Parliamentary Portfolio Committee on Transport
Budget Hearings
2002/3
INDEX
|
Budget Overview 2002/2003 |
3 |
|
Budget Notes |
4-16 |
|
Preamble |
A |
|
Revenue |
B |
|
Expenditure |
C |
|
Budget assumptions |
D |
|
Special Projects |
E |
|
Major Challenges |
17 |
|
Future Projections (Strategic Objectives) |
18 |
|
Other Issues |
18 |
Budget for the 12 months ended March 31, 2003
Overview
R’Ms
|
2003 12 months Budget |
2002 11 months Prelim |
2001 12 months Audited |
2000 12 months Audited |
|
|
Income from: Fuel levies Investments |
3.149 3.029 120 |
2.209 2.038 171 |
2.389 2.165 224 |
2.385 2.151 234 |
|
Expenditure to: |
||||
|
Claims paid Compensation Claimant’s medical Claimant’s legal RAF legal |
3.030 1.941 460 388 241 |
2.540 1.641 387 366 146 |
2.495 1.624 431 306 134 |
2.130 1.366 377 259 128 |
|
Administration |
484 |
240 |
186 |
163 |
|
Reinsurance |
10 |
5 |
5 |
4 |
|
Arrive Alive Road Safety |
50 25 |
50 |
50 |
50 |
|
Depreciation |
11 |
10 |
11 |
9 |
|
RAF Commission |
1 |
1 |
2 |
1 |
|
Capital expenditure |
41 |
12 |
4 |
39 |
|
Special projects |
173 |
51 |
||
|
Increase in provision for outstanding claims |
2.004 |
1.976 |
2.512 |
1.357 |
|
Excess of expenditure over income |
2.680 |
2.625 |
2.854 |
1.325 |
|
Deficit beginning of period |
15.960 |
13.335 |
10.481 |
9.156 |
|
Deficit end of period |
18.640 |
15.960 |
13.335 |
10.481 |
A. PREAMBLE
The budget reflects the actions and resources needed to meet the Vision, Mission and Strategic Plan 2002 – 2005 of the Road Accident Fund. The budget also incorporates the requirements as per the dictates of the PFMA Act and National Treasury (draft) regulations, which, amongst other things, requires that the budget cover a three-year cycle.
In order to comply with the requirements of the Public Finance Management (PFM) Act of utilizing resources in an economic, efficient, effective and transparent manner, proper planning is required. The scarcity problem requires that the limited resources available to the Fund are allocated in an economic, effective way of compensating victims of road crashes and taking into account the objectives formulated in the 2000/1 Budget.
The process of budgeting is an integral part of the planning and control process of an organization. The planning process as outlined and commenced in the previous financial period has been continued.
It is also essential to ensure proper control of the budget. The control aspect of budgeting entails the measurement of actual results and reporting on variances between actual and budget. It is therefore essential that Regional Managers and Departmental Heads be responsible and accountable for proper control over their budgets.
The PFM Act and National Treasury Regulations require that performance measurement takes place on a regular basis, hence the monthly reporting to and from all branches. On the same note, Regional Managers and Departmental Heads will maintain monthly operational cost and performance reports and compare them on an exceptional item basis with the reports received from Head Office.
The Budgeting process has included all stakeholders and it is imperative that all spending is within the parameters of the Budget, irrespective of how "trivia" an expense might seem. The impact of these "trivia" expenses is great when they are assessed collectively. This budget will be for three years and will be reviewed annually, from a zero base during the three years. The key factor for the RAF costs is staff members. The cost driver for the RAF budget is the staffing numbers in the various departments.
National Treasury determines the quantum, based on a RAF fuel levy on petrol and diesel fuel. The fuel levy income and income from portfolio investments has been outstripped by claim compensation and the cost of claims paid. The Minister of Finance announced a 2c per liter increase effective from April 4, 2002, on the understanding that the RAF will implement processes to stem the influx of false claims.
The expenditure levels are increasing on a constant basis. This has had adverse effect on the Fund’s portfolio investments with the banking institutions. The level of draw down shows a significant reduction in the investment portfolios and consequently a reduction in the investment income generated.
