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The views expressed in this paper/presentation are the views of the author and do not necessarily reflect the views or policies of the Asian Development Bank (ADB), or its Board of Governors, or the governments they represent. ADB does not guarantee the accuracy of the data included in this paper and accepts no responsibility for any consequence of their use. Terminology used may not necessarily be consistent with ADB official terms.
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Public and Private InfrastructureInvestment Management Center
PPP LEGAL AND REGULATORY
FRAMEWORK IN KOREA
Sanghoon Ahn
Head, Policy & Research Division
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1. PPP Act and Legal Framework
2. Implementation Procedure
3. Major Players
4. Framework for Government Support
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Part-01 PPP Act and Legal Framework
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- Infrastructure projects were carried out underindividual laws
- Enactment of PPP Act 『The Act on Promotion ofPrivate Capital into SOC Investment』
-Revision of PPP Act
『The Act on Private Participation in Infrastructure』-Introduced Unsolicited project, Risk sharing scheme,Establishment of PICKO
- Amendment of PPP Act- Introduced BTL method, Diversified facility types (Social Infra)- PICKO of KRIHS + PIMA of KDI => PIMAC of KDI
January 1999
January 2005
Before August 1994
August 1994
History of PPP Act
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Hierarchy of legal and administrative framework of PPP System
PPP Act
PPP Act Enforcement Decree
PPP Basic Plan
PPP Implementation Guidelines
The Legal Status of the PPP Act The PPP Act and Enforcement Decree are the principal components of the legal
framework of PPP.
They define eligible infrastructure types, procurement types, procurementprocess, the roles of the public and private parties, policy supports, etc.
The PPP Act is a special Act that precedes other Acts:
Exempts PPP projects from strict regulation in national property management
Allows a special purpose company (SPC) to play a role of competent authority
Legal Framework of the PPP System (1)
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Legal Framework of the PPP System (2)
PPP Basic Plan and Implementation Guidelines
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 directions 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 RFP preparation
guidelines for standard output specification by facility guidelines for tender evaluation guidelines for standard concession agreement guidelines for refinancing
PPP Basic Plan and Implementation Guidelines are annually updated, reflectingrelevant changes and market conditions.
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Part-02 Implementation Procedure
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PPP Facility Types
Sector Facility Type
Road(3) Road, Ancillary Facilities, Non-road Parking Facilities
Rail(3) Railway, Railway Facilities, Urban Railway
Port(3) Port, Fishing Port Facilities, New Port Construction Facilities
Communications(5)Telecommunication Facilities, Information Communication System,
Information Super-highway, Map Information System, Ubiquitous City Infrastructure
Water Resources(3) Multi-purpose Dam, River-affiliated Ancillary Structures, Waterworks
Energy(3) Electric Source Facilities, Gas Supply Facilities, Collective Energy Facilities
Environmental(5)
Waste Treatment Facilities and Public Livestock Wastewater Treatment Facilities,
Waste Disposal Facilities, Wastewater Treatment Facilities, Recycling Facilities,Public Waste-water Treatment Facilities
Logistics(2) Distribution Complex, Cargo and Passenger Terminals
Airport(1) Airport
Culture and Tourism(10)
Tourist Site or Complex, Youth Training Facilities, Public Sports Facilities,
Libraries, Museums and Art Galleries, International Conference Facilities,
Culture Centers, Science Centers, Urban Parks, Professional Training Facilities*
Military Housing (1) Military Housing
Education(1) Schools
Forestry(2) Natural Recreational Resorts, Arboretums
Public Housing(1) Public Rental Housing
Welfare(4) Child-care Facilities, Senior Homes, Medical Facilities, Facilities for the Disabled*
* Expected to be included in the 2009 revised PPP Act Enforcement Decree
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Project Initiation
Solicited Projects
A solicited project is that the competent authority identifies a project for
private investment and announces a RFP
Unsolicited Projects For an unsolicited project, a private company (project proponent) submits a
project proposal, and then the competent authority examines and
designates it as a PPP project
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Procurement Schemes
BTO (Build-Transfer-Operate) Scheme
Both solicited and unsolicited projects are eligible
Roads, seaports, and railway projects, etc
User-fees, Minimum Revenue Guarantee (MRG) for solicited projects
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
