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KRIHS
- Ha Jung Yoon
국토연구원
Korea PPP System
2015. 10. 13
1. Korea PPP System
2. Governmental Supports
3. PPI Performance Result during 10 years
4. Status and Prospects on PPI in Korea
5. Case Study
6. Policy Issues
Contens
KRIHS
KRIHS
I. Korea PPP System
PPP (Public Private Partnership) is a concept which induces
private participation to providing infrastructure and public
services.(Also known as PPI.)
By combining such responsibilities of design, building, financing
and operating in a single contract and transferring part of the risks
and responsibilities to the private sector, PPP projects realize
VFM(Value for Money) with less project costs and improved service
quality compared to conventional public procurement.
PPP encourages the private sector to utilize its skills, creativity and
innovation which can be extended to the public sector.
1
l. Korea PPP System
Hierarchy of legal and administrative framework of PPP System
The PPP Act and the PPP Act Enforcement Decree are the
principal components of the legal framework for PPP
They clearly define eligible infrastructure types, procurement
procedures, implementation process, conflict resolution and termination
mechanism, and the roles of the public and private parties.
PPP Act
Enforcement
DecreesPPP
Basic PlanPPP
Implementation
Guideline
PPP Act
2
l. Korea PPP System
Legal Framework of the PPP System
1.2 과업의 범위
PPP Basic Plan and Implementation Guidelines(annually updated)
The PPP Act directs the MOSF and PIMAC to issue the PPP Basic Plan
The Basic Plan provides• PPP policy directions
• Details in PPP project implementation procedure
• Financing and re-financing direction
• Risk allocation mechanism
• Payment scheme of government subsidy
• Documentation direction
PIMAC has developed PPP Implementation Guidelines
• Guidelines for value for money(VFM)test
• Guidelines for value for RFP preparation
• Guidelines for value for standard output specification by facility
• Guidelines for value for tender evaluation
• Guidelines for value for standard concession agreement
• Guidelines for value for refinancing
3
l. Korea PPP System
Legal Framework of the PPP System
History of the PP act
PPP was first introduced in Korea with the enactment of the
Promotion of Private Capital into Social Overhead Capital
Investment Act in 1994.
The Act was amended to the Act on Private Participation in
Infrastructure (PPI Act) in 1998, after the onset of Asian financial
Crisis in 1997.
Enactment of ‘The Act on PPP’, Jan. 1999
Centered on unsolicited projects
Risk sharing
Minimum revenue guarantee (MRG)
Incentives for reducing project costs
Feasibility study for selection of private investment project
Establishment of PICKO(KRIHS)
4
l. Korea PPP System
History of the PPP act
Amendment of ‘The Act on PPP’, Jan. 2005
Introduction of BTL Scheme
Expansion of facility type
Diversification of investor profiles
Amendment of ‘PPP Basic Plan’, Oct. 2009
Abolition of MRG Scheme
Introduction of Investment risk sharing
Introduction of VFM revalidation
Expansion of Incentive for Early Completion
5
l. Korea PPP System
History of the PPP act
Land Infrastructure
And Transport(15)
Gender Equality
and Family
(1)
Welfare
(4)Forestry
(2)
Energy
(5)
Oceans and
Fisheries
(3)
Communication
(4)
Environment
(6)
Security and
Public Administration
(1)
Education
(1)
National defense
(1)
Culture & Sport
(6)
2.1 Legal Framework of the PPP System
6
Requirements :
The project is in accord with mid- to long-
term Infrastructure plans and national
investment priorities
The project has such profitability to
attract private sector participation
Amendment of of the Act in 2014 :
Eligible infrastructure facility types, which
have been stipulated by the Act, can
also be stipulated by the Enforcement
Decree.
