Road Accident Fund: hearing; Defence Resolution: adoption

Meeting report

STANDING COMMITTEE ON PUBLIC ACCOUNTS (SCOPA)
12 June 2002
ROAD ACCIDENT FUND: HEARING; DEFENCE RESOLUTION: ADOPTION

Chairperson: Mr F Beukman (NNP)

Documents handed out
Defence Resolution - draft version
Minutes of SCOPA hearing with RAF and other transport-related bodies on 22 May 2002
(email [email protected] for above documents)
RAF Annual Report (available at http://www.raf.co.za/content/statistic/AnnualReport2001B.doc)
SCOPA's written questions to RAF and the response by RAF [not for release to public]

RAF website: www.raf.co.za

Relevant news articles:
"Accident fund acts against fraud": Mail and Guardian [Appendix 1]
"Report finds systematic fraud at RAF": Mail and Guardian [Appendix 2]

SUMMARY
The following matters arose for discussion during the meeting with the delegation from the Road Accident Fund (RAF): the contracts of employment of the RAF consultants and members, the reengineering process engaged by the RAF, its involvement in and measures taken to ensure road safety, whether any fraud prevention initiatives have been implemented and the progress made in this regard, whether the internal controls of the RAF are effective, the funding and finances of the RAF, measures taken to reduce its deficit and the skills needed to hold a position as board member.

The Defence Resolution report was discussed and adopted by the Committee, subject to minor amendments effected by Members.

MINUTES
Road Accident Fund Hearing
The Chair commenced proceedings by welcoming all present, and informed Members that he would first be posing a series of questions to the delegation from the Road Accident Fund (RAF), after which Mr N Bruce (DP) would then pose a further set of questions to the delegation.

The CEO of the RAF responded to a question that had been posed by Mr D Gumede (ANC) in the 22 May meeting by stating that the RAF was engaged in the process of reorganising its operations. The RAF delegation was asked if it has employed any consultants in that process.

Mr Humphrey Kgomongwe, CEO of the RAF, replied that a management consultancy had been used by the RAF Board, and its services were procured via an open tender process.

The Chair asked the CEO which firm precisely was contracted and whether its services were still being retained by the RAF.

The CEO replied that the Ebony Management Consultancy had been contracted in this regard, but they have since completed their mandate.

The Chair inquired as to the remuneration of this consultancy for the services provided.

The CEO responded that he was not sure as to the exact figures, but an approximately R5m was paid for these services.

The Chair asked if the RAF has since conducted an evaluation of these services and the current position so as to determine whether this was "money well spent".

The CEO replied that the board has received regular evaluation reports on this matter, and thus the progress made has been presented at regular intervals.

Mr Gumede contended that the price paid for these services could very well be irrelevant if the procedure was properly followed and the desired results were achieved.

The CEO answered that the procedure followed in this regard was indeed correct as an open tender process was followed, candidates were short listed, then had to undergo an interview process and were then finally appointed by the board.

Mr P Gerber (ANC) informed the CEO that this Committee has been supplied with a list of the consultants evaluated in this process, yet there does seem to be a problem in the procedure adopted in this regard. The reason is that the Draft RAF Corporate Plan was made available to Members during the preparatory meeting held on the 21 May 2002 and during the hearing on the following day it was decided that the RAF would again address this Committee in June. It is not clear how this meeting was anticipated, as it seems as though it was already decided on the 22 May 2002 that the RAF would address this Committee during this session.

The Chair informed Mr Gerber that new items are placed on the agenda for this Committee as they arise during the course of the year.

Mr Gerber reiterated his concern that it appears that it had already been decided on 21 May 2002 - the preparatory meeting - that the RAF would be addressing this Committee on this date. Indeed, it seems as though the draft corporate plan was supplied to this Committee on the 21 May, yet the hearing on it was only held the following day on 22 May 2002.

The Chair assured Mr Gerber that this was not the case, but the matter would be evaluated.

Mr Bruce requested the RAF delegation to explain precisely what is meant by the use of the term "reengineering".

The CEO responded that this term implies, with regard to the RAF, the redesign and re-evaluation of its claim processes. The reason for the decision to embark on this reengineering process is that it was recognised that when a claim is registered with the RAF it is referred to one official within that claim environment, who then becomes responsible for evaluating and processing every aspect of that claim. Thus this single RAF official would evaluate the medical and merit aspects of the claim, conduct investigations to verify the information provided by the Department of Home Affairs and the South African Police Services (SAPS), assess the claim, make an offer to the claimant and even authorize the payment to be made. These officials were thus "one-stop-shops".

It was thus decided that this operational framework creates room for deviance from acceptable claims processing standards as the claimant could develop a relationship with the official responsible for processing his/her particular claim which, which could result in collusion between these two parties. The reengineering process thus aims to streamline this process so that different aspects or parts of the claim are now processed by different RAF officials, thus effectively doing away with the possibility of the formation of this sort of relationship.

It is also envisaged that the reengineering process could entail the establishment of call centres, which are currently in the tender stage, which would be used to deal with queries or provide updates to claimants on the status of their claims. There is also a concerted initiative to move away from a paper-based to a computerised system, which will have sufficient checks in place to ensure the data relating to the claim is not manipulated.

These measures will also have a financial impact as it will reduce the costs of service delivery, because the reengineered process is streamlined, as with an assembly line in motor vehicle manufacturing plant where several persons are tasked with different functions that together ensure a reliable product is produced.

