Directors Report. Dear Shareholders,

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1 Directors Report Dear Shareholders, I am pleased to welcome you all on behalf of the Board of Directors to the Annual General Meeting of Galfar Engineering & Contracting SAOG and to present to you the Annual Report for the year ended 31 December Overview The Company is deeply concerned with the financial results over the last few years, which has largely arisen from unprecedented delays in closing out projects and delays in payment of receivables from clients, mainly the Governmental entities. These factors are well known but not resolved till now and Galfar, as well as all other contractors, are affected by long outstanding receivables, including that of certified receivables. Some claims are also pending due to the changes in government legislation and ministerial decisions like increase in fuel prices and the minimum wages for National workforce. The time taken by the client and consultants to settle contractual matters has become significantly longer than it was few years ago. At the same time these delays in payments do not affect our contractual rights but as per the interpretation of the applicable International Financial Reporting Standards ( IFRS ) provisions have to be made for them. To protect the rights of the company we have initiated a number of arbitration cases. Since the last report, two arbitration cases have been concluded and the awards were in favor of Galfar. Three other cases have been amicably settled. The transformation programme led by the Strategy Consultant Roland Berger, has continued throughout the year and most of the initiatives have been implemented. This includes a new organization structure and many new processes related to the more efficient use of resources and employee retention and motivation. Current focus is on lean on site construction and increasing output of people and plant. Due to prolonged non receipt of certified payments, which ultimately results in an increase in the costs to completion of the affected projects the Board and management have had to consider how the progress of works will need to be aligned to expected inflows..

2 Operations During the year, the Company was awarded new projects worth RO 267 million. The major contracts awarded were: the Yibal Khuff Project for PDO (RO 115 million), the Duqm Fishery Port for SEZAD (RO 56 million), the Adam Grid Station for OETC (RO 5 million), the Raysut WRP Upgrading for SSDS (RO 12 million), and a number of operation and maintenance packages for PAEW. These awards continue to diversify our project portfolio into expected growth sectors. During the year, the company has completed 16 major projects amongst others the site preparation for the new Duqm refinery. During the year the parent company has provided RO 6.8 million towards impairment of receivables and retention and RO 6.1 million for impairments of investments, which is made in line with IFRS requirements and company's accounting policies. These provisions come from other contracts which could not be financially closed for a long period. These provisions are made without prejudice to the company's right to recover these dues through amicable settlement or arbitration proceedings. The summary of the financial performance of the company (including group companies) is as follows: In RO millions Particulars Total Revenue Profit from operations (before impairment of receivables and, retention) Profit / (loss) for the year (10.823) (28.859) The Board and management continues to explore avenues to strengthen the company s financial position in a challenging external environment. In particular, the Board is working with management to reduce overhead expenses in line with market realities. These efforts are expected to reduce cash outflow and improve the operating financial results going forward.

3 Subsidiaries & Associates Galfar Aspire Projects & Services LLC and Galfar Aspire Readymix LLC, wholly owned subsidiaries of Galfar in Oman, have achieved good financial results, from both the parent company and external revenues. The Fully Owned subsidiary Galfar Engineering & Contracting India Pvt. Ltd (GI), is completing its road construction activities, with an order book of RO 27 million as at 31st December 2016 (FY15: RO 76 million). Galfar India continues to experience high tendering activity emanating from strong long-term infrastructure investments in India. The parent company along with its subsidiary, Galfar India, have two fully owned Special Purpose Vehicles (SPVs) as subsidiaries namely, Salasar Highways Private Limited (SHPL) and Kashipur Sitarganj Highways Private Limited (KSHPL). These SPVs are currently constructing on Design, Build, Finance, Operate and Transfer (DBFOT) basis two roads, viz. i) two-lane road on the Fatehpur-Salasar section of National Highway 65 in the State of Rajasthan, and ii) four laning of road in the Kashipur- Sitarganj section of National Highway 74 in the States of Uttarkhand / Uttar Pradesh. Construction of these projects is expected to be completed in In the three Associate SPVs, viz. Mahakaleshwar Tollways Pvt. Ltd (MTPL), Ghaziabad Aligarh Expressway Pvt. Ltd. (GAEPL), and Shree Jagannath Expressway Pvt. Ltd (SJEPL), created with other partners for the construction of Highway Roads in India on DBFOT basis, the Company holds 26% share. Construction has been completed in the two SPVs, namely MTPL and GAEPL and toll collection is going on. Although the present toll collection is below the estimated level we expect collections to improve in the years to come. Associate company, Galfar Engineering & Contracting Kuwait KSC again recorded a profit for the financial year 2016, with the company looking to explore additional opportunities that exploit the Group s combined capabilities where investment remains strong, particularly in infrastructure and oil & gas sectors. Omanisation Galfar is committed to the development of Omani Nationals. The Company employs 3723 Omani Nationals and continues to actively recruit, train and retain them in technical and managerial cadres.

4 Corporate Structure and Governance A report on corporate governance, management discussion and analysis as well as auditor s report confirming the compliance with the provisions of code of corporate governance are included in the Annual Report of the Company. Corporate Social Responsibility The Company has contributed significantly to local communities wherever we deliver our projects. In addition, we are active in supporting innovation and safety campaigns throughout the country. Outlook The order book of the company stands at RO million (FY15: RO million) out of which RO million (FY15: million) is related to oil and gas sector. On Record The Directors take this opportunity to thank the customers, shareholders, suppliers, bankers, business partners/associates, financial institutions and the Government of Sultanate of Oman for their consistent support and encouragement to the Company. On behalf of the Directors, I convey my sincere appreciation to all employees of the Company and its subsidiaries and associates for their hard work and commitment. Their dedication and competence has ensured that the Company continues to be a significant and leading player in the contracting industry. The Directors are thankful to His Majesty s Government for its continued support and we pray for His Majesty s health and long life. Salim Said Hamad Al Fannah Al Araimi Chairman