l. Korea PPP System
49 Types of facility in 12 categories are eligible for PPP
Legal Framework of the PPP System
Sector Infrastructure Types
Education (1) Pre-school and school facilities
National defense (1) Military residential facilities
Land Infrastructure
And Transport(15)
Road and ancillary facilities, railway, urban railway, airport facilities, multi-purpose dams, urban park,
river-affiliated ancillary structures, distribution complex and cargo terminals, passenger terminals,
non-
road parking facilities, pre-school and school facilities, ubiquitous city infrastructure, railway facilities
Culture and
Sports, Tourism (6)
Tourist site or complex, youth training facilities, public/professional sports facilities, libraries, museum
and art galleries, international conference facilities, culture centers, science museum
Communications (4)Telecommunication facilities, information communication system, information super-highway, map
information system
Welfare (4)Senior homes and welfare medical facilities and facilities for remarried seniors, public health and
medical facilities, childcare facilities
Forestry (2) Natural recreational resorts, arboretums
Energy (5) Electric source facilities, gas supply facilities, collective energy facilities, new renewable energy
Security and
Public Administration(1) Bicycle Facilities
Gender Equality
and Family(1)Youth training facilities
Oceans and Fisheries(3) Port facilities, fishing port facilities, eligible facilities for new port construction
Environmental (6)Excreta treatment facilities and public livestock waste-water treatment facilities, waste disposal
facilities, waste-water treatment facilities, recycling facilities, sewage and sewage treatment facilities
7
l. Korea PPP System
49 Types of facility in 12 categories are eligible for PPP
Procurement Schemes
BTO(Build-Transfer-Operate) Scheme
Both solicited unsolicited projects are eligible
Roads, seaports, and railway projects, etc
User-fees
Private Sector
(SPC)
End-user Government
Provides
ServicesPays
User Fee
Grants
Operational RightsTransfers
Ownership
8
l. Korea PPP System
Procurement Schemes
BTL (Build-Transfer-Lease) Scheme
Only solicited projects are eligible
School, dormitory, military housing, etc
Government payments (Lease rent +operating costs)
Low risk-low return
Government
End-userPrivate Sector
(SPC)
Pays
User Fee
(If necessary)
Transfers
Ownership
Provides
Services
Grants Operational Rights/
Pays Government Payment
9
l. Korea PPP System
Procurement Schemes
10
BTO-rs (Build-Transfer-Operate-risk sharing) Scheme
Improving business profitability and reduce the fees by sharing the
business risk between the government and the private sector (50:50)
Changing the high profit and risks of the business to medium profit and
risks by sharing the facility investment and operation costs between the
government and the private
the ratio can be adjusted according to nature of the business)
enforcement
Agreement
100%
Case 1. decrease of Operating Income
Private loss 20%
government loss 20%
residual income
60%
Case 2. increase of Operating Income
Private profit 10%
government profit 10%
residual income
120%
l. Korea PPP System
New PPP Model (2015)
11
BTO-a (Build-Transfer-Operate-adjusted) Scheme
The government takes the risk equivalent to the minimum business
operating costs (70% of private investment, interest to 30% of the private
investment, operating costs), and shares any excess earning
Minimum business
operating costs 70%(government guarantee)
Case 2. decrease of
Operating Income
Private loss 30%
government loss 10%
residual income
60%
Case 3. increase of
Operating Income
residual income
80%
Private profit 6%
government profit 14%
residual income
120%
Private loss 20%
Case 1. decrease of
Operating Incomeenforcement
Agreement
Non-guaranteed
invested costs 30%
l. Korea PPP System
New PPP Model (2015)
BTO BTO-rs BTO-a
Private risk High risk ⇒ Middle risk Low risk
profit and loss Private 100% ⇒▪ profit case and Loss case : Private
50%, Government 50%
▪ In the event of loss: the first 30% of
losses private, financial support if in
excess of 30%
▪ In the event of profit: shared
between the government and the
private (about 7:3)
government
guarantee- ⇒
government guarantee of
investment and operating costs
70% of private investment, interest to 30% of
the private investment, operating costs
Rate of return
to investment7~8% ⇒ 5 ~ 6% 4 ~ 5%
Apply
businessRoad, Port ⇒ railway, urban railway Environment
Fee ratesAgreement fee
+ prices ⇒
Agreement fee+
prices Public enterprise fee
12
l. Korea PPP System
Characteristics of BTO, BTO-rs, BTO-a Schemes
Both the government and a private company can initiate a PPP project
Solicited Projects
A solicited project is that the competent authority identifies a project for
private investment and announces a RFP
Competent authorities develop a potential project after considering
