| 03/12/2014 02:28 PM |
Why mindless government policies, regulations and populism must take as much blame for Bhopal disaster
Exactly 30 years ago, in a factory in Bhopal, water entered the tank E-610, which held 42 tons of Methyl Isocyanate (MIC). MIC is a highly toxic compound with a very low boiling point and can only be stored in stainless steel or glass containers. On reaction with water, MIC violently releases toxic gases, which is what happened in the Union Carbide plant in Bhopal. It instantly started producing the toxic gases, which killed more than 2500 people, leading to the worst-ever chemical disaster ever.
How could Union Carbide, which had Safety First as its motto, be so irresponsible? How come there weren’t any eyebrow raising accidents at Union Carbide’s Sevin plant in Virginia? Kamal Pareek, a young Indian engineer sent to America for training, marvelled at the work ethic and comprehensive safety mechanisms in place at Union Carbide’s Virginia plant that was similar in design to the Bhopal plant.
“It was a pleasure working with those American engineers. They were so professional, so attentive to details, whereas we Indians often have a tendency to overlook details. If they weren’t satisfied, they wouldn’t let us move on to the next stage. For weeks on end, we made a concerted effort with our American colleagues to imagine every possible incident and its consequences.”
– Five past midnight in Bhopal by Dominique Lapierre and Javier Moro
While fingers have rightly been pointed at Union Carbide for letting this tragic accident happen, what is astounding is how the government of India completely escaped the series of ideologically-tainted decisions over several decades that are equally responsible for the disaster.
Union Carbide Corporation started its operations in India in 1934. Starting with importing and selling batteries, they eventually set up a battery manufacturing plant and became a household name under the brand Eveready batteries, powering torches in the remotest villages of India in an era when villages didn’t have electricity but housed 86% of the population. Why did Union Carbide have to set up a plant that involved such toxic chemicals in the first place? The fact is, apart from poor corporate decisions at different stages, it is a series of government policies that led to the plant being set up here, causing losses and ultimately the disaster which ended up killing 2500 people in a densely populated area.
1. Government’s Industrial Policy
With India’s independence in 1947, the whole industrial and business atmosphere changed. Through the Industrial policy resolutions of 1948 and 1956, Jawaharlal Nehru, as the Prime Minister and de facto Chairman of National Planning Commission, laid out the pattern of a socialist economy, espousing the middle path between public and private enterprise, allowing government to interfere and encroach without restraint, on the freedoms of private industry.
To add to this, the Congress government was inspired by the Swadeshi philosophy of Gandhiji, and curtailed foreign investment in India and insisted on ‘technology transfer’, without considering the capabilities of local talent in handle such advanced technologies.
Where technology is available in India, it must be preferred to foreign technology (regardless of the quality). All technology, once imported into India, is Indian technology. It should not be paid for beyond a period of five years. – Industrial Policy, 1948
As a result in 1956, following the Companies Act enacted that year, Union Carbide Corporation was forced to sell off 40% of its holding in its Indian subsidiary, of which most was bought by Indian government through public sector banks and companies and it became Union Carbide India Limited (UCIL). At the time of the accident, the Government of India was holding at least 25% of it.
2. Food Shortages
In 1957, Union Carbide Corporation (US), after three years of research created the pesticide SEVIN (brand name of Carbaryl). DDT, then the most popular pesticide had become harmful to humans. UCC invented SEVIN at a serendipitous moment and to prove its harmlessness to humans, photographs flashed in newspapers of UCC’s scientists tasting a few granules of SEVIN.
MIC is one of the main ingredients of SEVIN. It is awe-inspiring what human genius is capable of, producing a totally innocuous substance from such a deadly toxin. SEVIN’s huge success in rescuing Egypt’s cotton crop in 1961, which averted an economic disaster for the country, catapulted it to worldwide popularity.
In the 1960’s India was reeling under food shortages and Lal Bahadur Shastri had to call upon all Indians to fast once in a week. Under Public Law-480, the United States, through Red Cross, donated 870 metric tons of SEVIN to assist India’s quest for self-sufficiency in food production in their Green Revolution. Taking this as an opportunity, UCIL expanded its operations into agricultural sector through pesticides. After taking relevant permissions from the Indian government, UCIL initially only imported technical grade SEVIN from UCC, diluted it with local inert agents, packaged and then sold it across India.
