The Standing Committee on Public Accounts held a hearing on the annual performance report and financial statements of the Road Accident Fund for the 2019/2020 financial year. The Minister of Transport, Mr Fikile Mbalula, was in attendance.
The Minister said that the Road Accident Fund has operated on a financially unsustainable model for a number of decades. In recent years, the fund has also experienced liquidity challenges, as claims against the fund have outpaced the growth in the Fund’s levy. Bringing the entity back to financial stability will require both a regulatory overhaul and operational improvement.
During the period under review, the Fund achieved a performance of 57% against its annual performance plan. Although this was a drop in performance compared with the previous year, this matched the change in strategic focus by the new board and management. The Fund obtained a clean audit outcome from the Auditor-General for financial year 2019/20. This is an improvement from three consecutive years of unqualified audit outcomes. The Fund has further strengthened internal control measures to prevent instances of fruitless, wasteful and irregular expenditure.
The entity reported that, on unauthorised, irregular, fruitless and wasteful (UIFW) expenditure, there was a decrease in fruitless and wasteful expenditure, with progressive discipline being adopted as a measure against non-complying officials. Irregular expenditure stood at R3 734 000 for the 2019/2020 financial year. The action that was taken against officials included resignations, counselling for others and dismissals.
The Members raised concerns on the amount of time it takes the Fund to pay claims within the 120 days as required, because claimants were involving lawyers – which results in an increase of legal costs and beneficiaries receiving 50% of the monies that are claimed. The structural and regulatory problems within the Fund were questioned and whether there are plans and interventions in place to address the recurrent issues. Members also questioned the high deficit that was reflected in the financial statements of the entity. The clean audit was applauded by the Committee but the lack of financial management was disappointing, especially since all the claims of the Fund end up in the courts. Member emphasised that beneficiaries need to be prioritised.
The Members were unimpressed with some of the responses it received from the entity, which led to them requesting written responses on some areas of concern. There were also doubts on the entity’s five-year strategic plans and new operating model. The Chairperson said that the issues in the entity are long overdue and need to be urgently resolved with the proposed five-year strategic plans.
Opening Remarks by the Chairperson
The Chairperson opened the virtual meeting, welcoming everyone present, and he thanked the Committee Members for using their time during the recess period. He said that the work that had been completed by Parliament with the Road Accident Fund (RAF) has to be properly finalised, especially since a clean audit was received by the entity. He then handed over to the Minister of Transport, Mr Fikile Mbalula.
The Minister said that the Road Accident Fund has operated on a financially unsustainable model for a number of decades. In recent years, the fund has also experienced liquidity challenges, as claims against the fund have outpaced the growth in the RAF levy. The current system is inequitable because the payment of damages, loss of earnings and general damages per individual are assessed in relation to the person’s earning capacity and the potential earning capabilities are irregular to those that are deemed to have or are able to reach that earning capacity.
When the Department of Transport appointed the current Board towards the end of the 2019/20 financial year, a Shareholder Compact was concluded; it outlined key priorities and included reduction of legal costs, revisions to the operational model, implementation of an integrated claims assessment system and the strengthening of the supply chain management (SCM) system. There has not been a link between the fuel levy and the number of accidents that happen on public roads as well as the challenge of the ever-increasing administrative costs of the RAF scheme.
Of the revenue collected, approximately R17 billion (40%) of this went to administrative costs and R26 billion (60%) was paid out to claimants. The RAF’s biggest cost driver is the number of road accidents that happen on public roads daily. As at 31 March 2020, the RAF had accumulated an annual deficit of R5.3 billion and also had claims to the value of R14 billion that had been finalised but could not be paid due to the financial cash flow challenges. Claimants had to wait on average 1 475 days for their claims to be settled. The average value of a claim also increased by 21%, from R 114 008 to R138 010. Claims against the fund have increased at an average annual rate of 8.4 per cent, from R61.3 billion in 2017/2018 to R78.2 billion in 2020/2021, and are expected to increase to R102.9 billion by 2023/2024. As a result, the accumulated deficit is expected to increase to R518.7 billion in 2023/2024. The other biggest cost drivers for the RAF are legal fees that have to be settled, both in terms of the entity’s own legal cost and those of the claimants. Of the R43 billion fuel levy received, R10.6 billion goes towards legal costs. In the R26 billion paid, there is a further “success fee” to the plaintiff attorneys as part of the contingency fee agreement entered into between the claimants and their legal representatives. In some instances, operations within the RAF are suspended due to the attorneys attaching some of the RAF assets.
