Road Accident Fund Annual Report 2006/7: briefing

TRANSPORT PORTFOLIO COMMITTEE
17 October 2007
ROAD ACCIDENT FUND ANNUAL REPORT 2006/7: BRIEFING

Chairperson: Mr J Cronin (ANC)

Documents Handed out;
Road Accident Fund (RAF) 2007 Annual Report: Presentation
Road Accident Fund 2007 Annual Report

Audio recording of meeting

SUMMARY
The 2007 Annual Report of the Road Accident fund was introduced by their non-executive officer; Mr V Mhalangu. The report dealt with the performance and achievements of the RAF in the past year. The RAF outlined their increased liabilities, and their focus to reduce the number of claims and satisfy existing ones. The committee emphasized that despite their attempts and appearance of success, the RAF remained technically insolvent and appealed for intervention to ensure that the fund was sustained.

Much discussion was focused however around the amendment act that would provide a workable definition of “serious injury” and the fact that the amendment had only been addressed 18 months after the parliamentary decision around it had taken place. The amendment was seen to be critical to the sustainability of the Fund and the ability to meet claim demands and objectives.

The committee expressed dissatisfaction at the RAF failure to get the amendment into play in a suitable amount of time. Other issues, such as the Contingency Act, the fault system in place for the pay out of claims and the role of foreign claims were also discussed in detail.

The RAF was thanked for their coherent presentation, although reprimanded for their delay with regard to the amendment.

MINUTES
The Chairperson welcomed the Road Accident Fund noting that this was the first hearing of various annual reports for 2007. The Delegation from the Road Accident fund and the Department of Transport was then introduced. Mr J Modise, the CEO of the Road Accident fund was accompanied by Mr M Luyt (Chief Director Public Entity Oversight), Ms R Raath (Director for Corporate Legal), Mr L Pakati (Director of parliamentary services and stakeholder management) and Mr V Mhalangu and Professor C Greef (non-executive directors). Mr Modise agreed to lead the presentation with relevant assistance from his delegation.

Presenation by the RAF
Mr Modise thanked the Committee for the opportunity to present. He believed that the fund had performed to the best of their ability, although the outcomes did not fully reflect this.

Successes and challenges
Mr Modise began by outlining the highlights of the previous year, some of which included a reduction of the backlog, an increase in the levels of compensation and a net fuel levy income. However Mr Modise noted that despite the impression of success that these highlights created, this is not the case; particularly in relation to the growth in claims to the amount of R 23.9 billion, which had created a substantial deficit.

In addressing the reasons for this poor performance by the RAF, Mr Modise assessed the regulatory factors and issues that impacted upon this: the substantial national growth of GDP and the increased vehicle population, distance traveled and road fatalities in addition to the increase of foreign visitors created an environment in which the RAF turnaround had been difficult.

Mr Modise felt that the number of foreign visitors was an important consideration, particularly in light with the upcoming 2010 and the number of accidents foreign visitors are involved in. Mr Modise felt that the role of the foreign visitors, in addition to the other factors, had resulted in no change to the functioning of the RAF. He felt that the RAF was fighting a losing battle and that they were doomed, unless assistance was received. Mr Modise believed that the current system was not sustainable and required more prudent limitations in the payout system.

Mr Modise believed that the RAF needed to make a couple of economic choices; the fact that the RAF had no assets or reserves from which to pay the backlog, and no immovable property was problematic. In addition to this, the fuel levy that was received by the RAF had been substantially depleted due to the R 1 billion owed to the RAF by SARS. The conclusion was that RAF has a poor capital base and a low fuel levy – resulting in the inability to meet required demands. The South African vehicle population stood at 7,9 million and had increased over the last year, along with the number of road fatalities. However it appeared that fuel sales were not comparable.

Operational Review
The RAF presented the committee with a detailed review of their operations; beginning with an examination of their income statement. Mr Modise drew attention to the comparative revenue for the last two years, highlighting that the 2.7 billion requested from Treasury had already been spent prior to being allocated, therefore no inroads had been made into satisfying the deficit. Mr Modise submitted that the RAF was in the process of attempting to roll out management and settlement institutions to try and avoid this problem. The money received had not been entirely received in cash, which was problematic given that the claimants required cash payments. The result was that RAF only had access to about R5.5 billion due to the SARS collection, and annual expenses had increased by R2.2 billion. Mr Modise noted that the increased RAF expenditure had little to do with administration costs, which had in fact declined; despite this they had successfully maintained efficiency.

