Road Accident Fund, Restructuring & Combatting of Corruption, Payments to Beneficiaries: briefing by Department of Transport &

NCOP Public Services

22 August 2006
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Meeting report

PORTFOLIO COMMITTEE ON PUBLIC WORKS

PUBLIC SERVICES SELECT COMMITTEE
23 August 2006
ROAD ACCIDENT FUND, RESTRUCTURING AND COMBATTING OF CORRUPTION, PAYMENTS TO BENEFICIARIES: BRIEFING BY THE DEPARTMENT OF TRANSPORT AND THE ROAD ACCIDENT FUND (RAF)

Acting Chairperson:
Mr R J Tau (ANC)

Documents handed out:
Strategy for the Repositioning of the Road Accident Fund: Incorporating the Current System into the Social Security system: Document from Department of Transport: Part1 & Part2
Road Accident Fund Presentation

SUMMARY
The Department of Transport gave a presentation on its strategy for repositioning the Road Accident Fund. The Department had to ensure that the current system used by the Road Accident Fund provided benefits for road accident victims. Three phases had been identified to assist the Fund. The first involved business intervention, by appointment of a new Board of Directors and addressing the Fund’s solvency and deficit. The second required legislative amendments. The third would shift the current liability insurance system to a social security system. Both the Department and the Road Accident Fund stressed that the current system was a fault based system which should be redesigned.

The Road Accident Fund briefed the Committee on its financial status and challenges. It was technically insolvent, and had a backlog due to insufficient funds being available to finalize claims. There was no proper correlation between its income from fuel levies and its outflow in paying claims. The fund only had limited control over most external factors influencing claims and its internal systems had several weaknesses impacting on its performance. There was a preponderance of small but administratively expensive claims and some extremely large claims involving foreigners. The litigation system was not only extremely costly but hindered service delivery and early reintegration of claimants back into society. The system of compensation without capping led to huge claims, and legal costs were a major factor. Graphs and comparable analyses were tabled to illustrate the impact of the proposed amendments. It was noted that the Fund was currently able to control four challenges, which would be dealt with by the restructuring plan and the Amendment Act. However, it could not control the unsustainable economic model, which needed to be redesigned through government funding and legislative amendment, and the Fund’s poor financial health. Both issues would have to be pursued with key stakeholders.

The committee commented that a different, and perhaps misleading view, had previously been given as to why legal costs (which amounted to around 1.3 billion rand) should not be capped. The committee had relied on this information in supporting the non-capping of legal fees. It was agreed that the members would revert back to the previous minutes.

Questions were asked on the shift the system to a no- fault system, the timetable for various initiatives by the Department, how the public would be informed, public relations by the RAF, and the length of time for the amendments. Queries were also raised on use of legal practitioners.

MINUTES
Repositioning of the Road Accident Fund: Incorporating the Current System into the Social Security system : Presentation by Department of Transport
Mr Marius Luyt (Chief Director: Department of Transport (DOT) reported that purpose of the presentation was to give feedback on DOT’s progress in addressing inefficiencies in the management and administration of the Road Accident Fund (RAF) and to outline the phases identified to address shifting policy so that RAF was positioned within the policy environment.

RHF was perceived as having poor administration and poor customer services. There were four problems with the current system of compensation in that it was unsustainable, inequitable, unreasonable and unaffordable. New policy decisions would have to be made on RAF and the Government’s role to ensure the viability of the system of benefits for road accident victims. The RAF policy was currently based on a fault system, but should move to a no-fault system, where limited benefits were provided to all victims irrespective of the cause of the injury. This no-fault system should be aligned to the comprehensive security social system

Other strategic directions by DOT would involve restructuring and repositioning the RAF, and addressing corporate governance issues.

DOT planned that the intervention would encompass three phases. The first phase was business intervention, where a new board of directors would be appointed and financial strategies would be identified to address RAF’s solvency and its accumulated deficit. The second phase involved legislative intervention by the RAF Amendment Act, and Draft Regulations, which were published in May 2006. The third phase involved shifting the current liability insurance system to a social security system.

