Two years after the promulgation of the Independent Resource Plan (IRP) 2010 by the Department of Energy,
South Africa’s bourgeoning renewable-energy sector has attracted sizeable global investments into the country.

According to the Financial Times, the South African sector drew more than $15-billion dollars in investment in 2012, up from a few tens of millions in 2011. One of the more recent investments was made by computer software and Web search engine company Google which finalised its first renewable-energy deal in Africa with a R12-million investment in several solar power projects being built in South Africa.

“Public–private partnerships will play a significant role in achieving the country’s envisaged goal of generating 18 GW of renewable energy by 2030. With such positive investor confidence in the government’s resource plan, the country’s energy goal is bound to be on target,” says Santam Bonds and Guarantees manager Reeta Ambaram.

Due to the considerable investments involved in the roll-out of the plan over the next 17 years, companies will be required to have surety insurance; a type of insurance that gives the assurance that a contractor will fulfil promised duties and, if not, employers or project owners would be indemnified for specific amounts.

The IRP 2010, thus, represents a considerable growth opportunity for the surety sector. Santam, South Africa’s largest short-term insurer is already involved in this sector and is providing surety for various renewable-energy projects including the notable KaXu Solar One, a concentrated solar power project.

“Santam is providing sureties both directly and indirectly for some of the big renewable-energy projects, such as the R5.28-billion KaXu project, comprising a 100 MW facility in the Northern Cape. Abengoa, a Spanish renewable-energy contractor which Santam is providing surety for, brings its significant experience and expertise to the project,” says Ambaram.

She explains that an extremely crucial aspect in rolling out these projects for both employers and contractors will be having the assurance of a strong stable surety company, as it will need to be underpinned by excellent underwriting expertise.

Companies are seeing the value of a surety bond as a reliable way of providing certainty to projects and as a practical alternative to bank guarantees.

“Surety bonds enable many enterprises to separate their lines of credit from the banks and bonds through insurance companies. This allows companies to protect their lines of credit with banks, which might otherwise be unavailable owing to credit facilities being used for large bonds when working capital is needed,” says Ambaram.

The additional appeal of surety bonds for companies is that support can be provided for complex projects where several contractors may be involved. “This may not be as easy to secure through a bank guarantee or a letter of credit,” she explains.

Success in underwriting surety business entails a combination of sound underwriting principles. Understanding the client’s business and its history provides an underwriter with the ability to forecast trends. “The ability to predict where a company will be in the next three to five years, the bedrock of surety underwriting, is both challenging and exciting because a successful realisation of the project means a thorough assessment of all risks and mitigating factors must be analysed,” notes Ambaram.

A detailed account of the insured company’s business activities is vital in pricing its risk. “Typically, here we look at the experience of the contractor, the levels and scope of recent projects completed by the contractor, the company’s financial position in terms of access to financing and/or available credit facilities, profit margins, liquidity and gearing among other factors,” she says.

Ambaram adds that renewable energy projects, in particular, often contain minimum performance ratios which must be assessed. “These often involve complicated formulas and third-party verification from engineering experts is often sought to ensure that the minimum performance levels are achievable,” she points out.

It is crucial to note that guarantees and bonds are only as good as the company offering them. Surety companies are required to be financially sound, profitable companies that have a good record and history. If a surety company turns out to be insolvent, the purpose of the bond received from them is rendered useless.

“This is why the surety on a bond has to be with an insurance company whose solvency is verified by a private audit, governmental regulation, or both,” says Ambaram.

She stresses that the ability to keep promises is not only the currency for the surety business, it is also the very reason that the sector exists. Santam Bonds and Guarantees is underwritten by Santam, South Africa’s largest short-term insurer. With the insurance giant’s strong balance sheet and its A- Standard & Poor’s credit rating, beneficiaries certainly have the confidence of Santam Bonds and Guarantees’ ability to keep to its promises.