1

ECONOMIC GOVERNANCE AND THE LOCAL BUSINESS ENVIRONMENT:

EVIDENCE FROM TWO ECONOMICALLY LAGGING PROVINCES OF SOUTH

AFRICA

Christian M. Rogerson, School of Geography, Archaeology & Environmental Studies, University

of the Witwatersrand, Johannesburg, South Africa: E-mail: Christian.Rogerson@wits.ac.za

__________________________________________________________________

Abstract: The improvement of local business environments in order to provide more favourable

conditions for private sector development represents a critical policy intervention for

strengthening local economic development planning. This article reports the findings of a

participatory assessment tool which was developed to assess changes in the business

environment between 2006-2009 for 16 local municipalities in South Africa’s Eastern Cape and

Mpumalanga provinces. It is shown that whilst a general improvement is recorded in the overall

quality of local business environments across surveyed municipalities, in many cases the

improvement is marginal. This points to a need for sustained intervention and support in order to

achieve necessary improvements in the local business environments within these two poor

provinces of South Africa.

Keywords: Economic Governance; Local Business Environment; Private Sector Development;

Local Economic Development; South Africa

2

Introduction

The existence of a vibrant private sector is highly dependent on whether the policy environment

obstructs or enables private enterprises to form, operate and exit a business (Millett 2009). The

private sector functions within a complex network of political, legal and institutional conditions,

which are captured by the terminology ‘business climate’ and ‘business environment’. The

definition of these two terms is, however, “problematic” (White 2004, p. 19). It is acknowledged

that the two terms are “more often than not rather loose” (Tanburn and Wenger 2006, p. 2) and

lack agreed or standard definition (UNIDO and GTZ 2008). Indeed, often different scholars and

donor agencies apply different definitions and rival terms such as business climate, investment

climate and enabling environment to cover the same or similar ground (Hindson and Meyer-

Stamer 2007, p. 3).

The improvement of local business environments in order to provide more favourable conditions

for ‘doing business’ by the private sector represents one focal point for local economic

development planning (van Gerwen and Nedanoski 2005; Hindson and Meyer-Stamer 2007).

Ruecker and Trah (2007, p. 57) emphasize that a conducive local business environment “reduces

the costs of doing business, unleashes economic potential and attracts investment”. By contrast,

if the local business climate is dominated by problematic governance patterns, cumbersome

political guidelines, laws and regulations and ineffective administration, enormous and

unnecessary costs are imposed upon the private sector with correspondingly negative impacts for

local economic growth. In most contexts the existing business environment is biased towards

larger formal enterprises to the disadvantage of small and medium enterprises and “more so, of

the very small informal enterprises of the very poor” (Chen 2005, p. 2). Generic business climate

reforms are viewed as affecting all firms or enterprises and “are thus claimed to induce

improvements with broad social outreach” (UNIDO and GTZ 2008, p. 2). As a whole, it is made

clear that whilst business environments do not have to be perfect, “they have to be good enough

on a number of crucial dimensions to stimulate investment and competition sufficient to launch

the self-reinforcing process of industrial growth” (Eifert et al. 2005, pp. 7-8).

In South Africa the shaping of a conducive business environment is regarded as “a key

ingredient” for the establishment of vibrant competitive local economies, which are a

cornerstone for successful local economic development (DPLG 2008, p. 1). The National

3

Framework for Local Economic Development encourages local governments to foster conditions

that stimulate and enable the general environment in which business is done (DPLG 2006). It is

stated that district and local municipalities are considered to “have a lead role to play in ensuring

that local business environments create the opportunities for shared economic growth and

development” (DPLG 2008, p. 1). In particular, an urgent need exists to improve the local

business environment for private sector development within South Africa’s most economically

lagging regions. Indeed, international donors supporting local economic development processes

in South Africa have sought to improve local business environments by kick-starting local

reforms and dialogue between local government and the private sector and galvanizing a series

of ‘quick win’ reform measures which can build the necessary trust at local level essential for

wider targeted reforms of the local business environment and thereby to further the long-term

prospects for successful local economic development (Ruecker and Wegmann 2006; UNIDO and

GTZ 2008).

The aim in this article is to undertake an analysis of changing local business environments for

private sector development in two of South Africa’s economically lagging provinces. More

specifically, the objective is to investigate the changing conditions of local business

environments across select district and local municipalities in the two provinces of the Eastern

Cape and Mpumalanga. The paper is structured into three sections of discussion. First, an

overview is given of the importance and issues drawn from international debates on improving

the local business climate or business environment for private sector development. Second, a

discussion is undertaken of the methodology and case study research in South Africa. The study

utilizes a participatory assessment tool to measure economic governance and the conduciveness

of local business environments in 16 local municipalities. Lastly, attention turns to an

examination of research findings which interrogate the local business environments across the

two provinces under investigation.

