T

he government now has another way to guarantee that public infrastructure contractors will not run away from their responsibility to finish projects as it has authorized an insurance consortium to issue surety bonds for the projects.

Sumito, the Public Works and Public Housing Ministry'€™s head of the state property management and procurement services bureau, said that the consortium was authorized by the Financial Services Authority (OJK).

'€œThe consortium is one answer for us as we seek ways to ensure the completion of projects that are in the public interest,'€ he said recently after a seminar on the consortium'€™s establishment.

The new business entity was created under Ministerial Regulation No. 31/2015 on Standards and Principles of Procurement in Construction Projects and Consultancy Services. Article 4 of the regulation stipulates that surety bonds for projects worth more than Rp 2.5 billion (US$186,500) can be issued by banks, insurance companies, surety companies or insurance consortiums.

The consortium comprises several insurance companies that combine pool capital to issue surety bonds for the obligee, in this case the ministry or regional administration, to ensure that the principal, which is the contractor appointed for the infrastructure projects, can finish their work according to the contract.

'€œPreviously, our options were limited to bank guarantees,'€ said Sumito.

According to Dumoly Pardede, the OJK'€™s deputy commissioner for the supervision of the non-banking industry, surety bonds issued by the consortium would differ from bank guarantees in numerous points.

A surety bond is a three-party agreement that legally binds together a principal who needs the bond, an obligee who demands the bond and an insurance company that sells the bond. By contrast, a bank guarantee is solely signed by the bank.

Contractors may put up 0 percent of collateral for the bond, but they have to provide 100 percent for the bank guarantee. A surety bond'€™s effective date is according to the agreement, but a guarantee is usually only for a year. Risks in bonds are reassured by reassurance companies, but in guarantees, risks are borne solely by the contractor.

'€œSince it'€™s a consortium, there are more companies, which means more capacity to ensure that claims are paid,'€ Dumoly said at the seminar.

'€œThe three-party agreement also obliges the consortium to study the processes of a project comprehensively, so that in the event of a dispute, the relevant parties that need information can easily get it from the consortium,'€ he added.

However, the OJK is still in the process of setting the standards for terms and conditions concerning the disbursement of claims, the definition of '€œunconditional'€ characteristics of the surety bond and the dispute settlement mechanism, among others.

Nevertheless, contractors and the government could already start using surety bond for projects, as the legality and functions of the consortium are already approved by the OJK. (rbk)