ROAD ACCIDENT FUND STRATEGIC PLAN 2006 -2009 Presentation to the Portfolio Committee on Transport 17 May 2006

PURPOSE To share with the Portfolio Committee on Transport the Strategic Plan of the Road Accident Fund for the period 2006 to 2009

CONTENTS Background Performance to Date Contributing Factors – External Contributing Factors – Internal Impact of RAF Amendment Act Objectives and Action Plans Financial Plan

BACKGROUND Motor Vehicle Insurance Act 29 0f 1942 PREDECESSORS Compulsory Motor Vehicle Insurance Act No 56 of 1972 Motor Vehicle Accident Act No 84 of 1986 Multilateral Motor Vehicle Accidents Fund Act 93 of 1989 Road Accident Fund Act No 56 of 1996 Remove

ILLUSTROUS OR DISASTROUS? HISTORY ILLUSTROUS OR DISASTROUS? Motor Vehicle Insurance Act 29 of 1942 Corder Commission of Inquiry (1954) Du Plessis Commission of Inquiry (1962) Compulsory Motor Vehicle Insurance Act No 56 of 1972 Wessels Commission of Inquiry (1976) Grosskpf Commission of Inquiry (1981) Motor Vehicle Accident Act No 84 of 1986 Viviers Commission of Inquiry (1987) Multilateral Motor Vehicle Accidents Fund Act 93 of 1989 Malamet Commission of Inquiry (1992) Road Accident Fund Act No 56 of 1996 Satchwell Commission of Inquiry (2002) Heading – Inappropriate Model

MANDATE “The object of the Fund shall be the payment of compensation in accordance with this Act for loss or damage wrongfully caused by driving a motor vehicle”. Road Accident Fund Act No 56 of 1996. (Section 3 of the Act) Heading change? Conflicting focus on mandate Fault based system of compensation Administrators/Defenders of rights

VISION To be world class administrator of the system of compensation defined in the Road Accident Fund Act (Act no 56 of 1996) Heading vision

MISSION To administer the system of compensation defined in the Road Accident Fund Act (Act no 56 of 1996) in a manner that is timeous, cost effective and appropriately delivers on our mandate ” Heading Mission

RATIONALE Change in operating mindset Can administer any system of compensation Not threatened by RABS/No-Fault etc Heading rationale

PERFORMANCE TO DATE CLAIMS Figure 1:RAF: Total number of claims - 50,000 100,000 150,000 200,000 250,000 300,000 350,000 400,000 450,000 500,000 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 1984 1983 1982 1981 1980 Nr of Claims + New claims lodged - Claims finalized = Claims outstanding at yearend

PERFORMANCE TO DATE DEFICIT RAF: Levy Income, Compensation, Deficit RAF: Analysis of important financial indicators -R 5,000,000 R 0 R 5,000,000 R 10,000,000 R 15,000,000 R 20,000,000 R 25,000,000 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 1984 1983 1982 1981 1980 R'000 Provision for outstanding claims Accumulated deficit Net Fuel levy income Total Cash Claims Expenditure

PERFORMANCE TO DATE INSOLVENT RAF: Solvency analysis TOTAL ASSETS 25,000,000 20,000,000 15,000,000 10,000,000 5,000,000 TOTAL - ASSETS 2000 2001 2002 2003 2004 2005 (5,000,000) TOTAL LIABILITIES (10,000,000) (15,000,000) Net Total liabilities (20,000,000) (25,000,000)

PERFORMANCE TO DATE ILLIQUID

CONTRIBUTING FACTORS - EXTERNAL South Africa has one of the highest traffic accident rates in the world Reasons for South Africa’s high accident rate: Alcohol abuse Vehicle Condition Road Environment Enforcement of road safety Source: IRTAD, Australian Transport Safety Board, South African National Fatal Crash Information Centre

CONTRIBUTING FACTORS - EXTERNAL Vehicle accidents in South Africa increased annually at 9% from 1999 to 2003 CAGR: 8.9% CAGR: -2.9% Source: RAF internal data, South African National Fatal Crash Info Centre

In comparison, fuel sales have been increasing steadily at ~2% CONTRIBUTING FACTORS - EXTERNAL In comparison, fuel sales have been increasing steadily at ~2% CAGR: 2.2% CAGR: 1.7% CAGR: 9.2% Suggestion: Show growth in vehicle population - RTMC stats CAGR: 7.2% Source: RAF internal data

CONTRIBUTING FACTORS - EXTERNAL There is an inadequate correlation between the amount of fuel sold and the number of accidents Source: RAF internal data