4

Improving the Local Business Environment for Private Sector Development

During the past decade, the enhancement of business or investment climates “has become an

important topic in the international discourse on private sector development” (Kaufmann et al

2007, p. 2). In particular, the international donor community has turned increasingly to the

broader conditions in which enterprises operate “in the search for ways to affect a larger number

of firms and hence expand the benefits of their interventions” (White 2004, p. ii). According to

the World Bank (2002), improving the investment climate is about better public policy for the

private sector, including the required supporting institutions. The World Development Report for

2005 stresses that a good investment climate is central to growth and poverty reduction by

furnishing opportunities and incentives for all forms of enterprises, from micro-enterprise to

foreign investor – to invest productively and create jobs (World Bank 2004). Likewise, the DFID

Investment Competition and Enabling Environment (ICEE) Team (2004, p. 10) asserts that the

“investment climate shapes the costs and risks of doing business, as well as barriers to

competition all of which strongly influence the role of the private sector in social and economic

development”. This section reviews international debates around business environments,

definitional issues, and considers the importance of nurturing conducive local business

environments for catalyzing local economic development potential, more especially in the

developing world contexts.

Eifert et al. (2005, p. 7) identify the business environment “as the nexus of policies, institutions,

physical infrastructure, human resources and geographic features that influence the efficiency

with which different firms and industries operate”. The concept of ‘business climate’ is

considered to comprise an array of different areas and policy fields including governance issues,

policy, legal and regulatory frameworks, organizational frameworks and access to services, both

in terms of business services and adequate social and economic infrastructure (Ruecker and Trah

2007). The term investment climate is considered to refer to a set of enabling factors broader

than the ‘regulatory business environment’. The investment climate would encompass all

elements of the regulatory business environment but also include variously issues of good

governance, improved state-business dialogue, the quality of infrastructure, the health system,

rule of law, security and so on, which collectively are the “location-specific factors that shape the

opportunities and incentives for firms to invest productively, create jobs and expand” (World

5

Bank 2004, p. 1). It is stressed that if “local government is highly bureaucratic and corrupt, and if

government’s own provision or regulation of infrastructure and financial services is inefficient so

that firms cannot get reliable services, then returns on potential investments will be low and

uncertain, and one would not expect much accumulation and growth in these environments”

(Dollar et al. 2005, p. 1). Correspondingly, in localities that create a good governance and local

business environment “returns and accumulation should be high” (Dollar et al 2005, p. 1).

For analytical purposes UNIDO & GTZ (2008, p. 6) provide a useful distinction between the

narrow concept of the ‘regulatory business environment’ and the broader concept of the

‘investment climate’. The term ‘regulatory business environment’ spans the regulations that

immediately affect business through costs of compliance. It is stated that these “are comprised of

direct costs, such as license fees, and indirect costs resulting from often unnecessary

transactions” such as “costs arising from the time that has to be spent in obtaining a license as

well as increasing costs stemming from inappropriate government regulations” (UNIDO and

GTZ 2008, p. 6). The term ‘investment climate’ is considered to refer to a set of enabling factors

broader than the ‘regulatory business environment’. Business environment conditions critically

affect firm decisions and performance (Dollar et al. 2005; Hallward-Driemeier and Aterido,

2007). At firm level the business environment directly influences costs of production and at the

industry level often relates to market structure and competition. It has been shown from research

in China that, if spatial differences exist in investment climate across locations, total factor

productivity is related to investment climate as bureaucratic harassment or infrastructural

shortcomings will “result in less value added being produced from the same capital and labour in

different locations” (Dollar et al. 2005, p. 3). The impact of the business environment is

experienced more heavily in traded sectors that are not particularly intensive in natural resources

(ie manufacturing or services) rather than in primary production and extractive resource sectors

as the “former tend to more intensively require ‘inputs’; of logistics, infrastructure and

regulation” (Eifert et al. 2005: 7).

Measures to improve the local enabling environment for private sector development include the

undertaking of local business climate surveys (Kaufmann et al. 2007). A ‘Business Climate

Survey’ (BCS) represents an analytical tool that primarily looks at laws and regulations and the

extent to which they encourage or discourage business activities (Ruecker and Trah 2007;

6

Hindson and Meyer-Stamer 2007). The BCS can be a potentially “effective tool to stimulate

regulatory and administrative reform” at local and national levels (Kaufmann et al. 2007: 1).

BCS is a tool that can assist “to identify, ‘reveal’ and prioritize in an easy-to-understand way the

regulatory and administrative bottlenecks to private sector development” (Kaufmann et al. 2007:

1). It is emphasized that BCS are a vital instrument in regulatory and reform processes which are

targeted towards improving the Business Enabling Environment of small and medium

enterprises” (Kaufmann et al. 2007: 1). The reduction of red tape is considered as especially

important for thriving localities where more efficient government may create competitive

advantage and facilitate conditions for local business growth (Hindson et al. 2009). By contrast,

in lagging or declining localities the reduction of red tape would be important but critically “by

no means sufficient to initiate a substantial growth process” (Hindson and Meyer-Stamer 2007,

p. 20). Indeed, there is disclosed a paradox in local efforts to reduce red tape, that on the one

hand it potentially may speed up the growth of fast growing localities but on the other hand is

“unlikely to accelerate growth a great deal in locations that are stagnant” (Hindson and Meyer-

Stamer 2007, p. 20).

In the developing world, research into the business environment and country investment

assessments “have invariably found that developing countries are challenged by poor public

governance, weak infrastructure, and policy and legal frameworks that are inconsistent, unstable

and unpredictable” (DFID ICEE Team et al, 2004: 10). The simplification of business

registration procedures coupled with reform of labour regulations and property titling are

highlighted as core elements for creating a conducive business environment especially in sub-

Saharan Africa (UNIDO and GTZ 2008). The continent of Africa is characterized by “most of

the world’s least business-friendly regulatory environments” (Bannock and Darroll 2007, p. 3).

