The funding model for local government is under review as some of the assumptions of the existing model are incorrect, co-operative governance and traditional affairs minister Velenkosini Hlabisa has indicated.
The South African Local Government Association (Salga) has long objected to the equitable share of national revenue that local government receives, which works out to 9.6% of the total for the 2024/2025 fiscal year. Salga argues this allocation does not adequately cater for the services municipalities are constitutionally obliged to deliver.
Many of South Africa's 257 municipalities are either in financial distress or bankrupt. They owe Eskom R110bn and the water boards R23bn and are owed billions of rand. By end of September consumer debt to municipalities amounted to R386.5bn, of which government debt was R23.2bn and municipalities owed creditors R126.8bn, Treasury data shows.
The objective of this review is to identify shortcomings in local government policy and its implementation.
— Salga
In a written reply to a parliamentary question by EFF MP Veronica Mente-Nkuna, Hlabisa acknowledged the funding provided to the local government sector was “inadequate and therefore a review is being undertaken to ensure this is rectified. In this regard, the ministry of co-operative governance and traditional affairs has raised this matter with the ministry of finance”, he said.
“The department of co-operative governance has also been working closely with Salga to review the funding model for local government with the view to engaging the National Treasury in this regard.”
Hlabisa said his department was reviewing the 1998 white paper on local government in preparation for future engagements with the Treasury.
Revenue generation
“While many aspects of the white paper remain relevant, some structural and systemic assumptions made at that time are now seen as incorrect. This review offers an opportunity to evaluate the expected outcomes after nearly three decades of implementation. One critical assumption is related to municipal revenue generation, which directly affects municipalities’ financial sustainability,” he said.
According to Salga, the white paper assumed local government would be capable of generating 90% of its revenue; an assumption that has not materialised.
“The objective of this review is to identify shortcomings in local government policy and its implementation. Additionally, it will propose recommendations to address challenges that hinder the effective performance and functioning of local government. The issue of reviewing the funding model has been prioritised during the process.”
The calculation of the division of revenue between the three spheres of government is dependent on data on matters such as poverty and underdevelopment provided by Stats SA based on census data. There were questions about the reliability of Census 2022 data, which were, however, rejected by Stats SA.
In the medium-term budget policy statement tabled in parliament by finance minister Enoch Godongwana in October, the Treasury noted the phased release of the 2022 census data had delayed the availability of information needed to update the provincial equitable share and local government equitable share formulas for 2025/2026.
“This delay also affects the release of income and expenditure data essential to updating poverty measurements in both formulas ... the biggest impact is on the local government equitable share, which relies heavily on income and expenditure data,” the Treasury noted.
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