South Africa’s decay: What’s to be done?

This article was first published on BizNews.com on 2 August 2022

South Africa’s decay: What’s to be done?

The possibility that the Government’s insurer SASRIA may not be able to meet its solvency capital requirements caused by the large claims arising from the riots, looting and destruction of last July is becoming a reality.  As predicted, SASRIA has since announced significant premium increases critical for its financial survival, but that will not bring it to a solvent state.  SASRIA was however, profitable at the old premium rates before the looting and thus in the absence of further such events, should return to profitability.
 
Nonetheless, our purpose is not to focus on the legal or ethical implications of a state-owned enterprise now trading in a technically insolvent state, but how the South African economy should provide for risk from a ‘systems’ point of view.
 
The economic system is complex. It consists of many role players and entities that interact and depend on each other on many levels.  If the inherent instability of change and disruption is not managed carefully, then an economy such as ours will be subject to increasing complexity and instability. 
 
The current statist approach to government in South Africa demands control over the economic system, but that presupposes the state assuming responsibility for the stability and smooth functioning of the system.  It must create and maintain a safe and reliable working and living environment. In terms of the South African Constitution, the principles of cooperative government and intergovernmental relations require all spheres of government and all organs of state within each sphere inter alia to preserve the peace and secure the wellbeing of the Republic. This in turn ensures that individuals and the nation as whole can seek a better life, free from fear, living as equals and in peace and harmony. To accomplish these goals, the Constitution permits the state to establish systems and institutions such as a defence force, police and intelligence services, and to enact legislation for disaster management, industrial and economic promotion, protection of the environment, and so on.
 
By almost every metric, the South African government has been unable to fulfil this mandate.  The lack of governance, corruption and greed revealed in the pages of the Zondo Commission has left the middle-class and especially the poor, in a very much worse economic state than would otherwise have been.  Government policies, such as B-BBEEE and preferential procurement processes, add a premium that raises the cost of all goods and services beyond their true market value, dramatically illustrated in the recent Covid-19 PPE procurement scandals. The end result is that the discretionary spending of the middle class and poor is decreasing.  The cost of this failure to all South Africans is beyond reconning.
 
South Africans are reacting to the collapse in their environment and the destruction of state and local government facilities by increasingly creating their own parallel private structures. This often means middle class people having to pay twice for services which their taxes should be paying for in the first instance: Private security services because of police failure, private schools because of education system failure, home generators and solar installations because of Eskom failure, private medical services because of state health care failure, private transport services because of Prasa and Spoornet failure. The list goes on. 
 
The poor however, do not have the capacity to bypass the state and therefore vent their frustrations through more and more service delivery protests.  There were over 900 such protests reported in the six months between August, 2020 and January, 2021 according to Defence Web magazine. These protests often destroy important infrastructure such as medical clinics, libraries, schools, police stations and administration offices.
 
A vicious cycle ensues when Government stands idly by whilst state infrastructure is destroyed, leading to more spending going to the parallel solutions, and the ability to provide services to those that need them most all but vanishing.  Thus, increases in the cost of doing business and the cost of living for everyone are inevitable when important participants in the system do not, will not, or cannot, perform their functions effectively and efficiently, and without corruption.
 
Evidence suggests that the damage caused by looting, riots, protests and general social unrest is as a result of these system failures. Moreover, such damage does not constitute a manageable economic risk.  The instability is so pervasive, and has been going on for so long, that it is now all but baked into SA’s economic fabric.  Yet, there is an apparent reluctance to recognise that the risk caused by this instability is a major cause of the low growth, high unemployment and increasing inflation evident in our economy.
 
In their Insurance Barometer of November 2021, Santam Ltd identified risks such as climate change, electricity and water infrastructure, and cyber risk as systemic risks and proposed a similar structure to SASRIA to insure these risks. Although one can understand that insurers may wish to transfer systemic risks to the state (and thus to taxpayers), this will not improve the underlying causes, given the current state of government. According to their annual integrated reports, most if not all listed insurers are committed to environmental, social and governance (ESG) objectives or corporate social responsibility (CSR) targets.  The insurers are also involved in a number of projects to assist local governments to improve risk related services, which is commendable.
 
