News Archive October 2018

Global Financial Integrity releases new study on trade misinvoicing in Nigeria

Nigeria trade misinvoicing leads to significant revenue losses

Analysis of trade misinvoicing in Nigeria in 2014 shows that the potential loss of revenue to the government was approximately $2.2 billion for the year, according to a new study by Global Financial Integrity. To put this figure in context, this amount represents four percent of total annual government revenue as reported to the International Monetary Fund. Put still another way, the estimated value gap of all imports and exports represents approximately 15 percent of the country’s total trade.

The report, titled Nigeria: Potential Revenue Losses Associated with Trade Misinvoicinganalyzes Nigeria’s bilateral trade statistics for 2014 (the most recent year for which sufficient data are available) which are published by the United Nations Comtrade. The detailed breakdown of bilateral Nigerian trade flows in Comtrade allowed for the computation of trade value gaps that are the basis for trade misinvoicing estimates.

Import gaps represent the difference between the value of goods Nigeria reports having imported from its partner countries and the corresponding export reports by Nigeria’s trade partners. Export gaps represent the difference in value between what Nigeria reports as having exported and what its partners report as imported.

The portion of revenue lost due to the misinvoicing of exports was $1.3 billion during the year which was related to a reduction in corporate income taxes. The portion of revenue lost due to the misinvoicing of imports was $880 million. This amount can be further divided into its component parts: uncollected VAT tax ($100 million), customs duties ($365 million), and corporate income tax ($415 million). Lost revenue due to misinvoiced exports was $1.3 billion for the year which is related to lower than expected corporate income and royalties.

Related GFI reports

“The practice of trade misinvoicing has become normalized in many categories of international trade,” according to GFI President Raymond Baker. “It is a major contributor to poverty, inequality, and insecurity in emerging market and developing economies. The social cost attendant to trade misinvoicing undermines sustainable growth in living standards and exacerbates inequities and social divisions, issues which are critical in Nigeria today.”

Examination of the underlying commodity groups which comprise Nigeria’s global trade show that a large amount of lost revenue ($200 million) was related to import under-invoicing of just five product types. Those products and the related estimated revenue losses include: vehicles ($100 million), iron and steel products ($40 million), electrical machinery ($20 million), ceramics ($20 million), and aluminum products ($20 million). Lost revenue due to mispriced exports ($1.3 billion) may be related to the mineral fuels trade given this category of goods makes up over 90 percent of all exports.

Trade misinvoicing occurs in four ways: under-invoicing of imports or exports, and over-invoicing of imports or exports. In the case of import under-invoicing fewer VAT taxes and customs duties are collected due to the lower valuation of goods. When import over-invoicing occurs (i.e. when companies pay more than would normally be expected for a product), corporate revenues are lower and therefore less income tax is paid. In export under-invoicing the exporting company collects less revenue than would be anticipated and therefore reports lower income. Thus, it pays less income tax. Corporate royalties are also lower.

Total misinvoicing gaps related to imports can be broken down by under-invoicing ($2.4 billion) and over-invoicing ($1.9 billion). It should be noted that these figures represent the estimated value of the gap between what was reported by Nigeria and its trading partners. The loss in government revenue is a subset of these amounts and is based on VAT tax rates (5 percent), customs duties (15.2 percent), corporate income taxes (22.4 percent), and royalties (.2 percent) which are then applied to the value gap.

Export misinvoicing gaps were a massive $5.9 billion for export under-invoicing and $5.6 billion for export over-invoicing. Lost corporate income taxes and royalties are then applied to export under-invoicing amounts to calculate lost government revenue.

The report was published with the generous support of the Ford Foundation.

