Govt to launch first surety bonds for road contractors on December 19

Will provide relief to contractors, free working capital stuck in bank guarantees, says Gadkari

The road transport and highways ministry will launch the maiden surety bonds insurance product by general insurance companies for highway contractors on December 19, Union Minister Nitin Gadkari said on Thursday.

The announcement comes two years after the ministry had requested the Insurance Regulatory and Developmental Authority of India (IRDAI) to explore the feasibility of these bonds.

“On December 19, our ministry is launching India's first-ever surety bond insurance product...that is going to give a good relief to the contractors,” Gadkari said addressing the Confederation of Indian Industry’s Global Economic Policy Summit.

Surety bonds are guarantees of payment issued by insurers, but different from bank guarantees in that a sizable amount of the project funds of contractors do not get frozen. The Centre had first pushed for the idea as liquidity with the infrastructure sector, which is capital-intensive, became acute during the Covid-19 crisis.

“The surety bonds will help in boosting the liquidity in the infrastructure sector by freeing the contractors' working capital stuck in bank guarantees. Contractors can utilise these funds for growth of their business,” Gakdari said.

In 2020, Irdai had formed a nine-member committee to study the legal framework and suitability of the Indian insurance industry or any other sector to offer such bonds. So far, the regulatory framework did not allow underwriting of bonds related to performance securities and bid securities as they did not come under the ambit of conventional insurance products.

Gadkari had reportedly also met insurance executives in June and sought their assistance to develop a model product that could be offered to highway developers. Some of the legal issues entail amendments required in the Indian Contract Act and the Insolvency and Bankruptcy Code.

Liquidity continues to be an issue for highway developers. The government had announced a slew of measures to provide financial relief to contractors as funds became scarce during the Covid-induced economic slowdown. 

The pace of construction of highways has fallen this fiscal year, and Gadkari has admitted that the Centre may only be able to meet last year’s construction numbers in FY23, which is much lower than the ministry’s actual target of 12,000-14,000 kilometres (kms) and its aspirational aim of 18,000 kms.

Recently, the Centre also extended these Covid relief measures till April 2023. While it allows breathing space to developers, it has diluted the competition with several non-serious players making abnormally low bids for projects.

“The Centre needs to ensure that only serious and decently large players remain in the market. A lot of small players have entered in the market during Covid,” a Mumbai-based analyst said.