PREPARED BY ENVIRONMENTAL

RESOURCE MANAGEMENT
Table of Contents
FOREWORD v
ACKNOWLEDGMENTS vii
EXECUTIVE SUMMARY 1

CASE STUDY 1 4
América Latina Logística

CASE STUDY 2 16
Mengniu

CASE STUDY 3 22
Morion

CASE STUDY 4 27
Reclamation Group

CASE STUDY 5 32
Terapia

E XECUTIVE SUM M ARY iii

Foreword

IFC is committed to investing in and fi nancing ventures that are

fi nancially, environmentally, and socially sustainable. To show the
benefits of a triple bottom line approach to investing, we have
produced five case studies that show you can make money and
thereby meet the demands of the commercial marketplace and
still be environmentally and socially responsible. In fact, we show
that environmental and social responsibility will support and
enhance the achievement of fi nancial imperatives.

And what better place to look for success stories than within the private
equity industry, whose clear imperative is achieving financial returns for
investors in a highly competitive environment?

The five case studies come from five private equity managers
with whom IFC has invested: GP Investimentos in Brazil, CDH China
Fund in China, Quadriga Capital in Russia, Brait Capital in South
Africa, and Advent International in Europe. In each case the
environmental and sustainability aspects were integral to core
business competencies, contributed directly to profits, and were
implemented for commercial reasons.

We hope these stories will inspire you and provide ideas that
both enhance the success of your own investing and contribute
to a sustainable future.

Haydeé Celaya
Director
Private Equity & Investment Funds Department
International Finance Corporation

F ORE WORD v
Acknowledgments
Special thanks to all those involved in the development of this report.

AMÉRICA LATINA LOGÍSTICA TERAPIA

Antonio Bonchristiano, GP Investimentos, the PE Fund
Alex Behring, Chairman of ALL and former GP partner
Melissa Alves Werneck, Manager of Projects, Logistics
and Marketing, ALL
Bernardo Hees, CEO, ALL
Raimundo Pires Martins de Costa,
Director of Operations, ALL
Pedro Roberto O. Almeida, Director of Human
Resources, ALL
Emma Popa-Radu, Advent International
Eric Haworth, Plant Director, Terapia
Dan Petcovici, Site Engineering and
Project Manager, Terapia
INTERNATIONAL FINANCE CORPORATION
Sustainable Financial Markets Facility:

Cecilia Bjerborn
MENGNIU Ekaterina Grigoryeva
Stuart Schoenberger, Managing Director, Andrea King
CDH China Fund Clive Mason
Lu Jun, Executive Director and VP, Mengniu Dan Siddy
Lei Yong Sheng, Secretary of the Board and Chief Fayana Willie
Administrative Officer, Mengniu
Zhang Zen Hua, Manager of Foreign Affairs Department Private Equity & Investment Funds Department:

Simon Andrews (RECLAM)

MORION Jean Laprevotte (ALL)
Reinhard Kohleick, Quadriga Capital Umberto Pisoni
Yakov Vorokhovsky, CEO Morion Sergio Pombo
Olga Sidorenko, Mr. Vorokhovsky’s assistant Peter Tropper
Sergei Olhovsky, Plant Engineer, Morion David Wilton
Rebecca Xu (Mengniu)

RECLAMATION GROUP
Chad Smart, Brait Capital
Darshan Daya, Brait Capital
Dave Kassel, Executive Chairman, Reclamation Group

ACKNOWLEDGEMENTS vii
Executive Summary
THE PROMISE OF PRIVATE EQUITY

BACKGROUND
Five case studies of companies exhibiting good examples of different aspects
of “sustainability” were drawn from the portfolios of private equity funds in
which IFC was an investor.

The definition of sustainability was the triple bottom line concept, broadly
defined. This term refers to the concept of triple bottom line accounting, i.e.,
that for-profit corporations could consider three levels of accounting,
traditional profits as well as environmental and social effect accounting, an
idea proposed by John Elkington in 1998.1 Implicit in the concept as applied
herein, however, was recognition of one of the criticisms of the triple bottom
line theory: that it may potentially be harmful to a business to divert
attention from its core competencies. Rather, as will be seen below, the
sustainable attributes noted in this study were integral to core competencies
and sound business management, contributed directly to profits, and were
implemented purely to foster the business case.

The five companies selected to be case studies are shown in table 1, next page.

KEY FINDINGS
As noted above, the concept of sustainability in this study was based on the
triple bottom line approach, with the caveat that aspects of sustainability
identified would likely reflect good business management and directly
contribute to the bottom line, as would be expected in what were primarily
emerging market businesses operating in their host country marketplace
(e.g., not exporting or part of multinational supply chains). This concept
was confirmed early on in the process of researching IFC’s portfolio for case
studies, when it became apparent that positive social and environmental
aspects of individual companies were an integral part of good business
management, as opposed to a separate or parallel end goal. In all cases

1. Elkington, John, 1998, Cannibals with Forks: the Triple Bottom Line of 21st Century Business,
Capstone Publishing, Oxford. 407 pp.

E XECUTIVE SUM M ARY 1

 TABLE 1.
THE COMPANIES AND THE FUNDS

Company Sector Location Ownership Investment Fund

América Latina Logística Transportation and Curitiba, Brazil Public GP Investimentos

(ALL)
logistics

Mengniu Dairy products Inner Mongolia, China Public CDH China Fund

Morion High technology St. Petersburg, Russia Privately held Quadriga Capital
instruments

Reclamation Group Metal and other waste Johannesburg, South Privately held Brait Capital
(RECLAM) recycling
Africa

Terapia Pharmaceuticals Cluj-Napoca, Romania Privately held Advent International

studied, the companies pursued these
“sustainable” initiatives because they
increased profits and performance.
A number of themes were identified
that were replicated across the five case
studies. The themes and the cases to
which they apply are presented in table
2, (page 3). The bottom lines of the
table present the five fi rms’ recent
fi nancial performance and illustrate
that the implementation of the
measures identified coincided with
strong financial performance. The data
are presented as growth percentages as
opposed to actual numbers, as three of
the five companies are privately held.
Highlights of how the themes were
manifested in each case are presented
below, and the full case studies are
presented in the ensuing chapters.
■ At four of the five companies (ALL,
Mengniu, Morion, and RECLAM)
the CEOs/founders were the source
of the drive for excellence that
resulted in the identified programs
on which the case studies focus. In
the case of Terapia, the private
equity fund viewed brownfield
development as an opportunity
rather than an obstacle for
the transaction.
■ Two companies, Mengniu and
RECLAM, were dependent on
supply chains for which there was
competition, and a key part of their
business success was a direct result
of their ability to capture a signifi-
cant market share of an independent
supply chain, in both cases consist-
ing at least in part of small entrepre-
neurs, via fair pricing and programs
that fostered the economic growth
of microenterprise suppliers.
■ Three of the companies had very
strong programs designed to
optimize worker commitment and
performance. Two companies (ALL
and Mengniu) were highly ranked
in their respective country’s
competitions for most popular
places to work. The third,
RECLAM, in addition to sponsoring
sports teams and other worker
extracurricular programs, was
extremely effective in designing
direct financial reward programs
that both benefited the workers and
resulted in dramatic improvements
in worker performance and revenue
generation for the company.
■ Both ALL and Morion applied
programs to reduce waste and
energy consumption. ALL, primar-
ily a railroad company, was able to
significantly reduce diesel fuel
consumption through application of
improved logistics management via
technology, awareness raising and
training, and its annual “Diesel
Cup” competition, in which
locomotive engineers compete to
use the least amount of fuel without
any dropoff in on-time performance
or decrease in health and safety
performance. Morion invested
in equipment upgrades and
re-engineering of the plant to reduce
water and energy consumption,
and the subsequent savings in
operating costs rapidly paid back
the initial investments and
improved profitability.
■ All five companies had proactively
adopted various international
environmental and other interna-
tional standards, though only
Morion was a part of a global supply
chain where such certifications were
required. The other four companies
willingly adopted these standards
and the associated costs for

2 THE PROMISE OF PRIVATE EQUIT Y

 certification and reporting as
part of their CEO’s drive to create
a world-class company.
■ Three companies were involved in
different aspects of recycling. Metal
and now other disposable product
recycling is RECLAM’s central
business (“the aboveground mine”
in the words of the founder and
CEO). Morion invested in recycling
its product water, both to recover
heat and save energy and to reduce
raw water costs. Terapia is involved
in the cleanup and recycling of
contaminated industrial site
as a sideline to investing in
a former state-owned
pharmaceutical company.
■ Three of the companies were
formerly moribund state-owned
enterprises that were completely
turned around and reinvented as
dynamic and profitable private
sector businesses, in part through
the programs described herein.
■ As can be seen in table 2, four of the
five companies for which financial
data are available have experienced
very healthy growth in revenues
and EBITDA.
METHODOLOGY
IFC contracted Environmental
Resources Management to carry out
the identification and preparation of
the case studies. As stated above, the
goal was to identify cases exhibiting a
range of aspects of sustainability.
Additional selection parameters were
broad geographic and sector diversity.
The case studies were identified via
interviews with IFC staff in the Private
Equity Funds Department. An initially
long list was gradually reduced to a
short list of leads, and then to the final
five through additional interviews with
IFC staff and discussions with the
investment funds staff. The companies,
and in most cases the investment
funds, were visited during 2005.To
develop the cases, a variety of materials
were used, ranging from investment
reports for the two publicly traded
companies to news stories
and interviews.
For three of the companies (ALL,
Morion, and RECLAM), the CEOs
were the primary sources of informa-
tion. For the other two, company staff
and investment fund staff provided the
information. The staff of IFC, of the
investment funds, and of the compa-
nies were enormously supportive
during the process.

TABLE 2.
SUSTAINABILITY THEMES FOUND ACROSS THE FIVE BUSINESS CASES

Theme ALL Mengniu Morion RECLAM Terapia

CEO leadership + + + +
Fostering microenterprise development in + +
the supply chain

Optimizing workforce commitment + + +

Eco-efficiency/energy conservation + +

Proactive adoption of international + + + + +

Environmental, Health, and Safety
standards

Recycling + + +

Privatization + + +
Financial performance 1997-2004 1999-2003 1997-2005 2000-2004 2001-2004

Revenue growth 200% 1343% 500% 282% 156%

EBITDA growth 1560% 1740% 1660% a 810% 180%

a EBIT data, not EBITDA.

E XECUTIVE SUM M ARY 3

 INTRODUCTION
América Latina Logística (ALL), the largest rail-based

América Latina Logística independent logistics operator in Latin America, was an

extremely successful investment for GP Investimentos (GP),
a highly successful Brazilian private equity fund. ALL began
with GP’s winning the concession for one of Brazil’s six
CASE STUDY 1 formerly state-owned railroad concessions at a public auction
Truck from new ALL fleet, in December 1996. In June 2004, less than seven years later,
next to ALL freight locomotive the company was floated on the Bovespa exchange in Brazil,
providing a very profitable return for GP.