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6 Company s Philosophy Corporate Governance Report Galfar Engineering and Contracting SOAG is committed to good corporate governance and healthy corporate practices. The concept of good governance at Galfar envisages care of the Company to enhance the value of all its stakeholders by adhering to proper methods of management, internal controls, accountability, corporate governance rules and high level of transparency to the extent of not affecting the competitive position of the Company. The Company follows high standards of Corporate Governance and has implemented the New Code of Corporate Governance, promulgated by the Capital Market Authority. Transparency, Accountability, Fairness and Responsibility are the pillars of good Corporate Governance. The Board Members are experienced in their diversified professional fields. They have given great support to the Board to exercise its widest authorities in managing the Company and supervise the good performance of the Company s business. The Board is responsible for achieving the company s objectives. For this purpose, the Board is assisted by various sub committees and the higher executive management of the company. In general, the board exercises its primary functions and duties in line with the powers stipulated in article 35 of the Articles of Association of the company. Board of Directors The Board of Directors comprises of 9 members who were elected by the shareholders at the Annual General Meeting of the Company held on 26 th March 2014 for a period of three years. The Members of the Board have professional and practical experience in their respective fields ensuring proper direction and control of company s activities. No director is a member of more than 4 joint stock public companies whose shares are listed on the Muscat Securities Market (MSM) and no director is chairman of more than 2 public companies whose principal office is in the Sultanate of Oman. None of the directors are members of a Board of a joint stock public or closed company which carries out similar business and whose principal office is in the Sultanate of Oman. 1

7 Sr. No. Name of Director & Representative Designation Category Directorship in Other Joint Stock Companies 1 Sheikh Dr.Salim Said Hamed Al Fannah Al Araimi Chairman Non Independent Non - Executive Oman Medical College S.A.O.C 2 Sheikh Salim Abdullah Saeed Badr Al Rawas Vice Chairman Non Independent Non - Executive Oman Oil Marketing Company S.A.O.G, Kunooz Oman Holding S.A.O.C. 3 Dr.Hatem Bakheit Saeed Al Shanfari Director Independent Non - Executive Gulf Investment Services Co. S.A.O.G, Gulf Baader Capital Markets Co. S.A.O.C 4 Mr. Hamad Mohamed Al Wahaibi Director Independent Non - Executive Voltamp Energy Company SAOG, Oman Cables Industry SAOG, SAOC, National Bank Of Oman SAOG 5 Engr. Salman Rashid Al Fannah Al Araimi Director Non Independent Non - Executive National Factory for Security & Safety Equipments SAOC 6 Ms. Khalood Mohamed Rashid Al Fannah Al Araimi Director Non Independent Non - Executive Gulf Plastic Industries Co. S.A.O.G Oman Medical College S.A.O.C 7 Mr. Abdulqader Askalan Director Independent Non - Executive Oman Telecommunication Company S.A.O.G 8 Engr. Mohiuddin Mohamad Ali Director Non Independent Non - Executive Oman Medical College S.A.O.C 9 Engr. Raiz Basheeruddin Director Independent Non - Executive None Board Meetings: During the year 2016, the Board held nine (9) meetings in eleven sessions. The dates of the meetings and the attendance details are given in the following table: 2

8 Sr. N o. Name of Director & Representative Board of Directors Meetings & Attendance Details - Year 2016 Meeting Feb-16 & 13-Feb- 16 Meeting Mar-16 & 09-Mar- 16 Meeting Apr- 16 Meeting Apr- 16 Meeting May- 16 Meeting Jun- 16 Meeting aug- 16 Meeting Nov- 16 Meeting Dec Sheikh Dr.Salim Said Hamed Al Fannah Al Araimi Sheikh Salim Abdullah Saeed Badr Al Rawas X 3 Dr.Hatem Bakheit Saeed Al Shanfari X X X 4 Mr. Abdel Qadir Ahmed Askalan X X X Engr. Salman Rashid Al Fannah Al Araimi Ms. Khalood Mohamed Rashid Al Fannah Al Araimi Mr. Hamad Mohamed Al Wahaibi X X X X 8 Engr. Mohiuddin Mohamad Ali X 9 Engr. Raiz Basheeruddin X X Remuneration to the Board of Directors: The total amount proposed to be paid to the Directors for the year 2016 is RO 50,000 being the sitting fees for the year 2016, which will be paid to the Directors after approval by the shareholders in the AGM scheduled to be convened on 30 th March,

9 The total amount approved by the shareholders for the year 2015 and paid to the Directors during the year 2016 is detailed as under: Sr. No. Name of Director & Representative Sitting Fees Remuneration Total 1 Sheikh Dr.Salim Said Hamed Al Fannah Al Araimi 2 Sheikh Salim Abdullah Saeed Badr Al Rawas 3 Dr.Hatem Bakheit Saeed Al Shanfari 4 Mr. Abdel Qadir Ahmed Askalan 5 Engr. Salman Rashid Al Fannah Al Araimi 6 Ms. Khalood Mohamed Rashid Al Fannah Al Araimi 7 Mr. Hamad Mohamed Al Wahaibi 8 Engr. Mohiuddin Mohamad Ali 9 Engr. Raiz Basheeruddin Total 5,695-5,695 5,931-5,931 5,931-5,931 4,448-4,448 5,931-5,931 5,694-5,694 5,694-5,694 5,931-5,931 4,745-4,745 50,000-50,000 Board Secretary The elected Board re-appointed Mr. Abdelbagi Daffalla, a legal professional, as secretary of the Board. The board secretary assists the board in complying with the provisions of the Code of Corporate Governance and the applicable local laws and regulations. The secretary sends out the invitations for meetings of the board, records the minutes of the meetings in detail and follows up the implementation of the resolutions adopted by the Board. Committees of the Board: The following committees assist and support the Board in carrying out its responsibilities. Supervisory and Follow up Committee (SAFCOM): The Supervisory and Follow up Committee (SAFCOM) was formed by the Board on August and now consists of 5 members. SAFCOM assists the board to provide its support to the executive management to run effectively and efficiently the businesses of the Company in order to achieve the Company s objectives and to ensure that the interests of the Shareholders are protected. In this context, the committee extends a follow-up support to overcome the difficulties faced by the executive management including collection of outstanding receivables. The committee also studies Investment 4

