Finance minister Enoch Godongwana’s recent decision to suspend all grants to 39 defaulting municipalities marks a significant point in local government finance.
This drastic measure, no doubt controversial in some quarters, follows years of deepening dysfunction, runaway debt and outright defiance of financial regulations. At stake is not just the sustainability of local government, but the financial integrity of national and regional utilities as well as the broader intergovernmental system.
The grants — both equitable share allocations and conditional infrastructure transfers — are being withheld until affected municipalities demonstrate progress in repaying long-overdue debts. This shift by the National Treasury from facilitative support to conditional enforcement reflects mounting frustration with municipalities that continue to defy financial norms and regulations, and ignore repeated warnings.
The scale of municipal indebtedness is staggering. By the end of March municipalities collectively owed Eskom about R120bn — up from R95bn just three months earlier. Water boards are also under pressure, with municipalities defaulting on billions in unpaid bulk water accounts. The combined total owed to all creditors — including Eskom, water boards, pension funds, the SA Revenue Service and others — now stands at R131.8bn. Of this, 84.8% has been in arrears for more than 90 days.
This skyrocketing debt, particularly to Eskom and the water boards, has moved beyond a local government issue and now represents a national fiscal risk. These state-owned entities are already financially vulnerable and rely heavily on municipal payments to stay solvent. Should defaults continue at present levels they could face operational and liquidity crises, raising borrowing costs, weakening service reliability and undermining sovereign creditworthiness. National debt risk assessments could soon reflect the instability introduced by municipal nonpayment.
The roots of this crisis are not simply financial. They are embedded in poor governance, weak political oversight and deteriorating administrative capacity. Many of the defaulting municipalities continue to pass unfunded budgets, where expenditure far exceeds projected revenue. This leads to grant funding and other revenue being diverted away from creditor payments towards inflated salary bills and operating costs.
However, the failure to pay creditors is not only due to weak budgeting but also to poor revenue collection. Since earlier this year municipalities are themselves owed R416.1bn by consumers. Municipal IQ’s analysis shows a strong and intensifying correlation between this rising consumer nonpayment and growing arrears to creditors. As households, businesses and even government departments fail to pay their municipal bills, municipalities in turn become unable to meet their obligations to Eskom, water boards and other service providers. This downward spiral is not only fuelling service delivery failures, but also weakening the financial integrity of the broader intergovernmental system.
Households are responsible for the bulk of this consumer debt — accounting for 72% of the total (R299.5bn), while businesses owe 22% and government departments 6%. But while nonpayment is often framed as a choice residents make, a moral failing if you will, it is a more complex problem. In some cases residents with limited affordability are genuinely unable to pay. In others they are unwilling — either due to billing errors, distrust of local government or active protest against poor service delivery.
Indeed, Municipal IQ data on service delivery protests show that most are now caused by anger at electricity and water non-delivery and outages. Though there are also a large number of residents who can and should pay but choose not to because they get away with it. Businesses frequently (and sometimes cynically) delay payments or dispute billing, while national and provincial departments — ironically — are often themselves in arrears.
This revenue shortfall is compounded by systemic administrative failures. Many municipalities lack the capacity to send accurate bills, enforce credit control or follow up on defaults. These failures are worsened by vacancies in finance departments and political interference in administrative processes. Without competent, independent financial management the basics of municipal governance collapse. And in fact it has to be said that while there is a clear and growing correlation between rising consumer nonpayment and growing arrears to creditors, this does not necessarily mean lower revenue collection is the primary cause of low creditor payments. Instead, it may just point to widespread administrative dysfunction and failure across all levels of municipal finance.
The Treasury’s Eskom Municipal Debt Relief Programme, introduced in 2023, was a well-intentioned attempt to incentivise better behaviour. It offered municipalities up to 70% debt write-offs — provided they paid outstanding Eskom bills and entered binding repayment plans. Yet by the end of 2024 it was clear the programme had not worked: Eskom’s arrears reached new highs, and many municipalities failed to meet the conditions. And for the Treasury this may have been the last straw. The programme’s failure highlights the limits of incentive-based approaches in an environment where governance has broken down.
The suspension of grants, therefore, represents the Treasury’s move from carrot to stick. But this approach is not without risk. Service interruptions, project delays and cash flow constraints may follow in affected municipalities. Residents could bear the brunt of deteriorating services, and protest action may escalate. In truth though, in many of the 39 municipalities concerned the scale of dysfunction is such that the suspension may be felt more acutely by councillors and municipal employees — who may face salary cuts — than by residents already receiving minimal services.
The Treasury may also soon deploy mitigating measures. Ring-fencing grant transfers directly to bulk service providers could ensure continued electricity and water supply, while denying errant municipalities discretionary access to funds. This would help balance enforcement with basic service continuity. One broader concern is investor confidence. Grants serve as a financial backstop in the municipal space and often underpin confidence in subnational borrowing. If grant flows are seen as unstable, it could chill investment or raise the cost of capital for the entire local government sector.
However, the problem is not limited to these 39 municipalities. Structural reform is urgently needed across the system. Government departments must pay their municipal accounts timeously. Provincial governments must be empowered to intervene earlier and more effectively under section 139 of the constitution. Interventions are often delayed, politically compromised or superficial. Without proactive, well-resourced, and apolitical intervention capacity, municipal collapse will continue.
Above all, municipalities must get back to basics. They must adopt funded budgets, bill accurately, collect revenue diligently and prioritise creditor payments. Professionalising financial management, insulating administration from politics and enforcing accountability are not optional — they are essential.
The Treasury’s decision to suspend grants is both bold and necessary. The stakes are enormous. Without intervention the escalating debt spiral could not only collapse local government, but destabilise national service delivery and weaken the country’s fiscal standing.
While the risks of enforcement are real, the risks of inaction are greater. What is now required is co-ordinated, multisphere reform to restore financial discipline, rebuild capacity and renew trust in SA’s municipalities.
Allan, a former special adviser to a previous local government minister, is MD of data and intelligence organisation Municipal IQ.
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