The Modi-Obama Nuclear Deal

09th Mar 2015 Political-Affairs

Prime Minister Modi and President Obama trumpeted a ‘breakthrough’ on negotiations over India’s Nuclear Liability Act, a thorny issue that has dogged Indo-US relations over the last few years. The media went into overdrive to herald the Prime Minister’s stellar diplomacy, while Foreign Minister Sujatha Singh proudly claimed that the US had ‘given up’ all its demands without any assurances from India regarding the dilution of the law in question. This is a specious statement and deserves a thorough analysis.

Indo-US diplomatic ties have had a tumultuous past. Following the 1974 nuclear weapons test, India was condemned for violating agreements where it had committed to using US and Canada supplied technology and material for peaceful uses only. Multiple sanctions were imposed and India became a virtual nuclear pariah – as a direct response to the Indian test, the Nuclear Suppliers Group was set up to regulate nuclear exports and prevent its use for non-peaceful purposes. 25 years later, diplomatic relations were given renewed momentum by the landmark 123 Agreement which normalized bilateral trade between India and the US and also opened up opportunities for nuclear cooperation on the global scale. India agreed to completely separate its civilian and military nuclear program, place the civilian component under IAEA inspections, and in return, it was promised full US nuclear cooperation as well as an India-specific NSG waiver to re-engage in global nuclear trade. However, the operationalization of nuclear cooperation between India and the US has been held up since then by the disagreement over nuclear liability which was apparently addressed by Modi and Obama last month.

Before an analysis of the Modi-Obama deal however, an understanding of the Act and its contentious clauses is a pre-requisite. The Civil Liability for Nuclear Damage Act (CLNDA), passed in 2010, mandates that operators of a nuclear plant face strict and absolute “no-fault liability” for any nuclear accident. Essentially, this means that victims do not have to worry about proving culpability or figuring out whom to sue for damages – the operator is liable for all damages incurred irrespective of actual fault. This formulation of liability is known as ‘legal channeling’ and involves channeling of the liability exclusively on the operator -it is premised upon the need to provide prompt and immediate compensation to victims without unnecessary delays in case of an emergency. However, under Indian law, having compensated victims adequately, the operator is entitled to a ‘right of recourse’ against suppliersif the accident can be proved to be a direct result of defective material provided by the supplier. This is provided under Section 17(b) of the Act – “The operator of the nuclear installation, after paying the compensation for nuclear damage in accordance with section 6, shall have a right of recourse where-the nuclear incident has resulted is 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.”

Given that it would be illogical for no-fault damage to be unlimited, Section 6 caps this liability of the operator at Rs1500 crore ($250 million) and mandates that any additional compensation (Rs 1100 crore – approx $180 million) be paid by government. However, the problem is that it is the Claims Commission of the government who decides the quantum of damages liable to be paid by the operator. In order to mitigate against the possibility of the government settling for a paltry compensation amount (such as what happened after Bhopal), Section 46 was also incorporated into the Act: “The provisions of this Act shall be in addition to, and not in derogation of, any other law for the time being in force, and nothing contained herein shall exempt the operator from any proceeding which might, apart from this Act, be instituted against such operator.” Thus, distinct from the “no-fault” liability of the operator, Section 46 is a provision which provides tort remedies: If the victim (or government or operator) could prove that the accident is the responsibility of the operator/supplier, they could claim additionaldamages from the operator/supplier as well.

Both these provisions (Section 17b and Section 46) ran into heavy opposition from nuclear suppliers in US, Japan, Canada, France and Russia. Suppliers in these countries were unwilling to take on potentially unlimited liability for an accident – this dispute over the terms of liability have held up the operationalization of the 123 Agreement with the US as well as nuclear deals with other countries mentioned. The crux of the objection is that Section 17b is against the spirit of the three main international conventions on nuclear liability – the Paris convention, the Vienna Convention, and primarily, the Convention on Supplementary Compensation (CSC) as well as against bilateral agreements that India has signed with supplier countries. The need to strike a balance between the contrasting interests of promotion of nuclear proliferation and the need to provide ‘quick and effective’ damages to the vulnerable victims has remained among the major dilemmas confronting the international legal framework governing nuclear liability, evident from the deliberative history while enacting these conventions.

For example, the CSC has no provision for a ‘right of recourse’ that operators can exercise against suppliers. In addition, India’s bilateral agreement with Russia states that the operator shall be “fully responsible for any damage both within and outside the territory of the Republic of India caused to any person and property as a result of a nuclear incident occurring at NPP [Kudankulum]” India’s agreement with France mandates that “each Party shall create a civil nuclear liability regime based upon established international principles” while the agreement with US states that “India intends to ratify the Convention on Supplementary Compensation within the coming year.” India’s agreements with its own domestic suppliers also state that “The Purchaser shall indemnify and hold harmless the Contractor in respect of Third Party life and Property damage claims arising out of nuclear event at Purchaser’s Site.” The text of these agreements thus make it quite clear that the concept of supplier liability enshrined in the CLNDA runs counter to existing bilateral agreements and international conventions. Or does it?

