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Friday, 30 January 2009

Zambia Budget 2009

2009 Budget Speech



Update:
As for the early media coverage, its the windfall tax abolition that is making early noise :

....Musokotwane said the government reduced the windfall tax after consultations with foreign mining firms, which have complained of higher taxes, high electricity tariffs and fuel prices and falling global metals prices...

"In light of the impact of the global crisis on the mining sector, I propose the following refinements, to remove the windfall tax and retain the (15 percent) variable tax, which will still capture any windfall gains that may arise in the sector," Musokotwane said.

Musokotwane said the government would cut duty for heavy fuel oils from 30 percent to 15 percent and to remove customs duty on copper powder, copper flakes and copper blisters.

"These measures will reduce the operating costs of mining companies as well as encourage the utilization of local smelting capacity," Musokotwane said.

The move is seen as part of efforts to save jobs. Zambia's Luanshya Copper Mines (LCM) laid off all of its 1,740 miners after halting operations in November after copper prices fell. Prices have plunged 65 percent since record highs last July.....

....Zambia introduced the windfall tax last April during the commodity boom. It also introduced the 15 percent profit variable tax on income above eight percent. In moves backed by the International Monetary Fund, the country also raised mineral royalty to 3.0 percent from 0.6 percent and corporate tax to 30 percent from 25 percent.



And here goes the main tax changes :
2009 Budget Highlights

28 comments:

  1. 1.1.2

    I find it odd that income tax goes straight from 0% to 25% and then up to 30% and 35%. At least the untaxed bracket is expanded (to people making less than $140 per month at an exchange rate of K5000/USD).

    1.1.7

    Abolish the Windfall Tax which was introduced in 2008 for the mining sector. This measure is intended to abolish (sic) windfall tax has mde the mining ta very onerous, particularly for high cost producing mines. The variable profit tax currently in place is adequate to address the issues of taxing supernormal profits for which (sic) windfall tax was intended to address.


    I'm sorry, but is this budget written up by the Finance Ministry, or by the mining industry? I think they are conspiring to defraud the Zambian taxpayer out of billions of dollars.

    This government can complain all it wants about diversification, but they are unwilling to collect the money from the mining sector to do it. It continues...

    1.1.8 Allow 100 percent capital allowance deduction for the mining sector

    This measure is intended to be an investment incentive for the mining companies in the light of cash flow difficulties that mining companies are currently experiencing. The measure will allow mining companies to claim capital allowances within one year rather than four years.


    More freebies for the mines.

    1.1.9 Classify hedgingincome arising from mining operations as part of the mining incomes so that it is taxed under the mining tax regime

    The measure is intended to include hedging income as part of mining income for tax purposes. However, it should be noted that any gains or losses from hedging will still be subject to tax but under the mining tax regime.


    Is that a lower tax rate, or no taxation at all?

    In this time of economic downturn, shouldn't the government try to collect more taxes from the mines not less, especially in light of the fact they increased the budget?

    Also, the lowering of taxes for the mines is not at all in keeping with the increase of taxation for other sectors.

    1.2.3 Increase company income tax for incoem earned from export of cotton lint without export permit from MCTI from 15 percent to 25 percent

    This measure is aimed at discouraging exports of cotton lint (raw cotton) in order to increase local value addition. This is in recognition of the availability of local processing capacity.


    Not bad, but I am not sure of just leaning on the fiscal means of increasing local production. But stimulating local production through taxing the export of raw materials is not bad (although it does not weigh up against the money lost from the mines).

    1.3 Housekeeping Measures

    1.3.1 Amend Section 41 so as to provide for tax reduction on donations made to public institutions such as educational, health, public safety and similar institutions.

    This measure is intended to make donations to public institutions allowable as a deduction for income tax purposes in order to encourage donations to public institutions.


    I don't want to think the worst of this, but didn't Chiluba use donations to charities to clear bribes, including during the Vulture Fund saga?

    2.1 - 2.1.3

    The 'zero rating' of equipment and the smelting copper locally. I think this is good, especially if it applies to Zambian manufacturers.

    However, isn't this counteracted with:

    3.1.1 - 3.1.2

    Reducing of customs duties on vegetable oils, 'clear beer' and gypsum. If reduction on one will support local manufacturing, why reduce excise on the other?