10 opportunities for the company and monitors performance of all Company s units. To be compliant with the Code of Corporate Governance, Dr. Hatem Bakheit Saeed al Shanfari, being the chairman of the Audit Committee, was replaced by the Director Ms. Khulood M Rashid Al Fannah Al Araimi in SAFCOM. Sr. No. Name of Director & Representative Designation 1 Sheikh Dr.Salim Said Hamed Al Fannah Al Araimi Chairman 2 Sheikh Salim Abdullah Saeed Badr Al Rawas Member 3 Dr.Hatem Bakheit Saeed Al Shanfari (Till 20/10/2016) Member 4 Mr. Abdel Qadir Ahmed Askalan Member 5 Ms. Khalood M Rashid Al Fannah Al Araimi (W.E.F 10/12/2016) Member 6 Engr. Mohiuddin Mohamad Ali Member SAFCOM Meetings: During the year 2016, SAFCOM held 18 meetings. The following table shows dates of the meetings and attendance details Sr. No Name of Director & Representative Sheikh Dr.Salim Said Hamed Al Fannah Al Araimi Sheikh Salim Abdullah Saeed Badr Al Rawas Dr.Hatem Bakheit Saeed Al Shanfari (Till 20/10/2016) Mr. Abdel Qadir Ahmed Askalan Ms. Khalood M Rashid Al Fannah Al Araimi (W.E.F 10/12/2016) Designation 1st Meeting 14-Jan- 16 2nd Meeting 21- Jan-16 3rd Meeting 28- Jan-16 4th Meeting 04- Feb-16 5th Meeting 18- Feb-16 6th Meeting 25- Feb-16 7th Meeting 03- Mar-16 8th Meeting 16- Mar-16 9th Meeting 31- Mar-16 Chairman Member Member X X X Member X X X X Member Engr. Mohiuddin Mohamad Ali Member X X 5

11 SAFCOM Meetings (Contd.) 10th Meeting 11th Meeting 12th Meeting 13th Meeting 14th Meeting 15th Meeting 16th Meeting 17th Meeting 18th Meeting Sr. No. Name of Director & Representative Designation 21- Apr May Jun Jun Jun Sep Oct Oct Dec Sheikh Dr.Salim Said Hamed Al Fannah Al Araimi Sheikh Salim Abdullah Saeed Badr Al Rawas Dr.Hatem Bakheit Saeed Al Shanfari (Till 20/10/2016) Mr. Abdel Qadir Ahmed Askalan Ms. Khalood M Rashid Al Fannah Al Araimi (W.E.F 10/12/2016) Engr. Mohiuddin Mohamad Ali Chairman X X X X x Member Member X - Member X X Member Member X X X x Audit Committee Audit committee was formed by the newly elected Board on 27 March 2014 and has 5 members. The primary responsibilities and functions of Audit Committee are to provide assistance to the Board of Directors in fulfilling its responsibilities of monitoring and overseeing the adequacy and effectiveness of the internal control systems, procedures, financial reporting process, the effectiveness of the internal audit function; the independent audit The process including recommending the appointment and assessing the performance of the external auditor; the company s process for monitoring compliance with laws and regulations affecting financial reporting and code of business conduct. The Audit Committee reviews and approves the annual audit plan which is prepared based on risk based audit approach. It also reviews the Audit Committee Charter, Internal Audit Charter periodically. These are key to reinforce the organizational independence of Internal Audit and to establish their rules of engagement throughout the Company. The Audit Committee has focused to create awareness on the code of ethics and whistleblower policy and ensure that all the staff of the Company has gone through the whistleblower awareness program. In performing its duties, the committee maintains effective working relationships with the board of directors, management, and the external and internal auditors. To perform its role effectively, each committee member will need to develop and maintain his skills and knowledge, including an understanding of the committee s responsibilities and of the company s business, operations and risks. 6

12 Sr. No. Name of the members of the committee Designation Dr.Hatem Bakheit Saeed Al Shanfari Ms. Khalood Mohamed Rashid Al Fannah Al Araimi Mr. Hamad Mohamed Al Wahaibi Chairman Member Member 4 Engr. Salman Rashid Al Fannah Al Araimi 5 Engr. Raiz Basheeruddin Member Member Audit Committee Meetings: The Audit Committee held 7 meetings in the year The dates of the meetings and the attendance details are given in the following table: Sr. No. Name of the members of the committee 1st Meeting 11-Feb- 16 2nd Meeting 08-Mar- 16 3rd Meeting 08-May- 16 4th Meeting 06-Jun- 16 5th Meeting 09-Aug- 16 6th Meeting 23-Oct- 16 7th Meeting 07-Nov Dr.Hatem Bakheit Saeed Al Shanfari X 2 Ms. Khalood Mohamed Rashid Al Fannah Al Araimi X X X 3 Mr. Hamad Mohamed Al Wahaibi 4 Engr. Salman Rashid Al Fannah Al Araimi X 5 Engr. Raiz Basheeruddin X 7