This sustainable business case study focuses on ALL’s

strategic investment in its labor force through training and
capacity building, and the parallel success achieved in terms
of reinvigorating the labor force to create a dynamic and
highly profitable company, dramatic improvements in health
and safety, and dramatic reductions in fuel consumption and
overall operating costs.

Highlights of the ALL story include the following points:

■ There has been a rapid reinvention of a formerly
state-owned enterprise with poor performance and
low staff morale resulting from a long history of low
investment, low expectations, and the halving of a
bloated labor force (from 12,000 to 6,000).1
■ Overall performance in terms of on-time delivery of
cargo and profitability has been dramatically improved.
■ The company is now considered one of the top 100
companies to work for in Brazil (and the top 25 in
the case of its Argentine operations).

1. In the year prior to the privatization, the government had slashed the labor force
from 12,000 to 6,000, which destroyed what company morale there had been. After
taking over, ALL was forced to reduce the labor force to 3,000 because revenues
could not support the larger staffing.

4 THE PROMISE OF PRIVATE EQUIT Y

■ Accident and health and safety
performance has gone from poor
to being the best among Brazilian
railroads and on a par with the best
North American railroads.
■ Diesel fuel consumption has
been reduced by 40 percent since
privatization in 1997, thereby
improving profitability and
reducing greenhouse-gas emissions.
BACKGROUND2
Between 1994 and 1998, the Brazilian
state-owned, 22,000-plus-kilometer
national rail system, Rede Ferroviaria
Federal SA (RFFSA), was divided into
six regional concessions and auctioned
as long-term operating leases.
The winning bidders were awarded
thirty-year leases renewable for an
additional thirty years. Huge layoffs,
mandated by the pared-down but
still unsustainably large labor force
from the government-run era, and
low morale and motivation were the
most significant liabilities.
RFFSA had not been a priority of
past administrations, and there
had been little investment in the
infrastructure or attention to
performance. This was due primarily
to the government’s decision in the
1960s to prioritize road transport
(e.g., trucking) over other forms of
transportation, essentially making
the once-proud railroads obsolete.
A pre-privatization study of RFFSA
in 1996 found that 50 percent of the
bridges needed repair, with 20
percent near collapse. Some twenty
2. Based on two primary sources, the ALL- América Latina Logística S.A. offering prospectus and Sull, Donald M., Fernando Martens, and Andre Delben Silva,
2004, “América Latina Logística ,” Harvard Business School Case Study 9-804-139.
3. Related by Alex Behring, former ALL CEO and now chairman, during a February 2005 interview.
of the locomotives were steam
driven, and integration of the
regional lines was so poor that
long-distance transport was difficult
at best. In addition, RFFSA had an
extremely poor accident record.
ROLE OF THE
GP FUND
GP was well aware of RFFSA’s service
and reliability problems. Some years
prior to its investment in ALL,
GP had acquired Brahma Breweries,
one of the major Brazilian brewers.
GP decided to experiment with
shipping Brahma’s fi nished product
on RFFSA, as the rates were favorable
versus trucking for longer distances.
GP contracted with RFFSA to ship
two rail cars of fi nished product, and
not only did neither rail car ever
arrive at the destination, but both
were permanently lost.3
Prior to the auction, GP had carried
out considerable research of the
railroad industry in general and
RFFSA in particular. They consulted
with CEOs and top executives of
several U.S. railroads and developed
a strategic relationship with one U.S.
railroad company, which assisted in
its pre-bid due diligence of RFFSA.
Fully recognizing the extent of
potential problems in the RFFSA
concessions, GP decided to bid for
one of the six regional concessions,
the Ferrovia Sul Atlantica, the
“Southern Line,” which served
Brazil’s three southern states, Paraná,
Santa Catarina, and Rio Grande do
Sul. The public auction took place in
December 1996, and the GP-led
consortium emerged with the
winning bid of Brazilian Real 217
million (at the time approximately
US$195 million).
GP had been very successful in prior
turnaround situations and brought a
wealth of experience and successful
techniques to be applied at ALL.
These included a general goal of
reducing the average age of the staff,
an aggressive performance-based
bonus system for all employees, and
a forced attrition program for
underperforming staff.
After the auction, there was a
three-month waiting period prior
to GP’s takeover of operations.
During this period GP assembled a
management team with expertise
in what they determined were the
four major functional areas of the
company: human resources,
operations, sales, and fi nance.
In a somewhat unusual move, GP
seconded their point person on the
transaction, Alex Behring, to the new
company to be the CEO. Management
identified four goals at the outset:
■ Create an aggressive
corporate culture
■ Cut costs
■ Eliminate bottlenecks
■ Increase revenues by
expanding services to
existing customers.
These original goals are still evident
in the company’s current corporate
mission statement.
A MÉRIC A L ATINA LO GÍS TIC A 5
THE ALL
SUSTAINABILITY
STORY
This case describes two aspects of
ALL’s program that have enhanced
the company’s sustainability and
profitability, or triple bottom line:
■ Its investment in its human
resources and reinvention of the
corporate culture to achieve its
business plan
■ Its efforts to improve operational
efficiency and performance,
which have resulted in a dramatic
reduction in accidents and energy
consumption and emissions.
Human Resources and Corporate Culture
On day one of its new ownership in
April 1997, ALL management faced
a daunting task. It had to severely
reduce the labor force and simultane-
ously reinvent and reinvigorate the
corporate culture to achieve its
business plan, which was based
largely on a dedicated, motivated,
savvy workforce.
ALL management kept the following
principles in mind during its efforts
to reinvent the company’s culture
and reinvigorate the staff:
■ Believe in its agreed business
case/model.
■ From a human resources
perspective, resuscitate a
formerly proud industry (many
of the current workers’ grandfathers
had worked for the railroad).
■ Create a meritocracy with few
barriers between management and
staff, organized around subteams
with clear and measurable goals.
4. Sull, Donald M., Fernando Martens, and Andre Delben Silva, 2004, “América Latina Logística” Harvard Business School Case Study 9-804-139.
6 THE PROMISE OF PRIVATE EQUIT Y
■ Remove people likely to
■
perpetuate the former culture.
Devolve responsibility to the
field and simultaneously seek
feedback and ideas from the
workforce on how to improve all
levels of operations, including
incidents/accidents, delivery time
performance, and fuel economy.
■ Challenge the workforce but
also provide incentives through
a policy of compensation tied
to performance.
■ Invest in the workforce through
training to improve capacity
and commitment.
ALL management moved quickly
to implement the “Pillars of Culture
Change.” These are described
individually below, though they
were in essence components of an
integrated program.
Reduce the Workforce While
Minimizing Impact to Morale
The labor force had been slashed
from 12,000 to 6,000 by the
government in the year or so before
the auction, yet there was a need to
reduce the staff by another 3,000
immediately, based on the pre-auction
due diligence carried out by GP. The
payroll, one of the major operating costs,
When we found someone who had a spark in their eyes,
who wanted to do something, and was strong technically,
we’d give them space and authority, managerial training,
and then a new challenge. Since the new challenge usually
represented an upgrade—also financially speaking—that
created instant loyalty to the new project. These people
really bought into our vision.
Alex Behring, now chairman but formerly CEO in the early years of ALL 4
was still boated, and the new company
urgently needed to cut costs. At the same
time, it was critical to keep the company
running and serve its customers to avoid
losing market share, and therefore
ALL had to endeavor to create a post-
downsizing workforce with a commit-
ment to the business going forward.
ALL minimized the painful and
negative repercussions of the
downsizing by doing the following:
■ It was made absolutely clear from
the first day of the new ownership
that dismissals were necessary for
the company to survive, and this
was in fact the consensus view
among most employees.
■ Severance actions were swift
and decisive, with the majority
carried out in the first month,
without mixed signals or mislead-
ing statements of intent (without
“lies,” as management phrased it).
■ The severance packages were
good, exceeding the government
requirements.
■ ALL subsequently saw to it that a
significant number of the staff let
go were hired by firms contracted
by ALL to carry out construction
and other projects necessary to
rehabilitate and upgrade facilities
and infrastructure.
In the course of the downsizing, it was
critical to retain the “right” staff to
continue operations and to create the
new organization. Over the first ten
days, the CEO and the operations VP
conducted 15-minute interviews with
150 mid-level managers. On the basis
of these interviews, 30 managers were
selected as the core team who would
work with senior management to
implement change. The interviews also
identified those who were considered
unable to make the transition to the
new organization, and those individuals
were let go or demoted. Over the next
two and one-half months, over 100
other employees, including both
managers and line staff, were
interviewed. The interviews served
to get the new management’s message
out to the workforce in an effective
manner and also revealed the fabric
of the staff, differentiating between ALL freight train
higher level political appointees with
little commitment to the business, a
middle tier of skilled engineers and ■ Quantitative annual goals compensation. Different programs
managers who had been demotivated (broken into monthly targets were developed for different levels of
by the destructive internal politics of during the year) staff. For example, for managers, five
the government era, and the main ■ A clear distribution through the quantifiable targets, linked to overall
workforce of train engineers, technicians, company hierarchy and staff corporate objectives but translated
and office workers who were still organizational structure of into objectives the manager could
largely committed to their work. performance bonuses. directly influence, were agreed on
at the start of each year (e.g.,
Establishing Clear, Some 1,000 staff were assigned margins, operating costs, service
Measurable Goals Tied individual goals, with the remainder indicators). The variable compensa-
to Compensation Across parts of teams with team goals. tion program was based on the
Entire Workforce Performance was tracked daily percentage achievement of the
Under government management, against monthly and annual targets and the staff level, with senior
salaries and promotions were based targets for each team and division. managers who met all targets receiving
solely on seniority, and there was Individual charts illustrating bonuses from 50 to 75 percent of
no structured human resources progress against targets for each annual salary. For middle managers,
program (e.g., performance evaluation, team were posted on the wall in the the range was 25 to 40 percent, and
career planning, or training). The individual teams’ office areas as well for staff from 7 to 24 percent.
new program established very clear as in common areas or gathering
goals and a transparent system places (e.g., hallways, and the The performance program also
of compensation tied to performance. cafeteria entranceway). acted as another form of staff
The elements were: selection. Some individuals thrived
■ Long-term vision Performance against goals was directly in this structure, while others didn’t
■ Values/rules of the game tied to compensation, termed variable care for it and left.

