Extended Annual Review Report

Project Number: 46944-014 Loan Number: 2997 October 2019

RG Brands Kazakhstan LLP RG Brands Agribusiness Project (Kazakhstan) This is an abbreviated version of the document, which excludes information that is subject to exceptions to disclosure set forth in ADB's Access to Information Policy.

CURRENCY EQUIVALENTS Currency unit – tenge (T)

At Appraisal At Project Review

(March 2013) (30 April 2019) T1.00 $1.00

– –

$0.00665 T150.44

$0.00260 T384.48

ABBREVIATIONS

ADB – Asian Development Bank EBRD – European Bank for Reconstruction and Development EROIC – economic return on invested capital ESMS – environmental and social management system FY – fiscal year GDP – gross domestic product HSE – health, safety, and environment IFC – International Finance Corporation ISO – International Organization for Standardization OHSAS – Occupational Health and Safety Assessment Series UHT – ultra-high temperature US – United States XARR – extended annual review report

NOTES

(i) In this report, "$" refers to United States dollars.

Vice-President Diwakar Gupta, Private Sector Operations and Public–Private Partnerships

Director General Michael Barrow, Private Sector Operations Department (PSOD) Senior Advisor/ Officer-in-charge

Craig Roberts, Private Sector Operations Department/ Portfolio Management Division

Team leader

Samarendra Singh, Senior Investment Specialist, Portfolio Management Division PSOD

Team members Ruby Lee Escaner, Associate Investment Officer, Portfolio Management Division, PSOD Manfred Kiefer, Senior Economist, Private Sector Transaction Support Division, PSOD Jose Manuel Limjap, Consultant, Portfolio Management Division, PSOD Arlene Porras, Senior Safeguards Officer, Private Sector Transaction Support Division, PSOD Marife Principe, Social Development Officer (Safeguards), Private Sector Transaction Support Division, PSOD

In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

CONTENTS

Page

BASIC DATA i

EXECUTIVE SUMMARY ii

I. THE PROJECT 1

A. Project Background 1 B. Key Project Features 2 C. Progress Highlights 2

II. EVALUATION 5

A. Project Rationale and Objectives 5 B. Development Results 5 C. ADB Additionality 8 E. ADB Work Quality 8

III. ISSUES, LESSONS, AND RECOMMENDED FOLLOW-UP ACTIONS 8

A. Issues and Lessons 8 B. Recommendations and Follow-Up Actions 9

APPENDIXES 1. Project-Related Data 10 2. Results and Ratings for Project Contributions to Private Sector Development and ADB

Strategic Development Objectives—Infrastructure 11 3. Sector Review 16 4. Kazakhstan’s Economic Indicators, 2014–2018 19 5. Environmental Impact 20 6. Social Impact 24

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BASIC DATA RG Brands Agribusiness Project (Loan 2997-Kazakhstan)

RG Brands Kazakhstan LLP

Key Project Data

As per ADB Loan Documents ($ million)

Actual ($ million)

Project Cost ADB Investment:

Loan: Committed Disbursed Outstanding

40.2

40.2

35.2

40.2 22.5 0.0

ADB = Asian Development Bank. Note: Actual project cost is less than the original estimate in the report and recommendation of the President, as the original estimate was projected for 8–10 projects. Actual financing was used for only 2 projects.

Key Dates Expected Actual

Concept Clearance Approval Fact-Finding Mission Board Approval Execution of Term Loan Agreement Loan Effectiveness Facility A Facility B First Disbursement Facility A Facility B

27 August 2012 1–5 October 2012

19 April 2013 24 May 2013

27 August 2012 1–5 October 2012

19 April 2013 24 May 2013

13 Nov 2013 25 June 2013

18 Nov 2013 15 July 2013

Project Administration and Monitoring Number of Missions Number of Person-

Days

Due Diligence and Appraisal XARR Mission

1 1

15 15

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EXECUTIVE SUMMARY

On 19 April 2013, the Asian Development Bank (ADB) approved a $40.2 million senior secured term loan to RG Brands Kazakhstan LLP for the RG Brands Agribusiness Project in Kazakhstan. RG Brands is one of the country’s leading producers of milk, juice, tea, and bottled water; the approved term loan helped finance its plant expansion and modernization, enhance production and distribution efficiency, and refinance maturing short-term obligations.

The debt financing extended by ADB had two objectives: (i) support the government’s policy to develop the agro-industrial subsector and thereby diversify its economic base and (ii) demonstrate that profitable investments are achievable in the agriculture sector and, as such, induce local commercial banks to provide longer-term financing to the sector. The government’s industrial development program for 2010–2016 identified the agro-industrial complex as a priority for the economy’s diversification with its strong export potential. The investment is consistent with ADB’s Strategy 2020 and aligned with ADB’s agriculture sector strategy, which recognizes Kazakhstan’s strong prospects in agriculture. It is also aligned with ADB’s country partnership strategy for Kazakhstan, 2012–2016, which identified agribusiness as one of the sectors to be supported by ADB’s private sector operations.

The significant devaluation of the tenge against the United States dollar during 2013–2016 and the simultaneous slowdown in gross domestic product growth because of a substantial drop in oil prices brought about a shift in consumer preference for more affordable products. This adversely affected the sales volume of RG Brands’ juice and milk products, in particular. To address growing competition, the company relaunched its products in more economy segments, introduced innovations in product packaging, started marketing new milk and water products, and initiated product and system improvements to streamline cost. Based on 2018 statistics, RG Brands continues to be a leading industry player with strong brands and leading market positions across all business segments (mainly juice, packaged tea and tea bags, ultra-high temperature milk, carbonated drinks, iced tea and bottled water). RG Brands had an overall 17.3% market share in the Kazakhstan’s domestic beverage market as of the end of 2018 and is targeting a 20% market share in 2019. RG Brands has an extensive nationwide sales and distribution platform with a high share of direct sales. The company’s primary clients are major supermarkets and convenience stores, which increased from 40,000 in 2013 to 44,000 as of April 2019. RG Brands’ overall financial performance from 2015 to 2018 remained positive with significant increases in total revenues. Profitability likewise improved with a record high 7.0% net profit margin and strong operating cash flows. Given its profitability, RG Brands remains sufficiently capitalized and its leverage is clearly below the maximum ratio stipulated in the ADB loan agreement.

The project contributed to private sector development and ADB’s strategic objectives. ADB’s financing helped RG Brands expand and modernize its operations, which helped sustain its market leadership and improve its financial performance despite a challenging economic and business environment. The company’s successful operations also benefited local suppliers of raw milk and juice concentrate with higher domestic sourcing of these raw materials—a boost to the agriculture sector. RG Brands provided working capital, equipment, and vaccines to local farmers to help increase their raw milk production. The company’s outsourcing of various functions like delivery, security, and warehouse maintenance contributed to higher employment and economic gains in the private sector.

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ADB reviewed the project’s environment, social, health, and safety performance. RG Brands has adopted an environmental and social management system that applies to all operations of the company. Its production facilities are fully compliant with applicable Kazakhstan laws and regulations, and adhere with internationally recognized standards No grievances or complaints about environmental impacts or any significant spills or harmful gas emissions were recorded. The project was classified category B for environment and category C for both involuntary resettlement

and indigenous peoples. The company’s human resource procedure is aligned with Kazakhstan labor laws. The company’s two plants outsource their security, cleaning, maintenance, and warehouse services; contracts with the outsourcing agencies contain a provision requiring them to comply with national labor laws. A grievance redress mechanism is in place; stakeholders and customers may call a hotline number for grievances. Grievances related to plant operations and activities are addressed by the plant managers. The grievance redress procedure will be improved through systematic documentation of any concerns or grievances that may be raised by stakeholders.

ADB provided financial additionality with extension of long-term financing at a time when local commercial banks would only provide short-term loans to the agriculture sector. RG Brands needed long-term financing to fund its expansion and plant modernization; this helped the company sustain its market leadership. The term financing offered by ADB also included a tranche to refinance maturing short-term obligations. The ADB deal team structured two long-term facilities to fund company’s planned expansion, improve production and distribution efficiency, and refinance maturing short-term obligations. The financing structure also tried to address foreign exchange risk by capping the USD-denominated loans and disbursing the balance in tenge. The deal team closely monitored RG Brands’ operating and financial performance through regular communication and follow-up on timely submission of reports, financial statements, and other reportorial requirements. ADB had been prompt in giving its consent to waivers and requests for amendments of existing agreements, including approval of new tenge-denominated loans from the International Finance Corporation, the European Bank for Reconstruction and Development, and the Development Bank of Kazakhstan. The deal team was also strict in enforcing provisions of the loan agreement, which led to the prepayment of the loans.