3. Forex Crisis
For importing SEVIN, UCIL was required to pay UCC in US dollars. However, there was a severe “dollar shortage” in India at that time. Added to that, the Indian government’s protectionist policies did not look favourably on UCIL’s dependence of imported SEVIN and pressured the company to produce it locally.
The dollar shortage issue is not some unknown or unexplainable phenomena. It’s a case of an economic fallacy that governments in India have been indulging in since independence. They believed that prices should be fixed by government diktats. In this case, Indian government arbitrarily fixed the exchange rate, thus over-valuing the rupee vis-a-vis the US dollar. This move depleted Indian foreign exchange reserves.
In essence, even though UCC had operations in 38 countries, Bhopal’s was its only SEVIN plant outside the US. Had it not been for these governmental controls and convoluted policies, there wouldn’t have been any need to establish this high-risk plant in India. Indeed, smart countries now don’t want polluting industries in their own backyard.
4. Government Conditions on Manufacturing
Based on the Planning Commission’s demand projections, which themselves are based on faulty statistical models of the National Sample Survey Organisation, UCIL applied for government’s permission to set up a plant to produce 5,000 MT of SEVIN every year in Bhopal, India.
While the government gave its permission to set it up, it also gave itself an important role to play by imposing a host of conditions. SEVIN, the trade name for the insecticideCarbaryl is produced by reacting α-naphthol with MIC in a process called Carbamoylation. Broadly, this required an α-naphthol manufacturing unit, a MIC manufacturing unit and a Carbamoylation unit.
However, UCC was not keen on building an α-naphthol manufacturing unit because the only major use of α-naphthol was the manufacture of SEVIN insecticide. Also SEVIN had been in the market for over 12 years. Insects slowly adapt themselves to insecticides, making them ineffective and thus UCC planned to replace SEVIN within next five to eight years. Their research and development department was already in possession of several replacement molecules. None of them required α-naphthol. UCIL, therefore, thought it was unnecessary to build an α-naphthol plant when it could just import it for a fraction of the cost.
However, the politicians and the bureaucrats thought otherwise and political decisions came to replace rational business and scientific decisions. They insisted UCIL develop a local technology to manufacture α-naphthol. Lack of indigenous expertise meant the plant never came to be built and thus the fiasco ended with millions of dollars being burnt to no avail.
5. The Tyranny of FERA-localise
In 1974, to assert the idea of ‘Indianisation’ even more, the Indira Gandhi government enacted Foreign Exchange Regulation Act. This act would further curtail foreign investors and their equity in Indian subsidiaries. It even restricted and controlled the employment of non-resident and foreign nationals in India. As a result, UCIL had to kowtow to the government every time they needed to keep a foreign expert at the plant.
Under this act, a new set of rules were framed to decrease the share in the equity of foreign holders. This led to UCC decreasing its holding from 60% to 50.9%. Because of the tyranny they unleashed, most foreign companies shut their Indian subsidiaries. Nearly 40% of the companies shut their Indian operations between 1973 and 1980. This included companies like IBM and Coca Cola, which were forced to reveal their trade secrets. Today, we have our PM Modi, going from pillar to post to attract foreign investments, but back then they harassed and drove them away. How times have changed.
UCIL was permitted to import the design of the plant from UCC but all the aspects of construction of the plant were mandated to be indigenous. UCC was kept at an arm’s length during detailed designing and implementation. Hence, UCC, in its design transfer agreement legally absolved itself of all responsibility in case of any mishap. Had there been no out-of-court settlement, this disclaimer would have been in prime focus and UCC could have gotten away without paying even a single penny in compensation.
6. Changing the Rules of the Game
In the late 1970s, the Indian government gave incentives to small manufacturers to produce second-grade, less effective fertilisers, which they sold at half the price of SEVIN. Parallelly the government also gave farmers subsidies to buy these fertilisers. All this resulted in selling of less than 1,000 metric tonnes of SEVIN, while the Bhopal plant was designed to produce 5 times that amount based on the Planning Commission’s projections.
7. Political Populism
When land was first allotted to UCC for establishing the SEVIN plant, there was none of the slums or the shantytowns in the area. As time passed and city grew, the people moved to settle in the precincts of the factory. Disregarding UCIL management’s complaints, the local governments regularised those slums by giving out pattas (ownership rights) for the sake of votes, with promise of water and electricity connections. When opposition parties in the assembly questioned the safety of the people living in the slums, the relevant minister was complacent in his reassurance.
