WO2020065543A1

WO2020065543A1 - A system for implementing a sponsored discount payment methodology

Info

Publication number: WO2020065543A1
Application number: PCT/IB2019/058111
Authority: WO
Inventors: Wayne VAN HOUTEN
Original assignee: Santam Limited
Priority date: 2018-09-27
Filing date: 2019-09-25
Publication date: 2020-04-02
Also published as: ZA201906340B

Abstract

A computer-based system of an insurer for implementing a sponsored discount payment methodology is provided. The system includes a database containing data. A hardware processor accesses the database and extracts information including relating to a building project contract and to an amount payable from an employer to a contractor. Data is transmitted from the insurer to a financial institution including an identification of the employer, contractor and building project. The data also including guarantee data for a guarantee for an advance amount. The guarantee providing performance criteria for the contractor as well as that if the advance amount is not paid back to the financial institution by the employer or the contractor by a predefined repayment date then it will be paid to the financial institution by the insurer.

Description

A SYSTEM FOR IMPLEMENTING A SPONSORED DISCOUNT PAYMENT METHODOLOGY

BACKGROUND OF THE INVENTION

The present application relates to a system of an insurer for implementing a sponsored discount payment methodology.

SUMMARY OF THE INVENTION

According to a first example embodiment there is provided a computer-based system of an insurer for implementing a sponsored discount payment methodology, the computer-based system comprising: a database containing data identifying a contractor, an employer and contract data describing a contract entered into between the contractor and the employer for a building project; and a hardware processor to control the system to perform the following steps: accessing the database and extracting information including information relating to the building project contract and to an amount payable from the employer to the contractor; transmitting data from the insurer to a financial institution, the data including an identification of the employer, an identification of the contractor and information relating to the building project, the data further including guarantee data for a guarantee for an advance amount, the guarantee providing performance criteria for the contractor as well as that if the advance amount is not paid back to the financial institution by the employer or the contractor by a predefined repayment date then it will be paid to the financial institution by the insurer; and receiving at the insurer payment data from the financial institution, the payment data indicating the advance amount has been paid to the contractor by the financial institution.

BRIEF DESCRIPTION OF THE DRAWINGS

Figure 1 is a block diagram illustrating a system of an insurer for implementing a sponsored discount payment methodology.

DESCRIPTION OF EMBODIMENTS

Referring to the accompanying drawings, a system of an insurer for implementing a sponsored discount payment methodology is illustrated.

The methodology described is implemented using a system operated by an insurer.

There are three other parties to the transaction being a contractor who is contracted to build a building or article, an employer that employs the contractor for the building project and a financial institution such as a bank.

For purposes of illustration the specification below will refer to the contractor being employed to build a building but it will be appreciated that many other examples of what the contractor is contracted to build could be effectively implemented using the system, such as the building of a ship, motor car, any type of machinery or any type of construction project, for example a bridge, are a few examples. Referring to Figure 1 , the figure shows a central server 10 that can be accessed via a communications module 14 and one or more communications networks (not shown).

The server 10 has a non-transitory data-storage device in the form of database 12.

The database 12 has data stored therein identifying a contractor, an employer and contract data describing a contract entered into between the contractor and the employer for a building project.

The server may also include a display 18 by which information can be displayed to a user, as well as a user interface 20 by which instructions can be input to the server 10 by a user.

A plurality of users typically access the server 10 using computers and/or mobile communications devices.

The server 10 includes a hardware processor 16 which is operably coupled to the other illustrated components and controls the operation of the server.

The processor 16 controls the system to perform method steps that will be described below.

The processor 16 accesses the database 12 and extracts information including information relating to the building project contract and to an amount payable from the employer to the contractor.

The server then transmits data from the insurer server 10 to a server of a financial institution via communications module 14.

This data includes an identification of the employer, an identification of the contractor and information relating to the building project. The data further includes guarantee data for a guarantee for an advance amount, the guarantee providing performance criteria for the contractor as well as that if the advance amount is not paid back to the financial institution by the employer or the contractor by a predefined repayment date then it will be paid to the financial institution by the insurer.