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tralac’s Daily News Selection

Alert: The Doing Business 2019 report will be released tomorrow (Wednesday)

Featured newsletter: African Cotton, Textiles & Apparel Monitor #32

Featured trade commentaries: Raj Bhala: The resurrection of import substitution (BloombergQuint Opinion); Phil Levy: What’s wrong with the World Trade Organization? (Forbes)

Turning tides: EY Attractiveness Program Africa

After facing its lowest economic growth in over 20 years, Sub-Saharan Africa posted a slow recovery in 2017 The IMF forecasts a modest rise in the region’s GDP growth from 2.8% in 2017 to 3.4% this year. In tandem with improved economic performance, FDI projects into Africa rebounded from their lowest level in a decade. Last year, Africa registered 6.2% growth in inward investment projects compared with 2016. Extract (pdf):

Africa’s FDI is more evenly spread than ever before. For the first time since we began tracking FDI in Africa, four of the five regions (East, West, North and Southern Africa) hold an almost equal share of the continent’s FDI projects. We are also seeing investment shifting between countries for the first time. South Africa, once the clear leader in attracting FDI, now shares the top rank with Morocco. This is the first time that South Africa has been challenged in terms of being the most preferred investment destination (measured by FDI project numbers). Ethiopia jumped seven places to become the fifth-largest FDI recipient, its highest ranking yet. These shifting FDI dynamics illustrate a broader trend. Outside South Africa, as growth across the rest of the continent accelerates, so they take a greater share of inbound investment.

Rwanda is, by far, Africa’s most successful country in terms of attracting FDI. This is evidenced by the fact that Rwanda ranks as one of Africa’s most business-friendly destinations. It is also one of the continent’s most consistent rapid growth economies. Rwanda receives 1.5 FDI projects for every US$1 billion of GDP. Measured on the same criteria, South Africa receives only 0.32 projects, attracting only 20% of what Rwanda does, given its relative size. Major economies, such as Nigeria and Angola trail by an even larger margin, receiving only 0.16 and 0.02 projects respectively. Both countries also rank very low on the Ease of Doing Business rankings compared with their counterparts in the continent. That, coupled with their recent low growth after plunging oil prices in 2016 and the same scenario persisting in 2017, would explain their low score according to this methodology.

Zimbabwe: Finance Minister’s speech on promoting FDI (UN-OHRLLS)

In the area of infrastructure development and maintenance, Zimbabwe is currently in the process of upgrading and modernising its road infrastructure along major trade corridors that serve East and Southern Africa, linking the North-South transport Corridor. For those road projects already completed, a Costs-Time-Distance study government has shown that the average speed of heavy trucks has increased from 33km/hr prior to the rehabilitation exercise to the current 48km/hr. This does not only reduce transit time and costs, but also improves competitiveness. Being a landlocked country, Zimbabwe has undertaken a number of reforms to promote and facilitate investment. The country has signed 35 Bilateral Investment Treaties and 10 of these are in force. These provides for pre-and-post investment facilitation and protection. Zimbabwe has also signed 9 Treaties with Investment Provisions and 7 of these are in force. [Various downloads available]

Ease of doing business in Nigeria: a case for eliminating multiple tax reviews, audits and investigations (Deloitte Nigeria)

The National Assembly, EFCC, Ministry of Justice, and other bodies have also been involved in the review of records of various taxpayers. FIRS and SIRS also conduct different types of reviews on taxpayers’ records some of which cover the same taxes and periods. The duplication of activities by government bodies in monitoring and ensuring tax compliance in Nigeria is clearly an inefficient use of resources by both government and taxpayers. Bearing the above issues in mind, as FGN seeks to achieve the budgeted tax revenues for 2018 and beyond, by ensuring increased tax compliance and improved efficiency in tax collection, the following actions may be considered:

Wandile Sihlobo: Predicting the El Niño effect (Fin24)

Admittedly, it is too early to tell how most Southern African countries will cope with the expected weak El Niño in the summer season. Typically, an El Niño weather phenomenon would lead to drier weather conditions in most countries on the continent, almost similar to what we witnessed in the 2015-16 drought years. However, when it is weak, as expected, the impact could be minimal. Above all, the production estimates [noted above] seem to show that they will be able to tide most southern African countries over this forecast El Niño, as it is not expected to be as harsh as the 2015/16 edition which caused widespread drought. The countries that could be pressured, such as Zimbabwe, could find supplies from South Africa, which should comfortably sit with surplus maize. Most importantly, the South African farmers and maize exporters might not face tough competition from neighbouring producers such as Zambia and Malawi, as was the case in the previous year, due to expected tighter supplies in these countries. [AfDB rolls out programme to boost climate risk financing and insurance for African countries]

UAE, Uganda to establish one of the world’s first agricultural free zones (The National)

