Stability lies at the heart of prosperity

Investors and the business community have an incentive and a responsibility to enhance local governance performance in South Africa. This is the clear conclusion in the latest intelligence report produced by Good Governance Africa. Stability is a necessary condition for a favourable business and investment climate, if not a sufficient one.

Lack of, or inefficient delivery of resources like water, contributes to governance instability. Photo by RAJESH JANTILAL/AFP

The report comes at a time of great tumult in South African politics, despite some stability returning in December with President Ramaphosa’s victory at the African National Congress elective conference. On present evidence, though, the instability trend will continue up to the 2024 general elections and the likely coalition years beyond. Considering this national uncertainty, more thought needs to be dedicated to ensuring better local government performance. Insulating local government from local and national politics – a ‘politico-administrative divide’ – is imperative; a function of basic good governance principles.

The term ‘governance’ can sound like corporate group-talk. At GGA, we define it as the authoritative allocation of resources. Good governance requires transparency, accountability, and a commitment to broad-based growth that benefits all citizens. Where most citizens feel the impact of governance, or a lack thereof, is at the local municipal level.

Recognising the importance of this sphere, GGA periodically produces a unique Governance Performance Index (GPI). The most recent GPI was released ahead of the 2021 local elections in South Africa. The index ranked and scored all 205 local municipalities (and eight metros separately) according to three key core areas of constitutional responsibility – service delivery, administration, and planning and monitoring.

On the back of the index, we hypothesised that: Given the dysfunctional state of local government in a few areas struck by a high frequency of lawlessness and rioting, improved governance performance correlates with increased stability.

Good Governance and stability

The intelligence report we produced to explore the issue clearly corroborates the hypothesis: better-governed municipalities have far lower levels of riot frequency than their poorly-governed counterparts. We also find that better-governed municipalities average better performances in a range of other critical outcomes including higher employment and voter turnout levels.

We are not at liberty yet to conclude that better governance causes improved stability, but this is complex work that we hope to conduct soon. There are several intervening historical, demographic and social variables that must be controlled for before causation can be suggested. However, our current findings are consistent with a broad body of global work which suggests institutional strength is a fundamental cause of long-run growth. Institutions are essentially the social systems – norms, beliefs, cultures and values – that motivate regular human behaviour. When these systems are inclusive and accountable, broad-based growth and development typically follow.

The correlation we found in the GGA intelligence report suggests that companies which invest in improving institutional capacity in local government will reap the benefits associated with higher levels of social stability. Companies typically (and understandably) think about Environment, Social and Governance (ESG) performance in three main ways. First, in ensuring a minimal environmental footprint. Second, doing right by the communities in the areas in which they operate. Third, through adhering to proper corporate governance practices. These are all important factors for attaining and maintaining a social licence to operate.

However, adopting slightly broader notions of the “S” and the “G” may help to create better environments for private enterprises to flourish. For instance, equipping local governments to properly implement the relevant sections of the King IV Code of Good Governance and the Municipal Finance Management Act alone will likely ensure more optimal resource allocation.

Ethics and administration

Better service delivery and political stability tend to flow from better, and more ethical, administration. This may well be less flashy than building a school or a local clinic, but its impact is more systemic and therefore more amplified and sustainable. This is precisely because a functional set of supporting institutions is more likely to sustain any investments towards improving health and education.

A school or clinic is often only as good as the social system supporting its scholars and patients respectively. Also, a school without running water or qualified teachers offers little tangible benefit to the communities it is meant to serve.

Regrettably, the prevailing Corporate Social Responsibility (CSR) model appears to incentivise ESG performance as a kind of marketing exercise to shareholders.

Although less perceptible, a more impactful approach would be to ensure alignment between a company’s CSR expenditure and a local government’s Integrated Development Plan (IDP), or even helping to develop the latter in a practicable way.

Moreover, some public policy requirements can inadvertently encourage this overly narrow approach. For instance, a large mining house recently indicated that the Social and Labour Plans (SLPs) required in the Mineral and Petroleum Resources Development Act (MPRDA) preclude broader ESG thinking by insisting on narrow, traditional CSR thinking.

Unfortunately, many businesses only count the cost of poor governance (G) and the associated social dysfunction (S) when riots occur, like they did in KwaZulu Natal in 2021. Those riots, which cost the economy billions and shuttered hundreds of businesses were not an exclusive function of poor local governance. But the subsequent Expert Panel report into the unrest did find that it was at least one inflammatory factor.

Long-term impact

The benefit of investing in better governance systems is not immediately obvious on a balance sheet or an income statement. However, the impact of the lack of those systems is quickly reflected therein.

So, what is the solution? Our research suggests that firms have a keen interest to invest directly in creating stronger institutional capacity, especially at the local level. Realistically, this focus will be in the jurisdictions in which they operate or are looking to expand into. ‘Institutional capacity’ constitutes the ability for local municipalities to execute their core mandate.

For instance, the ability of local governments to reliably adopt King IV principles and follow the MFMA properly, requires ‘upstream’ interventions. These include investment in human resources and a political willingness on behalf of firms and municipal managers to commit to good governance in everyone’s best interests.

To effectively solve this collective action problem, a critical mass of firms in any given area need to invest ‘skin in the game’ and, along with civil society groups, persuade municipal management that long-term value creation beats short-term rent-seeking.

A version of this article first appeared in Business Day.