By Jessica Donati
KABUL (Reuters) - A consortium of Indian companies led by Steel Authority of India is seeking to renegotiate the terms of an iron ore deal in Afghanistan worth up to $10.8 billion (6.7 billion pounds), a senior official at the Ministry of Mines said on Tuesday.
The situation arose after India's finance ministry refused to help finance the consortium without a detailed study about the commercial viability of the project.
Investment in Afghanistan's mining sector is considered one of the greatest hopes of the country attaining economic independence and the halt will add to concern that it will not be able to support itself economically as aid flows shrink.
"The negotiations are suspended for some reason ... (but) they haven't withdrawn from this process," the official told Reuters, asking for his name to be withheld because he was not authorised to speak to the media.
An Indian official with knowledge of the matter said the finance ministry had told the consortium to draw up a fresh viability study, adding that the studies submitted by the companies dated back to the 1950s and 1960s.
"They are asking for government funding. But that cannot be done without first evaluating the profitability of the project," said the official, who asked not to be identified.
India's economic slowdown has hit the country's finances, forcing the ministry to consider spending cuts to prevent a budget blow-out. However, the official said the initial proposal was not rejected to trim expenditure and that the project would be looked at again once the consortium improved its pitch.
The Steel Authority of India and the two countries' mine ministries were not immediately available for comment.
The Afghan official did not give a reason for the suspension, but the investment, at the Hajigak mine, is in the once peaceful province of Bamiyan where increasing insurgent attacks mean it is now only safely reachable by air.
About two months ago, Chinese firms demanded a review of the country's landmark deal to produce copper in Afghanistan, agreed in 2007. [ID:nL6N0GS1ZB] According to the ministry official, the suspension of talks with the Indian firms was partly owed to a Chinese refusal to build a railway as initially planned.
The 900-km railway under consideration was to run from northern Pakistan, through Kabul, and then across the country up to Uzbekistan in the north.
"The Chinese were going to build the railway for the Aynak mine, and now the Chinese company don't want to build this railway, so the question is (how to find) another, alternative way to export iron," the official said.
He added that other issues in the contract that had come up for review included a plan to build a steel plant.
"Maybe within a month or two months we will restart the negotiations," he said.
The Hajigak deposit contains an estimated 1.8 billion tonnes of ore, with an iron concentration of 62 percent, according to the ministry, basing its figures on a survey carried out in the 1960s.
It is located in mountainous Bamiyan, where Afghanistan's world famous ancient Buddha statues once stood in the cliffs before being bombed to rubble by the Taliban.
It was once considered Afghanistan's most peaceful province due to the dominant local Hazara tribe's opposition to the Taliban, who are mostly ethnic Pashtuns and who massacred thousands of Hazara during their austere rule.
But now that foreign combat troops are withdrawing, with plans to exit by the end of 2014, violence is returning to the province and insurgent attacks make its roads dangerous.
(Additional reporting by Rajesh Kumar Singh in NEW DELHI; Editing by Nick Macfie)