The Chair reminded all present that only 64 personnel had been employed by the RAF during 2001. However, a member of the RAF delegation had stated in the 22 May hearing that 1 600 personnel are currently being employed. It was also mentioned that the services of the South African Bureau of Standards (SABS) were engaged to evaluate the organisational structure of the RAF. The delegation was asked to provide more information and greater indication of the outcome of the SABS process, and whether the consultants employed were linked to a proper staff audit to verify that all 1 600 personnel are in fact needed.

The CEO responded that their services were engaged to eradicate the claims backlog that had arisen over the years, so that service delivery may be expedited. They were thus employed on a contract basis for a limited time period only. The claims process has since matured, the weaknesses have been identified and addressed and the process has been stabilised.

The Chair requested more information of the results of the evaluation done on the consultants, as to whether it was suggested by the SABS audit that these consultants be rationalised or reduced.

The CEO replied that the RAF had developed a job profile for each post as well as a profile of the type of person that would fill the post, and the implementation of this process is currently underway. This study highlighted the fact that a certain component was needed by the RAF to properly execute its mandate, yet it was not presently part of the RAF's organisational structure. The result is that the decision has now been taken to include medical personnel as part of the claims machinery, so that greater value may be added to the claims process.

The Chair noted that R50m has been allocated to the RAF to address Road Safety. He asked what measures the RAF has put in place to ensure it gains value for its money, as well as the manner in which this system will be monitored.

The CEO informed the Committee that the RAF had not previously been involved in monitoring this aspect, as this was done by the Department of Transport and government itself via the Road to Safety Strategy. The RAF does however serve on the steering committee and various subcommittees which decide, amongst other things, whether the RAF should invest in projects such as pedestrian and driver education.

The Chair asked if this amount is a once-off payment.

The CEO responded that the decision was taken by the Board that an amount of R50m would be allocated to Road Safety, but the RAF does not have to invest the full amount. It merely has to identify those projects that need funding and promote road safety and invest in those. The RAF could in fact only spend R40m of that allocated amount.

The Chair noted that it had been indicated that R300m per annum has been allocated to fraud prevention initiatives, and the actions taken by the prosecuting authorities in this regard have also been reported. The RAF was asked to explain the pro-active steps being taken by the RAF, in consultation with the relevant role-players such as the legal sector, to ensure fraud is detected early and prevented.

The CEO replied that the RAF conducts the preliminary and primary investigations into claims suspected of being fraudulent and the SAPS or Scorpions Unit is then involved, depending on the complexity of the situation. During the month of March 2002 the RAF has published a statement in all regional and national newspapers that it is now an offence to be involved in a fraudulent RAF claim, and the claimant will also be prosecuted if s/he allows his/her name to be used in a fraudulent RAF claim. This statement has achieved its desired result as the RAF has since received numerous responses and tip-offs from the public in this regard.

The RAF will be meeting with the Law Society to address their mutual concern with the conduct of certain legal practitioners. The Minister of Transport has himself expressed concern on this matter, and has called for the legal profession to "clean itself up" .

The Chair suggested that a dedicated investigation or inspection unit should perhaps be introduced to address fraud prevention.

The CEO informed the Committee that a dedicated forensic unit has been established, but only its top structure has been appointed and not its regulatory representatives. The result is that these services would probably be outsourced.

The Chair asked if a plan of action for this unit has been devised and implemented.

The CEO said it is hoped that the structure will be approved by the Board within the next four to six weeks. Thereafter, the structure would be implemented.

The Chair questioned the effectiveness of the current RAF internal controls as several cases of theft of computer equipment have been reported. The RAF delegation was requested to explain the remedial steps taken in this regard, as well as statistics on such theft.

Mr Duncan Anderson, the RAF Financial Executive, informed the Committee that this has not been targeted specifically. The general aim to increase security is addressed in the reengineering project, and the result is that all RAF assets are now been tagged and monitored.

Mr Sello Mokale, the RAF Chief Information Officer, added that a "gadget" has also been adopted that connects the user to the central processor, with the result that the equipment is useless without the central processor. In fact, no incidences of theft of RAF assets have been reported since this new system has been introduced.

The Chair stated that it was also mentioned by members of the RAF delegation during a previous meeting that the RAF will be moving from a paper-based to an electronic environment, and the delegation was asked to explain whether any measures have been devised and implemented to ensure that the electronic system is also "corruption free".

Mr Mokale informed Members that the entire claims process is now based on an "image" which is allocated to the claim and then placed on the system, and it would then not be possible to make any unauthorised changes to that image. Changes could however be made to the actual claim file, but by this time the file would have been archived. The result is that this system eradicates fraud to a large extent. This area has been specifically targeted by the reengineering process, and it is bearing fruit.

The Chair asked if the nature of the employment contract between the executives and the RAF is performance based.

Mr Mokale replied that this is as a result of the reengineering process, and the aim is for both the staff and executive management to be performance based. These personnel would then be held to account and the allocation of bonuses would be considered in terms of his/her performance, and thus salary increases would not be readily resorted to. For example, if a specific individual performs above 80% of his/her required performance, s/he would receive a bonus. A person operating at 60% would not receive a bonus and someone performing at 40% or less would be "on his way out".

The Chair asked if the executive management is employed for a definite term.

The CEO replied that his is a five year contract, but the final terms of his contract have not yet been specified and are pending, subject to the finalisation of the key business objectives and business plan of the RAF. This would determine the terms of the CEO's contract and his tenure.

The Chair asked if the board is responsible for assessing the performance of executive management.

The CEO answered in the affirmative.

The Chair asked if this assessment has been conducted during the last three years, despite the fact that the current RAF Board has only recently been constituted.

The CEO replied that before the current board was constituted in June 2001, the RAF was in fact operating in a vacuum for a period of ten months.

The Chair asked if any performance bonuses have been paid to executive members of the RAF in the last three years.