Road Accident Fund Presentation
Mr Jacob Modise (Chief Executive Officer: RAF) informed the Committee that RAF was formed in 1996, replacing the previous systems of insurance for personal injury claims. Seven commissions of inquiry had been held into the problems with compensation, but it still suffered enormous difficulty. RAF was governed by the Road Accident Fund Act 56 of 1996, which prescribed that RAF was to pay compensation to victims of road accidents involving a motor vehicle. Because of the fault based compensation system, RAF had to defend all claims lodged on an adversarial approach.

The fault based system this system required that clients go through a lengthy and costly litigation process to prove fault before claims could be admitted. This litigation process hindered service delivery, although RAF should be able to restore its clients to health and reintegrate them back into society
timeously and cost effectively. Furthermore, a claimant could lodge his claim up to three years after the accident and records were often impossible or very difficult to obtain, giving rise to delays in processing. Some claims dated back to the 1990’s and there was a huge backlog. Thirdly, the current system compensation was unlimited, which meant that the rich could obviously submit much higher claims than poor or unemployed people. In addition foreigners were paid in foreign currency and the average claim for foreigners was R15 million as opposed to R8 million for South African citizens. This system was unaffordable and problematic in a developing economy. In addition, the RAF had been technically insolvent for a number of years.

Both external and internal factors contributed towards the situation. External factors included the high accident rate, with the number of fatalities out of proportion to other countries. There had been a 9% increase in accidents from 1999 to 2003. RAF was funded by levies on fuel. In that same period, however, fuel sales had only increased by 2%. Other external factors included the high proportion of foreigners’ claims, and the increase in legal costs.
RAF spent R1.3 billion in legal fees despite having a number of legally qualified staff. Lawyers regrettably often did not advise claimants that RAF would pay their legal costs, and RAF was often unable to communicate directly with the claimants to tell them what they should receive.

Internal factors included excessive spending on staff costs, administrative costs and RAF’s own legal costs. The claims systems were neither integrated nor computerized, and therefore required manual input. The forms were very complex. RAF had not concentrated on developing systems that allowed for early settlement and payment because of the adversarial policy. Investment in IT had been below industry norms despite the fact that the preponderance of claims, specifically small claims required systems that allowed for early and productive processing. Although most of RAF’s employees were attorneys its legal costs had tripled in the last 3 years, and costs increased dramatically with each phase in the legal process, with no incentives being available to claimants’ attorneys for early settlement. Finally, RAF’s inability to process claims was constrained by cash shortages that cause greater inefficiency.

Mr Modise then detailed the RAF Amendment Act, tabling graphs and comparable analyses to illustrate the impact of the RAF Amendment Act and the restructuring plan. RAF was currently able to control four key challenges. The inability to effectively process claims would be dealt with in the restructuring plan, and RAF planned to turn around to deliver mandate in an operationally effective and efficient manner. The high costs of administration and service providers would be addressed by minimizing these costs. Two types of fraud were experienced at present; systemic fraud, which was encouraged by the current system of compensation opportunistic fraud arising from weak systems and controls. The fraud challenge will be addressed by promoting good governance and effectively managing risk within RAF. Lastly, the challenge of dissatisfied and disillusioned stakeholders would be addressed in the restructuring plan, through proactive engagement.

Two challenges that RAF could not control but could only influence were the unsustainable economic model and its poor financial health. The model  would require government funding and legislative amendment and key stakeholders would have to be involved.

Discussion
Mr M Mzizi (IFP) expressed his concern on the statement that if no investment was made to sustain the RAF it would have to close. He wondered how this tied in with the funding of the scheme that was tabled. He asked what would happen to the petrol levies and how other investments apart from petrol levies were used to sustain the fund.

Mr Modise explained that RAF and DOT had to prioritize issues with other Departmental strategies, such as the Gautrain. Benefits obtained by South Africa through something like the 2010 Soccer could be absorbed by RAF and ease its current situation.

Mr L Van Rooyen (ANC) also had concerns about a move to a no-fault system. He had trouble understanding the view and was concerned with how this would be communicated to society. He asked whether the insurance industry were involved in the discussions. Finally he asked whether this move would be sustainable, and how this would affect claims that were in progress before such a shift?

