Research on Construction Surety Bond Types in Land Consolidation in China

Transcription

1 Research on Construction Surety Bond Types in Land Consolidation in China ZHANG Pengtao 1, WANG Lixiang 2 1 College of Rural and Urban Construction, Agricultural University of Hebei, Baoding, Hebei, P. R. China Tianjin Municipal Bureau of Land and Resources and Housing Management, Tianjin, P. R. China zhangpt@hebau.edu.cn Abstract It objectively demands the introduction of construction surety bond system to deepen the institutional system reform of land consolidation and to strengthen risk management in land consolidation projects. Firstly, the paper analyzes the necessity of introducing construction surety bond in land consolidation in China. Secondly, considering the present conditions in China together with the characteristics and the nature of land consolidation, the paper suggests that in China six types of construction surety bond should be introduced firstly, i.e. contractor s bid bond, performance bond, payment bond, property owner s payment bond, concession bond and ecological bond, and then explains the meaning of them. Finally the paper gives several suggestions to promote construction surety bond in land consolidation, such as establishing guarantee measures to compulsively implement construction surety bond, carrying out personnel training on construction surety bond, and strengthening research on risk management in land consolidation. Key words Land consolidation; Construction surety bond; Risk management; Industrialization 1 Introduction In China, land consolidation, with the nature of public infrastructures, is a kind of project that is invested by government. And it possesses the characteristics of large capital input, long payback year, complex technique, important social influence and strong externality. All above characteristics determine many risks in construction process, especially in the initial stage of land consolidation industrialization. In addition, after China s joining World Trade Organization, foreign enterprises and capital will enter Chinese land consolidation market and will take part in the construction of land consolidation projects. Under this condition, it is necessary to introduce surety bond system into China as soon as possible. Construction surety bond is defined as that the surety (usually refers to banks, surety companies, insurance companies or other financing institutes), asked by the principal (one of the parties of a contract), submits a written guaranty to the obligee (the another party of the contract) to promise performing the contract instead of the principal or compensating the lost of the obligee if the principal can not perform the contract signed between the obligee and the principal [1,2]. In market economy countries, construction surety bond is regarded as a finance tool to evade credit risk, and is a kind of daily business of banks, insurance companies and surety companies. As an important measure of transferring project construction risk, construction surety bond takes advantage of credit means to strengthen the liability relationship between parties in construction market, and it can guarantee the accomplishment of the project construction effectively [3]. Therefore many countries formulate special regulations on construction surety bond system in construction laws, and many international organizations or trade guilds emphasize relative clauses in their standard contract. 2 Necessity of Carrying out Construction Surety Bond in Land Consolidation Land consolidation industrialization is a new land consolidation pattern of land resource comprehensive regulation and optimal disposition by way of administrative supervision and market-oriented operation [4]. The professional design, multi-channel financing, scientific management 741