The most shameless aspect of this fiasco was the passage of The Bhopal Gas Leak Disaster Act, 1985, which conferred on the central government, which held nearly 25% equity in the UCIL, which micro-managed UCIL, the powers to sue UCC on behalf of the affected people. While UCC paid 750 crores to the victims in an out-of-court settlement, the government escaped all moral and financial responsibility.
As these points show, the Bhopal factory was a living proof all that’s wrong with centralised planning. Under this system, governments make but take no responsibility. While corporates are absolves from the discipline of market forces. As Robert Bidinotto who through his New York Times article in 1985 first brought to light the government’s direct hand in the tragedy wrote:
Under (India’s) industrial policy, business and government are seen as “partners” in joint ventures to promote “national goals.” What does business bring to such a “partnership”? Basically, every creative element: vision, ideas. effort, know-how, capital. What does government bring to such a partnership? Basically, every coercive element: favours, dispensations, subsidies and other “carrots” for politically approved businesses, on the one hand—and on the other, prohibitions, regulations, punitive taxes and other “sticks” against politically unpopular businesses.
Ironically, the Bhopal operation was never profitable for UCIL. In 1984, the plant incurred a loss of USD 4 million, resulting in skilled workers leaving for greener pastures. Even the existing employees’ started losing morale. The final link between UCIL and UCC was Warren Woomer. He was a fine engineer who had trained Indian engineers at the Virginia plant and was appointed as the workers’ manager who was responsible for the safety of the plant from 1980, when the MIC plant started operation, to 1982. In 1982, as per FERA Indianisation policy, he was sent back by the Indian government, after which UCIL gradually lost interest in running the plant and started contemplating on shutting it down.
Even with respect to the original Virginia plant design of which the Bhopal plant was Indianised, a lot of automation was bypassed under the pretext of creating jobs, which left room for human error. Also the government asked the UCIL to end all the foreign collaboration with the UCC as soon as possible. The interim extension given by the government for UCC-UCIL collaboration was to end in January 1985. The accident happened in December 1984.
After the event, there was a lot of talk about Industrial Safety Standards. To paraphrase Thomas Sowell, the most basic question is not what the best safety standards should be, but who determines them. Should it be the government? The same government, which kills hundreds of people every day on the roads that it designs so badly and maintains even worse? In a control and command economy such as ours, governments, run by technically illiterate bureaucrats and politicians, have no idea of what is safe. Yet they mandate and manage each aspect of the industry, makes decisions for the individuals while keeping people in dark. And the government can never correctly estimate the ramifications of its own market distorting policies under changing the rules of the game.
In a freer market scenario, the onus is on the factory to run safely. There will be a market for a third-party service which specialises in safety standards to certify such plants. Like any other governmental institution, such a certifying third-party too can be bribed, but they will soon be out of the business. On the other hand, if you bribe a politician, his accountability is only to the mob, whose votes he will buy with the same bribe money. The vicious cycle continues.
It is not profitable for a factory to be unsafe. Just like many Indian technical experts left the Bhopal plant in exasperation, an unsafe company will find it hard to retain employees and face lawsuits, compensations, etc. No company wants it. Not being safe is an existential threat for the business in itself.
For decades, Indianisation / protectionism denied consumers best quality goods and spoiled its producers by eliminating the best in the business. It is profitable for foreign investors to employ local work force if they are capable of doing the job. Even if there is no capable work force, it is again in the interest of the foreign investors to build institutions to train local people, if you give them the freedom. Only if people are allowed to collaborate and exchange ideas across borders, do we get best possible solutions. Else, one will eventually have to settle for a second rate. In business, as in education, if you want excellence, privileges will not work. Only competition will.
Ideas, when given life, become events. They are not born in isolation. Far too often, we limit our vision to what we see and hear and don’t make any effort to trace back to the ideas behind the events. An abstract germ of an idea can lead man to land a robot on a comet or it can lead to a disaster.
Here is one such idea.
“I believe, as a practical proposition, that it is better to have a second rate thing made in our country, than a first rate thing that one has to import.” – Jawaharlal Nehru (From a speech in the 1950s)
This philosophy, and its unfettered application, must take as much blame for the Bhopal disaster as Union Carbide.