Other Schemes
BOT (Build-Operate-Transfer)
BOO (Build-Own-Operate)
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Comparison of BTO and BTL Schemes
Private Sector(SPC)
End-user Government
ProvidesServices
PaysUser Fee
Grants
Operational
Rights
Transfers
Ownership
BTO
Private Sector(SPC)
End-user GovernmentPays
User Fee(If necessary)
Transfers
Ownership
ProvidesServices
BTL
Grants OperationalRights/
Pays GovernmentPayment
Structure
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Characteristics of BTO and BTL Scheme
BTO BTL
InvestmentRecovery
User feesConstruction subsidy
MRG
Lease payment(Fixed Revenue)
Project risk Demand risk on concessionaire Little demand risk on concessionaire
Return High risk, high return Low risk, low return
EligibilityBoth solicited and unsolicited
projectsSolicited projects only
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Implementation Process (BTO)
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Implementation Process (BTL)
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Part-03 Major Players
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Major Players in the PPP System (1)
Ministry of Strategy and Finance (MOSF) 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.
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Major Players in the PPP System (2)
PPP Review Committee (PRC) 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 scalePPP projects.
Consists of: (i) the Minister of Finance and Strategy (Chairperson); (ii)vice ministers of line ministries in charge of implementing PPP projects;and (iii) private sector experts with knowledge and experience in PPP
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.
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Major Players in the PPP System (3)
Public and Private Infrastructure Investment ManagementCenter (PIMAC) 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 sectorpractitioners
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Major Players in the PPP System (4)
Special Purpose Company (SPC) 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 aproject proposal.
In such case, it shall include a corporate establishment plan in the project proposaland, when designated as a potential concessionaire, establish the company whichis to conduct the designated PPP project.
The SPC shall not engage in businesses other than those acknowledged by thecompetent authority at the time of designation of the concessionaire except
insignificant businesses approved by the competent authority.
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Part-04 Framework for
Government Support
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Government Support (1)
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 theconcessionaire
Concessionaires are allowed to use national or public property withoutcharge 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 reasonablelevel
Tax incentive Exemption from acquisition and registration taxes on real estate for BOT
projects
0% VAT on construction services
Tax reduction for infrastructure bond
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Government Support for Land Acquisition
In order to facilitate PPP implementation, the PPP Act grantsland expropriation right to the concessionaire. The concessionaire may entrust the competent authority or the local
government with the execution of land purchase, compensation for loss,resettlement of residents, etc. The PPP Enforcement Decree regulates that detailed contents, terms, and
fees for such entrustment shall be determined by contract between theconcessionaire and the relevant authorities.
Notwithstanding the related provisions of the State Properties Act and the
Local Finance Act, national or public property may be sold to theconcessionaire by contract ad libitum.
Competent authority may allow the concessionaire to useand benefit from such national or public property withoutcharge.
In many PPP projects, the entire or part of land acquisitioncosts are compensated by the competent authority exceptfor a few highly profitable projects.
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Financial and Tax Incentives for PPP Projects
Construction Period
(1) Construction Subsidy
Operating Period
(2) Minimum Revenue Guarantee (MRG)
(3) Infrastructure Credit Guarantee via Infrastructure Credit Guarantee Fund
Subsidy:
Guarantee System:
(4) Special Taxation, Corporate Tax, Local Tax, exception from chargeTax Incentives:
Types
(5)Guidelines for Early TerminationEarly Termination
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Special Taxation for PPP Projects
Type Contents
InfrastructureBond
The concessionaire and other parties may issue Infrastructure Bond for implementing PPP projects. A separate tax
rate of fourteen percent (14%) shall be applied to the interest revenue from such bonds with fifteen years of maturity
or more (such application has been extended through December 31, 2009: Article 29 of the Restriction of Special
Taxation Act).