Mr Chris Greenland, RAF Executive: Corporate Legal Services, replied that this is "regrettably not" the case.

Mr Gumede expressed his approval of the "more than one hundred arrests" made regarding fraudulent claims, and stated that the RAF has to be credited here. Clarity was requested with regard to the accounting authority of the RAF as the document provides that the CEO is the accounting officer, but it does not specify whether he is accountable to the board or to the Public Finance Management Act (PFMA).

The CEO replied that he is accountable to the board in his capacity as the accounting officer, and the board is thus the accounting authority. The Minister is the executive authority.

Mr Gumede asked if the board is in turn held accountable to the Minister.

The CEO answered in the affirmative.

Mr Bruce contended that it would perhaps have been more appropriate for the Chairman of the board to be present today, as these questions should properly be addressed to the accounting authority of the RAF.

The CEO replied that this might be the case, but the invitation to address this Committee was extended to him. Furthermore, the board and the Chairman are aware of today's meeting.

Mr Greenland stated that in terms of the RAF's governing statute, the CEO is responsible for conducting the business of the fund, and he is therefore the first functionary responsible for the types of concerns being raised by Members.

Mr Bruce contended that the failure to secure the presence of the Chairman is then a shortcoming by this Committee. It has to be accepted that the focus here is the insurance industry, in which the RAF is actively involved, or does it see itself and its role as something else? Furthermore, the delegation was requested to explain whether any of the current board members possess insurance skills as there is an understanding that these skills are necessary for RAF members. Yet is appears that the board consists largely of lawyers, and it is not clear what skills or expertise they could offer to the functioning of the RAF.

Mr Greenland responded that the RAF is essentially a public insurer, as provided by its governing statute. It is therefore not strictly involved in the insurance industry as contended by Mr Bruce, nor does the executive management of the fund view its role as such. The RAF only covers the claim but does not, as with a professional insurance broker, also conduct a risk assessment and set the insurance premium to match the risk involved. The fund thus insures all drivers immediately without first requiring a risk assessment to be conducted, and the fund therefore has to be granted the capacity by law to process these claims.

With regard to the skills of the board members, the governing statute does stipulate an eligibility threshold, which ensures and reflects that the board does have a broad base consisting of a cross-section of professionals from relevant fields. These include attorneys, actuaries and members of the medical profession.

Mr Bruce asked if any actuaries are currently serving as board members.

The CEO replied that none are currently on the board, but it does consist of one Senior Counsel and one Junior Counsel, a professor of neurology, a professor of clinical psychology, an econometrist, a member representing the interests of disabled persons as required by the governing statute, a representative from the public health sector and the Director General of the Department, who does possess legal knowledge.

Mr Bruce contended that this is precisely his point, as these lawyers and doctors have made a mess of the fund. It is not only a legal issue, as suggested by Mr Greenland, as the fund does impose a fuel levy which is determined by someone in the RAF. It cannot be contended that actuarial skills are not needed here.

Mr Greenland replied that Mr Bruce is correct, technically, but the RAF does currently have this in-house capacity which is being contracted on a part-time basis. The services of an actuary were employed on a full-time basis under the previous dispensation, and thus the actuarial sector was represented on the board. The RAF merely submits a written recommendation as to the fuel levy and has to provide appropriate motivation for this recommendation.

Mr Bruce stated that the precise remuneration of board members has not been made clear, but it has been reported that managers are adequately compensated. Furthermore, are any penalties imposed on board members if the current level of the fund's deficit does not decline by a certain amount, or are incentives granted when this level does decrease if this level is achieved? If these measures are not in place, should they not perhaps be introduced?

The CEO replied that the salaries of these officials are not quite as lucrative as Mr Bruce seems to believe, because they are determined by an objective test. Members are not paid an income or basic salary, but this takes the form of an "all-inclusive employment cost" paid from the coffers of the fund. The RAF business plan clearly indicates the targets in this regard as well as the measures being used here in an attempt to improve the liquidity of the fund. There are instances in which the decision does not rest entirely with the RAF such as the legislative reform which, if it is successful, will go a long way. The board will consider this further, and the guidance and input of this Committee is welcomed in this regard to "jack up" the functioning of the board, as it is a public institution.

Mr Greenland added that the income received from the fuel levy is set by government itself, and the RAF only provides government with a motivating analysis of the levy price. Furthermore, the fuel levy expenditure is part of an ongoing process, but there are also incurred or unknown liabilities. The RAF is not required to know the precise nature and extent of the injury and loss caused, and the primary driver of the liability in this regard is the unacceptably high accident rate, over which the RAF has no control. In fact, in 1995 Europe had reported a rate of 2,5 accidents for every 10 000 vehicles on its roads, compared to the South African figure at that time of 20 for the same number of vehicles. It cannot be argued that the RAF has any sort of control over this rate, and it thus only processes a claim which is the logical result of the high accident rate in South Africa in order to ensure the government has sufficient funds to deal with this matter.

The CEO reminded the Committee that the RAF has expressed its intention to promote road safety, and is prepared and willing to assist the relevant authorities in decreasing the carnage on the roads.

Mr V Smith (ANC) requested that a second meeting be scheduled to question the RAF delegation further, because important matters such as the going concern and the internal audit might not be properly addressed during this meeting, due to time constraints.

The Chair noted this concern.

Mr Bruce stated that the motivation of management is critical in any undertaking of the fund, and it has now been established that there is no tangible connection between the size of the fund's deficit and the responsibility of the executive management structure. It was also contended by Mr Greenland that board members do not need any actuarial skills because government determines the fund's income. Furthermore, that the current accident rate determines the amount that is paid out to the fund and that the RAF has no control over this rate. Yet it is suggested that the fund contribute to decreasing the accident rate, and this contribution is not business-related but determined on an actuarial basis.

