Looking beyond nuclear liability

RAKESH SOOD

March 16, 2015

While breaking the logjam on nuclear liability is perceived as the most significant outcome of the Obama visit, such a narrow focus misses the larger picture. An underlying broader political objective has driven the India-U.S.-nuclear dialogue since the end of the Cold War, and in the talk of ending the logjam, Narendra Modi and Barack Obama clearly had the larger political objective in view

A month has passed since U.S President Barack Obama was in Delhi as the chief guest at the Republic Day and had his famous “chai pe charcha” with Prime Minister Narendra Modi. An overview of the Indian commentary about the Obama visit would reveal that breaking the logjam on nuclear liability is perceived as its most significant outcome. Both leaders focussed on it at their joint press conference and Paragraph 43 of the Joint Statement states that “the Leaders welcomed the understandings reached on the issues of civil nuclear liability and administrative arrangements for civil nuclear cooperation, and looked forward to U.S.-built nuclear reactors contributing to India’s energy security at the earliest.”

Political objective in mind

A lack of details initially led to considerable speculation about the nature of the breakthrough and the assurances provided. To clarify matters, the Ministry of External Affairs took the unusual step of putting out a seven page ‘Questions and Answers’ explanatory paper which sparked yet another round of debate on whether this was really a breakthrough or not. However, such a narrow focus on nuclear liability misses the larger picture; there is an underlying broader political objective which has driven the nuclear dialogue between India and the United States since the end of the Cold War, and when Mr. Modi and Mr. Obama talked of breaking the logjam, they clearly had the larger political objective in view.

Following their meeting in Washington last September, the two leaders had “reaffirmed their commitment to implement fully the India-U.S. civil nuclear cooperation agreement”. Both leaders realised that the nuclear liability issue was a hurdle that needed to be overcome to take the relationship forward. A contact group was established and met thrice in the two months leading up to the Republic Day summit. In January, the officials had reached the limits of their respective negotiating mandates in the contact group. Mr. Modi and Mr. Obama understood that the issue was not whether Westinghouse and GE would set up nuclear power plants in India (that process was bound to take many months, even years, of complex technical and financial negotiations) but whether the two leaders could lead from the front on this issue.

“India needs to step up its outreach with NSG members, a process that needs to be coordinated with the U.S. so that at the 2016 NSG plenary, India formally joins the Group. This will end the Indian nuclear establishment's isolation.”Mr. Modi and Mr. Obama agreed that the matter should not be postponed any longer. Second, Mr. Modi was able to convince Mr. Obama that despite a majority in the Lok Sabha, he was not in a position to amend the Liability Law or the Rules. Such a move would create a political firestorm that could target senior members of his Cabinet, including both the Finance Minister and the Foreign Minister who were Opposition leaders in the Rajya Sabha and the Lok Sabha respectively when the Liability Bill had been debated in Parliament in 2010. The negotiators were accordingly directed to work out a solution based on political assurances and risk management procedures being developed by Indian insurance, instead of legal amendments. There was an implicit risk here. Would these understandings stand up to legal scrutiny in an Indian court, in case they were challenged? However, both leaders decided that the risk was worth taking because of their shared conviction that the bilateral relationship needed to move beyond the liability stranglehold.

An explanatory exercise

There were two principal sticking points in the 2010 Civil Liability for Nuclear Damage Act (CLNDA). The first was Section 17 which enables the operator of the nuclear installation (under Indian system, the Nuclear Power Corporation of India Ltd. or NPCIL), after paying compensation to the victims of nuclear damage, to have the right of recourse against the supplier, subject to certain conditions. Two of these conditions, namely when such a right is part of the written contract between supplier and operator, and second, when the nuclear accident has happened because of the intent to cause damage, are accepted as part of the international legal regime pertaining to nuclear liability. The third condition introduced in Section 17(b) was novel and gave the operator a right of recourse against the supplier if the incident had been due to ‘supply of equipment or material with patent or latent defects or substandard services’. The supplier community interpreted this provision as ambiguous and one that rendered it vulnerable to open-ended liability claims. The new explanation seeks to address it by relating Section 17(b) to ‘actions and matters such as product liability stipulations/conditions or service contracts’ between the operator and the supplier and therefore to be dealt with in the context of such contractual terms. The attempt is to remove the open-ended nature of possible liability claims by limiting these to the terms and conditions of the contract.