    3.1.7

    Reduction or elimination of excise duties on capital equipment. I think this is excellent, to the extent that these are not manufactured in Zambia.

    Finally,

    4.0

    All kinds of exemptions from tax for investors and developers of the MFEZs.

    ReplyDelete
  2. MrK,

    My understanding is that the new PAYE schedule results look like this:

    Earn = 700K, Pay = 0K, Rate = 0.000%
    Earn = 800K, Pay = 25K, Rate = 3.125%
    Earn = 900K, Pay = 50K, Rate = 5.555%
    Earn = 1000K, Pay = 75K, Rate = 7.500%
    Earn = 1200K, Pay = 125K, Rate = 10.417%
    Earn = 1335K, Pay = 158.75K, Rate = 11.891%
    Earn = 1500K, Pay = 208.25K, Rate = 13.883%
    Earn = 2000K, Pay = 358.25K, Rate = 17.912%
    Earn = 3000K, Pay = 658.25K, Rate = 21.942%
    Earn = 4000K, Pay = 958.25K, Rate = 23.956%
    Earn = 5000K, Pay = 1303.25K, Rate = 26.065%
    Earn = 10000K, Pay = 3053.25K, Rate = 30.533%

    Hope that helps!

    ReplyDelete
  3. "Government has allocated K435 billion to the FSP this year with the hope that should prices of fertiliser remain low, many small-scale farmers would benefit." Zambia Daily Mail (31/01/09)

    Gentlemen, is not this a waste of money? Do we really have to continue spending such amounts on programmes that yield little results? Imagine if we resuscitated NCZ what ramification that would have on the agriculture sector - of course not the one through which we have perpetually been giving out free fertilisers? Even if I received a lot of lynching form the likes of MrK on this issue (my posting of 24 November, 2008) when I referred to Zambian agric policy as a social one and not an economic one, surely these billions with a right management ( not of cadres) in place we could bring Kafue to life again. As a principle of forming clusters we could encourage the newly establihed steel plant which is just opposite NCZ, and some mines or kafironda explosives (whatever its new names is now) to have shares in NCZ. The steel company would primarily be focused on manufacturing of spare parts for the machines at NCZ (to instil a culture of maintenance) and could be a ground for R&D in machine tool technologies. What that might lead to are some spinoffs for spare parts for agric equipment or any sort of machine you could dream of, not forgetting the fact that we import a lot of motor vehicle spare parts. Now, if you consider employment contribution of just the combination of this one cluster, it would really make a difference. Of course we also need to continue with "free" fertiliser programmes but under the Ministry of Community and Social Welfare which would provide oversight through extension services. MACO would then focus on commercial entities in collaboration with MCTI and ZNFU. As a strategy, MACO could have contracts with commercial farmers to grow specific crops e.g. maize, soya beans, cassava, sorghum or any other staple crops which MACO could decide for a particular year so as to ensure (the much talked about) food security. That can be done on a revolving basis and in identified regions so that there is a balancing of benefits to avoid people crying like was the case with the winter maize thing with that Chiawa farmer. The whole process could be done with the help of ZNFU.
    With NCZ up and running, in comes other industries like the service industry-schools, clinics, lodges, hotels, police posts, theft etc. These will require new entrants in terms of jobs.

    Therefore, rather than focussing on "many small-scale farmers" whose path is but cul de sac, we need to re-orient our thinking on agriculture policies. Manufacturing for agriculture is what I feel could do.

    ReplyDelete
  4. Anon,

    I think that I tend to agree with your general point, "that we do not really need FRA; not in its current functional structure, " as expressed in your referenced comment from Nov. '08. I would also agree that the FSP in the form of handouts has limited multiplier effects on other sectors of the economy, as well as unacceptably high potential for fraud. Also, I understood you to mean that the annual political act of handing out subsidized inputs was a social exercise, not the actual business of farming.

    I am curious as to whether you know of any good sources as to the exact nature and condition of NCZ equipment? I am not exactly certain as to what you are proposing by the new steel production venture in Kafue, "to have shares in NCZ." Is there reason to believe that they have cash reserves which they might be persuaded to invest? Or do you mean offering shares in NCZ as payment for manufacturing of spare parts? Part of my confusion is that parts manufacture requires entirely different equipment from raw or alloy steel production, so would require establishment of a third enterprise, no? Is NCZ demand alone sufficient to sustain such an enterprise, and if not, what other potential clients might make use of the same supply?