VAT
A zero percent (0%) tax rate is applied on value-added tax for infrastructure facilities or construction services of such
facilities provided to the central or local governments pursuant to Article 4 Subparagraph 1 (BTO), Subparagraph 2
(BTL) and Subparagraph 3 (BOT) of the PPPAct or for the construction services with the purpose that the
concessionaire under Article 2 Subparagraph 7 intends to operate a project that is charged with VAT (such
application has been extended through December 31, 2009: Article 105 Paragraph 1 Subparagraph 3-2 of the
Restriction of Special Taxation Act).
A zero percent (0%) tax rate is applied on value-added tax charged on urban railway construction work provided
directly to the concessionaire under Article 2 Subparagraph 7 of the PPPAct (such application has been extended
through December 31, 2009: Article 105 Paragraph 1 Subparagraph 3 of the Restriction of Special Taxation Act)
ForeignInvestment
Zone
Reduction and exemption on taxes, including corporate tax, income tax, acquisition tax, registration tax, and propertytax, are applied to foreign investment who invest USD 10 million to newly establish private investment facilities in the
Foreign Investment Zone (Article 116 Paragraph 2 Subparagraph 3-3(e) of the Restriction of Special Taxation Act)
Infrastructure
Fund
With respect to the dividend income distributed for the Infrastructure Fund, 5% tax rate shall apply to the dividend
income from the equity investment portion up to 300 million KRW and 14% tax rate shall apply to the dividend income
from the equity investment portion exceeding KRW 300 million(such application has been extended through
December 31, 2009; Article 91-4 of the Restriction of Special Taxation Act; Article 129 Paragraph 1 Subparagraph 2
of the Income Tax Act)
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Corporate Tax for PPP Projects
Type Contents
Infrastructure
CreditGuaranteeFund
The bad debt allowance for redeemable liabilities of the Infrastructure Credit Guarantee Fund pursuant to the PPPAct is
categorized as an expense (Article 63 of the Enforcement Decree of the Corporate Tax Act).
When the Infrastructure Credit Guarantee Fund accepts the bad debt allowance for redeemable liabilities as expense,
the amount is included as expense in the process of calculating earnings of the year within the range of 1/100 of the
remaining amount of the Credit Guarantee as of the end of the business year (Article 63 Paragraph 1 Subparagraph 3
and Paragraph 2 of the Enforcement Decree of the Corporate Tax Act).
Way ofCalculatingEarning
when uses
grantedsubsidy
When a domestic corporation uses granted subsidy for the purpose of acquisition or reform of business
assets with an aim to carry out PPP projects, the amount pursuant to such use is included as expensein the process of calculating earnings of the year (Article 64 Paragraph 1 and Paragraph 6
Subparagraph 3 of the Enforcement Decree of the Corporate Tax Act).
for
concessionaire
When the concessionaire distributes as dividend 90% or more of the distributable income by meeting
the terms of a nominal investment company as stipulated under Article 51-2 of the Corporate Tax Act
(the equity capital of the concessionaire corporation for the projects other than BTL projects shall be 5
billion KRW or more and the equity capital of the concessionaire corporation for the BTL projects shallbe 1 billion KRW or more), that amount is deducted when calculating earnings (Article 51-2 of the
Corporate Tax Act; Article 86-2 Paragraph 4 Subparagraph 1 of the Enforcement Decree of the
Corporate Tax Act).
Taxes aboutthe Land
Land developed for the implementation of PPP projects is exempted from additional taxation of capital gain tax and
corporate tax (Article 55-2 Paragraph 1 Subparagraph 3 and Paragraph 2 Subparagraph 4(c) of the Corporate Tax Act; Article 92 Paragraph 1 Subparagraph 3 of the Enforcement Decree of the Corporate Tax Act).