The hostility of business environments in many African countries, as disclosed by the World

Bank’s Enterprise Surveys, emerges as a key underpinning for slow growth and low levels of

economic diversification (Eifert et al. 2008). Further, as shown by Hallward-Driemeier and

Aterido (2007), the business environment in which firms operate can influence the size

distribution of firms within a country or region. Across sub-Saharan Africa challenges in

accessing finance, unreliable infrastructure services, and difficulties in accessing other public

services are all conditions that serve to shift downward the distribution of firms and have the

7

consequence of encouraging the growth of micro-enterprises (Hallward-Driemeier and Aterido

2007).

Reducing regulatory costs and enhancing regulatory efficiency are considered “the most practical

and effective means of encouraging enterprise development” (Bannock and Darroll 2007, p. 2).

Several studies disclose that specifically the development of SMMEs is constrained by

unfavourable economic governance conditions that include non-transparent, time-consuming and

costly bureaucratic procedures; outdated laws and regulations for business transactions, and a

high level of corruption (Kaufmann et al. 2007: 2). Nevertheless, it is acknowledged that

changing rules and regulations at national level is not sufficient for energizing local development

(Ruecker and Wegmann 2006; Hindson et al. 2009). Although the focus of many business

environment programmes is nation-wide, the interaction of stakeholders takes place at all levels,

especially at the local level.

Improving the local business environment is therefore a vital theme in the scholarship of local

economic development (Van Gerwen and Nedanoski 2005; Ruecker and Trah 2007). At local

level, the growth potential from improving the investment climate can be quite substantial as

shown by recent evidence both from China (Dollar et al. 2005) and Vietnam (Vietnam

Competitiveness Initiative 2006; Becker and Binh 2009). In Vietnam a local competitiveness

index has been evolved to assess and rank provincial governments by their regulatory

environments for private sector development (Becker and Quan 2009). The Provincial

Competitiveness Index (PCI) “is an effort to explain why some parts of the country perform

better than others in terms of private sector dynamism and growth” (Vietnam Competitiveness

Initiative 2006, p. 1). In terms of ranking different geographical areas, the index examines a

range of issues most significantly ease of entry costs, transparency and access to information,

costs of regulatory compliance, labour training and pro-activity of local leadership. Overall, it

estimates how important economic governance practices are for attracting investment and

generating growth (Vietnam Competitiveness Initiative 2006, p. 2). It is asserted that the PCI

index offers a “compelling demonstration of the association between business-friendly

governance practices, business responses and, importantly, welfare improvements” (Vietnam

Competitiveness Initiative 2006, p. 2).

8

Case Study and Methodology

The research in South Africa sought to measure economic governance and the status of local

business environments in two of the country’s most economically lagging provinces. More

particularly, the application of a participatory assessment tool aimed to reveal the conduciveness

of local business environments for private sector development. The research focus was to address

the specific question of reforms or improvements made in the business climate and environment

for private sector development over the period 2006-2009. It has been observed that 2006

represents a watershed in terms of policy development and support for local economic

development (LED) in South Africa, with the establishment of a national policy framework and

the accompanying launch by stakeholders (including international donors) of support initiatives

to strengthen LED, including through improvement of business environments (Rogerson 2008).

9

Figure 1: Location of Study

10

The specific research focus was five district municipalities (DM) of the Eastern Cape and

Mpumalanga provinces; in Eastern Cape within the three DMs of Cacadu, Amathole and Chris

Hani; and, in Mpumalanga of the two DMs of Nkangala and Ehlanzeni. Within these five district

municipalities are encompassed a total of 38 local municipalities (LMs) as shown on Figure 1. It

must be understood that the economic character and size of the 38 LMs varies considerably. In

population size the municipalities range dramatically from a total of less than 7 000 people in the

case of Aberdeen Plain LM in Cacadu DM to over 700 000 people in the case of Buffalo City in

Amatole DM. Also included within the study is Nelson Mandela Bay, a metropolitan authority

which administers Port Elizabeth, the largest and most economically vibrant city in the Eastern

Cape. The geography of the study districts encompasses a mix of settlements with a segment of

the municipalities covering areas which would formerly have been called Homelands or

Bantustans. The municipalities vary enormously in terms of their economic base from heavy

manufacturing (iron and steel), to tourism towns, small town administrative centres, areas of

prosperous commercial farming to areas with a largely subsistence agricultural economic base.

In the cases of two small municipalities which border Gauteng province, the local economy is

reliant primarily upon a combination of social grants with remittances or income from workers

commuting to job opportunities outside of Mpumalanga. In these two localities, in common with

many of the municipalities that encompass former Homeland areas, the amount of business

investment taking place is minimal.

Methodologically, a Business Investment Climate (BIC) Assessment framework was developed

for application in South Africa. The development of this BIC Assessment Framework was

informed both by international experience and prior South African research on Local Business

Environments (see Reichert 2006; Kaufmann et al. 2007; Ruecker and Trah 2007). The

assessment tool sought to monitor the perception and opinions of private sector business

chambers as to the current situation and recent changes in ‘local economic governance’. In terms

of the assessment tool, six themes were identified for investigation as part of local economic

governance. The six themes explored different sets of issues considered as vital for the ‘ease of

doing business’ in general and for local economic development in particular. The six themes

were as follows:

11

• Dialogue and state-business relations - the working relationship between local private

sector and local government.

