Road Accident Fund achieves unprecedented milestone
When we came to office, we had to grapple with the challenge of the Road Accident Fund (RAF) which was struggling to meet its constitutional obligations due to a variety of reasons. In line with the Khawuleza ethos of the 6th Administration, we immediately got down to work to stabilize the entity and tackle the intractable challenges.
We appointed the current Board, under the able leadership of Adv Ouma Rasethaba, later succeeded by Ms Thembelihle Msibi, and gave them the mandate to turn-around the Fund and address the underlying challenges. This was followed by the appointment of the CEO, Mr Collins Letsoalo, who is responsible for implementing the new operating model approved by the Board.
We have previously reported that the RAF has operated on a financially unsustainable model for a number of decades. In recent years, the long-term liabilities of the fund have become the government’s largest contingent liability. The fund has also experienced liquidity challenges as claims against the fund had outpaced the growth in the RAF levy.
The RAF has been reporting annual deficits since 1981, the same year the Fund was declared technically insolvent. At the time, the Fund operated under the Compulsory Motor Vehicle Insurance Act of 1972 and had just been a subject of the following three (3) Commissions of inquiry, the Corder Commission of Inquiry in 1954, the Du Plessis Commission of Inquiry in 1962 and the Wessels Commission of Inquiry in 1976 respectively.
When the Road Accident Fund Act of 1996 came into effect on 9 May 1997, the annual deficit had grown to R886 million. This was followed by a further five (5) more Commissions of Inquiry. Notwithstanding all these Commissions and legislative changes, in 2005, a decade later, the annual deficit had risen to R1.2 billion. This astronomical increase in the annual deficit continued until the historic R3.2 billion surplus reported for the period ended on 31 March 2021.
Our determination and hard work to turn the situation around has paid off. These are unprecedented achievements, which will undoubtedly turn the tide in the manner in which the RAF delivers on its mandate.
The RAF collects R43 billion a year through the fuel levy. Only R26 billion, or 60% of this annual revenue is spent on the actual compensation of claimants.
R17 billion, or 40% a year is spent on administrative costs. Of this, R10.6 billion is spent on legal costs. More than R2 billion is spent on medical costs.
The RAF has over the years accumulated deficits as there are more claims from road accidents. This situation is further exarcebated by a number of fraudulent claims the RAF has to contend with. The model that the RAF operated on was centred on litigation, with 99% of the claims settled just before trial. The legal costs had been growing exponentially over the years from R800 million in 2008 to R10.6 billion in 2019.
The Board and management wasted no time in tackling the mandate to turn around this situation.
What was also a priority is the actuarial liability of R322 billion that the new team was asked to investigate and reduce. With this being the contingent liability of the state, it made the RAF the biggest liability after Eskom.
We are pleased to announce progress in the following areas:
- We have achieved a significant reduction in administrative costs of more than R7 billion in the 2020/2021 financial year.
- The RAF has for the first time in many years posted a surplus of R3.2 billion. This is a dramatic shift from a R5.2 billion deficit on the previous year.
- Investment income has increased by 152%, year-on-year, from R62 million to R157 million.
- Finance costs have decreased by 62%, year-on-year, from R263 million to R90 million.
- Writs of execution have reduced by more than 50%, through a legal strategy and stratification of the debt book.
- The short-term liability has reduced by R2.2 billion, from R17 billion to R14.8 billion.
- Current assets have increased, including cash position, by more than R4 billion.
More importantly, the RAF has adopted a more appropriate accounting treatment for social benefits, in line with its mandate, than the insurance contracts, previously employed.
This has resulted in the massive decrease of the RAF reported liability by R305 billion, bringing the RAF liability to R28 billion and the net liability position to R13.5 billion. This accounting treatment has been independently reviewed by PwC and its accounting experts.
Pursuant to the implementation of 2020/2021 Annual Performance Plan, the unaudited financial statements approved by the Board for the period ending 31 March 2021, show encouraging signs of the efficacy of the new operating model.
Although a combination of factors led to the surplus, it is clear that the 62% decrease in the finance or administrative costs, from R290 million in 2020 to R90 million in 2021, was a significant contributing factor. This is testament to the RAF 2020-25 Strategic Plan, which prioritizes reducing administrative costs.
What makes the achievement of this surplus even more remarkable, is that it was achieved, notwithstanding the devastating impact of Covid-19 on revenue. Although the Fund recovered well from the hard lockdown revenue dip, the annual revenue income of R42 billion was still lower that the 2019 level of R43 billion.
Following an investigation into the claims liability, which at the reporting period ended on 31 March 2020 was R330 billion, the RAF came to the conclusion that applying IFRS 4 Insurance Contracts standard to the Social Benefit activities is not resulting in reliable and relevant information.
As evidenced by the excellent financial results, there has also been very good progress registered in the implementation of the RAF Strategic Plan and the priorities we agreed to with the Board in the Shareholder Compact. In this regard, preliminary unaudited results show an overall performance of 77.8%. This is despite the challenges brought about by Covid-19 and the protracted legal challenge against this new Strategic Plan.
These developments demonstrate that we have turned the corner in addressing the RAF intractable challenges. We are on the right path and we will continue to work towards a sustainable and equitable road accident benefit scheme.
More Information:
Ayanda Allie-Paine
072 566 0827
