The Andhra Pradesh government served a pre-closure notice to an engineering company on Thursday and asked it to exit from the execution of the Polavaram head works, a major development that could impact the project's progress.
The notice comes against the backdrop of allegations of financial irregularities in the Polavaram project by the previous Chandrababu Naidu government.
The Water Resources Department served the notice to the Navayuga Engineering Company under Section 89(3) on the recommendation of an expert committee, according to sources.
The high-level body was constituted by the Y S Jagan Mohan Reddy government to probe alleged irregularities in various infrastructure projects.
The state government is said to have offered Navayuga to compensate the loss, if any, through mutual consent for exiting the project, sources in the department said.
Navayuga was awarded the over Rs 3,000-crore Polavaram works on a nomination basis in February last year after the previous Telugu Desam Party dispensation questioned the pace of the project being carried out by the original contractor, Transtroy.
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The Centre had subsequently approved the arrangement. In the case of Navayuga too, it has to ratify the state government's decision to remove the contractor since it is a national project, the sources said.
The Polavaram project is expected to irrigate 2.91 lakh hectares, generate 960 MW of power and fulfil the water needs of industries and 540 villages in Andhra Pradesh.
During campaigning in the state for the Lok Sabha election, Prime Minister Narendra Modi had alleged that the TDP was using Polavaram like an "ATM" to draw money from the Centre and was responsible for delays in the project.
Naidu had hit back, saying the Centre was yet to reimburse Rs 4,500 crore the state government had spent in spite of the financial crisis.