South Africa’s local government funding model is not “broken by design”, it is constitutionally grounded and explicitly redistributive. The Constitution requires an equitable division of nationally raised revenue and says the division must consider national debt obligations, municipalities’ ability to deliver basic services, and municipalities’ fiscal capacity and efficiency. Where the model struggles is in execution and in the real structural pressures that have grown over time.
Structurally, the fiscal reality across municipalities is highly unequal. Treasury’s consolidated local government budget analysis shows that the eight metros generate nearly 60% of the total revenue raised by local government, reflecting the concentration of tax base and economic activity in cities versus weaker revenue capacity in many smaller municipalities. In addition, the municipal revenue model has historically depended on trading-services surpluses, especially electricity. Stats SA estimates that in 2020/21 municipalities made an electricity trading surplus of about R23 billion, funding that is often used to support other municipal activities. But city-finance analysis highlights that declining electricity sales and changing demand patterns can squeeze these cross-subsidies, weakening the overall municipal financial model.
At the same time, governance is a decisive part of the problem. Treasury identifies weak revenue collection, poor credit control and lack of financial discipline as core drivers of municipal instability. The Auditor-General quantifies the cost of these failures through material losses and waste, over R37 billion in combined water and electricity losses in 2023/24, and billions more in fruitless and irregular expenditure. In practice, this means that even where funding provides a baseline, service delivery can still deteriorate if collection systems, procurement controls, and maintenance planning are failing.
- Would allocating a larger share of nationally raised revenue to municipalities realistically improve service delivery, and what are the fiscal trade-offs?
Allocating a larger share of nationally raised revenue to municipalities can improve service delivery, but it is not a silver bullet, and the impact depends strongly on governance and how the additional funding is structured.
On current numbers, the 2026 Budget Review shows local government receiving around R182.3 billion in direct transfers in 2026/27 (equitable share + conditional grants + fuel levy sharing with metros). This is about 9.4% of the non-interest allocations of nationally raised revenue after debt-service costs and the contingency reserve are provided for. If the local government’s share rose by 1 percentage point without increasing the overall envelope, the additional funding would be on the order of R19.5 billion in 2026/27 (1% × R1,945.8bn non-interest allocations). That is meaningful money—if it reaches maintenance, billing systems, repairs, and priority capital projects.
The fiscal trade-off is that the money must come from somewhere: either reduced allocations to other spheres, increased taxes, or higher borrowing. The Constitution explicitly requires the division of revenue to consider national debt obligations, and debt-service costs are high and rising in nominal terms (Treasury budget highlights show debt-service costs increasing from about R420.6bn in 2025/26 to R469.3bn in 2028/29). So, widening transfers to local government without accompanying reforms can worsen fiscal pressures or force politically difficult cuts elsewhere.
That is why the “bigger share” debate needs a second sentence: any increase should be paired with enforceable performance and accountability mechanisms, because the current system is already losing large amounts to poor procurement, weak consequence management, and technical/non-technical losses.
- What key reforms would you prioritise to strengthen the intergovernmental fiscal framework and close the municipal resource gap?
The most effective reforms are those that (1) increase the efficiency of existing funding, (2) strengthen accountability and consequence management, and (3) recognize that some municipalities need structural support beyond incremental capacity building.
Treasury’s 2026 Budget Review indicates that reforms are being organized around stronger links between transfers and measurable improvements in core municipal functions (especially revenue collection and asset maintenance), supported by legislative changes and targeted technology investments. Specifically, Treasury indicates that an MFMA Amendment Bill is intended to enforce funded budgets, strengthen expenditure controls and consequence management, and improve monitoring and intervention tools for treasuries. Treasury also reports that the state is strengthening intervention approaches for municipalities in severe financial distress, noting the limits of expecting distressed municipalities to implement their own recovery plans without stronger enforcement leverage.
On the revenue side, reforms that protect “cash for service delivery” are critical: better billing and collection systems, smart metering, ring-fencing of bulk-service collections, and loss reduction. Treasury reports R2.5bn is allocated to smart meters over the MTEF, with large-scale rollout already underway in debt-stressed municipalities. This agenda aligns with oversight evidence of the scale of water and electricity losses and other quantified waste.
Finally, reforms should acknowledge structural differences across municipalities. The White Paper review discussion document highlights the inefficiency and complexity of the two-tier district/local system in many areas and surfaces proposals for differentiated governance arrangements and even reconfiguration toward single-tier models where appropriate paired with stronger technical support for vulnerable municipalities.
