Canadian Study Verifies Surety Protection Has Economic Value

By Kathy Hoffman

On Dec. 5, 2017, Bill 142 passed unanimously in the Ontario Legislature, requiring public construction work to be protected by performance and payment bonds. The bill, which was fully supported by the Surety Association of Canada and other industry stakeholders, serves to modernize payment protocols in Ontario’s Construction Lien Act.

“We’ve just been successful in introducing mandatory bonding into Ontario and want it to be introduced nationally,” Steve Ness, President of the Surety Association of Canada (SAC), said.

Earlier last year, the Surety Association of Canada commissioned The Canadian Centre for Economic Analysis (CANCEA) to examine the impact of surety protection on the economy through an independent study focusing on Canada as a whole and on specific provinces.

“We commissioned the study, but right away they told us that you’re taking your chances,” Ness said. That’s because CANCEA does not accept any funding or engagements that require a pre-determined result or policy stance, or that otherwise inhibits its independence. “We took the risk that what they were going to say would support what we have long thought and known,” Ness said.

And it did. CANCEA’s assessment of Ontario showed that where a majority of public construction work is carried out under bonded contracts, there is a reduced risk of insolvency, greater protection of economic activity, greater management of economic risk, and more fiscal responsibility. The study also revealed that optimum benefits are seen when 100 percent of a public work is protected by a combination of both performance and payment bonds, and that the underwriting process on construction projects reduces financial stress and insolvencies.

“One of the conclusions which leapt off the page to us was the value of the due diligence; that non-bonded construction enterprises are 10 times more likely to become insolvent than bonded companies,” Ness said. “We kind of knew that was the case, but it was good to apply some science and have that confirmed.”

Overall, the report proved that surety protection has true economic value. “Through the province, decision-makers and public bodies who are engaging in construction services would do well to be protected by surety bonds—because we do the job, and because the way we do the job means economic development.”

“The results of the CANCEA Ontario study verifies that surety and the additional due diligence its use ensures, provides economic value and benefits,” said Sheila Thompson, Chair of the NASBP International Committee and President of Rosenberg & Parker of Canada, Inc., Toronto, ON. “The study was unique in that it was a quantitative analysis and that it had the cooperation of six sureties, which collectively underwrite the majority of surety bonds for the construction market in Canada,” she added.

Ness said that Quebec, Manitoba, and Saskatchewan are moving in a similar direction to Ontario. His message to any province looking to introduce mandatory bonding is to take a look at the report: “It’s to your advantage to read this carefully, understand it, and if you do, I think you’ll go Ontario’s way,” he said.

When asked whether the assessment could reflect the value of surety bonding in the U.S., Ness said: “I suspect so. The economies are different, but for the most part it’s a question of scale, because surety bonds are more widely used and legislated through the 50 states.”

Information on CANCEA’s assessment of the economic value of surety bonding in Canada as a whole, as well as its value in Alberta, the Atlantic ProvincesBritish ColumbiaSaskatchewan/Manitoba, and Quebec is available at the SAC microsite.