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I. THE PROJECT

A. Project Background

1. On 19 April 2013, the Asian Development Bank (ADB) approved a $40.2 million senior secured term loan to RG Brands Kazakhstan LLP for the RG Brands Agribusiness Project in Kazakhstan.1 RG Brands is a wholly owned subsidiary of the RG Brands Joint Stock Company, which provided an unconditional and irrevocable guaranty. The term loan agreement was signed on 24 May 2013. The term loan consisted of two facilities: (i) a $30.2 million 7-year term loan to finance the project (facility A) and (ii) a $10.0 million 6-year term to refinance RG Brand’s maturing short-term obligations (facility B). Of the combined facilities, the initial plan was to disburse $11.3 million in United States (US) dollars and the remaining $28.9 million in tenge unless ADB could execute an associated cross-currency swap, in which case the remaining $28.9 million could also be disbursed in US dollars, provided RG Brands executed a rolling short-term tenge–US dollar forward to hedge the resulting currency risk. However, the three disbursements during July 2013–July 2014 totaling $22.5 million were all denominated in US dollars notwithstanding the absence of hedging arrangements given the stability of the tenge and Kazakhstan’s economy because of high commodity prices, especially oil, at the time of disbursements.2 The cost of swaps was also prohibitively high. 2. ADB’s investment aimed to support the Government of Kazakhstan’s policy to diversify its economic base. The government’s industrial development program for 2010–2016 identified the agro-industrial complex as a priority sector for the economy’s diversification and a sector with strong export potential.3 Agriculture has huge growth potential in Kazakhstan in view of the country’s vast territory and its proximity to large growth markets like the People’s Republic of China and the Russian Federation, its top two trading partners. ADB’s assistance will also support private sector development by demonstrating that profitable investments are achievable in the agriculture sector, which will induce commercial banks to provide longer-term financing to the sector. This was consistent with the government’s goal of a cumulative T2 trillion ($5.2 billion4) increase in nonsovereign loans to agribusinesses during 2013–2020. 3. The project is consistent with Strategy 20205 and aligned with ADB’s agriculture sector strategy, which recognizes Kazakhstan’s strong prospects in agriculture. Supporting agriculture and rural areas is an underlying component of the inclusive growth strategy. Agriculture remains a source of productivity improvement, seasonal employment, and income growth, especially when connected to urban, industrial, and export markets. Under ADB’s country partnership strategy for Kazakhstan, 2012–2016, agribusiness was one of the sectors to be supported by ADB’s private sector operations.6 The project is consistent with two main pillars of the country strategy—private sector development and greater regional integration—since it will support exports of high-quality food products from Kazakhstan to neighboring Central Asian countries.

1 RG Brands, established in 1994, is one of the leading producers of milk, juice, tea, and bottled water in Kazakhstan;

it also has the franchise to bottle and distribute Pepsi Cola products and Lipton tea. As at 31 December 2012, its total assets had reached $197 million and it had posted total revenues of $234 million and net profit of $14 million.

2 Kazakhstan has a commodity-based economy with oil as its top export. The price of crude oil averaged $91.17 per barrel in 2013 and $85.60 per barrel in 2014. The tenge–US dollar exchange rate averaged T152.1675 = $1.00 in 2013 and T179.2288 = $1.00 in 2014.

3 Government of Kazakhstan. 2010. State Program of Accelerated Industrial and Innovative Development of the Republic of Kazakhstan, 2010-2014. Astana.

4 Based on exchange rate of T384.48 = $1.00 effective 30 April 2019. 5 ADB. 2008. Strategy 2020. The Long-Term Strategic Framework of the Asian Development Bank, 2008–2020.

Manila. 6 ADB. 2012. Country Partnership Strategy: Kazakhstan, 2012–2016. Manila.

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B. Key Project Features

4. The project consisted of (i) the expansion of RG Brands’ ultra-high temperature (UHT) milk and juice production facilities ($14.9 million), (ii) investments to boost efficiency in production and distribution ($15.3 million), and (iii) the refinancing of maturing short-term debt ($10.0 million) to compensate for the lack of long-term debt financing in the market and to extend the maturity profile of its $75 million total debt as of December 2012. The extension of its debt maturity profile allowed RG Brands to increase its annual investment level and support continuous growth. 5. RG Brands has two main production centers in Kostanay and Aksengir. The proposed financing helped expand production and storage facilities in RG Brands’ Kostanay plant as well as improve milk collection systems by investing in a fleet of trucks that will collect raw milk from dairy farms and households in the Kostanay region and deliver it directly to the plant. RG Brands will also build a similar UHT milk production unit within the Aksengir plant facility. To help sustain the growth of its juice business, RG Brands will also invest in the improvement of its juice production facilities in Aksengir and in a new juice production line in Kostanay. 6. Given the country’s vast territory, efficient distribution is critical. RG Brands works with about 40,000 supermarkets and convenience stores, which are mostly family run, located in rural areas, and lacking in financial resources to invest in coolers and racks. RG Brands will invest in coolers and racks that will be distributed to the stores to assure good product placement. RG Brands’ investment plan also includes a new 2-megawatt gas generator set to promote production efficiency. 7. RG Brands’ Kostanay plant, acquired from Nestlé in 2004 for $2.3 million, is its only milk production facility; the Kostanay region is an agricultural center owing to its favorable climate and availability of agricultural land. In 2007, RG Brands invested $75 million in the construction of a modern production facility in Aksengir to consolidate all production processes in the Almaty region into a single site. The European Bank for Reconstruction and Development (EBRD) and the Development Bank of Kazakhstan provided the financing. C. Progress Highlights

8. With the financing extended by ADB, RG Brands successfully expanded and improved its operations. Based on 2018 statistics, RG Brands continues to be a leading industry player, with strong brands and leading market positions across all business segments, including the following: (i) number one in juices (19.0% market share), (ii) number one in packaged tea and tea bags (21.0%), (iii) number one in UHT milk (11.2%), (iv) number two in carbonated drinks (11.2%), (v) number three in iced tea (13.3%), and (vi) number three in bottled water (10.7%).7 RG Brands had an overall 17.3% market share in the total beverage market as of the end of 2018 and is targeting a 20% market share in 2019. UHT milk and packaged tea are included in the food segment and not beverage since their nutritional value is deemed a replacement or supplement to food. RG Brands management sold the company’s potato chips operation (under the Grizzly brand name) in April 2019 because of stiff competition and subpar margins, with the aim of focusing its resources on other product lines. 9. RG Brands has an extensive nationwide sales and distribution platform with a high share of direct sales. The company’s primary clients are major supermarkets and convenience stores, which increased from 40,000 in 2013 to 44,000 as of April 2019. It also invested in at least 36,000

7 RG Brands Kazakhstan LLP. 2019. FMCG Sector Development Presentation. Aksengir.

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coolers and 2,060 racks, which have been distributed among the convenience stores to enhance the competitive advantage of its products. To streamline operating costs and improve profitability, RG Brands management decided to outsource its trucking requirements for delivery; this has helped reduce the average delivery time of products to 1 day. 10. Other expansions and product and system improvements undertaken by RG Brands from July 2013 onwards include the following: (i) installation of a milk cooling system; (ii) installation of a new line for bottle production in the Aksengir plant; (iii) modernization of the line for Lipton tea production; (iv) introduction of modernized technology to make hot drinks cold when bottled; (v) construction of a new warehouse in the Aksengir plant; (vi) upgrading of teabag equipment and expansion of the production line for tea; (vii) installation of separate production lines for juice, bottled water, tea, and Pepsi products in the Kosmis plant in Kostanay, which had originally been used exclusively for milk production; and (viii) expansion of distribution infrastructure with operation of logistics hubs in the Russian Federation (in Novosibirsk and Yekaterinburg). The Aksengir plant now has 10 production lines (up from two), including one for UHT milk production. The modernization programs initiated by the company helped increase capacity utilization, improve margins, and contribute to more efficient energy consumption. The company aims to undertake approximately five modernization projects annually. To further expand its product reach, RG Brands is planning to build a manufacturing facility for carbonated drinks, juice, and bottled water in either the Russian Federation or Uzbekistan by 2021. 11. Kazakhstan’s commodity-based economy suffered a major setback starting in 2015 with the precipitous drop in crude oil prices from $105.87 per barrel in 2013 to $49.49 per barrel in 2015 and $40.68 per barrel in 2016. This led to the devaluation of the tenge against the US dollar from an average rate of T152.17 = $1.00 in 2013 to T222.22 = $1.00 in 2015 and T341.82 = $1.00 in 2016; economic growth also slowed from 6.0% in 2013 to 1.2% in 2015 and 1.1% in 2016 (Appendix 4). With the economic downturn and high average inflation rate, which reached a record high of 14.2% in 2016, consumers’ purchasing power suffered and they started looking for more affordable, lower-quality alternatives.). Expansion of competitive low-price brands influenced the shift in consumer preferences in favor of cheap brands. To address this issue, RG Brands has relaunched its juice products in more economy segments; introduced innovations in juice and water packaging; and is marketing new water and milk products like flavored water and wheat-based and ready-to-drink milk products in portable packaging. RG Brands management is also planning to offer coffee products since coffee is a growing trend and is starting to impact the market share of tea (Appendix 3). 12. Notwithstanding the stiff competition and weak economy, RG Brands’ overall financial performance remained positive, with total revenues of T53.0 billion in 2018 ($141.2 million)—up 32.6% from T39.9 billion ($106.4 million) in 2014 and up 28.5% compared to the 2015 level (Table 1). Profitability likewise improved with a record high 7.0% net profit margin, and an increase in operating cash flows to T7.7 billion ($20.5 million). Given its profitability, RG Brands remains sufficiently capitalized with total equity of close to T17.8 billion ($47.4 million) as of the end of 2018.8 The debt-to-equity ratio remains at a reasonable level of 1.3, below the 2.0 maximum ratio stipulated in the ADB loan agreement.9 Approximately 70% of its cost of sales is foreign exchange