The same can be said about the longer-term investments that have been distributed amongst the three investments houses/asset managers. The Fund’s claims expenditure continued to exceed its income and more withdrawals had to be taken from the Investment Managers to bridge the gap that was created by high claims settlement. During the 2001/02 financial year, an amount of R455 million was disinvested from the long-term investments (R543 million in 00/01). The book value of these investments stand at just below a billion (market value R1 billion.)
The reserve situation will improve slightly with the increase in fuel levy at a rate of 12.5%. It is estimated that an amount of R120 million for both the short and longer-term investments will be generated.
There is little, if at all, improvement that can be made on the cash flow management of the Fund. The fuel levy income is insufficient to cover the claims outflow.
iv) Total income for the year
It is on the basis of all the factors highlighted above that total income to the Fund for the year is estimated at R4,2 billion.
Total expenditure for the year is estimated at R3,953 billion, with R3,417 billion (87,0%) being in respect of claims settlement. R536 million is allocated to operational costs (including special projects), Arrive Alive, the Road To Safety campaign and the Road Accident Fund Commission of Enquiry.
The operational budget reflects the expenditure required to meet the demands being placed on the Road Accident Fund to meet its legal obligations. Staffing levels have increased across all sectors and the numbers show an increase from 1194 at March 31, 2002 to a planned 1937 at March 31, 2003.
Feasibility studies conducted in 2000 and 2001 identified the urgent need for the Road Accident Fund to re-engineer all its processes and systems. The Fund experiences difficulties in retaining experienced staff. The budget includes extensive training programmes and processes to enable the transfer of skills. The expenditure for this work is included under ‘Special Projects’. All of these projects have an Executive sponsor and the Executive is responsible to the CEO for the planning and management thereof. All Executives agree to and sign a commitment to support the achieving the goals of the Special Project.
The budget endeavours to illustrate how the operations budget supports the key activity of claims settlement, with emphasis being on the three main pillars of the Public Finance Management Act, 1999 (Act no 1 of 1999) viz., efficiency, effectiveness and economy.
Claims settlement values are expected to increase by approximately 15,0% over the previous year. It is anticipated that the number of new claims lodged during 2002/3r will increase by 13,3% based on the last five years trends.
Annual increases in new claims lodged over the past five years averaged 16.7% and peaked in 1999 at 22%. The figures for the year ended April 2000 show that the increase in new claims lodged dropped to a low figure of about 1,3%. A hope existed that this trend would support the contention that the Fund should start to realise stability, or even negative growth, in the number of new claims lodged. The figures for the year ended April 2001 shows directly the opposite trend, with a growth of 25,6%. The claims towards end of the year are expected to increase by only 13,3%.
Some assumptions are made in this regard:
This is a new and self-imposed benchmark that should illustrate the determination to optimise the use of human and other resources in the process of discharging legislative mandate.
This percentage at 15% is higher due to various measures and programmes put in place to streamline the whole claims life cycle as well as the curbing of fraud by the in sourcing of external expertise. The Fund’s resolve to bring down the figure is embedded in the underlying philosophy of realising better value for money – to do more with less.
The benchmark is necessitated by historical patterns, which revealed large disproportions between the two.
|
Year |
Avg. Claim Amount |
% Incr. |
||
|
97 |
R30,263 |
|||
|
98 |
R29,792 |
-1.66% |
||
|
99 |
R35,388 |
18.90% |
||
|
00 |
R38,386 |
8.47% |
||
|
01 |
R49,335 |
28.52% |
||
|
02 |
R49,799 |
0.09% |
|
Year |
Finalised/ New |
|
|
97 |
||
|
98 |
89.9% |
|
|
99 |
88.4% |
|
|
00 |
83.8% |
|
|
01 |
59.4% |
|
|
02 |
66.4% |
|
Year |
Outstanding/ Beginning |
|
|
97 |
104.0% |
|
|
98 |
106.0% |
|
|
99 |
115.0% |
|
|
00 |
109.0% |
|
|
01 |
130.0% |
|
|
02 |
116.0% |
Through creation of supportive environment to the claims handlers, the number of open claims should reduce over time.
The Claims Enterprise represents 75% of the staff establishment of the Road Accident Fund. It is for the above reason that there will be focused emphasis on improving the skill levels and expertise of Claims Enterprise personnel.