13 Human Resource Nomination and Remuneration Committee: In accordance with the Code of Corporate Governance for Public Listed Companies issued by the Capital Market Authority, the Board of the Company has formed the nomination and remuneration committee and the name of the Human Resources Committee (HR Committee) has been changed to Human Resources, Nomination and Remunerations Committee. This committee consists of 4 members. Name of members of the committee Designation Ms. Khulood Mohamed Rashid Al Fannah Al Araimi Engr. Salman Rashid Al Fannah Al Araimi Mr. Hamad Mohamed Al Wahaibi Engr. Mohiuddin Mohamad Ali Chairperson Member Member Member During the year 2016, the Committee assigned the consultant appointed by the Company, Roland Berger, to perform some of the tasks of the Committee which included the designing of a holistic talent management framework with a particular emphasis on attracting, retaining and developing the right talent in an efficient and effective manner. Procurement Committee The Board of Directors, on 11 November 2015, formed the Procurement Committee to assists the board in overseeing the management of procurement process and practices. The Committee consists of 3 members chaired by Mr. Hamad Mohammed Hamood Al Wahaibi and membership of Engr. Mohiuddin Mohamad Ali and Ms. Khulood Mohammed Rashid Al Fannah Al Araimi. During the year 2016, the meetings of the committee were put on hold as some of the tasks of the Committee was taken up by the appointed strategy consultant Roland Berger to improve the Procurement and Supply Chain Management performance in the short, mid and long term, with an overall objective to transform from a reactive to proactive delivery management. 8

14 Annual General Meeting The Annual General Meeting for the year 2016 was held on 27 Mach The attendance detail is given below. Attendance Details to Annual General Meeting Held on 27/03/2016 Sr. No. Name of Director & Representative Designation Attendance 1 Sheikh Dr.Salim Said Hamed Al Fannah Al Araimi Chairman X 2 Sheikh Salim Abdullah Saeed Badr Al Rawas Vice Chairman 3 Dr.Hatem Bakheit Saeed Al Shanfari Director 4 Mr. Hamad Mohamed Al Wahaibi Director 5 Engr. Salman Rashid Al Fannah Al Araimi Director 6 Ms. Khalood Mohamed Rashid Al Fannah Al Araimi Director 7 Mr. Abdulqader Askalan Director 8 Engr. Mohiuddin Mohamad Ali Director X 9 Engr. Raiz Basheeruddin Director X Procedure for Standing as a Candidate for the Board: The right to stand as a candidate for membership of the Board of Directors of the Company is open to shareholders and non-shareholders who satisfies the legal requirements provided for in the Commercial Company Law 1974 as amended, the Articles of Associations of the Company and principles of the Code of Corporate Governance. In case of a shareholder, whether in personal capacity or representing a juristic person, he must have a minimum equity of not less than shares. Any person who wishes to stand as a candidate for the Board and is eligible for the same as per the regulations as well as the Articles of association, is required to submit the candidacy form as prescribed by CMA. A candidate who stands for election to the Board is elected at the General Meeting by following the procedures laid down in the Commercial Companies Law, and rules and regulations issued by the CMA. Key Management Remuneration: Total remuneration during the financial year 2016 to top Management (top 5) was RO 486,714. The Company enters into employment contracts with its employees at the start of their service according to the requirements of the Omani Labour law. 9

15 Non-Compliance: There were no penalties imposed on the Company during the year In the year 2014, a fine of RO 1450/-, was imposed on the Company, for delay in disclosure of the Unaudited Financial Statement for the second quarter on the Company s page at the website of Muscat Securities Market. Compliance with Rules and Regulations: The Company has been following the applicable rules and regulations issued by MSM, CMA and those stipulated in the Commercial Companies Law 1974 as amended and Articles of Association of the Company. The Compliance with Rules and Regulations are monitored and ensured jointly by the Legal Department & Internal Audit in cooperation with other departments. The Company is planning to create a full-fledged Compliance function. The Company has in place internal regulations and control systems which includes an updated Manual of Authority and policies for Whistle blowing, Code of conduct, Related Party Transactions and Revenue Recognition which have been duly approved by the Board. The Terms of Reference for Board of Directors procedures will be formulated and presented to the Board for their concurrence and approval. The Company has been giving induction to new Directors and has plans to train & develop the new Board to be elected in the upcoming Annual General Meeting. The Company follows the disclosure rules of the Capital Market Authority and the disclosure guide of the Muscat Securities Market and has now prepared a comprehensive Disclosure Policy which will be implemented in Communication with Shareholders and Investors: The company maintains good communication relations with the shareholders and Investors and responds as much as possible to their queries and requests in line with the disclosures rules. The company publishes its un-audited financial results in the newspapers on a quarterly basis and the audited financial statements annually. Detailed financial statements are sent to shareholders on request. The company posts its quarterly and annual results on MSM website, and also on the Company s website: All the Company s announcements are posted on MSM s website. The Management discussions and analysis report forms an integral part of the Annual Report. 10

16 Statement on Market Price and distribution of Holdings: Market High/Low price during each month of 2016 Sr. No. Month High Low Closing 1 January February March April May June July August September October November December Distribution of ownership of shares between shareholders (Including Shares having preferential voting rights) Distribution of Ownership of Shares shareholders (Including Shares preferential voting rights) 2016 Sr. No. Category No. of Shareholders No. of Shares % of Shareholding 1 Less than 5% 4, ,063, % to 10% 2 51,442, Above 10% 4 222,710, Total 4, ,215, There are no Securities / Convertible Financial Instruments as on the Balance Sheet date which will have an impact on the Shareholders equity. 11

