India’s Nuclear Pool


, , , , , , , , , , , ,

Few held much hope for President Barack Obama’s visit to India to attend its Republic Day parade. Several high-level delegations had been exchanged between India and the United States in recent years with little to show for the effort. The primary obstacles to several promising initiatives were stuck in a terrible logjam. The two world leaders, however, had a surprise for everyone: within hours of Obama’s landing in Delhi, he and Indian prime minister Narendra Modi announced to the waiting international press at Hyderabad House that the obstacles to operationalising the Indo-US nuclear deal had been resolved.

The solution, it was later revealed, was to create a national nuclear insurance pool from whom nuclear vendors would be able to buy coverage against a potential claim by a nuclear operator against them. This way, nuclear suppliers would be indemnified and there would be no need to modify India’s controversial 2010 Civil Liabilities for Nuclear Damage Act. More important politically, the ruling Bharatiya Janata Party would not be embarrassed by having to take back its vociferous demand for supplier liability.

The crux of the nuclear impasse is as follows: after the agreement between India and the United States in 2008 on civilian nuclear cooperation, Delhi had to put in place a nuclear liability regime as per international norms. Until then, it was simply assumed that any nuclear accident in India would be compensated for by the government. However, India’s nuclear liability law ran afoul of international custom of making the operator solely responsible financially for any accident. A few days after the CLNDA was passed, India signed the Convention on Supplementary Compensation (CSC). This convention provided additional funds to victims in case the damage from a nuclear accident is more than the national liability cap. However, the CSC also demands that the operator be the sole entity held responsible for a nuclear mishap and is thus in contradiction to Indian law.

During the parliamentary debate on nuclear liability, Sushma Swaraj and Yashwant Sinha of the BJP argued that the lessons of the Union Carbide gas leak in Bhopal in 1984 should not be forgotten and nuclear suppliers should be held accountable for the quality of their wares. The uncharitable may view the BJP’s position, supported by an assortment of non-Congress parties, as political obstructionism but the Bhopal tragedy is what informed its psyche.

The ideal outcome would have been for the Indian government to amend the CLNDA and this workaround is at best a half measure that creates several difficulties. First, the composition of the nuclear suppliers’ insurance pool is problematic. Some report that a conglomeration of India’s largest public sector companies, including the state-owned General Insurance Corporation (GIC), can only provide coverage up to ₹900 crores out of the required ₹1,500 crores. Others suggest that only ₹750 crores shall be provided by the public sector companies and the government shall supply the remainder of the sum to the insurance pool via instruments known as catastrophe bonds. The proposed government participation would effectively transfer the burden of safety from those insured to the state, which is exactly what the CLNDA had tried to avoid back in 2010. Since the insurance company, the operator, and the financial security of last resort are all the Government of India or its companies, the entire burden of liability will be, in effect, borne by the Indian taxpayer.

Second, Rule 24 states that the supplier shall be liable to an amount not less than what the operator is liable for. This means that the supplier and operator both shall have to seek financial security or insurance to the tune of ₹1,500 each. If the GIC is struggling to insure one client, the supplier, it is unlikely it can provide coverage to both. The Indian liability law forces a wasteful blockage of funds to cover both the nuclear supplier and operator. While the insurance pool is merely a way around Section 17(b) for the suppliers, operators are mandated to have coverage (Section 8). Since India does not allow the private firms into the nuclear energy sector, the liability of the state-owned Nuclear Power Corporation of India (NPCIL) will also fall to the government.

It is possible, theoretically, for the suppliers’ insurance pool to be reinsured by international financial houses. Yet this is unlikely at present because there is little international interest in the nascent Indian nuclear insurance market. The laws are unclear as yet and there is little by way of a track record for international inspections, dispute arbitration, and the like because India was only recently brought in from the nuclear cold. Most cross-border international insurance pools exist in countries that have longstanding close relations and are based on reciprocal understandings with nuclear installations in the countries involved. This is seen primarily in the countries party to the Vienna and Paris conventions on nuclear liability. A similar system in South Asia would entail an Indian national pool that linked to nuclear insurers in Bangladesh and Pakistan, an unlikely scenario for political reasons.

While the nuclear suppliers’ insurance pool has been agreed upon, there is a second proposal that is still under discussion: it has been suggested that all suppliers create a second corpus of emergency funds for ₹1,500 crores among themselves. This borrows from the US system wherein operators have created a separate pool among themselves beyond their insurance covers and suppliers contribute to the Convention on Supplementary Compensation fund. However, such a model would be most efficient in a system where several operators exist and not just one state-owned behemoth.

Another obstacle to operationalising the Indo-US nuclear deal is Article 46 of the CLNDA which opens suppliers to tort claims indirectly through the operator. Delhi has maintained that the clause is not applicable to suppliers but nuclear vendors fear the ambiguity. One proposal is to explicitly state the immunity of the supplier in the contract but for that, the primacy of the contract must be accepted by Indian courts. The difficulty lies in Section 23 of the Indian Contract Act (1872), which stipulates that clauses of a contract would be unlawful if they go against the law or declared public policy. Since Section 17(b) of the CLNDA has not been voided, any immunity to the supplier would be contrary to policy.

It is not yet known how receptive nuclear vendors will be to the understanding between Modi and Obama. If Delhi’s guarantees are sufficient for them, the Indo-US nuclear deal may well be in business even if it means that India will be double-billed. Yet for now, more details and reactions are awaited before there can be complete clarity on what exactly the declared nuclear breakthrough entails.

This post appeared on FirstPost on January 26, 2015.