Free Courses Sale ends Soon, Get It Now


INSURANCE SURETY BOND

14th November, 2023

INSURANCE SURETY BOND

Copyright infringement not intended

Picture Courtesy: www.hiscox.com

Context: The National Highways Authority of India (NHAI) adopted an innovative strategy, allowing Insurance Surety Bonds as Bank Guarantees for Toll Operate Transfer (TOT) Bundle monetization, a groundbreaking move in the road infrastructure sector.

Details

  • The National Highways Authority of India (NHAI) is set to utilize an innovative financial instrument, the Insurance Surety Bond, for the monetization program of the Toll Operate Transfer (TOT) Bundle.
  • This marks a departure from traditional Bank Guarantees (BGs) and introduces a new method of financial assurance for bidders in the road infrastructure sector.

Collaboration and Stakeholders

  • NHAI has collaborated with various entities to implement this initiative. These include the Highway Operators Association of India (HOAI), SBI General Insurance, and AON India Insurance.
  • This collaboration underscores the importance of partnerships between government bodies, insurance companies, and industry associations to bring about financial innovations in infrastructure development.

Insurance Surety Bond Details

  • The Insurance Surety Bond has been issued at a rate of 0.25% by the insurer without requiring any margin money from the Concessionaires.
  • This low rate and the absence of margin money are designed to result in significant cost savings for the entities participating in the bid process.

Cost Savings and Liquidity Enhancement

  • The use of Insurance Surety Bonds is expected to translate into substantial cost savings for Concessionaires.
  • By reducing financial burdens on bidders, this initiative aims to enhance liquidity in the market, creating a more favourable environment for the growth and development of the road sector.

Industry Benchmark and Private Participation

  • The adoption of Insurance Surety Bonds is positioned to set a new benchmark for the industry, emphasizing the role of innovative financial solutions in the road infrastructure development landscape.
  • This move is anticipated to encourage private participation in the highway sector by providing an alternative to traditional Bank Guarantees.

Scope for Insurance Companies

  • NHAI has received a significant volume of Bank Guarantees (BGs) since 2022, amounting to Rs. 15,000 crore.
  • The initiative to use Insurance Surety Bonds presents a substantial opportunity for insurance companies. The wider adoption of these bonds is expected to increase the availability of capital for road projects.

Government Recognition and 'Ease of Doing Business'

  • The Ministry of Finance, Government of India, has recognized e-BG and Insurance Surety Bonds at par with Bank Guarantees for all government procurements.
  • This official recognition is likely to instil confidence in the use of these instruments, facilitating the 'Ease of Doing Business' in the road infrastructure sector.

Positive Economic Impact

  • The introduction of innovative financial instruments like Insurance Surety Bonds is expected to have a positive cascading impact on the Indian economy.
  • Strengthening National Highway Infrastructure development is highlighted as a key outcome, emphasizing the role of such initiatives in broader economic development.

Conclusion

  • NHAI's acceptance of Insurance Surety Bonds represents a strategic move to enhance liquidity, reduce financial burdens on bidders, encourage private participation, and set a new industry benchmark for innovative financing in the road infrastructure sector. This initiative is expected to have far-reaching positive effects on both the industry and the broader Indian economy.

Must Read Articles:

Insurance Surety Bonds: https://www.iasgyan.in/daily-current-affairs/insurance-surety-bonds 

Surety Bond Insurance: https://www.iasgyan.in/daily-current-affairs/surety-bond-insurance

TOT MODEL: https://www.iasgyan.in/daily-current-affairs/tot-model#:~:text=The%20Toll%20Operate%20Transfer%20(TOT)%20model%20is%20a%20financing%20technique,transferred%20back%20to%20the%20government.

PRACTICE QUESTION

Q. How has infrastructure financing evolved in India over the past decade, and what key strategies or mechanisms are being implemented to address challenges and promote sustainable development in the country's infrastructure sector?