    Is the K435 billion (US$87M) sufficient to recapitalize NCZ operations to the point where domestic fertilizer production is competitive with established imported supplies? If not, how much more money is required up front in order to get this idea off the ground? How much of that budget would be transferred if, as you suggest, "we also need to continue with "free" fertiliser programmes but under the Ministry of Community and Social Welfare which would provide oversight through extension services?" I think that your idea deserves to be explored, I just don't see how to proceed without more specific details on what there is to work with. Thanks.

    ReplyDelete
  5. Yakima,

    Thanks for the clarification. I'm not sure why the entire structure was not included.

    The Post has an interesting commentary on the budget, and a promise that they'll take a close look at the Yellow Book in a future editorial.

    ReplyDelete
  6. Anonymous,

    Even if I received a lot of lynching form the likes of MrK on this issue (my posting of 24 November, 2008)

    Not on November 24th 2008 (I checked).

    when I referred to Zambian agric policy as a social one and not an economic one

    I think you said that about peasant farmers, not Zambian agricultural policy.

    The problem I have with that is that they produce most of the country's staple food. If Zambia professionalizes agriculture, they should be the central focus.

    By the way, if I was overly harsh, I try to be so about the arguments that are made, not the person, so please don't take it personally.

    I'm just tired of all the people who think that professioalisation means letting corporations do everything, when what is just as important as professionalisation, is to raise wages by creating mass employment. Without higher wages, there isn't going to be any demand for goods and services. People can still starve if there is plenty of food, but they can't afford to buy it.

    What is needed is comprehensive agrarian reform, which is about creating a national plan, not fiscal policy alone (as set out by 2009 budget) or monetary policy. What are required, are creating security of tenure (through for instance title deeds) for subsistence farmers, distributing more land to them, increasing support and extension services, and creating rural infrastructure so they can get their goods to market, and irrigation so they no longer need to depend on rainfall only.

    ReplyDelete
  7. Thanks a lot Yakima, especially for having time to go through my earlier posting. I like the way you called -"Anon" - very innovative of you. And innovation is what we need for agriculture sector using a driver like NCZ.

    "I am curious as to whether you know of any good sources as to the exact nature and condition of NCZ equipment?"

    The condition is terrible. I first visited NCZ in 1990 when I was a fresher; it used to be a marvel to look at. When I went to visit a friend in Kafue Estates in 2007, I almost cried. Those silvery shiny tanks were highly corroded and water-tank exteriors full of "balimbwelimbwe". I am sure there are a lot companies out there with know-how of how best we could upgrade NCZ's infrastructure whom we could engage- again only if we are willing. It may not entirely need the sole intervention of the steel company, that is where the whole point of innovation lies. I would like also to believe that at policy level there will be need to decide converting these annual financial wastes into wealth through industry and this is where I settled for NCZ as a starting point. The ministries to be tasked on that would mainly be MCTI and MACO. At firm level it would mean those companies we will encourage to invest in NCZ (steel company, mines etc) will bring their technological and management expertise to ensure that NCZ is competitively run. With this I am hoping I have attempted to answer your question of "I am not exactly certain as to what you are proposing by the new steel production venture in Kafue, "to have shares in NCZ.'" Let me also add here that I'd think one of the reasons for the commercialisation or is it concessioning of Zambia Railways has been bad management and the need for recapitalisation. I believe even similar attempts to have ZESCO undergo the same process were floated at some point. So, I think it would be good to have another local company investing in NCZ, part of the reason would be to instil a sense of responsibilty. If I recall very well, there was a time when the Chiluba govt injected something like K10bn into NCZ; I cannot remember the actual figure. Part of that money, I think K2bn, was meant for benefits, but the rest was misused.

    "Is the K435 billion (US$87M) sufficient to recapitalize NCZ operations to the point where domestic fertilizer production is competitive with established imported supplies?"

