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2017 Federal Budget Wrap

Government Affairs, News, Public Affairs
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Last night Treasurer Scott Morrison handed down his second budget, and in doing so many commentators say he has finally removed the Turnbull government, and Liberal Party, from Tony Abbott’s deeply unpopular 2014 budget.

Introduction

Last night Treasurer Scott Morrison handed down his second budget, and in doing so many commentators say he has finally removed the Turnbull government, and Liberal Party, from Tony Abbott’s deeply unpopular 2014 budget.

The Australian Financial Review noted that yesterday’s budget spends big, taxes big, builds big, and belts the banks. With major spending announcements on infrastructure, schools and the NDIS, as well as tax hikes on the big banks and foreign investors, some commentators have been quick to label it a ‘Labor tax dream’.

While the Turnbull government has won praise for bold spending measures focused on stimulating growth in the right areas of the economy, the prime minister has already been forced to defend ambitious GDP forecasts, which project a $7 billion surplus by 2020/21. Tony Abbott’s former chief of staff Peta Credlin has criticised the Turnbull government for losing its focus on debt reduction and deficit repair with new and higher taxes and heavy spending on infrastructure, education and health.

But with a headline grabbing measure targeting the banking sector – one of the few ‘new’ announcements in a widely pre-briefed budget – Scott Morrison ensured a broadly positive reaction in the morning’s papers.

Now the hard work begins.  While Labor are left trying to criticise policies they effectively proposed, there is significant proportion of coalition politicians who crave fiscal responsibility and reduced deficits, and will need to be convinced of the merits of higher spending and taxes.

The Edelman team have summarised the main developments by sector:

 

Infrastructure 

After Mr Morrison announced last month that infrastructure spending represented ‘good’ debt, it was no surprise it formed a central pillar of this year’s federal budget.  The proposed decade long $75 billion spending spree already being referred to as the most ambitious infrastructure spending program in a generation.

The major announcements included:

  • Investing $5.3 billion over ten years to build the new West Sydney Airport at Badgerys Creek. By creating the Western Sydney Airport Corporation, the government will take full control of building and operating Sydney’s second airport. With earthmoving work to begin next year, the airport is planned to be fully operational by 2026. The project will lead to the creation of 20,000 jobs by the early 2030s, and 60,000 jobs in the longer term.
  • On top of a planned $2 billion upgrade announced earlier this year, the budget outlined to offer to buy the NSW and Victorian combined 87% stake in Snowy Hydro, which could cost the Commonwealth up to $5.25 billion.
  • A $10 billion program to upgrade Australia’s rail network, focused on improving urban and regional services and upgrading critical freight lines. The east coast of Australia will see $8.4 billion in funding for the Melbourne to Brisbane rail project.
  • $1 billion for regional rail projects across Victoria, including $30 million to develop a business case for a rail link to Tullamarine Airport. The Treasurer has signaled that funding could also be available for AdeLINK, Brisbane Metro, Cross River Rail in Brisbane, and the Western Sydney Airport Rail Link.
  • Establishing the Infrastructure and Project Financing Agency to help the government identify new financing solutions and provide advice on implementation.

 

Financial Services

Australia’s banks have been dubbed the biggest losers of this year’s Federal budget, with the Turnbull government introducing a major bank levy for the ‘Big Four’ plus Macquarie.  This was one of the few policies that had not been announced before yesterday’s budget, so received widespread media coverage – particularly as the banking industry has responded furiously while commentators have suggested customers may be left to foot the bill.

The major announcements included:

  • A banking levy on those with licensed entity liabilities of at least $100 billion from 1 July 2017.  It is predicted to raise $6.2 billion and will be calculated quarterly on an annualised rate of 0.06 per cent to raise just over $1.5 billion each year.
  • The Australian Competition and Consumer Commission (ACCC) has been tasked with ensuring the levy does not come out of customers’ pockets, and can force the top five to explain any changes or proposed changes to residential mortgage pricing.
  • In response to the Ramsay Review, the creation of the Australian Financial Complaints Authority, a “one stop shop” for complaints and for Australians to resolve disputes and obtain binding outcomes from the Banks and other financial institutions.
  • A new Banking Executive Accountability Regime which will require all senior executives to be registered to APRA. If executives breach their obligations they can be deregistered, disqualified from holding executive positions and stripped of their significant bonuses. If banks try and hide misconduct or breach misconduct rules they will face fines starting at $50 million for small banks and $200 million for large banks.
  • A permanent team within the ACCC will be set up to investigate competition in the banking and financial system.

