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According to a new study by the Bureau of Economic Research (BER), the difficulties faced by South African municipalities are due to weak governance and inefficient financial management, rather than a lack of funds. The report asserts that significant reforms at the municipal level are necessary to achieve faster economic growth.

Financial Status of Municipalities

BER found that municipalities continue to receive about 75% of their operating income from their own tax bases, but they are increasingly unable to collect funds owed by residents and businesses. By December 2025, municipalities were owed R234.7 billion in unpaid consumer debt. Furthermore, municipalities had debts to Eskom amounting to R70.1 billion and to water utilities amounting to R25.9 billion, creating serious pressure on cash flow and hindering infrastructure investment.

Government Reaction and Recommendations

This report was published two weeks after Finance Minister Enoch Godongwana suspended national government transfers to 69 municipalities due to governance and financial administration failures, signaling a tougher stance from the National Treasury. BER welcomed Godongwana's decision to freeze transfers to underperforming municipalities, noting that it demonstrates the National Treasury's willingness to use its constitutional powers to improve governance, despite political tensions ahead of next year's local government elections.

The report also supported reforms within Operation Vukhelindela 2.0 and the current review of the White Paper on Local Government, but warned of risks associated with attempting to implement too many changes simultaneously, deeming that 'a shorter, clearly prioritized list of high-impact changes is likely better than a long list.'

Proposed Improvement Measures

Key recommendations from BER include strengthening intervention powers under Section 139 of the Constitution, as current interventions have become a 'revolving door rather than a recovery mechanism.' It also suggests granting appointed administrators greater authority, including the ability to assume the functions of municipal managers and financial directors, to revive non-functioning municipalities. BER called for isolating municipal electricity and water services within financially sustainable models, professionalizing the appointment of senior municipal officials, reviewing the local government funding model, and completely overhauling the municipality classification system.

The report noted that nearly 70% of municipalities in the Free State, including Mangaung, faced transfer delays, followed by 57% of municipalities in the North West, while only three municipalities in the Western Cape were affected. BER concluded that South African municipalities are 'too important to fail,' as this is where economic growth occurs and where citizens interact most closely with the state, but warned that without clear reform priorities and stronger governance, implementation could be undermined by its own ambition.

Gauteng municipalities are facing a serious financial crisis, forcing residents to bear the costs. The National Treasury has temporarily suspended funding for a significant portion of the Johannesburg City Council's funds, compelling the municipality to revise its financial strategy amid growing service delivery challenges.

Reasons for financial difficulties

The National Treasury's decision to withhold part of the equitable share of funds from several Gauteng municipalities, including Johannesburg, Emfuleni, Lesedi, Sedibeng District Municipality, Maropeng Town, and Rand West Town, was a predictable outcome of years of financial inefficiency, weak governance, and persistent disregard for the findings of the Auditor-General (AG).

The Auditor-General's consolidated annual report for 2024/25 on local government audits, combined with the National Treasury's Municipal Financial Management Act Compliance Report for 2024/25, presents a deeply alarming picture of local government in Gauteng. Although some municipalities have improved their audit results, the overall trend indicates a worsening financial condition.

Audit results and budgetary problems

The towns of Ekurhuleni, Tshwane, and the Emfuleni Municipality received a qualified audit opinion. Only one out of eleven Gauteng municipalities was rated as being in good financial health. Six municipalities were classified as financially concerning, and four as financially distressed.

Most alarming are the findings regarding unfunded budgets. Nine Gauteng municipalities adopted budgets they could not realistically fund, amounting to R164.8 billion in unplanned expenditure. Furthermore, six of these municipalities incurred unauthorized expenditures totaling R8.4 billion due to lack of funding.

An unfunded budget is not merely an accounting issue; it means the municipality has committed to spending money whose collection is unlikely. Inevitable consequences include unpaid suppliers, infrastructure deterioration, service delays, and rising debt, ultimately leading to reduced quality of services for residents through unreliable water and electricity supply, damaged roads, and diminished municipal capacity.

Debt obligations and expenditure management

The financial difficulties do not stop there. By year-end, Gauteng municipalities and organizations were required to pay Eskom R13.79 billion, and another R5 billion to water boards. It is worrying that 16 audited entities reported a cumulative deficit of R6.92 billion, with seven Gauteng municipalities having deficits. Even more concerning is that these municipalities failed to adjust their budgets during the adjustment process despite guidance and intervention from the National Treasury.

Moreover, the National Treasury's Municipal Financial Management Act Compliance Report identifies unauthorized, irregular, fruitless, and wasteful expenditure as one of the clearest signs of weakness in financial management, internal control, and law enforcement in local government. Despite many municipalities improving their ability to detect and record such expenditures, they continue to fail at the most crucial aspect: investigating cases, recovering public funds, ensuring accountability, and addressing the root causes of financial misconduct.

Culture of impunity

This gap between detection and consequence management remains a structural weakness undermining financial discipline and accountability. Beyond financial losses, the near-total absence of accountability is most alarming. The Auditor-General has once again found widespread failures in investigating and dealing with unauthorized, irregular, fruitless, and wasteful expenditure. Material findings regarding consequence management persist, confirming what the Auditor-General rightly calls a 'culture of impunity.'

Indeed, when financial irregularities are not investigated and officials are not held responsible, poor governance becomes institutionalized rather than corrected. The figures illustrate this failure. Gauteng municipalities closed the financial year with irregular expenditure of R32.96 billion, unauthorized expenditure of R12.63 billion, and fruitless and wasteful expenditure of R3.17 billion. Under the Lesufi administration, R45.92 billion in irregular expenditure accumulated. While R19.57 billion in irregular expenditure was written off, only R479 million has been recovered or is in the process of recovery.

Similarly, R9.82 billion in unauthorized expenditure was written off, alongside over R6 billion in fruitless and wasteful expenditure. Unfortunately, the amount recovered to date remains minimal. Writing off billions without substantive investigations or recoveries does not restore public trust. This raises fundamental questions about whether municipalities view financial misconduct as a management failure or merely as another administrative exercise.

Systemic problems in Johannesburg

Johannesburg serves as a prime example of how these governance failures lead to declining service quality. The Auditor-General identified systemic issues such as poor revenue collection, infrastructure decay, weak preventative controls, and unreliable performance reporting. Despite repeated intervention, the city incurred R2.38 billion in unauthorized expenditure, continuing to struggle to meet key service delivery targets.

Against this backdrop, claims that Johannesburg is not facing a financial crisis are unfounded and cannot be sustained. The application of Section 216 of the Constitution is not taken lightly. The National Treasury's decision to suspend part of the equitable share reflects a serious breakdown in financial management and compliance with the Municipal Financial Management Act.

Accountability demands

The Democratic Alliance (DA) in Gauteng has consistently warned that repeated audit findings, deteriorating financial control, and a lack of consequence management would ultimately lead to this outcome. The latest Auditor-General's report confirms these warnings. Nevertheless, recommendations continue to gather dust, and their implementation remains painfully slow.

Now the evidence is undeniable. The question is no longer whether Gauteng municipalities have a financial problem; the question is who will be held accountable for it. Every rand lost due to financial misconduct is a rand taken away from road repairs, maintenance of water and electricity infrastructure, waste collection, and the provision of basic services that taxpayers deserve. Structures alone do not ensure accountability; political will is required.

Until consequence management becomes the norm rather than the exception, municipalities will continue to move from one financial crisis to the next, and it will be the residents who continue to pay for it through increased tariffs, deteriorating infrastructure, and disruptions in public services.