17 Profile of the Statutory Auditors EY is a global leader in assurance, tax, transaction and advisory services. EY is committed to doing its part in building a better working world. The insights and quality services which EY delivers help build trust and confidence in the capital markets and in economies the world over. The MENA practice of EY has been operating in the region since 1923 and employs over 6,500 professionals. EY has been operating in Oman since 1974 and is a leading professional services firm in the country. EY MENA forms part of EY s EMEIA practice, with over 4,400 partners and approximately 1,00,000 professionals. Globally, EY operates in more than 150 countries and employs 231,000 professionals in 700+ offices. Please visit ey.com for more information about EY. Audit fees of the Company and Subsidiaries: Audit Fees of Company and Subsidiaries and fees for other services paid to the Auditors for 2016 Sr. No. Particulars Amount (In RO) 1 Statutory Audit Fees (Parent) 39,000 2 Statutory Audit Fees Al Khalij Heavy Equipment & Engineering LLC (Subsidiary) 2,400 3 Statutory Audit Fees Galfar Training Institute LLC (Subsidiary) 1,700 4 Statutory Audit Fees Galfar Engineering & Contracting India Pvt. Ltd (Subsidiary) 1,258 5 Statutory Audit Fees Aspire Projects & Services LLC (Subsidiary) 2,300 6 Statutory Audit Fees Galfar Aspire Readymix LLC (Subsidiary) 2,200 7 Statutory Audit Fees Salasar Highways Pvt. Ltd. (Subsidiary) Statutory Audit Fees Kashipur Sitarganj Highways Pvt. Ltd. (Subsidiary) 858 The Board of Directors acknowledges as at December 31, 2016: The Board of Directors acknowledges: With its liability for the preparation of financial statements in accordance with the applicable standards and rules. Review of the efficiency and adequacy of internal control systems of the Company and that it complies with internal rules and regulations. That there is no material matter that affects the continuation of the Company and its ability to continue its operations during the next financial year. Salim Said Hamed Al Fannah Al Araimi Chairman 12

18 Management Discussion and Analysis Report 2016 Omani market context in 2016 The engineering and construction market continued to be influenced by lower global oil price. There was significant work available in the upstream oil and gas sector as well as in the downstream refining and petrochemical industries. Work in these areas is at an alltime high. Government infrastructure project award has slowed down apart from the essential water and electrical infrastructure. No significant road projects have been awarded. Non-government sector building development is very active. For existing government projects, non-payment of due amounts started in mid-2016 and is continuing till date. This is significantly affecting our financial resources. Galfar performance overview in 2016 Galfar Engineering and Contracting SAOG maintained its position as one of the leading contracting companies in Oman with operations across the Sultanate and India. With a turnover of OMR m, Galfar remains the largest employer of Omani nationals in the Private Sector. Galfar s objectives are always aligned with the policies of the Sultanate, with its core objective to satisfy its stakeholders and clients through committed efforts to deliver projects on time and in strict compliance with safety and quality standards. The Company, including its subsidiaries, has recorded for the year 2016 turnover of RO m (2015: OMR m) with loss after tax of RO 10.8 m (2015: RO 28.9 m). The parent company s turnover for the year 2016 was RO m (2015: RO m) and incurred a loss after tax RO 11.7 m (2015: RO 28.5 m). The loss was as a result of impairment of receivables RO.6.8 m (2015: RO 31.9 m), and Impairment of investment RO 6.1 m (2015: nil). Page 1 of 5

19 This provision for impairment of receivables and investment are in line with International Financial Reporting Standards (IFRS) requirements and the Company's accounting policies. These provisions are made without prejudice to the company's right to recover these dues through amicable settlement or arbitration proceedings. In major projects were closed out. This includes major civil works for upstream oil and gas and Duqm refinery site preparation. Galfar has five subsidiaries and three associates in operations. The performance of the subsidiaries is as follows: Galfar Engineering & Contracting India Pvt. Ltd., which is engaged in BOOT contracts in India, recorded a turnover of RO 23.5 m (2015: 14.3 m) with profit after tax RO 0.8 m (2015: RO 0.7 m). Galfar Aspire Readymix LLC, which produces ready mix concrete, recorded a turnover of RO 20.7 m (2015: RO 20.0 m) with profit after tax RO 0.7 m (2015: RO 1.0 m). Aspire Projects and Services LLC which is a specialized engineering and services company had a turnover of RO 4.7 m (2015: RO 3.3 m) with profit after tax RO 0.4 m (2015: RO 0.3 m). Al Khalij Heavy Equipment & Engineering LLC which specializes in hiring out of equipment recorded a turnover of RO 1.7 m (2015: RO 1.8 m) and incurred a loss RO 0.02 m (2015: RO 0.1 m). Galfar Training Institute LLC which specializes in the field of training Omanis in various trades recorded a turnover of RO 0.5 m (2015: RO 0.3 m) and incurred loss RO 0.4 m (2015: 0.3 m). The 2016 transformation programme was multi-faceted and focussed on: organizational transformation, liquidity management and assets optimization, overhead cost reductions, productivity improvement and lean on-site execution, and supply chain management optimization. The newly introduced construction methods have enhanced the operational performance in all areas of the business. Page 2 of 5

20 Human Resources and Omanization Galfar is committed to develop its resource and maintaining its Omanization targets. Our total salary bill remains a high risk to profitability which can only be offset by enhanced people and productivity output. To that effect daily performance monitoring and enhancement has been introduced. Galfar aims to accomplish employee development through transparent and harmonious HR policies, and maintain a motivating work environment and retain talent. Our goal is to be seen as the employer of choice. Quality, Health, Safety and Environment The Company continues to maintain its certification to ISO 9001 (Quality), OHSAS (Health & Safety), ISO (Environment) standards and ISO (Petroleum & Petrochemical Sector specific standard). The Company has worked 82.2 million man-hours and has driven million kilometres collectively during year 2016, in projects across the country. Our Lost Time Injury Frequency (LTIF) was at The Company has recorded several achievements in terms of man-hours worked without Lost Time Injury in projects / units. The most significant one being 41 million man-hours in Off-plot Delivery Contract with PDO. This demonstrates our commitment to protect our employees & other stakeholders from injuries & ill health, prevent damages to assets and minimize impact on the environment during the course of our business. The Management Review Committee chaired by the CEO with the participation of all Unit Heads is reviewing the HSEMS and QMS performance on a regular basis and initiating actions for continual improvement. Page 3 of 5