 

Housing

Leading up to last night’s budget announcement, housing and affordability continued to be a focus of discussion for the Federal government.  With house prices surging in Sydney and Melbourne, a significant proportion of the community has been priced out of private rentals and sales leaving some to claim that the Australian dream of owning a property is becoming just that, a dream.  To address this, the government introduced a number of measures but stopped short of fully reforming negative gearing, which critics say is one of the main drivers behind housing affordability issues.

It will be interesting to see how this affects the government’s virtually impossible challenge of making housing more affordable without reducing the value of people’s homes – an almost guaranteed vote-loser.

The major announcements included:

  • From July 1, those looking to buy their first home will be able to contribute up to $30,000 into their superannuation account to buy their first home. Dubbed the “First Home Super Savers Scheme”, it will attract the tax benefits of superannuation, with contributions and earnings taxed at 15 per cent, rather than marginal rates, and withdrawals taxed at 30 per cent below their marginal rate although some economists have previously questioned this type of initiative, warning it may increase demand and push up house prices even further.
  • Australians aged 65+ are also being offered tax incentives to sell their homes and downsize, in a bid to boost the supply of housing for younger people. From July 1, 2018 they will able to deposit $300,000 from the sale of their home into their superannuation accounts, as a non-concessional tax contribution, regardless of how much super they already have.
  • Negative gearing rules are being tightened around what can be claimed, specifically travel expenses and depreciation deductions.
  • Focus on building more homes to increase capacity and ease affordability issues. Measures in the budget include working with states and territories to reform planning and zoning laws, opening up surplus Commonwealth land for development, and establishing a $1 billion National Housing Infrastructure Facility to “address infrastructure chokepoints that are impeding housing development in critical areas of undersupply”.  

 

Tax Overview

The government used the budget to reaffirm its commitment to cut the company tax rate to 25%, whilst proposing measures aimed at reducing red tape and easing tax burden on small businesses. A statement accompanying the budget outlined that a 25% company tax rate would increase competitiveness, attract investment, and protect jobs from being taken overseas. However, there were tax increases notably the bank levy and for individuals through the Medicare Levy.

In addition to the bank levy outlined in the Financial Services section, the major announcements included:

  • A new tax for businesses hiring foreign workers – $5,000 upfront for each foreign employee on a permanent visa for companies with a turnover exceeding $10 million
  • A continued crackdown on multinational tax avoidance and profit shifting with a toughening of the Multinational Anti-Avoidance Law, and a renewed crackdown on the back economy
  • For small businesses, the popular $20,000 instant asset write off facility for businesses with a turnover of less than $10 million extended for another year, while states and territories will receive up to $300 million in exchange for reducing red tape for small businesses
  • Increasing the capital gains tax discount from 50% to 60% for residents who choose to invest in affordable housing. Foreign investors are the biggest losers, with a new tax aimed at those who leave their building unoccupied or unavailable for rent for more than six months of the year. The CGT withholding rate for foreign residents also increases from 10 per cent to 12.5 per cent and the withholding threshold will be reduced from $2m to $750,000.
  • A significant increase in the Medicare Levy to 2.5 per cent for every Australian earning over $21,655, an increase of 0.5 per cent that is expected to raise $8.2bn over four years (see further details in Health)

 

Technology and Innovation

Whilst the government has come under fire since last year’s election campaign for losing sight of its innovation agenda, Scott Morrison used the budget to outline the Coalition’s ongoing focus on boosting Australia’s digital infrastructure.  The government allocated $350 million over three years to incentivise to modernising the public service.  However, the tech sector has reacted with disappointment suggesting budget initiatives do little to put the government back on track when it comes to innovation.