The RAF income increase had not been sufficient to overcome the number of claims. He suggested that the fuel levy issue should be addressed in order for the RAF to address the backlog appropriately. A slide included in the hand out provided a break down of the various different levies that were already imposed on fuel, noting that the RAF portion was minimal. Mr Modise took a comparative look at other institutions similar to the RAF globally and noted that the RAF had not yet managed to create an asset bank to address backlog claims and submitted that this needed to be addressed in the future.

Mr Modise then outlined the expenditure breakdown for the RAF, noting that a significantly small amount had been spent on administrative functions. However, with regard to the claims expenditure, this increased since last year as with RAF liabilities. However Mr Modise noted that the RAF system was wasteful, as the not only did the claimants not see the full R 6.6 billion, but the money intended for payment of claims was facilitated through attorney’s accounts, thus resulting in substantial amounts being extracted to satisfy attorneys costs and success costs. As a result of this attorney facilitation, the RAF was unable to determine whether the claimants had in fact received the payments and what amounts the claimants were left with at the end of the process. As a reaction to this the RAF would like to bring in a system of direct payment. The existing system was problematic as it reduced the RAF’s efficiency and created the impression of RAF incompetence, which was often not the case but rather due to attorney administration delays. This issue tied in with the problem of a fault-based system of compensation, which involved the process of fighting compensation entitlement through the use of attorneys. This was also problematic as it resulted in delayed assistance to the claimant.

Legal costs
The Chair intervened briefly, querying clarification on the issue of contingency; noting that often lawyers put up funding if they were of the mind that the client had a substantial claim, which resulted in costs borne by the law firm on behalf of the client.

Mr Modise continued with his presentation noting that the claimant had little to lose as the RAF did not only pay legal fees but all fees involved and incurred by the claimant. Therefore despite the fault-based system, the claimant had nothing to lose in making a claim. With regard to the contingency issue; this was an idea borrowed from the United States. It allowed lawyers, to take a portion of the compensation. However this portion was not always related to the actual expenditure. In reality there should be no room for such third party compensation in an injuries claim. Mr Modise acknowledged that the legal profession did incur some costs in the dealing with the claim, however this expenditure did not entitle a ‘success fee’ in the portion taken by the law firms. Of this R3 billion, the majority had gone to general damages. The message conveyed was that, if the amendment act was in place to limit payouts to circumstances in which damage was substantial, some of these issues would be averted. Most of the claims were in the form of minor damages that resulted in minimal medical costs, however they formed a large part of claimant expenditure.

Claims backlog
Mr Modise noted that at the end of the previous business year; 445 000 outstanding claims remained. This number had dropped to 341 000 claims in the current year due to the work of the RAF; therefore it was clear that a substantial number of claims had been processed. Mr Modise noted the two types of claims; supplier and non supplier claims. The area where most impact was made was in satisfying the supplier claims. The distribution of claims, has not changed. Claims below R50 000 was where the bulk of the claims were located. These were cases in which a person was not really injured, yet they still claimed. Most of the claims arose out of “soft tissue claims”.

Mr Modise submitted that the RAF had done as much as possible to reduce the backlog. He noted, however, that the RAF had tried to break down as many of the older outstanding claims. The problem remained that claimants took an average of 12 months to bring a claim to the RAF. Finally,he noted that the average claim hadincreased to over 35 000, though only foreigners made substantial claims.

Foreign claims
On the topic of foreigners, Mr Modise noted that pay outs to foreigners claims result in Billions of rands. The foreigners claims are paid out in the currency of the country where treatment was received. This was an incredibly generous move for a developing nation, and Mr Modise believed that unless limitations were placed on this foreign payment, the RAF would not be able to sustain itself. He noted that this was an important consideration with the upcoming world cup.

Budget
With regard to the balance sheet, Mr Modise noted that the RAF remained insolvent. The RAF was owed money by SARS and the fact that since the RAF did not own investments and had no immovable property other than the Pretoria building, the situation was dire. Although the RAF attempted to manage the money allocated, they continued to struggle as their liabilities exceeded their assets. The time frame in which claims could be brought varied: 21 years for minors and a period of three years for majors. The payout for 2007 would be in excess of R7 billion. Due to the fact that it took up to 5 years for the payout of claims to occur, the RAF needed to consider the payout in real value; there were therefore further expenditures incurred due to the delay.