A MÉRIC A L ATINA LO GÍS TIC A 7

Building Trust and
Communication with Workers
from the Former Railroad
ALL management recognized the
extreme importance of gaining the
trust and commitment of the former
government workers remaining after
the reductions. Management broad-
cast the message that they were sorry
about the staff reductions, but that
those were a necessary step to keep
the company alive, and management
spent a lot of time listening to the
staff and eliciting feedback and
suggestions for improving the
company’s performance.
In the first year of ownership, ALL
management did two things to signal to
all employees that a new era had begun.
First, office space at headquarters and
regional offices was converted to an
open plan without walls, symbolically
illustrating new management’s intent
to eradicate the barriers that had
existed between management and
staff in the government era.
Even more dramatic, ALL senior
executives went to school to become
certified locomotive engineers,
allowing them to operate locomotives.
After receiving the licenses, ALL
senior staff started a program of
TABLE 1.
TRENDS IN ALL WORKFORCE AGE DISTRIBUTION, 1997-2001
Age 1997 1998
≤ 30 years 270 402
31 to 40 2,290 1,792
41 to 50 873 809
Over 50 16 13
TOTAL 3,449 3,016
8 THE PROMISE OF PRIVATE EQUIT Y
Money for Merit
A cultural revolution based on results and self-esteem has
transformed ALL from a moribund state-owned firm into
a successful company.
Revista Exame—August 6, 2003
spending a week or so each month on
the trains, driving locomotives with
the crews, wearing the standard ALL
uniform, and overnighting with the
crews in company dormitories. ALL
managers recognized that the field
staff understood operational realities
and challenges far better than they
did, used this field time to learn from
the staff, and encouraged the field
staff to make suggestions for improving
operating efficiencies. This evolved
into the company’s “ideas competition”
described below.
In August 1998, one of the worst
accidents in the company’s history
occurred, resulting in a 27-car
derailment. The ALL CEO and
Operations VP were in the field
and arrived at the accident site
within 4 hours. While the Operations
VP spent the next 36 hours supervising
construction of a temporary bypass, the
CEO visited the train’s operators in their
1999 2000 2001
476 554 677
1,233 874 757
705 661 667
13 13 15
2,427 2,102 2,116
homes. This marked the first time in
the company’s history that a company
officer had visited the home of a field
worker, and it served to establish a new
relationship between management and
the train operators that was key to ALL’s
subsequent success.
Seeking Ideas
from the Workforce
Building on the positive outcomes
from soliciting ideas from the
workforce, both in the offices and
from the train operators in the field,
in 1999 ALL established an annual
ideas competition. Ideas were
solicited on a quarterly basis, and
at the end of each quarter, an ideas
competition was held at headquarters
and the top three ideas of the quarter
were selected by a panel. At the end
of the year, a major event was held
to select the top three ideas of the
year. The winners received significant
prizes, sometimes cars. In the event
that the idea came from a team,
the division of the prize was at the
team’s discretion.
Reducing the Age
of the Workforce
Reducing the age of the workforce
had been an effective strategy at other
GP turnaround projects, and as under
the government no new employees
had been hired since 1985, this was
also a basic goal. The challenge was
how to attract bright, young people
to what was widely viewed in Brazil
at the time as a decrepit industry.
 FIGURE 1. objectives that the internal
CHANGE IN EMPLOYEE PRODUCTIVITY, 1997–2003 training program should impart:
■ Enthusiasm
■ Technical knowledge
■ Managerial knowledge—
how to identify problems
and fi nd solutions
■ Management capacity
(Total Quality Management
and the Six-Sigma program
were used.)

ALL initiated various training

RTK = Revenue ton kilometer, ALL’s “volume” indicator; it represents the amount of net volume
transported (load) x distance between origin and destination.
CAGR = Compound annual growth rate, an average annual growth rate measure.
ALL moved almost immediately to
address the recruitment problem by
beginning a program of awareness
and hiring campaigns at universities
throughout the southern states and
the adjacent state of São Paulo. This
program, in conjunction with stories
of ALL’s successful turnaround, led in
2003 to ALL’s being named one of the
100 best places to work in Brazil by a
popular business magazine, Revista
Exame, and resulted in a dramatic
change in the company’s ability to
recruit young, high-caliber staff
(see table 1).
The results were dramatic:
■ In June 1997, ALL was able to
recruit 32 university graduates
for 40 trainee openings.5
■ In 2003, there were over 12,000
applications for 18 trainee openings.
Training
One of the major labor and
cost-cutting decisions had been
to replace people with information
technologies in train operations.
These measures would also allow
centralized tracking of all trains
at all times and serve to boost
operational efficiencies and traffic
scheduling. ALL had studied the
types of systems available during
the due diligence phase, and
knew that implementation of high-
technology systems would require
substantial training to utilize
these technologies effectively.6
In addition, ALL management
wanted to raise internal awareness
of the core business realities,
so that workers at all levels would
appreciate as much as possible how
their actions and those of their
immediate colleagues impacted
the company’s performance. Last,
management wanted to instill a
culture of excellence with a
commitment to solving problems.
ALL identified the following
programs immediately, and in
August 2000 it opened the company
university, UNIALL, at company
headquarters. Each employee is
required to attend at least one week
of training a year. Highlights of the
training program include:
■ Over 12,000 applications for the
trainee programs from less than
3,000 staff in 2003
■ UNIALL—Corporate university
providing training in operations,
administration, and management
modules; all employees
receiving at least one week
of training each year
■ MBA in Logistics, Operations,
and Services Qualification in
partnership with COPPEAD/UFRJ
■ Six-Sigma Black Belt Program.
Recognizing that a significant
portion of the staff had not received
the Brazilian equivalent of high school
diplomas, management also introduced
ALL on the Tracks of Education, a free
high school equivalency program that
resulted in the award of a diploma to
those staff and prepared them for
access to higher education. Some 170
staff members have benefited from
this program and received high school
equivalency diplomas.

5. After 12 months, trainees performing well would be promoted to entry-level supervisor or assistant manager positions.
6. These included a satellite-based system that monitored track conditions and on-board computers on all locomotives, allowing real-time tracking of all equipment 24 hours per day.

A MÉRIC A L ATINA LO GÍS TIC A 9

 FIGURE 2.
RELATIVE RANKING IN TERMS OF ACCIDENTS PER MILLION KILOMETERS OF
TRAIN TRAVEL, BRAZILIAN RAILROADS, 2002

FIGURE 3.
RELATIVE RANKING IN TERMS OF ACCIDENTS PER MILLION KILOMETERS OF TRAIN
TRAVEL, ALL VS. U.S. RAILROADS, 2002

10 THE PROMISE OF PRIVATE EQUIT Y

 FIGURE 4. ALL’s investment in its workforce
DECLINE IN FUEL CONSUMPTION, 1997–2003 has paid huge dividends with a
dramatic increase in productivity
since 1997 (figure 1).

Improving Operational Performance

Accidents and
On-Time Performance
The former state-owned Southern Line
had a terrible accident and reliability
record. As the company’s business plan
was geared to retaining and expanding
business with existing clients as well as
winning new clients based on perfor-
mance, it was fundamental that the
company drastically reduce accidents
GTK = Gross ton kilometer, or the amount of gross mass (load+railcars) x distance, and worker lost days in order to
for loaded and unloaded flows.

WE CONTINUE TO PERFECT OUR CULTURE

We believe that people make the difference, in particular for a service company such as ours. In 2003, we continued to make strong investment in training,
with more than 1,000 employees having completed our corporate university program, including more black belts and green belts in the Six-Sigma quality
management and problem-solving program. Our culture is based on goal achievement, and aggressive variable pay has helped us to be the only privatized company
to rank among the best companies to work for in the annual survey conducted by Exame magazine in Brazil, as well as in the Apertura magazine guide of the 25
best companies to work for in Argentina. The extraordinary commitment of our people to go the extra mile brings many benefits to our company, including higher
service quality: over 90 percent of our rail traffic arrives on time. This significantly increases the safety and reliability of our locomotive fleet. We have not only
surpassed the safety targets for our concession, we have reached a level of safety that is comparable to that of U.S. rail operators.

Values
▲ Focus on the customer
▲ People make the difference and are compensated for results
▲ Integrity and transparency
▲ Increasing shareholder value through profitability
▲ Simplicity with creativity and austerity
▲ Methodology and superior quality standards for constant improvement
▲ Teamwork in a fun and safe environment
▲ Commitment to the community and the environment

A MÉRIC A L ATINA LO GÍS TIC A 11

 People Who Never Cease To Do More and Better
Over the last seven years, ALL has improved its productivity and enhanced the quality of its services, boasting numerous success cases.
These results are mainly due to two factors: the qualification of its employees, who are always ready to develop and implement solutions
to maximize the company’s performance; and the control of corporate operations, which, with the assistance of state-of-the-art technology
and methodology, ensures ongoing improvement.

In 2003, ALL doubled its capacity of tons hauled, from 11 million tons in 1997 to 22 million. Over this same period, it increased car utilization
by 67 percent: in 1997 it was 1.98 carloads per month,and in 2003 this figure rose to 3.31. Fuel consumption was reduced by 12 percent,
from 6.7 to 5.9 liters/1,000 GTK, which implies a substantial reduction in operating costs.

Train times are strictly monitored. In 2001, when the company began a major on-time performance drive, the percentage was 56 percent,
whereas in 2003 it ended the year at 90 percent—an improvement of more than 50 percent. During the same period, the average transit time
of its cars was reduced by 25 percent. These results were possible thanks to investments in technology such as ACT (traffic control automation)
and the Translogic system, which managed to increase operational efficiency.

In road operations, the results were also inspiring. The average remunerated kilometer increased from 9,000 km/month per vehicle
in 2002 to 11,800 km/month in 2003, an increase of over 30 percent in just one year. ALL’s operations now include a trucking business
and railroad operations in Argentina.

These are some of ALL’s achievements over recent years that illustrate its operational excellence and show that, being focused on results,
it is possible to achieve ever more daring goals without losing the focus on cost reduction.

People Who Do Not Stop Growing

The fuel for ALL to keep moving ahead is the potential and the force of its people: a great team which makes the difference.

At ALL, we believe in the potential of our people and value the contributions of each of them—so much so that we have adopted a methodology
that establishes clear targets, discloses achievements, and awards outstanding collaborators. This makes ALL one of the most aggressive companies
in terms of variable compensation on the market. In 2003, over R$15 million was distributed in the profit sharing program.

But this is not all. Through various actions, ALL prepares its collaborators to perform their functions better. UNIALL—ALL’s Corporate University,
founded in August 2000, has trained over 7,000 employees, in a total of 650,000 hours of training. In 2003 alone, over 1,100 employees
were trained at UNIALL.

ALL on the Tracks of Education

Designed for collaborators who have not concluded their formal school education, the purpose of the “ALL on the Tracks of Education” program
is to provide a contribution to professional formation and to the development of society. Initiated in 2001, the program has already trained 170
persons, and the company has invested over R$800,000.