It nevertheless appears that the larger South African companies approach their social responsibility on the basic assumption that the SA government is capable and has the will to fulfil its role.  They also seem to assume that private and public partnerships in the current form is the main opportunity for them to play a supporting role in these activities.  Business seems to only work in lockstep with government and rarely challenges the policies and legal structures imposed on it.  When one considers the important role that government plays in the society and the importance of developing and maintaining the basic infrastructure, the private sector may need to change their paradigm from being a junior partner to one that is more assertive and  demanding of a safer and less wasteful environment.
 
Creating more SASRIA-like structures to pay the costs of our instability is not the answer:  Firstly, given the existing track record of government institutions outlined above, any further interventions by them are likely to suffer the same fate, adding to that increasingly long list of failures.  Secondly, the underlying systemic causes are not addressed by this.  SASRIA would not have become another taxpayer burden were it not for the widespread riots and looting.  In a stable economic and political environment these would not have taken place.  It is therefore inadequate to address only the result of the risk. We must address its cause and get back to a legal and infrastructural environment where risk is minimised.  Government must deal with this urgently, as the risk of not doing so will far outweigh the cost of putting it right. 
 
It will of course, be a grave mistake to see the events of July, 2021 in isolation. That looting and rioting was a trigger event and we are still not sure of what it cost the nation, although some have spoken of amounts exceeding R50 bn. This is probably a very modest estimate, and definitely does not include the long-term effects of distrust in government, leading to disinvestment and the creation of private parallel structures to take over the role of the state.  Since last July well-nigh nothing has been done to officially identify, let alone address, the root causes of that upwelling of anger and frustration.
 
Our own view is that the root cause is the systematic decay and collapse of our systems, infrastructure and institutions. The effect on the general instability of the economic system will be catastrophic if nothing is done to change the underlying policy causes immediately. The government’s waste and misuse of funds is now so endemic that we often simply accept it as a feature of doing business in our country. 
 
In the context of insurance, the cost of the failure of South Africa’s social and economic systems is far beyond the risk bearing capacity of the local insurance community.  It is perhaps for this reason that business and especially our larger firms, remain so muted in demanding that the dire state of our economy and the higher risks that that poses for business be made a priority.
 
We should urgently be formulating alternative plans to manage the overall risk of failure of the economic system that do not create a myopic focus on isolated parts of the system, like many  current versions do.  To achieve this, government needs to change their approach to adopt policies that create more stability and more employment, and social society needs to support such changes with appreciably more commitment. 
 
For South Africa to break out of this calamitous configuration and modernise its society, a number of things are now essential. These include:

1. All laws and regulations (red tape), especially those against small business, must be reviewed and promptly repealed so as to grow employment opportunities a quickly as humanly possible;
2. All laws and regulations (red tape), especially those against small business, must be reviewed and promptly repealed so as to grow employment opportunities a quickly as humanly possible;
3. Electoral reforms must introduce mixed constituency and proportional representation at national and provincial levels, and the direct election of the president;
4. The state must extricate itself entirely from the provision of education, health care, transport, electric power and water;
5. Public services, including the traditional leaders’ sector, must be re-configured so as to serve the people and not the bureaucrats involved as at present;
6. Trade, investment and economic relations with the Southern African Development Community (SADC), the Common Market for Eastern and Southern Africa (Comesa), and with non-African partners must be re-negotiated on terms that properly secure all parties’ interests;
7. Government policy must be investment and productivity driven, rather than consumption and extraction driven, and black economic empowerment’s demands on business must rapidly be phased out.

Recent utterances by members of the governing party have however, emphasised that the ANC is still committed to a centralised hegemonic state.  The SASRIA dilemma is a case in point – an insolvent state-owned monopoly insurer still underwriting risks that are created by the policies of the state itself, and more of such centralist solutions are proposed to pay for the failures of the policies of that same state.  Whilst such an approach pertains, it is doubtful that we could see the changes now so urgently demanded to salvage our beloved country.