Provision of medical attention is also a problem due to the lack of harmonisation and standardisation of medical attention rendered to road accidents victims. In some cases, victims approach specialists for injuries that do not warrant those types of services and should be dealt with in accordance with structured medical assessment rates. There is also a need to deal with monies spent on providing medical attention to victims of car crashes. The need to prescribe set and standardised medical tariffs that victims of accidents submit to the fund as a result of motor vehicle accidents has been identified. Inefficiencies in the claims administration process have been linked to disputes being declared by both the plaintiff and the RAF attorneys. Where these legal costs are incurred, there is very little value added, as more than 90% of these claims are settled. For the past five years, an average of less than five percent of the RAF legal matters have ended up in front of a judge, whilst constituting more than 80% of the civil trial court rolls. The lack of early investigations and settlement of claims has also resulted in the Fund receiving an average of just over 4 353 summonses per month, some of which may be fraudulent claims.
Bringing the RAF back to financial stability will require both a regulatory overhaul and operational improvement. Due to the liquidity challenges, the RAF has experienced attachments of its bank accounts and moveable assets through the writs of execution. This has led to the RAF having half of its monthly levy income also attached. The need for asset and liability matching where the RAF pays in instalments or periodically, rather than in lump sums, cannot be over-emphasised. The RAF operated, for the most part of the 2019/20 financial year, with an interim Board and an Acting Chief Executive Officer (CEO). Following the appointment of a permanent board and CEO, the RAF has since embarked on a new 2020-2025 strategic plan, which is a complete departure from the previous strategy. One of the devastating effects of the litigation strategy was the constant writs of execution that the RAF was subjected to. The current RAF Board and Management have since brought the writs of execution risk under control. This was achieved by changing the payment strategy. The result has been an improved liquidity position for the Fund, recovery of over R400 million in duplicate payments and just over 100 plaintiff firms being reported to the Legal Practice Council.
During the period under review, the RAF achieved a performance of 57% against its annual performance plan. Although this was a drop in performance compared with the previous year, this matched the change in strategic focus by the new board and management. The RAF obtained a clean audit outcome from the Auditor-General (AG) for FY2019/20. This is an improvement from three consecutive years of unqualified audit outcomes. The RAF has further strengthened internal control measures to prevent instances of fruitless, wasteful and irregular expenditure.
The Committee Chairperson requested that a digital copy of the remarks made by the Minister be forwarded to the Committee for record purposes. Even though the RAF received a clean audit, there are still issues that are ongoing such as performance rates. He then handed over to the RAF for its presentation.
Briefing by the Road Accident Fund (RAF)
Mr Phutjane Letsoalo, CEO, Road Accident Fund (RAF), said that the presentation will focus on the annual report and financial statements for the 2019/2020 financial year. He first outlined the RAF’s business model, which identifies the revenue and cost streams.
On performance outcomes, the key statistics for 2019/2020 were presented, including the fuel increase of 2.59%, the increase in permanent employees, increased claims paid, increased claims liabilities, increased value per claim, an increase in the calls responded to and a decrease in the total revenue. On the APP achievement outcomes, 57.14% of the planned quarterly targets were achieved for the 2019/2020 financial year. The AG’s opinion on the entity was an unqualified audit with no findings, for the 2019/2020 financial year. The claims performance was outlined and the age analysis decrease was provided.