The major announcements included:

  • $10.7 million will be allocated to build a Cyber Security Advisory Office, which will be established by the Digital Transformation Agency over the next four years
  • $22.7m has also been allocated to complete the next stage of development for GovPass – the digital identity framework which links to existing document and facial verification services to provide secure proof of identity on online government services.
  • A funding boost to the CSIRO’s digital research network, Data61, to develop a data integration platform to support law enforcement and regulatory agencies to better detect, prevent and disrupt illicit activities within Australia and overseas
  • Just over $374 million will be spent over the next two years to give every Australian an electronic health record by default, with another $67.3 million to go towards the overhaul of the Medicare payments system. The Immigration department has been handed $95.4 million to improve its storage and processing of biometric data and introduce a new risk processing system for travellers.
  • Measures aimed at cutting regulation for fintech startups and expanding the ‘regulatory sandbox’.

 

Education

Education has been a key policy area in the build up to the budget, with the government announcing major changes on university and school funding over the past week. As such, there were no major surprises under the education banner on Tuesday night.

The Turnbull government has effectively poached Labor’s policy by announcing the Gonski 2.0 education package on needs based funding. However, developments are not so great for university students.

The major announcements included:

  • A $2.8 billion cut to Australian universities will increase the share of university costs borne by students by an additional 7.5 percent to be phased in over four years, while also lowering the salary threshold for university fee repayments to $42,000 from a current level of $55,874.
  • Federal money for schools will increase from $17.5 billion in 2017 to $30.6 billion by 2027 in an effort to give all students a ‘fair go’ by bringing each school to the same needs-based per-student level. The majority of Australian schools will see an increase in funds of 2.5 percent, with some experiencing greater increases.
  • 51 independent schools (both private and Catholic) will experience cuts or withdrawal of government funding. In response to a backlash from the Catholic education sector, Senator Birmingham has maintained that the cuts are all part of introducing true needs-based funding based on fairness.

 

Health

Australia’s health system was a primary focus for this year’s budget, with a $10 billion healthcare package announced. As part of this, the Medicare Levy will rise from 2% to 2.5% of taxable income (from July 1 2019) in order to fully fund the National Disability Insurance Scheme (NDIS) and guarantee Medicare.

The decision to raise the levy will ensure the NDIS is fully operational by 2020; seeing 46,000 disabled people better supported at a cost of $21 billion a year. Tax payers who pay the Medicare levy will be affected by the increase in tax rates whereas low income earners will continue to receive relief from the levy through the low-income thresholds for singles ($21,655), families ($36,541), seniors and pensioners ($34,244). The current Medicare Levy exemptions will remain in place.

The major announcements included:

  • A new Medicare Guarantee Fund to cover essential healthcare which will see $1 billion provided over four years from 2017-18 for the phased unfreezing of the Medicare rebate. Starting with bulk billing incentives for GPs in July 2017 and moving on to the lifting of the Medicare rebate for specialist consultations in 2018, specialist procedures in 2019 and diagnostic imaging in 2020
  • Patients with severe eating disorders will now benefit from an $80 million fund for those with severe mental illnesses and $350m will go to mental health services for veterans. There will also be greater investment in access to telehealth and telemedicine for psychology services.
  • A $5.5m vaccination campaign that will see Family Tax Benefit A payments reduced by $28 a fortnight from July for children who aren’t fully immunised.
  • Price cuts for taxpayer-subsidised medicines, which will save $1.8 billion over five years, and an extra $2.8 billion in funding for hospitals, including $730 million for Tasmania’s Mersey Hospital.
  • Reforms to the Pharmaceutical Benefits Scheme will be used to reinvest into drug subsidies and pharmacy initiatives.
  • The Medical Research Future Fund will get $65.9 million towards preventive health research, clinical trials and breakthrough research investments, and $5.8 million will be provided for research into childhood cancer.

 

Resources, Energy & Climate

In the biggest energy announcement in this year’s budget, the government outlined its plan to acquire a larger share or outright ownership of Snowy Hydro, as well as a commitment to keep the scheme in public hands, in what it is calling Snowy 2.0. Currently, Victoria and New South Wales own a combined 87% of the Scheme, and the Treasurer flagged that discussions with the NSW state government were already underway.

Announcements in this area were likely muted, with the wide-reaching Finkel Review into Australia’s energy future due in the coming weeks.