Insurance

The second sticking point was Section 46 which stated that the provisions of the CLNDA ‘were in addition to, and not in derogation of, any other law for the time being in force’, leading to concerns among the suppliers that they could be subjected to multiple and concurrent liability claims. This is sought to be addressed by explaining that all civil claims can only be brought under the CLNDA since that was the intention behind this special legislation and further, that these claims would come under the jurisdiction of the specially constituted Claims Commission, thereby excluding any jurisdiction of foreign courts.

The concept of risk management behind the setting up of the Indian Nuclear Insurance Pool has been elaborated in the explanatory paper to point out that the premium costs will be modest. For a policy of Rs.1500 crore, the annual premium would be between Rs.1.5 crore and Rs.3 crore (calculated at 0.1 to 0.2 per cent as per global practice), hardly a large sum given that the capital cost of a 1000 MW reactor would be upwards of Rs.10,000 crore. A Nuclear Liability Fund can be operationalised by a nominal surcharge of say 5 paise per unit of nuclear power which at current levels of installed nuclear power can provide about Rs.200 crore annually, thus enabling the government to recover its original contribution to the liability corpus fairly quickly.

Removing legacy of mistrust

Lawyers and risk analysts can continue to debate the legal validity of these explanations as well as the probabilistic risk assessment model employed for the insurance pool being set up, but this misses the larger picture. For Mr. Modi and Mr. Obama, the understanding reached in January is a means to push the nuclear dialogue process forward to its logical conclusion. It has been one of the most divisive issues in the relationship and its legacy of mistrust has made it difficult to move the strategic partnership forward. Neither Mr. Modi nor Mr. Obama can ensure that Westinghouse and GE will set up nuclear power plants in India but they can certainly lay the nuclear ghost to rest. The first thing now is to ratify the Convention on Supplementary Compensation (India had signed the CSC in 2010). The explanations should help smoothen the process. Once the ratification is done, it will strengthen the Indian government’s stand on the interpretations and enable the NPCIL to open preliminary techno-economic discussions with U.S. suppliers, while offering similar assurances to other foreign suppliers. Simultaneously, the NPCIL should bring its contract language into conformity with these explanations, which is presently not the case, so that domestic suppliers stand reassured.

Finally, 2015-16 provides a suitable time window that must be exploited to bring about India’s full participation in the Nuclear Suppliers Group (NSG). The momentum generated in 2008 when the NSG approved the waiver from its guidelines to permit civilian nuclear cooperation with India was only possible with U.S. diplomatic heavy lifting. Much of this momentum has been lost in recent years and needs to be revived. With its newfound diplomatic activism, India needs to step up its outreach at multiple levels with NSG members. This process needs to be coordinated with the U.S. so that at the 2016 NSG plenary, India formally joins the Group. This will end the isolation of India’s nuclear establishment that began in 1974 and reintegrate India into legitimate civilian nuclear trade and commerce while acknowledging India’s commitment to non-proliferation. At a bilateral level, U.S. support in bringing this process to its logical conclusion would remove the mistrust that has often cast a shadow on the relationship. Mr. Modi and Mr. Obama’s recourse to political pragmatism to get around the nuclear liability hurdle reflects their willingness to look beyond it at the larger picture. What is now needed is a plan with clear objectives which helps in realising the goal of making the India-U.S. relationship the defining partnership of the 21st century.

(Rakesh Sood, a former Ambassador, was the Prime Minister’s Special Envoy for Disarmament and Non-Proliferation till May 2014 and was closely involved with Indo-U.S. strategic dialogues from 1992 to 2004. E-mail: rakeshsood2001@yahoo.com)