Tariff Determination For Municipal Waste Management Power Projects in Pakistan

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Original Article

Waste Management & Research


1–6
Tariff determination for municipal waste ª The Author(s) 2020
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management power projects in Pakistan sagepub.com/journals-permissions
DOI: 10.1177/0734242X20916510
journals.sagepub.com/home/wmr

Mahmood Rehmani1 , Tahir Islam2, Munnawar Naz Khokhar3,


Umer Iftikhar4 and Mohsin Shahzad5

Abstract
Waste management is an emerging focus in Pakistan. Specifically, waste-to-energy (WtE) projects are conceived to obtain benefits
from municipal waste collection in metropolitan cities. This study provides a brief background of WtE potential, waste collection
statistics, type of generated wastes, and current measures to build the confidence of investors in WtE projects. In addition, a brief
overview of government efforts for WtE and delineation of licensing requirements for power generation are discussed. The parameters
laid down for the determination of tariffs for municipal waste management power projects and the cost accounted for each parameter
are analyzed in detail. Similarly, this study deliberates on observations among stakeholders and compares Pakistan tariffs with those of
neighboring countries.

Keywords
Waste management, waste-to-energy, renewable energy, solid waste management, power projects, tariff determination

Received 9th August 2019, accepted 21st February 2020 by Associate Editor David E. Ross.

Introduction (PPPs) are quite common in developing countries, given the effi-
cient availability of required resources using private company
The abrupt increase in municipal solid wastes (MSW) has
capital. In Pakistan, PPPs play an important role in improving
become a primary issue among policy-makers, environmental-
efficiency, providing timely financing and better services to the
ists, and industrialists worldwide and a starting point to enhance
public. These projects have deployed a state-of-the-art
the idea of power generation from MSW. Massive urbanization,
incineration-type electricity generation facility and the most suit-
economic development, and improved living conditions in met-
able WtE technology (Hamza, 2018). The first project of its kind
ropolitan cities have raised multiple environmental issues caused
has reduced 2000 tonnes of MSW from cities per day while
by solid wastes. For instance, MSW include agricultural, domes-
generating electricity, and thus seems like an immediate solution
tic, commercial, and miscellaneous disposals. In major metropol-
that can address the waste problems and energy needs of Paki-
itan cities of the world, waste-to-energy (WtE) has been
stan. Accordingly, NEPRA (National Electric Power Regulatory
recognized as a sustainable approach to generate electricity.
Authority, 2018) has already announced a Competitive Upfront
Moreover, WtE is considered one of the best strategies to solve
Tariff for WtE projects based on a 25-year operational period
severe environmental issues caused by extensive and hazardous
with an overall capacity cap of 250 MW. The four Pakistan
MSW. In Pakistan, the growing middle-class income and rapid
urbanization have produced thousands of tonnes of solid wastes
1
each day. Additionally, poor management, low infrastructure to Department of Management Sciences, Faculty of Management and
gather and shift, and high corruption rate are the primary causes Administrative Sciences, University of Sialkot, Pakistan
2
School of Economics and Management, Tongji University, Shanghai,
of the accumulation of solid wastes within metropolitan cities. People’s Republic of China
3
Accordingly, Narayana (2009) found that MSW are responsible Department of Management Sciences, COMSATS Institute of
for poor health conditions and environmental problems within Information Technology, Islamabad, Pakistan
4
Department of Leadership and Management Studies, Faculty of
these cities. Contemporary Studies, National Defence University, Islamabad,
In line with its efforts to promote renewable and indigenous Pakistan
5
resources for power generation (Rourke et al., 2009), the National School of Economics and Management, Dalian University of
Technology, Dalian, Liaoning, People’s Republic of China
Electric Power Regulatory Authority (NEPRA) Pakistan has
granted a generation license to a private company, Lahore Xingz- Corresponding author:
hong Renewable Energy Company (Private) Ltd., to establish a Tahir Islam, School of Economics and Management, Tongji University,
Building A, Tongji Building, No. 1500 Siping, Shanghai, 200092,
40-megawatts (MW) WtE-based power plant at Lakhodair, dis- People’s Republic of China.
trict Lahore (Khunshan, 2018). Public–private partnerships Email: kktahir@hotmail.com
2 Waste Management & Research XX(X)

