1 ROAD ACCIDENT FUND Presentation to the Portfolio Committee on Transport 5 March 2008 BUDGET FOR THE FINANCIAL YEAR ENDNING 31 MARCH 2009 AND 2009/2011 STRATEGIC PLAN

2 PURPOSE To share with the Portfolio Committee on Transport the Budget for the Road Accident Fund for the financial year ending 31 March 2009 and the Strategic Plan for the period 2009 to 2011

3 CONTENTS Rescue Plan Performance Review 2009 Budget Strategic Thrusts Actions to date

4 Key challenges identified by the RAF 1.Inability to effectively process claims (contributing to a growing backlog) 2.High costs of administration and service providers 3.Prevalence of fraud and corruption 4.Dissatisfied and disillusioned Stakeholders 5.Unsustainable economic model 6.Poor financial health Largely RAF controllable RAF influencable but not controllable RESCUE PLAN

5 Challenges converted into strategic objectives Largely RAF controllable RAF influencable but not controllable 1.Deliver the mandate in an operationally effective and efficient manner 2.Minimise the cost of administration and service providers (thus maximizing funds available for paying compensation) 3.Promote good governance and effectively manage risk within the RAF 4.Foster positive stakeholder relations through proactive engagement RAF strategic objectives 1.Develop a sustainable economic model in conjunction with the necessary stakeholders 2.Restore RAF financial health Joint pursuit of RAF sustainability with key stakeholders 1.Inability to effectively process claims (contributing to a growing backlog) 2.High costs of administration and service providers 3.Prevalence of fraud and corruption 4.Dissatisfied and disillusioned stakeholders 5.Unsustainable economic model 6.Poor financial health Key issues facing RAF RESCUE PLAN

6 … and rescue plan actions 1.Deliver the mandate in an operationally effective and efficient manner 2.Minimise the cost of administration and service providers (thus maximizing funds available for paying compensation) 3.Promote good governance and effectively manage risk within the RAF 4.Foster positive stakeholder relations through proactive engagement RAF strategic objectives 1.Develop a sustainable economic model in conjunction with the necessary stakeholders 2.Restore RAF financial health Joint pursuit of RAF sustainability with key stakeholders RAF internal initiatives Operational review Risk and governance review Stakeholder engagement review  Eliminate the backlog  Reduce costs of administration and service providers  Minimise fraud and corruption  Ensure positive stakeholder engagement Joint external initiatives Financial review  Develop a RAF model that is financially sustainable  Eliminate the deficit and return the fund to solvency RESCUE PLAN

7 … with target dates Process the required claims to eliminate the backlog over 5 years Reduce costs to 33% of compensation paid by 2010 Reduce levels of fraud Improve Stakeholder relations to acceptable levels RAF internal targets Develop a sustainable economic model Return the RAF to financial health over 5 to 10 years (financial solvency and liquidity) Financial review targets RAF internal initiatives Operational review Risk and governance review Stakeholder engagement review  Eliminate the backlog  Reduce costs of administration and service providers  Minimise fraud and corruption  Ensure positive stakeholder engagement Joint external initiatives Financial review  Develop a RAF model that is financially sustainable  Eliminate the deficit and return the fund to solvency RESCUE PLAN

8 Broad-based organisational transformation at all levels Getting the model right Full change management programme  Organisational structure  Team appointments  Scorecard  Performance management system  Stakeholder engagement  Processes and systems  Operational efficiencies  HR capacity building  Communication  Change management  Culture  Leadership development Re-design the business model Engage government on the funding model Pursue legislative amendments RAF could not do it alone RESCUE PLAN

9 New systems delivery process remains unchanged and on tract Set up “new claims model”Process all new claims via “new model” Pursue legislative amendments Agree backlog financing with DOT Process the remaining backlog via “new model” Continue with existing claims model 3-6 months~5 years months RESCUE PLAN

10 Elements of the dashboard implemented Programme office Communications HR capacity building HR capacity building and change management Operational diagnostic  Processes  Organisation  Operational efficiency  Support functions Business model diagnostic and implementation planning RAF scorecard and dashboard implementation Performance management system design Organisational structuring, team appointments and executive team building Stakeholder engagement strategy Process and technology re-design Streamlining Automation Cost efficiencies 3 months 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% RESCUE PLAN

11 Went live on SAP December 2007 RESCUE PLAN

12 Solutions to be procured and implement www Receive liability Near real- time access Physical file management DoHa UPFS HPSCA DHS ETL Mining HW Interface, network, contracts Call monitor and recording Capture Incident Approve Medical Services Capture Incident Funeral Benefits U/T Medical Merit Assessmen t Claim Info Benefit Informatio n LOE LOS Summon s Supplier Claims Supplier Claims Mobile POP Offers Reports Security Audit Forensic Workflow Call Centre CRM Interface s Portal FINEOS CLAIMS MANGEMENT Scanning and Indexing Scanning of claim papers Index solution QA counting Included in FINEOS Document Manageme nt Document Repository Save and retrieve Electronic imaging HW Colossus Submit injuries Integratio n Batch Integration / Uploads ITC eNatis RTMC CC VPN File Management File tracking E-docs generate Invoicing Faxing E-connect Business Warehouse HW CRM HW Faxback Escalation Management HW Uploads Begun the roll out of the new Claims Mgt. System RESCUE PLAN