On the administrative costs, the costs were high, at 24.6%. The financial performance showed that current assets were lower than the liabilities and the increase in outstanding claims. The various deviations and expansions for the quarters were provided, as well as the reasons for the deviations and the total amounts:
-Deviations for Quarter one amounted to R78 569 052.
-Deviations for Quarter two amounted to R474 696 and expansions amounted to R29 829 106.
-Deviations for Quarter three amounted to R5 864.
On unauthorised, irregular, fruitless and wasteful (UIFW) expenditure, there was a decrease in fruitless and wasteful expenditure, with progressive discipline being adopted as a measure against non-complying officials. Irregular expenditure stood at R3 734 000 for the 2019/2020 financial year. The action that was taken against officials included resignations, counselling for others and dismissals. He concluded that the information in the presentation was compiled before the new operating model was developed and that there have been early signs of improvement in the operational and financial performance of the RAF.
Ms B Van Minnen (DA) said that the model that is used by the RAF on the regulatory overhaul is not the best and has structural problems; a regulatory overhaul thus needs to be properly established. She asked about the regulatory overhaul that has been proposed and what the time periods would be.
Mr Letsoalo responded that the regulatory overhaul needs to ensure that compensation instalments are done progressively, instead of lump sums. Most of the RAF claimants need care throughout their lives so lump sum payments have resulted in the pay-outs being used in a year. Assets and liability profile matching has also allowed progressive payments to be made. He said that RAF is moving towards settling matters within 120 days while ensuring that information is correct. The entity pays five times more medical assistance than medical aids because medical tariffs had not been introduced to RAF. The medical tariffs were encouraged after a Constitutional Court ruling in 2013 that allowed medical doctors to charge patients any amount unless there was a medical tariff from the RAF. The RAF claiming forms also need to be changed to ensure that they are submitted on time and are submitted by the correct persons. He said that the biggest challenge will be ensuring that defiant benefits are determined so that claimants are aware of how much will be paid out to them and that the pay-outs are equitable based on the economic situation of the claimant.
Ms Van Minnen asked whether the defiant benefits will eliminate the loss of future income because of the tariff pay-outs and if people with higher salaries will lose out because of their income.
Mr Letsoalo said that there will not be any losses because there will a cap on the loss, unlike paying a higher premium if you have a higher cover. Everyone has to reach a maximum amount so that everyone can afford their own cover amount because the defiant benefit is more of a social scheme.
Ms Van Minnen said that a written response to the question is required because there is a lot to unpack on the matter. On the attorney costs, she asked how the payment of contingency fees impacts the deficit of the RAF, because contingency fees are negotiated between the client and the attorney. She also asked whether the contingency fees are higher because of the claims that are submitted to the RAF.
Mr Letsoalo said that the RAF is meant to take care of the victims, so the administrative costs assist in the process. If contingency fees were lower or did not exist then the claimant would receive higher pay-outs, which is why there are efforts to reduce the legal fees. The administration fees of the RAF are sitting at 40% which is a result of the litigation fees.
Ms Van Minnen asked for clarity on the impact of the contingency fee, because a contingency fee is negotiated between the client and the attorney and is paid from the lump sum of the pay-out. The RAF has no jurisdiction over what happens between the client and their attorney.
Mr Letsoalo agreed with Ms Van Minnen and said that the RAF is more interested in the pay-out to the claimant. If a contingency fee is higher, it may not directly affect RAF but it does affect the amount paid out to the claimant. It should not be a task to claim a pay-out from RAF, which is why the regulatory overhaul is important in the work by the RAF. Most claimants are not well-informed on their rights to receive 25% as a success fee.
Ms Van Minnen asked how much is being saved by the RAF through the non-renewal of panel attorneys and how much has been spent on litigations where the court has filed against the RAF.
Mr Letsoalo said that RAF is spending R3.8 billion on the internal panel attorneys, and more than R6.8 billion is paid out to the claimant’s side. The new model seeks to ensure that the court process is eliminated because more than 99% of the matters are resolved at the door step of the courts where litigations have been paid for, which is fruitless and wasteful expenditure.