• Infrastructure - the quality of local infrastructure as it relates to the private sector.

• Regulatory environment - the conduciveness of local policies, laws, regulations and

procedures for doing business.

• Land and property rights - access to available land and property with legal title for local

private sector development.

• Government support - the extent to which local government provides support for the

development and growth of the local private sector.

• Quality of Life – the local environment in respect of its conduciveness for both retaining

existing investors and encouraging new investors.

In each of these six themes, a series of questions (sub-themes) were examined concerning

different aspects of the theme under consideration. The different aspects of the six themes are

shown in Table 1.

Table 1: BIC Assessment Framework – Themes and Sub-Themes

THEME QUESTIONS/SUB- THEMES

Dialogue and State-Business Relations Communication and dialogue; Openness and

transparency; Results from dialogue

Infrastructure Availability and reliability of electricity;

Availability and reliability of water and sanitation;

Quality and maintenance of roads

Regulatory Environment Policies, laws and regulations; Efficient

administration; Responsiveness to business needs

Land and Property Rights Availability and suitability of land; Security of

tenure; Availability of suitable premises

Government Support Proactivity and innovation of LED support; Small

business support; Investment attraction and

retention

Quality of Life Education and health; Sports, entertainment parks

and public areas; Natural environment

12

For each of the six themes, private sector respondents were asked to reflect upon the state of

present conditions (2009) as well as compare these present conditions with the situation three

years earlier (2006). The responses of interviewees allowed the generation of quantitative data as

well as qualitative material in which interviewees gave ‘voice’ to the issues. In terms of the

survey, quantitative data was generated as a result of the responses provided with a score ranging

from 1-5 allocated for each of three questions in each sub-theme. Based upon the aggregation of

these individual scores, an average score was calculated for each theme and an average for all the

focus local municipalities. By accumulating the scores across the six themes a total score (range

1 to 5) could be obtained for each municipality both for the years 2006 and 2009. The total score

represents an index of the conduciveness of the local business environment for private sector

development. A comparison of these total scores across the time period 2006-2009 formed the

basis for assessing the changing local business and investment climate. In seeking to identify the

relative importance of the six themes, respondents were asked to rank the themes by identifying

simply those two themes which they considered most important and those two themes considered

as least important.

Overall, the interviews were targeted at representative private sector business associations in

Mpumalanga and Eastern Cape. Coetzee (2009, p. 7) argues that business chambers have a

critical role to play in promoting sustainable local economic development, especially in South

African small towns. In particular, the Chambers can assume a leadership role for private sector

development. In this research the interviewees, as far as possible, were representatives of local

private sector business associations. The chambers of the two most important national

associations of private sector business in South Africa that were interviewed were those of the

AHI and of SACCI. Both these organizations operate a national network of business chambers

with affiliated regional or local private sector business associations. The local chambers of these

two associations were the most appropriate for interviews as other business chambers in South

Africa – such as those of FABCOS and NAFCOC – only operate on a sectoral or provincial basis

and do not operate a network of local chambers.

The selection of AHI and SACCI chambers allowed interviews to be undertaken for the most

economically important local municipalities across the five district municipalities under

investigation. Nevertheless, these two national business associations did not have representative

13

offices or chambers in most of the smaller local municipalities. In such areas the focus was upon

securing interviews with non-affiliated local private sector business associations or business

forum wherever possible. Coetzee (2009, p. 11) points to the historical decline of business

chambers in much of small town South Africa as a result of economic decline and financial

crisis. Across the study area, examples were found of towns (such as Delmas or Butterworth)

where local business associations or offices formerly had existed but were no longer operational.

This meant that unless a business chamber situated in an adjoining municipality was active, these

local municipalities were excluded from the investigation. Further problems arose in identifying

appropriate representative private sector respondents in some of the smallest and most

economically marginal municipalities where little private sector investment exists. In particular,

municipalities covering former Homeland areas where little private sector investment had taken

place necessarily were excluded from the investigation.

Notwithstanding these difficulties, during September-October 2009 interviews were secured for

a total of 16 local municipalities across the five district municipalities. Before reviewing the

findings it is important to understand that the interviews cover all the most important economic

nodes in the study region as responses were captured for the following centres, Port Elizabeth,

East London, Nelspruit, Witbank, Middelburg and Queenstown.

Research Findings

The results of the interviews captured for the 16 municipalities are presented in this section. The

analysis unfolds by initially presenting the overall scores for the municipalities in terms of the

conduciveness of the local business environment (LBE) and subsequently unpacking those

scores in terms of the various themes and sub-themes that were contained within the overall

index. The qualitative responses of interviews are included to add further interpretation of the

quantitative data.