With regard to the "going concern" the five point plan to be implemented here as provided by the draft business plan, yet it does not clearly state how soon this measure will be implemented to decrease the deficit and the extent of the decrease. These matters are not adequately addressed in the business plan.

Mr Greenland responded that management is in fact concerned with the value of the losses incurred by the fund, which is expressed as a deficit. It has to be remembered that the reality of the matter is that the RAF does not control the accident rate. This has been addressed by the Road Safety Project but this is not sufficient, and the RAF is thus doing what it can to assist here by contributing in the only manner it can: ensure the claims process is thorough and efficient by making the liability more manageable via the draft legislative reform.

Mr Themba Mhambi, RAF Senior Manager: Corporate Communications, added that those who choose to view the RAF to be a private insurer continue to make a key mistake, because the latter control the amount paid by its clients, whereas the RAF does not adjust these amounts. In fact drivers pay R370 to R500 per annum to the fund for cover, whereas private insurance companies require this amount per month from their clients.

The RAF is not a profit-making entity, and it is obliged by law to compensate victims who satisfy the requirements stipulated in its governing statute. The fund does therefore not control the amount by which it has to compensate victims.

Mr Anderson added that a strategic plan has been devised to address this matter.

Mr B Kannemeyer (ANC) suggested that it could not simply be claimed that the total deficit amounts to R13b, because the RAF has to make it clear what proportion of the entire deficit has been lost on fraudulent claims. If the delegation cannot provide any further clarity on this matter then Mr Bruce may very well be correct is asserting that this Committee is not addressing its concerns to the proper RAF officials. If the board cannot provide proper performance indicators in this regard, this Committee cannot expect the officials present today to provide satisfactory answers to these questions.

This Committee could do what the Transport Portfolio Committee has done and sit with the RAF board to identify policy and performance directives and interventions that could be made to address the issue of performance.

Mr Greenland agreed with Mr Kannemeyer and stated that a high level of involvement of both government and the board is necessary to ensure the sustainability of the fund.

Mr Bruce reiterated that he was not referring to the profit made by the RAF but rather to the deficit alone, and contended that the reason for the current deficit is readily apparent if the RAF only commands R350 to R500 per driver per annum. This matter has to be addressed by the business plan.

Mr Anderson replied that the deficit is being addressed over a three to five year period, and the RAF envisages a 2,5% decrease by 2003. Other measures have also been put in place in this regard. Efforts are not only being made to curb the high accident rate, but there are also add-on costs such as medical, legal and Information Technology (IT) expenses. The actuarial evaluation does not take into account the amount of false claims handled by the RAF. It is expected that the deficit will depreciate significantly over the next three years, and the Departments of Finance and Transport are being consulted to this end.

Mr Bruce approved of these measures, but contended that a decrease of 2,5% per year is not sufficient. During a previous meeting the CEO stated that the terms of reference in this regard relate to the solvency of the fund, which implies the need for some sort of actuarial input, and the report compiled by Judge Satchwell (Road Accident Fund Commission) is important here. Yet the new report circulated by the RAF only seems to deal with the physical collection of claims money.

Mr Greenland replied that the RAF's governing statute stipulates that the terms of reference include considerations that are sustainable, fair, just and equitable, and the RAF therefore has to satisfy the tests for social justice as well as financial sustainability.

Mr Bruce asserted that "fairness" and "social justice" are not contained in the governing statute.

Mr Greenland maintained that these are indeed included in the terms of reference.

Ms K Mothoagae (ANC) referred to Section 10 of the governing statute and suggested that the mandate of the RAF Commission is long overdue, because it has not completed its work in the nine-month period. Perhaps this matter should be raised with the Transport Portfolio Committee, as the concern with the RAF expenditure is a serious one.

The Chair noted the concern, and assured Ms Mothoagae that it would be taken up with the Portfolio Committee.

Mr Bruce noted that it was stated that the RAF has completed its own risk assessment plan, and the delegation was requested to explain when it was approved, how and by whom. Furthermore, when does the RAF envisage full operationalisation would be effected, how this would be monitored and how the risks involved would be tracked.

The CEO replied that these issues are dealt with by the audit committee of the board via an internal audit, it is also done by the financial unit whose capacity has been adequately developed.

Mr Bruce reminded the delegation that it was mentioned during a previous meeting that board members do not enjoy full independence, and it is thus questioned whether the risk management plan should not be the sole responsibility of the internal audit, but rather of the management itself.

The CEO responded that management is indeed responsible here, and the internal audit monitors performance.

Mr Bruce referred tot he risk management plan and asked if the staff were adequately trained in this regard. Do they possess the necessary forensic capacity to deal with this aspect, and are there currently any vacancies in the senior management positions?

The CEO replied that the current staff complement stands at thirty, and all have the appropriate academic qualifications and experience. These do not however include public accountants, but does include those from the public sector and parastatals. The CEO stated that he was not certain as to the precise number of vacancies at management level.

Mr Bruce contended that one of the important aspects of the business plan is aimed at decreasing the deficit by investing in IT. The delegation was requested to explain whether a reliable timeframe has been fixed to implement this initiative.

Mr Mokale answered that the RAF is presently implementing an architectural plan which has to be developed at the beginning of the reengineering process. A network architecture will then be established together with a new architectural infrastructure that is fully equipped to handle the new RAF workload. Backup plans have also been devised to provide added security in this regard, and include a disaster recovery environment which ensures the network integrity should anything happen to the primary server. As mentioned earlier, an image component has also been introduced and is available on the RAF website, which essentially allows the public to log on to the site to check the status of their claim. This increases productivity because RAF claims officials are now not inundated with calls regarding the status of claims, and they are thus better able to process the claims expeditiously.

