Local government is considered to be government closest to the people. It is usually the third level or sphere of government in most countries. South Africa is divided into three spheres (not levels). Each sphere is distinctive yet interdependent and interrelated with the other spheres. The Constitution of the Republic of South Africa, 1996 provides for the allocation of functions and powers to each sphere, but prohibits one sphere of transgressing onto the area of jurisdiction of another sphere. The total geographic area of the country had been divided into three categories of municipality viz. category A (metropolitan), category B (urban) and category C (district). The dilemma faced is that nearly 60% of the population is urbanised. Since the end of the apartheid government’s era municipalities were merged into non-racial municipalities including large rural areas comprising relatively poor communities which cannot make any or only a limited financial contribution for the services they receive. The result is that municipalities have to rely on grants from the national government to provide basic services such as water, electricity, refuse removal and sanitation. The article addresses the justification for the allocation of grants to the various categories of municipality. It then explains the various kinds of grants and attends to the question of whether municipalities could provide sustainable services if they have to rely on grants. The article is mainly a desktop research project relying on documentation from official reports from, e.g. the Auditor-General and National Treasury, relevant legislation, other policy documents and literature were also consulted. A qualitative research approach is followed.