2 and efficient operation not only can promote the quality and benefit of land consolidation, but also can regulate land market effectively, stimulate the development of economy and the enhancement of land economic value, push the development of correlative industries, and increase employment. Whereas in China, land consolidation is at the early stage of industrialization, so the legal system and market mechanism have not been perfected. Furthermore, the absence of industrialization consciousness and professional talents in some local governments, and the incorrect value judgment of some government leaders, induce the deficiency of supervision and administration and result in planning and design separated from practice and construction departing from planning and designing scheme, etc. In China, there are many risks in land consolidation because of the large scale and complex technique of it, however the risk management is on a lower level and the relative systems and policies need improvement. So it is a key step to introduce construction surety bond system and establish the risk management system with Chinese characteristics in land consolidation. 2.1 Objective requirement of deepening the institutional system reform in land consolidation It is necessary to establish favorable market environment to promote the development of land consolidation industrialization. For a long time, land consolidation projects are invested, implemented and managed by government. Because the relative departments in the local government are short of market consciousness, the administrative ideas and administrative means are dissonant with the development of market economy. With the development of land consolidation industrialization, it is needed to reform the original market management pattern that relies only on the administrative means, and to introduce economic means to solve the problems in market economy and regulate the actions of market parties. The establishing and implementing of construction surety bond system is the beneficial trial to regulate market behaviors by economic means. 2.2 Requirement of strengthening risk management in land consolidation projects With the development of land consolidation industrialization, the project bid invitation and bidding system, project corporation system and project supervision system, etc. are introduced into the planning, designing and constructing phase of land consolidation projects (such as whole contract model, BOT model [5] and PPP model [6] ). Land consolidation projects are managed strictly according to contracts signed between project applicant and project construction undertaker. Because in China land consolidation industrialization is in the initial stage, market mechanism needs to be improved, market parties and their behaviors need to be regulated. The establishment and spread of construction surety bond system makes it possible to manage risks by market means, meanwhile it can guarantee the successful completion of land consolidation project. 2.3 Requirement of establishing trust system and avoiding unhealthy market competition With the development of land consolidation industrialization, more and more parties take part in land consolidation projects. To ensure the project quality and avoid that the unqualified contractor wins the bidding, construction surety bond system, as an economic means of project surety, can establish trust system and create market atmosphere of honesty and keeping faith, which based on the principle of the man keeping faith should benefit and the man breaking faith should be punished. Because the surety should pay for the behaviors that it guarantees, it has to examine the credit status and economic strength of the applicant. In addition, the surety will supervise contract performance by means of restriction mechanism and economic levers, and compel the applicant to enhance quality and regulate behaviors in order to ensure the project quality, schedule and safety. 2.4 Requirement of absorbing foreign capital and adapting to international practice To international projects, construction surety bond and insurance have been one of the necessary conditions. In international construction market either contractors and subcontractors or consultors almost cannot accept a project without providing relevant insurance or surety bond. China has been a member of WTO; as a result, the domestic construction market must be opened to international contractors. Simultaneously it is necessary that the domestic enterprises go into international market [7]. 742

3 In addition, the actualities of capital insufficiency push land consolidation into market in order to absorb foreign capital. In this way, land consolidation can take advantage of two markets and two resources, i.e. domestic one and foreign one. So it is important to establish risk management system in land consolidation after the systematic research on foreign experiences and national conditions. It is the construction surety bond and insurance which is the essential part of the above system. 2.5 Requirement of eliminating corruption in land consolidation Though the operating mode of industrialization has been introduced into land consolidation, there still existing some problems such as unsound market mechanism, insufficient competitors, etc. Property owners sometimes show influence on project bid invitation and bidding and then interfere the construction market. One of the purposes to spread construction surety bond is to restrain corruption in land consolidation. Moreover the establishing of construction surety bond system is helpful to eliminating asymmetry in obtaining information, reducing transaction cost, strengthening competitive power of construction enterprises and depressing accident probability. So it is very necessary to introduce construction surety bond system in order to promote the development of land consolidation market and to enhance competitive power of land consolidation enterprises. 3 Main Types of Construction Surety Bond in Land Consolidation Taking cognizance of the national conditions of cultivated land s insufficiency, to realize the dynamic balance of total cultivated land and intensive use and economic use of land resource, land consolidation has been generalized actively in local governments in China. The characteristics of land consolidation such as large investment, long period and high risk of investment & construction compel the investors and constructors to pay more attention to the economic benefit. Simultaneously the social and ecological benefits of land consolidation projects should be emphasized because that kind of projects is regarded as one type of public infrastructures and possesses strong externality. In addition, in China land consolidation is at the early stage of industrialization and the legal environment and market environment are not perfect, so when establishing the construction surety bond system, national conditions, the interests of the public and the parties in land consolidation should be concerned about. So the establishment of construction surety bond in land consolidation scope must adhere to principles of emphasizing cruxes, paying attention to timing sequence and spreading step by step. At present the emphasis is the extension of six types of construction surety bond, i.e. bid bond, performance bond, payment bond, which are submitted by contractors, payment bond submitted by property owners, concession bond and ecological bond. All above six types belong to banking bond pattern. If the conditions are suitable corporate bond and the same trade or business contract bond can be introduced. These six types can cover main legal relationships in construction surety bond in land consolidation, and can embody the principle of the man keeping faith should benefit and the man breaking faith should be punished. They can be treated as the frame and foundation of systematic construction surety bond system. 3.1 Contractor s bid bond A bid bond provides that the surety will compensate the owner if the bidder is awarded the contract but fails to accept and sign it or fails to provide the requisite performance and payment bond [8] The purpose of it is to select bidder and to guarantee the progress of land consolidation. The function of it can be presented from two aspects. One is prompting bidders to treat bid seriously and prevent thoughtless behaviors in bidding. The other is to ensure that bidders are competent and trustworthy. Bid bond in land consolidation can adopt banking bond pattern or corporate bond pattern, which was stipulated in bidding document. In bidding document the surety amount of money is stipulated too. Besides majeure, if bidders take back bidding document in period of validity or if the winning bidder can not sign the contract with tenderee or can not submit performance bond document to tenderee in 743