The UAE signed a deal with Uganda yesterday to establish one of the world’s only agricultural free zones in an attempt to enhance food security in the Emirates. The 2,500-hectare free zone will allow private companies from the UAE to invest in agricultural production and development in Uganda. Mariam Al Mehairi, Minister for Food Security, told The National it will also act as a launch pad for further investment into East and Central Africa. “There is a lot of potential to be unlocked in that area,” she said. The agreement was signed at Agriscape, a two-day exhibition in Abu Dhabi that convenes dozens of producers, suppliers and investors from across the globe. The deal will promote agribusiness between the two countries and lead to an increase in UAE imports of Ugandan crops and beef. [Quick take: Why is African agribusiness luring GCC investors?]

AfricaRice Council of Ministers sends strong signal of commitment to drive Africa’s rice agenda (CGIAR)

The 31st Ordinary Session of the Africa Rice Center (AfricaRice) Council of Ministers held recently under the chairmanship of Dr Papa Abdoulaye Seck, Minister of Agriculture and Rural Infrastructure of Senegal, reaffirmed strongly its commitment to support AfricaRice to help accelerate Africa’s rice self-sufficiency. Calling it a “historic” session, the chair stated: Extracts from resolutions: The Chair of the AfricaRice Council of Ministers should address a letter to the System Council and the System Management Board conveying the concerns of member states of AfricaRice about the drastic reduction in financial resources allocated to Centers, and in particular destined for rice research, whereas rice constitutes a strategic crop for Africa. AfricaRice should solicit institutional and financial support from the AU and the RECs in Africa, through advocacy actions. AfricaRice should extend the Continental plan for Accelerating Rice Self-Sufficiency in Africa study to other member countries in order to provide strategic evidence-based information that will guide decisions for investments in priority areas of the rice value chain and accelerate the attainment of rice self-sufficiency by 2025 in all member countries of AfricaRice. The Council ratified the adhesion of Mozambique and accepted to examine and ratify in due course the request of Kenya for adhesion to AfricaRice. [We’ll make Tanzania major rice producer in region, pledges JICA chief]

Local pharmaceutical appeal to EAC govts for protection against imported drugs (New Vision)

Pharmaceutical manufacturers in the EAC have appealed to authorities in partner states to impose duties on imported medicines that compete with the locally manufactured. They say the medicines imported from mainly China and India, where manufacturers enjoy big economies of scale and get subsidies from their governments were killing local industries by selling cheap products, making it hard for them to compete in the market. The manufacturers also complain that importers of cheap medicines win tenders to supply medicines to government institutions and agencies because they bid with relatively lower rates.

Uganda: Government puts SGR on hold over unresolved issues (Daily Monitor)

Finance minister Matia Kasaija has said government has put on hold the Standard Gauge Railway venture and has instead turned attention to revamping the old metre-gauge railway network until unresolved issues with Kenya and China have been concluded. “It is apparent the SGR is going to take us a lot of time to complete. First, we have to wait for Kenya to reach at the Malaba [border] point then we can start,” Mr Kasaija told Daily Monitor yesterday. He said government, in the interim, is refurbishing the old railway line as “an alternative” to lower transportation costs for traders. Uganda and Kenya first agreed to construct the SGR in 2008 but the arrangements were only concretised in 2012.

President Museveni, according to sources familiar with the venture, in recent months had been directly involved in discussions on the project, and had hoped to secure financing for the first section of the railway line during his visit to China last month when he attended the seventh FOCAC summit. But he returned empty-handed. However, Mr Kasaija revealed that during the discussions in Beijing, it was agreed that “Uganda and Kenya will embark on joint financing negotiations” after Kenya has completed the current Nairobi-Naivasha section. “Kenya also has its own problems which we cannot speak about in public. We shall wait for them to settle but on our side, we have already compensated people from Tororo to Iganga. When they finish their part, we shall proceed with it.”

American trade delegation looks to expand business opportunities in Southern Africa (Engineering News)

An American trade delegation, comprising businessmen from more than 30 American companies and state government leaders, is in South Africa seeking to expand agricultural export opportunities in the region. The trade delegation, which arrived in South Africa on Monday and will conclude its visit on Friday, is being led by US Department of Agriculture Under Secretary for Trade and Foreign Agricultural Affairs Ted McKinney.