8 The US dollar equivalent amounts were derived using the exchange rate as of the end of 2018: T375.15 = $1.00

(Appendix 4). 9 RG Brands’ actual operating and financial performance pales in comparison to the base case financial projections

prepared by Pricewaterhouse Coopers during the report and recommendation of the President stage. The financial model used to make those projections did not anticipate the economic downturn and substantial currency devaluation that beset Kazakhstan starting in 2015 and led to a shift in consumer preferences, which adversely affected the sale

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related, mostly in US dollars, since 90% of juice concentrates are imported from Chile, Europe, Greece, Israel, the People’s Republic of China and Uzbekistan, while 100% of tea leaves are imported from India, Kenya and Sri Lanka. The cost of raw milk has also increased starting 2018 because of competition from the Russian Federation. System improvements, quality standard programs with suppliers like Tetra Pak, and some government support (especially for imported materials) also helped stem cost and improve margins.

Table 1: Financial Performance T million 31 Dec 2015 31 Dec 2016 31 Dec 2017 31 Dec 2018

Item

RRP Plan

Actual

RRP Plan

Actual

RRP Plan

Actual

RRP Plan

Actual

Revenues 54,243 41,215 62,423 48,741 72,031 52,431 74,192 52,969

Operating profit 6,070 4,813 6,683 3,785 7,830 4,964 6,129 4,556

EBITDA 7,433 6,379 8,209 5,932 9,521 7,092 7,820 6,763

EBITDA margin (%) 13.7 15.5 13.2 12.2 13.2 13.5 10.5 12.8

Finance charges 1,045 1,198 961 1,917 851 1,651 762 1,850

Income tax 1,014 487 1,149 774 1,400 617 1,078 952

Net profit 4,055 1,697 4,595 1,025 5,601 1,995 4,311 3,684

Net profit margin (%) 7.5 4.1 7.4 2.1 7.8 3.8 5.8 7.0

Cash from operations 5,870 6,668 6,253 5,326 8,164 3,325 6,169 7,686

Cash 9,160 10,542 14,075 15,651 20,380 5,750 25,215 6,830

Total current assets 22,669 21,805 28,040 25,886 35,130 19,438 40,615 28,324

Total assets 42,200 39,482 46,448 48,074 52,254 41,651 56,046 53,943

Total debt 11,022 20,951 9,475 22,723 8,198 17,556 7,038 22,817

Equity 20,021 8,578 24,444 11,958 29,873 13,502 34,012 17,776

Debt-to-equity ratio 0.6 2.4 0.4 1.9 0.3 1.3 0.2 1.3

Return on invested capital (%) 19.4 20.4 21.8 15.9 25.5 18.0 21.9 12.3

Source: ADB and RG Brands JSC consolidated financial statements.

13. On 27 August 2015, RG Brands fully prepaid facility B’s remaining balance of $6.66 million. On 3 November 2015, RG Brands requested an extension of facility A’s availability period, which was due to expire 13 November 2015, to address the redenomination of the outstanding $12.5 million loan to tenge. The company proposed to prepay the outstanding US dollar loan after which ADB would use the proceeds to enter into a cross-currency swap with the International Finance Corporation (IFC) to receive tenge funding that would be lent back to the company under the undrawn portion of facility A.10 The Office of Risk Management, however, did not agree to an extension of the availability period, opining that it might bind ADB to existing terms of the facility agreement that may no longer be reasonable given Kazakhstan’s economic downturn. Instead, the Office of Risk Management proposed to amend the facility agreement to permit a one-time revolver of the facility to allow prepayment of the outstanding US dollar loan and redraw the equivalent amount in tenge. The Office of Risk Management deemed this scheme more appropriate and did not require an extension of the availability period. Dealing with a single loan that has already been deployed toward capital expenditure financing, consistent with ADB Board approval, more clearly illustrates the redenomination objective. The amendment process, however, was protracted because of issues related to the incremental tenge loan margin given market conditions at the time, swap valuation, and swap cost pass-through to the borrower. The proposed amendment was further derailed when the National Bank of Kazakhstan eventually withdrew the facility extended to IFC. The outstanding facility A loan remained in US dollars,

of RG Brands’ premium juice and milk products. The financial model assumed stable growth in sales volume and an exchange rate of T150.44 = $1.00.

10 ADB had been in discussion with IFC to avail of a cross-currency swap using IFC’s facility with the National Bank of Kazakhstan.

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started to amortize per the schedule in the facility agreement, and was eventually prepaid (in the amount of $7.5 million) by the company on 19 July 2017. 14. Facility A was not fully drawn because RG Brands obtained a $30 million equivalent tenge loan from IFC in late 2014 to finance capital expenditure and working capital requirements. In 2016, the company also executed a $50 million equivalent tenge loan facility with the EBRD for funding of loan refinancing and capital expenditures, and a T5 billion ($15 million) loan from the Development Bank of Kazakhstan for working capital requirements.

II. EVALUATION

A. Project Rationale and Objectives

15. The debt financing extended by ADB to RG Brands had two objectives: (i) support the government’s policy to develop the agro-industrial subsector and thereby diversify its economic base and (ii) demonstrate that profitable investments are achievable in the agriculture sector and, as such, induce commercial banks to provide longer-term financing to the sector. The investment is consistent with ADB’s Strategy 2020 and aligned with ADB’s agriculture sector strategy, which recognizes Kazakhstan’s strong prospects in agriculture. It is also aligned with ADB’s country partnership strategy for Kazakhstan, 2012–2016, which identified agribusiness as one of the sectors to be supported by ADB’s private sector operations. B. Development Results

1. Contributions to Private Sector Development and ADB Strategic Development Objectives

16. The results for project contributions to private sector development and ADB strategic development objectives are in Appendix 2. 17. The project contributed to private sector development and ADB strategic development objectives. ADB’s financing helped RG Brands expand and modernize its operations, which helped sustain its market leadership, especially in juice and UHT milk, and improve financial performance despite a challenging economic and business environment. The company’s successful operations also benefited local suppliers of raw milk and juice concentrate with higher domestic sourcing of these raw materials—a boost to the agriculture sector. RG Brands provided working capital, equipment, and vaccines to local farmers to help increase their raw milk production. The company’s local sourcing of raw milk increased from 9.8 million liters in 2015 to 15.2 million liters in 2018 while that of juice concentrate increased from 0.52 million kilograms in 2015 to 3.9 million kilograms in 2018. The uptrend in RG Brands’ domestic sourcing may lead to greater economic benefits to local farmers as they enjoy economies of scale in their production as well as in sourcing of raw materials required for their operations. The company’s outsourcing of various functions like delivery, security, and warehouse maintenance contributed to higher employment and economic gains in the private sector. Its expanded distribution network—from 40,000 in 2013 to 44,000 retail outlets as of April 2019—is another positive contribution to private sector development. 18. ADB’s debt financing to RG Brands also paved the way for IFC to provide local currency financing to the company.

