In today’s complex business landscape, ensuring trust and reliability is paramount. Whether a company is engaging in construction, mining, logistics, hospitality, institutions of higher learning, property developers, fuel, power, or energy providing services or entering large contracts, the assurance that contractual obligations will be met is critical.
According to Sizakele Mbatha, surety manager at Aon South Africa, this is where surety/guarantees/ bonds come into play, offering a robust mechanism to safeguard interests and uphold commitments.“Surety, at its core, involves a promise by a contractor to assume responsibility as contractually agreed. A surety/bond is a tripartite agreement that binds together the principal (contractor) and the obligee (the project owner) with the guarantor (insurer and/or bank), providing a guarantee that the principal will execute and complete the project timeously as agreed and according to contract specifications.”
The importance of bonds for business
At its most basic level, it’s about building trust, enhancing a business’s credibility and signalling to clients and partners that the business is reliable and committed to fulfilling its obligations. “This is achieved by offering the project owner a safety net that allows the business to be indemnified for the failure of the contractor to complete the work thus mitigating potential financial losses,” Sizakele explains. When applying for a bond, the business in question (principal) would need to prove to the guarantor that they are a worthwhile risk to back. To ascertain the principal company’s ability to successfully undertake the task at hand, the guarantor will look at the company’s profile, past completed projects, project pipeline, audited financial statements, management accounts as well as the contract that they are bidding for.“Businesses with bonds have a competitive advantage as it allows the business to bid on larger and more lucrative projects, setting them apart from competitors who may not have the backing provided by bonds issued by an independent third-party insurer or bank. And because the process of setting up a guarantee facility requires a thorough evaluation of the principal’s financial strength, operations and history, this itself signifies financial stability and governance, and compels the principal to maintain strong financial practices,” says Sizakele.
Which industries stand to benefit from this solution?
The list of industry sectors includes, but is not limited to:- Renewable Energy: With rising electricity demands, many countries are turning to clean energy to meet this need, reduce carbon emissions, promote ESG goals, realise long-term cost savings, reliable power supply which will ensure business continuity. These projects require various guarantees as security for different project stages such as bid bonds, preferred bidder bonds, performance bonds, advance payment bonds, maintenance bonds, operation and maintenance bonds, decommissioning bonds, early termination bonds and so on.
- Mining Rehabilitation Guarantees: The National Environmental Management Act, 1998 (NEMA), prescribes that mining companies must provide for land rehabilitation at the end of a mine’s life. This can be achieved using a section 37A trust, a bank guarantee, cash deposited with the Department of Mineral Resources or insurance guarantees issued by approved DMRE insurers.
- Construction: Guarantees are prevalent in the construction industry, regardless of the contract type (e.g., FIDIC, NEC, GCC, JBCC). Each contract type has specific guarantee wordings applicable to agreements between the principal and the obligee. The predominant type of guarantee includes bid bond, Advance payment bond, performance bond, retention bond or maintenance bond.
- Customs & Excise: The South African Revenue Services (SARS) requires guarantees as security against deferment liability for VAT/Duty on imported goods. These are essential for freight forwarders, logistic companies and transporters and include bonded warehouse bonds, deferment bonds, temporary importation bonds and airline bonds.