14

Table 2: Direction of Change in Local Business Environment, 2006-2009

Improved Same Decline

Number 11 3 2

Local Municipalities Amahlati, Blue Crane

Buffalo City,

Camdeboo, Inxuba

Yethemba, Lukhanji,

Makana, Mbombela,

Ndlambe, Nelson

Mandela Bay, Thaba

Chweu

Emalaheni, Kou

Kamma, Steve Tshwete

Nkomazi, Umjindi

Source: Survey

Table 2 presents the overall result for the 16 municipalities that were captured in this

investigation. It is evident from Table 2 that in the majority of the sampled municipalities there

has occurred an improvement in the conduciveness of the LBE for private sector development in

the impact zones of Eastern Cape and Mpumalanga. In many cases, however, as indicated on

Table 3, the improvement was marginal and often from a low base score.

Table 3: Changes in Assessment of Local Business Environment (LBE), 2006-9

RANK Reform

2006-2009

Score

2009

Location Score

2006

1 0.7 2.33 Thaba Chweu 1.67

2 0.5 2.56 Mbombela 2.06

3 0.5 3.17 Amahlati 2.72

4 0.4 3.17 Lukhanji 2.78

5 0.4 4.00 Makana 3.61

6 0.3 1.89 Buffalo City 1.56

7

0.3 2.56

Nelson Mandela

Bay

2.28

8 0.2 2.56 Ndlambe 2.39

15

9 0.1 2.89 Camdeboo 2.83

9 0.1 2.17 Inxuba Yethemba 2.11

11 0.1 2.11 Blue Crane 2.06

12 0.0 1.94 Emalaheni 1.94

12 0.0 2.44 KouKamma 2.44

12 0.0 3.72 Steve Tshwete 3.72

15 -0.2 2.5 Umjindi 2.67

16 -0.3 1.89 Nkomazi 2.22

Source: Survey

Table 3 presents the overall scores for each of the municipalities in the investigation for both

2006 and 2009. At one level, it is clear that a general improvement is recorded in the scores

which reflect the perception of interviewees concerning the conduciveness of the LBE for private

sector development. That said, it must be acknowledged that in 2009 only seven of the 16

municipalities attain a minimum score of 2.50 which would reflect an average assessment of the

conduciveness of the LBE. The majority of sampled municipalities score below 2.50 in 2009

which suggests considerable shortcomings remain in the LBE. The best individual scores are

recorded for the Makana (Grahamstown) LM in Cacadu DM, Eastern Cape and Steve Tshwete

LM (Middelburg) in Nkangala DM, Mpumalanga province. Over the period 2006-9 the greatest

relative improvements are recorded in the two Mpumalanga municipalities of Thaba Chweu and

Mbombela. Nevertheless, it is observed that the list of municipalities which record improvements

in the LBE does include the most important economic nodes across the study region. Only 2 of

the 16 interviewed municipalities reveal an actual worsening in the LBE; these are two adjoining

local municipalities in Ehlanzeni DM, Mpumalanga.

16

Table 4: Local Municipality Scores by Theme, 2009

Dialogue

and State-

Business

Relations

Infrastructure Regulatory

Environment

Land and

Property

Rights

Government

Support

Quality of

Life

Amahlati 2.67 (2.00) 2.00 (1.67) 3.00 (2.00) 4.33 (4.33) 3.00 (2.67) 4.00 (4.00

Blue Crane 3.00 (2.33) 2.67 (3.33) 2.00(2.00) 2.33 (2.00) 1.67 (1.00) 1.00 (1.67)

Buffalo City 2.33 (2.33) 2.33 (1.67) 2.00 (1.67) 1.67 (1.33) 1.67 (1.00) 1.33 (1.33)

Camdeboo 4.00 (3.67) 3.67 (3.67) 3.33 (3.33) 2.67 (2.67) 2.67 (2.67) 1.00 (1.00)

Emalaheni 2.67 (2.67) 2.33 (2.33) 1.67 (1.67) 2.33 (2.33) 1.00 (1.00) 1.67 (1.67)

Inxuba

Yethemba

3.33 (3.00) 2.00 (2.00) 2.00 (2.00) 1.00 (1.00) 1.33 (1.33) 3.33 (3.33)

Kou Kamma 1.67 (1.67) 2.00 (2.00) 2.00 (2.00) 4.67 (4.67) 1.33 (1.33) 3.00 (3.00)

Lukhanji 3.33 (3.33) 4.00 (2.67) 3.00 (3.00) 2.67 (2.67) 3.67 (2.67) 2.33 (2.33)

Makana 3.00 (2.00) 3.00 (3.00) 3.67 (3.67) 4.67 (4.67) 5.00 (3.67) 4.67 (4.67)

Mbombela 2.00 (1.33) 3.33 (2.33) 1.67 (1.67) 3.67 (2.67) 1.67 (1.33) 3.00 (3.00)

Nelson

Mandela

Bay

4.00 (3.33) 2.67 (2.67) 2.67 (2.33) 1.33 (1.33) 2.33 (1.67) 2.33 (2.33)

Ndlambe 3.33 (3.33) 2.33 (2.33) 2.00 (2.00) 2.33 (2.33) 2.33 (2.00) 3.00 (2.33)

Nkomazi 1.00 (1.00) 2.33 (3.00) 3.00 (2.67) 1.67 (2.00) 1.33 (1.67) 2.00 (3.00)

Steve

Tshwete

4.33 (5.00) 3.67 (3.00) 4.33 (4.33) 2.67 (2.67) 4.00 (4.00) 3.33 (3.33)

Thaba

Chweu

3.00 (1.33) 3.33 (2.67) 1.33 (1.33) 2.33 (2.33) 3.00 (1.33) 1.00 (1.00)

Umjindi 2.67 (3.00) 3.67 (4.00) 3.00 (3.00) 2.33 (2.67) 1.33 (1.33) 2.00 (2.00)

Source: Survey.