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2. Environment, Social, Health, and Safety Performance

a. Environment 19. When RG Brands sought ADB financial assistance in 2013, the proposed project was processed and approved under the corporate finance modality since the ADB loan was specifically earmarked for the modernization works of the Aksengir and Kostanay plants, which house all of the company’s operations. To comply with ADB’s Safeguard Policy Statement (2009) requirements, RG Brands established and adopted an environmental and social management system (ESMS) on 13 April 2013 to be mainstreamed in the overall operations of the two production centers. The project was classified category B for environment. As such, modernization works for the Aksengir and Kostanay production centers required preparation of an initial environmental examination. Based on the review of relevant health, safety, and environment (HSE) documents; a site visit; and an interview with the management and HSE staff of RG Brands, the XARR mission confirmed that these two main production centers are fully compliant with applicable Kazakhstan laws and regulations. No grievances or complaints about environmental impacts or any significant spills or harmful gas emissions were recorded. No penalties were imposed by theGovernment of Kazakhstan. There were no reported major occupational health and safety incidents or accidents during the plants’ operation. RG Brands also adhered with internationally recognized standards such as Good Manufacturing Practice, and hazard analysis and critical control points, which are fully aligned with the IFC Environmental, Health and Safety Guidelines for Food and Beverage Processing, the IFC Environmental, Health and Safety Guidelines for Dairy Processing, the International Organization for Standardization (ISO) 9001:2000 (quality management systems) standard, the ISO 14001:2014 (environmental management systems) standard, and Occupational Health and Safety Assessment Series (OHSAS) 18000; all of these standards are also integrated in the overall operations of the two production centers. The chief manufacturing officer, the corporate-level HSE manager, and an HSE officer located at each production facility are responsible for supervision and monitoring. 20. The ESMS was approved by RG Brands management on 23 June 2013 and was updated on 25 April 2019 to include HSE plans and resource efficiency programs such as (i) an industrial waste management plan, (ii) an energy efficiency plan, (iii) a water resource efficiency plan, and (iv) a material waste reduction program. The company chose to update the ESMS after the XARR mission to provide updated information as the basis for XARR preparation. RG Brands has carried out environmentally friendly programs, including the phasing out of Freon during plant operations. Moreover, both the Aksengir and Kostanay plants have adopted the ISO 14001:2014 standard and the OHSAS 18001 safety management system, which are generally aligned with the health and safety system developed by RG Brands. 21. RG Brands is committed to sustaining implementation of the ESMS to (i) continually improve staff capacity through the conduct of HSE and ESMS training; (ii) maintain close collaboration with the government regulatory agencies on compliance; and (iii) regularly provide updates of HSE plans, procedures, and resource efficiency programs to promote smooth operation of the Aksengir and Kostanay production centers.

b. Social Safeguards and Other Social Dimensions

22. The project was classified category C for both involuntary resettlement and indigenous peoples.

The Aksengir plant was built on a 21-hectare property located in the Karasay district of Almaty oblast (province), near Aksengir village. The company acquired the 21-hectare state reserve land from the government in 2006. The land is a greenfield area with no people using the land. The

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Aksengir plant was built during 2006–2009 and began its operations in 2009. RG Brands confirmed that the plant does not require additional land and that there are no remaining issues related to past land acquisition. However, ADB was informed that about 3,000 square meters of the land on which the Aksengir plant is located will be acquired by the Government of Kazakhstan for its forthcoming toll road project. Initial discussions have been conducted with the government. Based on the 2010 census, the population of Karasay district comprised mainly Kazakhs (58%), Russians (22%), Turks (6%), and Azeris (3.5%). No ethnic group considered to be indigenous peoples is affected by the Aksengir plant operations. 23. The Kostanay plant was purchased by RG Brands in 2004. The first Kostanay plant was built in Kostanay city in the 1990s by the Turkish-Kazakh enterprise Kosmis as a milk processing facility. In 2001, the plant was acquired by the Nestlé Group, which aimed to improve unpasteurized milk collection and the quality of produced goods. In 2004, RG Brands acquired the plant and expanded its production to include juices and carbonated beverages. The Kostanay plant is established on 4.62 hectares of land located in an industrial zone. No additional land acquisition was carried out from 2013 to 2019. The social audit conducted in 2013 and confirmation from the Kostanay plant manager indicated that there are no concerns or court cases related to the land or assets of the Kostanay plant. The population of Kostanay city is composed mainly of Kazakhs (46%) and Russians (28%), with some minorities such as Byelorussians, Germans, Tatars, and Ukrainians. The plant is located in an industrial zone and residential settlements are located 500 meters away from the plant. No ethnic group considered to be indigenous peoples is affected by the Kostanay plant operations.

24. The Aksengir plant increased its staff headcount from 285 in 2013 to 315 in 2018, of which about one-quarter were women. The Kostanay plant has a total of 149 staff, of which about 33% are women as of April 2019 The Aksengir and Kostanay plants’ human resource procedure is aligned with Kazakhstan labor laws. The two plants outsource their security, cleaning, maintenance, and warehouse services. The managers shared that their contracts with the outsourcing agencies contain a provision requiring them to comply with national labor laws. Grievances of outsourced workers and staff are raised initially with direct supervisors and elevated to the human resources department or the plant manager if not otherwise resolved.

25. As regards to the grievance redress mechanism for other stakeholders, including customers, the Aksengir and Kostanay plants have hotline numbers. Any concerns raised about the products produced in either plant are dealt with by quality control managers. Other issues, if any, are dealt with by the plant managers. People or entities with grievances may also contact the government to report instances of noncompliance or complaints. Both the Aksengir and Kostanay plant managers confirmed that no grievances have been received by the plants from nearby entities and civil society organizations. The plants do not maintain any logs of the concerns raised by external stakeholders.

3. Business Success

26. Notwithstanding the challenges posed by competition and the economic slowdown, RG Brands’ overall financial performance remained positive, with total revenues of KZT 53.0 billion in 2018—up 32.6% from T39.9 billion in 2014 and up 28.5% compared to the 2015 level. Profitability likewise improved with a record high 7.0% net profit margin, and an increase in operating cash flows to T7.7 billion. Given its profitability, RG Brands remains sufficiently capitalized with total equity of close to T17.8 billion as of the end of 2018.

8

C. ADB Additionality

27. ADB provided financial additionality with the extension of long-term financing at a time when local commercial banks would only provide short-term loans to the agriculture sector. RG Brands needed long-term financing to fund its expansion and plant modernization; this helped the company sustain its market leadership. The term financing offered by ADB also included a tranche to refinance maturing short-term obligations. It also incentivized IFC to start a relationship with RG Brands and provide a local currency-denominated term loan. D. ADB Work Quality

28. Screening, appraisal, and structuring. ADB first met with the management of RG Brands in December 2011 to assess its financing needs and strategic fit. RG Brands was deemed suitable for ADB assistance based on its solid operational and financial track record. The deal team structured two long-term facilities to fund the company’s planned expansion, improve its production and distribution efficiency, and refinance its maturing short-term obligations. The financing structure also tried to address foreign exchange risk by capping the US dollar-denominated loans at $11.3 million, with the balance of $28.9 million to be disbursed in tenge. The loans may also be 100% US dollar-denominated, subject to the availability of cross-currency swaps and short-term rolling forward hedges.

29. Monitoring and supervision. The deal team closely monitored RG Brands’ operating and financial performance through regular communication and follow-up on timely submission of reports, financial statements, and other reportorial requirements. ADB had been prompt in giving its consent to waivers and requests for amendments of existing agreements, including approval of new tenge-denominated loans from IFC, the EBRD, and the Development Bank of Kazakhstan. The deal team was also strict in enforcing provisions of the loan agreement, which led to the prepayment of the loans. However, no missions were undertaken during the project’s implementation stage to ensure compliance with safeguards requirements.

III. ISSUES, LESSONS, AND RECOMMENDED FOLLOW-UP ACTIONS

A. Issues and Lessons

30. ADB’s Treasury Department needs to be more creative in its funding strategy for the private sector and develop closer relationships with the central banks of member countries to be able to avail of cross-currency swaps just like IFC. This will allow ADB to be more competitive in offering financing to private sector projects. In the case of RG Brands, the facility A loans had to be prepaid because ADB could not provide local currency financing; the cost of potential hedging arrangements was also prohibitively high. 31. The economic slowdown and significant tenge devaluation could have easily led to losses for RG Brands. Its management, however, was proactive in modernizing the plant and production systems, introducing innovations in products and packaging to address growing competition, and sourcing longer-term tenge-denominated loans to mitigate foreign exchange risks. Management’s actions were appropriate and necessary for the fast-moving consumer goods business, where competition and shifts in consumer preferences are prevalent and must be anticipated. 32. RG Brands is committed to sustaining the ESMS implementation. It is expected that RG Brands will continue to enhance its staff capacity through conduct of HSE and ESMS training.

9

Additionally, the company is expected to enhance its grievance redress procedure through systematic documentation of any concerns or grievances that may be raised by stakeholders. 33. ADB’s Private Sector Transaction Support Division safeguards team needs to undertake regular monitoring and supervision of category B projects during implementation to check compliance with applicable national and local laws, adherence to internationally recognized standards, and ESMS implementation progress. B. Recommendations and Follow-Up Actions

34. RG Brands has profitable operations and is a proven market leader in Kazakhstan’s food and beverage industry. ADB should keep communication lines with the company open, as there may be potential financing opportunities for ADB, like the company’s plan to build a manufacturing facility in Uzbekistan.