Ms Smith referred to the "going concern" and stated that it was mentioned during a previous meeting that a major movement has been experienced with regard to expenses as a major increase of R1,1b has been recorded from 2000 to 2001. The delegation is thus requested to explain the basis on which this expected expenditure pattern is calculated, as this is related to any attempts to decrease the current deficit. The delegation thus has to clearly state the exact percentage of this expenditure that relates to accidents and that percentage related to bad management of the fund.

Mr Anderson responded that the determination of the accumulated deficit is an actuarial calculation, and it involves an evaluation of a twenty-four year period with regard to the particular behaviour of the claimant. This forms a large portion of the inquiry and relates largely to medical evaluations and investigations that have to be done at the actual scene of the accident, so that the RAF may immediately compile a profile of the person. It has been discussed whether this entire process may not be expedited if these officials arrive at the scene much earlier, as this would spare the RAF a significant amount of funds. The RAF has been proactive here as it has consulted the medical suppliers, the ambulances and hospitals as well as the Minister of Safety and Security, 1 500 police stations and the South African Post Office for assistance.

Mr Smith asked if this implies that, should a delinquent medical practitioner file a fraudulent insurance claim with the RAF, s/he could possibly receive payments from the RAF for a period of twenty-four years. If this is in fact the current position, what measures have been put in place to ensure this type of fraudulent activity does not come to pass?

Mr Anderson replied that merit assessment of insurance claims forms a large portion of the work done by the RAF as the requirement of fault has to be discharged with regard to the fraudulent claim. The services of both medical and legal specialists are engaged here, so that the suspected fraudulent claim may be thoroughly evaluated.

Mr Greenland added that the window period for adults currently stands at three years, within which time the prosecutor has to act or the claim would eventually prescribe. The period of twenty-four years only applies to minors which is not that great a cause for concern, as the majority of fraudulent claims are lodged by adults.

Mr Mokale added that the RAF ensures that it interacts with all the relevant authorities in this regard, such as the Unemployment Insurance Fund, the Department of Home Affairs and the Compensation Commission. There is thus a thorough and extensive verification procedure in place, and this kicks in at the very beginning of the process so that it is not cluttered.

The RAF has begun an audit to ensure that all the payments made on claims received during the last five years have actually been validly due to the recipients. The preliminary information available on this audit indicates that approximately R64m has been paid to fraudulent claims since October 1997. The final report on this audit is expected in the following six days.

The Chair invited the Auditor General, Mr Shauket Fakie, to comment.

The AG replied to the question posed earlier by Mr Smith, saying that the provision has been increased to the current amount of R1,5m. This is due to several factors, including the fact that the claim could have accrued but payment has not yet been effected, and here liability is recognised but has not yet been discharged.

Mr Kannemeyer said that the fraud prevention plan is vital to the successful functioning of the management plan to achieve the RAF's objective of decreasing the deficit.

The Chair suggested that the matter of fraud prevention be dealt with at a later stage of the discussion.

Mr Bruce said that the RAF management had stated earlier that it exercises little influence over the income it receives, and it appears that the executives are downplaying the extent of their influence here. A case could very well be made for placing a cap on the amounts paid out, even though this might just be a temporary arrangement.

During a previous meeting the CEO referred to certain legislative imperatives and the fact that the fund is not always able to deal adequately with all the claims it receives. Yet the resources of the fund are not finite as it can receive financial support from other sources, and one has to be wary of this fact.

Mr Greenland agreed with Mr Bruce and stated that the legislative amendments were effected to afford South Africa a period of 15 years to devise a substantive resolution to match the income to the costs of the accident. Members of this Committee are encouraged to support this initiative so that the fund's cash outflow may be curbed. It also affords the RAF time to consider whether placing a cap on the payments is a feasible option.

Mr Mokale added that the RAF is confident that these legislative reforms will decrease the deficit and ensure stability.

Mr Kannemeyer requested further information regarding the audit in which it was discovered that R64m had been paid out to fraudulent claims, as well as how it is related to the internal control system of the fund. Secondly, the fraud prevention policy has not been approved by Treasury yet it has been devised, and the delegation was asked to explain the key areas that have been highlighted by this study regarding the risk assessment process.

Mr Mokale replied that this audit was engaged because there was a reasonable suspicion that certain claims that have already been finalised might have been paid out fraudulently amongst the lawful payments. There was a certain window period within which the claims could have been "fiddled with", and the exercise was therefore embarked on to ensure that the data was in fact reliable and certain. The problem here is that the terms of reference did not allow access to the actual bank transactions and the RAF is presently consulting with "its colleagues" in order to gain access to such records, so that it can properly follow-up on these fraudulent transactions.

Mr B Nair (ANC) requested the delegation to explain the fraud prevention mechanisms that have been put in place by the RAF, and whether these mechanisms are effective.

Mr Mokale responded that the RAF has announced to its entire staff complement that 2002 would be the year of accountability, and during the first month after this declaration nine staff members ranging all management levels were suspended. This was done to send a clear message that deviation from accepted standards of professional conduct would not be tolerated. The RAF would conduct all the preliminary and internal investigations, and the perpetrator would then be handed over to the law enforcement authorities, as the RAF does not have powers of arrest.

With regard to the RAF's internal controls, this begins with the reengineering process during which every single process is evaluated and its value is identified. A new claims life cycle has since been developed that incorporates these new and improved internal controls, and quality measures are included in all the RAF processes. The new dispensation thus makes it difficult for potential fraudsters and colluders to actually succeed, because the individual claim now passes through several hands and checkpoints. It is acknowledged that these measures do not totally eradicate fraud, but they do go a long way in reducing its frequency within the RAF.