21 Galfar outlook for 2017 Building on its strong market position and its reputation for delivering high-quality construction projects across various sectors, Galfar has a confirmed healthy order book of around OMR m (2015: RO m). The main threat for 2017 is the delayed payment for projects which has led to unpaid certified receivables of OMR 58.6 million as at 31 December 2016 and which further increased since the beginning of This situation will lead to reduced activity levels in those areas and part demobilisation to make expenditure match income. Work in oil and gas upstream and downstream will go ahead as per contract. Management of our borrowings has now become extremely critical until such time that the receivables backlog is resolved. Beyond the core business, the outlook of subsidiaries is overall positive. Galfar Aspire Readymix now has 7 operational areas. Efforts are being made to ensure that the turnover is maintained as in the previous year despite tough market conditions. Aspire Projects and Services LLC will continue focusing on providing specialized facilities management and engineering services. Risks Risks remain an integral part of the construction business in the region. The construction sector, and Galfar in particular, face the risk of higher cost of capital and increasingly difficult access to capital in the future. A deteriorating macro-economic environment might result in banks tightening their lending. This could affect the company's funding and might have broader repercussions on the country as a whole. Page 4 of 5

22 Galfar has a strong confirmed order book paired with a positive business development pipeline. However, an increasingly difficult macroeconomic context could cause clients to slow down or even stop ongoing projects and delay award of new projects. A major risk is the delay of collecting outstanding payments. Construction companies have large concentrations of receivables and continue to deal with outstanding payments that are increasingly hard to collect. The profitable delivery of projects relies on the right talent. Higher salaries in other countries in the Arabian Peninsula are driving away expatriate workforce and pose a risk to Galfar operations. At the same time, the construction sector is struggling in attracting qualified Omani nationals. Our gratitude and commitment Galfar salutes His Majesty Sultan Qaboos, who in the more than 46 years of his commendable rule has transformed Oman into a powerful modern economy in the region. Galfar shall endeavour to reach even higher standards of project delivery through continuous improvement in processes and wishes to lead by action in Omanization as a true Omani enterprise. Hans Erlings Chief Executive Officer Page 5 of 5

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31 Consolidated Statement of Financial Position As at 31st December, 2016 Amount in RO '000s Parent Company Consolidated Notes ASSETS Non-current Assets Property, plant and equipment 3 76,139 88,282 88, ,411 Intangible assets ,310 29,307 Investment in subsidiaries 5 11,937 10, Investment in associates 6 8,302 8,706 5,244 3,899 Investment available for sale Retentions receivables 9 33,468 30,507 33,525 30, , , , ,301 Current Assets Inventories 7 10,109 13,353 12,355 15,055 Contract work in progress 8 47,529 55,631 48,068 56,069 Contract and trade receivables 9 206, , , ,885 Advances, prepayments and other receivables 10 17,429 23,936 26,094 28,839 Deposits with bank 11 8,892 1,258 8,896 1,263 Cash and bank balances 12 3,687 14,795 6,636 18, , , , ,146 Total Assets 424, , , ,447 EQUITY AND LIABILITIES Equity Share capital 13 41,522 41,522 41,522 41,522 Share premium 14 18,337 18,337 18,337 18,337 Statutory reserve 15 13,840 13,840 14,278 14,093 Foreign currency translation reserve (2,766) (2,660) (Accumulated losses) / Retained earnings (10,660) 1,005 (10,459) ,039 74,704 60,912 71,831 Non controlling interest Total Equity 63,039 74,704 61,877 72,806 Non-current Liabilities Term loans 18 45,262 60,658 75,833 74,947 Employees' end of service benefits 22 13,232 12,181 13,478 12,396 Advance from customers payables 23 22,494 27,224 22,494 27,224 Deferred tax liability 24-1, ,004 80, , , ,571 Current Liabilities Term loans -current portion 18 30,271 38,912 30,924 39,523 Short term loans 19 55,600 32,750 59,318 37,547 Bank borrowings 20 47,759 39,521 48,369 40,193 Trade payables 21 87,654 78,101 94,209 88,772 Other payables and provisions 23 58,426 82,249 73,833 98,008 Provision for taxation 24 1, ,749 4, , , , ,070 Total Liabilities 361, , , ,641 Total Equity and Liabilities 424, , , ,447 Net Assets per share (RO) The consolidated financial statements were approved by board of directors on 12th March, 2016 and were signed on their behalf by: Chairman Chief Executive Officer Chief Finance Officer The attached notes 1 to 39 form part of these consolidated financial statements.

32 Consolidated Statement of Comprehensive Income For the year ended 31st December, 2016 Amount in RO '000s Parent Company Consolidated Notes Contract revenue 320, , , ,692 Sales and services income 25 3,678 3,412 17,493 19,542 Total revenue 324, , , ,234 Other income 26 2,726 3,422 2,913 3,422 Cost of contracts and sales 27 (307,003) (310,213) (320,598) (326,708) Gross Profit 19,738 19,179 23,192 21,948 General and administrative expenses 28 (10,965) (9,799) (13,274) (11,275) Profit from operations before impairment of receivables and contract work in progress Provision for impairment of receivables and contract work in progress 8,773 9,380 9,918 10,673 8,9,10 (6,813) (31,917) (7,002) (31,408) Profit / (Loss) from operations 1,960 (22,537) 2,916 (20,735) Finance costs, net 30 (7,829) (8,555) (8,951) (9,402) Share in profit / (loss) of associates (4,268) (758) Impairment loss for investment in associate 6 (6,118) Fair value loss on forward exchange contracts 23 - (1,229) - (1,229) Loss before tax (11,987) (32,321) (10,303) (32,124) Income tax expense ,812 (520) 3,265 Loss for the year (11,665) (28,509) (10,823) (28,859) Other comprehensive income Item that may be subsequently reclassified to profit or loss: Foreign currency translation difference - - (106) (801) Total comprehensive loss for the year (11,665) (28,509) (10,929) (29,660) Loss attributable to: Equity shareholders of parent company (11,665) (28,509) (10,813) (28,882) Non-controlling interests (10) 23 (11,665) (28,509) (10,823) (28,859) Basic earnings per share 31 (0.028) (0.069) (0.026) (0.070) The attached notes 1 to 39 form part of these consolidated financial statements.