The major announcements included:

  • An announcement to set aside $90 million to secure access to gas resources for domestic use. Energy consumers and businesses will get a fairer deal, with more funding going to ACCC to investigate competition in retail electricity and gas markets. Additional funding will go towards improving gas market efficiency and transparency, and there will be increased investment in “new generation, transmission and storage capacity”.
  • Around $37 million will go to South Australia for new energy infrastructure and funding to prove up gas pipeline proposals to South Australia from Western Australia and the Northern Territory.
  • The establishment of an enquiry into why electricity prices are continuing to rise. The government will also be offering limited assistance to pensioners struggling to pay their bills.  A one-off energy assistance payment of $75 for single eligible recipients and $125 per couple was also announced.

Mike Baird does a "John Key” and quits politics

News, Public Affairs
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Despite his success in running Australia’s biggest state, outgoing New South Wales Premier Mike Baird, who announced his resignation today after nine years in Parliament, was never going to be a career politician.

Despite his success in running Australia’s biggest state, outgoing New South Wales Premier Mike Baird, who announced his resignation today after nine years in Parliament, was never going to be a career politician.

Baird, a former Sydney investment banker, carefully considered his future over the recent long Christmas break. He reflected on the highs and lows of his Government and also on the health challenges being faced by three members of his family.

Then he acted, putting his personal situation as a priority and announced his departure from State politics altogether from next week.

Baird leaves behind a government and state in strong financial shape. New South Wales is the leading economy in Australia with low unemployment, a significant budget surplus, a building and construction boom creating thousands of jobs and government infrastructure projects that will continue for two decades.

Baird took over the Premier’s job in 2014 from his friend Barry O’Farrell who resigned over not declaring a $3,000 bottle of Grange Hermitage given to him by a party donor.

Baird’s main competitor for the leadership at the time was Gladys Berejiklian, the ex-banker who did not stand in the end to preserve party unity and became Treasurer and a loyal Deputy-Leader.

A political moderate, Berejiklian has worked hard managing the financial fortunes of the state including overseeing a multi-billion dollar privatization program including the sale of New South Wales’ power assets. As a result, much of the money is being spent on roads, rail and other major projects to transform the state’s transport system.

A hard-working Minister, Berejiklian has the numbers to assume the leadership (she has already declared her candidacy) but there may be conservative candidates considering nominating for the job. The lay Party in New South Wales is factionally very divided between moderates and the hard and centre right groups so competition for all key positions can be expected. We will know the outcome next week.

Despite economic success, the Baird Government has had its problems, most of them self-inflicted.

Responding to public concerns about alcohol-related violence, it put in place regulations to limit late night trading hours for hotels, bars and entertainment venues in the Sydney area around the City of Sydney and Kings Cross. This effectively ruined many smaller businesses and upset people who would traditionally have been Liberal Party supporters. Only a growing wave of protests against the “Nanny State” saw the Government back down in late 2016, loosening the laws.

And in an almost dictatorial move, Baird personally moved to shut down the state’s greyhound racing industry that had been plagued for many years with bad practices including incidences of cruelty to dogs. Without warning many smaller trainers and owners in rural areas (again traditionally conservative voters) were contemplating financial losses including the closure of their businesses and livelihood. Once again, after much hand-wringing (and appalling opinion polls) the government softened its position.

Whoever wins the leadership contest next week the new Premier and government faces electoral challenges. Change will bring new faces into Cabinet and new approaches although the private-enterprise friendly complexion of the government won’t change. The next election is not due until March 2019.

What Baird’s surprise announcement today says that (like the recent departure of John Key as Prime Minister of New Zealand) good political leaders in the 21st century are not focused on longevity but doing what they set out to do then handing over to someone else to take over.

Just as in the corporate sector (with the shelf life of a CEO three years), politics is probably following that trend.

Turnbull shuffles the deck

Government Affairs, Health, News, Public Affairs
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Prime Minister Malcolm Turnbull has announced a minor re-shuffle of his ministry following the departure of Sussan Ley as Minister for Health earlier this month.

Prime Minister Malcolm Turnbull has announced a minor re-shuffle of his ministry following the departure of Sussan Ley as Minister for Health earlier this month.

Turnbull has moved quickly to replace Ley following a revelation of misuse of her parliamentary travel allowances and ahead of the return of Federal Parliament on February 7 and what is likely to be a robust political year.