The concept of supplier liability is actually well-established and finds traction in many different parts of the world in non-nuclear sectors. Nuclear power is actually an oddity in this sense – the absence of supplier liability is an exception to the norm and can probably be attributed to the immense political power of state-owned suppliers and privately owned suppliers with strong state support. In the 1950s, the nuclear industry belonged exclusively to the United States and its suppliers needed the protection to establish itself – and thus these interests were preserved in international conventions. Is there a coherent argument to be made for the continuation of such a regime today? It is important at this stage to recall that the intent behind the framing of the CLNDA was to prevent a Bhopal like travesty from happening again – where victims languish to this day struggling for meagre amounts of compensation; while Union Carbide got away almost scot free. The tragedy at Bhopal was only a leak of cyanide gas, a nuclear disaster would be immeasurably worse. The disaster at Fukushima is another sobering lesson for India – damages in excess of a mind-boggling $100 billion (400 times higher than the Indian insurance pool) were caused by fundamental deficiencies (that had been identified years earlier) in reactors provided by GE – the same company that India will be buying reactors from. The 3-Mile Island disaster in 1979 was also caused by design defects that the suppliers were aware of but had not bothered to correct. Is it thus reasonable for liability to be channeled exclusively to the operator when a nuclear accident may be *entirely* due to design or construction faults of the supplier? There is a general consensus among environmentalists and nuclear experts alike that the existing tort law is insufficient to adjudicate upon the issues of compensation and other forms of legal remedies in the event of a nuclear disaster, justifying a specialized legislation for an effective redressal mechanism.  Many have thus argued that the Indian attempt to bring supplier liability into the CNLDA is an excellent attempt at evolving a new international norm that corrects past mistakes and rewrites anachronistic laws (such as the CSC) that were written for the benefit of the American nuclear industry that was in its infancy decades ago.

Moreover, it is fallacious to argue that the Indian law is in complete violation of the CSC. The concept of ‘legal channeling’ that the CSC envisages is clearly incorporated into Indian law. The Indian law just goes beyond this to provide for supplier liability as well.As Siddharth Vardharajan argues, “In return for this burden on the operator, the government places a cap on the liability involved. You cannot, after all, have unlimited liability on a no-fault basis. But the capped, legal channeling of non-fault liability should not automatically mean the end of fault-liability for those whose actions might have contributed to a nuclear accident. To do would compromise the rights of the victims or place an unfair burden on taxpayers if the government ends up bearing the cost of rehabilitation.” India has thus argued that the incorporation of supplier fault liability in addition to no-fault operator liability is permitted by Section XII(2) of the CSC: “[N]othing in this Convention shall prevent any Contracting Party from making provisions outside the scope of … this Convention, provided that such provision shall not involve any further obligation on the part of the other Contracting Parties..”

However, despite there being substantial grounds for upholding the Indian law as it is; under pressure from foreign governments, the Indian government made changes to some of the administrative rules that govern the CNLDA and in effect, diluted some of its provisions. The most important concession made via the Civil Liability for Nuclear Damage Rules 2011 was limiting the right of recourse in both time and amount:

  • right of recourse for not less than the extent of the operator’s liability under sub-section(2) of section 6 of the Actor the value of the contract itself whichever is less
  • The provision for right of recourse referred to in sub-rule (1) shall be for the duration of initial license issued under the Atomic Energy (Radiation Protection) Rules, 2004 or the product liability period, whichever is longer

The liability of suppliers was thus limited to the maximum liability of the operator (approx$250 million) and also limited in time to a mere 5 years (Atomic Energy Rules 2004 – “Every licence issued under rule 3 shall, unless otherwise specified, be valid for a period of five years from the date of issue of such licence.”)Note: The legal validity of these rules promulgated by executive order (as opposed to legislative amendment) are subject to judicial review itself especially if the severe limitations proposed by the rules are interpreted to be against the spirit of the Act and opposed to public policy. (This lack of legal clarity that exists is yet another reason that foreign suppliers are hesitant to sign the dotted line)

To get an understanding of the scale of these concessions, consider the following: The life cycle of a nuclear reactor is typically 30-50 years and no nuclear accident has *ever* taken place in the first 5 years of operation. Secondly, the estimated damages of the Fukushima accident was upwards of $100 billion which puts the $250 million figure to shame. Even the compensation paid for the Bhopal Tragedy (which was far too little and has victims begging for compensation even 30 years later) was $450 million. The reduction in liability thus greatly compromised the spirit of the CNLDA – yet the objection from nuclear suppliers did not abate. This brings us to the present juncture.