related plans and demands for the facility. They weight the procurement
options in order to determine whether the PPP procurement is more
efficient than the conventional procurement
Unsolicited Projects
For an unsolicited project, a private company (project proponent)
submits a project proposal, and then the competent authority examines
and evaluates the contents and value for money of the private proposal,
and designates it as a PPP project
13
l. Korea PPP System
Procurement Procedure
14
l. Korea PPP System
Procurement Procedure – BTO(Solicited Project)
Competent AuthorityReview by PIMAC
Competent Authority
Competent Authority
Selection of PPP Project
Designation as the PPP Project
Announcement of RFPs
Submission of Project Proposals
Evaluation and Selection ofPreferred Bidder
VFM Test
Negotiation and Contract Award(Designation of Concessionaire)
Application for Approval of Detailed Implementation Plan
Construction and Operation
Competent Authority
Private Sector → Competent Authority
Competent Authority
Competent Authority →Preferred Bidder
Concessionaire →Competent Authority
Concessionaire
Submission of Project Proposal
VFM Test
Notification of ProjectImplementation
PIMAC
Private Sector → Competent Authority
Competent Authority → Proponent
Announcement of RFPs
Submission of Project Proposals
Evaluation and Selection ofPreferred Bidder
Negotiation and Contract Award(Designation of Concessionaire)
Application for Approval of Detailed Implementation Plan
Construction and Operation
Competent Authority
Private Sector → Competent Authority
Competent Authority
Competent Authority → Preferred Bidder
Concessionaire → Competent Authority
Concessionaire
15
l. Korea PPP System
Procurement Procedure – BTO(Unsolicited Project)
Selection of BTL Project
VFM Test & Application of Investment ceiling
Determination of Aggregate Investment
Ceiling for BTL Project
Competent Authority, Review by PIMAC
Competent Authority
MOSF
Announcement of RFPs
Submission of Project Proposals
Evaluation and Selection ofPreferred Bidder
Negotiation and Contract Award(Designation of Concessionaire)
Application for Approval of Detailed Implementation Plan
Construction and Operation
Private Sector → Competent Authority
Competent Authority
Competent Authority → Preferred Bidder
Concessionaire → Competent Authority
Concessionaire
Submission to National Assembly MOSF→ National Assembly
Competent AuthorityDesignation as the PPP Project
Competent Authority, Review by PIMAC
Sam
e a
s P
roced
ure
for B
TO
So
licite
d P
roje
ct
16
l. Korea PPP System
Procurement Procedure – BTL
MOSF(Ministry of Strategy and Finance)
Major players in the PPP program include MOSF, concerned line
ministries, and the private sector
MOSF is responsible for managing the PPP Act, Enforcement Decree,
and the Basic Plan for PPP
MOSF is also responsible for preparing the draft budget for PPPs.
MOSF plays a central role in budgeting as well as in preparing and
implementing PPP investment plans.
Main budgeting decisions are made in bilateral negotiations between
MOSF and the spending ministry.
17
l. Korea PPP System
Major Players
PRC(PPP Review Committee)
Organized and managed by the MOSF.
Deliberates the matters concerning the establishment of major PPP
policies and key decisions in the process of implementing large scale
PPP projects.
Main responsibilities of PRC are deliberation on:
• Establishment of major PPP policies
• Establishment and modification of the Basic Plan for PPP
• Designation and cancellation of a large (total project cost with KRW 200
billion or above) PPP project
• Formulation and modification of the RFP for a large PPP project
• Designation of a Concessionaire of a large PPP project
• Other matters which MOSF proposes for the active promotion of the PPPs.
18
l. Korea PPP System
Major Players
PIMAC(Public and Private Infrastructure Investment Management Center)
In order to provide comprehensive and professional support for the
implementation of PPP projects, PIMAC was established under the PPP Act
The mission and roles of PIMAC are prescribed in the PPP Enforcement Decree:
• Supporting MOSF in the formulation of the Basic Plan for PPP
• Supporting the competent authorities and ministries in the procurement process
• Assessment of feasibility and value for money for potential PPP projects
– Formulation of the request for proposal
– Designation of the concessionaire
– Evaluation of project proposals by private companies
– Negotiation with potential concessionaire, etc
• Promoting foreign investment in PPP projects through consultation services
• Developing and operating capacity-building programs for public sector
• practitioners
19
l. Korea PPP System
Major Players
SPC(Special Purpose Company)
Private sector participants who intend to implement a PPP project shall
establish a PPP project company, a legal entity which is to be
designated as concessionaire upon PPP contract award.
