A municipality’s financial health is a crucial indicator for how the municipality performs in delivering such services. Finances determine, for instance, whether municipalities can acquire and maintain infrastructure, fund development projects, appoint contractors, settle debt or attract and retain skills and talent. Thus, sound and strategic financial management is necessary to ensure that municipalities are financially viable and have the capacity to meet their service delivery and development objectives. Municipalities must meet their financial obligations and are primarily responsible to avoid, identify and resolve any financial problems they may face. In this regard, the municipal council, executive and senior management are collectively responsible for the professional management of the municipality’s revenue, expenditure and assets.

Failure to properly manage and safeguard municipal finances adversely impact organisational performance, as it constrains municipalities from meeting their financial commitments or rendering basic services. When this happens, municipalities must be subjected to a mandatory provincial intervention under section 139(5) of the Constitution, which entails the imposition of a financial recovery plan to turn the situation around.

This article provides an analysis of financial recovery plans and their effectiveness in improving the financial health of municipalities.

What is a financial recovery plan?

A financial recovery plan is implemented following a mandatory or discretionary intervention to resolve serious or sustained financial problems that hinder a municipality from managing its finances effectively, efficiently and economically. Indicators of a serious financial problem include a municipality’s failure to settle debt timeously, defaulting on its financial obligations (i.e., paying salaries of councillors and employees), when municipal expenditure exceeds  revenue for two or more consecutive periods, submitting financial statements for auditing after more than 60 days after the end of a financial period, or disclaimed audit outcomes (see section 138 of the Local Government: Municipal Finance Management Act).

The primary objective of a financial recovery plan is to build the capacity of the municipality to meet its financial and service delivery obligations.  It is aimed at placing a municipality in a sound and sustainable financial position as soon as possible. Thus, it contains timeframes for financial recovery, as well as milestones to be achieved within such timeframes. The plan sets out, for instance, the financial problems of a municipality, debt-containment strategies, revenue optimisation measures, and the actions to be taken by the municipality to implement the financial recovery plan.

Financial recovery plans are binding on the municipality in the exercise of its executive and legislative functions. Regardless of whether such plans are mandatory or discretionary, they must be implemented by the municipality and monthly reports must be submitted to either the MEC for local government (in the case of a discretionary intervention) or the MEC for finance (in the case of a mandatory intervention). Therefore, financial recovery plans are directed at supporting municipalities to improve their financial performance and reduce going concern uncertainties.

The status of financial recovery plans in resolving financial problems in municipalities

The 2023/24 Consolidated General Report on Local Government Audit Outcomes shows that many municipalities are in a poor financial state. Their financial health continues to deteriorate, with an increased number of municipalities adopting unfunded budgets and being mandated to implement financial recovery plans during the 2023/24 financial year.

An unfunded budget refers to a budget in which expenditure exceeds the revenue. Unfunded budgets indicates that a municipality has reduced spending power which may lead to cashflow deficits and constitutes a serious financial problem warranting the imposition of a financial recovery plan. During the 2023/24 financial year, 113 of 257 municipalities adopted unfunded budgets (Auditor General, 2025: 77). In KwaZulu-Natal and Northern Cape provinces, for example, 13 and 22 municipalities, respectively, adopted unfunded budgets (Auditor General, 2025: 194 & 204). Moreover, there appears to be a mismatch between the number of municipalities operating with an unfunded budget and those that have been subjected to section 139(5) interventions.

Where these interventions do not follow when municipalities show signs of financial distress, it affects their ability to continue as a going concern. The 2023/24 Auditor General report suggests that this intervention is often delayed or not adopted at all. This is exemplified by the fact that only 27 of 49 municipalities with going concern uncertainties had financial recovery plans in place (Auditor General, 2025: 92). Similarly, only 3 of 7 municipalities with repeated disclaimed audit outcomes have financial recovery plans in place (Auditor General, 2025: 59).  

Importantly, in municipalities where financial recovery plans are in place, the financial performance of these municipalities have not improved. For example, Emalahleni Local Municipality continues to struggle financially despite being under a mandatory financial recovery plan since 2018 (Auditor General, 2025: 92). Municipalities with financial recovery plans in place include the City of Tshwane, City of Johannesburg, Emfuleni Local Municipality, Mbombela local Municipality and !Kheis Local Municipality.

Recently in !Kheis Local Municipality, the South African Municipal Workers Union (SAMWU) approached the High Court for an order directing the national executive to intervene under section 139(7) of the Constitution for the purposes of implementing a financial recovery plan in the Municipality. This follows after the Municipality failed to pay the salaries of its employees for two months as a result of a sustained financial crises. As in other municipalities in a similar situation, the financial sustainability of !Kheis Local Municipality has not improved despite the Municipality implementing a financial recovery plan in 2022. The Court, in refusing the relief sought, ordered the municipality to pay the salaries of the municipal employees, citing that the “payment of remuneration for services rendered is an essential term of any contract of employment”. In this regard, the Court held that it is unacceptable for the MEC for local government in the Northern Cape province to merely shrug his shoulders and argue that there is not enough money to pay the salaries of its employees (see paras 56-59).

Recommendations for improving the financial well-being of municipalities

The 2023/24 Auditor General report raises the alarm that financial recovery plans are not effective in improving the financial health of municipalities. It is indicative that there are serious underlying challenges that are hindering section 139(5) interventions from yielding desirable outcomes in municipalities. If not resolved, the number of municipalities facing a financial crisis will increase despite provincial interventions being in place to resolve the crisis. This is an instance where collaboration with research institutions and other stakeholders may be useful to assess how the interventions can be strengthened to yield better results in municipalities. The following recommendations may be useful in improving the impact of financial recovery plans in municipalities:

• Review how financial problems are diagnosed in municipalities;
• Ensure that financial recovery plans are “appropriate”, and strategies are tailored to resolving financial problems, which are context specific;
• Strengthen internal controls for monitoring the implementation of financial recovery plans;
• Stabilise the municipal administration to avoid disruptions in the implementation and monitoring of the financial recovery plan;
• Enhance the capacity of, and support to, the mayor, council and provincial MEC for Local Government or Finance to effectively monitor and implement the financial recovery plan;
• The MEC for Local Government or Finance should continuously improve the financial recovery plan, which must be informed by reviewing the monthly reports submitted to them; and
• Where necessary, collaborate with municipalities by providing training and deploying additional technical support to facilitate the implementation of financial recovery plans.

Beyond this, municipalities must ensure that their Integrated Development Plans (IDPs) are accompanied by feasible financial plans, which includes financial strategies that enable them to become economically self-sufficient in the long run. Financial recovery plans must, in turn, be aligned to the long-term aspirations by prescribing measures that are financially sustainable.

By Jennica Beukes, Doctoral Researcher