Ministry of Road Transport and Highways allows e-bank guarantee, insurance surety bonds as bid, performance security for projects

The Ministry of Road Transport and Highways (MoRTH) on Wednesday said it has allowed acceptance of e-bank guarantee and insurance surety bonds as 'bid security' and 'performance security' in standard documents of engineering, procurement, and construction (EPC), hybrid annuity model (HAM) and BOT (Toll) projects.

Recently, Union Minister Nitin Gadkari has said the finance ministry has agreed to allow contractors engaged by state-owned NHAI and NHIDCL to convert their bank guarantees into insurance surety bonds.

"After the amendments done by Department of Expenditure in GFR 2017 relating to inclusion of e-bank guarantee and insurance surety bonds as means to accept 'bid security' and 'performance security', this ministry has approved the changes in necessary clauses in the standard documents (RFP and MCA) of EPC, HAM and BOT (Toll)modes," MoRTH said in a circular.

Gadkari had recently said changes will be made to the surety bond offering to make it more lucrative as no contractor is buying it because of the strict conditions imposed by insurance regulator Irdai.

"For all the existing contracts - including road development, toll contracts, ropewaysand any other contract wherein Ministry has prescribed a BG - any instrument of bid security / performance security may be replaced by insurance surety bond as peravailability," MoRTH added.

Further, the ministry said if bank guarantee is being taken as bid security or performancesecurity and it is not possible to furnish the same in the form of e-bank guarantee,physicat BG can be accepted.

Last year in December, Gadkari launched the country's first-ever surety bond insurance product with an aim to reduce the dependence on infrastructure developers on bank guarantees.

The product, from the stable of Bajaj Allianz General Insurance, has been developed in response to a demand by the industry and the government.

The surety bond insurance is a risk transfer tool for the principal, and shields the principal from the losses that may arise in case the contractor fails to perform his contractual obligation.

The product gives the principal a contract of guarantee that contractual terms and other business deals will be concluded in accordance with the mutually agreed terms.

In case the contractor doesn't fulfil the contractual terms, the principal can raise a claim on the surety bond and recover the losses they have incurred.

Unlike a bank guarantee, the surety bond insurance does not require large collateral from the contractor, thus freeing up significant funds for the contractor, which they can utilise for the growth of the business.

Recently, Irdai relaxed norms for surety bonds, a type of insurance policy protecting parties involved in a transaction or contract from potential financial losses due to a breach of contract or other types of non-performance.

The changes are aimed at expanding the surety insurance market by increasing the availability of such products.