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NHAI moves IRDA proposing insurance of road projects

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.

, ET Bureau|
Last Updated: Jan 29, 2020, 08.04 AM IST
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New Delhi: 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.

“We are trying that insurance companies should also give a surety,” an official close to the development told ET. “We have proposed to the Insurance Regulatory and Development Authority of India (IRDAI) to come up with an instrument.” This mechanism has been proposed since banks are facing difficulties in furnishing bank guarantees, the official said, requesting not to be named.

“This is a new instrument we are working on. We want that the performance obligation of concessionaires is brought under insurance,” a second official said. Union minister Nitin Gadkari on Tuesday 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. “World over, we have the concept of surety bonds. We are trying to bring that concept to India,” the first official said.

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 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 IRDAI is yet to form an instrument for such guarantee, surety could mean huge business for insurance companies in India, one of the officials quoted earlier said. 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.

“With these bonds, the government is trying to make road projects more amenable to private-sector financing,” said Arindam Guha, partner and lead government and public sector, Deloitte India. “The government will be able to guard against faulty developers through these bonds,” Guha said.
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