4 stated time period, the surety, the bank or guarantee corporation, would response according to bond contract. 3.2 Contractor s performance bond A performance bond guarantees to the property owner that the surety will be liable up to the penal obligation of the bond for the cost of completing the work in the event that the contractor defaults [9]. In other words that kind of surety bond guarantees the contractor of a land consolidation project perform its contractual obligations and complete the land consolidation project according to promissory standard. The function of performance bond is keeping the superior and eliminating the inferior in land consolidation enterprises. In addition the contractor not only is regulated by contract, but also is supervised by the surety on capital use, schedule arrangement and quality control. Performance bond is the most important type of the construction surety bond in land consolidation, and is the type whose surety amount of money is highest. All the other types of construction surety bond can be regarded as the supplements of it. To this kind of surety bond, if the winning bidder (land consolidation enterprise) can not perform the contract excluding the reason of tenderee, the surety will take the duty in ways listed as below: i) providing aid of capital, equipment, technique to the winning bidder to make it go on performing the contract; ii) directly taking over the project or selecting another winning bidder (agreed by the tenderee) to complete the rest of the contract (the tenderee will pay the project only according to the original contract); iii) compensating for the lost of tenderee according to the surety bond contract. 3.3 Contractor s payment bond A payment bond (sometimes referred as a labor and material bond) is given by the contractor to guarantee payment to laborers, material suppliers and subcontractors for labor or services that is incorporated in the project that they perform and the material that they furnish in performing the construction contract [10]. Once the contractor cannot pay for the labor, material or other services, the surety will pay instead. It can promote the accomplishment of the land consolidation project, and can keep the property owner away from unnecessary legal dispute and reduce unnecessary management cost. 3.4 Property owner s payment bond This kind of payment bond is given by property owner to guarantee payment to the contractor of the land consolidation project. If the property owner defaults the surety will perform payment obligation instead of property owner. It is a measure to ensure the payment of land consolidation project capital, and it can be regarded as a performance bond of property owner because the contract performance of property owner mainly refers to the payment of land consolidation capital. To accelerate the spread of construction surety bond in land consolidation, the government should obey the laws of market economy and pay for the project on schedule. Government investors can take advantage of part of the government appropriation or other efficacious measures to guarantee the capital needed. Without such surety bond, government project will not be approved and be constructed too. 3.5 Concession bond Concession bond refers to a construction surety bond that is submitted by contractors of land consolidation projects in order to guarantee that the operating and managing actions of contractor are confined to operating concession contract. Land consolidation, as a kind of commonweal project, should be executed by the land consolidation enterprises, which have got the operating concession. The contractor of a land consolidation project cannot damage public interest when pursuing economic benefits. So the constructor should submit a surety bond document, which ensures performance of operating concession contract to the government. The operating concession bond is a kind of surety bond with high value object and large risk because the contract amount is large and the contract period is long. 744