The server 10 then receives via communications module 14, payment data from the financial institutions server indicating the advance amount has been paid to the contractor by the financial institution.

The advance amount could be implemented in different scenarios, two of which will be explained in more detail below.

In a first scenario, the advance amount is paid to the contractor before or during the building project and is typically used by the contractor to fund the building project. This is referred to below as sponsored advanced discounting.

In this scenario the guarantee data is for a cash advance amount which equals at least a portion of the cost of the building project, the guarantee providing that if the cash advance amount is not paid back to the financial institution by the employer or the contractor by a predefined repayment date then it will be paid to the financial institution by the insurer.

In a second scenario, the advance amount is paid to the contractor after the building project is complete but before the end of a maintenance period during which any defects in the building project are to be rectified by the contractor. This is referred to below as sponsored retention discounting.

In the second scenario the amount payable from the employer to the contractor is a cash retention amount and is payable if the employer provides a final certificate. In either of the above scenarios, on or after the predefined repayment date, the server 10 receives a data message from the financial institution communicating whether or not repayment of the advance amount has been received by the financial institution.

On receipt of the data message, the hardware processor 16 executes program instructions to perform the following further steps.

If the data message received from the financial institution indicates that the repayment of the advance amount has not been received by the financial institution, then transmitting a data message from the server to the financial institution that the guarantee is to be implemented and transmitting a payment message from the server to make a payment of the advance amount from the insurer to the financial institution.

The above two scenarios will now be described in more detail.

In the first scenario referred to as sponsored advanced discounting, the contractor will approach the insurer to provide the financial institution, typically in the form of a bank, with the necessary guarantees to allow the bank to advance funds to the contractor.

The insurer will conduct an investigation into the contractor, building contract and the employer to determine if the insurer is willing to provide the necessary guarantee.

The investigation will typically include traditional underwriting and risk assessment procedures relating to the particular project, the employer and the contractor. This will include, but is not limited to, the following:

With regards to the project:

• Inherent risks relating to the contract program;

• Project cash flows;

• Technical specifications; • Review of the general and special conditions of contract and any qualifications thereto;

• The review of the budget and potential financial constraints;

• Health, Quality, Safety and Environmental considerations;

With regards to the Employer:

• Assess the strategic importance of the project;

• Requisite financial capability;

• Credit risk;

• The assessment of professional advisors;

With regards to the Contractor:

• CV and technical capability;

• Financial standing including credit ratings and facilities;

• Reviewing requisite skills of the project team;

• Assessing plant resources;

• Relevant accreditations;

• Capacity.

Pricing of the product will be determined based on a risk score.

If after the investigation, the insurer approves the process, a term sheet will be issued by the Insurer to the Contractor and should the Contractor accept the term sheet the necessary agreements will be concluded, such as Indemnity agreements, Suretyships, Bonds etc. The term sheet will include the respective guarantee terms and details of the Sale and Cession / Loan / similar Financial agreement. The terms of the guarantee effectively underwrites the obligations of the Contractor to the Bank. In turn, the Employer, will pay the Bank the revenue earned on fulfilment of the Contractor’s obligations.

After a positive outcome, the insurer will request the bank to advance the contractor an agreed advance payment amount on a specified contract. The bank will enter into either a Sale and Cession Agreement, with the contractor whereby the contractor sells its future revenue earning rights on a particular contract for a purchase consideration to the Bank which is underwritten by the Insurer or alternatively the Bank enters into a Loan or similar Financial agreement with the Contractor that is underwritten by the Insurer.

A purchase price“Advance payment” (Present Value of a portion of the stipulated payment amount after costs) is made to the contractor in exchange for a percentage/amount of future contract receivables to be earned through future performance by the contractor. This amount is then present valued by discounting a portion of the future contract receivable by a risk adjusted discount rate over the duration of the agreement.

