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Poland regained its independence in 1918 only to be overrun by Germany and the Soviet Union in World War II. It became a Soviet satellite country following the war, but one that was comparatively tolerant and progressive. Labour turmoil in 1980 led to the formation of the independent trade union "Solidarity" that over time became a political force and by 1990 had swept parliamentary elections and the presidency. A "shock therapy" program during the early 1990s enabled the country to transform its economy into one of the most robust in Central Europe, boosting hopes for acceptance to the EU. Poland joined the NATO alliance in 1999.

Update No: 064 - (27/08/02)

The Poles are chafing at the stalled performance of their economy, GDP growing at barely 1% this year, like last year. The previous government led by Solidarity, fell from power largely because of that. The new government elected last year, of communists and the rural protection party is concerned to promote fresh growth.

New finance minister
The key job in Poland right now is that of the finance minister. In July Premier Leszek Miller appointed a new figure, Grzegorz Kolodko, to the post, in place of Marek Belka, a pro-free market economist. The markets dipped in response. For Kolodko in May published an article calling for a currency board, a zloty devaluation and a relaxation of fiscal policy. The introduction of a currency board with the zloty linked to the Euro, is not such an outlandish idea, but devaluation beforehand is, as is that of fiscal stimulus.
The economy is likely to remain in the doldrums so long as the wider EU economy is depressed. For trade with the EU is a main component of aggregate demand. The EU beckons as the ultimate destiny of Poland.

EU flutters
The Brussels Commission is insisting on full compliance with all 29 chapters of the Acquis Communitaire, the regulations that make for an integrated single market. Among them is one clause that is causing real difficulty, namely the requirement to scrap special economic zones (SEZs) that offer tax breaks to foreign investors. This would undermine job creation just when it is most needed, as in Silesia where thousands of steel workers and coal miners are being put out of a job.
The Katowice SEZ is a case in point. Japanese, German and US companies have all been attracted there and now face cessation of what Brussels calls: 'open-aid envelopes,' hundreds of millions of Euros in fiscal aid. "Candidate countries must scrap the SEZs or convert state aid into legal aid," says an EU official.
Poland set up the SEZs in high unemployment areas in the 1990s to lure investors - with remarkable success. Foreign direct investment (FDI), into Poland is over US$40bn, easily the highest FDI figure in the post-communist world. To threaten FDI in any way is the last thing the government wants to do.
But Brussels is obdurate, insisting that the SEZs impair competition and the allegedly level playing field of the EU single market. Anti-trust regulators have convinced Brussels to be tough with new entrants on the matter.
Brussels is also insisting on compliance with other chapters, as on the sale of land to foreigners in the near future. The Poles are reluctant to agree, having a visceral fear of foreigners taking over their country, as happened in mediaeval times, again the three partitions of Poland between 1772 and 1795 and yet again under the terms of the Nazi-Soviet Pact of 1939. All such foreign domination having finally been expunged, the Poles are not prepared to see their former occupiers buy their way back to owning the land from which they have been expelled.
It is the memory of the infamous conduct of Nazi Germany that is motivating the Germans and Europeans generally to be accommodating to Polish susceptibilities. Polish accession to the EU by 2004 or 2005 at the latest, still looks feasible.

Government reshuffle
Premier Miller has not just not re-appointed his finance minister; he has a new arts minister and justice minister as well.
Above all, he wants his government to be popular. The ousted arts minister, Andrzej Celinski, was tactless in telling the art community the truth - that there was no money available for them, adding for good measure that they were a lot of prima donnas. The former director of the National Theatre, Waldemar Dabrowski, has been brought in to placate them, one of their own.
The change at the justice ministry is to indicate a new tough line on crime, an inevitable accompaniment of Poland's economic depression.

New course ahead
Miller is convinced that all of Poland's problems need addressing by promoting growth even at the cost of a rise in inflation. Given the independence of the central bank, the stimulus would have to be fiscal and via the exchange-rate. The devaluation of the zloty can be expected.
If a growth spurt for a while can be created, the referendum next year on EU entry could go the government's way, in favour, and Brussels would then bail out any budget deficit. That then is the somewhat cynical scenario of the ex-communists of the Democratic Left Alliance. 

