Road Accident Fund 2008/09 Budget

Meeting report

Road Accident Fund (RAF) 2008/09 Budget and 2009/11 Strategic Plan
Mr Veli Mahlangu, Acting Chairperson, RAF, introduced his delegation of the Fund’s management and board, before handing over to the Chief Executive Officer.

Mr Jacob Modise, RAF CEO, explained that the reason for such a large entourage, was that the Fund had ‘reached a precipice’, and would be obliged to take some critical measures, which would be explained in the presentation. He thanked the Fund’s board members for being present. He said that the Fund’s management and board were under no illusions that they could restore the Fund to health without the help of other entities such as Parliament and the Department of Transport.

Rescue plan
The Fund had in its rescue plan identified four key challenges that were largely within the control of the Fund: inability to effectively process claims, contributing to a growing backlog; the high costs of administration and service providers; prevalence of fraud and corruption (see previous presentation to the Committee); and, dissatisfied and disillusioned stakeholders.

As part of the rescue plan, the Fund sought to convert these challenges into strategic objectives. Those that were largely within the control of the Fund were: to deliver the mandate in an operationally effective and efficient manner; minimise the cost of administration and service providers, thus maximizing funds available for paying compensation; promote good governance and effectively managing risk within the Fund; and fostering positive stakeholder relations through proactive engagement.

As part of the rescue plan, the Fund had identified two key challenges that were beyond its control: its unsustainable economic model, and its poor financial health. The Fund sought to convert these two challenges into strategic objectives, to be pursued in conjunction with the necessary stakeholders.

The Fund had launched a rescue plan, with the following course of action in terms of the Fund’s strategic objectives: conduct an operational review to eliminate the backlog; reduce costs of administration and service providers; review risk and governance; minimise fraud and corruption; review stakeholder engagement; and ensure positive stakeholder engagement.

Under the rescue plan, the Fund was undertaking jointly with key stakeholders external initiatives to review the Fund’s finances and develop a model that was financially sustainable, eliminate the deficit and return the Fund to solvency and liquidity within five to ten years.

The Fund had set itself internal targets to process the required claims in order to eliminate the backlog over 5 years; reduce costs to 33% of compensation paid by 2010; reduce levels of fraud; and improve stakeholder relations to acceptable levels.

The Fund realized that it could not achieve its aims without the co-operation of Government, the Fund’s stakeholders and staff. The Fund sought broad-based organizational transformation at all levels. This included a full change management programme; a review of the organisational structure; the introduction of team appointments; a scorecard performance management system; stakeholder engagement; review of processes and systems; investigations into operational efficiencies; human resource capacity building; review of communications; the introduction of a culture of change management; and leadership development. Furthermore, the Fund sought to re-design the business model; engage Government on the funding model; and pursue legislative amendments.

The Fund’s new systems delivery process remained unchanged and on track. The Fund continued with its existing claims model, but was establishing a new claims model, over a period of 12 to 18 months. It sought to process all new claims via its ‘new model’. It sought to agree on backlog financing with the Department of Transport within three to six months, and process the remaining backlog via the new model within five years. The Fund would pursue legislative amendments.

The Fund’s rescue plan went live with its SAP claims management system in December 2007. Under the rescue plan the Fund had begun the roll-out of the new claims management system.

Performance
In reviewing the Fund’s performance, Mr Modise said that progress in meeting shareholder expectations had been hampered by lack of funding. Shareholders expected the Fund to achieve a turnaround that would bring about the stability, efficiency and sustainability of the organisation. The Fund was working to achieve the social economic objective of Government to create appropriate capacity through training, development, attraction and retention of staff as well as succession planning. Further, it sought to manage its affairs in a manner that would locate the Fund in the broader strategy of delivery in relation to the border transport sector and social security system. It sought to manage stakeholder relations, in particular relations with victims, government, legal representatives and service providers, in a manner that was driven by a culture of risk management. 

Progress
Mr Modise reviewed the Fund’s progress. The Fund had achieved some stability. However, continued improvements in efficiency and sustainability were being hampered by Government’s failure to fund the turnaround strategy. Organisational capacity had expanded with the roll-out of new systems and processes. Social delivery was also being hampered by Government’s failure to fund the turnaround strategy. A culture of risk management was firmly in place at board level. Stakeholder relations were gradually being addressed with regard to service delivery.