• In general, construction companies, financial investors, and professional
operators
• form a special purpose company (SPC) for the associated PPP project.
• In many cases, a project proponent is a would-be company when it submits
a project proposal.
• In such case, it shall include a corporate establishment plan in the project
proposal and, when designated as a potential concessionaire, establish the
company which is to conduct the designated PPP project.
The SPC shall not engage in businesses other than those acknowledged
by the competent authority at the time of designation of the concessionaire
except insignificant businesses approved by the competent authority.
20
l. Korea PPP System
Major Players
What is Value for Money?
The best available outcome after taking account of all benefits, costs
and risk over the whole life of the project (HM TREASURY)
Not lowest price
Why it is Used?
Seek the best use of available resources
Efficient and effective public service delivery
“ The competent authority uses VFM reports as basic material to make a
judgment on whether to move forward with the PPP project proposed by
the private proponent” according to the Article 7, Paragraph 3 of the
Enforcement Decree of the PPP Act
21
l. Korea PPP System
VFM(Value for Money)
VFM is often a comparative assessment
Requires a benchmark cost : PSC (Public Sector Comparator)
PSC is a benchmarking and evaluation tool : a Key tool
Benchmarks the cost of government service delivery
Evaluates whether VFM is delivered from bids
A procurement principle
Applied on a project or program basis
Innovation, asset utilization, risk sharing, competition, service
integration are key drivers of VFM
Presence of VFM drivers confirms suitability for PPP
22
l. Korea PPP System
VFM(Value for Money)
Phase 1: Feasibility study (Decision to Invest)
The cost- benefit analysis is conducted to determine feasibility of the project from a
national economy perspective.
Phase 2: Value for Money Assessment (Decision on PFI)
The government payment of PSC (Public Sector Comparator) is compared against
that of PFI (Private Finance Initiative) to assess whether the PFI achieves VFM.
Phase 3: Formulation of PFI alternatives
Based on the results of phase 2, an appropriate PFI alternatives are formulated
The level of project cost, user fee, subsidy scale, etc. are suggested from the
government.
Phase 4: Award bonus points to the initial proponent
Bonus points (10% max.) awarded to the initial proponent are estimated based on
the results of VFM tests and the quality of the proposal.
23
l. Korea PPP System
VFM(Value for Money)
II. Government SupportII. Government Support
KRIHS
Acquisition of land by the concessionaire
Granting of land expropriation rights to the concessionaire
National or public property in designated areas may be sold to the
concessionaire
Concessionaire are allowed to use national or public property without
charge or at lower price
Financial support
Construction subsidy : The government may grant construction subsidy to
the concessionaire, if it is inevitable to maintain the user fee at a
reasonable level
Tax incentive
• Exemption from acquisition and registration taxes on real estate for BOT projects
• 0% VAT on construction services
• Tax reduction for infrastructure bond
24
ll. Government Supports
MRG(Minimum Revenue Guarantee)
A certain fraction of projected annual revenues may be guaranteed when the
actual operating revenue falls considerably short of the projected revenue
prescribed in the contract
36 out of 145 signed contracts include minimum revenue guarantee clauses
at the end of 2008.
MRG risk sharing scheme was completely abolished in Oct 2009
Jan 1999May 2003
January 2006
Solicited UnsolicitedSolicited Unsolicited
Period Whole operating period 15 Years 10 Years
Abolished
Guarantee
Level (Max)90% 80%
First 5 Years 90%
Next 5 Years 80%
Last 5 Years 70%
First 5 Years 75%
Next 5 Years 65%
Condition None
No MRG applied
if Actual Revenue < 50%
of Forecasted Revenue
Same as Left
25
ll. Government Supports
Risk-sharing By the Government
Government pays the amount of shortfall when the actual
operation revenue is less than the share of investment risk* by the
government.
• by the government share of investment risk: the sum of private sector’s
invested capital and the interest rate of government bonds, calculated on an
annual basis
If the actual operation revenue exceeds the share of investment
risks, it will be redeemed within the limit of the amount previously
paid.
Subsidies provided only when the actual operation revenue is
greater than 50% of the share of investment risk.