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Government Support (2) : MRG
A certain fraction of projected annual revenues may beguaranteed when the actual operating revenue falls considerablyshort of the projected revenue prescribed in the contract Applicable only to solicited projects
Not applicable to projects that earn less than 50% of projected revenue
Jan 1999May 2003
January 2006
Solicited UnsolicitedSolicited Unsolicited
Period Whole operating period 15 Years 10 Years
Abolished
GuaranteeLevel (Max)
90% 80%First 5 Years 90%Next 5 Years 80%Last 5 Years 70%
First 5 Years 75%Next 5 Years 65%
Condition NoneNo MRG applied
if Actual Revenue < 50%of Forecasted Revenue
Same as Left
Profile of Minimum Revenue Guarantee
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Government Support (3)
SOC credit guarantee fund provides credit guarantee for PPPproject finance to enhance the timely payment of debt service. Its
guarantee products include:
Guarantee for facility loans (during construction)
Guarantee for working capital loans (during operation)
Guarantee for bridge loans
Guarantee for refinancing
Guarantee for infrastructure bond
Buyout options
Force majeure (natural disaster or political turmoil)
Other specific events prescribed in the concession agreements
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Approval of Credit Guarantee
Year 2001 2002 2003 2004 2005 2006 2007 2008
Number 11 9 6 10 11 15 16 23
Amount 331 303 469 1005 1006 1215 1207 1216
(unit: bill. KRW)
SOC Credit Guarantee Fund is administrated by KODIT (Korea Credit Guarantee
Fund).
The maximum credit guarantee coverage has increased from 200 bill. KRW to
300 bill. KRW per project (Annual PPP Plan, revised Feb. 2009)
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RailwayParking
Lot
Environ
-mentRoads Schools Port
Number 1 2 5 4 8 3
Amount 200 24 148 400 39 135
In 2008, 23 PPP projects were provided with credit guarantee by SOC creditguarantee fund.
The total amount of guarantee in 2008 is around 1.2 trill. KRW.
(unit: bill. KRW)
Approval of Credit Guarantee (cont.)
Credit Guarantee in 2008 by Sector
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Recognition of Buyout Right
The concessionaire of facilities revertible to the government may
request the central or local government to buyout the concerned project
(including supplementary projects) in the event that construction or
management and operation of the infrastructure facilities is impossible
due to inevitable circumstances such as natural disaster.
[Grounds for recognition of buyout right]
When construction is suspended for six months or longer or total project cost increases byfifty percent (50%) or more due to natural disasters, war and other cases of force majeure;
When operation of the facility is suspended for six months or longer, or where the repaircost or reconstruction cost exceeds fifty percent (50%) of the initial total project cost dueto natural disasters, war, and other cases of force majeure;
When the government does not perform its duties in the absence of justifiable cause asdetermined in the concession agreement for a year or longer from the date of receipt ofnotification of the grounds thereof, or when the construction or operation of the facility isdelayed or suspended for six months or longer as a result; and
When a cause as determined by the concession agreement occurs and the competentauthority determines that it is reasonable to recognize the buyout right of theconcessionaire
* source: Basic Plan for PPP, May. 2008
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Buyout Right and Early Termination in PPP Projects
1. PPP
SOC
2. Gov. Project
1. Government
2. Concessionaire
3. Political Force Majeure
Event (default)
occurs by
4. Non -Political Force Majeure
Early Termination / Termination Payment
The concessionaire may request the
government to buyout the project in the event
that facilities is impossible to maintain due to
inevitable circumstances
Buy -out
RightBasic Plan for PPI
&
Concession
Agreement
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Change of Early Termination Clauses
Environment& SystemChanges
EarlyTerminationPaymentChange
1994 1997
’97 financial crisis leaves banksconscious of BIS ratios Risk weight of PPP senior loan is 400%
vs. government guaranteed seniorloan weight of 0%,
Early terminationpayments were notclearly stipulatedby law or regulation
Government’s Senior Debt
Guarantee clause
appeared inconcessionagreement
2000
“Basic Plan for PPP”
adopted buyout right& early termination
payment criteria
PPP projectsFirst launched
2003
Board of Audit &
NGO’s criticize system
Excessive MRGpayments and other PPPissues surface. Changeto payment per stage:Guarantee period andratio reduced
Guarantee stipulationburdened government Criticized for inequity
since senior debt sizediffers for each project
2004
New calculation methodconsidered privateinvestment andperformance-based futureexpected revenue To enable repayment of
remaining loans
2006
MRG payment methodchanged: 75-65%for10 years only for solicited projects
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Calculation Guidelines for Early Termination Payment for BTO Projects
CategoryBTO
Construction Period Operating Period
Default byConcessionaire Incorporated private investment amount1) Depreciated value of the amount on the left4)
Non-politicalforce majeure
Incorporated private investment amount x [1 +
Standard debt interest rate (A)2)]
Weighted average6) of the sum of the
depreciated value of the amount on the plus
the future expected profit5) while considering
the remaining operating period.
