The medium-term budget policy statement said major reforms are taking place with the government looking to reward successful infrastructure roll-out and assist poor performers to do better.
In his medium-term budget speech, Finance Minister Pravin Gordhan said increased allocations for infrastructure were not enough.
"We also need to address the shortcomings in planning, procurement and contract management that undermine the effective use of these funds," said Gordhan.
"There will be changes in the way our infrastructure conditional grants are managed. Cash flows will be linked to actual project delivery and technical support programmes will be stepped up. We need to see substantial improvements in infrastructure management in many departments and municipalities if we are to succeed in building the capacity required for a faster growing economy and better living conditions."
Over the next three years the government aims to achieve better value for money from investment in provincial infrastructure.
"A new approach to infrastructure conditional grants is intended to institutionalise proper planning," said the medium-term budget policy statement. "Provinces will be required to bid for these allocations two years in advance and financial incentives will be built into the grant for provinces that implement best practices in delivering infrastructure."
A treasury official said this related to the launch of the infrastructure delivery improvement programme, with delivery over the first six months of the current financial year showing improvement.
On the local funding side Gordhan used the medium-term budget to announce that the formula used to divide the local government funds across the 278 municipalities is being reviewed and adjusted.
"The formula will provide a subsidy for the provision of free basic water, electricity, sanitation and refuse removal services for every poor household," said the statement.
"The formula will also provide funds for the institutional costs of municipalities and, for the first time, will explicitly allocate funds for non-trading services, such as municipal roads and fire services. To ensure that the funds for institutional costs and non-trading services are targeted at poorer municipalities, the proposed formula will apply a revenue-adjustment factor reflecting municipalities' ability to generate their own revenue."
A treasury official said there was dissatisfaction with the current formula because it was based on old data. The new formula will use data from the 2011 census and will be updated annually to reflect estimates of population growth and projected increases in the cost of services such as water and electricity.
The details of the new formula are being finalised to take into account input from municipalities and it will be presented as part of the Division of Revenue Bill tabled with the 2013 budget.
See the rest of the M&G's medium-term policy statement coverage:
Pravin Gordhan mum on Zuma's Nkandla upgrades
Finance Minister Pravin Gordhan remains guarded about public works's decision to use state funds for upgrades to President Zuma's Nkandla homestead.
Government debt to rise as tax revenues wobble
Pravin Gordhan has offered some optimism for SA's economic outlook, despite his mid-term budget signalling plans for a rise in government debt.
Midterm budget: Government failing to create jobs
The midterm budget policy statement has revealed that the government is failing at creating jobs, outside of the expanded public works programme.
Midterm budget: Money put aside to revamp mining sector
In response to developments in mining, the medium-term budget policy sets out imperatives to modernise the industry and amend labour relations.
Midterm budget: Strikes cost economy dearly
The treasury says unrest has had a negative impact on growth, adding tax revenue will be lower as wildcat strikes are estimated to have cost R10bn.
Fighting talk from Pravin Gordhan
Finance Minister Pravin Gordhan tightened his belt, chided the country's critics and delivered a no-nonsense medium-term budget policy statement.