(Source: ALL, 2003 Annual Report)

12 THE PROMISE OF PRIVATE EQUIT Y

improve on-time performance. In FIGURE 5.
addition, rail accidents in the govern- ALL’S GROWTH IN EBITDA MARGINS, 1997–2003
ment-owned era had caused significant
impacts to the environment and the
public at large, depending on the
location of the accident and the cargo.

Operating safety was designated the top

“pillar of service.” As described previous-
ly, ALL management reduced accidents
and improved operational performance
through a combination of training and
new information technologies.

Health and safety training was a basic

training requirement for all employ-
ees, and accident prevention and FIGURE 6.
reduction became a focus of all teams ALL REVENUE AND EBITDA PERFORMANCE
throughout the company and a key VIS-À-VIS BRAZIL’S GDP, 1997–2003
metric to be charted and displayed on
the team goal charts posted through-
out the company’s offices. The health
and safety message became central to
the corporate culture.

Some of the new technology systems

that required staff training for
operation are listed below:
■ Satellite Tracking System—Cost-
effective train-tracking system,
using alternative technology that
allows for 30 percent communica-
tion cost reduction with the same
level of safety
■ Translogic—A proprietary
railroad operational system
that supports service-level
requirements control
■ OPTCAP—Asset allocation
optimizer that allows for
commercial flow prioritization
and revenue/yield maximization
■ OPTVAG—Car trip optimizer that
allows for a reduction of empty car
traffic and maximizes service-level
compliance
■ On-Board Computers—Provide
real-time data for the engineer
related to speed limits, fuel
CAGR = Compound annual growth rate, an average annual growth rate measure.
consumption, and traffic,
increasing the safety level and
decreasing operational costs
■ Derailment Detectors—Detect
derailed cars in traffic, minimizing
incident severity
■ Hot Box Detectors—Detect over-
heated bearings on cars in a train,
minimizing the risk of in-service
bearing failure.
Locations of all trains across the
entire rail network can now be
monitored and speeds optimized to
reduce or avoid track or switching
delays. Incidents and accidents
have been significantly reduced
and on-time performance
dramatically improved.
Figures 2 and 3 show how ALL
ranks in terms of accidents
compared with other Brazilian
and North American railroads.
Fuel Consumption
Diesel fuel consumption had formerly
been the company’s largest single cost
item, as much as 25 percent of net

A MÉRIC A L ATINA LO GÍS TIC A 13

 One of ALL’s newly acquired reconditioned locomotives.

14 THE PROMISE OF PRIVATE EQUIT Y

revenue.7 Investment in newer
locomotives, better maintenance,
and logistics management and other
technologies had helped to reduce fuel
consumption, but with the introduc-
tion in 2000 of a fuel conservation
competition among the locomotive
operators, fuel consumption has
declined significantly (figure 4).
The Diesel Cup is an annual
competition in which all the
locomotive operators compete to
reduce fuel consumption, with the
reward being recognition for
fulfilling a major corporate initia-
tive and cash bonuses and other
prizes. To avoid any possibility of a
decline in attention to health and
safety performance resulting from
the competition, accidents or
other significant safety violations
automatically disqualify an
operator from the competition.
As a result of the program, locomo-
tive operators have become far more
focused on efficient operation of their
machines, with greater attention to
maintenance and improvements in
fuel economy as well as reduced
downtime and better on-time
performance. This in turn has put a
higher premium on the maintenance
shop, which in turn has raised its
performance standards. The mainte-
nance shop studied the Caterpillar
corporation’s maintenance program
and adopted many of their standards,
including white uniforms and a
“clean room” atmosphere for the
maintenance shop. Oil changes and
7. Alex Behring interview, February 9, 2005.
8. During the Vietnam war, bridges were key to rapidly deploying forces across the many rivers. The Viet Cong, with limited resources, built cheap, wooden bridges,
which could be rapidly rebuilt if destroyed and therefore did not require defense. The U.S. military took the opposite approach, building expensive and
time-consuming steel bridges, which they then had to defend.
9. Sull, Donald M., Fernando Martens, and Andre Delben Silva, 2004, “América Latina Logística,” Harvard Business School Case Study 9-804-139.
heavy lubrication operations, which
required handling and storage of
used oils and solvents, have all been
outsourced to licensed operators,
leaving the maintenance operation
to focus on lengthening service
between locomotive overhauls.
Results
ALL’s results have been dramatic,
including a very successful public
offering in 2004.
ALL’s 2003 Annual Review
describes the company’s continuing
commitment to its employees, to the
environment, and to the public at
large, and the success resulting
from this approach.
CONCLUSIONS
Companies often avoid or delay
implementing investments in
sustainability for budget reasons.
This is because, in effect, they are
discounting the benefits or positive
feedback from such investments. A
central aspect of the ALL case is that
the company made the investments
described in this case within a
business plan extremely focused on
cost cutting and very carefully
controlled investments. Two tenets
of the business plan were zero-based
budgeting and what was referred to
as its “Vietnamese” 8 approach to
capital investments.9
ALL management applied four
rules to screen and prioritize
capital investments:
■ Capital expenditures were
limited to those that eliminated
bottlenecks preventing the
company from growing revenues.
■ The lowest upfront cash alternative
was preferred, even if it was not
necessarily the largest net present
value or the most elegant solution.
■ Options that fi xed a problem
faster were preferred to
longer-term solutions.
■ Reutilizing existing resources
was preferred to acquiring
new materials.
With these investment management
principles in place, ALL has made
significant investments in its
workforce and its business operations
that have clearly contributed to the
company’s long-term sustainability.
This case illustrates that investments
in long-term sustainability are part
of sound fiscal management and are
absolutely integrated with it. In ALL’s
case, financial sustainability is one
and the same with commitment to
employees, the environment, and
the public at large.
Figure 5 illustrates ALL’s increase
in profitability vs. the Brazilian
economy as a whole, and figure 6
shows ALL revenue and EBITDA
performance relative to Brazil’s
GDP from 1997 to 2003.
A MÉRIC A L ATINA LO GÍS TIC A 15
 INTRODUCTION
Founded in 1999, Mengniu Group (Mengniu) has grown
rapidly to become the leading dairy product manufacturer

Mengniu in China. Its principal products are liquid milk (UHT milk,1
milk beverages, and yogurt), ice cream, and other dairy
products such as milk powder, milk tea powder, and tablets.
Mengniu has overtaken its long-established state-owned
CASE STUDY 2 rivals through dedication to quality and innovation in all
Mrs Zhang’s farmyard, aspects of its business, including marketing, governance,
cows, and watchdog.
and aggressive adoption of international quality and best
practice standards.

CDH China Fund, an IFC investee private equity fund,

invested in Mengniu in 2002. Mengniu went public in
2004 and trades on the Hong Kong exchange.

This sustainable business case study focuses on

Mengniu’s commitment to:
■ Its supply chain, consisting of independent
small farmers
■ Adoption and implementation of internationally
accepted management, systems for quality
assurance, environmental management, and
worker health and safety
■ Its employees and the creation of a safe and
desirable workplace (recognized in 2005 as one
of the 20 best places to work in China based
on the “Happy Workplace” index)
■ Continuing improvement and innovation
through joint ventures and use of
state-of-the-art equipment.

1. Ultra-high-temperature (UHT) pasteurized milk does not require refrigeration, thereby

providing extended nonrefrigerated shelf life of up to nine months and simplifying
shipping and storage for the producer and consumer.

16 THE PROMISE OF PRIVATE EQUIT Y

BACKGROUND
Mengniu is a manufacturer of milk
products based in Inner Mongolia,
famous for its grasslands and one of
the traditional dairy regions of
China. Mengniu was privately
founded in 1999 by a management
team with long experience in one of
Inner Mongolia’s state-owned milk
product companies, Mongolia Yili
Industrial Group (Yili). Mr. Niu
Gensheng, the founder and chairman
of Mengniu, had lost his position as
vice-president of sales at Yili after an
internal power struggle in 1999. Mr.
Niu had worked at Yili for 17 years
and his father before him for 38
years. Mr. Niu, and the small but
experienced management team he
brought with him from Yili,
started Mengniu with $12,600
of their own capital.2
Mengniu competes fiercely with
Yili and the other big Chinese dairy,
Bright Dairy & Food. The three
companies collectively controlled
approximately 60 percent of the
market as of August 2005.3
In only five years, Mengniu has grown
explosively, overtaking Yili as the top
seller of milk and simultaneously
becoming one of China’s best-known
brands. According to AC Nielsen,
Mengniu was China’s top seller of
milk in 2004 with 22 percent of the
market and revenues of US$871
million. This represented a revenue
increase of 77 percent over the prior
year, with an increase in profits of 94
percent or US$38.5 million. In the
first half of 2005, sales increased 37
2. Personal communication with CDH China Fund; Business Week, “China’s Free Range Cash Cow,” October 24, 2005.
3. Business Week, “China’s Free Range Cash Cow,” October 24, 2005.
4. The Standard, China’s Business Newspaper, Top Stories: “Mengniu reaps 34 percent gain in profits as sales climb,” August 24, 2005.
percent to US$578 million and
earnings 34 percent to US$30
million, putting Mengniu on track
to exceed US$1 billion in sales and
US$60 million in profit.4
Mengniu’s success is also a function
of its commitment to innovation and
quality in the dairy industry which
has led it to adopt international best
practices and to actively seek techno-
logical and operational improvements
through joint ventures and demon-
stration projects with international
leaders in the dairy industry.
THE DAIRY
BUSINESS IN CHINA
The milk product market in China has
grown dramatically in the last decade
as a result of increasing levels of
disposable income and improved
consumer awareness of the need to
improve dietary nutrition. The growing
market for milk products is due in part
to a government program that pro-
motes consumption of dairy products
for their health and nutritional
benefits. The annual growth rate in
dairy product consumption has been
estimated to have increased from 5.4
percent to 14.4 percent between 1998
and 2002 nationwide and by as much
as 30 percent per year in urban areas.
The dairy business in China involves
the following process:
■ Dairy farmers bring their cows to
milk collection centers for milking.
■ After each milking, the fresh
milk is immediately transported
by sterilized tank trucks to the
Mengniu plant for processing.
■ Milk is processed 24 hours a day.
■ Products are packaged and
warehoused.
■ The products are then distributed
to the market.
The collection centers, which were
established by the government,
consist of a central milking barn
surrounded by a series of small cow
barn and feeding yard complexes
with attached residential units for
the farmer and family.
The milking barn at each collection
center is owned and operated by a
third party who milks the cows and
supplies the milk to a dairy products
company. The cow barn and residential
units in the complex are owned by the
individual farmers, who must purchase
them. The farmers must also supply
their own cows and forage. The typical
collection center/farm complex has 40
farmers and their families, and the
average farmer has from two to ten
cows. All manure is collected and sold
to the farmers for fertilizer, and given
the dry climate and relatively flat
landscape, there is little runoff.
In Mengniu’s case, each farmer has a
contract to supply milk to Mengniu
through the third-party collection
centers, which also are contracted to
Mengniu. The farmers are paid in
cash after each milking, based on
the quantity of milk produced.
Mengniu also provides quality
control supervisors.
MENGNIU 17
 The milk truck transfer operators
own their own trucks but are also
contracted to Mengniu. The trucks
are sterilized after each load at the
Mengniu plant’s sterilization center.
Mengniu has some 3,000 collection
centers under contract in China,
with some 1,800 in Inner Mongolia.
ROLE OF THE CDH
CHINA FUND
CDH China Fund took a very
active role with Mengniu in the
following areas:
1) Restructuring of the company’s
ownership and shareholding,
which incentivized management
to build long-term shareholder
value as opposed to short-term
personal wealth.
2) Improved internal corporate
governance, which provided the
foundation for the company to
manage rapid growth (at times
greater than 100 percent year to
year) and create a sustainable
platform to effectively compete
in a highly competitive market.
Equally important, going public
raised the company’s profi le and
reputation and increased access to
market intelligence.
5) Board-level Activity: CDH’s
Managing Partner, Mr. Jiao Zhen,
was appointed Chairman of the
Board and continues to be an active
member, providing invaluable
advice to Mr. Niu and the manage-
ment team on business strategy and
corporate finance issues.
CDH did not, however, have a specific
role in the sustainable business aspects
discussed in this case study.
THE MENGNIU
SUSTAINABILITY
STORY
This case describes four aspects of
Mengniu’s business model that have
enhanced the company’s sustainability
and profitability, or triple bottom line:
The Zhangs—Part of the Mengniu Supply Chain
■ Commitment to and technical and
financial support for the small
farmers in the supply chain, which
has fostered entrepreneurial
growth in this sector
■ Commitment to its workers,
resulting in the company’s
top-20 ranking among places to
work in China
■ Implementation of international
quality standards and certifications
■ Continual improvement and
innovation.
Commitment to Supply Chain
One of Mengniu’s key competitive
strengths is its ability to obtain a
steady supply of high-quality raw
milk. Its supply chain consists of
some 500,000 dairy cows owned by
300,000 small, independent farmers
in Inner Mongolia and adjacent
provinces, with an average of 1.67
cows per farmer.
Prior to the creation of Mengniu,
the state-owned dairy company, Yili,
effectively had a monopoly as the only
buyer of raw milk in the region. Yili
was able to set prices and keep them