Ms Van Minnen recounted that, two months prior to this meeting, the Minister had said that there was a surplus of R3.2 billion. She asked how this actually squares off the growing deficit.
Mr Letsoalo said that the matter does not concern the year under review. The issue of surplus has to be understood that, as legal costs are reduced, there is always money going to the bottom line. At the end of the year, surplus is a snapshot at RAF, and a zero net (no deficit no surplus) is the target because money has to be paid out to the claimant. The actuarial deficit works out the number of outstanding claims on the balance sheet.
Ms V Mente (EFF) said that the RAF is not being called out on financial irregularities but because of the outcry of payments and the high percentage charged by lawyers, which result in lower pay-out amounts. The Committee is trying to prevent a situation where people are being robbed in the name of taking care of them. She asked what the regulations will cover to ensure that victims of accidents are safeguarded from receiving low pay-outs because of legal fees; she also asked on the role of the Competition Commission in covering in determining the percentages that go to the law society and the lawyers. She also asked what RAF is doing to rectify the issue by creating awareness on the unnecessary need for lawyers or doctors and that 100% of pay-outs will be received by the victims.
Mr Letsoalo said that the RAF has been in a battle with the legal teams because they have the attorney-client relationship, so the RAF is excluded from having any discussions with the claimants. RAF is a state entity, so Ubuntu and the Batho Pele Principles are important. People that go to lawyers have been encouraged by the RAF to disclose the contingency fee agreement, because section 19(c) of the RAF Act states that a claimant either comes on their own or with a lawyer, which is still not understood because doctors are not included in the section. The longer it takes to settle a case, the more money is spent on legal fees. If a claim is not submitted within 120 days, then a summons can be issued. But a summons cannot be issued if RAF has rejected an offer after a claim was made. He said that a summons requires lawyers and representation, which is why the necessary information has to be provided to RAF within 120 days so that an offer can be made. Mediation strategies have been introduced to reduce the involvement of the courts by claimants because the legal teams benefit the most from the RAF claims if the matters are taken to the courts. He said that, out of each rand that is collected from the fuel levy, at least 90% should go towards the claimants’ pay-outs, instead of the 50-50 that is currently happening between the claimants and the RAF administration costs. A total of 102 law firms were reported to the law society on the duplicates that were received by the lawyers. Amendments to Acts have been submitted to allow the RAF to have minimum requirements to make an offer within 120 days.
Ms Mente noted that amendments have already been proposed by the RAF and asked for an indication whether the amendments were already proposed by the Minister to the Committee and how far the process of the amendments is because the law society cannot be allowed to take as much as 50% of the pay-outs from the victims, especially if more victims are not aware of the processes and the contingency fees. The victims have to be protected through the process being fast-tracked.
Mr A Lees (DA) expressed frustration on the bankruptcy of the RAF since the liabilities have exceeded the assets by more than R300 million, and he questioned the reason behind the legal fees. He said that the focus should be the elimination of the legal fees by making pay-outs and running an efficient organisation, which is not happening based on the deficit figures that have been presented.
He reckoned that the administration costs are very high. He asked when the deficit will be eliminated, how long it will take, and when will claims be processed, within the 120 days. The legal action is a reflection of the poor performance of the RAF while the administration of the RAF is the root cause of the problems. The CEO should have a timeline to address the issues in the RAF instead of making excuses.
Mr Letsoalo said that, in 1920, the RAF was taken over and it has been bankrupt since 1981. The cost of employees is R1.8 billion. On the 120 days, the five-year strategy of the RAF outlines the intention to finalise claims within 120 days, with the assistance of the newly adopted administration model that deals with the assessment and settlements of claims within the period. Minimum information requirements have also been introduced to assist with incomplete claims where offers cannot be made. About 80% of the received claims do not have enough information for an offer to be made, which means that litigation processes are pursued by claimants.