10 Appendix 1

PROJECT-RELATED DATA

Table A1.1: Investment Identification 1. Country Kazakhstan 2. 3.

Project Number Loan Number

46944 2997

4. Type of Business Fast-moving consumer products 5. Project Title RG Brands Agribusiness Project (Kazakhstan) 6. Investee Company and/or Borrower RG Brands Kazakhstan LLP 7. Amount of Approved ADB Assistance $40.2 million

ADB = Asian Development Bank. Source: Asian Development Bank

Table A2.2: Investment Data

1. Concept Clearance Approval 27 August 2012 2. Date of Board Approval 19 April 2013 3. Signing Date of Term Loan Agreement 24 May 2013 4. Date of Loan Effectiveness

Facility A Facility B

5 June 2014 13 November 2013 25 June 2013

5. Amount and Date of Initial Disbursement Facility A Facility B

$7.5 million, 18 November 2013 $10.0 million, 15 July 2013

6. Amount and Date of Second Disbursement Facility A Facility B

$5.0 million, 2 July 2014 Fully drawn

7.

Prepayment Date Facility A Facility B

19 July 2017 27 August 2015

Source: Asian Development Bank

Table A2.3: Summary of Project Cost and Funding Sources

Item

Amount (T million)

Amount ($ million)

Share of Total (%)

Project Description Expansion of Milk and Juice Facilities 2,250.0 14.9 37.3 Milk collection 116.0 0.7 1.9 Milk processing 270.0 1.8 4.5 New line for UHT milk production in Aksengir 602.0 4.0 10.0 Juice processing improvements 152.0 1.0 2.5 New line for juice production in Kostanay 1,110.0 7.4 18.4 Distribution and Production Efficiency 2,296.0 15.3 37.9 Coolers 1,230.0 8.2 20.3 Juice racks 315.0 2.1 5.2 Delivery trucks 375.0 2.5 6.2 New 2-megawatt gas generator 376.0 2.5 6.2 Refinancing of Maturing Short-term Debt 1,500.0 10.0 24.8 Total 6,046.0 40.2 100.0 Sources of Funds

ADB Term Loan Facility 6,046.0 40.2 100.0 Total Sources of Funds 6,046.0 40.2 100.0

ADB = Asian Development Bank, UHT = ultra-high temperature. Source: ADB. 2013. Report and Recommendation of the President to the Board of Directors: Proposed Loan to LLP RG Brands Kazakhstan for the RG Brands Agribusiness Project (Kazakhstan). Manila.

Appendix 2 11

RESULTS AND RATINGS FOR PROJECT CONTRIBUTIONS TO PRIVATE SECTOR DEVELOPMENT AND ADB STRATEGIC DEVELOPMENT OBJECTIVES—INFRASTRUCTURE

Results Area Actual Achievements Justification Potential Future Achievements

1. Within company PSD effects

1.1 Improved skills. New or strengthened strategic, managerial, operational, technical, or financial skills.

Improved staff capacity RG Brands Kazakhstan LLP conducts ongoing training for its employees, especially on safeguards, health, and safety. The company also continues to modernize its production processes and trains staff accordingly.

RG Brands is committed to continually improving management and staff capacity through trainings.

1.2 Improved business operations. Improved ways to operate the business and compete, as seen in investee operational performance against relevant best industry benchmarks or standards.

Industry leader in UHT milk and juice Sustained profitability despite stiff competition

a. RG Brands continues to modernize production processes to streamline production costs, introduce product innovations, and launch product offerings in more economic segments to address competition.

Management plans to initiate at least five modernization projects annually.

1.3 Improved governance. As evident in set standards related to corporate governance, stakeholder relations, ESHS fields, and/or energy conservation, and their implementation.

Improved safeguards monitoring Certified for ISO 9001:2000 (quality management systems), ISO 14001:2014 (environmental management systems), and the OSHAS 18001 safety management system

RG Brands adheres to internationally recognized standards such as Good Manufacturing Practice, and hazard analysis and critical control points. All standards are integrated in the overall operations of the two plants.

RG Brands is expected to continue to demonstrate a high level of governance in all aspects of its operations.

1.4 Innovation. New or improved infrastructure design, technology, service delivery, ways to cover or contain cost, manage demand or optimize

RG Brands outsourced various functions like delivery, security, and warehouse maintenance to cut costs

RG Brands is expected to continue with its modernization program to remain an industry leader. The fast-moving

Management plans to initiate at least five modernization projects annually

12 Appendix 2

Results Area Actual Achievements Justification Potential Future Achievements

utilization, improved risk allocation between private company and government, financial structure, etc.

RG Brands reduced electricity consumption through modernization projects like preformed necks for juice bottles and the modernization of Lipton production lines

consumer goods business requires continuous innovation to be competitive.

1.5 Catalytic element. Mobilizing or inducing more local or foreign market financing or foreign direct investment in the company.

Tenge-denominated term loans from the EBRD, IFC, and the Development Bank of Kazakhstan

RG Brands’ long-term debt is mostly denominated in local currency to minimize foreign exchange risk, which is especially important because of the recent devaluation of the tenge.

Management’s plan is to focus more on local currency-denominated financing.

2. Beyond company PSD effects

2.1 Private sector expansion. Contribution by a pioneering or high-profile project that facilitates in its own right, or paves the way, for more private participation in the sector and economy at large.

Increased employment More family-run convenience stores and supermarkets Increased business for dairy farmers

RG Brands contributes to the local economy and private sector development by sourcing more raw materials locally; outsourcing various functions like delivery, security, and maintenance; and selling its products through an expanded distribution network (from 40,000 to 44,000 retail outlets). The company has 464 employees and indirectly employs 192 persons via its outsourcing contracts.

RG Brands continues to expand its business and market. There are plans to penetrate more stores and improve distribution infrastructure.

2.2 Competition. Contribution of new competition pressure on public and/or other sector players to raise efficiency and improve access and service levels in the industry.

More product offerings in the lower economic segment Consumer preference shift to more affordable products

RG Brands has maintained its profitability and market share despite increased competition. Management continues to reduce cost and

RG Brands expects higher market share in 2020 and plans to introduce new products like coffee and flavored water.

Appendix 2 13

Results Area Actual Achievements Justification Potential Future Achievements

New product launches and innovations in packaging to reduce cost Streamline cost structure by improving processes and outsourcing certain functions

improve product offerings.

2.3 Demonstration effects. Adoption of new skills, improved infrastructure assets and services, more efficient processes, maintenance regimes, improved standards, risk allocation, and mitigation beyond the project company.

Improved distribution infrastructure Outsourced certain functions to reduce capital requirement and minimize risk

RG Brands continues to invest in coolers and racks to be distributed among its various distribution outlets for better product positioning. The company is committed to continued improvement in processes and adoption of internationally recognized standards.

RG Brands is expected to achieve higher market share as a result of its continued investments in distribution infrastructure and improvements in processes.

2.4 Linkages. Relative to investments, the project contributes notable upstream or downstream linkage effects to business clients, consumers, suppliers, key industries, etc. in support of growth.

Increased business for local suppliers of raw milk and juice concentrates Increased business for suppliers of certain services like security, delivery, and maintenance Increased business for family-run convenience stores

RG Brands continues to benefit other businesses and individual entrepreneurs as it expands its business and outsources more functions and services.

RG Brands is expected to continue to be a major factor in the growth of the local economy.

2.5 Catalytic element. Mobilizing or inducing more local or foreign market financing or foreign direct investment in the sector (beyond the company) through pioneering or catalytic finance.

More long-term debt financing available for the agriculture sector More foreign investors coming in to manufacture equipment for the agriculture sector

The Government of Kazakhstan has instituted programs to support the agriculture sector. This serves as incentive for more investors in the sector.

Increased longer-term financing from local commercial banks.

2.6. Affected laws, frameworks, and regulation. Contributes to improved laws and sector regulation for PPPs, concessions, joint ventures, and build-operate-transfer projects; and liberalizing markets as

The project demonstrated the financial viability of investing/lending to agribusiness ventures

The agriculture sector is expected to grow and contribute more to GDP.

Further growth is expected in the agriculture sector as the government institutes programs to diversify Kazakhstan’s commodity-based

14 Appendix 2

Results Area Actual Achievements Justification Potential Future Achievements

applicable for improved sector efficiency.

economy and attract more private investment.

3. Contribution to other ADB strategic objectives

3.1 Sector development (outputs). Contribution to other sector development outputs and outcomes not captured under point 2, such as capacity or network expansion.