The negotiations between India and the US in the run-up to the Modi-Obama summit centered on two issues: US demands to track Indian nuclear material and the issue of supplier liability.

The demand that US be allowed to track nuclear material was first raised by the US in 2012 as part of the ‘administrative arrangements’ negotiation for implementation of the 123 Agreement. The US claimed that this was a requirement under the Hyde Act (2006) which stipulates that the US President must certify to Congress that India is in compliance with US ‘tracking and flagging’ requirements that ensure that nuclear material (even if from 3rd parties) are not diverted for military or terrorist use. It has been pointed out before that “Contrary to public perception, this demand is not a requirement of American law. Indeed, in November 2011, three crucial government departments in the US – the Nuclear Regulatory Commission, the Department of Energy and the State Department – had taken an official position against the intrusive tracking of US-obligated fuel overseas. This was in response to criticism by the US Congress’s General Accounting Office which faulted American efforts to monitor and evaluate the security of US nuclear materials around the world. The State Department view was that there were “sovereignty issues” involved and that the demand for intrusive tracking would affect the US’s bilateral relationships.” The American insistence on intrusive tracking that violates Indian sovereignty gave credence to the theory that this demand was just a ‘bargaining chip’ that the US was using to get its way on other issues. This is in fact exactly what happened – with America backing down on this demand in return for Modi’s concessions on supplier liability. It has been reported that the US accepted India’s offer of being given access to information that India shares with IAEA (a mechanism that was also accepted by Canada) however the MEA FAQ sheet does not provide any clarity on this issue.

The MEA factsheet released recently provides some clarity on the agreement finalized between Modi and Obama. An analysis of the key points follows:

  • Setting up of an India Nuclear Insurance Pool of about $250 million which would be funded by public sector insurance companies in India. In case an operator exercised ‘right of recourse’ against a foreign supplier, the compensation would be paid out of this insurance pool

In other words, the Modi government has completely reinterpreted Indian law to transfer supplier liability to an insurance pool that will be paid by Indian taxpayer money! The MEA claims that there is ‘no additional burden on the taxpayer’ however the conveniently ignored truth is that all the insurance companies that will contribute to the pool are state-owned companiesi.e the money is effectively taxpayer money.Lets not forget that PSUs are part of the State under Article 12 of the Constitution of India. Apart from that, as the price of a nuclear reactor is made negotiable, the turn key supplier will, in all probability, be allowed to jack up its price to factor in the cost of insurance, if at all any.

Secondly, the proposed insurance pool is barely 0.3% of the damages sustained as a result of an accident such as Fukushima. (This limit is set by CNLDA itself but should surely be increased to account for modern realities). Thirdly, the Fiscal Responsibility and Budget Management Act 2004 states that the government cannot take sovereign guarantees in excess of 0.5% of GDP in a fiscal year. By providing sovereign guarantees to limit foreign supplier liability, the government has also reduced the money it has to provide guarantees for other projects. Furthermore, since US suppliers have always had the choice of purchasing an insurance cover from any external provider, the attractiveness of the proposed Indian pool would probably lie in its low premium rate chargeable on the supply of nuclear materials. The cheaper the premium payable for the insurance pool, the greater the extent to which Section 17(b) loses its effectiveness

Clause 2 of the Statement of Objects and Reasons of CLNDA states that one of the reasons for enactment is because the present regime “leaves anyA trans-boundary liability to uncertainty.” This makes it indisputably clear that “transferring the risk” (in the MEA’s own words) from foreign suppliers to Indian insurance companies is against the spirit and intent of CLNDA

  • Foreign suppliers *cannot* be sued for damages by victims under Article 46. The MEA claims that Section 46 only allows victims to sue the operator – the fact that an amendment to include the supplier was defeated in Parliament at the time of passing the bill proves this.
  • Victims are also not allowed to sue suppliers in foreign courts – The MEA’s claim here is that it would defeat the intent of the Act to create a ‘domestic legal framework’ to seek compensation

It has been pointed out by several commentators already that it is absurd for the Indian commentators to ban victims from suing foreign suppliers in foreign courts when foreign laws (such as in the US) explicitly allow for claims against suppliers to be made! For example, sailors affected by the Fukushima disaster in Japan are currently suing TEPCO for an accident that happened in Japanese territory.

  • The ‘right of recourse’ is only an ‘enabling’ provision and it is not mandatory for operators to claim a right of recourse against the supplier – they may waive it if they chose to do so by not including it in the contract between operator and supplier.