Applied only for solicited projects with significant public benefits.
-Sharing Scheme
26
ll. Government Supports
New Risk – Sharing Scheme
Purpose : Compensate the unsuccessful bidder for a portion its project
proposal cost for the purpose of promoting the competition in projects.
Calculation : The maximum amount of compensation as follows.
Only 1 unsuccessful bidder: 25% of basic design cost
2 or more unsuccessful bidder: 30% of basic design cost for 2nd contender
and 20% of 3rd contender
(*Basic design cost : applying the basic design rate for the government project as set
forth in the budget compilation guideline)
Exclusion : Unsuccessful bidders who earned the engineering score under certain level (eg. average “C” level from A~E 5 level evaluation), Unsuccessful bidders who submitted the project proposal containing service quality significantly below the required level.
Notice : The competent authority is to provide the details in the RFP.
such as whether the compensation is available, the size of compensation, criteria and procedures of compensation, and due period of compensation.
27
ll. Government Supports
Compensation for Proposal Cost
KRIHSKRIHS
III. PPP performance Result during 10years
Expansion and Saving of SOC Budget
Early supply of SOC facilities
Increasing of Social benefit
Risk Sharing
Macro-Economic effect
28
lll. PPP Performance Result during 10 years
Efficiently management of construction risk such as increased cost, expansion working period etc. compared to investment by government
13.3% extended working period of investment by government
10.5% shortened working period of BTL project
0.00% 20.00% 40.00% 60.00% 80.00% 100.00% 120.00%
Government Investment BTL
29
Early supply of SOC facilities
lll. PPP Performance Result during 10 years
Calculating benefits on expansion of private SOC investment
Estimated reduction effect of financial burden due to PPP is about 2.0
trillion, since 2014
Early and high quality service supplied by BTL scheme
As of 2014, Announced of 440 projects(27.7 trillion won)
Early and high quality service supplied by BTO scheme
As of 2014, Announced of 222 projects(71.7 trillion won)
30
lll. PPP Performance Result during 10 years
Increasing of Social Benefit
Increasing the reliability of SOC facilities supply
LCC(Life cycle cost) is more profitable then investment by government
Maintenance cost of private project are lower then investment by
government
Minimization of project cost by observance of construction period
• PPP scheme that private sectors get disadvantaged
• If construction period in agreement is exceeded
31
lll. PPP Performance Result during 10 years
Risk Sharing
Output Effect
PPP project (9.6 trillion won) – Output Effect (19.7 trillion won)
Employment Effect
Transportation Facilities – 13.4 persons/billion won
Seaports Facilities – 9.3 persons/billion won
Railways Facilities – 12.1persons/billion won
Environment Facilities – 13.0 persons/billion won
32
lll. PPP Performance Result during 10 years
Macro-Economic Effect
KRIHS
IV. Status and Prospects on PPP in Korea
Number & Investment of PPP projects by Procurement Scheme
project type
stepsBTO BTL Total
Under Operation 159 393 552
Under Construction 40 15 55
Preparing to construct 23 32 55
Number of Project 222 440 662
Total Investment 71.7 27.7 99.4
(Unit : Number(trill. KRW))
33
Source : KDI(2014)
lV. Status and prospects on PPP in Korea
Number & Investment of PPP projects by Facility Type
(Unit : Number,% (trill. KRW))
Source : KDI(2014)
34
TypeNumber of
Projects Total Investment Type
Number of
ProjectsTotal Investment
Education 223 (33.7) 9.7 (9.8) Railways 13 (2.0) 17.3 (17.4)
Environment 176 (26.6) 12.8 (13.0) Airport 13 (2.0) 0.7 (0.7)
Roads 84 (12.7) 42.3 (42.6) Welfare 12 (1.8) 0.3 (0.4)
National
defense71 (10.7) 5.6 (5.6) Distribution 6 (0.9) 1.3 (0.3)
Culture 41 (6.2) 1.9 (1.9) Communication 5 (0.8) 0.3 (0.3)
Seaports 18 (2.7) 6.9 (7.0) Total 662 (100.0) 99.4 (100.0)
lV. Status and prospects on PPP in Korea
In 2000~2008, Average return of SOC projects are 7.9%,
