Economic Value of Surety Bonds

The Surety Association of Canada is pleased to announce the publication of The Economic Value of Surety Bonds in Canada; which assesses the impact of construction surety bonds on the overall economy across the country.  The study was carried out by The Canadian Centre for Economic Analysis (CANCEA), an Ontario-based socio-economic research and data firm.  CANCEA provides objective, independent and strictly evidence-based analysis dedicated to a comprehensive, collaborative and quantitative understanding of the short- and long-term risks and returns behind market changes, policy decisions and economic outcomes.

During the course of the study, CANCEA reviewed more than 150,000 bonded projects completed over the last 20 years by more than 10,000 construction firms.  It examined the economic ripple effect of more than 3,000 contractor defaults and analyzed the impact that surety protection has on key performance indicators such as GDP, job creation and revenue generation/recovery.  The findings confirm the value proposition of public sector bonding to taxpayers by way of strengthening the broader economy and bringing stability and certainty to the public construction process.  Below is a summary of the highlights:

The Value of a Surety’s Due-Diligence

A non-bonded construction enterprise is 10 times more likely to become insolvent than bonded companies.  This serves to illustrate the effectiveness of the surety risk selection process in ensuring that only qualified firms are permitted to undertake public work and the consequent economic benefits that result from this certainty around the construction delivery process.

Protection of GDP

Even in the current stable construction environment with microscopic interest rates and insolvencies at a 35-year low, surety bonds protect $3.5 million of GDP for every $1 million of premium paid on public infrastructure.  In more volatile times, this impact is magnified.  In the early 1990s when the rate of construction insolvencies spiked to 6 times their current levels, surety bonds protected approximately $25 million for every $1 million in premium paid.

Protection of Jobs/Wages

Under current economic conditions surety bonds will protect approximately 25 full time jobs or $1.5 million in wages for every $1 million in premium paid.  In the tumultuous early 90s, $1 million in surety premium on public projects protected about 200 full time jobs or $12 million in wages.

Fiscally Responsible: Revenue Recovery on Premiums Paid

The CANCEA study has determined that some or all of the premium paid by the government for bonds on public work can be recovered through the tax revenue generated from the timeliness and certainty of the completion of the bonded asset.  The analysis demonstrates that even under status quo economic conditions, governments will recover $0.40 in tax revenue for every dollar paid out in premium.  In a high-risk economic environment such as seen in the early 90s, governments show a net gain, recovering $3.00 in tax revenue for every premium dollar spent.

The study demonstrates that the size and scope of the economic benefits generated are largely dependent upon the extent to which bonds are used to protect construction risk on public infrastructure.  The optimum benefits are realized when 100% of public work is protected by performance and payment bonds.