The road transport and highways ministry will launch a maiden surety product by general companies for highway contractors on December 19, the minister of state for road transport and highways said on Thursday.
The ministry had asked the Regulatory and Developmental Authority of India IRDAI to investigate the feasibility of these. On December 19, our ministry is launching India's first surety bond insurance product. Gadkari spoke at the Confederation of Indian Industry's Global Economic Policy Summit, which is going to give a good relief to the contractors.
A sizable amount of the project funds of contractors do not get frozen because of the guarantees of payment issued by insurers. The idea was initially pushed by the Centre as it became acute during the Covid 19 crisis because of the capital-intensive infrastructure sector.
The surety bonds will help in boosting the liquidity in the infrastructure sector by freeing workers' working capital from bank guarantees. Gakdari said contractors can use these funds for growth of their business.
In 2020, a nine-member committee was formed to study the legal framework and suitability of the Indian insurance industry or any other sector to offer bonds. The regulatory framework did not allow the underwriting of bonds related to performance securities and bid securities, as they did not come under the ambit of conventional insurance products.
Gadkari had met insurance executives in June and sought their help to develop a model product that could be offered to highway developers. Amendments are required in the Insolvency and Bankruptcy Code and in the Indian Contract Act.
Highway developers are concerned with the issue of liquidity. The government announced a number of measures to provide financial relief to contractors as funds became scarce during the Covid-induced economic slowdown.
The pace of construction of highways has fallen this fiscal year, and Gadkari admitted that the Centre may only be able to meet last year's construction numbers in FY 23, which is much less than the ministry's actual target of 12,000 -- 14,000 kilometres kms and its aspirational goal of 18,000 kms.
The Centre extended these Covid relief measures until April 2023. It allows breathing space for developers, but it has diluted the competition with several non-serious players making low bids for projects.
The Centre needs to make sure that only serious and decent players remain in the market. A lot of small players have entered the market during Covid, a Mumbai-based analyst said.