Report indicates negative impact of municipal collapse on South African economy

Tensions are escalating between the South African Municipal Workers' Union and Finance Minister Enoch Godongwana, raising questions about the consequences of his controversial actions for municipal governance and the most impoverished segments of the population.

Escalation of Conflict

The South African Municipal Workers' Union, supported by the Communist Party of South Africa, has accepted the challenge issued by Finance Minister Enoch Godongwana this week. Both organizations, part of the ANC-led alliance, threaten to take to the streets of Tshwane, labeling their comrade minister a 'rebel.'

The author notes that as a taxpayer, he is unsure how to react to this complex situation. However, he views the minister's move positively, as it signals clearly that no one in the affected municipalities can continue to ignore the Auditor-General's warnings about poor management, irregular, and wasteful spending year after year.

Protests and Consequences

Beyond overturned trash bins everywhere, traffic disruptions, and municipal service failures, and other forms of protest against the minister's 'reactionary' actions, it is unclear how the 'workers' will be able to counter. Potential protests may be limited to media statements and online discussions.

It remains uncertain whether the minister's intended targets—the culprits behind financial mismanagement in municipalities across the country—will feel the pressure. Can the temporary withholding of billions in grants cause a change in future behavior?

Impact on the Poor

The 'poorest of the poor' are most likely to suffer. Low-income populations cannot independently solve the problem of poor service delivery, which may worsen following Godongwana's unprecedented actions. They are unable to afford generators or JoJo tanks to cope with the lack of basic municipal services. This is the only clear point in this situation, while everything else remains convoluted, apart from the sentiments evoked by unionists and communists.

Communist Party's Stance

Nevertheless, beyond the minister's decisive actions, the Communist Party of South Africa considers the development 'encouraging.' According to the SACP statement, 'it encourages the SACP when workers in the local government sector participate in these struggles to protect the local state from hostile takeover by the private sector and bourgeois economic interests. This resistance from local government employees is not just about protecting jobs, but something more: it is the working class reasserting its position as the driving force of state policy and public services.'

The author presents a thought experiment on the potential revolutionary impact for beautiful Mzansi if workers were this active in all 257 municipalities, defending not only their jobs but also the interests of the working class. He describes this as true dictatorship of the proletariat and revolution. However, in the author's view, the real revolution has not yet begun, and voters are unlikely to believe in Godongwana's 'decisive actions,' which he believes are linked to the upcoming elections.

The National Treasury has temporarily suspended the transfer of municipal grants for July 2026 to over 60 local government structures, including Johannesburg. This decision was made because these structures failed to promptly resolve their financial issues.

Reasons for Funding Suspension

The National Treasury announced the temporary withholding of transfers due to 'persistent and serious non-compliance' with the Municipal Finance Management Act (MFMA) and related provisions, despite support provided by the Treasury through consultations, engagement, and communication.

Scale of Financial Problems

The announcement of transfer suspension affected numerous municipalities in South Africa and revealed widespread financial mismanagement. Municipalities incurred losses amounting to R24.12 billion in early and wasteful expenditure since 2021-22. Furthermore, irregular expenditure reached R145.21 billion, with R40.14 billion recorded just for the 2024-25 financial year.

Additional Financial Indicators

Since 2021-22, municipalities have disclosed R118.13 billion in unauthorized expenditure, of which R63.43 billion relates to budget items not involving cash. In 2024-25, 116 municipalities (45 percent) adopted unpaid budgets, which is higher than the figure of 113 (44 percent) in the previous year's adjusted budget.

Debt and Reporting Issues

By the end of 2024-25, municipalities owed Eskom R3.40 billion in interest and water boards R1.21 billion in interest. Moreover, 48 municipalities (20 percent) had overdue third-party deductions exceeding one month. The National Treasury noted that many municipalities failed to process instances of unidentified, irregular, fruitless, and wasteful expenditure (UIFWE) through their Municipal Public Accounts Committees (MPACs).

Consequences of Non-Compliance

The Treasury stated that non-compliance with financial legislation is not only a failure of fiduciary duties by municipal political and administrative leadership but also threatens the financial sustainability of essential service providers such as water boards and Eskom. Non-payment to third parties negatively impacts the ability of public bodies to function optimally.

Requirements for Resumption of Payments

Transfers will resume after the affected municipalities meet the necessary conditions and provide proper confirmation of their fulfillment. The Treasury expects the suspension to be short-term so as not to affect service delivery. It was emphasized that municipalities were given sufficient written notice urging them to take steps to improve their financial situation before the funds were frozen.

Expert Opinion on Local Governance

Professor Joseph Sekhampu, Director of the NWU School of Business, noted in a recent statement that the consolidated Auditor-General's report for 2024-25 showed that none of the metropolitan municipalities received an unqualified audit. Five metros have a qualified audit opinion, compared to two at the beginning of the sixth term.

According to Professor Sekhampu, total water losses in eight metropolitan municipalities amounted to nearly R10 billion, electricity losses exceeded R17 billion, and the average creditor payment period reached 121 days. He suggested that the dominant explanation for local government problems in South Africa has always been that many municipalities are too small, poor, and administratively fragile to operate effectively. However, according to the professor, the findings regarding the metros point to a different governance issue: metropolitan municipalities are not primarily constrained by resource scarcity, as they manage R336 billion—about 54% of local government expenditure—and serve almost 25 million people, possessing the institutional and financial capacity expected of large urban governments, yet continuing to face serious management breakdowns.