3) Development of a stock option
plan, which further supported and
emphasized long-term, sustainable
profitability.
4) Execution of an IPO: CDH
was a key advisor to management
throughout the IPO process,
which was a huge success.
Mengniu’s going public was a
critical part of the company’s
long-term viability, given
the need for capital to expand.
Zhang Xiu Fang and her husband were traditional dairy cow herders from the western reaches of Inner
Mongolia. Seeking a better quality of life, they heard about Mengniu’s rapid growth and decided to
explore opportunities in the Mengniu supply chain. In 2003, they moved to a collection farm where the
dairy farmers were contracted to Mengniu. The company helped them to get bank loans to purchase a
house and farm unit. In the last two years, they have been able to increase their herd from 10 to 50 cows
by leveraging their earnings with the bank to buy additional cows. They have also increased their per
animal production via the technical support they have received from Mengniu.
The Zhangs have profited from the arrangement but have concerns, because milk prices are steady but
forage prices have been rising. They also miss their children who remained in their home town, but they
are now participants in China’s economic growth and own a truck, have a television with a satellite feed,
and have achieved a higher quality of life than would have been possible in their former village.

18 THE PROMISE OF PRIVATE EQUIT Y

low, in part because the supply then
exceeded the demand.5
Mengniu was able to capture supply by
offering a “fair” price and establishing
contracts with farmers guaranteeing
to purchase their milk at fair market
value. The more entrepreneurial
farmers saw this as a market
opportunity to increase production by
investing in more cows. Mengniu also
assisted the farmers in obtaining loans
from local banks, which allowed them
to purchase farmettes at collection
centers, as well as more cows.
Mengniu established the following
principles for dealing with the
supply chain:
■ The farmers must supply milk
to the collection center.
■ Mengniu will pay the established
market value for the milk.
■ Mengniu will not pay more than
other companies, but neither will it
purchase milk for less than the
established market value or
contrive to pay less.
Mengniu’s pro-farmer program has
been extremely successful, as evi-
denced by its milk collection perfor-
mance. At the end of its first year,
Mengniu was collecting 19 tons a day,
whereas in 2005 they were averaging
5,000 tons a day, an increase of 263
times over six years.
Through its supply chain program,
Mengniu has in effect served as an
incubator for small business
development, helping its small
suppliers to access fi nance and
fee-based technical support, and
training in animal husbandry to
5. Dairy product consumption in China has increased dramatically in the last decade due to government programs that have advertised the health benefits of dairy products, and
because of more effective marketing and distribution by companies such as Mengniu.
6. Occupational Health and Safety Assessment Series.
optimize their production. This has
in turn improved the well-being and
economic situation for the small
farmers in their supply chain and the
local economy (see box on previous
page). The modern animal husbandry
techniques have been drawn from
best international practice, thereby
improving the environmental
sustainability of the small dairy
farmers in Mengniu’s supply chain.
Commitment to Workers
Mengniu’s extraordinary growth and
expansion would not have been
possible without a dedicated work-
force. Since its founding, the company Mrs. Zhang in front of her new
has taken measures to create an esprit truck and farmyard.
de corps and worker dedication to the
company’s mission.
In addition to financial performance tion conducted by CCTV and based
incentives, the company has created an on research conducted by Beijing
elaborate campus environment at its University’s Social Investigation
headquarters, including apartment Research Center.
complexes with gardens, fountains,
shopping centers including grocery Implementation of International Quality
stores, and recreation centers complete Standards and Certifications
with pools and other sports facilities.
There is also a large U.S. suburban style As a part of Mengniu’s focus on quality
neighborhood development for those and innovation in the dairy industry, the
with families, featuring individual company has aggressively adopted and
houses with grass lawns and winding implemented international best practices
streets with newly planted trees. The and standards encompassing food safety
company developed these facilities and quality, worker health and safety
for those workers who can rent or standards, and environmental manage-
purchase. For purchasers, the company ment. Mengniu is certified for and
arranges financing for employees to reportedly rigorously compliant with:
purchase the housing of their choice. ■ ISO 14001, the international
standard for environmental
Mengniu was selected in 2005 as one management.
of the 20 best companies to work ■ OHSAS6 18001, the international
for in China by the annual China occupational health and safety
“Happy Workplace” index competi- management system specification.
MENGNIU 19
 One of Mengniu’s seven state-of-the-art milk
processing plants headquarters.

20 THE PROMISE OF PRIVATE EQUIT Y

 It is comprised of two parts, 18001
and 18002 and embraces BS8800
and a number of other publications.
■ HAACP, or Hazard Analysis
and Critical Control Point
certification, the U.S. Food and
Drug Administration’s standard
for food safety and quality control
during production.
Mengniu is also certified under the
Chinese Department of Agriculture’s
“Green Food Net” program. This
rating system examines agricultural
sector companies against certain set
standards, including compliance with
national environmental standards
and technical product standards
established by the Department
of Agriculture.
Continual Improvement and Innovation
One of the major factors in Mengniu’s
success has been its dedication to
improvement and innovation, both in
the dairy industry and companywide.
This is reflected in its aggressive
adoption and certification program
for quality standards described
above, as well as its purchase of
state-of-the-art equipment and
business liaisons with leading
international companies in the
dairy industry.
State-of-the-Art Equipment
Mengniu’s seven enormous produc-
tion plants at company headquarters
use the latest Tetra Pak machinery and
equipment. The entire system, from
fi lling and packaging to palletizing
and warehousing, is computer
controlled. In the modern warehouses
at the rear of each modular produc-
tion plant, robotic forklifts automati-
cally carry and stack pallets of
packaged products. Mengniu also has
a sophisticated training program to
educate workers in the operation and
maintenance of the equipment.
Tetra Pak has a strong commitment
to the environment and sustainability
as well, and its equipment is designed
to minimize environmental impacts
and energy and water consumption.
Tetra Pak works closely with
Mengniu to optimize performance
and minimize impacts.
Strategic Liaisons with
International Companies
Mengniu has sought out a number of
strategic relations with leading
international firms to improve its own
business as well as to raise the bar in
the Chinese dairy industry as a whole.
In 2005 alone, these included:
■ An alliance with the Danish
biotechnology firm Chr. Hansen,
which provides ingredients to the
food, dairy, human health and
nutrition, and animal health
industries. Chr. Hansen and
Mengniu are teaming up to
promote “probiotic” cultures
for yogurt in China. Probiotic
culture yogurt is extremely
popular in Europe for its
enhanced nutritional benefits.
■ A joint venture with the
Scandinavian food firm Arla Foods
for the production of milk powder
packs. China is the world’s largest
consumer of milk powder packs.
■ A joint venture with the Australian
company Autasia, a specialist in
dairy cow breeding and husbandry
and part of the Japfa Group and the
Indonesian-based Salim Group, in
the state-of-the-art Inner Mongolia
Mengniu Autasia Model Dairy
Farm. The 600-hectare farm has
a planned capacity of 10,000
breeding cows and features a host
of innovations to promote contented
cows, including robotic milking
machines that allow the cows
to milk themselves; hay from 12
species of grasses; piped-in music;
foam sleeping mats; and self-
grooming rotary brushes.
CONCLUSION
The sustainability aspects of Mengniu
can be attributed at least in part to its
many associations with international
leaders in the dairy industry. But the
paramount reason for the company’s
commitment to and successful
implementation of these measures
is the vision of its founder and the
management team.
Second, while these initiatives
identified have been presented as
specific aspects or initiatives, they
are actually fully integrated within
Mengniu’s business plan.
Last, in the conventional business
sense, at least part of Mengniu’s
success would be attributed to
brilliant marketing and strong
policies and programs to build
worker satisfaction and dedication.
But from a sustainability perspective,
these could be considered elements
of a strong stakeholder engagement
program. Mengniu has demonstrated
a great knack for understanding the
marketplace, and for using this
understanding to develop products
and advertising campaigns that
have been extremely successful in a
short time. Similarly, the extremely
high worker satisfaction rating is
evidence of a management team
that is fully engaged with its
workers, understands what they
want, and is delivering.
MENGNIU 21
 INTRODUCTION

Morion Morion is a St. Petersburg, Russia–based developer

and manufacturer of high-end quartz frequency-control
devices. These devices provide the precise time and
frequency on which modern electronics depends.
CASE STUDY 3 Applications range from watches and cell phones to
Morion final crystal navigation (GPS) and space and satellite technology.
quality testing facility.
Morion’s customers include the International Space
Equipment banks
contain crystals being Station, Nokia, Motorola, and Alcatel.
subjected to
continuous tests to Quadriga Capital, a private equity fund in which
weed out substandard IFC has invested, invested in Morion in 2000 along
performers. with the EBRD. Morion remains privately held, and
detailed financial data were not disclosed.