Ghana: Enforce laws on retail trade – GUTA (Ghanaweb)

The Ghana Union of Traders Association has implored government to enforce the Ghana Investment Promotion Centre Act 865 section 27, which bars foreigners from engaging in retail business or trade. Ashanti Regional Secretary of GUTA, Mohammed Ali, noted that the call was not to intimidate foreigners in Ghana but rather to encourage authorities to implement the statutory laws of the country without fear or favour. According to him, most foreigners in the retail business evade taxes as well as sell sub-standard products. [Related: The Lagos Chamber of Commerce and Industry will hold a roundtable discussion tomorrow on ECOWAS integration and the challenges faced by Nigerian traders in Ghana]

Ghana: GRA revokes licenses of 20 freight forwarders (Ghanaweb)

The customs division of the Ghana Revenue Authority has revoked the operating licenses of 20 freight forwarders for falsifying the port of loading documents from India to other countries. They also under-declared the values presented to customs for duty and tax purposes. Out of the 20 freight forwarders being sanctioned, 13 are said to have diverted transit goods while seven are being punished for falsifying the port of loading documents from India.

Nigeria: Oil firms, others yet to remit $22bn to federation account – NEITI (Leadership)

The Nigeria Extractive Industries Transparency Initiative said yesterday that the Nigerian National Petroleum Corporation) and its subsidiary, Nigerian Petroleum Development Company, and other oil and gas companies are yet to remit a total of $22.06bnand N481.75bn to the Federation Account. According to NEITI, the amount is part of the un-reconciled difference of its audited accounts of the companies for the year 2013 and 2014. These figures were released at a national conference on remedial issues with the theme, “Resolving Remedial Issues In The NEITI Industry Audit Reports”, held in Abuja. [NEITI executive secretary: Why remediation processes are slow]

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tralac’s Daily News Selection

30 Oct 2018
Alert: The Doing Business 2019 report will be released tomorrow (Wednesday) Featured newsletter: African Cotton, Textiles & Apparel Monitor #32 Featured trade commentaries: Raj Bhala : The resurrection of import substitution...
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Promoting foreign direct investment to LLDCs: Luncheon at the World Investment Forum 2018

On 25 October 2018, on the sidelines of the World Investment Forum in Geneva, the UN Office of the High Representative for the Least Developed Countries, Landlocked Developing Countries and Small Island Developing States (UN-OHRLLS) and UNCTAD co-organised a high-level event for Ministers and Ambassadors from LLDCs to share success stories as well as measures and priorities to boost foreign investment.

The meeting provided an opportunity for different stakeholders, including LLDCs, development partners, business executives, and the United Nations system to take stock of progress and share successful experiences in promoting and facilitating FDI to LLDCs, identify constraints, and suggest recommendations to help LLDCs to attract and optimally utilize FDI to support efforts towards achieving the SDGs.

The 32 LLDCs, with a population of over 500 million, share some common problems due to their geographical location, which affect their economic engagement with the rest of the world. Many LLDCs find themselves marginalized from the world economy, cut-off from the global flows of knowledge, technology, capital and innovations, and unable to benefit substantially from external trade. This situation results in narrow production and export bases, leading to limited economic growth and persistent poverty in the LLDCs.

As a result, the LLDCs have numerous special needs financing requirements including: investment in the development and maintenance of hard infrastructure; investment into soft infrastructure/trade facilitation; enhanced trade –productive capacities, value addition, diversification, and global value chains; enhanced trade in services; enhanced human and institutional capacity building; enhanced regional integration; and mitigation and resilience building to economic shocks, climate change, desertification, and others.

In countries with low domestic capital formation like LLDCs, foreign direct investment (FDI) is an important means of financing development. After five consecutive years of decline (2011-2016), FDI flows to the LLDCs rose by 3 per cent in 2017, to $23 billion. This modest increase still left total flows to LLDCs almost 40 per cent below the peak of 2011.

LLDCs have traditionally been marginal destinations because of the small size of their economies and the inherent geographical disadvantages compounded by poor infrastructure, high transportation costs, inefficient logistics systems and weak institutional capacities. Most FDI to LLDCs goes into extractive sectors, such as mining, quarrying and petroleum.

