Poor leadership and lack of workforce capacity are preventing Welsh councils from demonstrating improvement, according to the Audit Commission in Wales.
The commission has found that a year into the Wales Programme for Improvement, councils have 'a long way to go'.
There were also concerns about the backlog of housing repairs and the scope for investment in housing.
Clive Grace, director general of the commission, said a greater focus is needed on the significant corporate risks faced by councils.
'Some authorities have yet to develop effective performance measurement frameworks, while some need to introduce mechanisms for reporting performance and progress against action plans,' he said.
'A distinct policy agenda in Wales which does not rely on published categories of achievement, league tables or naming and shaming has placed greater responsibility on local government itself to change and improve the services it provides.'
But Colin Everett, head of improvement and development at the Welsh Local Government Association, denied the report painted a bleak picture of the progress made by Welsh councils since the introduction of WPI.
'Reports tend to pull out the things that require attention,' he said. 'What it doesn't reflect is that several services are struggling because of historical underinvestment.'
Corporate governance was improving in Wales as councils got to grips with new political structures, he said.
Wales Programme for Improvement 2003/4 is available from www.audit-commission.gov.uk