Galfar Engineering & Contracting, one of Oman's biggest construction companies, reduced its accumulated losses in 2018 despite liquidity issues stemming from delays in “certified payment from the government and its related entities” worth around $155.8m (OMR60m), but the sale of its India operation and favourable arbitration awards are expected to drive growth in 2019, according to news revealed in the contractor's public missive to the Muscat bourse.
Detailed news about these topics, among numerous other business issues, is now publicly available as part of Galfar’s 2018 financial statements, which were recently published on Muscat Securities Market.
These extensive documents not only provide key insights into the operations of one of Oman’s – as well as the GCC’s – largest contracting organisations, but also shed light on how wider market conditions are impacting Galfar – and perhaps even other contractors – in the sultanate.
In the firm’s Directors’ Report, published as part of its 2018 financial results, Galfar’s vice chairman, Mohiuddin Mohamad Ali, says outstanding payments have “impacted ability to do business and […] our profitability, due to the company borrowing the overdue receivables”.
Management of our borrowings has now become extremely critical until such time that the receivables backlog is resolved.
As Ali explains, Galfar is also awaiting payments related to changes in legislations and ministerial decisions, adding that claims linked to the “increase in fuel prices and the minimum wages for [local] workforce are outstanding”.
He continues: “The time taken by some clients and consultants to settle contractual matters and close out contracts has become significantly longer than it was a few years ago. This affects the recovery of retention money, which again affects the cash position.”
While delays in project close-out and related payments does not affect its contractual rights, Galfar must still make provisions for them as per the interpretation of IFRS standards, the vice chairman explains.
“Arbitration awards in favour of the company are expected to be realised in 2019,” Ali continues. “Part of the arbitration amount as already been realised in the first quarter [of the year].”
Despite these challenges, Galfar’s financial performance has been positive. The group reported a profit of $5.7m (OMR2.2m) for 2018, which marks a steady improvement over 2017’s loss of $16.8m (OMR6.5m).
Accumulated losses amount to $43.1m (OMR16.6m), better than 2017’s corresponding figure of $47.8m (OMR18.42m), and revenues reached $751m (OMR289.1m) last year.
The company – an engineering, procurement, and construction (EPC) contractor that also delivers civil, mechanical, public health engineering, plumbing, and maintenance services across various sectors – says that the bulk of these accumulated losses is attributable to its Indian operation, for which a preliminary sale-purchase agreement has been signed by Galfar’s parent company.
GALFAR’S INDIA PLANS
In India, Galfar’s organisations include Galfar Engineering & Contracting India, formed in 2009; and Salasar Highways and Kashipur Sitarganj Highways, both of which were incorporated in 2013. Its associate companies in India include Mahakaleshwar Tollways, Shree Jagannath Expressway, and Ghaziabad Aligarh Expressway.
Galfar’s group holds 26% shareholding in these firms, which were incorporated in India to manage design, build, finance, operate, and transfer (DBFOT) projects in the country.
Separately, in International Water Treatment (IWT), Galfar’s parent company has a 30% shareholding in partnership with India’s VA Tech Wabag (32.5%) and Spain’s Cadagua (37.5%).
IWT has completed the Ghubrah independent water desalination project and is maintaining it until February 2020, following which it will be liquidated.
Galfar’s board of directors decided to divest its Indian investments – including those in subsidiaries and associates – in 2017, and a programme was launched last year to find a suitable buyer.
On 18 February, 2019, Galfar’s parent company entered a non-binding agreement with PMA International to sell its Indian investments at a price of $44.6m (OMR17.2m).
The sale process will be discussed during an extraordinary general meeting due to be held this April, and Galfar is “confident that the transaction will be executed in due course”.
When it is complete, the transaction is expected to support Galfar’s aim to “concentrate on its core business in Oman and enhance value addition to the shareholders and stakeholders”, Ali says.
CEO SPEAKS: CHALLENGES AND OPPORTUNITIES
Chief executive officer, Hans Erlings, says that Oman’s focus on the promotion of public-private partnerships (PPP); the local investment climate; and homegrown small- and medium-enterprises, will drive the sultanate’s economy in the year ahead.
However, he adds, Oman’s engineering and construction market has “continued to face a backlog in due payments”, which in turn has restricted the flow of working capital to deliver projects.
“There are serious fiscal constraints in the sector, influenced by lower global oil prices,” Erlings says in Galfar’s Management Discussion and Analysis Report 2018.
“All contractors are carrying this burden in their projects, which is having a significant impact on their ability to maintain business, let alone grow business.
“There was significant work available in the upstream oil and gas sector, as well as in the downstream refining and petrochemicals sector,” Erlings continues more optimistically.
“Work in these areas will be at an all-time high in 2019 and the near future. Government infrastructure project awards have slowed down apart from the essential water and electrical infrastructure, [and] no significant road projects have been awarded. [However] the non-government sector […] is very active.”
With this in mind, where do the opportunities lie for Galfar – and its Omani contracting peers – in 2019? According to its CEO, new engineering and construction work is “expected from BP and Eni”, which recently signed agreements with Oman’s Ministry of Oil and Gas to work on new exploration projects in the sultanate.
“The same is expected from the signing of an interim agreement by the Ministry of Oil and Gas with Shell and Total for the development of integrated gas projects in Oman.”
Additionally, Erlings is optimistic about the deployment of PPP, build-operate-transfer (BOT), and similar contract “innovations” in Oman.