The number of claims has been growing sharply since 1997 CONTRIBUTING FACTORS - EXTERNAL The number of claims has been growing sharply since 1997 Backlog stats to grow Source: RAF annual reports and internal data

CONTRIBUTING FACTORS - EXTERNAL Claims have been growing almost 4 times faster than accidents over a 10 year period Increase in supplier claims Increase in % of accidents reported Change in categorisation of claims Source: RAF annual reports, RAF internal data and Burlington analysis

Foreigners are entitled to claim CONTRIBUTING FACTORS - EXTERNAL Foreigners are entitled to claim Source: RAF annual reports and internal data

Composition of 2006 Fin year Claims expenditure CONTRIBUTING FACTORS - EXTERNAL Composition of 2006 Fin year Claims expenditure Source: RAF annual reports and internal data

CONTRIBUTING FACTORS - EXTERNAL To balance the equation, fuel levy growth has to be above inflation targets Fund outflows Fund inflows 6% 2% Claims growth: Fuel growth: 3-6% 7-10% Claims inflation*: Fuel levy growth: This has not been the approach to parliament – to balance the equation the system of compensation will need to be changed as the affordability of increasing fuel levies in a inequitable system is not an option. 9-12% 9-12% Total Balance Note: *Higher medical inflation counter-balanced by changing claims mix to smaller claims

The RAF has limited control over the fund economics CONTRIBUTING FACTORS - INTERNAL The RAF has limited control over the fund economics Fuel usage Fund Accident events / claims behaviour / inflation Fuel levy Claimant Medical costs Claim settlements Investment income Historical liability Claimant Legal costs Combine slides 6, 11, 28 and 29 into - 43 Fraud RAF internal costs RAF legal costs RAF controllable Regulatory environment RAF influenceable RAF uncontrollable

20% of the fund economics are directly RAF controllable CONTRIBUTING FACTORS - INTERNAL 20% of the fund economics are directly RAF controllable RAF controllable Combine slides 6, 11, 28 and 29 into - 43 RAF influenceable RAF uncontrollable Note: *Based on stated estimates Source: RAF 2005 Annual Report

CONTRIBUTING FACTORS - INTERNAL RAF controllable costs are however out-growing claim costs significantly Source: RAF annual reports

Claims systems are not integrated and require manual input CONTRIBUTING FACTORS - INTERNAL Claims systems are not integrated and require manual input Lodgement Registration Validation Verification Claims Assessment Settle Manual filing and sorting Manual input Single station linking to Home Affairs Manual input Single license to link to NATIS Manual input Claims system Payment systems Manual input AXIS ONE system Manual input Pre - Registration System (not used) Registration system HA system NATIS terminal Offer control system Combine slide 25 and 34 Manual payment system Structured payment system Legal costing system AXIS ONE system

Investment in IT appears to be well below industry norms CONTRIBUTING FACTORS - INTERNAL Investment in IT appears to be well below industry norms IT costs as % of operating budget Combine slide 25 and 34 Source: Gartner, Arivia.Kom

Process focus: 11% of claims account for 59% of funds paid out CONTRIBUTING FACTORS - INTERNAL Process focus: 11% of claims account for 59% of funds paid out Source: Road Accident Fund Commission Report 2002

Largest proportion of claims are below R 50 000 CONTRIBUTING FACTORS - INTERNAL Largest proportion of claims are below R 50 000 Source: Road Accident Fund Commission Report 2002

CONTRIBUTING FACTORS - INTERNAL Claim type differs considerably by claim size; general damages are highly prevalent in smaller claims Please indicate that this is due to both abuse of the system and the fact that indigent claimants are unable to claim for loss of income. Source: Road Accident Fund Commission Report 2002

Claim costs make up almost half of small claim outflows CONTRIBUTING FACTORS - INTERNAL Claim costs make up almost half of small claim outflows Source: Road Accident Fund Commission Report 2002

“We have qualified attorneys doing administration work” CONTRIBUTING FACTORS - INTERNAL RAF legal costs have tripled in 3 years despite large amounts of legally qualified staff “We have qualified attorneys doing administration work” Source: RAF Commission 2002 report, RAF internal data

Legal costs increase dramatically as the legal process proceeds CONTRIBUTING FACTORS - INTERNAL Legal costs increase dramatically as the legal process proceeds This is a theoretical analysis as only 0.74% of claims reaches trial stage. A indication of where cost are actually spent would be more informative. Source: Road Accident Fund Commission Report 2002