13 PERFORMANCE REVIEW

14 Expectations Progress Achieve a turn-around of the Fund that brings about the stability, efficiency and sustainability of the organisation. Achieve the social economic objective of Government to create appropriate capacity through training, development attraction and retention of staff as well as succession planning. To manage the affairs of the RAF in a manner that locates the RAF in the broader strategy of delivery in relation to the boarder transport sector and social security system. Manage stakeholder relations, in particular relations with victims, government, legal representatives and service providers, in a manner that is driven by a risk management culture. RAF stabilised – continued improvements in efficiency & sustainability is being hampered by Government’s failure to fund the turnaround strategy Organisational capacity expanded with roll-out of new systems and processes (e.g. SAP) Social delivery is being hampered by Government’s failure to fund the turnaround strategy. Risk management culture firmly in place at board level. Stakeholder relations gradually being address with service delivery. Successes to be communicated in the new year. Progress in meeting shareholder expectations hampered by LACK OF FUNDING PERFORMANCE REVIEW

15 PERFORMANCE REVIEW Total income expected to rise 12% to 2006 levels Actual Dec 07

16 PERFORMANCE REVIEW Bulk of the increase occur in fuel levy income Actual Dec 07

17 PERFORMANCE REVIEW Volume of diesel and petrol sold rose 7% to 21,3 mega-litres during the calendar year Source: South African Petroleum Industry Association

18 PERFORMANCE REVIEW RAF Levy at 41.5 cents per litre represent less than 5% of fuel price at the pump

19 PERFORMANCE REVIEW RAF Levy accounts for less than 13% of all margins levied on fuel

20 PERFORMANCE REVIEW Diesel rebate continues to grow in line with fuel levy growth Actual Dec 07

21 PERFORMANCE REVIEW Investment income drops due to depletion of cash reserves despite rising interest rates Actual Dec 07

22 PERFORMANCE REVIEW Total expenses, including provision for outstanding claims, is expected to outstrip fuel levy income Actual Dec 07

23 PERFORMANCE REVIEW The bulk of the increase is expected in claims expenditure (incl. claims provision) Actual Dec 07

24 PERFORMANCE REVIEW In 9 months, the RAF has already paid in cash for claims more than in has paid for the full year last year (excl. structured payments) Actual Dec 07

25 PERFORMANCE REVIEW Staff costs are expected to rise only 10.6% Actual Dec 07

26 PERFORMANCE REVIEW Admin and other costs are expected to rise mainly as a result of roll-out of new systems (SAP, Fineos, etc) Dec ‘07

27 PERFORMANCE REVIEW Claims processing has had to be curtailed due to cash shortages (mix to change for year end)

28 PERFORMANCE REVIEW More supplier claims will be processed up to year-end to preserve cash

29 PERFORMANCE REVIEW RAF has been experiencing a rise in reported claims

30 PERFORMANCE REVIEW With change in processing mix, RAF expects to maintain claims backlog at 2007 levels

31 PERFORMANCE REVIEW For as long as the no-fault system is not introduced, legal costs will continue to grow

32 PERFORMANCE REVIEW Delays in introducing RAF Amendment Act means R4b continue to be wasted in general damages

33 PERFORMANCE REVIEW Efficiency gains continue to be made with a reduction in cost-to-compensation percentages

34 PERFORMANCE REVIEW Efficiency gains made in 2007 hampered by cash shortages

35 PERFORMANCE REVIEW Staff compliment has remained constant

36 PERFORMANCE REVIEW Increasing accidents arising from growing economic activity, coupled with the absence of ‘caps’, will results in claims liability growing

37 PERFORMANCE REVIEW Accelerated claims processing had reduced cash reserves significantly

38 PERFORMANCE REVIEW Cash crunch has reached a level where the it is difficult to conduct the business of the RAF  Level of summonses continue to rise  Writs of execution issued by the courts disrupts normal business operations

39 PERFORMANCE REVIEW The RAF now has no choice but to invoke protection afforded it by the Act The RAF is now considering mechanisms it needs to use to invoke Section 21 of the RAF Act

BUDGET

BUDGET Honourable Minister of Finance Budget Speech  Fuel levy to be increased 5 cents per litre with effect from 1 April 2008  Work outstanding on legislation required to remove the burden on taxpayers Will this help?