Reduction of return
Before 2005, average return of SOC projects are 9.01%
Since 2005 , average return of SOC projects are 6.9%
2000 2001 2002 2003 2004 2005 2006 2007
Road 9.52 9.52 7.86 8.94 8.16 7.21 5.49 5.34
Railways 10.43 10.43 9.10 9.10 8.86 8.45 7.76 7.76
Seaports - 8.76 8.76 8.62 8.63 8.24 6.75 6.35
(Unit : %)
Source : PIMAC(2010)
35
lV. Status and prospects on PPP in Korea
Rate of Return(Real)
Operating period varies from 11 years (airports) up to 50 years (seaports)
Roads and railways 30 years; seaports 50 years
The typical operating period for social PPP project is 30 years
Total investment Period Number of projects
Road 42.39 30 84
Railways 17.31 30 13
Seaports 6.95 17~50 18
Airports 0.71 11~30 13
(Unit : trill. KRW, years, number)
36
Source : KDI(2014)
lV. Status and prospects on PPP in Korea
Operating Period
Pubic & Private Investment Trends
Trends of Private Investment in PPP
(Unit : trill. KRW, %)
Source : KDI(2014)
37
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Total
Investment in
SOC(A)
19.1 21.2 21.3 21.5 24.3 29.3 27.8 26.6 25.8 26.7 26.4
Gov’t
Investment17.4 18.3 18.4 18.4 20.5 25.4 25.1 24.4 23.1 25.0 23.7
Private
Investment(B)1.7 2.9 2.9 3.1 3.8 3.9 2.7 2.2 2.7 1.7 2.7
Ratio of
Private
Investment
(B/A, %)
9.8 16.2 15.9 16.8 18.5 15.4 9.3 9.0 11.7 6.8 11.4
lV. Status and prospects on PPP in Korea
Trends of Private Investment in PPP
Local GovtAdmin
DefenseEducation
Welfare
Economic
0%
20%
40%
60%
80%
100%
2005 2010 2015 2020 2025 2030
Local Govt Admin Defense Education Welfare Economic
2005 2015 2030 OECD AVG
Welfare (%) 26.6 35.6 46.7 51.7
Economic (%) 19.7 13.8 10.6 9.5
38
lV. Status and prospects on PPP in Korea
Long term Government Expenditure
KRIHS
V. Case Study
Groundbreaking Ceremony marking the commencement of
construction of the Incheon Bridge, second connecting bridge to
Incheon International Airport, was held on June 16, 2005.
Opening of Incheon Bridge is connect the 2nd and 3rd Gyeongin
(Seoul-Incheon) Expressway with Seohaean West Coast
Expressway which is expected to cut travel time to the airport
from Seoul metropolitan areas southern districts by more than 40
minutes.
39
Concept
V. Case Study – Incheon Bridge
Type : Cable-Stayed
Total length : 21,400m including the connecting road(12,000m over sea)
Cost : 2,085.8 billion won
Method : BTO
Concession period : 30 years (2009 completion)
Project Company : KODA Development
(AMEC, Incheon Municipal Government, private investors)
40
V. Case Study – Incheon Bridge
Project Outline
41
Location of Incheon Bridge
V. Case Study – Incheon Bridge
42
The Route Map of Incheon Bridge
V. Case Study – Incheon Bridge
43
The Night View of Incheon Bridge
V. Case Study – Incheon Bridge
KRIHS
Vl. Policy Issues
Developing a Model for Public Involvement in PPI
By developing public involvement model that induces potential users to
step in the procurement process of BTL projects, we try to improve end-
users’ satisfaction and to contribute to community development
Promoting to Construct Integrated Compound Facilities
To satisfy community’s various needs, more than a single infrastructure
facility can be built on one site and create synergy effect by making them
function properly
For example, community schools may contain senior care facilities and
sports center, which maximize facility usage after school hour and also
provide students with an opportunity to interact with elderly people
44
Vl. Policy Issues
Developing PPP Advisory Market
The public sector needs to hire specialists who help them in the process of
PPP procurement.
By developing PPI advisory market, the public sector’s efficiency in
procurement process is expected to enhance.
Developing the Sector Standard Models for Major Facility Types
By developing the sector standard models from output specifications to
standard contracts, the trial and error may be minimized and the
procurement process would be more effective.
45
Vl. Policy Issues
Thank you
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