5 3.6 Ecological bond Ecological bond refers to a kind of construction surety bond which guarantee ecological maintenance or improvement to government based on the consideration on the characteristics of strong externality and public investment of land consolidation. Before the performance of land consolidation contracts, the contractors are asked to submit ecological bond to the government. The purpose is to prevent contractors from paying much attention to economic benefits and neglecting the ecological influence of the project. 4 Some Suggestions to the Promotion of Construction Surety Bond in Land Consolidation 4.1 Establishing guarantee measures on the compulsive implementation of construction surety bond in land consolidation In China the land consolidation industrialization is a newborn thing, the relevant legal system has not been established and the policies about construction surety bond only exist in few domains, such as construction industry and real estate industry. So in order to strengthen land consolidation to achieve dynamic balance of cultivated land, legal system about land consolidation and institutional environment of construction surety bond should be constructed rationally. Then China should formulate and publish standardized construction surety bond documents, unified regulations on surety bond business and code system, etc. to promote construction surety bond in land consolidation in order to exert the functions of construction surety bond. Concerning the essence of public investment and characteristic of strong externality of land consolidation, if the government were not spread construction surety bond compulsively, it would be short-lived because of the boycott of land consolidation contractors. So out of regard for the public interest, to eliminate risks due to artificial factors, China government needs to formulate forceful guarantee measures to promote the implementation of construction surety bond in land consolidation. 4.2 Carrying out personnel training on construction surety bond in land consolidation At present construction surety bond is implemented only in construction industry and real estate industry in China, and the personnel in above professional field know little about land consolidation. A conclusion can be made that no eligible personnel of construction surety bond in land consolidation has been founded. So with the issue of laws or regulations, carrying out personnel training to cultivate qualified professional group is regarded as a key work to spread construction surety bond in land consolidation in China. 4.3 Strengthening research on risk management in land consolidation The particularity of land consolidation projects determines that there are many potential risks when carrying out that kind of project, and the risks derive from human factors, social factors and nature factors. In China government investment has long been the main investment mode of land consolidation, and either the government or the contractors show lack of social responsibility consciousness. Moreover in China the land consolidation industrialization is at the early stage, so there is a lack of understanding of risk management in land consolidation. And the research of risk theory is still not enough. All stated above restrict the improvement of risk management level intensively. To strengthen risk management in land consolidation, on the one hand the function of land consolidation guild on research and development of risk management technique, on offering risk management consultation, and on conducting risk management training, should be exerted; on the other hand risk management information center should be founded as soon as possible. All above measures are helpful to risk identification and assessment, risk decision-making, and the determination of relevant rate and the amount of surety in land consolidation. 5 Conclusions In China, land resources, especially cultivated land, are scarce relative to the population of

6 million. To maintain the dynamic balance of total cultivated land and to guarantee state food security, land consolidation must be generalized. Land consolidation projects, with strong externality, possess the characteristics of large capital input, long payback year, complex technique, and the nature of public infrastructure. And all above characteristics determine the huge risk. Risk management in land consolidation projects is necessary. Therefore construction surety bond system, as one of the risk transfer means, should be introduced in land consolidation. In the process of establishing such system, considering the state conditions of land consolidation industrialization in China, six types of construction surety bond should be introduced firstly to construct the framework of construction surety bond, i.e. contractor s bid bond, performance bond, payment bond, property owner s payment bond, concession bond and ecological bond. Simultaneity, to promote the implementation of construction surety bond system in land consolidation, it is needed to establish guarantee measures of compulsive implementation of such system, and to carry out correlative personnel training. In addition strengthening research on risk management of land consolidation projects is necessary too. References [1]Chen Hua. Research on Construction Surety Bonds. Master dissertation of Taiyuan University of Technology, 2003: 6~12(in Chinese) [2]Zhang Shuzhen. Research on the Theories and Practices of Construction Contact Bonding System for China. Master dissertation of Tianjin University, 2004: 5~6(in Chinese) [3]Deng Xiaomei, Tian Qian. Study on the Characteristics of International Construction Surety Bond System. Journal of Tsing Hua University (Philosophy and Social Science Edition), 2003, 18(2): 66~71, 78(in Chinese) [4]Luo Yun, Huang Xianjin, Pu lijie. Land Consolidation: from Administrative Directed Model to Whole Process Industrialization the Basic Strategy of Land Consolidation Industrialization Development in China (in Chinese) [5]Bao Haijun, Wu Cifang, Xujianchun. BOT, the New Model of Land Consolidation Financing. China Land, 2002, (6): 24~26(in Chinese) [6]Bai Xuehua, Wu Cifang, Ai Lianghui. The PPP Model of Land Consolidation Project Financing. China Land, 2003, (1): 20~23(in Chinese) [7]Deng Xiaomei. Research on Construction Surety Bond System in China. Beijing: China Architecture & Building Press, 2003(in Chinese) [8]Welch J.W., Morelewicz J.F., Ruck A J. & Trecker S.J. Contract Surety. AFSB 152, 1 st ed, Insurance Institute of America, 1992 [9]Gordon Hunt. Construction Surety and Bonding Handbook, Professional Education Systems, Inc, 1990 [10]Jeffrey S. Russell. Surety Bonds for Construction Contracts. ASCE Press,