It imposes conditions which go beyond international law

India nuclerAmerican firms hoping to get a piece of India's expected $150 billion nuclear energy market over the next two decades got a rude shock Sept 1.

Instead of an open door to hundreds of billions in trade deals, with the passage of a divisive liability law, India's parliament imposed harsh liability measures on both suppliers and operators of any new nuclear plants. 

The law goes beyond international rules that limit liability to operators of the plants. It effectively stops any American firm from selling nuclear reactors, fuel, or components to India. This may have been the opposition party's goal all along which used the Bhopal tragedy as a poster child for their cause. The new law has created a huge headache for both countries.

The U.S. India Business Council, composed of hundreds of U.S. firms that could be affected by the new law, took the unusual step of issuing a protest. It said in a statement that the sole remedy for compensation from accidents should be with Indian operators.

What were you thinking?

American firms aren't the only ones upset with the new law. Russia, which is building four new reactors for India, demanded a "clarification" from India. This is diplomatic speak for "what were you thinking?"

Russian Ambassador to India, Alexander M. Kadakin, told the Times of India Sept 15, that the liability law is being looked on as a "deterrent" for suppliers to sell into the Indian nuclear market.

Areva, the French state-owned nuclear giant, also weighed in on the liability law. According to a report in Platts Sept 7, French President Nickolas Sarkozy is expects to bring up the issue on a state visit to India in December.

Areva spokesperson Pauline Briand told Platts her firm "does not consider the clause to be good news," and she noted that the Nuclear Power Corporation of India Ltd (NPCIL) has also criticized the measure.

NPCIL is worried the law will cut off the supply of western components for the 30-40 GWe of new nuclear generation capacity the country wants to build in the next two decades.  If that happens, India's ambitious plans to build new reactors will quickly come to an end.

The Wall Street Journal reported Sept 9 the new law has U.S. and Indian diplomats "scrambling" to fix the situation prior to a November visit to New Delhi by President Obama prior to the G20 summit in Seoul, South Korea Nov 11-12.

The newspaper says U.S. diplomats and companies planning to do business in India were "caught by surprise." This report is difficult to accept since anyone following the history of the measure could see the opposition position coming a mile away. This is the third time PM Singh tried to pass the law having failed previously twice before to pass the bill.

What to do about a bad bill?

Efforts to mitigate the impact of the law on American firms could take one of three paths.

  • Option 1: India pledges to indemnify foreign suppliers through government-to-government agreements.
  • Option 2. PM Singh sets aside the supplier provision via the equivalent of an executive order.
  • Option 3: NPCIL assumes the liability as the supplier since it is India's only operator of nuclear plants. Private investment in nuclear reactors is not allowed under Indian law.

Efforts to diminish the effect of the law would likely set off a firestorm among opposition groups. To see how hard over they are about the supplier provision, consider this statement to the WSJ by Ravi Prasad, spokesman for the main opposition party.

"India is a huge market. Come on my terms or not at all."

His problem is that his party is not in power, and has no executive ability to enforce the law.

Nonproliferation group has ideas that are non-starters

ImageNot everyone in the U.S. nuclear world is unhappy with India's tough new law. Henry Sokolski, head of a nonproliferation think tank in Washington, DC, (right) wrote a Sept 13 Op Ed in the WSJ.  He said the US. needs to concentrate on trade issues and not new nukes.

Sokolinski said efforts by PM Singh to gut the liability law could "poison" U.S. relations with India and would make President Obama look like he was carrying water for the nation's nuclear component manufacturers.

Actually, that second thought is on the mark. Sokolski got some other things right, but in several cases, imposed his own idealistic worldview on two countries that probably don't agree with them.

What he got right is that India doesn't need American firms to build out its nuclear energy infrastructure. Russia has four reactors under construction there. France has two more with plans to build six. Both countries operate through state-owned corporations that self-insure through sovereign immunity. Good luck suing either one if there is a problem.  American firms are already behind in gaining market share for India's nuclear new build.

What he gets wrong is a claim that what India really needs is "energy efficiency." This is a blind spot that affects green groups and now appears to have moved to the nonproliferation community. India needs growth, and to get it, needs electricity. For instance, in late August the state-owned railway system started talking about having its own nuclear reactor so it can electrify the country's train system.  India needs the baseload power that comes from nuclear reactors to stabilize its shaky electric grid.

Also, Sokolski gets wrong the view that Indian can supply its own fast reactors to replace the ones the country wouldn't get from the U.S. That technology is decades out in the futrue along with India's continued exploration of Thorium fueled reactors.  India doesn't have the manufacturing capability to build either design in the near term. And there is no way India will import reactors from China which is supplying them to Pakistan.

Obama is coming

ImageWhat’s driving the need to resolve the nuclear liability issue is that President Obama is coming to India in November. Neither the U.S. State Department nor India's foreign policy establishment want the nuclear liability issue as a distraction.

The diplomatic trap lines are being worked at both ends. In Sept 8, U.S. Ambassador to India Timothy Roemer met with Indian national security advisor Shiv Shankar Menon to express U.S. concerns. That's a repeat of the U.S. India Business Council's question, "What were you thinking?"

In the U.S. India's foreign minister Nitrupana Rao arrived this week to meet with U.S. Undersecretary of State William Burns and other senior officials to finalize the agenda for Obama's visit. One of India's desires coming out of Obama's visit is support for a permanent seat on the U.N. Security Council. There are also a host of defense and trade issues to be worked out.

The nuclear liability law looms large because the U.S. supported India's return to being able to buy nuclear fuel as part of an implied promise that U.S. firms would be able to supply the fuel, and reactors. That hasn't happened and U.S. firms have become more vocal about it.

John Rice, head of G.E., which has plans to build six 1,500 MW ESBWR reactors for India, told the WSJ flatly he's not going to do the deals if the law stays on the books.

"We're not going to do business in countries where the nuclear liability regime is not well-defined."

Right now the situation has the potential to cause political problems between the two counties. These are problems that PM Singh has inherited from his own political system. Whether he'll accept any of the options to resolve it remains to be seen.

Update September 15, 2010

The Press Trust of India reports Sept 15 that Aneesh Chopra, chief technology officer at the White House, said that both the sides will sit together and address the concerns relating to liability issues.

"I am confident that these issues will be resolved because good people sit across the table and things improve... Each side needs to have their voices heard and you make progress. I am confident that is the way this issue will be approached," he told reporters in New Delhi.

Chopra was responding to a question on the US business community being reportedly unhappy over making suppliers of equipment also liable in the event of a nuclear accident.

Last week, state department spokesman PJ Crowley had said that the US was looking to the Indian government to see what changes can be made in certain provisions of the bill.

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