Mr Anderson added that the risk assessment audit revealed that the major risk is that the RAF might be perceived as a "honey pot", and the other areas of risk identified were: the current skills levels within the RAF; the level of experience of staff members; the staff complement; the merits of claims; RAF processes, especially with regard to IT; banking procedures and the South African Post Office; the RAF communication system; its mandate and the delegation of authority. As far as the current skills level within the RAF is concerned, it was decided that both legal and medical qualifications are needed. With regard to the merits of the claims, it was decided that the actual scene of the accident would have to be thoroughly investigated and the role of medical suppliers here has to be considered. The RAF would also have to look behind the scenes to identify the actual cause and extent of the injuries, because these are often exaggerated.

Thus the objectives laid down for the first year of the strategic plan have been met, but it is part of an ongoing process.

Mr Gumede stated that a member of the RAF delegation had earlier mentioned that the claims system has been improved. He wanted to know the measures taken to achieve this improvement - and the nature of the improvement.

Mr Mokale replied that the improvement relates largely to the turnaround time in processing the claim. Until recently it took approximately eighteen months to fully process a claim, despite the fact that an attorney can issue a summons within one hundred and twenty days. Thus the latter was used as a benchmark for claims processing, and the pilot programme conducted in the Gauteng Province was able to fully process a claim within one and a half months. It is thus possible to expedite the claim procedure, and this clearly illustrates that the plans that have been devised to address this issue are moving the process in the right direction.

The skills level was also improved, as mentioned earlier, by demarcating the process so that the claim now passes through different checkpoints. The result is that the process is expedited and productivity is increased, and fraud is eradicated to a large extent because internal control measures have been incorporated into the process. The costs involved in processing the claim are also decreased, and this is significant if it is recognised that as much as R37 000 is expended by the RAF to finalise a single claim.

Furthermore, Mr Gumede requested the delegation to disclose the present source of income of the RAF and whether it is sufficient. Also, has a compensation mechanism been devised to accommodate any shortfall should the RAF expenditure exceed its income.

Mr Mokale replied that the RAF has only one source of income: the fuel levy. Yet the fund also invests any surplus, and these reserve funds were used to cover the recent increase in the number of claims received by the RAF.

Mr Anderson added that the RAF will liaise with the Minister of Finance in an effort to understand the direction in which the fund is moving, and also to discuss the possibility of RAF officials arriving at the scene of the accident to record data and statistics on the cause and extent of the accident. The professional insurance houses consider this information to be very valuable, and it could then be sold to them for a fee. The "green levy" is also currently being considered, as it seems as though the RAF is losing funds to the agriculture industry. This would not be possible if the reengineering process is not fully implemented or if the legislative reform is not effected, and in this case the result would be a serious cash flow problem.

Mr Gerber reminded the delegation that it informed this Committee on 22^nd May that R50m has been allocated to the Arrive Alive campaign, and that a small fund has been created to reduce the danger on South African roads. The delegation was requested to explain precisely how much has been allocated to this smaller fund, and where this amount is reflected.

Mr Mhambi responded that the Arrive Alive Campaign is governed by the Department itself and not by the RAF. It was however decided that a dedicated road safety desk would be established within the RAF that would be tasked with conducting analysis to identify strategies and critical weaknesses. Thus this matter is being proactively dealt with by the RAF, with special reference to the risks faced by the fund itself. An amount of R25m has been set aside for this purpose, which includes the provision of staff, literature and the creation of support services to other entities, especially the Department.

Mr Gerber stated that page 30 of the RAF Annual Report 2000/1 report illustrates that the "related pay transactions" of board members have experienced an increase. Yet it also indicates that the Vice Chairman of the board has spent R32,59m in legal fees, which is a huge amount of money. The report also provides that an amount of R357 000 has been paid to Dr Koch and R28 000 to a Professor from the Medical University of Southern Africa (MEDUNSA). The delegation was requested to explain this expenditure.

Mr Anderson replied that these amounts were paid in terms of the usual reporting and accounting transactions, and these members were selected by the Minister himself because of their expertise. The Professor from MEDUNSA resigned as a board member during 2001 because a conflict of interest had arisen because of his medial and surgical expertise. These amounts are thus merely payment for services rendered.

The Chair noted that the Committee regretted that the RAF delegation could not spend more time at this meeting, as they are had to go on to important appointments elsewhere. The Committee thanked the delegation for its input.

Draft Resolution on Defence Budget Vote 7
Mr L Chiba (ANC) read through the Draft Resolution.

The Chair called for any proposed amendments to the draft.

Mr Gerber suggested that the word "the" be inserted before the term 'accounting officer" at the end of the first line of the third paragraph under point 2.

Mr Chiba agreed.

The Chair noted that Members agreed to this amendment.

Mr Gerber suggested that the first line of the fourth paragraph under the same point does not make sense, and contended that a word might perhaps have been omitted.

Mr Chiba suggested that the phrase "stock will be evaluated" be replaced with "evaluation of
stock".

The Chair noted that Members agreed to this amendment.

Mr Chiba suggested that the word "containing" in the last paragraph under point 2 be replaced with "regarding".

The Chair noted that Members agreed to this amendment.

Mr Gerber suggested that word "year" be inserted before "2001/2002" in the third line of the first paragraph under point 4.

The Chair noted that Members agreed to this amendment.

Mr Gerber recommended that the word "the" be inserted before "Auditor-General" in the first line of the last paragraph under point 6 of the draft.

