The Road Accident Fund (RAF)’s funding model has been flawed since its inception, leading to enormous shortfalls in its operating budget that have left it technically insolvent.
This problem was recently highlighted by RAF CEO Collins Letsoalo in the entity’s most recent annual report for the 2023/2024 period, where he pointed out that it is trying to cover rapidly escalating costs from a limited source of income.
Fatal funding flaw
The RAF functions as a form of state-funded insurance for all road users in South Africa, which is obligated to pay for damages claimed by individuals involved in a motoring-related accident.
Its primary revenue source is the tax it collects from a dedicated Road Accident Fund Levy placed on every litre of fuel sold in South Africa.
The RAF’s expenses, meanwhile, hinge on the number of road accidents in the country, as this directly ties into the number of accident claims and the amount of litigation that the state-owned entity must engage with annually.
This means that, as the number of cars on the road continues to grow, the RAF should see increased revenue from the fuel consumed. However, it also leads to a greater risk of accidents and claims that the entity is required to pay out.
Letsoalo argues that this system is misaligned with the RAF’s risk profile, as accidents are tied to driver behaviour and not how much fuel they put in their cars.
The CEO stated that the RAF’s legislative framework has been amended six times since its creation and that seven commissions of inquiry have been established to address the defects in the funding model, but that no solution has been put forward.
Exacerbating this issue is the fact that the RAF Levy, which is normally adjusted annually to account for inflation, has been frozen for three years as part of a pandemic-era consumer relief measure, heightening the financial pitfall facing the entity as it struggles with escalating claims and third-party administrative costs.
Furthermore, Letsoalo claims medical and legal fraternities are to blame for the RAF’s financial woes, arguing that lawyers have repeatedly drained the fund with exorbitant claims also feeding the backlog of non-payments on claims due to non-compliance in submitting all the necessary support documents to the RAF.
In the report, he noted that out of the R43 billion the road fund receives from its fuel levy, R17 billion goes to admin costs, including nearly R11 billion in legal fees.
Letsoalo referenced a previous court ruling from 2024, where the presiding judge stated that the RAF was “saddled with an inheritas damnosa“, or “a cursed inheritance that would be doomed to failure,” in reference to the funding model that has prevented it from being solvent since launch.
The RAF as we know it today was established in 1996 with the Road Accident Fund Act, which replaced the previous Multilateral Motor Vehicle Accidents Fund that ran from 1989 to 1996.
Before this, it was the Compulsory Motor Vehicle Insurance Fund (1972-1985), and the Motor Vehicle Insurance Fund (1942-1971).
Even as far back as 2002, the RAF’s first annual report showed that it was technically insolvent with a negative equity of -R11.1 billion, according to BusinessTech.
Kirstie Haslam, a legal expert and partner at DSC Attorneys, explained that the solvency of the RAF needs to be understood in the context of its “pay as you go” structure.
If you examine the fund in terms of the revenue collected from fuel taxes and compare it to outgoing expenditure, there have been several years where the RAF was cashflow positive, she said.
In its latest report, the RAF stated that the average claim value increased by 9.54% during the 2023/2024 financial year, ending with a new total of R287,000.
More specifically, these were the average values for different types of claims:
- Medical claims – R29,700
- General damages – R565,055
- Loss of earnings claims – R1,110,815
- Loss of support claims – R632,671
- Funeral costs claims – R15,380
The total claims received by the RAF were slightly less than the year before, ending with a combined value of R45.1 billion.
For the financial year ending, 31 March 2024, the Road Accident Fund declared a deficit of R1.59 billion, which is substantially lower than the shortfall of R8.43 billion it declared during the previous year.
While this may be seen as a positive development, the lower deficit is partly the result of lower payouts for victims, particularly medical claims, according to Haslam.
Haslam’s stance is that maladministration, a lack of early investigation, and the settlement of legitimate claims are among the biggest contributors to the RAF’s current problems.
The unwillingness to settle legitimate claims in particular has led to significant litigation costs for the entity, driving up its operating costs.
She said that several viable models and strategies have been proposed to the RAF and Department of Transport over the years, but that these would require a fundamental rework of the entire system.
As it stands, the RAF has two options to reduce its deficit – either increase revenue, or cut costs.
Increasing revenue would likely result in a consderable increase to its bespoke levy, which would draw immense backlash from the public.
This means its most promising solution is to reduce costs, which has already seen some success through agreed settlements that have curbed spending on litigation by roughly R6 billion over the last four years.
This strategy is not without its own problems though, as law firms have pushed back on these changes, accusing the RAF of unlawfully dismissing legitimate claims and ignoring its obligations under the RAF Act.
The RAF’s funding is unlikely to improve, too, as the fuel levy was once again frozen in the now-postponed 2025 Budget Speech, likely as a way for the government to further justify its proposed VAT hike of 17%.
This could still change, however, and it remains to be seen if the RAF Levy will be adjusted as part of the revised budget plan that will be revealed on 12 March 2025.
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