The key appointment of former Industry and Innovation Minister Greg Hunt to the high-profile Health portfolio is the biggest news of the day.

Hunt is from Victoria and is a political moderate who is close to Turnbull. He is a highly-energetic and capable minister who was previously a successful Minister for the Environment. He negotiated the repeal of the unpopular carbon tax through Federal Parliament and was instrumental in Australia signing the Paris Climate Change Agreement in 2016.

Hunt has family connections to the health portfolio. His wife was a nurse and he regularly supports fundraising and awareness-raising efforts in his electorate of Flinders for juvenile diabetes and autism. His mother was bi-polar, so he has a strong affiliation with the impact of mental health issues on families.

As a moderate, while philosophically to the left, he will need all his negotiating skills to maintain spending levels in the traditionally high cost of the public health sector in the face of the Turnbull Government’s desire to cut expenditure and reduce the country’s rising deficit.

The other main portfolio change is to appoint Senator Arthur Sinodinos to the Industry, Innovation and Science ministry formerly held by Greg Hunt. A high-profile and well connected New South Wales Senator, Sinodinos is one of Turnbull’s closest advisers and parliamentary friends.

He was instrumental in seeing Turnbull succeed to the leadership of the Liberal Party in September 2015, deposing Tony Abbott and removing several right-wing members from the Cabinet.

While some question remains over Sinodinos in relation to his fundraising activities in New South Wales politics while Treasurer of the Liberal Party (which is still subject to an ICAC review), the Prime Minister has nevertheless appointed him to an important portfolio that includes Innovation, one of the key planks of the Coalition’s election campaign in 2016.

Senator Sinodinos’ old job of Cabinet Secretary will now sit within the Prime Minister’s office as a public service not elected position. Another key ally, Senator Scott Ryan, has been promoted to Minister Assisting the Prime Minister in Cabinet while Ken Wyatt, the nation’s first indigenous House of Representatives Member has been made Minister for Aged Care and Indigenous Health recognising two of the key public policy challenges facing the Government. Conservative Michael Sukkar has been made Assistant Minister to the Treasurer.

While Turnbull has avoided major changes to his barely six-month-old ministry, we can expect these won’t be the last as the year unfolds.

The Prime Minister’s media statement can found here

Nic Jarvis – Head of Public Affairs – Edelman Australia

nic.jarvis@edelman.com

Explaining America

Government Affairs, Insights, News, Public Affairs, Reputation, Trade
United States flag blows in the wind

Last night’s election of Donald J. Trump as President of the United States not only stunned the pundits, but confirmed many of the trends we’ve seen in populist movements worldwide. It signifies the potential for dramatic change to come in American policy on issues ranging from foreign policy and immigration to the environment and health care. It appears America chose to turn inward.

Last night’s election of Donald J. Trump as President of the United States not only stunned the pundits, but confirmed many of the trends we’ve seen in populist movements worldwide. It signifies the potential for dramatic change to come in American policy on issues ranging from foreign policy and immigration to the environment and health care. It appears America chose to turn inward.

This was a declaration by working class white Americans, who have suffered a decline in living standard and fear for their future in a globalized world, echoing the Brexit vote in the United Kingdom. It was a profound rejection of the establishment, especially of the mainstream media, which uniformly endorsed Secretary Hillary Clinton. Here are a few thoughts on the implications of the election.

Why this happened:

1. Inequality of Trust and Income Has Consequences — The 2016 Edelman Trust Barometer found that the informed public/elites (college plus education, top 25 percent of income, report significant media consumption) had much higher trust levels in institutions, than the mass population, particularly in the U.S. and UK (respectively). Income inequality correlates with trust inequality, with a 31 point gap between high and low income respondents in the U.S. on trust in institutions. Trump’s victory is a vote of no confidence in institutions and in the establishment.

2. Twitter Triumphs over The New York Times  Trump went direct to the people, mostly through his community of 14 million followers on Twitter. The mainstream media, notably The New York Times, broke stories on Trump’s non-payment of taxes, his failed Trump University and his questionable behavior with women. None of those stories ultimately were enough to change the tide. There was a near-universal set of editorial endorsements of Clinton. Trump used this disparity to his advantage, to claim media bias and unify his base of supporters. Social media coverage captured the angry tone of the country better than mainstream because it relies on a ‘person like me,’ doing away with the hierarchical in favor of the personal.