provinces and the federal territory are limited to shares of 50 MW number of wastes has the potential to generate up to 5000 MW of
each. Successful implementation of these projects is expected to power.
pave the way for similar initiatives to solve pressing waste dis- This potential has drawn extensive interests from domestic
posal problems and challenges of limited space for landfills and and international investors. For example, the World Bank has
gas emissions, resulting in cleaner cities and healthier lifestyles. funded a project to carry out a detailed study for biomass/WtE
Given its rapid industrialization and urbanization, Pakistan projects in 20 Pakistan cities. A similar study that can generate up
faces difficult challenges due to heightened quantity and con- to 10 MW of energy is being carried out for Karachi. The AEDB
stantly varied composition of solid wastes produced by increas- has also issued a letter of intent to establish a 12-MW biomass-to-
ingly high consumerism and a growing population. At present, energy project in the province of Sindh, which would be based on
policy-makers, environmentalists, and citizens consider MSW as bagasse and agriculture wastes. Similar plants are also being
a primary topic that requires serious attention from the govern- considered in Punjab, the largest province of Pakistan in terms
ment for proper management. Despite considerable research on of population.
MSW in developed nations, such studies are limited in Pakistan. Ghauri (2018) presented a report on WtE potential in Pakistan
To highlight this topic, the present study proposes several con- during the Expert Group Meeting on Sustainable Application of
tributions in the context of Pakistan’s cities. First, MSW in Paki- WtE in the Asian Region held on 22–23 February 2018 at Busan,
stan, where poor handling of solid waste adversely affects the Republic of Korea. This expert meeting was organized under the
environment and citizens’ health conditions, is analyzed. Second, patronage of the United Nations Office for Sustainable Develop-
the tariff determination in relation to MSW is explored in detail. ment. Sadef et al. (2016) found that Pakistan, with a population of
In summary, this study aims to explore the earnestness of the 209,970,000 and density of 244.4/km2 (633.0/square mile), gen-
GOP (Government of Pakistan) toward WtE projects, suitability erates approximately 20 million tonnes of solid wastes per year,
of policies, potential, and the environment for future WtE proj- at an increasing rate of over 2% annually. The GOP estimated
ects. Specifically, this study focuses on MSW to capture interna- that 71,000 tonnes of solid wastes are generated per day, mainly
tional investors’ attention and stimulate their interests in working from major metropolitan areas. Karachi, Pakistan’s largest city
on such projects under PPPs. In addition, the current situation of with a population of 20,500,000, generates approximately 9440
MSW in metropolitan cities is highlighted to help policy-makers, tonnes of municipal wastes daily. Solid waste generation in Paki-
world agencies such as the World Bank, non-governmental orga- stan ranges between 0.283 and 0.612 kg/capita/day, and the waste
nizations, and other organizations that invest in projects related to generation growth rate is 2.4% per year (Korai et al., 2017).
MSWs. Furthermore, the findings of this study provide a guide- Lahore, the second largest city with a population of
line on significant parameters that require extensive attention 10,000,000, generates 6510 tonnes of solid wastes per day. MSW
while operationalizing WtE projects in Asian countries. in Pakistan are mainly composed of ash, bricks, dirt (18%), glass
(6%), textile (2%), cardboard (7%), food wastes (30%), leather
(1%), paper (6%), plastic (9%), rubber (1%), metal (4%), wood
(2%), and yard wastes (14%).
Background of WtE in Pakistan
The Renewable Energy Policy (Government of Pakistan, 2006)
only focused on solar, wind, and hydro sources. Therefore, the
Highlights of the first 40 40-MW WtE project
Alternative Energy Development Board (AEDB), in consultation awarded with generation license
with all provinces and 199 other energy stakeholders, updated Punjab, the largest province in Pakistan in terms of population,
and presented a revised Alternative Renewable Energy Policy in has taken the lead in conducting a feasibility study for a 40-MW
2012. Wind, solar, hydro, bagasse, co-generation, WtE, and geo- WtE project in Lahore, the provincial capital. NEPRA Pakistan, a
thermal energies are included, providing extremely attractive power regulatory authority, has accepted an application from a
financial and fiscal incentives to local and foreign investors while private company, Lahore Xingzhong Renewable Energy Com-
offering a level playing field (Ministry of Finance, Government pany Ltd., for a generation license for the 40-MW MSW power
of Pakistan, 2013). The GOP’s commitment to develop alterna- project to be constructed at Lakhodair, a site in the suburbs of
tive renewable energy sectors and the AEDB’s extensive efforts Lahore. NEPRA announced the first upfront tariff for MSW
paved the way for significant development of a considerable WtE power projects (Business Recorder, 2018) at 9.8257 US cents,
base in the country. and has allowed a project cost of US $3.5 million per MW. This
The current condition of Pakistan’s major cities, including amount seems to be reasonable and comparable to other projects
Quetta, Peshawar, Karachi, and Lahore, confirms the fact that in neighboring countries. The project aims to have an installed
MSW has become a major challenge for the metropolitan gov- capacity of 40 MW with two turbine generators of 20 MW each,
ernment. This problem is worsening especially in the wake of and the total cost is US $220 million. The project is expected to
rapid urbanization in the country. According to the Ministry of start commercial operation by the end of the year 2022, wherein
Finance, Government of Pakistan (2013), the country produces its generated electricity would be fed to the national grid of
up to 50,000 tonnes of MSW and agricultural wastes per day, Lahore Electricity Supply Company 132/11 kilovolts (kV)
including rice husks, cotton sticks, and bagasse. This enormous Mominpura. To undertake this proposed project of the Punjab
Rehmani et al. 3