Based on research and analysis, numbers of staff processing claims should increase marginally. This is based on the trend of accidents occurring on the roads that have a potential for claim lodgment. See table below:
|
CLAIMS REPORTED PLUS I.B.N.R. AS % OF TOTAL L.O.E. |
|||
|
YEAR |
L.O.E. |
CLAIMS |
% CLAIMS/L.O.E. |
|
1987 |
74391 |
23297 |
31.32% |
|
1988 |
83384 |
26166 |
31.38% |
|
1989 |
88077 |
28937 |
32.85% |
|
1990 |
89178 |
28612 |
32.08% |
|
1991 |
89818 |
30005 |
33.41% |
|
1992 |
88888 |
33113 |
37.25% |
|
1993 |
83994 |
33040 |
39.34% |
|
1994 |
86458 |
36358 |
42.05% |
|
1995 |
94437 |
40030 |
42.39% |
|
1996 |
96079 |
45953 |
47.83% |
|
1997 |
85522 |
49166 |
57.49% |
|
1998 |
85687 |
54453 |
63.55% |
|
1999 |
80622 |
60988 |
75.65% |
|
2000 |
* |
* |
* |
|
2001 |
* |
* |
* |
The LOE (Loss Occurrence Events) statistics are obtained from Statistics South Africa, and is only available up to 1999. These are numbers of accidents that create potential claims to be lodged against the Fund. The column "Claims" represents the number of LOE under which actual claims will be lodged, including IBNR’s i.e. incurred but not reported. From the schedule, it is clear that due to the increased awareness by the general public of the role and function of the RAF, there has been a significant increase in the number of claims lodged.
It is on the basis of the above assumptions that it is concluded that the Fund will have more than the required number of claims handlers in the near future. As opposed to increasing the number of claims personnel, who will be permanently employed, an opinion is held that the focus should be on improving the efficiency of the current staff by equipping them with the tools – technical training (both computer and claims system) and improving the working environment such that they will be stable (i.e. low staff turnover) in their work environment. Staff turnover has averaged more than 10% over the past two years.
Management has already started to encourage staff to work overtime in order to reduce the backlog. If necessary, ex-employees are being employed on a contract basis.
Increases in personnel numbers are anticipated in the support services departments, notably Admin, Computer Services and Finance. These three components constitute the core of financial risk management, development of control systems and promotion of efficiency.
The Fund had experienced negative perceptions from its stakeholders because of its rigidity and bureaucratic tendencies. The legal profession on behalf of road accident victims were seen as the only parties to access the Fund. The highly legalistic process more often than not resulted in protracted and expensive litigation in the courts of law.
On the other hand, the Fund needs to ensure that the health care is in accordance with the undertaking issued and to ensure that it has not been abused. Abuse will lead to an increased deficit.
Coupled with the already-started structured training and streamlining of internal processes, the quicker response time to queries and speeding up of claims settlement will be facilitated.
The Arbitration pilot project that has been running for two years in the Western Cape will be rolled out to all the branches.
Following the successes of the relocation of the Randburg Regional Office to CBD Johannesburg, the RAF Board agreed with Executive Management to relocate Pretoria Regional Office to CBD Pretoria. A branch office is to be opened in East London in the Eastern Cape. This is in tandem with the fund’s view of being more accessible to the public.
The Administrative budget presented should make all the above stated objectives realisable.
The 2003 budget, in deviating from previous norms of using actuarial projections as its basis, makes assumptions, which serve as integral pillars on which it finds its basis. Some of the assumptions cum projects found their origins in the previous budget year.
E. SPECIAL PROJECTS
Business Case:
External medical specialist companies specializing in medical risk assessment will be utilized to assist the Fund in containing medical costs. The first project commenced in December 2001 and runs for 24 months. This project was entered into following a pilot undertaken in 2000 and 2001. The project brief is "to bring about cost and control management processes to enable the RAF to meet its current and future medical obligations in terms of the RAF Act".
Complementing the first project is a programme to generate an injury and medical profile that establishes an accurate accident and medical history. A referral brief is provided identifying specific injuries for expert assessment. Medico legal reporting templates and questionnaires will be provided for examination documentation to enable focused review and objective reporting of findings. A Final Report Summary will provide the claims handlers, case mangers and pre-authorisation staff with a summarized, systematized and graphically presented medical information base.
