Like a lot of things that have gone wrong in South Africa, municipal decline is one that can be squarely put down to a problem of incentives.
No doubt in the lead-up to local elections, most of the coverage will be focused on shocking stories about service delivery failure, like water outages, load-shedding and bath-sized potholes. However, beneath those very visible symptoms is the deeper structural issue of local governments facing unprecedented fiscal collapse, brought on by a mishmash of terrible incentives that socialise failure and do not reward municipal excellence, along with a system of over-centralized government.
To quote the great “Stone Cold” Steve Austin, can federalism get a “hell yeah” that handicaps capable local governments in the name of “protecting” poor municipalities?
According to National Treasury’s most recent local government section 71 report for the year ending June 2025, municipal consumer debt in South Africa has ballooned to R427.7 billion, up sharply from the previous year. Of this total, about R376.1 billion (almost 88%) is older than 90 days and unlikely to be recovered. 72% of this is owed by households.
To contextualise these numbers, it is important to understand that municipalities are funded through three main streams; property rates, service charges (water, electricity and refuse), and national transfers (equitable share + conditional grants).
Property rates
This is the quiet time-bomb because property rates assume property values will rise, owners will continue to be able to afford to pay and that municipalities can collect effectively. However, in many towns and even metros, property values are stagnating or declining, businesses are closing or relocating due to service-delivery failures, (more on that later), and billing systems are dysfunctional. When property values stagnate, municipal revenue stagnates but salary bills, electricity purchases (from Eskom) and maintenance costs do not. This creates structural deficits. This is the problem with a system that does not tie the pay of senior municipal leaders aggressively to well-thought-out performance and governance targets that include business vitality and service delivery efficiency.
Service charges (cross-subsidisation is breaking down)
Historically municipalities have always relied on electricity markups to subsidise other services. This worked when Eskom supply was stable, most homes were grid-dependent and industrial users (back to that business vitality point) consumed large volumes. This setup has definitively changed (and municipalities are even trying to fleece solar users) because of the scarring of prolonged load-shedding that has incentivised solar adoption by affluent households and large industrial users increasingly investing in self-generation, along with non-payment in poorer areas. (That business vitality point, plus asinine policy from national government). The cross-subsidy model is broken because the customers who paid the most are leaving the system, and the poor are increasingly relying on indigent status or simply illegal connections. It is a structural death-spiral created by adverse incentives brought on by the ANC and its dogged insistence on rent-seeking and patronage.
A way out is quite difficult, because enforcement (cutting off illegal connections and non-payers) drastically increases the risk of social unrest. Non-enforcement accelerates financial collapse. If Helen Zille and any other competent mayors win outright, I do not envy them their jobs.
National transfers (dependency without incentive)
By design, national transfers are meant to support poorer municipalities. However grants are often used to fund capital expenditure and not maintenance. Money is often returned to Treasury due to underspending, because our municipalities are chronically underskilled. There are also weak consequences for financial mismanagement, and well-run municipalities do not get rewarded. In other words, our system is set up to penalize performance and competence, socialize failure and create dependency.
Why does all this matter?
In that section 71 local government report, 49 municipalities were flagged for having negative cash positions, up from 42 a year earlier. This is a clear sign of increasing liquidity-distress all over the country. National Treasury itself publicly declared that 63% of municipalities are currently in financial distress and unable to meet basic financial management standards or sustain service delivery.
In other words, this year’s local elections are deeply significant, and I don’t think it would be an exaggeration to call them a fight for the soul of this country. Ultimately, incentives do matter very much. Those failing municipalities and their leaders have no incentives to improve or hire based on competence and skill because at some point a national bailout will come, their pay will be unaffected and the dependency will continue.
It doesn’t matter how competent a local government is, because for all the City of Cape Town’s laudable governance prowess under duress, the pictures of sewerage spills and other service delivery deficiencies will continue on social and traditional media. Without a structural reset (and increasing government decentralisation) based on incentives that reward municipal governance excellence and service delivery, even the best local governments will continue to be handicapped and be unfairly maligned by those who don’t understand the system.
Being a good mayor and being a competent local city council are unenviable and thankless jobs in South Africa.
[Image: https://liveandletsfly.com/makause-squatter-camp/]
The views of the writer are not necessarily the views of the Daily Friend or the IRR.
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