Note: Scores for 2006 are indicated in brackets.

17

As shown in Table 4 the strong scores recorded both in 2006 and 2009 by Steve Tshwete and

Makana are linked to different circumstances. In the case of Steve Tshwete the high rating is due

variously to the existence of very good local dialogue and state-business relations, a sound

regulatory environment and active local government support for private sector development. In

the case of Makana, the high overall score is the product of a high quality of life for private

sector investors, secure and available land and property for business development, and, most

importantly, of the establishment and activities of an LED unit in Grahamstown which has

supported positively private sector development in the locality. Likewise, the improvements

shown in the scores for Camdeboo LM in Cacadu DM, Thaba Chweu in Ehlanzeni DM and

Lukhanji LM in Chris Hani DM were also attributed by interviewees to the establishment of

either an LED unit or LED Forum in these particular municipalities. In the case of Camdeboo

LM a solid base of local dialogue and state-business relations is another important factor in the

LM’s overall score. Against this must be set, however, in Camdeboo LM a very poor score in

terms of quality of life indicators and of major local difficulties with water and sanitation, the

unsatisfactory provision of which triggered a court case between the local chamber and the LM.

The LMs which recorded the worst scores in 2009 were Nkomazi in Ehlanzeni DM and Buffalo

City in Amatole DM (see Table 2). In Nkomazi, the key problems related to the lack of any

dialogue between the LM and the private sector, a situation which had progressively worsened

leading to a lack of communication and eventually the Chamber’s expulsion from the Council’s

meetings. The Nkomazi LM was described as ‘unreachable’, ‘not transparent’, not having ‘the

time for the business chamber’ and lacking in ‘capable people’. In the case of Buffalo City, the

largest and most economically important centre in Amatole DM, unsatisfactory assessments were

made across all six of the themes in the LBE. Those attracting particular concern related to

quality of life, absence of government support and land and property rights. A fundamental

underpinning for the poor assessment of Buffalo City was the fragile condition of local state-

business relations and dialogue which was highlighted by the comments that ‘nepotism is a big

problem’ and that ‘racial issues influence the administration of policies and laws’.

18

Figure 2a: Comparative Performance of the 16 Local Municipalities on Each of the Six

Themes (Note 1 = very poor and 5 = very good).

19

Figure 2b: Comparative Performance of the 16 Local Municipalities on Each of the Six

Themes (Note 1 = very poor and 5 = very good).

20

Figures 2a and 2b provides a schematic picture of the state of the LBE in the 16 sampled local

municipalities and show the scores for each municipality disaggregated by theme,. From the

profiles on Figures 2a and b, it is possible to identify areas of relative strength and weakness in

each of the sample municipalities. Only the municipalities of Steve Tshwete and Makana emerge

as having LBE’s which have above average scores for all six themes under investigation. By

contrast, Buffalo City and Emalaheni record scores which are below average across all six

themes. The remaining 12 municipalities exhibit profiles wherein there are areas of both relative

strength and under-performance in terms of the LBE.

Table 5: Assessment of LBE by Key Themes, 2006-2009

THEME 2009 Average 2006 Average Best Performers

2009

Worst Performers

2009

Dialogue and

State-Business

Relations

2.90 2.58 4.33 Steve

Tshwete

4.00 Camdeboo

4.00 Nelson

Mandela Bay

1.00 Nkomazi

1.67 Kou Kamma

Infrastructure 2.83 2.65 4.00 Lukhanji

3.67 Camdeboo

3.67 Steve

Tshwete

3.67 Umjindi

2.00 Amahlati

2.00 Inxuba

Yethemba

2.00 Kou Kamma

Regulatory

Environment

2.54 2.42 4.33 Steve

Tshwete

3.67 Makana

1.33 Thaba Chweu

1.67 Emalaheni

1.67 Mbombela

Land and Property

Rights

2.67 2.60 4.67 Kou Kamma

4.67 Makana

1.00 Inxuba

Yethemba

1.33 Nelson

Mandela Bay

Government

Support

2.33 1.85 5.00 Makana

4.00 Steve

Tshwete

1.00 Emalaheni

1.33 Inxuba

Yethemba

1.33 Kou Kamma

1.33 Nkomazi

1.33 Umjindi

Quality of Life 2.48 2.46 4.67 Makana

4.00 Amahlati

1.00 Blue Crane

1.00 Camdeboo

1.00 Thaba Chweu

Source: Survey

It is evident from Tables 4 and 5 that LMs record a differential performance across the six

themes of the LBE. On Table 5 is presented the average score recorded across all the sampled

21

municipalities for the six themes and an indication of the respective best and worst rated

municipalities for each theme. A comparison of the scores between 2006-2009 across the six

themes, discloses an improvement in the average score for all of the six themes, albeit only

marginally so in the quality of life indicator. The improvements recorded across the six themes

must be seen as the product of interrelated considerations, in particular with improvements in

dialogue and state-business relations an important driver of change in factors such as government

support and the regulatory environment. Overall, direct support from local government is rated

as the lowest overall element in the LBE.