3. Genuine and Authentic Beats Intellectual and Measured — The short-form, speed and consistency of communication by Trump beat Clinton’s nuanced, detailed and long-form communication. Trump came across as more genuine, Clinton as less than transparent. Trump engaged directly with his community, Clinton spoke through the media in a careful and less frequent manner.

4. Advertising and Celebrities Hurt the Cause — The dominant advertising advantage of Clinton, with spending of 10 to 1 over Trump, reinforced the perception that she was trying to buy, rather than earn, votes. Her emphasis on negative campaigning, focused on Trump’s persona, instead of on economic issues, proved ineffective. The use of celebrity spokespeople may have rallied her base, but among swing voters it only exacerbated the feeling Clinton was part of the establishment, out to protect its own interests.

What must happen next:

1. Business in the Dialogue, Not Bystander — The temptation might be for business to use the Republican dominance in both Houses of Congress and in the Executive Office to seek less oversight in environment, financial services, and health care. This would be a mistake of monumental proportions, seen as the politics of self-interest. His Republican party can be deeply hostile to business. The need for Business to lead has never been more evident, whether on supply chain, pushing for free trade, or on immigration. CEOs should fill a leadership void, educating employees and their communities on issues such as trade while creating movements such as Starbucks’* 100,000 Opportunities jobs program.

2. Business Must Calm the Resentments — The election reflects a deep suspicion about the pace of change, the threat posed by globalization and the rise of the sharing economy. The Trump campaign slogan, “Make America Great Again,” is a simple line that relies on nostalgia. There must be a better explanation of the How and the Why, not simply the What. Any sense of cultural condescension must go away, in favor of a narrative that can be shared with employees and their families.

3. Recognize that Much of Your Audience Rejects Established Authority — The usual cultivation of academic experts and opinion leaders on issues is insufficient, if not counter-productive. We have to find voices who are believed by the average person, from long-tenured employees to passionate brand enthusiasts.

4. Consider the Impact of Nationalism and the Power of Local — We must recognize the rejection of long-accepted brands in favor of upstart locally sourced brands. National identity will be deeply important. The foreign companies seeking to prosper in the U.S. will have to emphasize their community involvement, training programs and local executive talent. There will be a much higher hurdle for brands from developing markets such as China.

5. Every Company Needs to Be a Media Company — Institutions are better served by going direct to end users, establishing a channel for direct dialogue and feedback. It is a world of many to one, not one to many. The predominant axis of communication is horizontal, that mass population relies on search and social, not mainstream media. Our content has to be short-form, shareable and with an opportunity for consumer generated response and engagement.

6. Truth Matters More Than Ever — In the campaign, there were several instances of exaggeration or part-truths. The hashtag #NeverHillary spread lies like wildfire. In a post-election context, there will be a need to prepare for similar pressure through social channels, best answered by passionate consumers and well-informed employees.

In January, in my essay on the findings of the 2016 Edelman Trust Barometer, I suggested that the Grand Illusion of the elites was coming to an end. The illusion was premised on three concepts: that elites had superior information, that elites were acting in the best interests of the mass population, and that someday a few in the mass population could become elites. The results of the Brexit vote and the U.S. election have confirmed the idea that the Pyramid of Influence, with elites at the top holding authority and influence, has been flipped on its head, with mass population now in control and wielding influence.

Historical context is vital. Many were concerned that the election of Ronald Reagan in 1980 would provoke nuclear war with the Soviet Union; ultimately he reached a deal on nuclear weapons with Soviet leadership. The populist sentiment unleashed by Trump has unsettled minority and LGBT populations. We would be advised to remember this is a country of laws, with a three-branch government designed by the Founding Fathers to check any momentary popular impulse. As an American running a global business, I have faith in our system, in our Constitution’s mandate to the balance of powers. President Obama said this morning that “Ultimately, we’re still on the same team.” Gridlock will cause government to walk away from key issues, giving the private sector an opportunity to fill this void. Edelman employees should also get more deeply involved in volunteer work for non-profits, to take up some of these societal challenges. Together, it’s our time to lead.

Richard Edelman is president and CEO.

*Edelman client

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