Dr Danisa Baloyi (Chairperson: RAF) replied that the legal framework and attitudes would have to change. The general public should be educated so that people understood what their rights were. The general public, rather than their attorneys, would then be able to benefit from the monies paid by the RAF.  She mentioned that because RAF did not have a presence in outlying areas, the offices would have to be national, but properly managed.

Dr Baloyi commented further that RAF needed to run as a business and not as an extension of a law firm. Lawyers would be extremely unhappy with the shift in direction because they currently received more than half of the money that RAF paid to claimants. Although there was no incentive for lawyers to make the system more efficient, Dr Baloyi commented that RAF still needed to have lawyers in the system. They would not be excluded from work, but the current bias towards their interests would change.

The Chairperson asked how long RAF‘s regulations would take to promulgate before the Act itself. He explained that the committee had accepted the previous proposition not to cap legal fees because it had heard a rather different explanation, and had based its decision on a treaty to which South Africa was a signatory. He remarked that the Committee would have to revisit previous minutes to check this aspect.

Rev P Moatshe (ANC) commented that if the committee had supported something contrary to societal interests it would have to apologise, unless Parliament was misled in the way that the facts were put before it. He thanked Mr Modise for his presentation and expressed that there was no way that any potential lobby against what he had presented would be a wasted lobby. He commented that problems needed to be reversed as soon as possible.

Mr Van Rooyen agreed with Rev Moatshe that there was something wrong, and that the committee had probably failed at one stage in supporting something that was not in the best interests of South African society. He confirmed that the Committee had acted in good faith, believing the reasons given not to cap legal costs, which amounted to around R1.3 billion. He suggested that RAF address the problem through legislation.

Mr van Rooyen raised a concern on the position of legal associations such as the Bar Council and asked what position they held. He also asked what would be done to address foreign claimants.

Mr Modise explained that the legal fraternity’s stance had been quite defensive. He remarked that they had been given a platform in public, and that their views had not necessarily been correct. The new Board at RAF was recently appointed and had been spending some time getting to understand the problems.

The Chairperson thanked RAF and the DOT for making the presentations. He expressed that the committee saw the problems at hand and that they had previously been given a different, misleading view. He reiterated that members should go back and read the minutes of the meeting where they were possibly misled and apply their minds again to the issues raised.

An ANC member asked what the committee could do to prevent the situation where the claimant’s attorney failed to act for a number of years.

Mr Modise replied that this problem really concerns the issue of a Power of Attorney. RAF would like to be able to cancel a Power of Attorney in such cases so that the claimant could deal with the matter himself.

Ms H Matlanyane (ANC) commented that if RAF had been in such a poor state for a number of years, the previous CEO had not justified his salary. She agreed that educating the public on this matter was vital, and whether any enlightenment could be obtained from Australia, who had gone through a similar situation. Finally Ms Matlanyane expressed her extreme concern on foreign claimants.

Mr Modise explained that many of South Africa’s neighboring counties had inherited South Africa‘s legislation, but had now incorporated a no-fault based system, reciprocity and other elements that South Africa did not possess. Botswana, for example, had put a lot of thought into its laws and provisions. South Africa should also create policy that adequately dealt with the issues that RAF faced.

Mr A Watson (DA) agreed that new legislation was needed and asked how it would be funded.

The Chairperson asked Mr Luyt how long it would take before any concrete legislation was put before Parliament.

Dr Baloyi explained that the RAF needed to work together with DOT as the RAF faced these issues on a daily basis and was the implementing agency for Departmental policy. The key issue was a change so that the claimant could be paid directly. RAF would be happy to come and run a committee workshop to address any of the issues posed, and amendments to the legislation.

Mr Van Rooyen commented that the Committee, in exercising oversight over DOT, would need a fixed timetable on when it plans to complete certain undertakings.

Ms Matlanyane advised the presenters that there were many radio stations that would be interested in what RAF had to say about its current situation and predicaments and members of Parliament would be willing to spread their message to their constituents.

The Chairperson also commented that communication was crucial and suggested that the presenters create booklets and pamphlets which Members could give to people in their constituencies.

The meeting was adjourned

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