Table 6: Assessment of LBE by Sub-Themes, 2006-2009

THEME SUB-THEME 2009 Average 2006 Average

Dialogue and

State-Business

Relations

Communication and Dialogue 2.81 2.50

Dialogue and

State-Business

Relations

Openness and Transparency 3.12 2.56

Dialogue and

State-Business

Relations

Results from Dialogue 2.50 2.44

Infrastructure Availability and Reliability of

Electricity

3.19 3.06

Infrastructure Availability and Reliability of

Water and Sanitation

2.81 2.50

Infrastructure Quality and Maintenance of Roads 2.50 2.31

Regulatory

Environment

Policies, Laws and Regulations 3.38 3.19

Regulatory

Environment

Efficient Administration 1.94 2.00

Regulatory

Environment

Responsiveness to Business Needs 2.38 2.13

Land and Property

Rights

Availability and Suitability of Land 2.38 2.44

Land and Property

Rights

Security of Tenure 2.69 2.69

Land and Property

Rights

Availability of Suitable Premises 3.06 2.69

Government

Support

Pro-activity and Innovation of LED

Support

2.25 1.88

Government

Support

Small Business Support 2.44 2.00

Government Investment Attraction and 2.38 1.88

22

Support Retention

Quality of Life Education and Health 3.06 3.06

Quality of Life Sports, Entertainment, Parks and

Public Areas

2.25 2.31

Quality of Life Natural Environment 2.25 2.31

Source: Survey

Table 6 shows the recorded assessments of the LBE as differentiated by the 18 sub-themes under

consideration. Three points are of note. First, the highest ratings in 2009 are given to issues relating to

policies, laws and regulations; availability and reliability of electricity; openness and transparency;

education and health facilities; and, availability of business premises. By contrast, the lowest ratings are

for (in) efficient administration of local regulations, lack of government support for LED, poor public

space and entertainment, and, the lack of attention to the natural environment, which many respondents

commented was in a situation of severe decline. Second, uneven trends are recorded across the 18 sub-

themes. The majority of the sub-themes (12 of 18) show improvements in evaluated scores across the

period 2006-2009. In particular, notable improvements are evidenced in the areas of communication and

dialogue, openness and transparency of LMs and availability of business premises. Nevertheless, in

respect of the latter, it is noted that in some LMs the improved availability of premises was merely the

consequence of economic downturn and closure of certain firms. Finally, of special policy concern must

be the poor or deteriorating scores which are evident for certain sub-themes such as the natural

environment and availability of local sports, entertainment or provision of public space. The worst

situation would appear to be a marked deterioration in relation to the efficiency of administering the

regulatory environment.

Table 7: Improving the LBE: Perceived Relative Importance of Different Themes

THEME Most Important Important Least Important

Dialogue and State-

Business Relations

8 7 1

Infrastructure 10 3 3

Regulatory

Environment

4 7 5

Land and Property

Rights

3 6 7

Government Support 4 5 7

Quality of Life 3 4 9

Source: Survey

The analysis which has been presented above reflects an equal weighting across all the six

themes under consideration in the LBE. The final question of the survey asked respondents to

23

rate the six themes in terms of which were considered most important and those as least

important. The results are shown on Table 7. It is apparent from Table 7 that the two themes

which private sector considers most important are those relating to dialogue and state-business

relations and infrastructure. The two themes considered as least important were those relating to

quality of life for private investors and availability of local government support.

Concluding Remarks

This article presents the results of a participatory assessment which focused upon the perceptions

of the private sector towards the conduciveness of the local business environment. The

international experience points to the importance of improvements in LBEs as a foundation for

successful private sector-led LED. In South Africa, national government and other LED

stakeholders increasingly acknowledge the necessity for identifying the key issues and

constraints in LBEs as a first step towards improving the ‘ease of doing business’ for the private

sector. The assessment of the LBE in selected municipalities of Mpumalanga and Eastern Cape

provinces points to the potential usefulness of the BIC framework which was applied in this

research. The major difficulty with applying this BIC framework as an assessment tool relates to

the erosion in the network of local private sector business chambers, especially in small towns

and rural areas across South Africa.

In final analysis, whilst the research discloses (with certain exceptions) a general and welcome

trajectory of improvement in the overall quality of local business environments, the caveat must

be noted that in many LM’s the improvement has been marginal. Of particular concern for

policy-makers is the poor performance recorded across all surveyed municipalities for several of

the themes and sub-themes under investigation. Taken together these findings point to a need for

sustained intervention and support in order to achieve necessary improvements in the local

business environments within these two poor provinces of South Africa. One critical need is for

the development in South Africa of ‘competitiveness partnerships’ (Herzberg and Wright 2006)

or structured dialogue between the public and private sector in order to improve local business

environments.

24

Acknowledgements

For funding and logistical support, acknowledgement is due to Mattia Wegmann and GTZ’s

Strengthening Local Governance Programme in South Africa. In addition, thanks are due to all

respondents for giving their time to participate in this research, to Andries de Beer for interview

work, Jayne Rogerson for survey support and Wendy Job for cartographic assistance. Usual

disclaimers apply.

