Nuclear Liability Act: Will it scare away the suppliers?

Nuclear Liability Act: Will it scare away the suppliers?

What was meant to be landmark legislation for this country -- and for the most part it still is -- has been marred by the inclusion of certain clauses that are clearly at odds with the overall philosophy behind the bill.

For the first time in independent India, a contemporary liability framework for nuclear damages has been put in place that eliminates the need for the victim to prove who is responsible for causing a nuclear incident, whether there is fault, negligence or intent, or whether there are any legal defences that might be raised. This has been accomplished by instituting 'strict' liability for the operator who, according to Clause 6 (1) of the act, has to cough up damages of up to a maximum of Rs 1500 crore.

This is a major move forward, since both the Atomic Energy Act, 1962 and the Public Insurance Act,1991 are silent on the issue of nuclear damages. And in the absence of a separate liability framework for nuclear damages, compensation in the event of an incident would have been ad hoc and, at best, rather similar to the way in which victims of railway accidents find redressal or, at worst, would have resulted in a legal circus as in the aftermath of Bhopal.

However, all that is now in the past and a liability law that is broadly in consonance with the Paris Convention (1961), Vienna Convention (1963) and the Convention on Supplementary Compensation (1997) is now in place, which not only employs a broad definition of nuclear damages but seeks to incorporate cross-border effects.

The operator liability cap of Rs 1500 crore or roughly $ 322 million is fairly decent by international standards. France, a country which has a nuclear setup similar to India's, albeit much larger, calls for the operator to have a financial security amount of only 91 million Euros. The bad news for consumers, of course, is that the insurance premium will certainly be reflected in the cost of power. 

Additionally, under clause 7(a), the Act enjoins upon the government to make good on losses over and above the limited liability of the operator, in the event of a nuclear incident. It also makes the government liable in the case of an accident at a nuclear installation owned by it. The Act also calls for the setting up of a Nuclear Damages Claims Commission which can become an example for regulatory methods in other industrial segments as well.

From what we have seen above, it would seem that the Civil Liability Bill has managed to confer adequate protection to citizens while putting in place a liability framework that would allow India to engage in international nuclear trade to foster nuclear power development in the country as the best option to generate clean form of power.

Unfortunately, in reality it is not so simple. After initially drafting what, by international standards, is a very sound piece of legislation, political pressure has forced the government to incorporate a rather debilitating poison pill in this Act as represented by Clauses 17(a), (b) and (c) that allow the operator a ‘right of recourse’ vis-a-vis a supplier. The new wording of clauses 17(b) and (c) in particular will certainly act as deterrent for many suppliers.

Earlier, 17(b) had the words ‘wilful act and gross negligence,’ but these were deemed as vague by the parliamentary standing committee on the bill, and have been dropped. As a result clause 17(b) now reads: “the nuclear incident has resulted as a consequence of an act of supplier or his employee, which includes supply of equipment or material with patent or latent defects or sub-standard services.” This means that ‘strict’ and ‘no fault’ liability has been extended to suppliers and this is at odds with standard international practice wherein liability is legally channelised only to the operator and the supplier is exonerated.

As a result, suppliers will now have to seek insurance for their supplied components in the country, which will naturally lead to an increase in the price of the same. This, in turn, would get reflected in the capital cost of nuclear power thereby putting it at further disadvantage vis-a-vis other sources of generation like coal that do not internalise the social cost of  their pollution, which nuclear does.

Given that the bill has no provision for how the liability amount will be apportioned in the event that the right of recourse is exercised, industry will definitely be scared to participate in the nuclear sector, since not many may be willing pay $ 300 million for a fault in some minor piece of equipment!

Clause17(b) particularly disincentivises hundreds of small suppliers contributing to the existing three-stage nuclear programme, who are definitely not in a position to obtain insurance cover for potential liability that may be several hundred times their turnover. Small suppliers like Kaybouvet Satara now say that they are anxiously watching tender documents that will be issued by NPCIL in the coming months to see how these reflect clause 17(b) before they make a quotation.

The liability bill began as an exercise to bring nuclear governance structures in India to match with international standards and attract the global nuclear industry to participate in India. However, far from giving foreign suppliers what they seek, exoneration from liability, this bill has now managed to not only worry global majors, including the Russians, but also present a challenge to the domestic programme by scaring away existing suppliers. This will certainly have long term consequences for the pace of nuclear power development in India.

(The writer is an independent consultant on energy)