NOMPU SIZIBA: The Road Accident Fund, or RAF, is often in the news for the wrong reasons. It’s often said to be insolvent and basically not able to perform its mandated function of financially assisting South Africans who’ve been adversely impacted in accidents on South Africa’s roads. And then there are stories of lawyers swindling the fund for all that they can get. So what is the reality?
Well, a study has been done by one Elad Smadja, who is an actuary. He has been looking at the real state of the RAF, and we’re going to speak to him now. He is the CEO of Taurus Capital. Thank you very much Elad, for joining us. Why was the Road Accident Fund specifically created by law and how is its operating model supposed to work?
ELAD SMADJA: Thank you very much. The RAF is a unique creature. It’s often portrayed as another SOE, a state-owned enterprise, to go with Transnet, Eskom, SAA and so on – which have all become hot topics.
The Road Accident Fund is very different in its nature. It’s not an entity that was created to make profits, to create jobs for the shareholders, being the sovereign and the state. It was created to fulfil a constitutional mandate, which is to make sure that claimants of road accidents are covered and have protection in the event that they are damaged, and they don’t have to go out and sue the person who caused those damages. It’s in a sense very similar to a grant programme in that regard. Its mandate is to pay claims. When it’s portrayed in the news that this is an entity that’s got massive expenses – well, that’s what its purpose is. Its purpose is to pay these claims. And that it does.
NOMPU SIZIBA: There’s been a lot of talk that the Road Accident Fund is not fit for purpose. What do you think would happen if the fund were to be removed altogether?
ELAD SMADJA: There was a recent court judgment, and it’s made quite clear in those papers what the state of affairs would be. Basically, if I were to drive into the back of a car, whether accidentally or on purpose, and cause damage to that individual, I would be personally liable. They could sue me for damages, for loss of future income – and you can imagine those numbers can be staggering. A typical claim can run into millions of rands. And so I’d be pretty nervous to get into my car every morning if that was the reality on the ground. And so the RAF acts as this insurer across our society, making sure that we’re not out there suing each other every day; we’ve got a recourse against the fund. So that’s the world without the RAF. It’s quite a scary reality.
NOMPU SIZIBA: There’s often talk about the RAF essentially being broke or insolvent. Does your research back up these perceptions?
ELAD SMADJA: Insolvency is an interesting measure. Insolvency looks at assets versus liabilities, and obviously if the liabilities are greater than the assets, that’s technical insolvency.
The RAF runs a very different operating model. The way that the RAF is funded is, as we know, through the fuel levies, and it’s never set up to hold assets to back those liabilities, which are its future claims. And so that measure of assets-versus-liabilities is a little bit misleading because it was never set up to hold the assets.
Its funding model is more a pay-as-you-go type scheme, where every month there are revenues coming from those fuel levies, which then go out to pay claims.
Without going into all the maths now, according to my study there are sufficient revenues coming in every month from the fuel levy, especially if the fund can do the work which it’s trying to do, which is to bring in efficiencies and lower its overheads and operating cost model.
And yes, as long as those fuel levies remain and there are no major shocks to the system – like Covid, where we didn’t see traffic on our roads for three months – the model actually does work.
NOMPU SIZIBA: Maybe it works, but there is the real problem, as I mentioned in my introduction, as apparently some lawyers make it their business to screw the fund and not conduct themselves properly. Is there the capacity in the RAF to ensure that people don’t pull the wool over its eyes?
ELAD SMADJA: There are two bunches of lawyers which you’re referring to. One is the defendant lawyers. The fund has made a decision to no longer use outsourced lawyers. You’ll remember last year there was quite a debacle around that. But that’s basically [in place]. It has freed up R10 billion a year in savings.
The fund has moved now to an operating model which hopefully is a lot more sustainable, which is: let’s not litigate every single matter until conclusion, let’s opt for a mediation and the settlement approach, because these matters on the whole are generally quite predictable. I think the merits and the quantums – there’ve been enough of these cases over the last 10, 20, 30 years that where they end up is pretty predictable upfront. And then we will use the court system and the judicial system where a case is obviously more complicated and requires more in-depth analysis and law. That’s one side of it, and it seems to be working quite well.
There are then the plaintiff lawyers. It’s quite difficult for them to screw the funders, as you say. They take a 25% contingency fee, and we can debate whether that’s too high or too low. But that is mandated by law, and that is what it is.
And then there are, obviously, the rotten eggs which will then dip into their trust accounts and roll the clients over. That is very unfortunate, obviously, but for that there is a Fidelity Fund in the Legal Practice Council, which is there to protect claimants and ultimately provide them insurance guarantee against trust monies which are misappropriated.
NOMPU SIZIBA: So in essence, Elad, what you’re saying is that you think that the operating model has improved and you think, in principle, it’s a good thing. It was established to help South Africans who get into difficulties on the roads and so on. But what challenges do you think lie ahead for the fund?
ELAD SMADJA: I think that’s right. I’m not saying it’s a perfect model in any way, but I’m just struggling to reconcile what I see in the press every day versus the reality that we’re seeing in our business. At Taurus Capital, our business, we fund attorneys and we provide funding also for RAF claimants. We’ve over 120/130 attorneys whom we work with, and 400-odd claimants at any point in time. So we’ve got quite a breadth in terms of what the market looks like. We obviously see how these claims are or are not being paid. So the reality is that, since about September, October last year [things have] vastly improved. I think claimants and attorneys on the ground will testify to that.
Yes, there are challenges. There are challenges in our society. There are challenges around the underlying peril, which is road accidents. The carnage on our roads in South Africa is way out of proportion with other countries in the world. So there’s work to be done at a societal level, at a funding level, at an administrative level, and things to be written off. I don’t get to that conclusion.
NOMPU SIZIBA: Elad, we are going to leave it there. Thank you so much for your insights. Elad Smadja is the CEO at Taurus Capital.