On 7 July 2026, National Treasury (NT) announced it was temporarily withholding the July 2026 local government equitable share (LGES) transfers to 69 municipalities – more than a quarter of South Africa’s 257 municipalities. National Treasury cited “persistent and serious non-compliance” with the Municipal Finance Management Act (MFMA). Roughly R13.5 billion of the R110 billion 2026/27 LGES envelope was affected. Since then, NT has begun releasing funds to municipalities that met its conditions, while continuing to withhold funds to others. While it is necessary and urgent to address financial mismanagement and corruption, AIDC argues that this is not the only reason for financial challenges faced by the majority of municipalities in the country. Underlying the financial problems is an unsustainable and irrational financing model that is based on the assumption that municipalities can generate 90 percent of their own income. Overwhelmingly, this is meant to be achieved through service charges and tariffs. This arises from the adoption of the full cost recovery model.
Nowhere has the full cost recovery model delivered affordable, reliable, universal basic services for the poor; everywhere it has been applied at scale, it has produced exactly the pattern now visible in South African local government: rising arrears, disconnections, deteriorating infrastructure, and a widening gap between well-resourced and poor municipalities. While not unusual, the problem of the full cost recovery model is magnified in a country defined by mass unemployment and entrenched inequality. Raising sufficient revenue in this context is a guaranteed impossibility; the outcome is that most municipalities find themselves with very little funding to cover operational expenses. In such cases, withholding of funding is not only a false solution, it also punishes the poor. As a result of the withholding of the equitable share transfers, many households will not receive the free basic services that they are dependent on. Furthermore, in the long term the measures taken by NT will not result in a fundamental change to the unsustainable financial situation that municipalities find themselves in.
Why Treasury says it withheld the funds
National Treasury’s stated justification, repeated by Finance Minister Enoch Godongwana in Parliament, centres on five categories of failure:
- the adoption of unfunded municipal budgets (45% of municipalities did so in 2024/25);
- the non-payment of bulk suppliers, principally Eskom and the water boards;
- unaddressed unauthorised, irregular, fruitless and wasteful expenditure (UIFWE);
- non-payment of statutory obligations to SARS, the Auditor-General and pension and retirement funds;
- and the collapse of internal consequence management, with many Municipal Public Accounts Committees failing to process UIFWE cases at all.
Since 2021/22, municipalities have collectively recorded R287.46 billion in unauthorised, irregular, fruitless and wasteful expenditure combined. These are real and serious problems, and the AIDC does not dispute that governance failures exist in many councils. However, not all municipalities are plagued with all five of the categories listed above. In some cases, even financially “clean” municipalities can have unfunded budgets because their income is just too low, as residents are not able to “buy” enough services from the municipality, and municipal rates are low. The fact is that the national division of revenue allocated to local governments is inadequate in relation to the functions that local governments must serve, such as the provision of water, electricity, sewage and waste removal, and public transport. The combined effect of inadequate funding of local government along with harsh budget cuts for more than a decade has culminated in a drastic reduction in the number of households that are provided with free basic services, from 3,6 million in 2016 to 2,8 million in 2023. There is also a significant gap between the National Treasury’s allocation of resources for free basic services and the ultimate number of beneficiaries. For example, in terms of free basic electricity, NT makes provision for 11 million households, but only 2,8 million households end up receiving indigent support.
How Eskom fits into this picture
Eskom’s finances sit at the centre of NT’s justification. The NT argues that non-payment to Eskom and the water boards threatens the financial sustainability of these bulk suppliers, with knock-on risks for the electricity and water systems nationally. However, municipal non-payment to Eskom is not simply a function of municipal indiscipline, but the product of a fiscal architecture in which municipalities are expected to recover costs from residents who increasingly cannot pay and businesses that refuse to pay. As the AIDC has set out in previous submissions, municipalities that were previously able to direct 52.4 percent of tariff revenue to running service networks and cross-subsidisation now retain only 28 percent, with almost three-quarters of tariff revenue absorbed by Eskom and the water boards. A large portion of municipal debt to Eskom is due to household debt to municipalities, and household debt to municipalities is due to mass unemployment, poverty, and tariffs that have outstripped what working-class and poor households can afford. Punishing municipalities for Eskom arrears without addressing the underlying affordability crisis simply pushes the same pressure further down the chain. The NT’s measures combined with the shift to a wholesale electricity market will lead to more disconnections and affordability-driven energy poverty, as municipalities are forced to act with the logic of businesses.
It is also worth noting what Treasury’s own intervention has revealed about the direction of debt in local government. The Financial and Fiscal Commission (FFC) told Parliament on 17 July that while the 69 affected municipalities collectively owe R97.4 billion to creditors – including Eskom and the water boards – they are themselves owed R217.9 billion, including R11.6 billion by other organs of state and R46.4 billion by commercial entities. Municipalities are not simply bad debtors; they are also unpaid creditors of the national and provincial governments and the private sector.
The intervention by National Treasury is unlawful
In the briefing on Friday, 17 July, this piecemeal, conditions-based release process was described by FFC chairperson Dr Patience Nombeko Mbava as a “blunt instrument” applied in an undifferentiated way to municipalities whose underlying problems are not homogenous. Fifteen of the affected municipalities, she noted, have no cash buffers at all, meaning the withholding of transfers carries a real and immediate risk to service delivery for their residents, whatever Treasury’s public assurances. Mbava went further, arguing that the unconditional local government equitable share, unlike a conditional grant, can lawfully be stopped only by Parliament, not by the executive acting alone, and she identified textual contradictions between Treasury’s invocation of section 216(2) of the Constitution (which speaks only of “stopping,” not “withholding,” funds) and the Division of Revenue Act, which governs withholding but was not invoked.
Our demands
The AIDC does not defend municipal financial mismanagement, and we support real accountability for officials and political leadership responsible for irregular and wasteful expenditure. Accountability for individuals, however, is not the same as collective punishment of residents, and correcting governance failures is not the same as fixing a broken fiscal model. We call on the government to:
- Ring-fence the free basic services (FBS) component of the equitable share to all affected municipalities immediately, regardless of the status of other compliance conditions, so that discipline aimed at councils does not translate into service interruptions for the poor;
- Reform municipal property tax and own-revenue instruments progressively. Municipalities should explore raising additional revenue from increasing property taxation on very high-value property, rather than by using regressive tariff increases and cost-recovery mechanisms that fall hardest on low-income households;
- Abandon the drive toward cost-reflective tariffs and further commercialisation of electricity and water services under the Metro Trading Services Reform programme and Operation Vulindlela, in favour of a publicly-financed, publicly-delivered pathway for essential services; and
- Substantially increase the level of finance to local government to ensure that it can effectively fulfil its mandate through progressive resource mobilisation, including a wealth tax, closing the estimated R600 billion annual tax evasion gap, and removing tax breaks for the rich, such as the medical aid tax credit.
The current intervention by NT risks depriving residents, and it does nothing to address the structural cause of the crisis – a local government fiscal framework built on the assumption that the poor can pay their way out of a system that was never designed to ensure universal access to water, energy and sanitation. South Africa needs a publicly financed, publicly delivered pathway for water and electricity rather than deeply entrenched commercialised service delivery. The shift to Metro Trading Services and the expansion of Operation Vulindlela into local government risks the further commercialisation of basic rights such as water access. Austerity and the full cost recovery model in relation to essential services will mean the continuation of the failure to ensure service delivery for all. It also means the continuation of social tensions in this country due to conflict over a perceived scarcity of resources. Instead, we say tax the rich to fund municipalities to work for all who live in South Africa.
