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.