PPPs are already popular in the Omani power and water sectors, and as Erlings explains, these new contract types have “significant potential in the sultanate”.
He adds: “Most of the regulations [required for these models] are already in place, and there is definitely a confidence in the government that this mechanism will work successfully to deliver infrastructure to the country.”
There are serious fiscal constraints in the sector, influenced by lower global oil prices. All contractors are carrying this burden in their projects, which is having a significant impact on their ability to maintain business, let alone grow business.
With an order book of $987.2m (OMR380m) as of 2018 – notably lower than end-2017’s corresponding figure of $1.2bn (OMR483m) – Galfar is optimistic about growth in the months to come.
Of the total orders reported by Galfar at the end of 2018, $459.8m (177m) was related to oil and gas projects. For EPC contractors in Oman, perhaps the good news is that the energy sector has contributed more than 2017’s $405.3m (OMR156m) to Galfar’s order book.
Developments in Galfar’s portfolio include operation and maintenance work for Salalah Waste Water System & Treated Effluent Network, worth $33.7m (OMR13m); construction for Daleel, valued at $78m (OMR30m); and Phase 2 of gas gathering work for BP, priced at $93.5m (OMR36m).
For Petrofac, Galfar is delivering EPC for Packages 1 and 3, worth $49.3m (OMR19m) at one site, and a $41.5m (OMR16m) subcontract to deliver civil, mechanical, electrical, and instrumentation works for Package 1 of the Salalah LPG project.
Galfar, which employs 3,279 locals as part of its Omanisation programme, also plans to continue supporting the sultanate’s in-country value programme. From Oman alone, the contractor procured goods and subcontracts respectively worth $128.8m (OMR49.6m) and $124.7m (OMR48m) during the year.
To improve efficiencies, Erlings explains, the company is focused on speedy collection, reducing inventory levels, and implementing Xpedeon, an enterprise resource model that integrates project management.
The time taken by some clients and consultants to settle contractual matters and close out contracts has become significantly longer than it was a few years ago. This affects the recovery of retention money, which again affects the cash position.
In 2018, Galfar recorded 67 million man-hours and 76 million km, with its loss-time injury (LTI) frequency recorded at 0.18 during the year – far lower than its limit of 0.28.
The firm's road traffic accident frequency of 1.92 was also lower than the year’s limit of 2.0, and Galfar noted 163 days and 29 million man-hours without LTI in 2018 – surpassing its previous record of 89 days and 15 million man-hours in 2015.
Erlings says that Galfar “has potential opportunities” in the gas production and downstream project sector in Oman, “despite [a] contraction of spends due to depressed oil prices”. Other sectors could also drive growth for the contractor, the CEO is confident.
“In 2018, Galfar successfully completed and handed over the BEW Phase 3 project,” he continues. “Taqa Mirbat Road was opened in Dhofar, and in North Oman, the Jabrin Ibri road was opened to the public.
“The government is planning to award two major road projects in 2019, [and] is also considering alternative financing for some projects, through privatisation of these infrastructure [schemes]. We are thus poised to take up new work as and when the projects materialise.”
Galfar is work “in full capacity” on a hospital project in 2019, as well as a fishery port in Duqm, Erlings says, adding that the Omani government’s active investments in water management projects is “giving rise to large business [opportunities]” that the firm will participate in.
“Risks remain an integral part of the construction business in the region […] and the sector – and Galfar in particular – face the risk of higher cost of capital and increasingly difficult access to capital in the future,” Erlings remarks.
“A deteriorating macro-economic environment might result in banks tightening their lending. This could affect the company’s funding and may have broader repercussions on the country as a whole.
“The main threat is the delay in receipt of payment for major projects [that] has led to significant unpaid certified receivables, which further increased since the beginning of 2019. This situation will lead to reduced activity levels in those areas and part demobilisation to make expenditure match income.
“Management of our borrowings has now become extremely critical until such time that the receivables backlog is resolved.”
The CEO is confident about Galfar’s order book and business development pipeline, but “an increasingly difficult macroeconomic context”, he warns, could cause project delays, slowdowns, or cancellations by clients.
“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’s operations. At the same time, the construction sector is struggling [to attract] experienced Omani nationals,” Erlings says in the report.
OTHER SUBSIDIARIES AND FUTURE PLANS
Both Galfar Aspire Projects & Services and Galfar Aspire Readymix, wholly owned by the firm in Oman, have achieved solid financial results, and associate firm Galfar Engineering & Contracting Kuwait also made a profit in 2018.
Ali says the parent firm – which also has a branch in Saudi Arabia – plans to explore opportunities in infrastructure, and oil and gas projects, for the unit.
“In addition to hiving off investments in India, the company continues to pursue international business opportunities in selected geographies in the Mena region with a view to diversifying [its] concentration risk,” Ali explains in Galfar’s Directors’ Report.
[Galfar will] concentrate on its core business in Oman and enhance value addition to the shareholders and stakeholders.
Erlings adds that the firm is also studying potential work in East Africa and Kuwait, and says his team is focused on driving value for Galfar’s stakeholders.
“Galfar salutes HM Sultan Qaboos, who in the more than 48 years of his rule, has transformed Oman into a powerful modern economy in the region,” Erlings says.
“Galfar shall endeavour to reach even higher standards of project deliver through continuous improvement in processes and […] to lead by action in Omanisation as a true Omani enterprise. Given our restructuring programme and optimisation of processes, we are determined to raise the bar and set new benchmarks in the industry.”