Table 1. Generation tariff for refuse derived fuel power project.

Tariff components Rs. /kWh WACC

1–10 11–30 Levelized 1–15 16–30 Levelized Levelized

FCC 3.5294 3.5294 3.5294 3.5294 3.5294 3.5294 3.5294


Variable O&M –foreign 0.2526 0.2526 0.2526 0.2526 0.2526 0.2526 0.2526
Variable O&M – foreign 0.2526 0.2526 0.2526 0.2526 0.2526 0.2526 0.2526
Variable O&M – local 0.1684 0.1684 0.1684 0.1684 0.1684 0.1684 0.1684
Fixed O&M – local 0.2807 0.2807 0.2807 0.2807 0.2807 0.2807 0.2807
Insurance 0.1754 0.1754 0.1754 0.1754 0.1754 0.1754 0.1754
Working capital 0.0230 0.0230 0.0230 0.0230 0.0230 0.0230 0.0230
ROE/WACC 0.9665 0.9665 0.9665 0.9665 0.9665 0.9665 0.9665
Debt servicing/depreciation 2.7666 1.8033 2.2311 1.8001 0.7871
Total 8.1627 5.3961 7.1994 7.6271 5.3961 7.1962 7.0592
Fixed O&M: fixed operational and maintenance expense; FCC: fixed capacity charge; ROE: return on equity; WACC: weighted average cost of
capital.

Table 2. For municipal solid wastes technology generation tariff.

Tariff components Rs. /kWh WACC

1–10 11–30 Levelized 1–15 16–30 Levelized Levelized

FCC 1.7647 1.7647 1.7647 1.7647 1.7647 1.7647 1.7647


Variable O&M – foreign 0.3400 0.3400 0.3400 0.3400 0.3400 0.3400 0.3400
Variable O&M – local 0.2267 0.2267 0.2267 0.2267 0.2267 0.2267 0.2267
Fixed O&M – local 0.3778 0.3778 0.3778 0.3778 0.3778 0.3778 0.3778
Insurance 0.2361 0.2361 0.2361 0.2361 0.2361 0.2361 0.2361
Working capital 0.0461 0.0461 0.0461 0.0461 0.0461 0.0461 0.0461
ROE/WACC 1.2635 1.2635 1.2635 1.2635 1.2635 1.2635 1.2635
Debt servicing/depreciation 3.6169 2.3576 2.9168 2.3534 1.0291
Total 7.8717 4.2548 6.6123 7.1716 4.2548 6.6082 6.4483
Fixed O&M: fixed operational and maintenance expense; FCC: fixed capacity charge; ROE: return on equity; WACC: weighted average cost of
capital.

