Earthquake’s Lesson: Building Byelaws or Strict Liability?

Friday, 2 February 2001
Parth J Shah
Economic Times

The earthquake in Gujarat has drawn attention to the quality of building construction. Most of the damage—to property and people—has been due to collapse of multi-story buildings. Construction of these buildings was such that they could not withstand the shocks of the earthquake. Government engineers tell us that the buildings were not built according to the building byelaws. And now there is a clamour from government, tenants, and consumer activists for new byelaws and strict enforcement. Buildings collapsed, it is argued, because of the lack of laws and regulations. Or did they collapse under the weight of all the good laws and regulations?

When the government of Australia was looking for standards for little-used consumer gadgets, it was rather surprised to find them at the Bureau of Indian Standards. We may be behind in many areas, but we have never been accused of lacking enthusiasm in passing laws and regulations. As recent studies suggest, we do not even know how many laws and regulations we have, let alone what they are. New laws would get lost in the extant jungle. Builders are already required to submit building plans and obtain permit before they start construction. They also have to get “completion certificate” before tenants move in. Despite these requirements, the current bureaucracy has evidently failed. Who else would enforce the new laws? Why do we expect the enforcement of new laws to be any different?

A better protector of consumers would be, not new building byelaws, but strict liability of builders and developers for their constructions. Even here, the government does not need to pass a one-size-fits-all type of liability law. It should let builders and buyers decide the terms of the contract. Individual circumstances and risk preferences differ; they would be reflected in the terms of voluntary contracts. Economic diversity is as much part of our lives as the cherished cultural and biological diversity. But the government can nudge the process of establishing terms of such contracts by specifying “default liability.” It is the extent to which the builder is responsible in the absence of any specification of liability in the contract. Defining of the default liability is simply a means to jump start negotiations about assurance of the quality of construction. Experience of the earthquake itself would be a stronger reminder of the need to focus on quality assurance.

Builders have more control over the quality of construction than prospective buyers, so in an open market, the liability is likely to rest on the shoulders of the builders. The optimum level of the default liability is rather difficult to determine. If the liability level is too low, it would not serve the purpose; if it is too high, parties would find shortcuts and undermine the purpose. The government would be tempted or pressurised to set the liability higher so as to force builders to build almost earthquake-proof buildings. This would make the cost of building too high for most to afford. In the name of safety, we would take away the roof.

We certainly need a more efficient legal system to adjudicate disputes and to enforce settlements among builders and buyers. A better enforcer however would be insurance companies. Once builders are certain of their minimum liability, they would find it in their interest to insure against it. Insurance companies would then inspect the buildings to determine the premia they would charge for insurance coverage. The poorer the construction, the higher the premium. The premium itself would serve as a proxy to buyers about the quality of construction. Under the liability approach, greedy insurance companies would monitor greedy builders, not public-spirited government officials or even consumer activists. Greed of one businessman is the most effective defense against the greed of other businessmen.

For the greed of insurance companies to work in the public interest, selfless government insurance companies must be ousted. Let the market for insurance, like all other markets, be ruled by greed. Greedy insurance companies would make it affordable for homeowners to purchase insurance for the valuables they keep. Under open competition, greed of the private sector serves the public good far more effectively and efficiently than the alleged altruism of public servants. Those who doubt the power of greed should remember that more households have cable TV than telephone connections. Greedy and puny cable operators serve more people than the subsidised government megalith.

Strict liability, a free insurance market, and a better legal system would solve the problem of shoddy construction quickly and permanently. No amount of building byelaws and stern inspector raj would ever come close. Many cities and towns lack laws governing the ownership of flats in multi-story buildings. Owners do not have inheritable and transferable rights to their flats, as owners of independent and tenement houses do. Well-defined and properly enforced property rights are critical for the operation of competitive markets. Property rights are the primary responsibility of the government. Let it define them and then get out of the way.

Standards are needed for quality construction. I am not against standards but against government monopoly in defining and enforcing them. Market regulation is preferable to government regulation. Consumer interests would be better served by competition in all areas, not just in production of goods and services, but also in formulation and execution of standards. Let the standards be determined and enforced by trade associations. Let them censure offending builders, maintain funds to support tenants and buyers to sue them, keep consumer grievance cells to record and report on culprits. Their telephone hotlines can answer questions from potential buyers about the track record of builders. We should also encourage independent certification agencies for building construction, similar to the credit-rating agencies.

It is here that public-spiritedness is most useful and effective. Nonprofit, private associations are its right loci. Not bureaus, bureaucrats, or inspectors. Let us be the activists for civil society, not political society.

Buildings are collapsing under the weight of massive regulations. Excessive regulations create perverse incentives. If builders are going to bribe their way through building permits and completion certificates, it is irrational to obey some rules and disobey the rest. Why bother to even know what the rules are? Build as you please, and pay off the authorities. We all know that it would indeed be a miracle if builders can “get away” just by following the rules. Too many rules, and almost none would be obeyed or enforced.

To build and keep roofs over our heads, we need to rid them off regulations, not load them with more. Expansion of the housing market requires reduction in our well-intentioned laws concerning town planning, land acquisition and holdings, rental charges, tenancy rights, transfer of property and foreclosure, building byelaws, and the market for housing finance. These myriad constraints must be rationalised to lower the cost of housing, especially for the people at the bottom of the economic ladder.

Earthquake is nature’s reminder to think afresh. Let’s not chant old mantras of more laws and regulations. Let’s rebuild not just buildings but our understanding of ideas necessary to build them and keep them up.