33 Consolidated Statement of Cash Flows For the year ended 31st December, 2016 Operating Activities Loss before taxation Non-cash adjustments: Amount in RO '000s Parent Company Consolidated (11,987) (32,321) (10,303) (32,124) Depreciation on property, plant and equipments 19,597 20,772 21,837 22,835 Amortisation of intangible assets Finance cost, net 7,829 8,555 8,951 9,402 Share of loss of associates - - 4, Gain on disposal of plant and equipments (1,731) (2,014) (1,755) (2,011) Working capital movements: Inventories 3,244 7,778 2,700 7,324 Trade and other receivables 7,569 22,245 8,264 18,409 Trade and other payables (13,129) 26,123 (17,597) 29,577 Non-current operating assets/liabilities changes: Retention receivables (2,961) 309 (2,986) 357 Advance payables (4,730) 11,078 (4,730) 9,480 Employees' end of service benefits 1,051 1,115 1,082 1,143 Income tax paid (759) (1,143) (2,087) (1,195) Net cash flows from operating activities 4,376 62,895 8,056 64,363 Investing Activities Purchases of property, plant and equipments (8,045) (18,632) (9,522) (21,298) Addition to intangible assets (19) (27) (12,415) (10,468) Disposal of property, plant and equipments 2,322 3,483 2,551 3,726 Investment in associates and subsidiaries (1,330) (5,707) (5,719) (597) Bank deposits (7,634) 35 (7,633) 61 Interest income Net cash flows used in investing activities (14,588) (20,763) (32,620) (28,491) Financing Activities Term loans repaid (24,037) (1,012) (7,713) 7,900 Short term loans received 22,850 4,750 21,771 4,520 Bank borrowings received / (repaid), net 8,238 (23,170) 8,176 (23,310) Interest expenses (7,947) (8,640) (9,069) (9,487) Dividend paid (28) Net cash flows (used in) / from financing activities (896) (28,072) 13,165 (20,405) Net (decrease) / increase in cash and bank balances (11,108) 14,060 (11,399) 15,467 Cash and bank balances at beginning of the year 14, ,035 2,568 Cash and bank balances at end of the year 3,687 14,795 6,636 18,035 The attached notes 1 to 39 form part of these consolidated financial statements.

34 Statement of Changes in Equity -Parent Company For the year ended 31st December, 2016 Amount in RO '000s Attributable to equity holders of the parent company Share Capital Share Premium Statutory Reserve Retained Earnings Total Balance as at 1st January, ,747 23,370 12,582 29, ,213 Total comprehensive loss for the year (28,509) (28,509) Transfer to statutory reserve - (1,258) 1, Stock dividend paid 3,775 (3,775) Balance as at 1st January, ,522 18,337 13,840 1,005 74,704 Total comprehensive loss for the year (11,665) (11,665) Balance as at 31st December, ,522 18,337 13,840 (10,660) 63,039

35 Statement of Changes in Equity -Consolidated For the year ended 31st December, 2016 Amount in RO '000s Share Capital Share Premium Attributable to equity holders of the parent company Statutory Reserve Foreign Currency Translation Reserve Retained Earnings Total Non controlling interest Grand Total Balance as at 1st January, ,747 23,370 12,835 (1,859) 29, , ,494 Net comprehensive loss for the year (28,882) (28,882) 23 (28,859) Transfer to statutory reserve - (1,258) 1, Foreign currency translation reserve (801) - (801) - (801) Stock dividend 3,775 (3,775) Dividend paid (28) (28) Balance as at 1st January, ,522 18,337 14,093 (2,660) , ,806 Net comprehensive loss for the year (10,813) (10,813) (10) (10,823) Transfer to statutory reserve (185) Foreign currency translation reserve (106) - (106) - (106) Balance as at 31st December, ,522 18,337 14,278 (2,766) (10,459) 60, ,877

