Context
Insurance companies have issued approximately 700 insurance surety bonds valued at around ₹3,000 crore.
- In November 2023, NHAI decided to accept insurance surety bonds as part of the monetization program for an upcoming Toll Operate Transfer (TOT) package bid.
Toll Operate Transfer (TOT)
- This model was introduced by the government of India.
- Objective: To manage public – funded projects efficiently and enhance development of Infrastructure.
- Operational Framework: Under TOT, operational projects, which have been running for at least two years, are put up for bidding.
- PPP Model: Projects under TOT emphasise collaboration between private sector entities and the government.
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- It was the first time anyone used these bonds like a bank guarantee for road projects.
- NHAI has received a total of 164 insurance surety bonds.
- Among these, 20 bonds are designated for performance security, while 144 are for bid securities.
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About Surety Bonds
- A surety bond is a method for transferring risk where an insurance company provides a guarantee to a beneficiary or obligee.
- It is a legally binding three party contract.
- This guarantee ensures that the principal or contractor will fulfill their contractual obligations.
- If the principal fails to deliver, the insurer compensates the obligee with monetary payment.
- Parties Involved:
- The Surety:
- The insurance company, like SBI General, offers the financial guarantee to the obligee.
- Obligee or Beneficiary:
- Examples include the government or infrastructure development authorities.
- They are the ones who require the surety bond and typically benefit from it.
- Principal:
- This could be the owner or contractor.
- The principal purchases the surety bond from an insurer as a guarantee.
- They commit to fulfilling their obligations as per the contract they’ve entered into.
| Feature |
Benefit |
Drawback |
| Financial Guarantee |
- Protects the party receiving a service (obligee) from losing money if the party providing the service (principal) fails to fulfill their contractual obligations.
- This could involve completing a project, following regulations, or providing a refund.
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- Can be expensive for the principal to obtain, especially if they have poor credit or the bond amount is large.
- The cost is typically a percentage of the bond amount.
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| Increased Trust
and Credibility |
- Signals to the obligee that the principal is a reputable business and is committed to fulfilling their contractual agreements.
- This can be particularly important when dealing with unknown companies or for projects requiring significant financial investment.
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- This Does not guarantee the quality of the work performed by the principal.
- It simply ensures that the project will be completed, or that the obligee will be financially compensated if not.
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| Facilitates Business Opportunities |
- May be required by law or regulation in order to obtain licenses, permits, or contracts, especially in industries like construction, finance, or where handling public funds is involved.
- Having a surety bond can give businesses a competitive edge by demonstrating financial responsibility.
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- Obtaining a bond can be a time-consuming process.
- The surety company will assess the principal’s financial health and risk profile before issuing a bond, which may involve submitting financial statements and undergoing credit checks.
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| Faster Project Completion |
- In the event that the principal defaults on their obligations, the surety company will step in and take necessary steps to ensure the project is finished.
- This minimizes delays and disruptions for the obligee.
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- The principal may be subject to a detailed financial evaluation by the surety company (underwriting review) before a bond is issued.
- This can involve disclosing financial information that may not be readily available.
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| Security to all parties |
- Provides a sense of security for all parties involved in the agreement.
- The obligee knows they will be financially compensated if the principal defaults.
- The surety company has a system for vetting principals to minimize the risk of having to pay out claims.
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- The claims process for recovering funds from a surety bond can be complex and time-consuming, especially if there is a dispute between the obligee and the principal regarding the validity of the claim.
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