However on a final note Mr Modise noted that serious inroads had been made in addressing employment equity within the RAF, clearly showing that the number of females employed within the fund was substantial.

The Delegation thanked the committee and the meeting was opened for questions.

Discussion
The Chair thanked the delegation and noted that the competency of the fund appeared not to be a reflection of success. He noted that unfortunately many of the decisions of the Transport Committee had still not been acted on, and suggested that the discussion begin there before opening the floor to other questions. He also believed that the fault system should be addressed.

Mr M Luyt noted that with regard to the amendment act the Minister of Transport had recently met with the Minister of Health to discuss problems with the decisions, however he did not know the outcome of that meeting. He noted that a written response from the Minister was required for the enactment of the legislation.

Ms R Raath addressed several other issues that the department had faced with regard to decisions and amendments. Ms Raath noted that in July the previous year, government regulation of sections; 4, 6, 10 11 and 12 of the amendment act had been created. She noted that these sections dealt with serious injuries. However this proclamation had been issued and published in error. The department then issued another proclamation, amending the previous proclamation. In August last year, a man (Marius Kruger) had initiated proceedings challenging the proclamation. He submitted that the President did not have power to amend the proclamation issued, resulting in a hearing of this matter in court this year. The decision would be given to the department in October this year. The result of the hearing was that the erroneous proclamation was null and void. Therefore the original proclamation also fell away. Once a court declares that certain acts or sections were unconstitutional, the matter had to be refereed to the Constitutional Court (CC) to hear and pronounce on the matter. The CC was scheduled to hear the matter at the beginning of 2008. She noted that from a practical point of view, certain aspects of the Act were necessary to the RAF.

The Chair paused a moment to compartmentalise the two issues that had just been submitted. He noted that the regulations had been certified in July.

Mr L Mashile (ANC) noted that such deliberation wasted time. He expressed dissatisfaction with the delay the Department had taken to consider the changes when the decisions had been made by the Committee two years prior. The unfortunate result was that the committee’s actions were rendered null and void as there was no effect. He felt that dedication and commitment should be addressed.

Ms N Khunou (ANC) reaffirmed the discontent echoed in the committee at the substantial delay within the department to address the amendment changes, and noted that such delays were unacceptable. Furthermore she noted that all RAF reports complained about the high foreign payouts, however they delayed in making the necessary adjustments to rectify the problem.

Mr S Farrow (DA) agreed with the previous sentiments expressed on the delay sounded by the Committee. He believed that the committee has missed a necessary opportunity to assist the RAF. The shocking revelation that we are still paying out in foreign currency rather than rands leds him to conclude that perhaps a more efficient amendment would have been to rectify the foreign outflows. He suggested that the committee bring the bill back and adjust it appropriately to prevent such substantial outflows.

Mr O Mogale (ANC) noted that the supposed dealing on behalf of the department with the amendment was to take place in March that year. He queried why the department did not instigate such discussions in March, and the reason for the delay.

The Chair briefly summarised the mentioned points; and said that the sentiments of the committee regarding the delay have been conveyed and understood as unacceptable. In addition to this there was an urgent need to address the issue of foreign outflows with regard to some form of capping. The definition of serious injury in the amendment act caused unnecessary delay that the Committee expressed their disapproval of, and although he noted that the Minister of Health may indeed play a role in the delay, the Chair noted that the ‘buck must stop’ with the Department of Transport. The Chair noted that no further excuses would be tolerated and a formal statement would be issued expressing this.

Regarding the CC challenge the Chair noted that there were two issues to consider; firstly what appeared to be a blunder with an issue that dealt with governance and regulations. With regard to the contingency and success fees, this was costing the country R10 million daily. There was some urgency therefore in the implementation of the amendment act; awaiting the CC hearing in February would not be wise. The Chair asked if there was any way in which the CC hearing could be circumvented in order to speed up the process. He requested a technical way to avert this, and asked the department to return the following week with a solution on how to do this.

Ms R Raath (RAF/DOT) noted that a technical circumvention as requested by the chair was problematic as once the directions had been issued one could not undermine the CC processes or the constitutional rules. She did note that no further delay would occur at the CC level; once a date is set for a hearing at the CC level, the matter would be heard on that date. In addition to this she noted that if the CC makes a judgment one cannot appeal against it. It appeared that there were limited options unless the Committee was willing to repeal the amendment.