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Poland gets funds from EU aid farming programme

The European Commission has transferred to Poland 42m euros (about 171m zlotys) as part of funds for the implementation of Sapard pre-accession programme for agriculture, the finance ministry said on 30 July, PAP News Agency has reported.
The ministry reported that funds, transferred on 25th July account for 24.5 per cent of the annual allotment for Poland assigned according to an annual financial agreement for 2000.
The EC declared that it would assign 180m euros out of the third tranche of Sapard fund for 2002. The funds can be used by the end of 2004.
The Polish government has so far signed two annual financial agreements with the EU for 171.570m euros and 175.057m euros.

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Offset deal on Rover motor car production possible

Officials from the MG Rover car company have suggested that Poland's purchase of Swedish-British Gripen fighters for its airforce could be offset by financial loans for the Polish car industry, Deputy Economy Minister Maciej Lesny reported on 31st July, PAP News Agency has reported.
Lesny said Rover, soon to start up production in Warsaw's former Daewoo plant, could receive start-up loans for the project from Gripen's British shareholder BAe Systems if Poland decided to buy Gripen planes.
According to a business plan presented by Rover officials, the offset deal would cover the project's financing and allow Rover to resign from earlier-planned government loans. Lesny said the Rover company's plans were sound but that its cars could prove too expensive for Poles. "The Rover 45 model costs from 40,000 to 45,000 zlotys (US$9,600-10,800), which is not the best offer for the Polish market. I think Rover overestimated the Poles' buying power," he said.

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Polish-Russian air accord signed

After ten years of negotiations, it has finally been possible to sign an accord on civil air communication between Poland and Russia, TV Polonia has reported. For Polish Airlines LOT, this above all means lower payments for flights over Russian airspace, and significantly lower at that. The accord, signed in Kaliningrad by Deputy Prime Minister and Infrastructure Minister, Marek Pol, gives LOT a privileged position in the East European market.
The crowning of efforts and above all the opportunity to increase the number of flights and - the most important thing - at decisively lower costs.
Pol said "This is an accord that it was not possible to sign for ten years. So, we have got a great success today. This is a very modern accord..."
"Such flights as this will now be possible, and served by Polish Airlines alone, because SAS gave up flying to Kaliningrad after 11 September. Most probably, it was scared off by the high payments. We will no longer have to pay these."
Pol continued: "It is easy to fly to Kaliningrad from any point in Europe via Warsaw, and from Kaliningrad it is easy to fly to any point in Europe via Warsaw."
Warsaw's Okecie may thus become a transit airport linking eastern and western Europe.
Sergey Frank, the minister of transport of the Russian Federation said: "Apply good prices, and everything will be in order." For LOT, cheaper payments open the door to the whole of the East.
Pior Ikonowicz, the LOT spokesman said that they will now be conducting studies on the start-up of flights to the Far East.
In the 1990s, Poland had to pay US$1m a year for flights to Beijing, for instance. This was unprofitable. Now, after the lowering of rates, it is not precluded that Poland will again fly to Singapore, Beijing or Bangkok.
For LOT, eastern Europe is one of the most important markets to win. One of the most important, and in fact the sole one which can be won and in which LOT can play a leading role. And LOT now needs such a position very much, especially when it is thinking about a serious alliance with large airlines.

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Polish Finance Ministry plans incentives boosting biofuel production

The Sejm [lower house of parliament] economy committee on 25th July received from the Finance Ministry a reply to its position on boosting the production of biofuels in Poland, PAP News Agency has reported. "Referring to proposals included in the position: home production and the import of rape seed oil esters will be exempt from the excise tax," Deputy Finance Minister Irena Ozog said during the committee meeting. The development of biofuels production will boost the Polish economy. The Finance Ministry role will boil down to granting tax allowances, she added.
The government draft law regulating the market of biofuels has been sent to the Sejm, Kazimierz Zmuda from the Agriculture Ministry said at the committee meeting. According to Zmuda, the draft envisages that production will be based on long-term agreements with components producers. Under the draft as of March 1, 2003 the share of bioethanol in the fuel market is to account for 4.5 per cent of gasoline sold on the market.
According to the deputies, the Civic Platform has also sent a draft law regulating the fuel market to the Sejm.