government, three Chinese companies, including China ENFI The estimates for the NEPRA generation tariff explain the
Engineering Corporation, MCC Tongsin Resources Co. Ltd., and project cost. Tables 1 and 2 show the two project estimations for
Chengdu Xingrong Environment Co. Ltd., have established a discussion, deliberation, and input from all stakeholders. NEPRA
new special purpose vehicle (SPV) company named Lahore has estimated US $1.3 million per MW for RDF power projects
Xingzhong Renewable Energy Ltd. This SPV company would and US $1.7 million for MSW power projects. Additionally, the
be responsible for the investment, construction, operation, and annual plant factor is 75%, insurance is estimated 1% of engi-
transfer of WtE projects. neering, procurement and construction (EPC) cost, debt–equity
structure of the estimated plants is 75:25, internal rate of return
(IRR) is 15%, and the Karachi Interbank Offered Rate is 3%. The
Upfront tariff for MSW power projects in exchange rate varies and is calculated at the time of agreement.
Pakistan The estimated project debt period for repayment is 10–15 years,
and the weighted average cost of capital (WACC) is assumed to
Under the Tariff Standards and Procedure Rules 1998 and be 11.30% for 30 years. Similarly, the estimated efficiency for
Upfront Tariff Regulations 2011, NEPRA began proceedings to both plants is 29.24%. Notably, calorific value of 9918.597 btu/
determine new upfront tariffs for electricity generation from kg is assumed for solid WtE power projects. In addition, a fuel
MSW power projects in February 2017. Accordingly, NEPRA price of Pakistan rupees (Rs.) 1500/tonne is assumed for MSW
released an advertisement in the press on 25 February and 5 power plant and Rs. 3000/tonne for RDF technology including
March 2017 to seek comments, views, and information from freight.
various stakeholders. Two intervention requests were received Specifically, the proposed MSW technology generation tariff
from Whistle Blower and Anwar Kamal Law Associates. The is shown in Table 2.
proposed generation tariff for refuse derived fuel (RDF) power A third-party observer, Anwar Kamal Law Associates
projects is given in Table 1. (AKLA), considered that the upfront determination is
4 Waste Management & Research XX(X)

