Steelmaker Cites Difficulties in Getting Land for the $5.3 Billion Plant


NEW DELHI—Posco 005490.SE +0.80% of South Korea has pulled out of an initial agreement to build a $5.3 billion steel plant in India‘s Karnataka state, two people with knowledge of the matter said Monday, in a setback to a government striving to woo foreign investment.

An executive at Posco’s Indian unit said protests by local people against the project have made it difficult to acquire land. “The project is off. But we are open to discuss alternate sites,” he said.

A government official in Karnataka confirmed the development and said the company has approached the state government about another location for the plant. Karnataka, an iron-ore-rich state in southern India, and Posco signed the agreement in 2010 under which the company was to build a factory in the Gadag district with a capacity to manufacture six million metric tons of steel a year.

Posco’s decision will likely hurt India’s efforts to attract foreign investment to boost its economy, which is growing at its slowest pace in a decade. Finance Minister Palaniappan Chidambaram visited several countries in recent months to invite investors, portraying India as an investor-friendly country.

Difficulty in acquiring land is a major impediment to industrial projects in India. Most of the land required for factories and infrastructure projects is acquired from villagers and forest-dwelling tribes, who often protest against such projects as there isn’t any clear policy on the compensation to be paid to landowners and the steps to rehabilitate them. The government is in the process of bringing in legislation to clearly define its policy, and the new law is expected to increase the cost for companies.

An earlier project by Posco to build a 12-million-ton steelmaking facility in the eastern Indian state of Orissa was also hit by difficulties in acquiring land and getting environmental clearances. A committee of ministers recently recommended environmental clearance for the project, for which land acquisition is now completed, but the environment ministry has yet to make a decision.

Under Posco’s agreement with Karnataka, the state was to acquire land for the project. However, the government halted the process in July 2011 as protests against land acquisition intensified.

The Posco executive said the company recently took back 600 million rupees ($10 million) it had given to the state government as advance payment for the land.

The company’s move to pull out of the project also comes as Posco, hit by lower steel demand, is focusing on cost cuts. For the first quarter of this year, the company, the world’s fourth-largest steelmaker by output, posted a 54% drop in net profit because of weak orders from shipbuilders and construction companies.

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