A key objective for LLDCs is therefore to attract and effectively target FDI in non-extractive sectors, particularly agriculture, so as to encourage job creation, infrastructure development, export diversification and structural transformation. Technical and capacity building assistance need to be increased, for areas such as negotiating contracts, developing bankable projects, and investment facilitation.

As the LLDCs and their partners prepare to undertake the Comprehensive Midterm review of the Vienna Programme of Action (VPoA) for the LLDCs for the Decade 2014-2024 (VPoA) in 2019, it is important to identify ways of encouraging FDI flows to LLDCs.

Statement by Zimbabwe Minister of Finance and Economic Development, Hon. Prof Mthuli Ncube

I am delighted to take the floor and contribute my national perspective to this very important discussion on Promoting Foreign Investment to Landlocked Developing Countries (LLDCs) focusing on our experiences, challenges and strategies that can help attract quality investment.

In light of time limitations, I shall try to zero in more on Zimbabwe’s experiences, and the strategies we are employing to make the country more land-linked and attractive to investment.

Zimbabwe’s National Development blueprints have largely reflected much of the fundamental priorities identified in the Vienna Programme of Action (VPoA) for Landlocked Developing Countries for the Decade 2014-2024. Here I am specifically referring to the issues of transit policy, infrastructure development and maintenance, international trade and trade facilitation, regional integration, cooperation and structural economic transformation.

Zimbabwe is located at a very strategic position as a transit country within the Southern Africa subregion. In recognition of this, the country has harmonised transit policies in compliance with the COMESA and SADC protocols on transit trade, transit facilities, and third-party motor vehicle insurance schemes.

Aside form that, Zimbabwe is also establishing one-stop-boarder-posts to facilitate smooth transit of both people and goods across the country’s borders. A study of one of the completed border posts, the Chirundu One-Stop Border-Post (OSBP) has shown that its establishment induced between US$2.2 and US$3.1 million of Zimbabwe’s annual exports to Zambia.

In the area of infrastructure development and maintenance, Zimbabwe is currently in the process of upgrading and modernising its road infrastructure along major trade corridors that serve East and Southern Africa, linking the North-South transport Corridor. For those road projects already completed, a Costs-Time-Distance study government has shown that the average speed of heavy trucks has increased from 33km/hr prior to the rehabilitation exercise to the current 48km/hr. This does not only reduce transit time and costs, but also improves competitiveness.

In the area of energy. The country has taken the initiative to promote the use of renewable energy in the form of solar generators, apart from the expansion of the current thermal and hydroelectric generation capacity. Great effort is being made to balance the need for climate sustainability and quality affordable investment.

Being a landlocked country, Zimbabwe has undertaken a number of  reforms to promote and facilitate investment. The country has signed 35 Bilateral Investment Treaties (BITs) and 10 of these are in force. These provides for pre-and-post investment facilitation and protection. Zimbabwe has also signed 9 Treaties with Investment Provisions (TIPs) and 7 of these are in force. The country has embarked on Ease of Doing Business reforms aimed at boosting the competitive advantage of the economy in attracting foreign direct investment. Measures undertaken under this process include, but are not limited to the following:

  • Establishment of the Zimbabwe Investment and Development Authority (ZIDA): A One-Stop-Investment Services Centre.

  • Promulgation of a Special Economic Zones (SEZ) law which designate areas to be SEZ and the sectors of investment in these areas. The law also provides a number of fiscal and non-fiscal incentives.

  • The Ease of Doing Business Reforms have also been aimed at reducing the cost of trading through trade facilitation in order to attract FDI.

In the agriculture sector, Zimbabwe is a huge producer of tobacco and the bulk of the product is exported unprocessed. The average prices are $3/kg for unprocessed and $6/kg for crushed tobacco as compared to between $30 and $60 for tobacco cigarettes. Therefore, by exporting unprocessed tobacco we are also giving away value of at least $27 per kilogram that could be accruing to the country.

Beneficiation also helps in triggering the emergency of vertical and horizontally integrated industries – a strategy for luring both local and foreign direct investment.

As we go towards the review of the VPoA, we call upon partners to put in place a tracking mechanism that would assist us in reviewing the progress that both ourselves, the LLDCs and the development partners have managed to achieve in the implementation of VPoA priorities. It is essential that cooperation between the public and private sectors be strengthened to turn our statuses to land-linked developing countries.