The Chair re-emphasised the importance of the amendments to the Committee, and expressed their desire to see these amendments enacted as soon as possible. He requested the Department to find an alternative route to that of the CC process. Secondly, the Chair queried how the committee could achieve its ends without undermining a legitimate legal process. He concluded that if this meant repealing the Act, the Committee would be ready to do so.

Mr M Luyt noted that in March the Department had in fact been ready to address the amendment, however the Minister of Health had waylaid the process rather than facilitating it.

Mr O Mogale (ANC) asked the chair to write a letter expressing discontent.

Mr S Farrow (DA) requested that the state law advisor be bought in the following week. In addition to this he wanted to raise two issues that were related to the presentation and not necessarily the issue previously discussed; the issue of the Auditor General. Firstly, on the necessity of restructuring the fund; he noted that the RAF sat with more lawyers than administrators which was an issue he believed needed to be addressed. He asked the CEO how he was dealing with that issue. The second issue dealt with the aspect of the IT; providing an efficient process to get the system to deal with the claimant. He noted that the CEO did not know if the claimants have not been paid – if a computer system would be put in place; to ensure that the payment gets into the claimants hands as soon as possible would be ideal. Finally he noted that no mention was made of the decline in corruption within the Fund.

Ms B Thomson (ANC) queried how money was transferred to the lawyers and not the claimants. And asked why there was no monitoring process for the expenditure of the money.

Mr B Pule (UCDP) questioned whether the money received influences road construction with regard to the vehicle population.

Mr Modise answered the questions raised by giving an historical break down of the RAF. Noting that it arose out of the law of delict, with the intention of righting a wrong, therefore little work was done in putting workable institutions in place, the issue of institutions needed to now be addressed to ensure sustainability. The problem with the RAF was that it was simply a law converted into a company, i.e. a law firm, until recently. Most of the interaction occurred between attorneys, with little concept of customer service. Mr Modise noted that much needed to be done to rectify this, to automate payment, to ensure efficiency and customer care. He noted that the movement would be towards only having administrators not lawyers, this would require an assessment of the fault-based system. However there had been substantial resistance to this opinion.

On fraud and corruption he noted that the fund was facing two types of fraud; systemic and opportunistic. Opportunistic resulted from the poor structure of the fund; systemic fraud required legislative assistance in the definition of a serious injury and a whistle blowing system, he noted that this required the RAF to become involved earlier on in the process and not wait for the claimant to approach the RAF.

With regard to transferring money to attorneys, the historic hurdle was the problem of the power of attorney. He noted that this was no more was a problem as the power of attorney no longer inhibited the claimant from communication directly with the principal, allowing the claimant to communicate with RAF directly. The problem however remained in the loan of money to claimants by the law firms therefore indebting the claimant to the law firm.

Addressing Mr B Pule’s question, the RAF submitted that it did not get involved directly in road construction.

Mr J Modise turned to the issue of insolvency. There are two types of insolvency; Technical and oppressive insolvency. In most cases a company went out of business. However, the RAF was technically insolvent as many other similar institutions. There was a loop hole with the RAF that provided that the claimant may claim directly from the third party if the RAF did not pay. This ensured the RAF technical insolvency.

Mr O Mogale (ANC) requested a follow up to Mr Farrow’s earlier question regarding how the RAF was dealing with the issues it faced and how other institutions, such as the TAC of Victoria, Australia and New Zealand was dealing with the issue.

Ms N Khunou (ANC) asked how the RAF hoped to achieve the goal of dealing directly with the claimants and what steps the organisation had taken to achieve this. She noted the difficulty involved in filling out the claim forms and suggested a simplification.

Mr L Mashile (ANC) asked what the problem was surrounding the implementation of the IT and whether the problem was within the department.

The Chair then identified a number of risks; foreigners and 2010, and the issue of the price of fuel. If the oil price rose, there would be pressure put on oil consumption. The gross consumption would come down therefore all these issued needed consideration in order to ensure the effective running of the regime.

Ms B Thomson (ANC) asked how the RAF measured performance after all the problems that had been experienced.

Mr S Farrow (DA) questioned what the fund was doing with regard to the increase in the number of accidents, whether there was any communication or preventative methods; he further noted the previous R50 million spent annually on the Arrive Alive Campaign. In addition, he asked if an investigation had been done into averting the debt of the RAF with regard to considering the doubling up of fuel prices.