Income
Total income was expected to rise 12% to return to 2006 levels. The bulk of the increase in total income was expected to occur in the form of income from the fuel levy. Volumes of diesel and petrol sold rose 7% to 21.3 mega-litres during the calendar year. The RAF Levy at 41.5 cents per litre represented less than 5% of the fuel price at the pump. The RAF Levy accounted for less than 13% of all margins levied on fuel. Diesel rebate continued to grow in line with fuel levy growth. Investment income dropped due to depletion of cash reserves, despite rising interest rates. Total expenses, including provision for outstanding claims, were expected to outstrip income from the fuel levy. The bulk of the increase was expected in claims expenditure, including claims provision. In nine months, the Fund had already paid in cash for claims more than it had paid for the full past year, excluding structured payments. Staff costs were expected to rise only 10.6%. Administration and other costs were expected to rise mainly as a result of the roll-out of new systems, such as SAP, Fineos, and others. Claims processing had had to be curtailed due to cash shortages. More supplier claims would be processed up to year-end to preserve cash.

Claims
The Fund had been experiencing a rise in reported claims. With the change in the processing mix, the Fund expected to maintain its claims backlog at 2007 levels. For as long as the no-fault system was not introduced, legal costs would continue to grow. Delays in introducing the Road Accident Fund Amendment Act meant that R4 billion would continue to be wasted in general damages. Efficiency gains continued to be made with a reduction in cost-to-compensation percentages. Efficiency gains made in 2007 were hampered by cash shortages. The staff complement had remained constant. The increasing number of accidents arising from growing economic activity, the increased population of vehicles, distances travelled, and the increase in the number of foreign visitors, coupled with the absence of ‘caps’, would result in the growth of claims liability. Accelerated claims processing had reduced cash reserves significantly. The ‘cash crunch’ had reached a level where it was difficult to conduct the Fund’s business. The number of summonses continued to rise. Writs of execution issued by the courts disrupted normal business operations.

The Fund would have no choice other than to invoke the protection afforded it by the Road Accident Fund Act. The Fund was now considering the mechanisms it needed to use to invoke Section 21 of the Act. In the 2009 budget, the fuel levy was to be increased 5 cents per litre with effect from 01 April 2008. It was necessary to ask if any alleviation of the situation could be expected from the work outstanding on legislation required to remove the burden on taxpayers. The Fund had revised its assumptions to align with delays in the Amendment Act, no-fault and 5 cents levy increase. These assumptions showed that in 2009 the deficit would have escalated to R50 billion.

Strategy
The Fund’s 2009 budget conclusion was that South Africa required a model to determine the appropriate level of fuel levy on an annual basis. Delays in funding the turnaround strategy would cost South Africa more in the future. The RAF has no option but to invoke section 21 of the Road Accident Fund Act.

The Fund’s strategy in 2009 would be founded on the four pillars of cost management - reducing costs and increasing organisational efficiencies; legislative influence – increasing the fuel levy, introducing a no-fault system, and promulgation of the Amendment Act; restructuring the business - recapitalising to attain FSB specified solvency standards; and proactive prevention of accidents - understanding the leading causes of accidents, and developing and implement proactive measures.

The key features of the Fund’s strategic thrusts were re-examination of the Fund’s business; a revised vision, mission and values; and positioning for lasting recovery.

Vision, mission and values
The Fund’s revised vision was to be a sustainable, world-class provider of cover for personal injury arising from the use of motor vehicles in South Africa.

The Fund’s revised mission was to provide appropriate cover to all road users within the borders of South Africa; to rehabilitate and compensate persons injured as a result of motor vehicle accidents in a timely and caring manner; and actively to promote the safe use of South Africa’s roads.

The Fund’s revised values were based on Ubuntu: care about and support of others; involvement with and listen to others; recognizing others’ contributions; and showing concern for people’s well being. The Fund took pride in its work.

Discussion
Mr S Farrow (DA) requested further discussion on the restructuring of the Road Accident Fund. He suggested that the Road Accident Fund Amendment Act be repealed and redrafted legislation be introduced to address the Fund’s problems. He asked for further information about the claim by a Swiss citizen injured in South Africa for a vast sum of money to be paid as compensation from the Fund.

Mr Modise responded to Mr Farrow by saying that it was preferable to invest money upfront. Mr Modise gave details of the SAP system, links with hospitals, the status of claims, and use of the internet. He spoke of the role of attorneys and other law professionals in the work of the Fund. He said that the Swiss citizen’s claim had now escalated to R2.2 billion

Ms N Khunou (ANC) asked about the role of law professionals in the Fund.