Share of agriculture sector to GDP increased from 5.1% in 2014 to 5.4% in 2018 Agriculture sector growth rate increased to 3.5% in 2018 from 1.3% in 2014

The agriculture sector is expected to grow and contribute more to GDP.

There is expected to be continued government support and increased private investments to further sector growth.

3.2 Sector development (outcomes). Contribution to other sector development outputs and outcomes not captured under point 2, such as increased infrastructure utilization or consumption, improved in-country connectivity, and improved energy security.

Increased production and export of food and beverage products Growth in local food and beverage consumption as a result of growth in consumer spending

The growth is an offshoot of continued government support.

The government wants to increase food production and exports by 40% by 2020. Food sales in Kazakhstan are forecast to rise at a healthy CAGR of 8.7% (in local currency terms) during 2019–2023.

3.3 Inclusion. Improved access to availability or affordability of infrastructure services for the poor and other disadvantaged groups.

Increased raw milk production by local farmers who supply RG Brands

RG Brands provides working capital, equipment, and vaccines to local farmers.

The company continues to work with suppliers.

3.4 Job creation. Creation of additional sustainable jobs or self-employment. Distinguish between jobs created within and beyond the company.

The company indirectly employs 192 persons via its outsourcing contracts

RG Brands continues to outsource various functions and services to streamline costs and minimize capital requirements.

Increased business for outsourcing agencies as RG Brands expands its operations.

3.5 Environmental sustainability. Project net impact on GHG emissions. Any other contributions to environmental improvements.

Environmentally friendly projects that were launched in 2018 include the following: Decrease in electricity consumption of about 45,625.17 kW per hour annually Stopped usage of Freon, which harms the ozone layer

RG Brands replaced mercury arc lamps with LED lamps and replaced Freon-based refrigerants with propane (R290) refrigerants for refrigerators. However,

RG Brands continues to find ways to reduce its energy consumption. The company’s modernization

Appendix 2 15

Results Area Actual Achievements Justification Potential Future Achievements

Reduced water consumption by 50% Decreased the use of plastic materials for the production of preformed necks for bottle containers

RG Brands has not confirmed yet if the coolers distributed use refrigerants that comply with the PIAL. Water recycling and treatment helped reduce water consumption. The amount of plastic used in producing the preformed neck of a 0.5-liter bottle container was reduced from 31 to 28 grams per preformed unit, and the amount used for a 1-liter bottle was reduced from 57 to 44 grams.

program is an ongoing process and most of its modernization projects have had a positive impact on the environment.

3.6 Regional integration. Project contributions to regional cooperation and integration by facilitating trade, cross-border mobility, cross-border power supplies, etc.

RG Brands imports juice concentrates and tea leaves from countries like India, the People’s Republic of China and Uzbekistan; it exports milk to the Russian Federation and other neighboring countries, and operates logistics hubs in the Russian Federation (in Novosibirsk and Yekaterinburg)

RG Brands’ continued business expansion leads to increased trade flows.

RG Brands also plans to build a new production facility in a neighboring country.

CAGR = compound annual growth rate, EBRD = European Bank for Reconstruction and Development, ESHS = environmental, social, health, and safety, GDP = gross domestic product, GHG = greenhouse gas, IFC = International Finance Corporation, ISO = International Organization for Standardization, kW = kilowatt, LED = light-emitting diode, OSHAS = Occupational Health and Safety Assessment Series, PPP = public–private partnership, PSD = private sector development, UHT = ultra-high temperature.

16 Appendix 3

SECTOR REVIEW

A. The Agriculture Sector in Kazakhstan

1. Agriculture accounts for approximately 5.5% of Kazakhstan’s real gross domestic product. More than 74% of the country’s territory is suitable for agricultural production but only 25% of the land is arable. The country’s major crops are wheat, barley, cotton, and rice, with wheat exports a major source of hard currency. Kazakhstan is one of the top 10 grain exporters in the world, exporting to over 70 countries. Table A3 provides a breakdown of Kazakhstan’s real gross domestic product from 2014 to 2018 and the agriculture sector’s contribution.

Table A3: Real Gross Domestic Product and the Agriculture Sector’s Contribution Item 2014 2015 2016 2017 2018

GDP (T billion) 12,887 13,016 13,133 13,645 14,245 Agriculture sector’s contribution (T billion)

663 679 714 736 762

Agriculture sector’s share of total GDP (%)

5.1 5.2 5.4 5.4 5.4

Real GDP growth 4.3 1.0 0.9 3.9 4.4 Agriculture sector growth 1.3 2.4 5.2 3.1 3.5

GDP = gross domestic product. Note: In constant 2005 prices. Source: Economist Intelligence Unit. 2019. Country Report: Kazakhstan. London.

2. In 2017, exports of agricultural products from Kazakhstan increased by 12.5%, an offshoot of the huge work of agricultural producers as well as the measures taken by the Ministry of Agriculture to open new markets. For instance, the work on harmonizing the veterinary and phytosanitary requirements of importing countries resulted in a 34.3% increase of exports of domestic agro-industrial products to the People’s Republic of China. The Ministry of Agriculture is also in discussions with its counterpart in the Government of the People’s Republic of China to agree on veterinary requirements for beef, pork, some types of cereals, legumes, and melons. These agreements are expected to lead to 20%–30% growth in exports to the People’s Republic of China in 2019. The Ministry of Agriculture also successfully negotiated the removal of trade barriers on frozen beef, meat products, chicken eggs, and livestock in countries like Iran, Saudi Arabia and the United Arab Emirates. 3. To diversify the country’s economic base, the Government of Kazakhstan has adopted several programs supporting the agriculture sector. In February 2013, the government approved a new sector program of agro-industrial complex development for 2013–2020 called Agribusiness 2020. The program aims to incentivize investments in agriculture by providing new tools of government support in the form of capital grants, insurance and guaranteed loans, interest rate subsidies on loans and leases, and bank funding, as well as measures to improve the mechanisms of compulsory crop and livestock insurance. The Ministry of Agriculture developed 15 master plans covering different businesses related to agriculture. An example is the master plan for the development of dairy farming, which set a goal to increase milk production by 1.7 million tons by 2020. This will reduce the share of imported milk and increase the rate of per capita consumption of milk, which was 27.5 liters in 2016. The master plan includes the construction of 20 industrial and 2,000 mini dairy farms and an increase in the number of livestock.1 4. In 2016, the Ministry of Agriculture launched a program aimed at providing financing to cooperatives that help firms buy equipment, store and transport products, provide veterinary

1 The Astana Times. 2013. Master Plans for Agribusiness 2020 Programme Developed. Astana.

Appendix 3 17

services, organize the supply of fodder and agrochemical products, and help with lending. This program allowed 157 cooperatives to provide assistance to 15,000 farms. The cooperatives created more than 100 milk collecting centers and 7,000 forage bases. The said programs have helped increase the volume of investments in Kazakhstan’s agriculture sector, which grew 17% in 2014 to T166 billion and reached T228 billion in 2016. B. Food and Beverage Industry 5. The outlook for Kazakhstan’s food and beverage industry is positive. It is one of the industries intended to facilitate Kazakhstan’s economic diversification and will likely continue to receive generous state support. Improving the macroeconomic and consumer outlook will support consumer spending growth. This offers potential for premium pricing across the board. However, increasing levels of health consciousness among consumers will continue to influence spending preferences, particularly in the nonalcoholic drinks segment. 6. Headline food sales in Kazakhstan are forecast to rise at a healthy compound annual growth rate of 8.7% (in local currency terms) during 2019–2023. Real gains, however, will be slightly moderated by inflation, which is projected to average 5.5% during the same period. The government wants to increase food production and exports by 40% by 2020. Nonalcoholic drink sales are forecast to register a strong 9.1% compound annual growth rate during 2019–2023 owing to a strong tea-drinking tradition and the rising popularity of coffee.2 7. Food consumption is growing from a low base in Kazakhstan. The country’s mass grocery retail sector is highly fragmented and dominated by traditional bazaars and small family-run shops. The ongoing shift toward modern retail formats favors processed and packaged foods. With the government keen to diversify the economy and develop the banking and financial sectors, the availability of credit is expected to pick up, particularly credit cards, which will allow for an expansion in consumption for Kazakh households. Dairy products account for almost 42% of total food sales, with cheese and eggs being the two major categories within this segment. The dairy market has grown since 2016 as rising disposable incomes allow consumers to spend more and try new product varieties such as drinks and cheeses. 8. Current health and wellness trends provide positive prospects for milk consumption in Kazakhstan. There is a growing demand for milk products fortified with vitamins and minerals or with other components offering potential health benefits as consumers pay more attention to these sorts of products. Overall milk consumption in Kazakhstan reached 600 million liters in 2018 with ultra-high temperature milk accounting for approximately 50% of the market. There is strong competition in milk products in Kazakhstan. Thus, players invest in promotions and advertising in order to differentiate brands and products and gain a competitive edge. This category witnesses regular new product development and has led to the emergence since 2016 of milk alternatives, such as almond milk, coconut milk, goat milk, and soy milk. 9. The nonalcoholic drinks segment is still considered underdeveloped in Kazakhstan, which suggests significant scope for growth. As with other countries in the former Soviet bloc, Kazakhstan is a large consumer of tea; this category accounted for an estimated 57.6% of total spending within the nonalcoholic drinks segment in 2018. Its market share is expected to rise further in 2019-2023 as inflation decelerates and household real purchasing power rises. Other nonalcoholic beverage categories are also expected to experience strong growth on the back of new product launches as well as aggressive marketing and promotional activities focused on

