Surety Bonds Insurance Product for Infrastructure Sector

December 9, 2022

The Union Ministry of Road Transport and Highways is set to launch India’s first-ever surety bonds insurance product for highway contractors on December 19 this year. This comes two years after the union ministry directed the Insurance Regulatory and Developmental Authority of India (IRDAI) to explore the feasibility of surety bonds.

What are surety bonds?

Surety bond is a three-way agreement between the principal, surety and obligee. The surety is a company that provides the financial guarantee to the obligee (usually a government entity) that the principal (business owner) will fulfil their obligations. A principal’s obligations mean complying with state laws and regulations concerning specific business licenses, or meeting the terms of a construction contract, depending on the type of surety bond. If the principal fails to comply with the obligations, the obligee can file a claim against the bond to recover any damages or losses incurred. The surety is required to pay reparation that cannot exceed the bond amount. This makes surety bonds a risk transfer mechanism.

Surety bonds are not as same as corporate bonds and financial guarantees. They refer to the performance or delivery obligations to complete the insured object. Corporate bonds refer to financial obligations to repay debts or loans.

Why are surety bond insurance products introduced for highway contractors?

The general insurance companies will issue the first-ever surety bonds insurance products for highway contractors.
The new mechanism will help boost liquidity in the infrastructure sector by freeing up the working capital of the constructors that are stuck as bank guarantees.
These funds can be used by contractors to expand their business and further boost the infrastructure of the country.
This will help address the challenges associated with highway construction.
The current fiscal year witnessed a decline in the pace of highway construction. The central Government may be able to meet only the last fiscal’s construction targets in financial year 2023, which is lesser than the ministry’s actual target of 12,000 to 14,000 km.

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