This sustainable business case study focuses on Morion’s

successful efforts to improve operational efficiencies and
profitability by reducing energy consumption and
reducing water consumption and wastewater generation.

BACKGROUND
Morion means black quartz in Russian, and the conver-
sion of synthetic quartz crystals into extremely precise
oscillators is Morion’s business. Vibrating quartz crystals
are the heart of nearly all frequency-control devices,
which provide the basis for electronic clocks and the
control of electromagnetic waves in virtually all modern
electronic products. The use of quartz crystals began with
military applications in the late 1930s and has expanded

22 THE PROMISE OF PRIVATE EQUIT Y

 TABLE 1.
MAJOR APPLICATIONS OF QUARTZ CRYSTALS

Military and Research and Industrial Consumer Automotive

Aerospace Metrology
Communications Atomic clocks Communications Watches and clocks Engine control
Navigation Instruments Telecommunications Cellular and cordless Car stereo
GPS Astronomy and geodesy Mobile/cellular/portable phones Clock
IFF Space tracking radios, telephones and pager Pagers Trip computer
Radar Celestial navigation GPS Radios GPS
Sensors GPS Aviation Stereos
Guidance systems Marine navigation Color TV
Fuses Instrumentation Cable TV systems
Electronic warfare Computers Home computers
Sonar buoys Digital systems VCRs and video cameras
CRT displays CB and amateur radio
Disk drives Toys and games
Modems Pacemakers
Tagging/identification GPS
Utilities

to virtually all modern electronic
technology (see table 1.)
Morion traces its history back to the
establishment of the Siemens and
Halske telegraph company in St.
Petersburg in 1855. The company
subsequently became involved in the
early days of the quartz frequency-
control business in the 1930s.
In 1994, after the company had been
state-owned for 70 years, Dr. Yakov
Vorokhovsky, head of the research
and development department,
initiated a management-led buyout
and conversion of the company into
a private joint stock company.
Dr. Vorokhovsky soon began to
reinvent the company. In 1990, the
company had 1,500 employees and
sales of US$1.7 million. The staff was
bloated, as in most Soviet-era state-
owned enterprises, and the staff was
gradually cut, but Dr. Vorokhovsky
and the management team
endeavored to retain the best employees
and improve company morale. The
process was not as difficult as it might
have been in other settings, because as
a state-owned company, salaries were
very low and payment irregular.
In the end, the workforce was reduced
to 500, but average salaries increased
from US$17/month to US$500/month.
Dr. Vorokhovsky implemented a
number of other initiatives to make
Morion a desirable place to work,
including cleaning up and modernizing
the bathrooms and bringing in an
outside contractor to operate a
cafeteria for the workers.
Morion has experienced steady
growth since privatization.
Sales were US$2.4 million in 1997
and were projected to be US$15
million in 2005. The company has
continually improved its internal
quality control and production
efficiencies, and this has helped it
overcome the former market percep-
tion that Russian companies were
incapable of providing consistent
quality and on-time delivery. As a
result, the company has both pene-
trated and in recent years increased its
share of the international supply chain
to the cellular telephone market and
space industry and plans to continue
to penetrate these markets and
develop new ones.
ROLE OF THE
QUADRIGA
CAPITAL FUND
In the Soviet era the emphasis was on
production versus efficient use of
resources, as the state controlled

MORION 23
 prices, and market forces were
irrelevant. Heating costs, substantial
given the long and cold winters, were
paid by the state, and conservation
measures such as insulation, double-
glazed windows, etc. were not
considered. Morion’s building,
a sprawling, multistory labyrinth
typical of Soviet-era architecture,
was quite inefficient in all aspects
of building services, including
winterization measures, heating
and cooling, and boiler efficiency.
Quadriga was very familiar with
the state of affairs in former Soviet
enterprises, and specifically aware
of how these costs impacted Morion’s
financial situation. The initial
environmental due diligence
screening of Morion had identified
that the company was paying an
annual US$50,000 charge for raw
water and wastewater discharged
(in the Russian system, only the
incoming raw water is metered, and
wastewater volume is calculated on
the basis of raw water consumption).
Dr. Vorokhovsky in a Morion control room.
24 THE PROMISE OF PRIVATE EQUIT Y
Given the company’s tenuous
financial condition in the early years of
Quadriga’s involvement, the $50,000
charge was significant. While aware of
these opportunities, Morion was
focused on survival and did not have
the time or capital to invest in
developing solutions. Quadriga urged
Morion to pursue remedies and agreed
to finance the necessary investments.
This led to the three programs described
herein being implemented and the
development of a corporate culture
focused on optimizing manufacturing
performance and reducing waste and
pollution. To ensure success, Morion
hired Sergei Olhovsky, a civil engineer,
whose sole role would be to manage
the development and implementation
of the program. Mr. Olhovsky has
been creative in his approach, using
abandoned equipment in one
application to save capital costs.
In addition, broader sustainability and
technical demands were pushed down
the supply chain by the multinational
firms considering purchase of Morion
products. For example, Nokia, which
has subsequently become a major
purchaser of Morion products, had
stringent material requirements for
suppliers, including a prohibition on
the presence of lead and cadmium in
soldering of circuits. Nokia would not
agree to purchase Morion’s products
until these standards were met,
resulting in adoption of these stan-
dards for all its products.
Second, Nokia also required that
Morion be ISO 14001 certified, which
the company subsequently achieved.
Morion would likely have had a very
difficult time achieving these higher
performance standards without
Quadriga’s financial support.
Last, achievement of these international
standards has allowed Morion to access
other international markets where
these same standards are applied.
Hence, Quadriga was able to
significantly influence Morion’s
environmental sustainability, which
has contributed to the company’s
overall financial sustainability.
THE MORION
SUSTAINABILITY
STORY
This case describes three Morion
programs that have enhanced the
company’s sustainability and profit-
ability, or triple bottom line:
■ Measures implemented to reduce
natural gas consumption
■ Measures implemented to reduce
water consumption
■ Measures implemented to reduce
electricity consumption.
These measures are described below, FIGURE 1.
preceded by a description of the NATURAL GAS CONSUMPTION AT MORION, 2000-2004
context for the measures.

Natural Gas Use Reduction

Morion began its program for reduc-

ing natural gas consumption in 2000.
The first and most significant measure
was to redesign and retrofit the boiler
to make it more efficient. Morion was
able to realize considerable cost
savings in this project by obtaining
an abandoned boiler from another
plant, rehabilitating it, and using it to
replace the previous boiler, which was
oversized and inefficient.

In addition, as Morion’s primary

use of water is for cooling production
machinery, hot water was recycled
from the cooling line back into the FIGURE 2.
boiler feed stream to take advantage WATER CONSUMPTION AT MORION, 2000-2004
of the already elevated temperatures.
The total investment was approximately
US$5,000, and the investment was paid
back within six months.

In Year 2 (2001) Morion focused on

improving the thermal efficiency of its
building. The major effort, and cost,
was installing double-glazed windows
throughout the building. The compa-
ny also improved the seals around the
doors and cut off other leaks to the
outside, generally improving the
building’s performance.

In Year 3 (2002), Morion made a

series of additional incremental
improvements to the heating system
to improve performance.
The net result is that Morion has
reduced absolute gas consumption by
more than 55 percent, from approxi-
mately 700,000 m3/year to approxi-
mately 300,000 m3/year. The reduction
versus an output metric (e.g., versus
each $1,000 of production) is even
more impressive (see figure 1).
Morion has reduced gas consumption
from approximately 140 m3/$1,000
of production to 22 m3/$1,000 of
product, or approximately
85 percent.
Water Use Reduction
In 2000, Morion implemented a parallel
program to reduce water consumption.
Morion obtains water from the munici-
pality of St. Petersburg. Enterprises are

MORION 25
 charged Ruble 22/m3 (approximately
US$0.78/m3), and the charge covers both
water and wastewater, though only the
incoming fresh water is metered.
Morion used to discharge all its
heated water. As part of the gas
reduction program described above,
Morion now recycles the hot water,
thereby saving both energy and raw
water costs. In addition, Morion
purchased a system of electrical
coolers that allows them to recycle
water used for cooling multiple times.
Absolute consumption of water
decreased approximately 10 percent
from 2000 to 2004, from over 70,000
m3/year to approximately 63,000 m3/
year. In terms of product output in
dollars, Morion reduced consumption
in that period by approximately
65 percent, from 14 m3/$1,000 of
production to 5 m3/$1,000 of
product (see figure 2).
Electricity Use Reduction
Morion began its program to reduce
electricity use in 2001. There were
four primary programs under this
initiative:1
■ Replacement of older equipment
with more modern and efficient
equipment
■ Replacement of boiling/evaporation
unit for distilled water with a
reverse osmosis unit
■ Monitoring of consumption to
determine use patterns and
processes with heaviest usage to
then reexamine for possible
efficiency improvement
■ Parallel improvement programs
throughout the plant to improve
production quality, one of which
1. This initiative was financed by an EBRD credit for modernizing production, and Quadriga managed the process.
26 THE PROMISE OF PRIVATE EQUIT Y
FIGURE 3.
ELECTRICITY CONSUMPTION AT MORION, 2000–2004
was installing an air conditioning
system to improve “clean room”
standards and working conditions
for staff.
As shown in figure 3, Morion’s net
consumption of electricity from 2001
to 2004 actually increased by 150,000
kW/hr with increased production, but
consumption relative to production
decreased from 380 kW/hr to approx-
imately 300 kW/hr per US$1,000 of
production, a 21-percent decrease in
electricity consumption per US$1,000
of product.
CONCLUSION
Morion’s investments in energy and
water efficiency have reduced its
production costs, improved working
conditions and worker productivity,
and allowed the company to meet
environmental supply chain require-
ments. Further, the investments
helped Morion overcome a major
negative market perception: that
Russian companies utilize dated
technology and are incapable of
meeting stringent Western quality
standards and on-time delivery of
products. Morion’s efforts to reinvent
the company and optimize its produc-
tion efficiency and consumption of
resources are helping it overcome this
stigma as well as contributing directly
to the triple bottom line.
All of the investments made have had
rapid payback, with the longest
payback being the reverse osmosis
system (14-month payback), and the
shortest being the boiler upgrade,
which had a 6-month payback.
 INTRODUCTION
Reclamation Group (RECLAM) is the largest recycler

Reclamation Group
of ferrous and nonferrous scrap metal in South Africa.
The company is privately held and was founded in 1998
with a business plan to purchase and consolidate small,
family-owned steel scrap recycling businesses into a larger
CASE STUDY 4 company. The company’s vision was that waste and scrap
steel represented an “aboveground mine,” and that by
View of main plant, consolidating a number of smaller, established steel
with truck driving onto recyclers, improving operations, and raising standards,
one of the two
it could reinvent a formerly “dirty” industry into
weighbridges.
an important business sector contributing to
sustainable development.