Economic Benefits:
The rationale behind the first project is to assist the RAF in determining its medical liability (if any) as soon as possible after a road crash; enable the tabling of legislation for a dedicated RAF medical supply compensation tariff; and increasing the claims flow productivity. At the same time to contain medical costs by preventing overcharging, over-servicing and the detection of pre-road crash medical conditions.
Addressing the legacy of approximately 300.000 outstanding claims, the second programme will increase the accessibility and intelligibility of complex medical information from many sources resulting in a 30 fold increase in volume of medical data analysed and assessed, with a 4 fold increase for simple cases.
The project cost for cost and control management processes is R10,3 million for 2002/3. The expected medical cost reductions is estimated at exceeding R90 millions per annum.
The medical profiling will have a substantial effect on the productivity of the claims processing units, the cost containment for settlement and claims administration. It will provide a framework for assessment and authorisation of past and future medical and related costs.
Executive Sponsor: Finance Executive
Business Case:
This project will freeze the facts of the road crash at the road crash site within 24 to 48 hours of the road crash and freeze the locus standi. It will also assist in the stabilization of road crash victims during the ‘golden hour’ period.
The project envisages the establishing of 500 to 1000 new SMEs’ owned and managed by PDIs countrywide. They will be trained (and their proficiency monitored) in road crash management and the required legal reporting of the road crash. The SME businesses will be sustained by being paid for each and every road crash that has been reported to the Police Authorities within the required 24hr period.
Economic Benefits:
The increased claim payout experience can be directly attributed to the increased number of personal injury claims submitted for alleged road crashes. By capturing the facts at or soon after the actual road crash, ‘locking’ them up and keeping those in a pre-lodgment file, claims emanating from the particular road crash will be compared with the ‘facts’ and either repudiated or processed. Repudiated claims will be subjected to a forensic investigation and followed up with prosecution. This procedure will reduce the number of claims submitted for compensation.
The direct financial and operational impact will be so significant that any estimates can only really be determined after a pilot project has been completed. Such a project is currently waiting the authority from the Minister of Safety and Security to proceed. It is expected that the authority will be granted during the first half of the budget period. Training of the PDIs commences in April 2002.
Executive Sponsors: Finance Executive and Corporate Legal Counsel
Business Case:
A special bill was piloted in May 2001 by the Minister of Transport to make it formally possible for the RAF to financially support road safety programmes.
In terms of its Strategic Plan targets for 2002/3, the RAF is determined to play a meaningful and active role in the campaign of reducing road crashes on South African roads. A budget provision of R50 million for the Arrive Alive Campaign and R25 million for ‘Road To Safety’ is included.
Economic Benefits:
These amounts must be seen as investments - and not expenditure. The return will be in the form of a reduction in road crashes and personal injury claims. The Strategic Plan targets a claim cost reduction of 2½% and a productivity increase of 5%. Both these campaigns, if actively assisted by the RAF, will enable the RAF to meet these targets.
Executive Sponsor: Chief Executive Officer
Business Case:
This is an alternative dispute resolution that speeds up the claims settlement process, thereby saving costs. It is further planned that a litigation department be set up and manned by admitted attorneys. The admitted attorneys referred to will be drawn from within the Fund and will be responsible for the processes to settle claims without having to go the litigation route. In the event that the litigation is unavoidable, the briefs to the Fund’s attorneys would be such that the areas of dispute are reduced.
Economic Benefits:
The costs of compensation for the period 1998 to 2001 indicate that whilst compensation amounting to about R7.3 billion was paid, the cost of delivery without mediation/arbitration was at R2.3 billion. Pilot study calculations indicate that delivery with mediation would have been R1.6 billion, a cost reduction/saving of R700 million. The unquantified benefit is the improved turn-around time for the claimant. A cost benefit study showed that a saving of R80 million is achievable through an in house resource.
Executive Sponsor: Corporate Legal Counsel
Business Case:
During 2000/2001, National Treasury appointed external consultants, Tillinghast, to review and make recommendations on the Government’s SASRIA insurance policy. Based on that review, and its successful outcome, the consultant’s approached the RAF with a proposal to assist the Fund in its deficit management and risk management through insurance. Following presentations to the Executive Management, the consultant’s were invited to submit their proposal.
Their proposal covers the following deliverables:
The project outcomes will assist the Board and Executive Management with recommendations on cash flow, deficit management and re-insurance.