He said that the RAF faces bank accounts are being attached because of the liquidity challenges. The first bank attachment of the RAF was R1.8 billion per month. So, half of what was collected by the RAF from fuel levies was going towards this R1.8 billion, which meant that some salaries could not be paid and equipment was repossessed. The courts have been approached on the matter, and the liabilities books have been properly arranged. He said that big law firms used to receive a fixed allocation between R65 million and R100 million per month, from the RAF, for the debts that were owed to them. The RAF should be given a chance to execute the five-year strategy and the set targets. The Fund is moving in the right direction in resolving certain processes.
He said that, as long as there are road accidents in South Africa, claims are inevitable and so the RAF system has to be efficient to allow for as many claims to be done and approved. The new model was introduced in April 2020 and a difference will be made the next time the RAF appears before the Committee.
Mr Lees said that it is unacceptable that he should look up the timelines when he specifically asked for timelines from the RAF delegation. He asked for evidence on the ‘80% of incomplete claims’ to be submitted to the Committee by the end of the week and asked whether the remaining 20% of claims are being finalised within the 120 days. If not, why not and when?
Mr Letsoalo said that clear responses were provided because the issues of the RAF have long been in existence, which is why there is a five-year strategy in place.
On the evidence of the 80% incomplete claims, he responded that the minimum requirements were outlined for the claims process and that the evidence can be submitted during the following week. When the minimum requirements were requested from claimants, courts were approached; so, it seems like the RAF is not doing its work. He said that the RAF debt book was sitting at 2 000 days but is currently below 180 days, because the liability book was arranged. The 120 days will be achievable with the five-year strategy in place, which can be submitted to the Committee, as well as the achievements so far. The progress of the plans in place is reported to the Minister and to Cabinet as well as the relevant committees.
Mr Lees asked whether the 20% of claims are being finalised within the 120 days, and when the backlog of R300 million will be cleared. He also asked for details on why the courts ruled against the RAF on the minimum requirements.
Mr Letsoalo responded that the 20% of claims are finalised within 120 days. On the court matter, he indicated that requirements were issued according to section 4(1)(a), which states that conditions can be set for the administration of the payment of compensation. During the gazette of the requirements, the RAF was informed to allow for comments and there was an agreement with the court, not a ruling against the RAF.
On the backlog, he said that there is no backlog of R300 million, but rather a liability of R300 billion that divided between the claims that have been received that have not been settled (OCR), the IBNR and incurred amounts that are still awaiting a claim from the accidents. There are 350 000 claims that are being dealt with, including supplier claims – which will take another two years to go through, while the 120 payments are being made.
Mr Lees asked where the funds of settling claims in two years will come from.
Mr Letsoalo clarified that claims are not settled from a funds’ perspective; they are paid as the money is received. The aim is to balance the liabilities profile and the asset profile, and there may be a need to raise the money from the market before claims are paid out and to consolidate debts.
Mr Lees asked whether any shortfalls in funding will be borrowed from the market instead of an application to Parliament for a tax payer bailout.
Mr Letsoalo said a bailout is not part of the plan because it is not necessary but rather if every rand of the RAF is used properly, by reducing legal costs by R7.5 billion, then claims will be settled, especially if they are paid progressively instead of lump sums.
Mr Lees asked whether the market has been approached to identify an appetite for lending and the rates.
Mr Letsoalo said that a market testing exercise is underway, and so the market has not been predetermined, but it would probably be less than what is owed for finalised but unpaid claims of R14 billion.
Mr Lees said that there is no confidence in the RAF but hoped that in the future all doubts will be laid to rest.
Mr S Somyo (ANC) said that process driven questions are important to ask because it leads to inflated pay-over’s, which are the reason behind the poor fiscal capabilities of the RAF. Maybe that is why the CEO was emphasising the reduction of legal costs. He asked whether the entire process would result in a claim and the determination where the claim comes from, whether through the legal means or individuals, because there are doubts for claims to take place. He also asked how the RAF plans to evaluate the claims process, which is critical in the reduction of legal costs. The new strategic plan seems sound, and the competency of the RAF is heightened to address the current challenges. He asked how the deficit, which is registered against the performance of the RAF for the 2019/202 financial year, would be targeted to ensure increased performance. Some of the beneficiaries do not have the capacity to lodge claims, so the legal society’s involvement is evident and may be hard to reduce by the RAF. But the RAF staff should be available to assist individuals in making these applications without the involvement of the legal society.