Since 2000, having assembled a base infrastructure

of steel scrap recycling centers throughout South Africa,
the company expanded into other recyclable commodities,
including glass, paper, cardboard, rubber, and integrated
waste management services to become the one-stop waste
management/recycling solution. Brait Capital, a South
African private equity fund, invested in RECLAM in 2000.

BACKGROUND
RECLAM’s business is the purchase, processing, and sale
of ferrous and nonferrous scrap metal. The company
has 60 facilities and 2,300 employees. RECLAM is an
industry-leading concern and the largest such operation
in Africa. The company was founded and is still largely
based in South Africa, though branches have been opened

RECL A M ATION GROUP 27

 in Mozambique, Swaziland, Malawi,
Kenya, Zambia, and Botswana.
RECLAM’s primary business is the
recycling of ferrous metal (e.g., steel),
though the company also handles
smaller quantities of nonferrous metals
(e.g., aluminum, copper, brass). The
plants receive all manner of metal
scrap, from steel fabricator scrap to
decrepit vehicles and other metal trash.
The metal recycling business involves
the following stages:
■ Receipt/collection: Metal scrap is
sourced from a variety of suppliers
in South Africa and neighboring
countries, and the scrap metal is
transported to the closest process-
ing facility. RECLAM receives
metals directly from manufactur-
ers; collects metals from manufac-
turers via waste collection
contracts using the RECLAM truck
fleet; and buys metals from the
informal sector (e.g., individual
collectors/haulers).
■ Separation: Metal is separated from
nonmetal waste.
■ Weighing/grading: This enables the
company to determine load value
and payment.
■ Processing: This step involves
separating all waste, including
hazardous wastes disposed of
properly); cutting; fragmentizing
(cars, trucks); and compressing.
■ Final product: Storage and delivery
constitute the final stages.
There are three tiers in RECLAM’s
supply chain of metal scrap:
■ Contracts with major metal
working companies that deliver
scrap with their own trucks
1. By providing a fair value market, RECLAM has indirectly helped to create microenterprises engaged in scrap metal
collection and resale to RECLAM.
28 THE PROMISE OF PRIVATE EQUIT Y
■ RECLAM’s collection truck fleet,
which picks up scrap from larger
clients
■ The informal or microenterprise
sector—individuals or small
groups who earn a full-time or
part-time livelihood by collecting
and hauling metal waste for sale to
recyclers such as RECLAM.1
RECLAM has recently expanded into
glass, paper, and cardboard recycling.
The company’s concept is that on the
back of its existing infrastructure,
recycling of other waste products
should be both an economically and
environmentally sound business.
RECLAM was also motivated by the
opportunity to become a vertically
integrated waste management
company that can provide
comprehensive waste management
services to its clients.
ROLE OF THE BRAIT
CAPITAL FUND
Brait Capital played a significant role
in RECLAM’s growth over the last six
years, specifically by:
■ Investing early in RECLAM,
thereby making possible the series
of acquisitions that resulted in the
company’s current dominant
position as South Africa’s leading
recycling enterprise
■ Playing a major role in arranging
and negotiating the acquisitions
■ Providing advice in the strengthen-
ing of RECLAM’s corporate
governance policies and practices
■ Recruiting management
■ Helping design an incentivization
program for officers and major
shareholders.
Brait did not, however, have a specific
role in the sustainable business aspects
discussed in this case study.
THE RECLAM
SUSTAINABILITY
STORY
This case describes three aspects of
RECLAM’s business model that have
enhanced the company’s sustainability
and profitability, or triple bottom line:
This sustainable business case study
focuses on RECLAM’s commitment to:
■ Its corporate mission of recycling
as an environmentally sustainable
and profitable enterprise
■ Its “People First” (e.g., employee)
program and related health and
safety emphasis, which has incen-
tivized the workforce and improved
company profitability
■ The microenterprise scrap metal
collection supply chain, where
RECLAM has helped to foster
microenterprises for unemployed
South Africans via accurate
weighbridges and fair pricing
for the scrap metal collected
and delivered.
While these commitments apply
to all RECLAM operations, the case
study examples cited herein are drawn
from RECLAM’s scrap metal
recycling business.
Recycling as an Environmentally
Sustainable Enterprise
RECLAM’s vision is that waste metal
represents an “aboveground mine,”
and that the impacts of recycling are
far less than those associated with
mining and smelting. The company’s
mission statement is:
RECLAM management espouses a
strong and sincere commitment to the
people and the environment of South
Africa. RECLAM fully recognized the
traditional image of steel recycling, and
solid waste management in general, as
a low-technology, dirty, and marginal
business that cut corners to make a
profit (e.g., sloppy housekeeping, dust
and emission generating, dilapidated
trucks and equipment, poor working
conditions). RECLAM has worked to
alter that perception and change the
reality, the goal being to raise the
profile of recycling as a technically
savvy and sustainable business sector.
■ Hazardous and other wastes from health and environment officers
the recycling process and equip- throughout each plant during
ment maintenance are collected, working hours.
stored, and disposed of properly: ■ All RECLAM trucks are new or
▼ Processing vehicles requires the recent models and are rigorously
removal of all fluids (e.g., fuel maintained (always washed and
and oils) as well as tires and clean, truck beds covered during
batteries; RECLAM stores hauling, and very high levels
drained fluids and disposes of of mechanical maintenance to
them via licensed collectors. prevent accidents).
▼ RECLAM monitors for radioac- ■ All on-site equipment is
tivity; it is required to issue a rigorously maintained and kept
non-radioactive certificate in top condition (e.g., all track-
when shipping processed hoes and other heavy equipment
metal internationally. are painted frequently and kept
■ All plants have health and safety in top working condition,
programs and designated safety with special attention paid to
“To recover 100 percent of collected wastes while making
full use of our resources. To recycle this waste for the
benefit of the environment and future generations,
leaving no negative impact on our planet.”

The company has instituted a number

of programs to achieve this goal:
■ There is a continuous exploration
of new technologies to increase
processing efficiencies, and worker
incentive programs to extract more
reusable materials.
■ The company cleans up the
sites it has acquired and properly
disposes of accumulated debris
and other waste.
■ The ground is paved in order
to reduce dust generation.
■ Environmental management
systems have been implemented.
(Many of the plants are
ISO 14001 certified, and all Roadside sign outside RECLAM’s main plant in Johannesburg.
will be in due course; the main
plant is ISO 4 star certified.)

RECL A M ATION GROUP 29


Worker at RECLAM facility.
hydraulic hoses to prevent
leaks and failures.
RECLAM has made great progress in
these endeavors, but is not yet
fi nished and is continuing to make
incremental improvements.
People First
Another guiding tenet of
RECLAM’s vision of sustainability
is to put “people first,” meaning
primarily its employees. RECLAM
implements this philosophy
through its Worker Transformation
Program, designed to foster upward
30 THE PROMISE OF PRIVATE EQUIT Y
mobility. The program has two
main tenets:
■ Look within for all position
openings
■ Make workers agents through
mutual benefit sharing.
The Look Within Program
RECLAM’s “Look Within Program”
seeks to fi ll position openings from
within the workforce whenever
possible.
For example, one of the office maids
had a son who was unable to find
employment. She made this known to
management, and eventually an entry-
level position was found for him. Over
several years, the young man worked
his way up through the ranks, and he
was recently made the manager of a
RECLAM plant.
Make Workers Agents Program
RECLAM has endeavored to have all
staff incentivized in some manner
beyond basic employment and pay,
so that the workers become “agents
for the company.” At the time of the
site visit, RECLAM was in the
process of systematically docu-
menting all the incentive programs
throughout its 60 plants so as to
facilitate dissemination of best
practice across all operations.
Three examples of RECLAM’s
implementation of this program
are described below.
Solution to Theft of
Nonferrous Metals
At the main plant it was noticed that
nonferrous metal recovery was
extremely low, and upon investigation
it was learned that the workers were
stealing nonferrous metal and
reselling it to other scrap buyers. To
solve this problem, RECLAM devised
a two-pronged strategy:
■ Several blatantly guilty workers
were reported to the police,
arraigned, and subsequently
terminated.
■ The company offered the following
arrangement to the other workers:
one-third of the nonferrous metal
receipts would be given to the
workers on a monthly basis, and it
would be up to the workers to
decide how to divide up the
proceeds. RECLAM would receive
the other two-thirds of revenues
generated. The result was that non-
ferrous metal recovery went from
near 0 to 2,000 tons/month and has
continued at this level since.
BRIQUETTE MACHINE
PRODUCTION TURNAROUND
RECLAM produces a considerable
amount of ground metal from its
34-ton car fragmentizer machines,
which reduce cars to ground metal.
To prevent excess volatilization
during remelting, the ground metal
must be reprocessed to convert it
into dense metal briquettes with a
specific density. This is done via a
machine that compresses the
ground metal into briquettes.
At the main plant, RECLAM was
experiencing very poor productivity
at the briquette machine. The
machine’s factory production
specification was 1,600 tons/month,
but actual production was 1,200 tons/
month. In an effort to achieve the
specified productivity from an
expensive piece of equipment,
RECLAM instituted a productivity-
based compensation system in
addition to regular wages.
Achievement of the briquette machine’s
stated productivity of 1,600 tons a
month would result in a Rand 500/
monthly bonus to the 14 workers
operating the machine. For each
additional ton of productivity over
1,600 a month, the workers would
receive an additional Rand 100/month.
The machine is now regularly produc-
ing 2,000 tons a month, and the
workers are enjoying the extra income.
MICROENTERPRISE—COLLECTION
TRUCKS AND DRIVERS
RECLAM has a number of programs
for incentivizing the drivers of its
various collection truck fleets. The
intent of these programs is to get the
best productivity out of the assets
and the workers by allowing the
workers to share in the benefits of the
increased productivity.
In the basic scheme, RECLAM buys disqualification for the competition in
the truck and pays the insurance. The any given month.
driver leases the truck from RECLAM
and pays for maintenance and fuel. MICROENTERPRISE—SCRAP METAL
The driver is reimbursed by RECLAM COLLECTION SUPPLY CHAIN
on the basis of tons of material RECLAM offers a fair price (calculated
delivered to the plants. daily based on the commodity mar-
kets) to all suppliers, large or small.
In a typical case under this scheme, RECLAM also frequently calibrates its
one driver’s earnings increased from weighbridges to keep them accurate
approximately US$330 per month to and allows the deliverer to be present
US$2,500 per month. One of the when the load is inspected and graded.
drivers is sending a child to law
school. Another now owns two trucks; This fairness and transparency have
he drives one himself and has an made RECLAM the buyer of choice
employee driving the other. for at least a part of the informal
sector supply chain (see box). As
RECLAM also holds a monthly driver/ metal recyclers are competing for
collector competition, with cash product, their reputation for fair
prizes for the winning drivers. dealing with the microenterprise
However, violations of RECLAM’s collectors has given RECLAM a
health and safety program result in competitive advantage.
JOHANNES’S STORY
Johannes had lost his job some 5 years ago in the economic recession and had been unable to find
another. Having a family, and with no other prospects for employment, in 1997 Johannes turned to
collecting scrap metal for sale to metal recyclers. Johannes has been able to make a living doing this over
the last 8 years, and as a result of his success, he has been able to purchase his own small truck to conduct
his new business. Johannes has dealt with several other recyclers in Johannesburg, but he says he would
“drive an extra 50 km” to sell to RECLAM because he was confident his loads would be accurately
weighed, he would get a fair price, and he would be treated with respect. In RECLAM’s view, this is yet
another example of how its business is built on loyalty, a competitive advantage of its business model.
RECL A M ATION GROUP 31
 INTRODUCTION