The estimated timing for submitting the deliverables is two months elapsed time from commencement. Costs, based on assistance and support from the RAF, are estimated at not exceeding R1,6m.
Executive Sponsor: Finance Executive
Business Case:
A key strategic objective for 2002/3 is accessibility to the Road Accident Fund by claimants. The Pretoria Region will relocate to the Pretoria CBD during the first half of 2002 budget year. The Board approved the opening of a Branch Office in East London. The opening of the new branch is scheduled for June 1, 2002.
Economic Benefits:
The relocation of and the establishment of new branches are bottom line costs. The real benefit is for the claimants to have direct access for the lodgment of claims. There will be savings in the form of legal and medical costs.
Executive Sponsor: Finance Executive
Business Case:
The Strategic Plan 2002 – 2005 identifies goals that call for significant productivity increases and cost reduction programmes – all aimed at reducing the ‘financial deficit’ of the Road Accident Fund. In addition the PFMA Act requires that performance measurement must become the key operational control and management tool for the public enterprise.
By implementing an Activity Based Budget process by July 31, 2002, the managers will identify their key performance areas and the required targets. Objective and quantifiable performance statistics are then used in determining the criteria for each manager’s performance contract.
Economic Benefits:
The Road Accident Fund’s vision, mission and strategic objectives will be related to each manager’s performance, thereby enabling the overall performance of the Fund to be seen as being in ‘control’ and achieving the key target of reducing the reported ‘financial deficit’.
Executive Sponsor: Human Resource Executive and Financial Executive
Business Case:
Internal investigations of collusion between internal and external parties identified that the element of false merits is becoming a significant problem in the processing of claims. The Board authorized the outsourcing of forensics under the control of the Chief Executive Officer.
Economic Benefits:
The recent press reports are reporting on the successes being achieved through this process. Former employees, attorneys, medical suppliers, law enforcement officers and claimants are being arrested, prosecuted and sentenced. The risk of being associated with and being discovered for the submission of a claim with false merits will inhibit the prospective claimant.
Executive Sponsor: Chief Executive Officer
Business Case:
RAF processes are being re-engineered and will require migration to new IT platforms. The Fund will also be migrating to Citrix technology, which is a thin client solution.
New developments include an integrated system, inclusive of Human Resources, Finance and Claims processing. The new system caters for complete redundancy via servers located at regions and to provide for 100% uptime of the databases.
A detailed data warehouse with standard data drill down tolls is developed to provide for data integrity, ultimately used for management and control information.
Economic Benefits:
Supplied with accurate business data and information tools and techniques, the Fund will be able to discharge its legislative mandate effectively, efficiently and economically in terms of the RAF Act, the PFMA Act and the Draft National Treasury regulations.
Executive Sponsor: Chief Information Officer
The impact of the proposed legislative amendments – especially the cost saving benefits - has not been factored in this budget as the Minister of Transport has asked for further debate on the proposed amendments.
Executive Sponsor: Chief Executive Officer
Business case:
The Road Accident Fund compensates road accident personal injury claims, in terms of legislation. In cases where further medical care is determined, a medical undertaking is issued. The legal and medical issues require that the employees of the Road Accident Fund be suitably qualified to settle the claims in terms of the law. The processes of assessing merits and quantum call for objectivity. Due to the volume of claims being received, the processes are not able to allow a quality objective review. The project is to separate the processes to units of expertise.
Economic benefits:
The separation of the processes will allow for quality objective assessments of both merits and in the determination of the quantum. Productivity is enhanced and the unacceptable time to process claims will be reduced. Savings will be made in legal, medical and operating costs.
Executive Sponsor: Chief Executive Officer and Chief Information Officer
CONCLUSION
This is an endeavour by the RAF to produce a budget that is objective-driven and looks after the pennies. The human factor, represented by over 69% of the operational budget, receives the advanced focus, hence 1.2% of the salary bill being dedicated to skills development and training.
The number of special projects is indicative of Executive managements’ commitment to the supply and delivery of an effective, efficient and accessible service to society at large.
Major Challenges facing the Road Accident Fund
Future projections
Three year strategic plan
Refer to attached strategic plan as submitted to the Minister of Transport, in February 2002.
Other issues relating to budget allocation for the Parliamentary Portfolio Committee on Transport