Municipal audit regression raises red flags for investors

South Africa’s municipal finances are telling a story that its elections have failed to change. According to the latest Consolidated General Report on Local Government Audit Outcomes 2024/2025 from the Office of the Auditor General (OAG), 15% of municipalities regressed in their audit outcomes, including certain municipalities and metros that had previously held clean audits. Those regressed entities together account for 24% of the total local government budget, a figure that should concentrate the minds of investors, lenders and treasury officials alike, since nearly a quarter of the sector’s public money sits under weakened financial oversight.

The broader audit picture is equally sobering for anyone assessing the sector’s risk profile. A total of 57% of municipalities maintained the same audit outcome status as in 2020-21, the last year of the fifth administration. The OAG noted that regressions should be a rare occurrence, particularly given the lack of significant changes in legislation and in accounting and performance reporting requirements during this administration. In other words, the deterioration happened in a stable regulatory environment, which points to institutional and governance failures rather than shifting compliance rules.

For a system built on 257 municipalities, comprising local, district and metropolitan structures as provided for in the Constitution, the financial signals matter because they translate directly into service delivery capacity. Established in 2000 as South Africa’s democratic reforms for local government took shape, in a period polarised mainly on racial and ethnic differences, the system has absorbed intensive efforts since then to increase investment in skills development, infrastructure improvements and local economic development activities. Yet most municipalities remain unable to deliver on their constitutional mandate to provide basic services. Spilling sewers, dirty streets, uncollected garbage, water shortages, poor municipal road maintenance and financial mismanagement have become normalised across much of the sector.

That is the economic backdrop against which voters are being asked to head to the polls for the seventh democratic local government election, if the 1995 elections during the transitional period are included, scheduled for 4 November 2026. The author of this analysis, Professor Kedibone Phago, dean of the University of Mpumalanga’s Faculty of Economics, Development and Business Sciences, argues that citizens should not raise their hopes too high. His case rests on the audit evidence: despite regular elections over many years, municipal performance, service delivery and good governance remain, in his words, pipe dreams for citizens. Elections have served mainly to perpetuate and reinforce the status quo, a Faustian pact in which residents pay a heavy price for regular voting that does not reliably produce quality municipal services, job creation or strong municipal institutions.

The reform pipeline offers little reassurance from a market perspective. The Cabinet recently approved a revised White Paper on Local Government, but Phago characterises its changes as mainly cosmetic rather than the practical reforms needed to reposition local government to fulfil its constitutional and socio-economic obligations. Municipal councils, the highest decision-making bodies in the system, have instead become centrepieces for fracas rather than instruments of good governance that hold mayors and their leadership teams accountable and enforce discipline on administrative structures.

The political economy adds another layer of risk. More political parties have entered the fray, further polarising voters and in some cases threatening the stability of municipalities, especially where coalition arrangements are in place. Phago’s remedy is consequence management, and here he points to a precedent from the financial oversight side. The OAG has adapted its own mandate through the Material Irregularity process, enforcing consequences for public sector financial mismanagement so that the changing needs of public institutions are catered for. He argues the Independent Electoral Commission (IEC), a Chapter 9 institution, should evolve similarly, finding ways to implement consequence management for political parties that underperform or fail to provide functioning municipal systems. The IEC cannot remain a political tool for processing electoral results and data without adjusting its mandate to new socio-economic realities, and a range of instruments, including OAG reports and municipal audit committees, already exist to support such a task.

The underlying question is one of accountability and return. Councillors are sworn in to be faithful to the Republic of South Africa and obedient to the Constitution, yet allegiance too often flows to political parties and their cronies rather than to voters. Reconciling that disconnect, Phago argues, is essential to avoid a pact that has become too costly for the Republic, its voters and its Constitution. The professor writes in his personal capacity; he previously served as professor and a director in the School of Government Studies at North-West University and holds a doctoral degree in Public Administration from the University of South Africa. Whether the November 2026 poll breaks that pattern, or simply renews it, remains the open question hanging over the sector’s finances.