 "National Highways, NHAI")
In an effort to alleviate liquidity difficulties in the construction sector, the National Highways Authority of India (NHAI) is advocating for the adoption of surety bond insurance products for highway projects. The highway authority extended an invitation to stakeholders on Thursday for a discussion to hasten the integration of these bonds, aiming to address the delays in financial closure of highway projects.
The session was presided over by top officials from NHAI and the Department of Financial Services (Ministry of Finance) and was attended by representatives from various insurance companies, contractors, industry experts, and senior officials, according to a statement from the Ministry of Road Transport and Highways (MoRTH).
Union Minister Nitin Gadkari inaugurated the first surety bond insurance product by Bajaj Allianz General Insurance Company last December. Although it was introduced with the expectation that construction companies could utilise the liquidity to complete highway projects on schedule, several issues have hindered the adoption of this product by financial institutions.
"NHAI has urged insurance companies and contractors to consider the use of Insurance Surety Bonds as an additional method for submitting Bid Security and/or Performance Security Deposit. The Insurance Surety Bonds, once issued, would be cost-effective and furnish sufficient security for NHAI projects," the statement read.
Insurance Surety Bonds act as instruments where insurance companies function as the 'Surety,' offering a financial guarantee that the contractor will meet its obligation according to agreed terms. The Centre recently equated surety bonds with bank guarantees, aiming to replace them. The global surety bond market is valued at $29.5 billion.
Contractors have expressed concerns over bank guarantees, mainly due to the escalating collateral requirements by banks and the immobilisation of otherwise accessible working capital in bank guarantees (BGs), jeopardising the survival of these companies and, consequently, their projects.
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India is projected to become the world's third-largest construction market, according to government estimates. The infrastructure sector alone may need an estimated Rs 2.70 lakh crore of BGs in 2023, anticipated to grow by 6 to 8 per cent on a year-on-year basis. Replacing BGs with surety bonds could offer capital relief of up to Rs 50,000 crore to Indian contractors.
Nonetheless, several barriers are undermining the Centre's initiative. Officials have stated that insurers are apprehensive about repayments, particularly since the Bankruptcy Code does not acknowledge the rights of insurers on equal terms with financial creditors (FCs).
Insurers also lack the diverse recovery avenues that banks have, contributing to their hesitation in adopting these insurance products. Uncertainty in legal frameworks further exacerbates the issue, said an official familiar with the matter.
Among the solutions being explored by NHAI is the obligatory periodic sharing of previous term sheets and total exposure, duly authenticated by contractors, and the fortification of support mechanisms under the IRDAI regulatory framework.
New India Assurance Company was the second insurer in India to introduce these bonds. Several other insurers are eyeing this new market but are waiting for policy and regulatory clarity before making a move, sources revealed.