Polish government to assess risk of Russian investment in oil sector

The government will assess the political risk of letting a Russian investor get involved in Polish oil sector privatisation before it replies to a Nafta Polska request, Treasury Minister Wieslaw Kaczmarek told journalists on 26th July, PAP News Agency has reported. Nafta Polska recommended that the government should approve the purchase of 75 per cent of shares in Gdansk refinery by Rotch Energy and Lukoil. The minister said that the project is risky from one point of view, namely it would be the first investment in an important sector made with the participation of an important Russian firm.
Kaczmarek did not reveal the price offered by the consortium for shares. On 9th July, Nafta Polska received a final bid to buy 75 per cent of Gdansk Refinery from the Rotch Energy and Lukoil consortium.
The refinery's net profits fell 97 per cent in 2001 to 5.4m zlotys from 182m in 2000.

Polish company signs contract for exploratory drilling in Russia

Poszukiwania Nafta i Gaz (PNiG), a subsidiary of Polskie Gornictwo Naftowe i Gazownictwo (PGNiG) [Polish Oil and Gas company], has signed a contract for exploratory drilling in Russia with a Russian oil company OAO Kaliningradnieft, PNiG spokeswoman, Agnieszka Siola, said on 22nd July, PAP News Agency has reported.
She added that PGNiG will start exploratory drilling in Russia at the end of September and the beginning of October 2002. During five months the company will drill four holes to a depth of 2,000 metres. Siola declined to disclose the value of the contract.
PGNiG Krakow Ltd. has been carrying out exploratory drilling in Kazakstan, Pakistan, India, Lithuania and Ukraine. Income from export services accounts for 65 per cent of the company revenues.
In 2001 the company exports rose to US$26.2m from US$14.2m in 2000. Gross profit exceeded 4.8m zlotys (US$1.2m ) and net profit totalled 451,000 zlotys. The company employs 600 workers.

Economy ministry outlines mining reform plan

A new mining sector reform programme is an alternative to the sector bankruptcy, Deputy Economy Minister, Marek Kossowski, told PAP News Agency on 23rd July.
He added that the ministry wanted to conclude consultations on the programme by the end of summer vacations and send it to the government.
Under the programme seven coal companies are to be transformed into two concerns [companies] and one coal and coke company in 2003. The transformation will not be immediate as the sector is heavily indebted.
The debt of the sector which has lost liquidity long ago exceeds 20bn zlotys (US$4.9bn). The ministry plans to write off almost 8bn zlotys mainly towards the budget and environment protection funds. Six billion zlotys worth of debt to ZUS insurance institution will be paid off in instalments between 2007 and 2017. A 13.7bn zloty debt to banks and suppliers should be paid. Without debt rescheduling the sector would go bust.
Kossowski believes that in view of falling demand for coal and high costs of its production extraction should be cut by 15bn tons by the end of 2006 which means that six or seven pits should be closed.
The programme envisages the growth of coal exports to 31.6m tonnes in 2006 from 23m tonnes in 2002.