Terapia is a formerly state-owned pharmaceutical manufac-

Terapia turing company located in Cluj-Napoca in northwestern

Romania. Terapia was acquired by Advent International in
2003 in a US$49.5 million leveraged public-to-private
transaction. Advent International is an IFC investee
CASE STUDY 5 private equity fund focused on Eastern Europe. Prior to
View of Terapia site, the acquisition, Terapia was the third largest pharmaceutical
circa fall 2004, company in Romania, with projected 2003 annual sales of
with buildings to US$35 million and market share of about 4.5 percent.
be demolished in
foreground. In the This sustainable business case study focuses on the “brown-
middle background
field” investment concept of the Terapia case. A brownfield can
is the Terapia
pharmaceutical be defined as: “Real property, the expansion, redevelopment or
facility, located reuse of which may be complicated by the presence or potential
in one corner of presence of a hazardous substance, pollutant or contaminant,”1
the property, which and which has the potential to be successfully cleaned up and
was retained and reused. For example, Cherokee Partners, a U.S.-based pioneer
continues to operate. brownfield investment fund operating in the U.S., Canada, and
In the distance are the
Europe, has been enormously successful in exploiting this niche
suburbs of Cluj-Napoca.
real estate market and now has assets in excess of US$1 billion.

ROLE OF THE ADVENT

INTERNATIONAL FUND
Terapia, as typical of many pre-1991 Eastern European and
Soviet enterprises, did not have proper handling, storage,
and spill response management systems for solvents and

1. Cherokee Partners, 2004 Sustainability Report.

32 THE PROMISE OF PRIVATE EQUIT Y

other toxic materials and waste used
in its previous chemical manufactur-
ing processes. As a result, there was
significant ground and groundwater
contamination both at the Terapia
plant site and at a nonsecured disposal
site outside of town and adjacent to
the Cluj municipal dump site.

Advent and its investment partners

were aware of the potential environ-
mental liabilities at the Terapia site. At
the time of the acquisition, the site
had a dozen or more separate build-
ings and facilities constructed over the
years as Terapia grew and expanded.
The core pharmaceutical facility was
located in one corner, and the remain-
der of the site was occupied by
dilapidated or obsolete buildings that
had formerly been used in the
Similar view, following demolition.
manufacture of chemicals, many as
feedstock for the pharmaceutical
plant, as well as non-core businesses.

Advent determined that Terapia’s core

manufacturing operations could be
contained in the occupied and modern
building at the corner of the site along
with a new warehouse and administra-
tive building. The rest of the site, if it
could be remediated or cleaned of the
pollutants, could potentially represent
valuable real estate.
Advent and its co-investors required
Terapia to commission detailed
environmental liability investigations
to determine the extent of the
contamination and develop detailed
capital cost estimates for cleanup
prior to investing.
As has been successfully demonstrated
in the United States and Europe, this
case suggests that with proper risk
management measures, brownfield
sites can represent good investment
opportunities. However, as the project
is still in its early days, there are not yet
any financial data to demonstrate the
returns on the brownfield aspects.
Nevertheless, the pharmaceutical
company is performing well.
The details of the operation are
described more fully below.
TERAPIA
SUSTAINABILITY
STORY
This case focuses illustrates two
main points:
■ Advent’s recognition and
appreciation of a second opportu-
nity (e.g., the brownfield upside)
■ The thorough due diligence carried
out to ascertain the extent of the
risk and the costs of cleaning up
the site to both Romanian and
European Union standards.
Advent’s Identification of the Brownfield
Opportunity
At the outset of their due diligence of
Terapia, Advent was aware of the
contamination at the Terapia site. But
as opposed to viewing this as a deal
breaker, Advent saw it as an opportu-
nity. Advent reasoned that the existing
and future pharmaceutical operations
could be contained in the modern
building currently housing operations
at the corner of the site along with a
new warehouse and administration
building. The rest of the buildings
would be demolished and the site
cleared, and the excess land eventually

TER APIA 33
 sold or leased for commercial use or
used for expansion.

Hence, Advent viewed Terapia as a

two-stage play, given the excess
12 or so hectares of property in a
prime industrial zone on the edge
of the city of Cluj-Napoca.
■ The central play was to grow the
pharmaceutical business through
investment in new equipment,
new product lines, and improved
management, marketing,
and governance.
■ The second opportunity was to
clean up the site contamination and
associated landfill contamination,
thereby reducing risks and meeting
both the Romanian environmental
requirements and those of Advent
and its co-investors EBRD and the
Netherlands finance development Old Terapia dump site, less than 0.5 hectare in area.
company FMO, followed by an
eventual real estate sale/development
play with the excess property.

Advent’s Environmental Due Diligence

Underestimation of the extent of

environmental liabilities can result in
severe financial impacts, but overesti-
mation can result in missed opportu-
nities. Advent was thorough and
methodical in its investigations, and
this gave it the confidence to proceed
with the investment in Terapia.
The due diligence program is
described below.

Since there was site contamination

from the many years of pharmaceuti-
cal manufacturing by Terapia as a
state-owned enterprise, one of the
conditions of the transaction was that
Terapia would engage a qualified
environmental consultancy to carry
out detailed site investigations to Longitudinal view of construction of new Terapia
determine the nature and extent secure waste disposal site.
of contamination.

34 THE PROMISE OF PRIVATE EQUIT Y

Terapia commissioned a respected
European environmental firm with
the proper credentials and expertise to
carry out the initial site investigation,
and a report was produced in October
2002. The site investigation involved a
detailed surface and subsurface
investigation of the site via the drilling
of monitoring wells and the regular
collection and laboratory analysis of
groundwater samples. It was deter-
mined that there were areas of soil and
groundwater contamination at the 15-
hectare site, and eight specific “hot
spots” or areas of definite contamina-
tion were identified.
In addition, contamination emanating
from the company’s former noncon-
tained dump site located on the
outskirts of Cluj was also identified.
An underground plume was detected
which flowed downgradient from the
dump site to a small stream, a tribu-
tary of the River Some. The dump site,
located on the crest of a hill in porous
soil, lacked even simple measures to
prevent further contamination (e.g.,
coverage with waterproof or semiwa-
terproof materials such as clay, to
prevent the infi ltration of precipita-
tion and subsequent transmission of
contaminated leachate). Hence, the
key environmental issues identified by
the study were:
■ Contamination of soil and ground-
water at the Terapia manufacturing
site from chemicals used in prior
operations
■ Contamination of soil and ground-
water at the (former) landfi ll site.
Subsequent to the initial report,
Terapia commissioned the same
2 One of Advent’s conditions was that it (and its independent expert consultants) would be able to review the scope of work for both studies before Terapia com-
missioned them.
consultant to prepare a quantitative
risk assessment report.2 The primary
objective of the second report was to
quantify the extent of the problem
and produce a detailed cost estimate
for cleaning up the contamination.
The second report, published in June
2003, estimated the cost of cleanup to
be as much as US$4.5 million.
Advent then commissioned a second
environmental consultancy to carry
out a due diligence review of the
October 2003 and June 2004 studies.
The second study corroborated the
findings but increased the estimated
costs of cleanup costs up to US$5
million. On the basis of this double
due diligence procedure, Advent
decided to undertake the transaction.
At the time of the site visit for this
case study in July 2005, the demolition
of the nondesirable buildings was
nearly complete, and construction of a
new, engineered landfi ll for Terapia’s
pharmaceutical waste was underway.
Cleanup of the manufacturing site and
the old landfi ll was scheduled to begin
in the fall of 2005.
The black material is an effectively
impervious geotextile membrane that
prevents landfi ll leachate from
infi ltrating into the ground. The
leachate will drain to the far end of
the graded, bottom sump and be
pumped out and treated. The landfi ll
will also be capped to reduce infi ltra-
tion of precipitation.
CONCLUSION
Advent’s Terapia project is in its third
year. The pharmaceutical company is
performing well, but it is too early to
determine the success of the brown-
field project. However, the project
does constitute a good example of a
brownfield investment project as a
second play in a private equity
transaction as well as a good practice
example of the environmental due
diligence process.
The brownfield sector has been
extremely profitable in the United
States and Europe. As an example,
Cherokee Investment Partners, a U.S.-
based private equity fund specializing
exclusively in brownfield investment
and redevelopment since 1990, has
been extremely successful. Cherokee
now has three funds and over $1
billion in assets. Cherokee calculates
that in the U.S. market, an acre of
brownfield redevelopment saves 4.5
acres of undeveloped greenspace,
making brownfield reuse an inherent-
ly sustainable investment as well as
cleaning up the impacts of past and
ongoing pollution of water resources.
The Terapia case is an early example of
a brownfield redevelopment in Eastern
Europe, a region where there is
extensive site contamination and
brownfield opportunities. Because
of the necessary investment, East
European governments are unlikely
to have the financial capacity to carry
out the cleanups. But this is a sector
where the private sector may be able
to make money and clean up past
damage to the environment.
TER APIA 35
36 THE PROMISE OF PRIVATE EQUIT Y
Lateral view of new Terapia secure landfill construction showing
fine grading of clay liner to the right and installation of geotextile
membrane to the left. The cylindrical roller to the right is a compactor,
which is rolled over the clay using the crane to compact the clay to
an engineering design specification.

TER APIA 37
Photography

COVER
Courtesy of ALL, Reed Huppman,
Libby Schroen

AMÉRICA LATINA LOGÍSTICA

page 4, 7, 14: Courtesy of ALL

MENGNIU
page 16, 19, 20: Reed Huppman

MORION
page 22, 24: Reed Huppman

RECLAMATION GROUP
page 27, 29, 30: Libby Schroen

TERAPIA
page 32, 33: Courtesy of Terapia
page 34, 36, 37: Reed Huppman

39
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