The Chair suggested that a full stop be inserted at the end of the first paragraph under point 7, and noted that Members agreed to these amendments.

Dr G Koornhof (UDM) requested that two subheadings be inserted at the end of point 11 to provide for the relevant financial year and the amounts of unauthorised expenditure not yet finalised in thousands of rands.

The Chair noted that Members agreed to this amendment.

Mr Gerber requested clarity on the precise amount for the hiring of photocopies referred to in the first paragraph under point 12.

Mr Chiba replied that the amount should read "R2,031m".

The Chair noted that Members agreed to this amendment.

Dr Koornhof reminded Members that the two most important aspects that arose from the hearings is the excess stock, which is dealt with under point 2 of the draft, and the transformation process which is discussed in point 17. It is thus suggested that point 17 be moved to the beginning of the draft as it is the other most important concern here, and should thus become the new point 3.

Mr Chiba agreed with this proposal, and effected the consequential amendments to the numbering of the remainder of the points.

The Chair noted that Members agreed to this amendment.

Mr Nair contended that point 17 rather be renamed the new point 2 as it relates to an entire process, whereas the excessive stock levels is not as far-reaching.

Dr Koornhof reiterated his initial statement that the primary issue is the excessive stock levels which is closely followed by the transformation process, and the order in which these appear in the draft has to reflect its relative importance. Yet there is no objection to the proposal raised by Mr Nair.

Mr Chiba suggested that the following provision be inserted after the last paragraph under point 16:

It is recommended that this matter be followed up by the Auditor-General's office and that it be reported on during the next audit.

The Chair noted that Members agreed to these amendments.

Mr Gerber contended that the word "in" should be inserted before "management" in the fourth paragraph under point 17, as this makes more sense.

The AG disagreed with Mr Gerber and informed him that the proper terminology is indeed "change management system".

Mr Gerber suggested that the apostrophe be removed from "it's" in the third line of paragraph two under point 18.

Mr Chiba agreed.

The Chair noted that Members agreed to this amendment.

Dr Koornhof recommended that the following phrase be inserted after "31 July 2002" under the second part (i) in point 9:

and that the abovementioned assessment be submitted on 1 September 2002.

Mr Chiba stated that "31 July 2002" should actually read "31 June 2002" to accommodate the three month period.

The Chair noted that Members agreed to this amendment.

Mr Chiba stated that the concern with Personnel and Salary System (PERSAL) mentioned earlier by Ms Mothoagae has to been incorporated in a provision in this draft, and was drafted by himself and Mr Kobus Botes, from the AG's office.

The Chair agreed, and noted that the Committee adopts the draft resolution, with the minor amendments made during this meeting.

During the remainder of the meeting a few housekeeping issues were resolved.

There were no further questions or comments and the meeting was adjourned.

Appendix 1:
RAF policy slammed
Date: 15 Feb 2002
Nawaal Deane
The Law Society of South Africa has slammed a controversial move by the state-owned Road Accident Fund (RAF) to pay compensation direclty to claimants and not through their attorneys.
In a memorandum to the fund, the society says the move will curtail access to justice and is likely to deny compensation to thousands of poor and illiterate claimants.

The move was introduced in a draft Road Accident Fund Amendment Bill 2002, sent out in December last year, sparking off widespread shock among legal practitioners. The Bill was subsequently put on hold but the plan to pay claimants directly is still under way.

The Mail & Guardian reported last month that Humphrey Kgomongwe, the CEO of the fund, said he is committed to implementing a new system at the end of March and has liaised with law societies with regard to the process.

He said that the initiative is intended to curb corruption and the defrauding of the fund, to ensure that claimants are fully compensated and to eliminate the perception that the fund acts in the interest of attorneys rather than claimants.

Currently attorneys will take on a case without requiring a deposit and the client signs over power of attorney to the lawyer. Any medical expenses or continual funding of the client is the responsibility of the attorney until the settlement has been reached. "The proposed arrangement would do away with this access, necessitating attorneys to insist on payment of deposits," says the society. According to the memorandum the consequence of this new system is that poor people will be discriminated against because attorneys will no longer be able to act as their bankers or loan them money. In some cases, attorneys "keep them and their families alive pending settlement".

The move by the fund has caused uncertainty among personal injury attorneys who are reluctant to take on new cases, fearing that if this new system is implemented they will incur expenses that may not be paid or bills that will take a long time to be settled.

Personal injury attorneys say that this system will marginalise attorneys and eventually ensure that no attorney will take on third-party cases. But the fund says this won't happen. "It is not understood why all attorneys would seek to abandon claimants especially as, under the proposed operational mode, they would still be directly paid costs due from the fund for their representation of claimants," says Themba Mhambi, manager of corporate communications at the fund. The attorneys' fees will be paid by the fund after the case has been settled.

The fund says that people who cannot afford attorneys or who do not want to use attorneys can approach the fund without approaching an attorney. "If they qualify for compensation we will assist them fully," he says. According to the fund, access to justice will be achieved through an attorney who will still be paid for work done in representing the client.

The new system will affect medico-legal experts who deal with third party victims with the understanding that their accounts will be settled at the end of the case. "Doctors will not contract with claimants, as they are not sure of getting their money." But the fund disagrees, saying that if "the medical expenses were necessarily and reasonably incurred the fund is obliged to reimburse the attorney by law". The fund says that these issues need to be discussed with stakeholders in the legal, medical and other relevant professions.

The memorandum points out that the system is still open to fraudulent activity. "Those practitioners who do have a tendency to steal can open either a fraudulent account or an account under the control of the practitioner, circumventing the proposed new arrangements of the RAF trust. In the event that the proceeds are stolen the claimant will have no cover since the proceeds were not entrusted to the attorney's account."