Mr Letsaolo said that the challenge is how information is collected through the RAF 3 form, which is an accident report and indemnity fund for road drivers. When claimants decide to sue the RAF, the relationship is already not sound, and so the form has to be submitted by the driver within the 14 days to inform the RAF on the details of the accident. It is unfortunate that these RAF 3 forms are not submitted. A campaign must be launched to inform people on the benefits of the RAF when an accident has taken place.
On the direct claims, he said that the RAF would only take action when a summons is served, which is why the RAF has a panel of attorneys. But the process is being changed through the submission of all the required information. The competencies and capabilities within the RAF are also a difficulty because lawyers must assess a victim’s injury based on medical reports from medical experts. A multi-team approach will be used to assist in the pay-out of claims within 120 days.
On the deficit, he indicated that the issue is a historical matter because, when a liability is reported, it might never be seen as a liability. If the administrative costs are reduced through the legal fees, the required 30% will deal with the issues concerning claims. It will be unsustainable to match the fuel levy with the administration costs. Beneficiaries are the responsibility of the entity, and that is why claimants must receive every rand that is owed to them.
The Chairperson said that two clear observations are that a clean audit indicates good financial management but it does not reflect service delivery. The outcomes and the impacts of entities and departments that received clean audits need to be carefully assessed, because the RAF’s liability challenges are big. A clean audit is not the alpha and omega of impact because APP’s and targets are a different aspect that must be achieved on its own. The Chairperson said that there is a silo mentality that exists in government departments and entities. There is a lack of integration and the fourth industrial revolution is not developed because innovative technological capabilities within government have to be developed to ensure that there is a flow of information between all the government entities. The discussion can be escalated to the relevant stakeholders. There should be an integrated database with the information of citizens, to avoid people going from one office to the next, which may prolong the claims process with the RAF. The tracking system of government should ensure the flow of information is effective in the management of state funds.
The Minister said that the CEO tried to answer the questions raised by Members to the best of his ability, without creating any confusion. The Minister indicated that the RAF will move with speed, with the help of the new operating model that will not only shorten the claims process but also ensure that all victims are treated fairly and that progress is made in reducing legal costs. Victims should not rely on lawyers to access RAF benefits; this has to be corrected. There are challenges faced by the RAF, including insufficient funds from the levy to meet claims; unethical behaviour by some lawyers, RAF employees, clinicians and actuaries. The reduction of the liabilities is a priority, and the changes will be evident in the next financial year.
The Minister expressed his satisfaction with the RAF Board, saying that it is hands on and that the CEO is changing things in a small period of time. On the RAF Amendment Bill, he indicated that the Bill is before the National Assembly, with the Portfolio Committee, and issues related to it have been resolved. Emphasis is placed on how issues are addressed, and a clear directive has been given. The strategic plans and the APP commit to firm timelines in implementing the critical elements of the new operating model, which include the implementation of the 120 days strategy and the suspension of the service of reeds. The Minister said that the tangible interventions are in place to address issues that have existed for a long time, and the progress will be reflected in the next report. Some of the strategic issues will be addressed by the RAF Amendment Bill.
The Chairperson noted that the challenges of the RAF have existed since 1981, and he said that the urgency on addressing the challenges should be ongoing. There should not be a regression in progress. He requested that written responses are submitted within seven days. Once the annual report and audit outcomes are received in September/October, the RAF matters should be prioritised.
If there are any other questions from Members, they should be forwarded to the Chairperson or the Committee Secretariat so that they would be communicated to the RAF and the entity would then submit its responses. The Chairperson thanked the RAF delegation and the Minister for their attendance. He added that there are evident challenges, but a standard of good governance has been set, and it must be maintained to turn things around to deal with the issues of cash flow.
The meeting was adjourned.
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