Mr Modise said that the Fund used panel attorneys, an example of its need for specialised services. The Fund was examining the possibility of outsourcing such activities. The really large expenditure was on legal fees.

Mr B Mashile (ANC) said, with reference to the Fund’s previous session with the Committee, that the Department of Transport should have responded to the Fund about a funding model. It was a major constraint.

Mr Modise, in response to Mr Mashile, said that the Fund had interacted with the Minister of Transport. He would ask the Department of Transport to report further on the subject. It was not, however, the Fund's own Minister, the Minister of Transport, who determined the fuel levy. In spite of the series of major problems facing the country, such as the Eskom crisis, the Fund preferred to press its case at this time, rather than postpone it.

A member of the Fund's board appealed to the Committee to intervene with the Treasury on the Fund’s behalf.

The Chairperson, who, he said, had served with the Committee since 1999, said that the Committee had never really grasped the nettle of the Road Accident Fund. The crisis with which the Committee was now sitting, had been perpetuated, and was becoming worse with procrastination. In more recent years, however, the Committee was hearing fewer complaints about such issues as alleged slowness of processing of claims. The Committee's major concern was the sustainability of the Fund's business model. It was important to engage with the Department, and call upon the Financial Services Committee to brief the Transport Committee. He suggested calling in the reports on the Road Accident Fund. He said that all concerned were ‘fudging’ the issue. It was important to engage with the Treasury on the macroeconomic model of the fuel levy. After long deliberations, a funding model for the Fund remained to be devised.

The Chairperson observed that South Africa had many good ideas, but was unable to follow them through to successful implementation because of a lack of funding that amounted to 'a starvation diet’. A notable example of this was the taxi recapitalisation programme, which was likely to be a most protracted process. On the current allocations, it would take 50 years to complete the programme. It was important to ask how qualitative transformation was to be effected. The notion of a regulator for the Fund was a reasonable one. The Fund would then petition its regulator.

Mr Farrow said that the Committee should invite the Minister of Transport to brief the Committee.

Mr M Moss (ANC) asked if the Road Accident Fund had met with the Treasury.  Mr Moss asked secondly who was responsible for processing injury claims. One of his constituents, a paralegal employee, said that he had many problems with claims on behalf of his principal’s clients. Mr Moss asked about the length of the process for claims for compensation from the Fund.

The Chairperson observed that Mr Moss’s question was a good constituency question.

Mr Modise said, in answer to Mr Moss's first question, that, in the absence of a mandate, the Fund had no formal relationship with the National Treasury.

Mr Modise said, in response to Mr Moss's second question, for as long as the Fund was administering a fault basis claim system, the claims process could take weeks or months. The process required the Fund to prove that the wrong doer was not at fault before making payment to the claimant. To prove fault required evidence. A system was needed where one did not have to ask whether anyone was at fault or not before making payment. Certain cases, such as a drunken individual involved in an accident, or an illegal immigrant, could be covered by exclusions in legislation. Some of South Africa's neighbours had put a good deal more thought into their legislation. For example, such countries would pay only for emergency medical treatment for an illegal immigrant involved in an accident, and not make payments to compensate for such an individual's loss of income. Botswana had instituted the principle of reciprocity. That Swiss citizen was claiming R2.2 billion from South Africa's Road Accident Fund, yet in his own country he would not be allowed to claim even a tiny fraction of the amount that he was claiming from South Africa. Mr Modise said that the Fund wished to have a system whereby the claimant could receive payment 24 hours to 30 days after the treatment had been provided, depending on the complexity of the treatment. 

Mr O Mogale (ANC) said that he would repeat his question of the previous year on whether or not the Fund paid directly to the claimant’s account or to the account of the claimant’s lawyers.

With regard to Mr Mogale’s question, Mr Modise said that New Zealand’s equivalent fund paid the claimant directly. In South Africa, however, the historical practice had developed whereby accident victims were expected to assign to a legal professional ‘the power of attorney.’ Lawyers refused to disclose to the Fund the bank account information of claimants. This meant that payments of necessity had to be paid into a claimant’s attorney’s account. When the Fund had announced that it wanted to introduce a system of direct payment to claimants, the legal profession had been adamant in its opposition. However, the Fund had sought a legal opinion and had been advised that the Fund could, in theory, notwithstanding the claimant’s having power of attorney to a legal professional, deal directly with the principal (the claimant). The Fund was considering using the media to make the public more aware of the situation, and, possibly in some cases, to ask claimants to come forward with information about their bank accounts for payment purposes. South Africa was one of the few countries that paid through third parties. The Fund needed to be more proactive in following up claims from claimants of non-receipt of payment. It was suspected that, in some cases, third parties held onto clients' monies for a considerable time in order to earn interest.

