Local government capacity lies at the heart of prosperity

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

The report comes at a time of great tumult in SA politics, despite some stability returning in December with President Cyril Ramaphosa’s victory at the ANC elective conference. However, on present evidence 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. Insulating this tier 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 Good Governance Africa 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 municipal level.

Recognising the importance of this sphere we periodically produce a unique Governance Performance Index (GPI). The most recent was released before the 2021 local elections, ranking and scoring all 205 local municipalities (and eight metros separately) according to three 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 areas, 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 before causation can be suggested. However, our current findings are consistent with a broad body of global work that 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 our intelligence report suggests that companies that 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, 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 create better environments for private enterprise 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 are likely to 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 effective approach would be to ensure alignment between a company’s CSR expenditure and a local government’s integrated development plan, 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 required in the Mineral & Petroleum Resources Development Act 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 and parts of Gauteng in 2021. Those riots, which cost the economy billions of rand 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 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 mandates.

For instance, the ability of local governments to reliably adopt King IV principles and follow the Municipal Finance Management Act 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 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.

Harvey is director of research at Good Governance Africa. Desai is a data analyst in the organisation’s governance insights & analytics programme.