managed as a business unit or through a corporate structure with sound governance. Treasury requires a single point of management accountability with delegated authority; all the functions needed to deliver the service must sit within one operating structure; a service compact must define the relationship with the municipality; finances must be fully transparent; and a funded business and investment plan must show a credible path to improved performance and financial viability.

Its central financial principle is that revenue generated by a utility must first sustain that utility. Improved billing and collections are intended to finance operations, maintenance, rehabilitation, and new investment before any sustainable surplus is transferred to the municipality's general account. In this sense, the reform protects trading services from the diversion of cash to other functions (salaries, debt service, other administrative costs) that have contributed to infrastructure deterioration and service failure (Figure 3).

The programme is implemented through the existing municipal fiscal architecture: the Municipal Finance Management Act (MFMA), the Municipal Budget and Reporting Regulations, Treasury's budget circulars, and, crucially, the annual Division of Revenue Act. Early implementation began in 2025/2026, with 2026/2027 becoming its first full operational year.

THE GRANT THAT PAYS FOR PERFORMANCE, NOT PROMISES

The core incentive/inducement is a six-year R54 billion performance-linked incentive through the Urban Development Financing Grant. Treasury expects metros to match it with a further R54 billion of own-source revenue, creating the potential for more than R100 billion in additional infrastructure investment. Chapter 6 of the 2026 Budget Review gives the programme fiscal force by moving R19.5 billion of the metro trading services component from the Urban Settlements Development Grant into the Urban Development Financing Grant, and adding R8.6 billion over the medium term on a performance basis. This reallocation is important: reform conditions are not only attached to marginal new money, but increasingly to the main national funding channel for metro trading services investment. A US$925 million World Bank Program-for-Results operation agreed in April 2026 – the first of its kind in South Africa – adds an additional incentive linked to an external, verified results framework.

The grant also changes the sequence of reform. Metros first need political commitment through a formal agreement with Treasury, which includes institutional roadmaps, and business and investment plans. They must then establish the accountability framework and agree performance-improvement targets in a Performance Improvement Action Plan (PIAP). Payments are linked to maintaining a set of minimum institutional commitments, including ring-fencing revenue, operational targets for trading services, and achieving verified improvements in financial, technical, and service performance. The practical choice is therefore not between reform and the old system on equal financial terms. It is between meeting the reform requirements and gaining access to the reconfigured investment envelope or failing to qualify and carrying the political and service delivery consequences. Treasury's design goes beyond rewarding MFMA compliance. Compliance is the floor; access to funding depends on building an organisation capable of converting finance into measurable service outcomes.

The matching requirement is also important. Its aim is to force metros to improve cash generation, restore creditworthiness to facilitate borrowing, and select projects that they can operate and maintain. It also reduces the risk of another cycle in which funding is not used for building and maintaining assets, but for other outlays at the expense of service delivery.

There are risks: cost-reflective tariffs must be accompanied by accurate indigent registers and protection of basic services; political support must survive changes in councils and coalitions; and most importantly, the performance framework must not become an elaborate checklist. The test will be both the financial stabilisation of these utilities and the entities involved, as well as whether residents experience fewer interruptions, lower losses, quicker repairs, accurate bills, and cleaner neighbourhoods.

GOVERNMENT'S CONSOLIDATED SPENDING PLANS BROADEN THE INTERVENTION ARCHITECTURE

The MTSR sits inside a wider change in the subnational fiscal system. The new consolidated spending plans laid out in the Budget Review 2026/2027 note that intergovernmental transfers have masked municipal weakness for more than a decade and that government is moving from oversight to active structural intervention.

The first intervention is stronger financial discipline. The Budget Review proposes MFMA amendments to reinforce funded-budget requirements, expenditure controls, consequence management, and financial recovery.

The second strand is the ability to route delivery around a failed institution. The 2026 Division of Revenue framework introduces a mechanism to redirect infrastructure implementation from incapable local municipalities to the Development Bank of Southern Africa, the Municipal Infrastructure Support Agent, or capable district municipalities. Indirect smart-meter grants and proposed Distribution Agency Agreements, under which Eskom can operate distribution for defaulting municipalities, apply the same principle to revenue systems and electricity services. The Water Services Amendment Bill is an explicit effort to separate the role of municipal service authorities and municipal services providers, and introduce a strict centralised regulatory framework to ensure that municipalities provide clean drinking water and safe sanitation.^[4]

The third strand is enforcement. Chapter 6 of the Budget Review records the use of section 216(2) of the Constitution against 75 persistently non-compliant municipalities. In July 2026, Treasury temporarily withheld the equitable share tranche^[5] of 69 municipalities after persistent MFMA breaches. This is a significant escalation as Treasury also published a process through which affected municipalities could secure release of the funds – although these actions in future may face legal challenges.

Nonetheless, this new framework creates an architecture for intervention which is better coordinated than previous support programmes, and should be more effective.

TIMING CREATES A DIFFICULT POLITICAL ECONOMY

The upcoming 4 November 2026 local government elections bring these issues firmly into the political economy. Incumbents will likely face Treasury intervention as evidence of their own failure; challengers may promise rapid improvement, but will inherit tougher budget constraints, stricter performance conditions, and less freedom to divert trading service revenue into political patronage.

There is an electoral 'risk' for Treasury too. Withholding transfers or enforcing collections may be perceived as punishing residents for the failures of councils. The legitimacy of the reform will depend on transparent triggers, consistent treatment across parties, clear routes to restore funding, and visible protection of basic services. Without that, technically sound intervention may be politically discredited.

A NECESSARY INTERVENTION

Treasury's reform agenda deserves recognition because it acknowledges that municipal financial discipline is not an administrative objective separate from service delivery; it is a precondition for fulfilling local government's constitutional mandate. Municipalities cannot provide water, electricity, sanitation, and refuse removal sustainably where revenues are poorly collected, service income is diverted, infrastructure is not maintained, and there is no accountability.

These reforms will reduce municipal discretion and will be politically difficult, particularly ahead of the elections. But the status quo is not benign: unconditional funding of dysfunctional institutions entrenches service decline and shifts the cost to households, businesses, and the fiscus. Treasury's intervention, therefore, represents a necessary defence of the constitutional promise of sustainable local government.

^[1] Unqualified with findings: accurate financial statements, but other problems were flagged.
Qualified: financial statements are accurate except for specific, identified problem areas.
Adverse: financial statements are so inaccurate they don't fairly reflect the municipality's finances.
Disclaimed: not enough evidence to form an opinion at all – the most serious outcome.
Outstanding: incomplete or unsubmitted audits; no opinion issued.

^[2] Cape Town, eThekwini, and Johannesburg were unqualified with findings; Ekurhuleni, Tshwane, Buffalo City, Mangaung, and Nelson Mandela Bay were qualified.

^[3] Revenue and receivables: the income municipalities report earning, and the money still owed to them by ratepayers and consumers.

^[4] The Water Services Amendment Bill (B24-2025), introduced by the Department of Water and Sanitation, rewrites parts of the 1997 Water Services Act to tackle South Africa's municipal water and sewage crisis. It establishes accountability by legally separating Water Services Authorities (which oversee water services) from Water Services Providers (which actually pump and treat it). ↑

^[5] Equitable share: an unconditional grant of nationally raised revenue that funds municipal basic services; a 'tranche' is one instalment of it.