Public-private partnerships (P3s) will back many of the most important projects in the years ahead and some concessionaires have chosen to adopt what is known as the European or Canadian model, which focuses on guarantees in the form of letters of credit and liquidity. Even within the insurance industry, some are trying to make bonds look more like LOCs. This is very troubling.
The U.S. infrastructure has always been supported by surety bonds. As a purist, I believe that if we choose to use P3 as a procurement method, we should use surety bonding as the most effective way to guarantee payment of subcontractors and suppliers and completion of contracts. Adaptable, flexible and current, surety is a unique insurance product that hinges on some very basic tried-and-true principles. Why should we adopt a model that provides inferior protection when history has shown that even the biggest of contractors can occasionally default?
If LOCs had been the protection, many financial entities would have suffered greater losses, fewer projects would have been completed and the taxpayers would surely have been left holding the bag. Instead, the surety industry created and financed a new limited liability company, worked closely with the banks and funded completion of over $1 billion in projects, including transit cars used all around the U.S. Since then, other heavy civil contractors have failed. And recently we've seen electrical subcontractor Truland Group's sudden bankruptcy and liquidation.
Security Is Provided
Simply put, performance and payment bonds provide security.
Some people think that we need to make surety bonds perform like LOCs, but bonds provide much more than LOCs ever will. LOCs, for example, make a small percentage of money available on demand. Surety bonds not only focus on financing troubled or insolvent contractors so they can finish their obligations, but also guarantee payments to subcontractors. Those subcontractors and suppliers make those claims directly on the surety bond; they have absolutely no rights against the LOC. An added benefit of surety is that surety companies expand the ability of contractors to pursue work, partly because surety credit is an off- balance-sheet transaction. In the U.S., LOCs are an on-balance-sheet transaction that is more costly to the contractor than bonding.
Surety companies do not risk their balance sheets in making these guarantees until after a thorough underwriting process, through which sureties prequalify contractors, ensuring they have the capital, capacity and character to complete the work. If the bonded contractor runs into trouble, the surety often steps in to prevent a default and keep the project moving.
But here's the issue: A surety cannot scream from the top of a scaffolded building or an uncompleted bridge that the contractor is having financial difficulty and the surety is financing the contract completion or paying the contractor's bills. More often than not, the surety is working behind the scenes to assess the contractor's entire backlog and understand what is going on with not only one project but all the projects a contractor has undertaken. To do this, surety companies have a secret weapon—the claims department. Its professionals are investigating allegations every day, looking into contractors' financials, meeting payroll for troubled firms, paying bills and working toward completing troubled projects.
No other risk-management product provides all of these benefits. While surety bonding may not be a perfect solution, it has always been and continues to be the best in the U.S. It is in our national and public interest to make sure that if we are working with taxpayer dollars and public assets, projects get completed and workers get paid. There is no need to create another product; the best one already exists.
Joanne S. Brooks is vice president and counsel of the Surety & Fidelity Association of America. She can be reached at email@example.com.