CONTRIBUTING FACTORS - INTERNAL Ability to process claims is constrained primarily by cash availability Source: RAF internal data

This causes large inefficiencies within the RAF CONTRIBUTING FACTORS - INTERNAL This causes large inefficiencies within the RAF You will have to show how this situation has been and will be addressed. Source: RAF internal data

IMPACT OF RAF AMENDMENT ACT Legislation Impact in first year of implementation Removal of cap on passenger claims Increase of 27.8% of claims incurred Introduction of R160,000 limit on loss of income claims Reduction of 2% of claims incurred Limiting general damages claims to serious injuries Reduction of 51% of claims incurred NET EFFECT (all of the above) Reduction of 37.4% of claims incurred Would use this as the overview of Amendment Act. Please indicate that he expected saving may be influences by changes in claims behavior and may not be as high a proposed here. The DOT anticipated between R500 million and R1 billion by 2009. 2007 2008 2009 2010 2011 Savings incurred R2880m R3043m R3215m R3396m R3586m Cash savings R18m R338m R735m R1183m R1625m

IMPACT OF RAF AMENDMENT ACT The amendments to the Act could offer a temporary solution to the funding issues Assuming claims incidents grow at 6% claims cost and compensation grow at 5% fuel consumption grows at 1.5% a year fuel levy grows at inflation (4% - roughly 2c a litre) Investments grow at 5% Source: Burlington model 34

Shareholder Expectations OBJECTIVES AND ACTION PLANS Shareholder Expectations 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.

Summary of Key Challenges OBJECTIVES AND ACTION PLANS Summary of Key Challenges Inability to effectively process claims (contributing to a growing backlog) High costs of administration and service providers Prevalence of fraud and corruption Dissatisfied and disillusioned Stakeholders Unsustainable economic model Poor financial health Largely RAF controllable Combine slides 6, 11, 28 and 29 into - 43 RAF influencable but not controllable

Translating the key challenges into objectives OBJECTIVES AND ACTION PLANS Translating the key challenges into objectives Key issues facing RAF RAF strategic objectives Inability to effectively process claims (contributing to a growing backlog) High costs of administration and service providers Prevalence of fraud and corruption Dissatisfied and disillusioned stakeholders Unsustainable economic model Poor financial health Largely RAF controllable Deliver the mandate in an operationally effective and efficient manner Minimise the cost of administration and service providers (thus maximizing funds available for paying compensation) Promote good governance and effectively manage risk within the RAF Foster positive stakeholder relations through proactive engagement Combine slides 6, 11, 28, 29 and 43 Focus on RAF internal initiatives and combine slide 43 – 46 – incorporating targets in 45 RAF influencable but not controllable Joint pursuit of RAF sustainability with key stakeholders Develop a sustainable economic model in conjunction with the necessary stakeholders Restore RAF financial health

Translating the objectives into Rescue Plan actions OBJECTIVES AND ACTION PLANS Translating the objectives into Rescue Plan actions RAF strategic objectives RAF internal initiatives Deliver the mandate in an operationally effective and efficient manner Minimise the cost of administration and service providers (thus maximizing funds available for paying compensation) Promote good governance and effectively manage risk within the RAF Foster positive stakeholder relations through proactive engagement Operational review Eliminate the backlog Reduce costs of administration and service providers Risk and governance review Minimise fraud and corruption Stakeholder engagement review Ensure positive stakeholder engagement Focus on RAF internal initiatives and combine slide 43 – 46 – incorporating targets in 45 Joint pursuit of RAF sustainability with key stakeholders Joint external initiatives Financial review Develop a RAF model that is financially sustainable Eliminate the deficit and return the fund to solvency Develop a sustainable economic model in conjunction with the necessary stakeholders Restore RAF financial health

Translating the initiatives into targets OBJECTIVES AND ACTION PLANS Translating the initiatives into 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 Process the required claims to eliminate the backlog by 2009 Reduce costs to 32% of compensation paid Reduce levels of fraud (targets to be set during diagnostic phase) Improve Stakeholder relations to acceptable levels (targets to be set during diagnostic phase) RAF internal targets Focus on RAF internal initiatives and combine slide 43 – 46 – incorporating targets in 45 Joint external initiatives Financial review Develop a RAF model that is financially sustainable Eliminate the deficit and return the fund to solvency Develop a sustainable economic model (targets to be set during diagnostic phase) Return the RAF to financial health by 2009 (financial solvency and liquidity) Financial review targets

