For the past 15 years, local governance ratings agency Ratings Afrika has been sounding the alarm over the steady slide in the financial management and governance of South Africa’s municipalities.
The results of its annual Municipal Financial Sustainability Index (MFSI) for the 107 largest local municipalities, plus the eight metros, for the financial year ended June 2024 show that the downward trend continues unabated.
Last year, the aggregate operating deficits of the 115 surveyed municipalities amounted to R35bn, up R8bn from 2023.
The effect of these operating deficits is that the municipalities do not generate sufficient funds from their operations to fund the services they are supposed to deliver. These operating losses have over time culminated in huge working capital (liquidity) shortfalls for most municipalities, meaning they don’t have enough cash to meet their immediate financial obligations.
In 2020, the sector’s total liquidity shortfall was almost R51bn. The latest results show this shortfall has now reached almost R105bn.
Without working capital, it becomes almost impossible for these municipalities to provide an acceptable level of services or to pay their service providers, such as Eskom, within 30 days, explains Ratings Afrika analyst Leon Claassen.
“It is no wonder that service delivery is breaking down in most municipalities and that infrastructure is crumbling at an unprecedented pace,” he says. “At this rate, South Africa faces a calamity of major proportions if this lack of sustainability is not dealt with effectively and urgently.”
It’s a crisis that hits residents and businesses alike, adds Neil Gopal, CEO of the SA Property Owners Association (Sapoa). “Ageing roads go unrepaired, water treatment plants limp along and power cuts intensify. In some municipalities, service delivery is collapsing outright — a reality that drives up costs for property owners, undermines investor confidence and chokes economic growth.”
But when service delivery is reliable and infrastructure is maintained, property values rise, businesses invest and communities thrive.
Gopal was speaking at the inaugural Sapoa/Ratings Afrika Municipal Performance Awards in Sun City this month; the awards recognise and reward the country’s best-performing municipalities.
The Saldanha Bay and Swartland municipalities achieved joint first place based on their MFSI scores of 74 each. Swellendam came second (73) and Hessequa municipality third (72). All four towns are in the Western Cape.
Regrettably, despite a few bright spots, the overall financial health of the local government sector has deteriorated over the past four years, based on average MFSI scores by province.
Since 2021, five provinces’ MFSI scores have dropped. The biggest declines were in KwaZulu-Natal (down four points to 39 out of 100) and Mpumalanga (down four to 23). Gauteng, the Eastern Cape and Limpopo were also down a point or two compared with 2021 (see table). The threshold for a municipality to be considered financially viable is 45.
On average, local municipalities scored 36 points (or just 30 points if the Western Cape’s municipalities are excluded) compared with 37 in 2021. In short, most municipalities are in deep financial distress.
Of the four provinces that raised their MFSI scores, the biggest jump was by the Western Cape (up three points from 52 in 2021 to 55 last year). This makes it both the highest-scoring province and the fastest improver. It is also the only province with an average score of more than 50 and where municipalities are considered to be largely sustainable financially.
“A large number of Western Cape municipalities demonstrate adequate levels of financial sustainability, giving them the financial capacity to deliver services and develop infrastructure while at the same time building the reserves to absorb financial shocks,” says Claassen.
In 2024/2025, Western Cape municipalities budgeted to spend R2,860 per person on capex on average. In Gauteng the figure was just R1,055 — especially concerning in the light of the province’s water crisis.
“The other provinces could take guidance from the Western Cape municipalities,” adds Claassen, echoing recent remarks by President Cyril Ramaphosa that ANC councillors should learn from well-run DA-controlled towns and cities — comments he later walked back.
So far, so depressing. Even the National Treasury’s debt relief programme, which was introduced in 2023 and allows municipal debt to be progressively written off on demonstration of sound financial management, has had limited success: 72 municipalities have signed up but only 14 had complied with the financial management conditions at last count.
Now, finally, the national government has decided to stop being a spectator to the wholesale unravelling of local government. The solution, which is being driven as a flagship initiative of Operation Vulindlela (the joint Treasury-presidency delivery unit), is the creation of a new performance-based incentive grant.
Currently set at R54bn over six years, and initially available only to the eight metros, the grant creates an incentive for the metros to arrest the long-term decline in the provision of three municipal trading services: electricity, water and sanitation.
To access the grant, the metros must establish these trading services, which are currently run as ordinary municipal departments often with split responsibilities, as standalone, sustainable business units.
They must be headed by a CEO and managed along business lines. This means they must publish annual financial statements, practise sound governance, hire competent staff and enter into formal service-level agreements with their metros.
The expectation is that the R54bn ring-fenced grant will be matched rand for rand by metros’ own-source revenue, unlocking a total of R108bn to increase investment in the infrastructure necessary for better service delivery.
The Treasury expects early gains — such as better billing, stronger cash flow and more maintenance spending — in the first year, with visible improvements in service outcomes expected after year three once capex on electricity, water and sanitation provision ramps up significantly.
In short, the scheme has the potential to unleash a virtuous cycle of better municipal revenue, leading to more investment and improved service delivery. However, the benefits may take time to be felt on the ground.
Though participation is voluntary, all eight metros are on board, in part because the financial incentives are so significant. And it’s not a moment too soon, given that Ratings Afrika’s MFSI scores for the metros slid from 43 on average in 2023 to 42 in 2024.
With a score of 70, Cape Town outperformed the rest of the metros by a large margin. It is the only metro that is considered to be highly financially sustainable, though the position of Nelson Mandela Bay, with a score of 50, is considered to be “fair”.
According to Claassen, underpinning Cape Town’s high score is a sound operating surplus and high levels of cash reserves, which can be utilised for infrastructure development and provide a considerable buffer to absorb financial shocks.
Cape Town is also the national exception when it comes to collecting revenue, boasting a collection rate of 96.6% against the metro average of 86.1%. Across the provinces, the municipal collection rate averages 81.2%. The Western Cape’s collection rate of 92.1% is the only provincial average close to the benchmark of 95%.
These very low average revenue collection rates, which reflect the unwillingness or inability of municipalities to collect the monies owed to them, contribute to the sector’s large cash shortfall.
Speaking to metro mayors on the new trading services reforms last month, finance minister Enoch Godongwana said the government “could no longer be a spectator” to the underinvestment in key network industries, as this had “not only made our cities unattractive for investment but also created financial challenges for some municipalities”.
He added: “The reforms will assist us to address years of underinvestment that have eroded service delivery, strained municipal finances, had an impact on the quality of life for residents and reduced economic growth potential.”
He even went so far as to suggest that “through the metro trading service reforms, as a collective, we will position our country on a new growth path”.
Bureau for Economic Research senior economist Roy Havemann says, however, that in addition to enacting the “important” trading service reforms, municipal capacity and skills must improve, political interference in municipal operations must be curtailed, and the framework for intervening in problem municipalities must be refined.
He warns that without these changes, “the economic impact of other structural reforms included in Operation Vulindlela will remain muted”.
The bottom line for Claassen is that unless there is a concerted effort from the municipalities themselves to strengthen their governance and financial management, the sector will continue its descent, and everyone, from residents to businesses, will be the poorer.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.