36 Notes to Consolidated Financial Statements As at 31st December, Activities Galfar Engineering and Contracting SAOG ( The Parent Company ) is an Omani joint stock company registered under the Commercial Companies Law of the Sultanate of Oman and listed in Muscat Security Exchange. The principal activities of Galfar Engineering and Contracting SAOG and its subsidiaries ( The Group ) are road, bridge and airport construction, oil and gas including EPC works, civil and mechanical construction, public health engineering, electrical, plumbing and maintenance contracts and Design, Build, Finance, Operate and Transfer (DBFOT) projects. 2. Significant Accounting Policies Basis of preparation These financial statements for the year ended 31 December 2016 comprise the Parent Company and its subsidiary (together the Group ). The separate financial statements represent the financial statements of the Parent Company on a standalone basis. The consolidated and separate financial statements are collectively referred to as the financial statements These consolidated financial statements are prepared on the historical cost basis, as modified by the revaluation of derivative financial instruments at fair value through statement of comprehensive income, available-for-sale financial assets that have been measured at fair value and in accordance with International Financial Reporting Standards (IFRS), the relevant requirements of the Commercial Companies Law of the Sultanate of Oman, 1974 (as amended) and Capital Market Authority (CMA) of the Sultanate of Oman. The preparation of the consolidated financial statements requires management to make judgments, estimates and assumptions that affect the reported amount of financial assets and liabilities at the date of the financial statements and the resultant provisions and changes in fair value for the year. Such estimates are necessarily based on assumptions about several factors involving varying, and possibly significant, degrees of judgment and uncertainty and actual results may differ from management s estimates resulting in future changes in estimated assets and liabilities. The assumptions concerning the key sources of estimation uncertainty at the reporting date are set out in note 38. These consolidated financial statements have been presented in Rial Omani which is the functional and reporting currency for these consolidated financial statements and all values are rounded to nearest thousand (RO '000) except when otherwise indicated. Going Concern These consolidated financial statements have been prepared on a going concern basis, which contemplates continuity of normal activities and realization of assets and settlement of liabilities in the normal course of business. The Board have determined that these accounts should prepared on a going concern basis due to the following: The Parent Company has been profitable in the past and has a dividend paying history. While the consolidated entity incurred a net loss after tax for the year ended 31 December 2016 of RO 10,929 thousand (2015: RO 29,660 thousand), the net cash flows from operating activities for the reporting period was RO 8,056 thousand (2015: 64,363 thousand). At the end of the full-year period, cash balances totaled RO 6,636 thousand (2015: 18,035 thousand). This was significantly impacted as at the reporting date by non-payment of certified dues of RO 58,581 thousand from Government Ministries. Discussion with the relevant clients indicate that the amounts will be paid. The Parent Company has never defaulted in servicing its lenders and the group is committed to meeting all the loan repayment obligations as they fall due. While there was certain breach of covenants with banks (as referred in note 18) as at the reporting date, the company continues to enjoy adequate ongoing banking facilities. Further, the parent company regularly pays its employees and creditors and not defaulted in tax payment. The Parent Company continues to build on its strong market position as Oman's largest construction entity and having a strong order book at RO 650,075 thousand, and has worked to ensure that tendering activity adequately addresses potential risk associated with non-payment. The Board of Directors has taken necessary measures to strengthen the financial position of the Group and also to improve Group s profitability in coming years. In addition to the initiatives set out in above, the Directors continue to look at various sources of funding support and other long term investment options to provide the working capital required for the business. Non-essential capital expenditure has been frozen and initiatives to reduce corporate overheads and improve cost control have been launched. Change in accounting policy and disclosures For the year ended 31 December 2016, the Parent Company and the Group has adopted all of the new and revised standards and interpretations issued by the International Accounting Standards Board (IASB) and the International Financial Reporting Interpretations Committee (IFRIC) of the IASB that are relevant to its operations and effective for periods beginning on 1 January Adoption of new and revised International Financial Reporting Standards ( IFRS ) The following standards, amendments and interpretations became effective from 1 January 2016: Amendments to IFRS 11 Joint Arrangements: Accounting for Acquisitions of Interests Amendments to IFRS 10, IFRS 12 and IAS 28 Investment Entities: Applying the Consolidation Exception Amendments to IAS 16 and IAS 38: Clarification of Acceptable Methods of Depreciation and Amortisation Amendments to IAS 16 and IAS 41 Agriculture: Bearer Plants Amendments to IAS 27: Equity method in Separate Financial Statements Annual Improvements Cycle - IFRS 5 Non-current Assets Held for Sale and Discontinued Operations - IFRS 7 Financial Instruments: Disclosures Amendments to IAS 1 Disclosure Initiative IFRS 14 Regulatory Deferral Accounts The adoption of those standards and interpretations has not resulted in changes to the Parent Company s and the Group s accounting policies and has not affected the amounts reported for the current year.

37 Notes to Consolidated Financial Statements As at 31st December, Significant Accounting Policies (continued) Change in accounting policy and disclosures (Continued) Standards, amendments and interpretations to existing standards that are not yet effective and have not been early adopted by the Parent Company and the Group: The following new standards and amendments have been issued by the International Accounting Standards Board (IASB) which may impact the financial statements of the Parent Company and Group but are not yet mandatory for the year ended 31 December 2016: IFRS 9: In July 2014, the IASB issued the final version of IFRS 9 Financial Instruments which reflects all phases of the financial instruments project and replaces IAS 39 Financial Instruments: Recognition and Measurement and all previous versions of IFRS 9. The standard introduces new requirements for classification and measurement, impairment, and hedge accounting. IFRS 9 is effective for annual periods beginning on or after 1 January 2018, with early application permitted. Except for hedge accounting, retrospective application is required but comparative information is not compulsory. The Parent Company and the Group has performed a high-level impact assessment of all three aspects of IFRS 9 and expects no significant impact on its balance sheet and equity. The Parent Company and the Group plans to adopt the new standard on the required effective date. IFRS 15: IFRS 15 was issued in May 2014 and establishes a new five-step model that will apply to revenue arising from contracts with customers. Under IFRS 15 revenue is recognised at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer. The principles in IFRS 15 provide a more structured approach to measuring and recognising revenue. The new revenue standard is applicable to all entities and will supersede all current revenue recognition requirements under IFRS. Either a full or modified retrospective application is required for annual periods beginning on or after 1 January 2018 with early adoption permitted. The Parent Company and Group are currently assessing the impact of IFRS 15 and plan to adopt the new standard on the required effective date. The Parent Company and Group are considering the clarifications issued by the IASB in April 2016 and will monitor any further developments. IFRS 16: IFRS 16 was issued in January 2016 and it replaces IAS 17 Leases, IFRIC 4 Determining whether an Arrangement contains a Lease, SIC-15 Operating Leases-Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for all leases under a single on-balance sheet model similar to the accounting for finance leases under IAS 17. The standard includes two recognition exemptions for lessees leases of low-value assets (e.g., personal computers) and short-term leases (i.e., leases with a lease term of 12 months or less). At the commencement date of a lease, a lessee will recognise a liability to make lease payments (i.e., the lease liability) and an asset representing the right to use the underlying asset during the lease term (i.e., the right-of-use asset). Lessees will be required to separately recognise the interest expense on the lease liability and the depreciation expense on the right-of-use asset. Lessor accounting under IFRS 16 is substantially unchanged from today s accounting under IAS 17. Lessors will continue to classify all leases using the same classification principle as in IAS 17 and distinguish between two types of leases: operating and finance leases. IFRS 16 is effective for annual periods beginning on or after 1 January Early application is permitted, but not before an entity applies IFRS 15. A lessee can choose to apply the standard using either a full retrospective or a modified retrospective approach. The standard s transition provisions permit certain reliefs. In 2017, the Parent Company and the Group plans to assess the potential effect of IFRS 16 on its Parent Company and the Group financial statements.