    Well "sufficient" is a relative term depending on one's spending patterns. I am sure if it was spent on the NCC it would bring a lot of public outcry that it is too huge an amount. And if it makes sense to maintatin the status quo, we say amen to it. But this is the kind of money we are spending year-in-year-out, probably ,til Jesus returns. Surely, can't we try to waste it in a meaningful way which tries to create employemnt for a few people? Because what we are doing is creating employment for foreign fertiliser companies. The short-termism in the way we run business somehow just has to stop. So, this project can be fully running in a matter of a year and half using the money spent to import fertilisers for free distribution and yet having not to attain food security. Hand-in-hand with the fertilisers the joint venture with the steel comany could be used to manufacture farming equipment and their spare parts.

    That's how I would look at it, Yakima.

    Just a thought, what is meant by "lol"? I have seen this term used on this blog and on others where Zambians feature prominently.

    ReplyDelete
  8. Anonymous,

    lol - laughing out loud.

    It would be good to see what the economics of running NCZ are. Is it able to sustain itself (including repair and maintenance expense) at global market fertilizer prices, or would it be another Indeni, requiring high product prices to survive. It may just be better to just import cheap fertilizer and use the money saved for infrastructure and education.

    ReplyDelete
  9. Here is a report on NCZ:

    http://lnweb90.worldbank.org/oed/oeddoclib.nsf/DocUNIDViewForJavaSearch/DC1E75BF73508BCC852567F5005D86DB

    ReplyDelete
  10. Hi MrK,

    All is alright. No hard feelings. You are right I made reference to peasant farmers, but my guess is that that is what makes the Zambian kind of agric policy.

    "I'm just tired of all the people who think that professioalisation means letting corporations do everything, when what is just as important as professionalisation, is to raise wages by creating mass employment. Without higher wages, there isn't going to be any demand for goods and services. People can still starve if there is plenty of food, but they can't afford to buy it."

    In my view, I think we need professionalisation as much we need to raise wages. For example, where would those "increased wages" come from if not from a professionalised production of goods and services? I am sure we need both.

    "What is needed is comprehensive agrarian reform, which is about creating a national plan, not fiscal policy alone (as set out by 2009 budget) or monetary policy. What are required, are creating security of tenure (through for instance title deeds) for subsistence farmers, distributing more land to them, increasing support and extension services, and creating rural infrastructure so they can get their goods to market, and irrigation so they no longer need to depend on rainfall only."

    This is my point of departure regarding Zambian context of agric reforms. It can be noticed even in the huge budgetary allocation to agriculture. The usual mistake is making the agriculture sector to be a collection of activities ranging from feeder road grading, fertiliser procurement and distribution, marketing of agro produce, building and renovation of silos etc. One would wish feeder roads and silos were better left to local authorities. Irrigation systems could go to water utility companies (contracted by local authorities) who could also regulate how and where such could be located. This blog has some contibutions on water harvesting issues, I guess such could well fall under water utility companies. So when I said we have a wrong notion about the importance of agriculture, I meant in the way we have wrongly tried to group all these independent activities into one, thereby rendering it the whole thing ineffective. Similarly, we have imported fertiliser which does not reach intended targets as some of it ends up being sold in neighbouring countries. So the best way to hold people accountable is to come up with a system where beneficiaries are identified by the community whether through chiefs or headmen so that we do not have bags being given to ghosts. We may reduce losses if the activity is let to be overseen by commuinty and social welfare ministry. Indicators for comparison abound-number/type of farming equipment or bags of fertilisers per village vs level of productivity, malnutrition levels vs soyabeans yield per village, types/quantities of vegetables produced vs water availability, rates of infection of crops, availabilty of extension services, improved social status etc.

    In the end we may be suprised that actually it is the local government ministry which really requires a lot funds and not the ministry of agriculture per se.

    Kafue001, thanks for the explanation about "lol".

    But you ask "Is it able to sustain itself (including repair and maintenance expense) at global market fertilizer prices, or would it be another Indeni, requiring high product prices to survive."

    Well, I guess we won't need to try doing it so that we maintain the status quo. But if you have time try to read a book called "Technology Policy and Practice in Africa", particularly chapters 1 to 3. The title of Chapter 2 is " Understanding Deindustrialization and Technological Stagnation in Sub-Saharan Africa: A Framework".

    I guess you will also pick something from the coal industry in Nigeria in chapter 3 so that you see what it will entail to invest in NCZ. In other words, it can only perform better if we understand the economics of technological intervention.