Politicalforce majeure
Incorporated private investment
amount x [1 + (A + B)/2]Same as above
Default byGovernment
Incorporated private investment
amount x [1 + current IRR3](B)]Same as above
Note: 1) Construction interest rate is deducted from the total private investment cost.
2) Add 2% to the annual average amount of distribution rate of a 5-year government bond for every yearduring the construction period and take its weight average by the ratio of accumulated total privateinvestment fund amount at the end of each year.
3) The current IRR is calculated by reflecting the real rate of consumer price increase to the real IRR duringthe construction period.
4) The already invested private investment fund is depreciated by the rate fixed in the concession agreement.
5) The expected profit is the amount discounting by fixed IRR the flow of expected profit that is based on thereal price at the time of termination.6) [Remaining depreciation x (1-ratio of remaining operating period)] + [future expected profit x (ratio of
remaining operating period)]
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Calculation Guidelines for Early Termination Payment for BTL Projects
categoryBTL
Construction Period Operating Period
Default byConcessionaire
(Private investment cost put in up to the timeof termination)-(Equity Capital put in to the
time of termination)
(The PV of lease fee of the remainingperiod that is discounted by rate of return
applied at the time of termination)-(Equity
capital put in)=E
Non-political
force majeure
[Net private investment put in at the time of
termination] × [1 + C]
E+(F-E)X1/3
Politicalforce majeure
[Net private investment put in at the time of
termination] × [1 + (C+ D)/2]
E+(F-E)X2/3
Default byGovernment
Net Private investment put in at the time of
terminationⅹ [1 + D]
The PV of the lease fee of the remaining
period that is discounted by the rate of return applied at the time of termination=F
* C: [Government bond interest rate] determined in the concession agreement* D: [Government bond interest rate + additional rate] determined in the concession agreement
* E & F: [Government bond interest rate + additional rate] applied when calculation lease fee at the time of termination
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Government Support (4)
Temporary support measures were introduced in the AnnualPPP Plan (Feb. 2009) as a response to recent global financial
market instability.
Risk sharing for adverse movements in interest rates
Incentive for Early Completion In the event of early completion, the SPC is granted the right to operate the
facility to the extent of ½ the reduced completion period.
BTO
in the event of more than ±0.5% point change in reference rate,
60~70% government support/redemption for reduced/excess interest rateamount
BTL
adjustment period for rate of return reduced from every 5 years to every 2
years
60~80% government support if interest rate difference between
government bonds and bank bonds amounts to 50bp
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Government Support (5)
Annual PPP Plan (Feb. 2009)
Reduction in Minimum Level of Required Equity Ratio
B T O
during period of construction 25% 20%
projects with investment ratio of financial
investors exceeding 50%20% 15%
B T L
projects of less than 100 billion KRW
(e.g. schools, military housing, sewerage
facilities)
5~15% 5%
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