The government is currently investigating various ways in which it could lower fuel prices in South Africa, including changes to two major levies – the General Fuel Levy and the Road Accident Fund (RAF) Levy.
One of the more drastic suggestions put forward by the Fuel Retailer Association is to scrap the RAF in its entirety, which would remove the need for a special fuel levy to fund the organization.
However, the RAF is primarily responsible for providing compulsory coverage to all road users in the event of an accident, which could leave millions of South Africans with no recompense should the RAF be dismantled.
In its place, South Africa would need to adopt a mandatory third-party vehicle insurance policy, but this could end up costing motorists more than what they are indirectly paying for the RAF every time they fill up their car.
Weighing the costs
The RAF Levy contributes R2.18 to the fuel price, which accounts for more than 10% of the cost of petrol in South Africa as of October 2024.
The organization has also been in dire financial straits for a long time now, reporting a R1.5-billion deficit for the 2023/24 financial year.
The RAF partially attributes this poor performance to the fact that its levy has not been adjusted for three years now, owing to consumer relief measures that were first implemented in 2022.
In other words, the RAF believes that the R2.18 levy is too low and that it urgently needs to be raised.
Naturally, this suggestion has not been positively received by motorists given that fuel bills are one of the biggest monthly expenses for many households.
Scrapping the RAF and switching to a new compulsory insurance policy thus sounds like a great way to slash petrol prices in South Africa, but this raises the question of how much people will need to pay for the new system.
Compulsory third-party insurance is not a new concept, as it is already the policy in countries like Australia, Germany, India, the United Kingdom, and certain parts of the United States, according to MyBroadband.
The Fuel Retailer Association argues that a national insurance model should not be linked to the price of petrol, but rather a flat coverage fee.
According to Everycent, third-party motor insurance in South Africa can cost anywhere from R120 to R500 per month, depending on the car’s value and the driver’s risk profile.
This is enough to cover damages to other vehicles in an accident but does not provide the same level of care as comprehensive coverage for things like fire, theft, and damage to the owner’s car.
If we combine the two figures and assume an average insurance rate of R300 per month, motorists will need to spend R3,600 per year on third-party cover.
This is equivalent to paying the RAF’s R2.18 levy on 1,650 litres of petrol, so we now have to ask how much driving an individual will need to do before the fuel levy starts to outweigh the insurance rate.
With an average fuel consumption of 7.0l/100km, a motorist will need to drive for at least 23,600km before the RAF’s tax becomes more expensive than mandatory vehicle insurance.
That’s quite a lot of driving for a typical road user, given that most commuters travel approximately 44km per day or 16,060km per year.
It shows that, while the RAF levy is undoubtedly a major cost for all car owners in South Africa, the alternative could be a lot more expensive depending on your income bracket.
For individuals who already pay for comprehensive insurance each month, scrapping the levy will be a net positive, but there is a risk that third-party cover will be more expensive for those who are already struggling to make ends meet.
According to data from insurance provider Pineapple, only about a third of drivers in South Africa are insured, as it is not a legal requirement here unlike many other countries.
For the remaining 70% of motorists, the RAF is the only type of coverage they have access to, so scrapping it in favour of a potentially more expensive third-party insurance network could end up costing people more in the long run.
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