ROAD ACCIDENT FUND

1. ROAD ACCIDENT FUND Presentation to the Select Committee on Public Services (National Council of Provinces) 23 August 2006

2. PURPOSE To share with the Select Committee on Public Services (NCOP): • Systems in place to correct corruption within the RAF • Payments to beneficiaries • Restructuring of the RAF

3. CONTENTS • Background • Historical Performance • Contributing Factors – External • Contributing Factors – Internal • Impact of RAF Amendment Act • Restructuring Plan • Progress since July 2005 • Fraud and corruption • Payment to beneficiaries

4. BACKGROUND PREDECESSORS • Motor Vehicle Insurance Act 29 0f 1942 • 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

5. 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)

6. MANDATE “The object of the Fund shall be the payment of compensation in accordance with this Act for loss or damagewrongfullycaused by driving a motor vehicle”. Road Accident Fund Act No 56 of 1996. (Section 3 of the Act) Fault based system of compensation Administrators/Defenders of rights

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

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

9. RATIONALE • Change in operating mindset • Can administer any system of compensation • Not threatened byRoad Accident Benefit Scheme /No-Fault etc

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

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

12. HISTORICAL PERFORMANCE INSOLVENT RAF: Solvency analysis 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) Net Total (15,000,000) liabilities (20,000,000) (25,000,000)

13. HISTORICAL PERFORMANCE ILLIQUID

14. 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

15. 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

16. CONTRIBUTING FACTORS - EXTERNAL In comparison, fuel sales have been increasing steadily at ~2% CAGR: 2.2% CAGR: 1.7% CAGR: 9.2% CAGR: 7.2% Source: RAF internal data

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

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

19. 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

20. CONTRIBUTING FACTORS - EXTERNAL Foreigners claims represent a large proportion of big claims Source: RAF annual reports and internal data

21. General damages represent the largest proportion of compensation CONTRIBUTING FACTORS - EXTERNAL Source: RAF annual reports and internal data

22. 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: 9-12% 9-12% Total Balance Note: *Higher medical inflation counter-balanced by changing claims mix to smaller claims

23. 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 Fraud RAF internal costs RAF legal costs RAF controllable RAF influenceable Regulatory environment RAF uncontrollable

24. CONTRIBUTING FACTORS - INTERNAL 20% of the fund economics are directly RAF controllable RAF controllable RAF influenceable RAF uncontrollable Note: *Based on stated estimates Source: RAF 2005 Annual Report

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

26. 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 Manual payment system Structured payment system Legal costing system AXIS ONE system

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

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

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

30. CONTRIBUTING FACTORS - INTERNAL Claim type differs considerably by claim size; general damages are highly prevalent in smaller claims Source: Road Accident Fund Commission Report 2002

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

32. 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

33. CONTRIBUTING FACTORS - INTERNAL Legal costs increase dramatically as the legal process proceeds Source: Road Accident Fund Commission Report 2002

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

35. CONTRIBUTING FACTORS - INTERNAL This causes large inefficiencies within the RAF Source: RAF internal data

36. IMPACT OF RAF AMENDMENT ACT Amendment legislation will cost RAF more if definition of serious injury is as proposed by draft regulations Legislation Impact in first year of implementation • Removal of cap on passenger claims • Increase of 23.7% 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 1.8% of claims incurred • NET EFFECT (all of the above) • Increase of 21% of claims incurred

37. IMPACT OF RAF AMENDMENT ACT The amendments to the Act could offer a temporary solution to the funding issues (if tighter definition of serious injury is adopted) • 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

38. RESTRUCTURING PLAN 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.

39. RESTRUCTURING PLAN 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 RAF influencable but not controllable

40. RESTRUCTURING PLAN 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 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

41. RESTRUCTURING PLAN 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 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

42. RAF internal initiatives RAF internal targets Operational review • Eliminate the backlog • Reduce costs of administration and service providers • 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) Risk and governance review • Minimise fraud and corruption Stakeholder engagement review • Ensure positive stakeholder engagement Joint external initiatives Financial review targets 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) RESTRUCTURING PLAN Translating the initiatives into targets

43. RESTRUCTURING PLAN RAF Strategic Objectives

44. RESTRUCTURING PLAN Holistic approach required Broad-based organisational transformation at all levels 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 Getting the model right Re-design the business model Engage government on the funding model Pursue legislative amendments

45. 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% RESTRUCTURING PLAN The first 12 months will take an intensive effort Business model diagnostic and implementation planning Organisational structuring, team appointments and executive team building Stakeholder engagement strategy • Process and technology re-design • Streamlining • Automation • Cost efficiencies • Operational diagnostic • Processes • Organisation • Operational efficiency • Support functions RAF scorecard and dashboard implementation Performance management system design HR capacity building HR capacity building and change management Communications Programme office 3 months 3 months 3 months 3 months

46. RESTRUCTURING PLAN A full transformation programme will take up to 3 years Phase II: Perform detailed diagnostic and Implementation planning Phase III: Implementation Phase I: Develop the transformation plan Create longer-term organisational change Mobilise the organisation Operationalise the changes • Develop and agree the “Rescue Plan” • Outline the required strategy and actions • Workshop with Board • Agree and communicate • Deliver the “Corporate Plan” to Government • Incorporate the “Rescue Plan” as part of the business plan • Business model diagnostic and investigation • Stakeholder engagement • Organisational fitness assessment • Process and systems diagnostic • Operational efficiency diagnostic • Implementation planning • Programme office setup • Organisation structure and team appointments • Executive team building • RAF scorecard and dashboard • Business model implementation • Process and technology re-design • HR capacity building and change management • Communication • Organisation structure roll-out • Job profiling • RAF scorecard roll-out • Operating model refinements • Process refinements and technology implementation • Cost reduction and service improvement initiatives • Leadership development • Change management and communication • Organisational cultural change • Business model evolution • Process and technology enhancements • Continuous operational efficiency improvements 6 Weeks 3 months 12 – 24 months Trans-formation Perfor- mance measures Scorecard based perfor-mance measures Implement performance measures based on Phase I objectives Implement performance measures based on Phase II objectives Implement objectives based on Phase II Performance Measures

47. RESTRUCTURING PLAN 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” 3-6 months ~5 years Pursue legislative amendments

48. RESTRUCTURING PLAN Transformation period will be characterised by two work streams with different objectives • Maintenance workstream • Will be responsible for stabilising the business and maintaining aspects of the business in line with the strategic objectives • Transformation workstream • Phase 1: mobilisation for delivery and strategy development • Phase 2: diagnostics • Phase 3: implementation of the rescue plan • Subsequently, the two workstreams will converge and the transformation stream will take on continuous development objectives and less transformation Transformation Period Maintenance/ Stabilisation Workstream Maintenance Objectives Convergence Point Transformation Objectives Transformation Workstream Time End of Phase 1 Formulation End of Phase 2 Diagnostic End of Phase 3 Implementation

49. PROGRESS SINCE JULY 2005 Number of claims processed increased

50. PROGRESS SINCE JULY 2005 Cash compensation increased