Understanding surety bonds for infrastructure projects
A surety bond is a three-party agreement that protects project owners from financial loss. The surety bond issuer will promise to compensate the beneficiary (such as a government entity) if the issuer’s client (often a contractor) fails to fulfill their contractual obligations. Surety bonds are tightly regulated, especially in markets like France, and create the confidence needed for large infrastructure projects to go forward. They act as a safety net signaling to project owners that a contractor is credible and financially stable.
A bond issuer like Allianz Trade can come in at different phases of the project, each requiring a different type of guarantee:
- The starting point is typically a bid bond, issued for companies competing to win a major contract. Usually representing 1% to 5% of the project value, it signals to the project owner that bidders are serious and won’t withdraw from the project after months of evaluation.
- Performance bonds are the core product. These bonds assure project owners that work will be completed as specified. If we take the example of a company deploying submarine fiber optic cables across the Atlantic, that means guaranteeing both the cable’s construction on land and its successful deployment across thousands of kilometers of ocean floor. For very large projects, this bond can be syndicated, with different issuers covering a percentage.
- Retention bonds come into play at project completion. With this guarantee, the contractor can receive the last 5% of the total payment early, instead of waiting for the guarantee to be released 12-18 months later. This frees up the contractor’s cash flow while protecting the project owner.
Real-world impact: current and emerging infrastructure scenarios
France’s national fiber deployment program is an ambitious, years-long infrastructure project that is nearing its completion in 2025. When one local government recently delegated fiber network construction to a private operator, Allianz Trade committed to issuing multiple guarantees spanning the project’s entire lifecycle. During the initial five-year construction phase, our performance bond ensures that the network reaches every street and building as specified. Once operational, we put in place a renewable guarantee covering a 20-year concession period to ensure the network continues to work and be maintained. This layered support means authorities can confidently invest in critical digital infrastructure and award projects to local contractors without bearing excessive financial risk.
In another example, we supported an infrastructure project owned by an investment fund. The fund was backing a co-living development, a type of project that’s becoming increasingly common. These managed residences offer hotel-like services and are popular with students and young professionals. When an investment fund buys a new co-living development, they may pay only 15% upfront to developers, and the remaining 85% upon completion three years later. Our payment guarantee protected the developers, ensuring they would receive full compensation even if the fund had difficulty paying.
Looking ahead, we expect several trends to reshape infrastructure investments and our role within them. One example is renewable energy. Every major investment fund now maintains a dedicated renewable energy division, for example to fund wind farms or solar installations. We work alongside these funds, providing guarantees that make large-scale renewable energy projects financially safe.
Supporting emerging projects in a changing world
Infrastructure projects will only accelerate. Whether connecting continents with data cables, bringing high-speed internet to new communities, building next-generation housing, or enabling the shift to renewable energy, these projects require sophisticated financial guarantees to succeed.
Allianz Trade has a long history of supporting infrastructure projects. We also have the global footprint and local know-how that’s needed to provide robust solutions in a changing world. We’re present in 40 countries worldwide, and our AA rating from Standard and Poor’s, a premier credit rating agency, provides credibility in the market.
Beyond our footprint and credit quality, our integrated-team approach sets us apart. We’ve structured our operations so commercial account managers, risk underwriters, legal experts and contract and bond administration services work together from day one on major requests. This enables a uniquely responsive service where a complex guarantee package can be ready in a couple of weeks. It’s all part of how we help our customers across industries adapt to evolving demands, providing them with the best possible support so that they can grow with confidence.