RAF Strategic Objectives OBJECTIVES AND ACTION PLANS RAF Strategic Objectives Primary objective Secondary objective Deliver the mandate in an operationally effective and efficient manner Develop and implement effective processes and systems that timeously deliver on the mandate and assist in reducing the backlog Improve process efficiency to ensure legitimate and accurate payment of compensation Improve service quality to claimants Transform our Human Capital into a motivated team with a performance driven culture Minimise the cost of administration and service providers (thus maximising funds available for payment of compensation) Lower RAF costs of administration Actively manage service provider costs to appropriate levels Promote good governance and effectively manage risk within the RAF Adhere to corporate governance standards Implement effective risk management Maximise RAF impact on fraud reduction Foster positive stakeholder relations through proactive engagement Align with shareholder and wider Government objectives Engage claimants and service providers in a positive and value-adding manner Cultivate partnerships and alliances with government and private sector Foster positive public image Develop a sustainable economic model in conjunction with necessary stakeholders Pursue business model changes Pursue legislative amendments Develop proposals with stakeholders to restore the RAF to financial health Finance the elimination of the backlog Restore financial solvency Restore financial liquidity Update – remove funding requirements until approved by Cabinet, indicate that 1a is dependent on funding approved by Cabinet (September 2006) Remove 47 and 48

The first 12 months will take an intensive effort OBJECTIVES AND ACTION PLANS The first 12 months will take an intensive effort 100% Business model diagnostic and implementation planning Organisational structuring, team appointments and executive team building Stakeholder engagement strategy 90% 80% 70% Process and technology re-design Streamlining Automation Cost efficiencies 60% Operational diagnostic Processes Organisation Operational efficiency Support functions 50% 40% RAF scorecard and dashboard implementation Performance management system design 30% NB 20% HR capacity building HR capacity building and change management 10% Communications Programme office 3 months 3 months 3 months 3 months

OBJECTIVES AND ACTION PLANS Getting involved in the pre-lodge process could significantly improve chances of success Accident takes place Patient transported to hospital Patient admitted to hospital Attorney enrolled Assess merits Damage assessment Lodge claim Drivers Road accident report (Police) Witnesses Ambulance Medical care Hospital Doctors Care givers Healthcare Touting Power of attorney signed Fee negotiated Statement from injured party Road accident report Witnesses Sketch photos Orthopaedic report Industrial psychologist report Medico-legal report Hospital invoices Other RAF receives claim Latest 3 years NB Up to 3 years before lodging of claim: Facts could be diluted Leaves RAF little time to assess and verify facts Less time to respond

There are many potential partners in the pre-lodgement process OBJECTIVES AND ACTION PLANS There are many potential partners in the pre-lodgement process Emergency personnel Metro Police Insurance company SAPS AR Lawyer Accident Claim lodging NB – indicate any progress in this regard Tow-truck driver Ambulance Hospital Doctor Associations Up to 3 years

Potential Government partnerships OBJECTIVES AND ACTION PLANS Potential Government partnerships Department Desired processes Department of Transport Accident verification Road safety stats Traffic management stats Accident control stats SAPS Accident verification Local authority traffic departments Accident verification NB – indicate any progress in this regard NPA Prosecutions Recovery of claim costs Home Affairs Merit validation NATIS Traffic management stats

New systems delivery process OBJECTIVES AND ACTION PLANS New systems delivery process Continue with existing claims model Set up “new claims model” Process all new claims via “new model” 12-18 months Agree backlog financing with DOT Process the remaining backlog via “new model” Replace with 57, 59, 60 & 61 3-6 months ~5 years Pursue legislative amendments

FINANCIAL PLAN Reducing the cost-to-compensation ratio: Initial cost reduction assumptions FY07 FY08 FY09 Cost reduction Internal cost per staff member 5% RAF Legal costs 10% Claimant legal costs (including contingency) Change management costs Implementation costs R150M R20M R10M

FINANCIAL PLAN Efficiency enhancing initiatives are targeted to reduce the cost-to-compensation ratio to 32% by 2009 Critical to note that improvements are dependent on funding to address the deficit – remove slides 68 – 72 as these are dependant on Cabinet decision for funding.

FINANCIAL PLAN Income Statement Income statement, balance sheet and cash-flow statement for 2004/5 only – not assumptions on future funding.

FINANCIAL PLAN Balance Sheet Income statement, balance sheet and cash-flow statement for 2004/5 only – not assumptions on future funding.

FINANCIAL PLAN Cash flow Statement Income statement, balance sheet and cash-flow statement for 2004/5 only – not assumptions on future funding.

THANK YOU