2 Fitch Solutions. 2019. Kazakhstan Food and Drink Report. London.

18 Appendix 3

urban areas. Sales of fruit juices and bottled water will be particularly strong, reinforced by rising consumer health consciousness. Fruit and vegetable juices are projected to post a 9.1% compound annual growth rate during 2019–2023 while bottled water will grow at a close to 10% compound annual growth rate during the same period. The outlook for the carbonated soft drinks category is less favorable, with a forecast compound annual growth rate of only 2.9% during the same period (footnote 2).

Appendix 4 19

KAZAKHSTAN’S ECONOMIC INDICATORS, 2014–2018 Year

Real GDP

Growth (%)

Average Inflation

(%)

Current Account Balance ($ million)

External Debt ($ million)

International Reserves ($ million)

Year-end Tenge–United States Dollar

Exchange Rate

($1.00 = T)

2014

4.3

6.72

6,114

157,695

29,209

182.35

2015

1.0

6.66

(6,012)

153,395

27,871

339.47

2016

0.9

14.2

(8,132)

163,715

29,713

333.28

2017

3.9

7.4

(5,102)

167,485

30,747

331.31

2018

4.4

6.0

(52)

161,153

30,927

375.15

( ) = negative, GDP = gross domestic product. Source: Economist Intelligence Unit. 2019. Country Report: Kazakhstan. London.

20 Appendix 5

ENVIRONMENTAL IMPACT

A. Introduction 1. The project consisted of (i) expansion of RG Brands Kazakhstan LLP’s ultra-high temperature milk and juice production facilities ($14.9 million), (ii) investments to boost efficiency in production and distribution ($15.3 million), and (iii) refinancing of debt maturing in the short term ($10.0 million) to compensate for the lack of long-term debt financing in the market.1 The loan assistance helped expand production and storage facilities in RG Brands’ Kostanay plant as well as improve milk collection systems by investing in a fleet of trucks that collect raw milk from dairy farms and households in the Kostanay region and deliver it directly to the plant. RG Brands also invested in coolers and racks that were distributed to supermarkets and convenience stores to assure good product placement. 2. The project was classified as category B for environment for the modernization works at RG Brands’ Aksengir and Kostanay plants. An environmental assessment for the modernization works that involved minimal reconfiguration activities within the existing footprints of the plants was conducted to allow adequate space for the installation of additional or new machinery and equipment in the production line. The extended annual review report (XARR) mission, which was fielded in March 2019, evaluated the implementation of the environmental management plan and the environmental and social management system (ESMS) and gauged the degree of compliance for the aspects of the project related to health, safety, and environment (HSE).

B. Review Findings 3. Compliance with Asian Development Bank requirements and applicable national and international regulations and standards. Prior to Asian Development Bank (ADB) assistance, both the Aksengir and Kostanay plants had existing environmental permits from the concerned local government units. When RG Brands sought ADB financial assistance in 2013, the proposed project was then processed and approved under the corporate finance modality since the ADB loan was specifically earmarked for the modernization works of the Aksengir and Kostanay plants. To comply with ADB’s Safeguard Policy Statement (2009) requirements, RG Brands established and adopted an ESMS on 13 April 2013 to be mainstreamed in the overall operations of the two production centers. The XARR mission confirmed that these two main production centers are fully compliant with applicable Kazakhstan laws and regulations on air emissions, wastewater quality, groundwater abstraction, food safety practices, and occupational health and safety. No grievances or complaints about environmental impacts or any significant spills or harmful gas emissions were recorded. No penalties were imposed by the Government of Kazakhstan. RG Brands also adhered with the internationally recognized standards such as Good Manufacturing Practice, hazard analysis and critical control points (for food safety management systems), the International Organization for Standardization (ISO) 9001:2000 (quality management systems) standard, the ISO 14001:2014 (environmental management systems) standard, and Occupational Health and Safety Assessment Series (OHSAS) 18000; all of these standards are also integrated in the overall operations of the two production centers.

1 As confirmed by the extended annual review report (XARR) mission, the Asian Development Bank (ADB) loan facilities were not fully utilized, with (i) only $22.5 million out of $40.2 million drawn by RG Brands and (ii) only $12.5 million used to invest in coolers, racks, and other modernization projects related to the collection and storage of milk and the distribution of other beverage products.

Appendix 4 21

4. Environmental impacts, and environmental management and monitoring plans during operations. Environmental impacts were assessed to be minor, short-term, and temporary in nature during construction. Construction activities were mainly focused on small-scale reconfiguration activities to allow adequate space for the installation of additional or new equipment and machinery as part of the production line. The operation of the two production plants for milk, juices, and other beverages neither created significant pollution emission nor exploited a considerable amount of natural resources. The project did not generate any harmful atmospheric emissions, effluent, or solid contaminants during operations. Based on Kazakh legislation, production or operation activity was carried out only after all obligatory documents (e.g., environmental evaluations, calculations of emission limits, and environmental protection plans) had been reviewed and approved by the environmental protection department of each respective province. Once the project was operational, each environmental protection authority conducted annual checks to validate the production capacity design and its emission limit.2 No endangered flora and/or fauna were affected by the project since each production centers is located within an industrial area. RG Brands engaged a specialized company to collect hazardous and nonhazardous waste (e.g., used oil, busted bulbs, batteries, metal, industrial waste, paper, cardboard, and film) to dispose of or recycle. Water required by the Aksengir plant is extracted from boreholes managed in accordance with the plant’s water extraction permit. Water required by the Kostanay plant is supplied by the municipal water system. Both production centers are connected to municipal wastewater collection systems and send their wastewater through those connections. Both plants use diluted chemicals to maintain a very low chemical concentration in the wastewater, which promotes production safety. The government is responsible for controlling and managing the quality and quantity in the municipal wastewater collection systems. Proper personal protective equipment is mandated to be worn by all staff working inside the production centers. Safety signs and warnings are adequately posted at strategic locations inside the production centers. The XARR mission confirmed that the two production centers are fully compliant and there are no outstanding penalties and/or violations charged by the Government of Kazakhstan. The chief manufacturing officer, the corporate-level HSE manager, and an HSE officer located at each production facility are responsible for supervision and monitoring. 5. Environmental and social management system. The ESMS was approved by RG Brands’ management on 23 June 2013 and was later updated on 25 April 2019 to be in line with the progress made by RG Brands in terms of HSE plans and resource efficiency programs such as (i) industrial waste management plan procedures on proper waste collection, storage, and disposal (with possible reuse and recycling); (ii) an energy efficiency plan involving proper maintenance of all energy consuming units and improvement of insulation of the boiler and heating system; (iii) water efficiency through control of water abstraction and water recycling; and (iv) a material waste reduction program that aims to find alternative low-cost packaging materials and technology. Some resource efficiency programs being implemented by RG Brands are listed in Table A7.

Table A7: Resource Efficiency Programs

Resource Efficiency Program Date of

Implementation

Actual Environmental Effect

Replaced mercury arc lamps with LED lamps 2018 Decrease in electricity consumption of about 45,625.17 kW per hour annually

Preformed neck modernization for bottles (as a replacement for short necks); the following production lines underwent modernization:

2018 Decreased plastic use and energy consumption for the production of one preformed neck. The amount of plastic

2 A quarterly report is compiled on emission to be submitted to the state authorities. Actual emission measurement is

carried by the government regulatory body on annual basis.

22 Appendix 5

(i) Format DaDaDay 1 L and 0.5 L used in producing the preformed neck of a 0.5 L bottle container was reduced from 32 to 28 grams per preformed unit, and the amount used for a 1 L bottle was reduced from 57 to 44 grams.

