In the run-up to the Budget, expectations were high that the government would ramp up spending on infrastructure. And the Budget delivered well on this. Equally significant were the announcements on surety bonds as a replacement for bank guarantees, and a complete online e-bill system in central government procurement .

The government plans to incur capital expenditure (capex) of ₹7.5 lakh crore in 2022-23, a quarter more than the ₹6 lakh crore (revised estimate) expected to be spent in the current financial year. A large part of this will go to key infrastructure segments such as roads, highways and railways. In addition, the outlay for financial assistance to states for capex has been raised manifold to ₹1 lakh crore for 2022-23.

Road to growth

Roads and highways are among the government’s key focus areas under the National Infrastructure Pipeline. Accordingly, the allocation to the Ministry of Road Transport & Highways was raised by 55 per cent to ₹1.88 lakh crore (capex) for 2022-23, a chunk of which will go to NHAI. The planned expansion of the national highway network by 25,000 kms in 2022-23 can boost the order inflow of companies such as KNR Constructions, PNC Infratech and G R Infraprojects and Larsen & Toubro.

After the outbreak of the pandemic, the government had introduced several measures such as part payment within a specified period to ease the pressure on cash flows for infrastructure companies. Now, the Budget has announced the launch of an end-to-end online e-bill system that central government ministries must use for procurement. This can bring down payment delays and thereby, ease the working capital requirements of infrastructure companies, especially the smaller ones.

Surety bonds, funding

While restricted not only to infrastructure projects, the Finance Minister’s announcement on permitting the use of surety bonds instead of bank guarantees (BGs) in government procurement can offer much relief to small and medium entities engaged in such contracts. The insurance sector regulator, IRDAI’s guidelines on surety bonds come into effect from April 1, 2022. BGs ensure that if a contractor fails to meet his obligations, then the bank will step in to compensate the project owner, that is, the government in case of most infrastructure projects.

As highlighted in an IRDAI report, due to reluctance on part of banks, many contractors engaged in civil infrastructure projects have faced difficulties in getting BGs which can be a pre-condition for getting awarded projects. Moreover, a contractor must pledge certain assets as collateral to secure a BG. Surety bonds, which are issued by insurance companies can be a feasible and cheaper (no collateral needed) alternative.

3 points:

Higher order inflow for construction companies

Surety bonds as replacement for bank guarantees

Faster payment in government contracts