This is not a debt factoring or single invoice discounting product as an existing debt is not sold. With this product future specified contract receivables are sold. Let’s assume the following:

• Contractor X is awarded a contract to build a bridge for R1 .6 bn from Employer Y over a contract duration of 24 months with a further 12 months maintenance period thereafter;

• Prior to the start of the project, The Contractors sells 10% or R160m of future revenue earning rights in terms of this project to the Bank for R150m

• The Bank will pay a R150m to the Contractor once the Insurer has completed a successful underwriting process and issued a guarantee to the Bank for R160m and has concluded a Sale and Cession agreement with the Contractor. The Employer simultaneously agrees to a cession of payments to the Bank.

• The Contractor then fulfils its performance obligations in terms of its Construction Contract with the Employer (e.g. builds the bridge). The Employer then in turn discharges its obligation by paying the Bank, in terms of the cession, the earned revenue rights on specified dates. The Sale and Cession / Loan / similar Financial Agreement will record the particular building contract, the purchase price payable and the repayment terms. The repayment terms can either be fixed amounts and dates, including a long-stop date, or based on a percentage of the certified value up to a long-stop date. This is the final date on which the amount should be repaid.

The bank may or may not have direct recourse to the contractor and hence may or may not assume the full risk and rewards of the purchased future contract receivables.

The insurer will stand as guarantor/sponsor for the gross amount of the future contract receivables in terms of the Sale and Cession / Loan / similar Financial Agreement by issuing a guarantee in favour of the Bank.

The guarantee will allow the insurer a defined period of time, for example 90 days, to resolve and rectify any default events.

The guarantee will expire by the later of either the last fixed repayment date or by the long-stop date.

The bank will typically open and operate a bank account specific to this agreement on behalf of the contractor.

The contractor will be required to instruct the employer to use this bank account for payments to be made on the contract until the advance has been repaid.

The bank will administer the payments from this account by firstly discharging the contractor’s obligations to generate the future contract receivables (repayment of the advances), secondly discharging delayed charges and lastly remitting surplus funds due to the contractor. Thus it will be appreciated that the bank pays the contractor an advance amount which will be repaid to the bank by the employer. In the event of a default by both the employer or contractor, the insurer as the guarantor /sponsor will step in to repay the bank.

In the second scenario referred to above, the contractor again approaches the insurer for an advance on what is typically refer to as a retention amount or cash retention amount.

It will be appreciated that this scenario is applicable to retention amounts remaining owing by the Employer after the issue of the taking over/work completion or such other equivalent certificate has been issued to the contractor denoting the commencement of the defects liability or maintenance period.

This retention amount is a percentage of the total building contract amount due to the contractor. The retention amount is retained by the employer .

The purpose of the retention is to ensure that the contractor performs their obligations required under the contract, and in particular relating to obligations of the contractor during the defect liability or maintenance period.

Retentions will only be released on final completion of the contract and upon receipt of a final completion certificate and final account from the employer.

Traditionally employer’s offered the payment of retentions to the contractor in lieu of a retention guarantee issued by a financial institution (Bank or Insurance company) to assist the Contractors in their respective project finance cash flows.

In this example embodiment, a retention guarantee is issued by the insurer to the bank to enable the advancing of at least a portion of the retention amount. If the contractor has not already been through the initial process as described above, the contractor will approach the insurer and the same investigation into the contractor, building contract and the employer will be conducted to determine if the insurer is willing to provide the necessary guarantee, as has been described above.

On approval, a Sale and Cession agreement or Loan or similar Financial agreement will be concluded between the contractor and the bank whilst the insurer will underwrite the financial arrangement through guaranteeing the performance of the contractor and payment by the Employer.

The insurer will therefore sponsor the contractor by issuing a guarantee to the bank, typically amounting to a portion or full amount of the future retention receivable. This amount is then present valued by discounting a portion of the future retention receivable by a risk adjusted discount rate over the duration of the defects liability or maintenance period.

The employer will be required to acknowledge the arrangement and to consent to the cession of payment on the specific contract to the bank.

Once agreed, the bank will pay the contractor a cash retention advance amount which equals at least a portion of the total cash retention amount.

The repayment of the advance in terms of the Sale and Cession / Loan / similar Financial agreement will be settled by the employer directly to the bank on the fulfilment of the contractual obligations by the contractor.