Ms B Thomson (ANC) commented on the high cost of the Fund’s service providers.

Mr M Luyt, Chief Director, Public Entity Oversight, Department of Transport, said that the Department had a good working relationship with the Road Accident Fund.

The Chairperson said that it was pointless to go over the subject of ‘the blunder’ again and again. There was no unanimity. It was preferable not to compromise the outcome by envisaging the matter as an all or nothing issue. He asked if it were not possible to proclaim the governance issues of the Amendment Act, before proceeding to consider the serious injuries issues. He did not want to see mistakes repeated.

Ms Khunou said that she was taking the matter very seriously. The Minister of Transport was then the Acting Minister of Health and might have nevertheless been expected to act. 

Mr Farrow said that, although he was not a lawyer, he believed that Parliament had the right to deproclaim or repeal legislation. It was surely possible. He wanted a legal document to assure the Committee that it was doing all in its power to ensure that the matter was resolved. He was sure that it would be possible to draft and introduce a new bill to amend the Road Accident Fund Amendment Act in order to stop the waste of taxpayers’ money. Mr Farrow said, with due respects to any members of the legal profession who might be present, that he did not trust the opinion of lawyers, since their opinion depended on who was paying for their services. The Committee should aim to put the matter on the table within a week.

The Chairperson said that he preferred to await the Constitutional Court’s judgement, expected about two weeks hence, before following Mr Farrow's recommendation to seek a legal opinion. Perhaps the Committee could blame itself for not being sufficiently active in the matter previously. Parliament would shortly be in recess, but the Committee had an obligation to examine the measures it should take to resolve the matter.

Mr Modise said that the Fund suffered from two kinds of fraud: opportunistic fraud, arising from weak practices for handling money; and systemic fraud which tended to arise out of the legislation that the Fund was administering. This kind of fraud could be changed only by changing the system. The Fund was taking measures to reduce ‘systemic fraud’, and had presented to the Committee on the subject in the previous year. To the end of reducing systemic fraud, it was necessary to reduce the need for so many intermediaries to be involved in the claims process. In Australia one was required to report an accident within 14 days of its happening. Claims in respect of unreported accidents were not entertained. The Fund’s operations had formerly been heavily paper- based, but under the new methods for work flow solutions paper would be handled once only.

Mr Modise said that the Fund's poor financial health was not a new issue. The Fund had shared the issue with the Committee two years previously. If legislation had allowed the Fund to change the model, it would have changed it. Unfortunately, the Fund needed Parliament to change the model. It took the efforts of the Committee to introduce the Amendment Act to cap the benefits. Without legislative changes, Fund management could not by itself change the benefits. It was necessary to change them through the legal process. Mr Modise admitted that the Fund did need Parliament's help, and this need was 'the gist of the discussion'. 

Mr Modise said in answer to Ms Thomson’s question on the high cost of service providers, that the Fund expended the bulk of its cash on legal fees. The Fund's own staff costs were around only R400 million. The Fund needed information technology consultants to ensure that computer servers were kept operational. The Fund was examining the possibility of outsourcing such activities. The really large expenditure was on legal fees.

Mr Modise said in answer to a question on what changes had taken place, that the Fund had not changed holistically. It had become more efficient in some areas; such improvements tended to bring about a kind of crisis of unfulfilled rising expectations.

The Chairperson requested that the discussion proceed towards closure. He said that he would call Treasury officials and members of the Financial Services Committee to visit the Transport Committee on 18 March 2008. He expressed the hope that the Committee would hear, in the meantime, from the Constitutional Court. In the longer term he was mindful that the life of this Parliament was drawing to a close, and the Committee did not have the luxury of abundant time to complete its business. He said that the Department of Transport, rather than Parliament, would have to drive the process of solving the problem: it was crucial to create a serious momentum. He said that key objectives to be achieved were promulgation of the Amendment Act, implementation of the no-fault system, and recourse to Section 21 of the Road Accident Fund Act. It was important for the Fund to keep pressure on itself. The transformation issues were to ensure that the Amendment Act was put in process; developing a satisfactory business model; achieving a satisfactory process of regulation; and, very importantly, implementation of the no-fault system. These matters were also related to general concerns of social security. To date, sufficient progress had not been achieved.

The meeting was adjourned.

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