5th Annual Local Government Conversations - White Paper Series, Webinar 3 of 4

Sustainable Municipalities: Fiscal Decentralisation and Sustainable Revenue Models

Hosted by: Future Cities Africa and The Municipal Edge

Topics: Fiscal Decentralisation - Municipal Revenue Reform - Equitable Share - Unfunded Mandates - Chapter 8, White Paper on Local Government - Financial Sustainability

This webinar unpacked Chapter 8 of the 2026 White Paper on Local Government - the chapter that determines whether fiscal decentralisation translates into genuinely sustainable municipalities. Three panellists brought practitioner, sector and research perspectives to bear on one of the most consequential reform agendas in a generation: how South African municipalities can move from financial distress to sustainable value creation.

Platinum sponsor:Business Engineering

Moderated by Mr Zolani Zonyane, Editorial Director, The Municipal Edge
Hosted by Mr Dan Claassen, MD, Future Cities Africa

The core argument

Municipal challenges are fundamentally institutional before they are financial. South Africa does not lack legislation - it lacks implementation. The reform proposed in Chapter 8 can only succeed if governance is sorted first, if mandates come with full cost assessments and matching funding, and if municipalities do more with what they already have before seeking new revenue sources. The aggregate consumer debt owed to municipalities has grown from R143 billion in 2018 to R427 billion in 2025 - a number that reflects broken systems, not simply unwilling payers.

Speaker contributions

Dr Johan Tesselaar - Program Manager, Office of the Municipal Manager, West Coast District Municipality

Johan opened with a provocation: the question is not how municipalities generate more revenue - it is how they create sustainable value. His presentation moved from diagnosis to a practical three-phase implementation roadmap.

• Municipal dysfunction is institutional before it is financial. Governance before finance is not a slogan - it is the precondition. Sound systems, not more money, are where sustainability starts.
• Chapter 8 introduces three key reform pillars: revenue reform (including protection of affordability), fiscal reform (differentiated funding models replacing one-size-fits-all), and accountability reform (enhanced transparency).
• South Africa does not need more legislation. It needs implementation. Municipalities do not fail because legislation is absent - they fail because implementation is weak.
• Decentralisation must be approached with care. Decentralise decision-making and local innovation, yes - but do not decentralise poor governance, financial instability or institutional failure. Where decentralised functions underperform against agreed KPIs, a mechanism to recentralise must exist.
• No new mandate should be assigned without a full funding impact assessment. Unfunded, underfunded and poorly designed function assignments are a structural problem - and the White Paper is an opportunity to fix this permanently.
• The equitable share formula must be reformed to reflect the true cost of basic services, updated population projections, service backlogs, and the needs of weaker rural areas. A fairer equitable share is the foundation of fiscal decentralisation.
• Revenue models must evolve beyond property rates, electricity and water tariffs. Economic development - including investment attraction, semigration campaigns and tourism - grows the local economy and the revenue base organically. Weskus District's brand campaign is a concrete example.
• Districts must justify their existence through value creation - becoming regional economic coordinators, shared services providers, infrastructure authorities and innovation platforms. Weskus already operates a bulk water concession and regional roads function on this basis.
• Public trust is a fiscal asset. Citizens pay when they trust their leaders, see results and believe their money is well managed. Open budget platforms, participatory budgeting and real-time expenditure dashboards are the tools.
• Phase one of the implementation roadmap: stabilise governance, fix billing systems and enforce debt collection. Phase two: develop shared services and ring-fence utilities so that electricity pays for electricity and water pays for water. Phase three: scale to regional economic and infrastructure delivery.

"Public trust is not just a concept. Public trust is a fiscal asset. Citizens will pay us when they trust their leaders, when they see results, and when they believe their funds are well managed."

Mr Nkosinathi September - Senior Advisor: Financial Resilience, South African Local Government Association

Nkosinathi presented SALGA's formal position on Chapter 8, grounded in the findings of a commissioned 2024 study on the local government funding framework. His core message reinforced and amplified Johan's: do not decentralise fiscal stress.

• SALGA's position is unambiguous: municipalities are sustainable only when functions, powers, funding, capacity and accountability are aligned. A sustainable municipality is one where responsibilities are matched by realistic funding, adequate capacity and clear accountability.
• The total aggregated municipal budget for 2024/25 was R652 billion, with expenditure at R650 billion. Employee costs and bulk purchases together exceeded 60% of operating expenditure. Consumer debt stood at R428 billion as at 30 June 2025. Capital expenditure was only 65% of total revenue.
• The current equitable share allocation - at 10.2% of nationally raised revenue - is insufficient. SALGA's study found that even if municipalities maximise own revenue, a R58 billion fiscal gap remains. The minimum required share is 13.5%, with 18.8% needed for genuine sustainability.
• Free basic services is a national policy, not a local government policy. The delegation of this responsibility to municipalities must come with adequate and predictable funding. The recent conversion of the library conditional grant to provincial equitable share - with only a two-year ring-fence before it falls into the general provincial budget - is a warning of what happens when this principle is ignored.
• Revenue collection is under strain from affordability constraints, weak billing data, aging meters and poor credit control. Bulk electricity and water costs are crowding out service delivery. Infrastructure is under-maintained.
• Fix the revenue value chain first: accurate customer data, credible billing, updated valuation rolls, metering, verified indigent registers, and treatment of water and electricity loss reduction as a revenue strategy - not a technical services problem.
• Provincial oversight - under Sections 154 and 155 of the Constitution - must be rebalanced toward structured support and early warning rather than compliance enforcement.
• Governance affects revenue. Communities pay when billing is accurate and services are reliable. The SALGA submission closes on the same point Johan opened with: public trust is the financial sustainability of local government.

