The Land Transport Authority of Singapore (LTA) will be piloting a blockchain-based conditional payments solution from Oversea-Chinese Banking Corporation (OCBC) to disburse mobilisation advance payments efficiently with greater transparency to its main contractors.
Often amounting to millions due to the scale of the construction projects, mobilisation advance payment helps the main contractors defray heavy upfront capital outlays at the start of their construction project, and is usually a percentage of the total project value.
With OCBC’s blockchain-based conditional payments solution, the mobilisation advance payments are automatically disbursed to the intended contractor once the smart contracts verify that the conditions are met.
“The key concern we have today is the lack of visibility over the use of the funds. Another issue is the payment flow to the contractors; it can take several months because of manual verification document processing,” says Yong Yenn Leng, LTA’s chief financial officer, during one of the panel discussions at the Singapore Fintech Festival 2024.
As such, the blockchain-based conditional payments solution is designed to empower LTA with full transparency over the use of the mobilisation advance. LTA will also gain a real-time overview of the transactions and bank balances since the solution is integrated with OCBC’s business banking platform.
To encourage adoption among contractors, the solution is developed with user-friendliness and inclusivity in mind. “We had two primary requirements. First, we wanted a simple solution because construction companies vary in sizes and their tech capability. So, we told OCBC we wanted something straightforward and would not require significant efforts from the contractors or even changes to their payment system,” says Yong.
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She continues: “We also wanted something that worked for all contractors regardless of their banking relationships because not all contractors have an OCBC bank account and it is not possible for us to mandate our contractors to have any specific bank account. So these two requirements guided the whole collaboration with OCBC to push for a solution as both inclusive and user-friendly.”
The pilot involves three main contractors for the Cross Island Line projects. To date, over $22 million has been disbursed to the main contractors and sub-contractors with this solution.
"Moving forward, we will explore more payment types and get more contractors to onboard the solution. But we’re taking a gradual rollout approach to assure contractors that we are managing this transition together with them,” says Yong.
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Melvyn Low, head of Global Transaction Banking at OCBC, comments: "We are excited to embark with LTA on this journey of transforming the way payments are handled in the construction industry. This blockchain-based conditional payment solution will improve the governance and transparency of utilisation of the mobilisation advance payments that LTA extends to its contractors."
How it works
In the same discussion, Low shares how the blockchain-based conditional payments solution (or purpose-bound money) works in LTA’s pilot with OCBC.
From the panel discussion between LTA and OCBC at the Singapore Fintech Festival 2024. Photo: Nurdianah Md Nur/ The Edge Singapore
LTA will fund a purpose-bound money (PBM) account for the contractor to access as and when they require and when the conditions are met. LTA will also upload a set of conditions to the blockchain platform for OCBC to manage and control the funds as they are dispersed.
Once the funds are in the account, OCBC will mint tokens off the blockchain and the smart contracts will be attached to those tokens.
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To redeem funds, contractors will need to go into OCBC’s e-banking platform to trigger the payment they require. Once that is done, OCBC will check against the conditions that have been set within the system. If the conditions are met, the PBM will be unwrapped and funds will be disbursed to the contractor. Both LTA and the contractor will be alerted even if the transaction is rejected.
In the final step, the reports (of all the different payments) are availed to both the contractor and LTA to ensure visibility in the entire process.
“All these steps used to be done manually and within an opaque process. With the use of the PBM and smart contracts that wrap around the tokens that are minted, we're able to digitalise the entire experience. At the same time, we had to ensure that the way in which the contractors executed their payments would not change… and we didn’t want contractors to have to do any extra steps [when using our blockchain-based conditional payments solution],” says Low.
(Updated at 12.15pm to include information from the panel discussion at the Singapore Fintech Festival 2024)