    ReplyDelete
  11. Kafue001

    Here is the link to the book I was referring to : http://www.idrc.ca/en/ev-9301-201-1-DO_TOPIC.html

    ReplyDelete
  12. Anonymous,

    Check out section 5.4.9 of this report by NORAD

    www.norad.no/items/1589/108/7183973602/ZAM%20sluttrapport.doc

    My point is to focus on industries that are profitable and self sustaining in the long run.

    ReplyDelete
  13. Anonymous,

    I read chapter 3 about the Nigerian coal industry situation, it reminds me of the NCZ situation. Seems to me that it is better for private companies to establish and run these projects. If it fails, it is the private company's loss rather than the state. So the focus should be on attracting private companies to set up their own ventures.

    ReplyDelete
  14. There's a curious proposal in the latest budget where government appears to favour funding movies as a route to encouraging tourism. The idea is a 15% rebate towards costs.

    Now assuming someone comes and shoots a movie in Zambia worth a £100m. Presumably government funds £15m. The employment benefit of such a movie is meaningless. But the real cost is the opportunity cost. Wouldn't that £15m better spent on actually expanding local airports and improving village tourism?

    ReplyDelete
  15. Kafue001

    Thanks for the link on NCZ. I guess it asks you a question whether we should just forget about NCZ:

    "So the focus should be on attracting private companies to set up their own ventures".

    I mean, are you implying that we completely abondon that venture? Apart from setting up their own new plants, private entities should be encouraged to be involved in NCZ alongside with govt playing a huge role. I think it would help to leap-frog some of the stages and costs involved in ab initio. Try to look for Humanism Part I or is it II and see how the UNIP wanted carry out the privatisation process. If I remember well they had at least four levels; state with state, state with private company, state with private company and with state, private companies alone and some other level.

    In one of these levels we could have MACO and MCTI, representing the state, going into partnership with those companies I referred but injecting a greater proportion of capital in that venture using the funds I referred to earlier.

    "Seems to me that it is better for private companies to establish and run these projects.If it fails, it is the private company's loss rather than the state."

    This a mary-go-round statement you are making. Luanshya mine has closed down, NCZ is down, or even when KCM or mopani fails it won't be these componies feeling the pinch alone. There is more for the state to lose than private companies. Is not the current meltdown making states panicking after companies fold up?

    ReplyDelete
  16. Anonymous,

    While looking up NCZ articles on the internet, I came across many news articles saying that private investors were interested in NCZ but then later withdrew their interest or bids. Which leads me to think that they decided it would not be a profitable venture or not profitable enough. So then one can ask the question whether NCZ should join the list of ventures such as TAZARA and Indeni that the country subsidizes indirectly or directly.

    How about trying to attract a private company to build a huge fertilizer plant for the regional countries that could also produce fertilizer cheaply and employ current NCZ employees and then shut down the current NCZ factory?

    ReplyDelete
  17. Cho,

    Actually movie tax rebates are common incentives in many countries and provinces. The usually apply to certain movie expenses and not all. The government recoups the money through other taxes (hotel taxes, payroll taxes, etc).

    http://www.articlesbase.com/taxes-articles/michigan-film-cash-rebates-section-181-tax-incentives-offer-hedge-funds-private-equity-investors-and-tax-professionals-absolute-returns-in-media-364465.html

    ReplyDelete
  18. Kafue,

    Whether other countries (much richer) do it is irrelevant.

    I have seen no evidence that the government will recoup the money as you suggest. Its hope more than anything. In any case, to be fair to GRZ, they have not employed your argument, and rightly so. They see it as "putting Zambia on the map".

    ReplyDelete
  19. Cho,

    Here is a study showing the British Columbia government in Canada generating $121 million in tax revenue in return for $66 million in tax rebates for the film/tv industry:

    http://www.bcfilmcommission.com/about_us/news/articles52.htm

    ReplyDelete
  20. This is why the abolition of the windfall tax makes no sense.

    If copper prices are not high enough and the windfall tax does not apply, there is no reason to abolish the windfall tax.

    The only way the windfall tax would apply and be relevant to the mining companies, is if the mining companies believe that prices will recover, and it will apply in the future.

    Either way, it makes no sense to repeal the windfall tax now.

    The only way if it would make sense, is if the mining companies want to protect future windfall profits, and the government is practially in their pay (even though without the windfall tax, they barely receive a penny from them).

