The surety bonds are designed to provide financial stability and confidence by ensuring that contractual obligations are met. They have the potential to unlock the capital that usually gets blocked in bank guarantees during infrastructure project financing while simultaneously maintaining the confidence of project owners. Additionally, by moving the risks of long-term infrastructure project financing away from banks to insurance companies, i.e. entities which do not rely on public deposits to fulfil these obligations, there is better allocation of risk in the economy. In this way, surety bonds are expected to take risk away from banks and protect the taxpayers from the loss of public funds.
This paper examines the nature of this new instrument including its difference from traditional instruments as well as challenges voiced by stakeholders. It identifies four key issues based on engagement with relevant stakeholders and suggests the way forward for resolving the same.