mismatched with the least cost generation plan and lacks the functions of waste collection, dumping, and disposal of wastes,
provision of stakeholder participation. AKLA added that effi- whereas the cost of electricity generation could be placed on end
ciencies of new technology are low, and owing to the unavail- consumers. Consequently, prudent project cost required evalua-
ability of fuel, the power plants may not attain the desired factor. tion for the incineration power plants. The per-unit tariff for the
Furthermore, AKLA questioned the consideration of a costlier MSW power plant in Turkey was 13/kWh US cents, whereas that
power plant, low plant factor, and low-efficiency technology of the MSW Beijing power plant was approximately 10/kWh US
when more efficient plants are available in the market. cents and US $4 million per MW. NEPRA assessed the project
Other stakeholders likewise commented on the proposed cost of US $3.5 million per MW for MSW power plants, which
upfront tariff. The Energy Department of Khyber Pakh- included Energy Performance Certificate (EPC) US $2.4815,
tunkhwa government desired an initial environmental exami- non-EPC US $0.6049, custom duties and cess (a form of tax
nation and impact assessment report for review. The Energy charged/levied over and above the base tax liability of a taxpayer)
Department of Sindh Province highlighted the utilization of (5.95%) US $0.1476, and financing fees US $0.2660. The debt-
alternative energy technologies other than wind and solar. to-equity ratio of 75:25 was considered for MSW energy projects
This department also welcomed the availability of an upfront at the nascent stage in Pakistan (Sadef et al., 2016).
tariff for solid WtE power projects, which would save time in The State Bank of Pakistan approved a 6% flat rate with a
solving energy crises and similarly attract investments. The debt-servicing period of 10 years for renewable energy projects.
Hyderabad Electric Supply Company supported the initiative NEPRA considered this rate as a financing facility that would be
of NEPRA and suggested that the fixed cost component for made available to interested sponsors, given that renewable
RDF should be the same as that of MSW. Return on equity/ energy power plants have a capacity of 1–50 MW. However,
WACC for solid waste power plants needs to be reviewed on such financing required mandatory completion of prescribed
the basis of project life, and IRR may also be divided equally requirements of the AEDB and other public sector organizations,
into 30 years. The Lahore Waste Management Company sug-
and compliance to Renewable Energy Policy. The Renewable
gested that the project cost is low, efficiency is in the inter-
Energy Policy 2006 is applicable to MSW power projects, and
national range of 20–25%, and calorific value is low against
the tariff has also been finalized on the same basis. The upfront
the proposed figure due to greater moisture of garbage con-
tariff may be adjusted in case of installation of similar projects on
tent. In addition, IRR of 15% for a renewable energy project
commercial financing terms. However, adjustments are consid-
is low because the aim is not only to produce electricity but
ered only after exhausting the financing facility as available
also to preserve the environment.
under the State Bank of Pakistan.
Another commentator, the Waste Busters, emphasized that
The time period of 2 years was considered reasonable for the
NEPRA should give due consideration to several factors while
project construction. Each of the four provinces has been allowed
determining the tariff. These factors included no dumping fee,
to install 50 MW capacity MSW projects to avail of the instant
non-disclosure of various project development costs, duties on
upfront tariff. Similarly, 50 MW maximum cap was awarded to
imported equipment, financial and other professional fees in cost
Islamabad Federal Territory. Given the mixed fuel and operation
parameters, and financial modeling. The Waste Busters pointed
and maintenance issues, the 5% operation and maintenance cost
out that the capital cost of WtE projects typically ranges from US
of an MSW power plant was allowed. 15% of auxiliary consump-
$2.5 to US $3.0 million per MW, which is twice as much as the
tion was assessed with a tariff control period of 25 years from the
cost of power generated by gas-fired solar and other feed-stock
system power plants. Auxiliary expenses on compliance with date of commercial operations.
Table 3 shows the NEPRA approved tariff for MSW power
emission control norms, MSW feeding/recovery system, and ash
extraction system consume at least 16% gross power generated projects. This tariff is applicable for the next 25 years from com-
by the project, which is a generally high amount. Furthermore, mercial operation date, but only applicable to MSW power proj-
the efficiency range is 26–30% compared with other types of ects. In addition, for the estimated projects, the discharge
renewable energy plants. criterion is the energy charge.
NEPRA deliberated and considered the observations of such The approved tariff is valid for all new MSW power projects.
commentators and interveners. The project cost was also com- Only those companies that are eligible for such an upfront tariff
pared with similar MSW projects in Europe, Turkey, and neigh- are recommended by the AEDB and other related government
boring countries. The choice of technology and emission control agencies. The companies also certify the newness of the installed
standards were noted to be the major drivers of the US $2.5 to US plant machinery and its conformity with international standards.
$6 million project cost, derived by the authorities on the basis of Once exercised, the decision of sponsors to opt for an upfront
information and data available on incineration power projects. tariff is irrevocable. The power producers could offer electricity
The cost depends upon the size, type of technology, features of to the respective distribution company at 11 kV or 132 kV. The
solid waste, and emission control standards. approved upfront tariff does not consider the carbon emission
Given that the core objective of the WtE plant was environ- factor. Moreover, upon actual realization of carbon credits, the
ment cleaning, NEPRA stated that the project should cater to revenue is distributed between the power producer and the power
emission hazards. Furthermore, the plant should perform purchaser.
Rehmani et al. 5

Table 3. NEPRA determined and approved the following upfront tariff for municipal solid waste power projects for delivery of
electricity to the power purchase.

Tariff components Municipal solid wastes incineration power projects Indexation

1–10 11–25 Levelized

Rs. /kWh
Variable O&M – foreign 0.2100 0.2100 0.2100 US CPI and PKR/USD
Variable O&M – local 0.3149 0.3149 0.3149 CPI general
Rs. /kW/hr
Fixed O&M – local 1.2248 1.2248 1.2248 CPI general
Insurance 0.3499 0.3499 0.3499 PKR/USD
ROE/ROEDC 2.2272 2.2272 2.2272 PKR/USD
Debt servicing 4.9494 – 3.3504 LIBOR/KIBOR and PKR/USD (if applicable)
Levelized tariff – Rs. /kWh 12.4562 5.5941 10.3170
Levelized Tariff – US cents/ 11.8630 5.3277 9.8257
kWh
Fixed O&M: fixed operation and maintenance component of tariff; CPI: the applicable revised Consumer Price Index; revised ROE component of
tariff; ROE: return on equity; KIBOR: Karachi Interbank Offered Rate; PKR: Pak Rupee; USD: American Dollar.