I thank you.

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Foreign Domestic Investment into Africa rises, and Morocco joins South Africa as leading investment destinations

According to EY’s latest Africa Attractiveness report, FDI was up across the continent last year, although South Africa experienced a fall in project numbers, on the back of continued weak domestic growth.

The EY 2018 report, ‘Turning tides’, provides an analysis of FDI investment into Africa over the past 10 years. The 2017 data shows that Africa attracted 718 FDI projects which is up 6% from the previous year. This was in line with a recovery in the continent’s economic growth, following a difficult preceding year.

The higher project numbers were driven by interest in ‘next generation’ sectors, namely manufacturing, infrastructure and power generation. Despite the rise in FDI, project numbers remain below the 10-year average of 784 projects (per annum).

The report also highlights the countries with the strongest FDI gains, with Ethiopia, Kenya and Zimbabwe experiencing a major uptick in FDI during the 2017 year. By contrast, South Africa, Egypt, Mozambique and Cote d’Ivoire experienced declines in FDI projects in the same year.

Ajen Sita, EY Africa CEO, says: “2017 was in many respects a key year for the continent. We saw multiple changes in leadership across a number of countries, including South Africa, Zimbabwe and Angola. In addition, Kenya’s election was drawn out which created uncertainty at the time. Changes in leadership have in turn led to a renewed urgency to implement fresh policies as new administrations move to address slow economic growth.”

EY - Foreign Domestic Investment (FDI) into Africa rises

Emerging market investment into Africa slows

2017 saw a noticeable decline in emerging market investment flows into Africa. This is a major turnaround from the previous year when Asia-Pacific investors strongly increased inbound investments. Last year, investments from this region fell 16% while intra-African FDI also fell by 14%.

The weaker intra-African flows were largely driven by a weaker appetite by both Moroccan and Kenyan investors into neighbouring countries. South Africa’s outward investment project numbers held steady as weak domestic growth saw companies continue the search for external growth opportunities across the continent.

North American (primarily the USA), and Western European FDI flows to the continent remain strong

After the USA, which remains the single largest country investing into Africa, three of the remaining top five investors are European, namely the UK, France and Germany. Of the ten largest investing countries in Africa, six are Western European.

FDI is more evenly allocated across the regions, as South Africa’s lead narrows

The report found that South Africa, Morocco, Kenya, Nigeria and Ethiopia were the dominant anchor economies within their respective regions, collectively accounting for 40% of the continent’s total FDI projects. Overall these four major sub-regions each attract similar FDI when measured by project numbers.

For the first time ever, East Africa became the single largest beneficiary of FDI with 197 projects (27% of total projects). Southern Africa, by contrast, fared lowest of the four major regions, at 162 projects (23%).

Whilst South Africa remains the continent’s leading FDI destination when measured by project numbers, for the first time ever the country’s lead is under threat with Morocco increasing its FDI projects by a sizeable 19% to share the top spot with South Africa.

“Over time and as Africa’s growth accelerates, we anticipate that South Africa’s share of inbound FDI will continue to decline, relative to the rest of the continent. This will be driven by sustained strong growth, particularly in the Eastern-hub economies, and revived growth in the West hub. It illustrates the need for South Africa to ensure its leading economic role across the continent is sustained,” says Sita.

Next steps to increasing Africa’s FDI

“There are major opportunities that the continent can benefit from after the recent leadership changes we have witnessed. These opportunities require emboldened leadership to drive renewed policy reforms and implement new initiatives which encourage inbound investment flows. There are some outstanding examples of how this has already worked in some countries, not least Rwanda, which is able to attract FDI well ahead of other economies of similar size, and indeed, ahead of much larger economies.

“By focusing on improving public sector efficiencies and finances, minimizing bureaucratic processes and partnering with the private sector on major projects, more countries can stimulate much needed FDI. In addition, they should continue to focus attention on increasing their scores on the ease of doing business and global competitiveness rankings,” Sita concludes.

This report and analysis was carried out by EY in Africa, with the participation and collaboration of Graham Thompson, Sampada Mittal, Sanvee Jalan and Shubham Pipraiya.

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