Ms M Nxumalo (ANC) again addressed the issue of the middle man, or the lawyer in the facilitation of claims. Her question related to the role of fraud and corruption enacted by these lawyers. She noted however that it was a chain of corruption and concluded that without the amendment there is not way to monitor this corruption.

Mr Mushudulu (ANC) queried the problem regarding how people know what to do in accident circumstances.

Ms S Khunou (ANC) Gave a pragmatic example showing the problem with the allocation of funds and the removal of a portion by lawyers; people who ended up disabled were allocated R 40 000 and only R15 000 went to claimants. This money is given on assessment of the injury. She again queried the mechanisms for the removal of the middle man, and the mechanisms to ensure the productive use of money.

Mr B Pule (UCDP) asked what the numbers of the backlog were.

Mr Modise noted that there are systems that had been rolled out to reduce fraud and to improve efficiency and an assessment is being made if fuel levy system was the best route and to investigate alternative system. The Australian TAC system has a hybrid system, and there had been political vote to change system which had resulted in a no-fault system, which had only been adopted in a few Australian states. The opinion of TAC was that this no-fault system remained problematic. New Zealand had managed to improve efficiency by taking out the middle man. Mr Modise submitted that we need to therefore look at the best practices available.

With Regard to the lump sum idea, he argued that in certain circumstances it defeats the purpose of payment. Therefore he submitted that there should rather be mechanisms to assess when it is appropriate to pay out in a lump sum or in installments. For example, payments for the loss of livelihood should be paid out in installments to achieve the goals of the Fund. Mr Modise noted that no mechanisms were in place to educate with regard to the claimant expenditure of the payout.

The role of case management occurs at the end of the process and deals with the rehabilitation of the injured victim into society. He noted that, to date, the RAF only had 60 case managers, and in order to shift the focus to the victim this number needed to be increased. The issue of awareness campaigns would play a role again here.

The issue of direct payment; requires public campaigns to ensure the claimant comes directly to the RAF. In addition to this the RAF is simplifying the forms and implementing a system where the victim will not have to collect forms themselves but rather provide details and allow the RAF to follow through. Finally there should be the setting up of regulators such as ICASA and SARS to look after the interests of the client.

Mr J Modise believed that in order to effectively measure RAF performance the committee needed to be unified on objectives. To date these objectives were to clear the backlog and to focus on certain areas. He noted that perhaps the committee should revisit some of their focus points however, he noted that South African RAF was not the only insolvent institution of its type; the New Zealand TAC goal was to avert insolvency by 2014.

In addressing Mr S Farrow’s question, Mr Modise noted that the RAF did not only want to be involved at the accident level and indeed preventative measures were desirable. As the RAF had a significant interest in the prevention of accidents. The Australian TAC was substantially involved in the road construction, the modification of cars and extensive awareness campaigns. The RAF would like to eventually become similarly involved.

Mr J Modise’s submission on the prevention of fraud was that the RAF was trying to become involved at the beginning to remove other fraudulent interferences. With regard to the backlog, Mr Modise noted that this was not a recent occurrence but rather one that had been going on for years.

Mr O Mogale addressed the issue of foreign payouts, again asking for clarification the currency that the payout was made in.

Mr Modise reiterated that our generosity for a developing country was far beyond our call, as we paid out in the foreign currency of the place where the foreigner received treatment. He noted that this was not an accepted practice and no other country did this, not even our neighbouring countries. Therefore he reiterated that there was a need to address this problem.

Ms R Raath, in conclusion, requested the department to explain the substantial delay with regard to regulations. She noted that there had been another CC challenge relating to draft regulations, concerning hit and run accidents where the driver is not known. The court had found this to be unconstitutional and the regulations had been redrafted within 2 years.

The Chair thanked the department and the legal assistant for the explanation regarding the delay. However he further emphasized that the delay was unacceptable as it costed the country substantial amounts daily. The Chair urged for assistance in the speedy resolution of the amendment act. In addition to this the Chair noted that an adoption of a different economic model was needed and that the Committee needed to look at the problem of the Contingency Act. He confirmed that he would indeed write a letter of complaint to the Director General as requested, and issue a formal statement concerning the considerable delay.

The meeting was adjourned.