Hydro project in government hands but energy plans uncertain

A US-Swiss consortium, Ortima Treuhand, submitted a letter of intent to the Infrastructure and Environment Ministries to invest in a US$3bn hydroelectric dam project for the lower Wisla River, the Warsaw Business Journal has reported.
If approved the project could be initiated as early as the end of this year, according to Bernard Kwiatkowski, the president of the Foundation for Lower Wisla Dams, which is representing the consortium in negotiations. The proposal describes the creation of a seven-point hydroelectric dam system set to run from Ciechocinek to Gdansk. The proposal also sees the consortium putting up 100% of the investment and using the latest available technology in the field.
"The consortium is hoping for feed-back as soon as possible and hopes to invest this year if all goes according to plan," Kwiatkowski said. "This is the first time we have had serious foreign investment for such a project." 
The foundation was set up in 1992 to exploit the lower Wisla's hydroelectric potential and encourage and develop investment opportunities. It was given until 2010 to deliver a viable project for the river.
But some environmental groups, such as the Polish division of the World Wildlife Fund, said that despite its renewable energy tag, hydroelectric power can be irreparable damaging to the natural habitat and biodiversity of the river.
Pressure from such groups has so far been a leading factor in the Environment Ministry's rejection of such plans, according to Stanislaw Golebiowski, the head of solar and hydro affairs at the EC Baltic Renewable Energy Centre (EC BREC).
"There are certainly many opinions regarding such a project and it's difficult to say," Golebiowski said. "Personally I am torn between the two. On one hand, it's the cleanest and most powerful of renewable energy sources. At the same time, there are great risks. If an accident occurred, it could see the pollution of the surrounding area, and it would also ruin the biodiversity of the river."
But Kwiatkowski was optimistic about the outcome of negotiations with the ministry, which he said were set to go ahead this week.
"As well as the obvious clean energy production, this will bring seven new bridges that will allow people to make more use of the A1, which runs along the Wisla," Kwiatkowsi said. "It will also make water and irrigation possibilities accessible to new parts of the country, which we would like to use for the growing of biofuel crops, such as rapeseed."
The Environment Ministry's director of water resources, Tomasz Walczykiewics, denied that any dialogue would take place in the near future between parties, but confirmed receipt of the proposal.

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Tax relief is planned for Poland

Poland's new finance minister on 26th July outlined his plans to kick-start the country's ailing economy, promising that as many as 250,000 jobs could be saved this year as ailing companies have tax arrears written off and new firms get tax relief, the Wall Street Journal Europe, has reported.
Grzegorz Kolodko, making his first policy speech to parliament, also pledged to nearly cut in half Poland's budget deficit within the next three years and boost economic growth ahead of 2004, when the country is expected to join the European Union. 
Mr Kolodko's "anticrisis" package, which still needs parliamentary approval, would see ailing companies' tax arrears written off on condition they provide restructuring plans by the end of 2003. Start-ups, meanwhile, would be allowed to defer tax payments in their early years.
Mr Molodko said the measures would help halt the growth of unemployment, currently at 17.4%, saving a quarter million jobs this year alone.
Prime Minister Leszek Miller's government, which took office last October, has suffered in polls amid deepening economic gloom. Mr Kolodko, has returned to a post he held from 1994-97, raising investor's concerns of a return to the high spending and widening budget deficit that marked his previous reign.
But he has taken care to damp those concerns and has sounded conciliatory towards the country's central bank, which he long criticized and which the government has pressured to make deep cuts in interest rates.
Mr Kolodko said he aimed to boost Polish economic growth to an annual 5% by the end of next year. He insisted that there was no contradiction between using tax incentives to curb unemployment and the central bank's goal of stabilising inflation.
Mr Kolodko was appointed early in July after the resignation of predecessors, Marek Balka, who said he felt "burned out."

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US heavy equipment maker to build US$27m plant in southern Poland

Caterpillar Poland, subsidiary of the US road and construction machinery giant, will build a 110m-zloty (27.2m) engineering plant in the Katowice Special Economic Zone, the zone's management said on 22nd July.
The plant, to produce parts for Caterpillar machinery manufactured in other countries, will stand on a 9-hectare site in Sosnowiec by Katowice and make use of production halls left over from a previous prefab home factory. When ready, it will provide 350 new jobs.
Four more new investors are expected in the Katowice Special Economic Zone this year.

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Poland has three months left to utilize PHARE 2000 funds from EU

Poland has three months left in which to present projects for funding from the remaining 60 per cent of its 2000 Phare tranche. If the deadline is not kept, the money (290m euros) will be lost, Krystyna Gurbiel, EU aid coordinator in Poland's Office of the European Integration Committee (UKIE), said on 25th July, PAP News Agency has reported.
In 2000, Poland was granted 484m euros in Phare aid, of which it has to date utilized 40 per cent.
Gurbiel told reporters that the government will make all possible efforts not to lose any of the funds (in 1999 procedural shortcomings cost Poland 10 per cent of its Phare aid). "Both sides are responsible for the delays," she said, adding that most of the difficulties in processing Phare aid lie in complicated procedures, badly-prepared projects and staff shortages.