"A sustainable municipality is one where responsibilities are matched by realistic funding, adequate capacity and clear accountability. We must not decentralise fiscal stress."

Mr Jugal Mahabir - Programme Lead: Local Government, Public Affairs Research Institute

Jugal brought the research perspective, drawing on PARI's work on municipal revenue, poverty identification, tariff design and intergovernmental fiscal theory. His contribution focused on practical short-term interventions and the theoretical underpinnings of fiscal decentralisation.

• The problems in municipal finance are both performance-related and structural - and they are often linked. Increasing debt owed to municipalities reflects both poor management and genuine affordability constraints. Policy reform must address both simultaneously.
• The most immediate opportunity is to get more from existing resources - on both the expenditure and revenue sides - through a structured intergovernmental approach to fixing key institutional and system problems. This is the correct short-term strategy given the tight fiscal framework.
• Data is the foundation of the revenue value chain. If customer data is poor, every subsequent step - billing, credit control, indigent targeting, tariff design - breaks down. A nationally driven survey to understand poverty and affordability at municipal level would be transformative, particularly given that the equitable share formula still uses 2011 census data.
• Municipalities struggle to correctly identify the poor. Indigent registers have low inclusion errors but high exclusion errors - meaning many households that should qualify for free basic services are not receiving them and are instead being charged. A rural Eastern Cape municipality described driving hundreds of kilometres with a tent and a photocopier just to register poor households. Better targeting frameworks are needed.
• The quantity of free basic services has not been reviewed in line with actual costs since the policy was introduced in 2001. If the amount provided is insufficient, poor households are forced to consume beyond their allocation and are then charged for the excess - creating debt that is structurally built in.
• Progressive tariff design is an underutilised instrument. The goal is not to increase the burden on middle and high income households, but to better optimise the willingness and ability to pay at the higher end - while protecting affordability at the lower end. As electricity and water consumption falls across the system while fixed costs remain, tariff structures must adapt.
• Nationally driven smart metering rollouts, a national database of defaulters, and integration of SARS and deeds data into municipal revenue management systems are practical interventions that can support municipalities that lack the capacity to do this themselves.
• Theoretically, own revenues are preferable to grant funding for promoting local democracy and accountability. When communities see where their money goes, they hold government more accountable. Own revenues are also more stable than grants during fiscal consolidation and recessions - as research across the 2008 crisis, post-2010 consolidation, and COVID demonstrated. Where fiscal capacity exists, it should be maximised. Where it does not, grants should redistribute to fill the gap.

"If we can fix key aspects of the revenue management value chain initially, we can get the short-term benefits in improving fiscal effort - and from there look toward greater financing options and a more sustainable model for local government."

Key takeaways for practitioners

1. Governance before finance. No fiscal reform delivers results if the institutional foundation is broken. Fix governance systems first - then address revenue.
2. No new mandate without a full funding impact assessment and costing. The cycle of unfunded and underfunded mandates must be broken at the point of assignment, not managed after the fact.
3. The equitable share formula is outdated and underfunded. SALGA's study puts the minimum required share at 13.5% of nationally raised revenue, with 18.5% needed for sustainability. The current 10.2% is based on 1998 assumptions.
4. Fix the revenue value chain before pursuing revenue enhancement. Accurate data, credible billing, updated valuation rolls, correct indigent identification and loss reduction are the immediate priorities.
5. The 2011 census data underpinning the equitable share formula no longer reflects poverty and affordability realities. A nationally driven poverty and affordability survey, updated every five years, would materially improve both fiscal transfers and municipal revenue management.
6. Public trust is a fiscal asset - not a soft outcome. Where communities trust their municipality, payment rates improve. Transparency, reliable services and visible accountability are revenue instruments.
7. Districts must earn their place through value creation - regional coordination, shared services and infrastructure authority - not through administrative existence alone.
8. Own revenues, when achievable, are theoretically and practically preferable to grants. They promote accountability, are more stable through economic cycles, and strengthen local democracy. The long-term goal of reform should be to grow the own-revenue base alongside a redistributive grant system that supports those municipalities where fiscal capacity is structurally limited.

CPD points available - contact cpd@cigfaro.co.za