Critical review of WtE in Pakistan In awarding the license to generate electricity, concerned
authorities focus on environmental cleaning and only a design
Solid waste management is a matter of grave concern in Pakistan
guideline has been given to ensure that the plant caters to the
as casualties reach approximately five million citizens each year
emission hazards. The incentive for sorting with the objective of
due to diseases caused by wastes. Similar to those of other devel-
recycling is missing and may hamper the recycling activities in
oping nations, the metropolitan areas in Pakistan are inundated by the country. According to the GOP Ministry of Environment,
a wide range of economic, legislative, cultural, and social issues. plastics account for an average 9% of the total generated waste.
The generated waste is considerably greater than the number of Most of the plastic and metal-based materials, except for shop-
waste management facilities and landfill sites. Consequently, ping bags, are collected by scavengers for recycling before the
wastes are piling up along roadsides, canals, and open areas. waste reaches the landfill or dumping site. However, all the
Among the few landfill sites that remain available, even fewer energy produced from all types of waste, including plastics, is
are in operation. Even in Islamabad, the capital of Pakistan, no now considered renewable. These recycling processes therefore
permanent landfills are to be found. Wastes on the roads are a need attention in future similar projects. Additionally, the sorting
constant threat to humans, the environment, and other living of solid wastes needs promotion in the metropolitan cities of
creatures’ health. Such poor solid waste management causes var- Pakistan. Currently, consumers do not carry out sorting, and sin-
ious diseases and environment-related issues (Hameed et al., gly waste bins are made available to collect garbage. However,
2020; Lew, 2019). Due to a limited budget, the GOP is being sorting at the fundamental level of households can reduce the
criticized for spending billions on garbage disposal, whereas lim- effect of air pollution caused by the incineration and encourage
ited funds are available for people’s health. Even after spending recycling.
billions, heaps of garbage and litter are seen everywhere around
Lahore City (Yasir, 2018). Waste disposal to generate energy
would lessen this pressure on metropolitan governments to Conclusion
develop landfill sites and concentrate more on waste collection. This study focused on solid waste management, which has been a
Moreover, the national grid has a demand and supply gap; rele- difficult challenge for the governments in all four provinces of
vant authorities are constantly working on alternate approaches to Pakistan. The federal government has only recently taken con-
generate electricity without relying on expensive imported petro- crete steps to convert this challenge into an opportunity, and the
leum products, which is already a matter of grave concern for the first license for installation of the WtE plant has been awarded.
economy and balance of trade. Although the capital cost of WtE Accordingly, the upfront tariff has also been defined for this first
plants is almost twice that of energy generated by solar, gas-fired, and upcoming similar WtE projects across Pakistan. The total
and other feed-stock system power plants, the GOP Ministry of potential of installation of similar plants in other provinces has
Petroleum and Natural Resources has supported the usage of also been demarcated. The award of a first power generation
municipal wastes for electricity generation in their comments license to a WtE plant has not only paved the way for other
with respect to awarding the first license for installation of a WtE similar projects but also defined tariff parameters for power pur-
plant (Hameed et al., 2019). This project would not only reduce chasers from WtE power producers.
reliance on gas generation but also bridge the gap between elec- Furthermore, this study highlights detailed deliberation on
tricity demand and supply. observations from various stakeholders before issuance of a
6 Waste Management & Research XX(X)

license, which provides a thorough understanding of the issues Funding


that may arise in developing economies in terms of tariff deter- The authors received no financial support for the research, author-
mination and installation of WtE plants. Similarly, countries ship, and/or publication of this article.
interested in WtE projects need to assess the issues involved in
waste collection, dumping facilities, and available amount of ORCID iD
wastes that can be used for incineration. Potential investors could Mahmood Rehmani https://orcid.org/0000-0003-0968-8588
be attracted by assessing the potential of WtE projects near big References
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The authors declared no potential conflicts of interest with respect to Tribune, 17 February 2018. Available at: https://tribune.com.pk/story/
1637088/1-solid-waste-management-costs-exchequer-rs9b/ (accessed 16
the research, authorship, and/or publication of this article.
November 2019).

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