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British, Polish ministers discuss EU enlargement, Russian exclave

Foreign Minister, Wlodzimierz Cimoszewicz, has told PAP News Agency that his 25th July visit to Great Britain focused on Poland's integration with the EU.
The minister said that both his interlocutors Home Secretary Jack Straw and Secretary of State for Trade and Industry Patricia Hewitt declared their strong support for Poland's aspirations and the conviction that Poland would manage to achieve what it wanted to achieve within the set deadlines.
The British officials assured Cimoszewicz that training of Polish local administration officials on how to use Know How funds would be continued so that they would be ready to perform their functions after Poland joins the EU.
According to Cimoszewicz, the talk with Straw covered a number of international issues including terrorism fighting, the situation in Afghanistan and the latest development in the]Middle East.
"We have also discussed in detail problems related to Kaliningrad. I presented our opinions and arguments which were received with understanding," the Polish foreign minister stressed.
He added that talks with Hewitt covered economic cooperation including British investments in Poland which have developed very well. Great Britain is Poland's 6th biggest foreign investor.
Cimoszewicz delivered a lecture on the EU after enlargement that, as he put it, concerned EU institutional reforms, the reform of common policies including agriculture and foreign including the policy towards eastern neighbours.

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Mill steels for the future with debt plan

The management of Polish Steel (PHS) will step up efforts to restructure the state steel holding's outstanding debts. The process, which must be finished before a tender for the sale of PHS can be announced, will be completed by the end of August, said Krystian Kozakowski, the vice president of PHS, the Warsaw Business Journal has reported.
The estimated zl.5bn (US$1.1bn) debt of Huta Kotowice (HK) and Huta Tadeusza Sendzimira (HTS), the largest mills comprising PHS, have caused friction with suppliers and contractors by limiting production and sales and have led banks to freeze accounts, stifling the mills' liquidity.
PHS steel mill managers will meet with creditors to place a repayment offer on the table aimed at wiping out the conglomerate's debt to state-owned entities, Kozakowski said.
"I would sum it up in one sentence: PHS is finally up and running," he said. "We are working in two directions - a financial, debt-reduction and prolongation of debts and one accompanied by the development, stabilisation and stimulation of sales."
HK and HTS will negotiate to reduce by 50% their debts to state sector firms, including coal and energy suppliers and Polish State Railways (PKP). Following an agreement with creditors, which must take place before 20th July, the Treasury Ministry will issue 160 million shares with a nominal value of zl.10 each, which will be sold to creditors for zl.20, said Jorslaw Szolinski, HK's spokesman.
The issue should wipe out zl.3.2bn (US$762m) of the conglomerate's debt and raise equity capital to zl.4.1bn (US$976m), he said.
"We will also ask our private suppliers and contactors to reduce the debts, although this will be subject to individual contracts," Szolinski said. "I can't say what level of reduction we will propose."
As a result of negotiations between KHK's banks and the Industrial Development Agency (ARP), the banks agreed to reduce the mill's zl.250m (US$60m) debts by 35% and accept five-year treasury-backed bonds issued by the ARP as repayment. The agreement will free KH's bank accounts, which have been frozen since February after the mill failed to keep up with repayments.
Further PHS debt was wiped out in mid-July when HTS creditors voted in favour of a settlement to write off 40% of zl.750m (US$178m) owed by the mill and repay the remainder in 20 instalments over five years.
Progress on restructuring PHS debt is a positive sign for steel conglomerate, LNM Holdings, registered in the Dutch Antilles, which has reaffirmed its interest in the privatisation of PHS.
"We are hoping that things will start to move ahead now," said Annanya Sarin, the director of corporate communications at LNM Holdings. "There is a need for these companies to be privatised to bring them in line with the standards of the global steel industry."
Although she would not comment on how current debt restructuring would influence LNM Holdings's privatisation offer, Sarin admitted that the firm's "due diligence will have to be to be revalidated."