The society recommends that together with the fund they should find alternative solutions to address fraudulent activities. The society does not deny that there are some dishonest attorneys but says: "The [Road Accident Fund must] be requested to assist law societies to ensure that each and every claimant has personally acknowledged that he has seen the discharge form and is aware of the settlement amount." The fund says that both the claimants and the attorneys are sent settlement offers and the discharge forms.

The tension between the fund and attorneys seems set to continue, with the fund adamant that the new process will take place.

"There is, however, nothing in the proposed system that would stop attorneys and their clients from entering into their own agreements and the client instructing the fund to make certain payments to the attorney prior to making direct payment to the client. We reiterate, though, that there is no inherent injustice in the fund paying claimants directly; if anything, that would be the most just thing to do. Compensation money belongs to the claimant," says Mhambi.

In the January/February edition of De Rebus, an attorneys' journal, the editorial reiterates that the fund should work with legal practitioners and law societies to find a solution. It also commended the fund for withdrawing the draft Bill but said that: "[The Road Accident Fund] should not attempt to bulldoze through changes which will have such an enormous potential impact on the public's entitlement to road accident compensation."

Appendix 2:
Report finds 'systematic fraud' at RAF
Date: 28 Sep 2001
Barry Streek

The heavily indebted Road Accident Fund (RAF) paid more than R68,5-million ñ including nearly R6-million in attorney's fees ñ to a legal firm in which its deputy chairperson George Maluleke is a partner.

In addition, a secret R3,2-million audit report, leaked to the Mail & Guardian, has found "systematic fraud" against the fund.

According to the report, Maluleke's firm, Maluleke Msimang, received R68 506 310 over a three-year period ñ R17-million was for general damages of claimants, R16,4-million for future medical expenses of claimants and R5,7-million for the claimants' attorney.

The new CEO of the RAF, Humphrey Kgomongwe, said the board had wanted to keep the audit report confidential.

"We are attending to those problems with an implementation plan. Not everything in it is accurate but overall it is a good report and we are acting on it."

Kgomongwe said he could not comment about claims of a conflict of interest between members of the board who also acted as attorneys on behalf of the board.

Maluleke said he did not seek appointment to the board but agreed after being approached by the Black Lawyers' Association to serve.

"I was immediately concerned that such an appointment could raise allegations of conflict of interest and fully disclosed the fact that I work in the field," he said.

"I have four offices ñ in Johannesburg, Pretoria, Kempton Park and Pietersburg ñ [and] it is impossible for me to know on a day-to-day basis exactly how many personal accident claims the company is handling.

"At my instigation it was discussed at length during my interview for my appointment to the board.
"I would like to emphasise that the board is non-executive and has no involvement in or influence over settling claims."

Maluleke said his firm received payments of R68 506 310 from the RAF between 1997 and last year. "Only a very small fraction of this accrues to my partners and I. As claimant's attorneys we received R5†736 728 of this amount as contributions towards costs, but this has been principally taken up by covering overheads and expenses."

The former chairperson of Parliament's transport committee, Patricia de Lille, said conflicts of interest were a major problem in the RAF, and needed urgent investigation.

"These lawyers have lots of personal self-interest and are in charge of the fund, but the new government does not seem able to act. It is the public that pays the petrol levy," De Lille said.
According to Nkoni Sizwe Ntsaluba, a Cape Town accountancy firm, the systematic fraud at the RAF involved dishonest claims "aided and abetted by certain of [the fund's] own staff".

The RAF board announced in April it would run the fund in management's place after receiving the audit report.

In May Minister of Transport Dullah Omar told Parliament the RAF board regarded the audit report as confidential "at this stage", and would consider making it public only once it was satisfied there was no prejudice to any individual.

It was, however, available for scrutiny by the public protector and the national director of public prosecutions.

The Director General of Transport, Sipho Msikinya, said he was a member of the RAF board and in this capacity he was part of the decision to appoint the auditors.

"We have been aware of serious irregularities and we were very concerned to reduce the risk to the fund and put in place water- tight processes to make sure that the irregularities would be cut off," Msikinya said.

The fund, which receives about R2,3-billion in fuel levies, recorded a R1,32-billion operating loss in 1999/ 2000. This grew to R10,49-billion by the end of April last year.

The audit report concludes that systematic fraud is being perpetrated against the RAF through the submission of fraudulent claims "aided and abetted by certain of its own staff who abuse their position of trust and discretion that they exercise to the prejudice of the RAF.

"[They are] either in cahoots or partners to persons, groups and syndicates defrauding the RAF; or committing fraud acts for their own benefit; or fail to report fraudulent activities to the RAF board; or are negligent in performing their duties."

The report says the fund's management has failed to provide leadership, leading to key RAF employees dispensing millions of rands of taxpayers' money in an "almost uncontrolled environment subject to only their discretion".

The auditors say the claims process and payment system was "an archaic paper-based process subject to the almost unfettered discretion of the 385 key employees of the RAF".

There were cases where files were misplaced, lost or destroyed and were replaced by "dummy" files. These provided opportunities for claims handlers to make irregular payments.

The auditors say that in the RAF's Cape Town office, 13 files, involving payments of R1,14-million were missing. They recommend that two senior officials in the Cape Town should face disciplinary hearings.

They also found evidence that a syndicate may be operating in the fund's Pretoria offices.
In seven claims, involving a total of R1,3-million made to an attorney, the identification numbers of the claimants and dead people proved to be false. The same RAF employees appeared to have been involved in handling the claims.

The auditors also suggested that a syndicate was operating in the Randburg office, where 144 files involving payments of R16,6-million were missing.