Hyderabad: The financial position of Andhra Pradesh (AP), which may have worsened in the past few months because of political instability and protests for and against the bifurcation of the state, is wreaking havoc on the balance sheets of companies executing irrigation projects in the southern state.

Slow progress: Construction work on at the Polavaram irrigation project on the borders of Khammam and West Godavari districts of AP. Bharath Sai/Mint

The delays are affecting the ability of firms engaged in such projects to raise money. To be sure, delays in payments related to government infrastructure and irrigation projects are common across the nation, but they have become more pronounced in AP in recent months. The state has undertaken 86 major and medium irrigation projects, apart from the creation of so-called flood banks (a kind of a dyke) under the Jalayagnam programme since 2004-05. This involved a total budget of Rs1,79,679 crore. All the projects are to be completed by 2012.

To date, the state has completed four major and eight medium irrigation projects; the remaining 74 are in various stages of development. An amount of Rs47,382 crore has been spent on the completed and work in progress projects.

Firms developing these projects include IVRCL Infrastructures and Projects Ltd, Nagarjuna Construction Co. Ltd, Hindustan Construction Co. Ltd, Gayatri Projects Ltd, Patel Engineering Ltd, SEW Infrastructure Ltd, Navayuga Engineering Co. Ltd and Mega Engineering Infrastructure Ltd.

E. Sudhir Reddy, chairman and managing director of IVRCL Infrastructures, said he never faced any major payment delays in the first five years of the Jalayagnam project.

“Things have changed in the last six-eight months or so due to factors such as droughts, floods, general election, death of chief minister Y.S. Rajasekhara Reddy, political uncertainty and now the ongoing agitations for and against state bifurcation," he added.

Citigroup analysts Deepal Delivala, Venkatesh Balasubramaniam and Atul Tiwari said in a report on AP irrigation dated 18 January that while the bifurcation itself, when it happens, will not affect the implementation of the projects, “the current agitation may have impacted state government revenues, which may increase funding shortfall acuteness, and slowdown work".

Sudhir Reddy echoed this view and said some irrigation projects in Telangana were obstructed by protesters.

The chairman of a Hyderabad-based infrastructure firm, who asked that neither he nor his company be named, said that the “uncertainty on payment of dues by the government has started reflecting badly on our balance sheets". This, he added, was making it “difficult to approach the banks for bridge loans".

The delays aren’t a new development, although recent events have exacerbated the issue. Even as early as March 2009, Mumbai-based equity research firm Edelweiss Securities Ltd said that lenders were turning cautious about construction firms operating in the state?on?account?of delayed payments from the government.

In a report dated 2 March, Edelweiss analysts Revathi Myneni and Parvez Akhtar Qazi said infrastructure firms implementing irrigation projects could miss out on their revenue guidance due to delays in project cycles on account of a slowdown in execution of projects and associated cash flow problems. Most firms say the government owes them money. A Hyderabad-based firm executing irrigation projects worth Rs7,000 crore is waiting for the government to clear its bills of around Rs200 crore.

The delay is affecting the firm’s ability to take on more work, claimed its chairman, who too asked that neither he nor his firm be named, fearing a political backlash. And T. Sandeep Reddy, MD of Gayatri Projects, said the government still owes the firm around Rs50 crore for work done.

The delays are also affecting sub-contractors to whom these firms hand out pieces of the projects, said an executive at another company. Around 400-500 sub-contractors have been hit by the payments crisis, claimed C.V. Rao, chairman of the Navayuga Group.

Meanwhile, in an effort to address the problem, the state government is lobbying the Centre to provide a so-called “national project" status to at least three major irrigation projects that together involve a budget of around Rs61,500 crore.

“If a project is declared a national project, then 90% of funding required will be provided by the Central government," write the Citigroup analysts.

Much of the state’s financial problems can be attributed to the collapse of the real estate market in the state.

In 2008-09, the state government allotted Rs16,500 crore for irrigation projects out of a total budget of Rs43,203 crore. It planned to raise Rs12,500 crore through sale of land, but ended up with only around Rs3,000 crore, said an official in the state irrigation ministry, who declined to be identified.

In the 2009-10 budget, the state allotted Rs17,800 crore to irrigation projects, once again pinning major hopes on land sales, added this person.