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Polish shipyard, bank reach agreement on continuing to build ships

Pekao SA has agreed that Szczecin-based Stocznia Nowa SA shipyard should continue the construction of three ships started by the bankrupt Stocznia Szczecinska SA, PAP News Agency has reported.
"I think that the agreement will be finalized this week," Andrzej Stachura, the new shipyard CEO, told shipyard workers on 29th July. He did not disclose the value of the contract.
The new shipyard has been established on the basis of 30 companies making up the former Stocznia Szczecinska Porta Holding SA.

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Elektrim pushes back telecom sale

Elektrim will likely reschedule the deadline to mid-December for its exclusive negotiations with BRE Bank and Eastbridge for the sale of its 49% of telecom unit Elektrim Telekomunikacja (ET) and other holdings, analysts said, the Warsaw Business Journal has reported.
The agreement between the distressed telecom and power holding company, Poland's BRE Bank and Dutch retail and investment group, Eastbridge, expired on 22nd July, but the parties are likely to agree to a December 15th deadline, the date on which cash-depleted Elektrim would owe holders of its defaulted bonds a second €100m repayment, analysts said.
Elektrim defaulted on €480m bonds last December. The defaulted bonds are secured against the firm's 49% stake of ET, which controls Poland's biggest mobile operator Polska Telefonia Cyfrowa (PTC). Along with its 49% stake of ET, the sale package includes Elektrim's 49% of Fiat car dealer Carcom, which controls 1% of PTC, and one additional share of PTC.
The bondholders, who hold the bulk of Elektrim's debt, made an initial agreement with Elektrim in early June to accept a repayment plan proposed by company officials. Elektrim has said it expected to have a final agreement by mid-July. BRE previously said it would buy €100m of Elektrim's restructured bonds when the firm reached an agreement with bondholders. Elektrim would use the money for its first repayment to bondholders.
Elektrim can only sell its stake in ET to raise cash to repay its bondholders since BRE Bank, which owns about 20% of the firm, has said it wants to retain its power assets. Elektrim's 49% of ET is estimated to be worth about €350m.
"What Elektrim wants to do is have the bondholders off its back and offer them generous restructuring terms and come back to the negotiations (with BRE and Eastbridge)," said Dariusz Gorski, an analyst at ING Barings in Warsaw. "Otherwise anyone can pull the trigger and declare the company bankrupt."
The bondholders, who had threatened to drive Elektrim into bankruptcy, initiated legal proceedings against the firm earlier this year, although the resulting court-ordered restructuring talks failed. But because some creditors have appealed the matter to a regional court, Elektrim would not be able to make a legally valid repayment agreement with only a select group of its creditors until the higher court issues a decision, according to someone with knowledge of the situation.
Neither Marian Dabrowski, the vice president of ET, nor Alicja Kos, BRE's spokeswoman, was available for comment.
Another analyst said that a new deadline for the exclusive negotiations would be needed since BRE and Eastbridge could have trouble raising money for a telecom purchase in the current unfavourable environment for telecom investments.

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Poland, Russia agree on logistics centre for freight traffic from Asia

Poland and Russia have agreed that a terminal in Slawkow, south-eastern Poland, will become a logistics centre of trans-Asian freight traffic, Infrastructure Minister Marek Pol said on 27th July, PAP News Agency has reported.
"Our Russian partners see Slawkow as the best place for a logistics centre in view of the enormous amount of freight traffic from Asia to Europe," Pol told a press conference.
He said talks with Russian partners have been taking place since December. Final decisions were made during a June meeting of the Polish-Russian joint commission.
Pol added that the government wants to have some control over the investments. "I cannot conceal that we want to have control over the investment process. We are afraid to put the investment totally into private hands," said Pol.
He said that if freight traffic from Asia to Europe by wide-gauge railway continues to grow, than Slawkow will become one of Europe's largest dry ports.
The wide-gauge line runs through south-eastern and southern Poland and ends in Slawkow. The Polish stretch is some 400 km long.

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