(ii) Lipton, 0.5 L

(iii) Gracio, 0.33 L

(iv) DaDaDay 1.5 L

Replaced Freon-based (R134a)a refrigerants with propane (R290)b refrigerants based on low energy supply refrigerators

2018 Decrease in electricity consumption from 6.9 to 3.8 kW per hour. Also stop the usage of Freon that harm the ozone layer.

kW = kilowatt, L = liter, LED = light-emitting diode. a Hydrofluorocarbon 134a is included in the United States Environmental Protection Agency’s Significant New Alternatives Policy delisting of hydrofluorocarbons that will no longer be acceptable in new equipment for certain end-use applications in the United States market. b Propane R290, also known as CARE40, is refrigerant-grade propane, a natural refrigerant suitable for use in a range of refrigeration and air-conditioning applications. The use of R290 is increasing because of its low environmental impact and excellent thermodynamic performance. Source: RG Brands Kazakhstan LLP. 2019. RG Brands Overview. Almaty.

6. Both the Aksengir and Kostanay plants have adopted ISO 14001:2014 and OHSAS 18001 (safety management systems). Surveillance audits, internal audits, and management reviews will be conducted on a regular basis in accordance with the requirements of the ISO certification. 7. Occupational and community health and safety plan. RG Brands’ occupational health and safety system is based on the requirements of Kazakhstan legislation and is aligned with the international OHSAS 18000 standard. On the corporate level, the health and safety system is managed in line with the health and safety manual developed by RG Brands. This document establishes the main health and safety standards for facility operations and serves as the basis for related trainings and inspections. Implementation of procedures stipulated in the manual is obligatory for all units involved in RG Brands’ operations. In accordance with RG Brands’ health and safety system and the requirements of Kazakhstan legislation, all enterprises that enter into subcontract arrangements with RG Brands are obliged to maintain safety records. A safety records logbook is available at each plant. Personnel regularly attend relevant health and safety trainings, such as forklift operation, fire safety with practical training, injury prevention, safe use of chemicals, and electrical safety. Plant employees are provided with appropriate clothing, footwear, and headwear to meet required food safety standards and maintain strong health and safety performance. All premises are provided with warning and information signs, which are inspected during regular health and safety inspections. Firefighting equipment is also provided. RG Brands developed an action plan for emergency situations, which was approved by management. The document defines emergency situations and covers practically all scenarios that can happen inside and outside of facilities and production sites (e.g., accidents, fires, demolition of buildings, floods, earthquakes, transport accidents, terrorist acts, and robberies). All employees are aware of described regulations and know how to act in emergency situations. There were no reported major accidents or fatalities during its operation. C. Conclusion and Recommendation

8. Based on the review and evaluation of the relevant HSE documents, such as the 2015 environmental and social monitoring report, ESMS document, E&S due diligence report (2013), and site visit and interview meetings, it is concluded that the environmental and social requirements of ADB’s Safeguard Policy Statement and national laws and regulations have been adequately met. RG Brands is committed to sustaining implementation of the ESMS to (i) continually improve staff capacity through the conduct of HSE and ESMS training; (ii) maintain close collaboration with the government regulatory agencies on compliance; and (iii) regularly

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provide updates of HSE plans, procedures, and resource efficiency programs to support smooth operation of the Aksengir and Kostanay production centers.

24 Appendix 6

SOCIAL IMPACT

A. Project Overview

1. The project consisted of (i) the expansion of RG Brands Kazakhstan LLP’s ultra-high temperature (UHT) milk and juice production facilities, (ii) investments to boost efficiency in production and distribution, and (iii) the refinancing of maturing short-term debt. The project was implemented within RG Brands’ two existing facilities: its Aksengir plant and its Kostanay plant. The loan assistance to RG Brands helped (i) expand production and storage facilities in the Kostanay plant as well as improve milk collection systems by investing in a fleet of trucks that collect raw milk from dairy farms and households in the Kostanay region and (ii) improve the juice production facilities in the Aksengir plant. 2. The project was classified category C for both involuntary resettlement and indigenous peoples. When the Asian Development Bank (ADB) provided the loan to the company in 2013, the land for the two facilities was already owned by RG Brands. No additional land acquisition was carried out. Both facilities are located in industrial zones and thus did not affect any ethnic minorities who can be considered as indigenous peoples. The project is categorized as having no gender elements. An extended annual review report mission was fielded in March 2019 to determine the social impacts of the project.

B. Review Findings

3. Social safeguards. The Aksengir plant was built on a 21-hectare property. The facility includes production and warehouse areas. The plant is located in the Karasay district of Almaty oblast (province), near Aksengir village. The company acquired the 21-hectare state reserve land from the government in 2006. The land is a greenfield area with no people using the land. The Aksengir plant was built during 2006–2009 and began its operations in 2009 with two production lines. In 2013, the company installed a new line for bottle production and constructed a new warehouse, both in the Aksengir plant. The Aksengir plant now has 10 production lines, including one for UHT milk production. 4. RG Brands confirmed that the Aksengir plant does not require additional land and that there are no remaining issues related to past land acquisition. However, ADB was informed that about 3,000 square meters of the land on which the Aksengir plant is located will be acquired by the Government of Kazakhstan for its forthcoming toll road project. RG Brands management has conducted initial discussions with the government. 5. Based on the 2010 census, the population of Karasay district comprised mainly Kazakhs (58%), Russians (22%), Turks (6%), and Azeris (3.5%). No ethnic group considered to be indigenous peoples is affected by the Aksengir plant operations. 6. The Kostanay plant was purchased by RG Brands in 2004. The first Kostanay plant was built in Kostanay city in the 1990s by the Turkish-Kazakh enterprise Kosmis as a milk processing facility. In 2001, the plant was acquired by the Nestlé Group, which aimed to improve unpasteurized milk collection and the quality of produced goods; it later launched the production of UHT milk. In 2004, RG Brands acquired the plant and expanded its production to include juices and carbonated beverages. The Kostanay plant is established on 4.62 hectares of land located in an industrial zone. No additional land acquisition was carried out from 2013 to 2019. The social audit conducted in 2013 and confirmation from the Kostanay .plant manager indicated that there are no concerns or court cases related to the land or assets of the Kostanay plant.

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7. The population of Kostanay city is composed largely of Kazakhs (46%) and Russians (28%), with some minorities such as Byelorussians, Germans, Tatars and Ukrainians. The plant is located in an industrial zone and residential settlements are located 500 meters away from the plant. No ethnic group considered to be indigenous peoples is affected by the Kostanay plant operations.

8. Other social dimensions. The Aksengir plant increased its staff headcount from 285 in 2013 to 315 in 2018, of which about one-quarter were women. The Aksengir plant’s human resource procedure is aligned with Kazakhstan labor laws. The plant outsources its security, cleaning, maintenance, and warehouse services, constituting approximately 150 workers. The plant manager shared that their contracts with the outsourcing agencies contain a provision requiring them to comply with national labor laws. Grievances of outsourced workers and staff are raised initially with direct supervisors and elevated to the human resources department or the plant manager level if not otherwise resolved. 9. The Kostanay plant has a total of 149 staff, of which 49 are women. It also has 42 outsourced workers, who carry out cleaning, food, and security services. The plant follows a human resource policy aligned with Kazakhstan labor laws. Contracts with subcontractors include provisions on the need to follow national labor laws. Interviews with three staff members picked at random showed that they are satisfied with their salary and benefits, employment tenure, and promotion prospects. Grievances of staff are usually conveyed through supervisors and resolved through the human resource manager or the plant manager. 10. With regards to grievance redress mechanism for external stakeholders, including customers, the Aksengir and Kostanay plants have hotline numbers. Any concerns raised about the products produced in either plant are dealt with by quality control managers. Other issues, if any, are dealt with by the plant managers. People or entities with grievances may also contact the government to report instances of noncompliance or complaints. Both the Aksengir and Kostanay plant managers confirmed that no grievances have been received by the plants from nearby entities and civil society organizations. The plants do not maintain any logs of the concerns raised by external stakeholders. 11. The Aksengir plant has also sponsored some community programs, including providing desks, chairs, blackboards, and fences to a local school. It also donated one ambulance to a nearby clinic that serves eight villages. C. Conclusions and Recommendations

12. Land and asset acquisition for the two plants had been carried out before the ADB financing in 2013. The audit conducted in 2013 and the findings of the extended annual review report mission showed that there are no remaining issues related to land. No indigenous peoples were affected by the installation of equipment and construction of new production lines on the existing land of the plants. 13. The operations of the two plants contribute to generating employment. The company aligns its human resource policy with national labor laws. The grievance redress mechanism for stakeholders should be enhanced by ensuring that RG Brands and its production plants maintain logs and a documentation system. RG Brands also needs to improve the environmental and social capacity of its staff to implement and monitor its environmental and social management system. For instance, if the focal environment and social officer is unavailable, the company should ensure

26 Appendix 6

that other team members are capable of stepping in to guarantee the effectiveness of the environmental and social management system.