South Africa Cuts Road Accident Fund Liability by $22.6 Billion

(Bloomberg) -- South Africa’s government said the liability of the debt-stricken Road Accident Fund, which compensates vehicle-accident victims, has been reduced by more than 90% as a result of an accounting change.

The RAF adopted a new accounting treatment for social benefits in the place of the insurance contract approach previously used, Transport Minister Fikile Mbalula said in an emailed statement. This resulted in a decrease of the fund’s reported liability by 305 billion rand ($22.6 billion), bringing the RAF liability to 28 billion rand and the net liability position to 13.5 billion rand, he said.

Prior to the change the fund’s debts were the government’s biggest contingent liability after those of state power utility Eskom Holdings SOC Ltd., Mbalula said. The RAF is financed by a levy on fuel that equates to almost 13% of the retail price, but its expenses have outstripped its income for years and it is technically insolvent.

The fund has merely altered the way it calculates its potential liabilities, but its underlying financial position remains largely unchanged, according to Dawie Roodt, chief economist at Efficient Group in Pretoria. The adjustment will however enable the government to reduce its contingent liabilities and credit ratings companies will then have to decide whether those numbers are credible, he said.

The RAF posted a 3.2 billion-rand surplus in the year through March, the first time it hasn’t reported an annual deficit in four decades, according to Mbalula. The adjustment to the liabilities has been independently reviewed by accounting firm PwC, the minister said.

The National Treasury and RAF didn’t immediately respond to questions.

Other highlights from the statement:

• “Following an investigation into the claims liability, which at the reporting period ended on 31 March 2020 was 330 billion rand, the RAF came to the conclusion that applying International Financial Reporting Standards 4 insurance contracts standard to the social benefit activities is not resulting in reliable and relevant information,” Mbalula said.
• The RAF collects 43 billion rand a year through the fuel levy, 60% of which is spent on compensating victims, 25% on legal fees and the balance on other administrative costs.
• Administrative costs fell by 7 billion rand in the year through March, while finance costs dropped by 62% to 90 million rand.
• The fund’s short-term liabilities were reduced to 14.8 billion rand, from 17 billion rand, while current assets rose by more than 4 billion rand.

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