Quake lesson: Building bye-laws or strict liability

PARTH J SHAH
Economic Times Feb, 2001

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 which could not withstand the shock.

Government engineers tell us that these were not built according to the building byelaws. And now there is a clamour for new byelaws and strict enforcement. Buildings collapsed, it is argued, because of the lack of laws and regulations.

Or did they collapse under their weight? Builders are already required to submit building plans and obtain a 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 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 contract.

Individual circumstances and risk preferences differ; they would be reflected in the terms of voluntary contracts. Economic diversity is also to be cherished.

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.

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.

Rather than our legal system, a better enforcer of contracts 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.

The poorer the construction, the higher the premium. 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 defence 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 home-owners 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.

Strict liability, a free insurance market, and a better legal system would solve the problem of shoddy construction quickly and permanently.

Well-defined and properly enforced property rights are critical for the operation of 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 the production of goods and services, but also in formulation 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 hot-lines can answer questions from potential buyers about the track record of builders.

It is here that public-spiritedness is most useful and effective. Non-profit, 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.

To build and keep roofs over our heads, we need to rid them of 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, rentals, etc.

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.

The author is President, Centre for Civil Society.

New Delhi, February 3, 2001
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