42 VariableValueJustification Macro-economic assumptions GDP Growth Rate5.14%Conservative long-term economic forecast CPI Growth Rate5.10%Long-term forecast Reserve Discount RateCPI + 2.5%Equivalent to 2.5% real discount rate Fuel income assumptions Fuel consumption growthGDP - 1% 45 year historical data shows that fuel growth has exceeded GDP growth by ~1%. However, GDP growth has exceeded fuel sales growth in recent years. A low growth estimate is prudent. Diesel rebate10% of fuel levy income Diesel rebate has been 8% to 9% in recent years. A high rebate is prudent. Interest rate on investment7.70%Based on bond yields (R186 bond) 2009 BUDGET Assumptions revised to align with delays in Amendment Act, no-fault and 5 cents levy increase

BUDGET Assumptions Claims assumptions Claim reporting and payment patterns Varies according to scenario Growth in claim payments(GDP + 2%) + (CPI + 2%) Growth in number of claims GDP + 2% Growth in number of claims GDP + 2% Growth in undertakings (implicit) (Number of claims growth) * (CPI) Large claims inflationCPI + 2%Derived from history Claims inflation (excluding legal and large claims) CPI + 2% Savings from Amendment act General damages: 25% saving Medical: No change Loss of income/support: 25% increase Claimant costs: 10% saving RAF costs: 10% saving Conservative estimates based on GRS Actuarial Consulting recommendations. Savings only apply to claims incurred

44 No fault assumptions Claim payment patterns Patterns based on faster turn-around times for reporting a payment of claimsLess granular categories than other models Claims growthGDP + 2%Used for increase in claims Medical inflationCPI + 2% Compensation inflationCPI + 2% Accident rates 0.6 fatal accidents per million litres of fuel used 2 serious injury accidents per million litres of fuel used, 5 minor injury accidents per million litres of fuel used. Injuries per accident 1.25 fatalities per fatal accident, 1.25 serious injuries per serious injury accident, 1.1 minor injuries per minor injury accident Medical costs R5,000 per fatality, R22,500 per serious injury, R5,000 per minor injury Rehab costsR10,000 per major injury Funeral costsR8,002 per fatality Loss of income per litre (c) 0.084Actuarial forecast Loss of support per litre (c) 0.009Actuarial forecast Claims processed per staff member BUDGET Assumptions

BUDGET Assumptions Operational assumptions Admin costs R100,000 per employee, excluding salaries, depreciation, and marketing Staff productivity improvements 5% improvement in 2008, 2009 and 2010 Cost savings - RAF legal costs 10% saving in 2008, 2009 and 2010 Cost savings - Claimant's legal costs 10% saving in 2008, 2009 and 2010 Legal costs inflationCPI Marketing, communications and distribution R100 million per year from 2008 Other provisions as a % of HR costs 21%Accounts for performance bonuses Staff costs Costs per staff member based on TECs from July Number of staff based on predicted work-load and efficiency Staff costs inflationSalaries grow at CPI + 2% Scaling factor100% (no scaling)

BUDGET Assumptions Balance sheet assumptions CapexAs per 2008 three-year budget Fuel levy receivable days 120 days Payable days of HR and admin costs 30 days Sources: Reuters consensus long-term forecast; SARB

BUDGET No improvement in claims processing in 2009

BUDGET RAF runs out of money! Deficit balloons to R50b!

BUDGET Cash not available for systems improvements

BUDGET Conclusion South Africa requires a model to determine the appropriate level of fuel levy on an annual basis Delays in funding the turnaround strategy will cost South Africa more in the future The RAF has no option but to invoke section 21

51 STRATEGIC THRUSTS

52 The RAF’s strategy in 2009 will be founded on 4 pillars STRATEGIC THRUSTS

53 Re-examination of the RAF business Revised vision, mission and values Positioning for lasting recovery Key Features STRATEGIC THRUSTS

54 VISION To be a sustainable, world class provider of cover for personal injury arising from the use motor vehicles in South Africa. Revised vision STRATEGIC THRUSTS

55 MISSION To provide appropriate cover to all road users within the boarders of South Africa; to rehabilitate and compensate persons injured as a result of motor vehicle accidents in a timely and caring manner; and to actively promote safe use of our roads Revised mission STRATEGIC THRUSTS

56 UBUNTU  We care about and support others  We involve and listen to others and recognise their contribution  We show concern for people’s well being Revised values PRIDE IN WHAT WE DO  We believe in the role and work of the RAF;  We celebrate successes and achievements;  We demonstrate integrity, consistency and fairness in our actions decisions;  We demonstrate energy, passion and conviction in everything we do;  We model the highest standards of personal and professions behaviour STRATEGIC THRUSTS

57 Revised values FREEDOM TO SUCCEED  We take personal responsibility for delivering our work and we do what we say we’ll do;  We offer solutions not problems;  We empower others to take responsibility for their actions and decisions;  We continually look for way to improve what we do and how we do it;  We are open to change and learn from new ideas and ways of working;  We find ways to remove or minimise obstacles;  We learn from our mistakes STRATEGIC THRUSTS

58 THANK YOU