In the event that the advance amount is more than the final agreed retention amount as stipulated in the final account, or payment has not been received by the long-stop date a default event will be triggered.

The bank will allow the insurer a grace period of, for example, 90 days to remedy the default with the contractor or Employer. The insurer retains its rights in terms of the security documents (Indemnity agreements, Suretyships, Bonds etc.) to recourse in the event that the Bank exercised its right to payment under the guarantee issued by the Insurer.

The portion, as opposed to the whole, paid by the Bank under this specific contract is to allow for delays and other events that may occur in performance of the contract that can be used to cover such additional costs, fees and expenses that may be incurred.

The cession given by the contractor in favour of the bank will equal 100% of the contract specific retention receivable.

The employer will have to acknowledge and agree to the cession arrangement and that 100% of the contract specific retention receivable will be paid directly to the bank once a final certificate has been issued to the contractor.

The repayment date will be a specified date as agreed between the parties.

The bank will determine and reimburse any surplus funds due to the contractor after taking account of any further costs and fees caused through delays and other default events.

It will be appreciated that the advantages of the advance to the employer includes the following:

• The employer does not have to provide for the release of retentions on the back of a retention guarantee, after the issue of a taking over / work completion or such other equivalent certificate to assist the contractor with cash flow requirements. This therefore maintains the employer’s liquidity and project budget;

• Cession and acknowledgement from the employer will be required in favour of the bank without affecting any contractual terms with the contractor; • The employer’s project risk is reduced as the contractor’s performance is improved by the additional project liquidity secured under this arrangement.

It will be appreciated that the advantages of the advance to the contractor includes the following:

• It improves the contractor’s liquidity and hence reduces its business risks;

• Allows for the realisation of profits into cash earlier and the return to shareholders and or other stakeholders;

• Enhances overall profitability and competitiveness by securing settlement discounts;

• Allows for growth in the business and attainment of shareholder aspirations;

• Improves free cash flow;

• The cost of the facility is fully tax deductible;

• There is no amendment, other than the acknowledgement of the cession, to the contractual terms with the employer;

Claims

1 . A computer-based system of an insurer for implementing a sponsored discount payment methodology, the computer-based system comprising: a database containing data identifying a contractor, an employer and contract data describing a contract entered into between the contractor and the employer for a building project; and a hardware processor to control the system to perform the following steps: accessing the database and extracting information including information relating to the building project contract and to an amount payable from the employer to the contractor; transmitting data from the insurer to a financial institution, the data including an identification of the employer, an identification of the contractor and information relating to the building project, the data further including guarantee data for a guarantee for an advance amount, the guarantee providing performance criteria for the contractor as well as that if the advance amount is not paid back to the financial institution by the employer or the contractor by a predefined repayment date then it will be paid to the financial institution by the insurer; and receiving at the insurer payment data from the financial institution, the payment data indicating the advance amount has been paid to the contractor by the financial institution.

2. The computer-based system of claim 1 , wherein on or after the predefined repayment date, the system receives a data message from the financial institution communicating whether or not repayment of the advance amount has been received by the financial institution.

3. The computer-based system of claim 2, wherein the hardware processor executes program instructions to perform the following further steps: if the data message received from the financial institution indicates that the repayment of the advance amount has not been received by the financial institution, then transmitting a data message from the insurer to the financial institution that the guarantee is to be implemented; and transmitting a payment message from the insurer to make a payment of the advance amount from the insurer to the financial institution.

4. The computer-based system of any preceding claim wherein the amount payable from the employer to the contractor is a cash retention amount and is payable if the employer provides a final certificate.

5. The computer-based system of claim 4 wherein the guarantee data is for a cash retention advance amount which equals at least a portion of the cash retention amount, the guarantee providing that if the cash retention advance amount is not paid back to the financial institution by the employer or the contractor by a predefined repayment date then it will be paid to the financial institution by the insurer.

6. The computer-based system of claim 3 wherein the guarantee data is for a cash advance amount which equals at least a portion of the cost of the building project, the guarantee providing that if the cash advance amount is not paid back to the financial institution by the employer or the contractor by a predefined repayment date then it will be paid to the financial institution by the insurer.