    I would say that concession makes no sense, other than money has exchanged hands between the mining companies and, say, the Finance Minister (present and past).

    This concession is also a slap in the face of those mining companies which have paid the tax, and undermines the seriousness of the government in collecting it's taxes from those powerful enough to pay for 'representation' in government. It is also a slap in the face of those paying PAYE.

    ReplyDelete
  21. Kafue,

    Worth checking my comments again.

    The Canadian government funding movie rebates is not the same thing as a poor country with no movie infrastructure doing the same. The spillovers are limited. This is a standard argument that applies to all FDI.

    The other point I make is that the opportunity cost of spending £15m to fund a £100m movie is high. You can get more for that £15m say through investing it in agriculture or transport infrastructure. We need to move away from these useless incentives and focus on creating enabling infrastructure and local production. People don't film in South Africa because of incentives, they go there because it has the necessary human and physical infrastructure and a LOCAL DRIVEN movie industry.

    That movie cost £100m will most likely tripple profits..now for the Canadians thats okay, because the profits remain in the country...for Zambia....well...may be a few taxes....and a few temporary jobs...

    I admit I have never looked into this issue at much detail..but common sense tells me..that I should be wary of industry led articles that call this move profitable for the economy...More importantly...common sense tells me that if I have spare money to help tourism...this is not how I would spend it...

    Consider this question....Luapula has 4 falls...but its untapped.....why is that?....a movie will not help change the situation....better roads and good airport access will.... we can start that by spending that £15m on it...

    ReplyDelete
  22. Cho,

    The rebates only apply to qualified expenses, not the entire cost of a movie. Here is an example of what Canada considers qualified expenses:

    http://www.cra-arc.gc.ca/E/pbg/tf/t1196/t1196-fill-08e.pdf

    Movie infrastructure is not a major consideration unless one is using special effects. The actors and production personnel can be flown in. More important is the local scenery which can be hard to replicate elsewhere.

    ReplyDelete
  23. Kafue,

    I must be missing something. I have not seen this phrase "qualified expenses" in the Budget.

    Here are the relevant extracts:

    Para 150. Mr. Speaker, the tourism industry plays a significant role in job creation, foreign exchange earnings and has the ability to support a number of other industries. However, as a country, we need to move away from the traditional view that tourism is restricted to hotel building and costly media promotions.

    Para 151. In this regard, Sir, I propose to provide a rebate or refund to filmmakers of up to 15 percent of the expenses incurred in shooting movies locally. This will not only enhance our country’s reputation, but will also provide job opportunities and synergies for local actors.


    Whats your source?

    ReplyDelete
  24. Cho,

    The budget speech does not have the details in it. This usually comes later when the regulations are published. The speech also has no limitations on the total amount to be spent on the rebates. Which means theoretically it could bankrupt the budget if many costly movies were produced. So we have to wait for the regulations to be published to see what is covered.

    ReplyDelete
  25. Kafue,

    I'll wait eagerly to see just what they propose to fund. Incidentally if its too little then it wont have any effect. If its a blanket 15% then the opportunity cost is too high.

    Its the wrong policy...period.

    ReplyDelete
  26. Cho,

    In the Finance Minister's speech he says "of up to" 15% rebate. This makes me think that different types of movie expenses will have different rebate rates.

    I think it is the right policy that properly applied can benefit Zambia like British Columbia in Canada, although I concede that the volume of movies will be much less simply because of the large geographical distance from the current location of film companies. Better to have some movies than none.

    ReplyDelete
  27. Kafue,

    We obviously agree that part of tourism is marketing and getting your name out there.

    I watched a program on BBC that was filmed in RSA but it telling a story in Zambia.

    It strikes me that film industry requires significant "agglomeration or network effects". Its a bit like building a town.

    If I am correct, and I am no film industry expert, that would suggest that the best way is the Nollywood approach. Simply encourage a locally driven film industry...which should provide enough talent for people to tap into...

    I like synergies between policies......education....film industry....tourism....

    Policies which are single sector are weak...

    That is the perspective I am coming from...

    ReplyDelete
  28. Update on NCZ:

    http://www.daily-mail.co.zm/media/news/viewnews.cgi?category=5&id=1248763552

    ReplyDelete

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