The Steel Authority of India-led Afghan Iron & Steel Consortium’s (Afisco’s) $11-billion iron-ore and steelmaking project in Afghanistan was threatening to come unstuck following the Indian government’s decision not to make viability gap-funding available to the company.

Senior officials in companies making up the consortium said that, without Indian government viability gap-funding, critical issues relating to raising debt for the project, and investments for construction of logistics and infrastructure facilities linked to the project, had made implementation of the largest foreign direct investment in Afghanistan uncertain.

As a result, the formal contract between the Afghan government and Afisco, which was expected to be concluded in January 2013, had not been possible and no new timeline had been set either, as “there were a lot of frustrations on both sides”, the officials said.

A meeting between senior Afghan government officials and members of the Indian consortium was scheduled this week and its deliberations would provide an indication of the fate of the project.

Without government funding and against the backdrop of uncertainty over key issues such as security, transportation, infrastructure, integrated iron-ore mining projects and coking coal sourcing, a steel plant was not considered to be economically viable.

From the Afghan perspective, failure to start the exploration project within six months of signing the contract was a serious “deal-breaker”, the officials added.

The consortium of Indian mining and steel companies had bagged the rights to develop three iron-ore blocks at Hajigak, in Afghanistan’s Bamiyan province, in November 2011, and a memorandum of understanding was signed in April 2012, but a final contract was proving to be elusive, the officials said, pointing out the delays in achieving milestones set for the project.

The amount of viability gap-funding sought for Afisco had not been disclosed, but officials involved in the project said that $600-million had been the amount sought from the Indian government though the Steel Ministry, which had approved the proposal.

The Steel Ministry had proposed that the viability gap-funding be drawn from the $2-billion development fund made available by the Indian government under the India-Afghanistan bilateral developmental agreements, but the Indian government had now turned down this proposal.

Afisco, which also included iron-ore miner NMDC, steel producers Rashtriya Ispat Nigam and JSW Steel, planned investment to the tune of $11-billion for the development of the reserves and a steel production unit, as well as the associated logistics and infrastructure necessary for evacuation of ore and the transport of finished steel.