This clarification essentially means that a provision made by an Act of Parliament can be overridden by a contrary provision in a contract between operator and supplier! If this is the case, what was the need for the provision in the first place? It is evidently clear that the provision was written into the Act explicitly for situations in which a contract has no provision for right of recourse. Interestingly, ArunJaitley had slammed the UPA government for trying to make the right of recourse optional when he was in the Opposition and vehemently pointed out how it would be completely contrary to the provisions of CLNDA as also the Prevention of Corruption Act.

Each of the above clarifications issued by the MEA are interpretations of the CLNDA that the government has claimed will be formalized through a ‘memorandum of law’, presumably issued the Attorney General. But can the AG’s opinion completely reinterpret an Act of Parliament in a manner that effectively violates its intent and spirit? Moreover, will any of these interpretations stand a challenge in the Supreme Court (which has often rejected interpretations given by the AG)? In the absence of legal clarity, will any supplier be willing to invest anyway? Furthermore, the reactors that India is looking to procure from Westinghouse, GE etc. are not yet operational *anywhere* else in the world – meaning they will effectively be tested for the same time in India – something else in common that the Fukushima reactors share with India. The US itself has shut down all its nuclear reactors and the rest of the world, including countries like Germany are following suit. The US nuclear industry is on the verge of collapse and reactors are plagued by delays and cost overruns which is why the US is desperate to sell its technology to India. In essence, President Obama is selling India medicine that he would not consume himself. The question is: Why is India bending over backwards to accommodate the US?

The situation becomes even more startling when the costs are taken into account. While the Russian manufactured Kundankulum plants generate electricity at Rs3-4 per unit, the French and American reactors at Jaitapur and MithiVirdi will be paid a price far above the market rate at Rs 9-12 per unit – some sources cite tariffs as high as 15. The reactors produced by Westinghouse, Areva and GE are also prototypes which are not operational anywhere else in the world, highly expensive and have an abysmal history of  ten-fold cost increases and delays that run into 5-10 years. Given the above, India should be encouraging its own indigenous nuclear industry which has done a stellar job of building reactors so far that have been small in size, efficient, have lower construction cost, produce electricity at half the tariff rate and are built in record time.

However, the indigenous domestic industry is also not entirely happy with the CLNDA and has asked for further clarifications from the MEA and the government. In addition todetailsof the precise nature of the insurance pool, clarity over the definition of ‘suppliers’ has also been sought.Although the administrative rules do define ‘supplier’, it is uncertain whether Indian companies are ‘suppliers’ or ‘vendors’; since in India’s case, the functional design specifications are undertaken by NPCIL itself, who is also the ‘operator.’ Given that contracts signed by NPCIL used so far use the term ‘Contractor’ rather than ‘vendor’, there is significant legal ambiguity over whether Indian companies are liable under the CLNDA or not.

Lastly, at a time when the cost of nuclear power is consistently going up, it makes little sense for India to be investing large amounts of money to build expensive reactors that will run into land and construction problems, inconvenience locals, produce electricity that will have to be further subsidized, and most importantly, run the risk of accident that the state will ultimately be liable for. On the other hand, while the total installed capacity of nuclear power in India is 21,300 MW, wind power is being added at the rate of 3000 MW per year, expected to scale up to 10000 MW per year in 2015. The cost of solar power has been dropping exponentially in the last decade and current tariffs of Rs 7per unit are almost the same as tariffs from other conventional sources of energy.

Many argue that the boost in nuclear technology would help revive not only India’s supposed decline in economic growth, but also foster its development prospects, especially in its bid to generate clean energy, create a robust defense infrastructure and facilitate international investment and trade. In particular, the inability of indigenous ‘suppliers’ to build large, technologically advanced reactors are cited as a constraint. Many optimists also view this phase as a stepping stone for India’s recognition as a responsible steward of nuclear power. The proponents of this alliance have also argued that it will bring the two nations closer by forging a strategic relationship in this critical phase to pursue larger common interests that transcend nuclear energy.From that perspective, this is an important leap of faith made by India to achieve the larger objective of reinvigorating Indo-US relations and deriving bigger, more tangible gains in other areas – cooperation over terrorism, Asia-Pacific, Afghanistan, foreign investment etc.

This is not an argument devoid of merit. It remains to be seen how India’s interests are served in the larger context. However, the fact remains that the much-trumpeted ‘breakthrough’, like much else under this administration, is a lot of hype with little substance. Within the context of nuclear liability,It represents an absolute sell-out of India’s interests and a violation of the spirit of the CLNDA. Many have also been disillusioned by the government’s backroom deal breaking owing to the lack of transparency displayed by the MEA regarding the nature of the deal, the operation of the insurance pool, calculation and apportionment of the attendant risk. Mr. Obama came to India and walked back with potentially windfall profits for US suppliers.Moreover, at Obama’s request, PM Modi immediately restarted peace talks with Pakistan that he had summarily abandoned in August 2014.What did India gain from this summit – other than an insight into the Prime Minister’s appalling fashion sense?