The National Highways Authority of India (NHAI) has proposed insurance cover for road projects, in a step that could help bring in credible project developers and mitigate construction period risks. This mechanism has been proposed since banks are facing difficulties in furnishing bank guarantees, as per NHAI officials, as reported by the Economic Times.
Union minister Nitin Gadkari said he wants road projects to be brought under the ambit of insurance. NHAI is working on the concept of surety bonds, commonplace in several countries, including the US, UK, Australia, and Canada.
A surety bond is a three-party agreement that legally binds together a principal who needs the bond, an obligee who requires the bond, and a surety company that sells the bond. Surety bonds provide a financial guarantee that contracts will be completed according to pre-defined and mutual terms. When a principal breaks a bond’s terms, the harmed party can make a claim on the bond to recover losses.
While IRDA is yet to form an instrument for such a guarantee, the surety could mean huge business for insurance companies in India. Private investors are most wary of construction period risks, which is the main reason why projects are stalled. Surety bonds can help mitigate these risks, ensuring timely completion of projects, market watchers said.