References

Bannock, G., & Darroll, C. (2007). Africa overview paper - donor support for business

environment reform in Africa: A review of key issues. Paper prepared for the Committee of

Donor Agencies for Small Enterprise Development Conference on Business Environment

Reform in Africa, Accra.

Becker, D., & Binh, L.D. (2009). Sub-national PPD initiatives in Vietnam. Paper presented at the

Global Workshop on Public-Private Dialogue, Vienna, 28-30 April.

Becker, D., & Quan, D.A. (2009). Public-private dialogue in Vietnam: The experience of the

MPI-GTZ small and medium enterprise development programme (SMEDP). Concept note

presented at the Global Workshop on Public-Private Dialogue, Vienna, 28-30 April.

Chen, M. (2005). The business environment and the informal economy: Creating conditions for

poverty reduction. Paper prepared for the Committee of Donor Agencies for Small Enterprise

Development Conference on Reforming the Business Environment, 29 November- 2 December,

Cairo.

Coetzee, S. (2009). Chambers of Business in Karoo towns: Fulfilling their unexplored potential.

Paper presented at the Karoo Development Conference and Expo, Graaff Reinet, 25-27 March.

DFID ICEE Team with White S., & Fortune, P. (2004). Review of DFID activities in the

enabling environment. London: DFID.

Dollar, D., Hallward-Driemeier, M., & Mengistae, T. (2005). Investment climate and firm

performance in developing economies. Economic Development and Cultural Change 54, 1-31

DPLG (2006). Stimulating and developing sustainable local economies: National Framework for

Local Economic Development (LED) in South Africa. Pretoria: DPLG.

DPLG (2008). Better business environments for shared local economic growth and development:

Improving the local business environment. Pretoria: DPLG.

25

Eifert, B., Gelb, A., & Ramachandran, V. (2005). Business environment and comparative

advantage in Africa: Evidence from the investment climate data. Washington DC: Centre for

Global Development Working Paper No. 56.

Eifert, B., Gelb, A., & Ramachandran, V. (2008). The cost of doing business in Africa: Evidence

from enterprise survey data. World Development, 36, 1531-1546.

Hallward-Driemeier, M., & Aterido, R. (2007). Impact of access to finance, corruption and

infrastructure on employment growth: putting Africa in a global context. Paper prepared for the

Committee of Donor Agencies for Small Enterprise Development Conference on Business

Environment Reform in Africa, Accra.

Herzberg, B., & Wright, A. (2006). Competitiveness partnerships: implementing business

enabling programs through public-private dialogue. Paper presented at the International

Workshop on PublicpRivate Dialogue, Paris, 1-2 February.

Hindson, D., & Meyer-Stamer, J. (2007). The local business environment and local economic

development: Comparing approaches. Duisburg: Mesopartner Working Paper 11.

Hindson, D., Meyer-Stamer, J., Schoen, C., & Wegmann, M. (2009). Addressing red tape at the

local level: Options and tools. Duisburg: Mesopartner Working Paper 13.

Kaufmann, F., Madelung, P., Spatz, J., & Wegmann, M. (2007). A participatory multi-level

approach of using business climate surveys in regulatory and administrative reform processes:

experiences from Ghana, Mozambique and South Africa. Paper prepared for the Committee of

Donor Agencies for Small Enterprise Development Conference on Business Environment

Reform in Africa, Accra.

Millett, K. (2009). The role of public-private dialogue in investment climate reform. Paper

presented at the Global Workshop on Public-Private Dialogue, Vienna, 28-30 April.

Reichert, J. (2006). Business enabling environment survey report conducted in Queenstown.

Unpublished report prepared for the Border-Kei Chamber of Business, Queenstown.

Rogerson, C.M. (2008). Consolidating local economic development in post-apartheid South

Africa. Urban Forum 19, 307-328.

Ruecker, A., & Trah, G. (2007). Local and regional economic development: Towards a common

framework for GTZs LRED interventions in South Africa. Eschborn: GTZ.

Ruecker, A., & Wegmann, M. (2006). Local red tape reduction: To improve the business

environment – Facilitator’s manual. Pretoria: GTZ South Africa Office.

26

Tanburn, J., & Wenger, B. (2006). Reforming the business environment: Current thinking and

future opportunities. Unpublished Report on Small Enterprise Development Workshop,

Gerzensee (Bern), Switzerland, 12-13 January.

UNIDO, & GTZ (2008). Creating an enabling environment for private sector development in

sub-Saharan Africa. Vienna: UNIDO.

Van Gerwen, F., & Nedanoski, L. (2005). Monitoring and evaluation of multi-stakeholder co-

operation and partnerships in local economic development. Paper presented at the International

Conference on Reforming the Business Environment, Cairo, 29 November-2 December.

Vietnam Competitiveness Initiative (2006). The Vietnam provincial competitiveness index 2006:

Measuring economic governance for private sector development. Hanoi: Vietnam

Competitiveness Initiative.

White, S. (2004). Donor approaches to improving the business environment for small

enterprises. Washington DC: Working Group on Enabling Environment Committee of Donor

Agencies for Small Enterprise Development.

World Bank (2002). Private sector development strategy – Directions for the World Bank

Group. Washington DC: The World Bank.

World Bank (2004). A better investment climate for everyone, Washington DC: The World

Bank.