Localisation progress report by Auditor-General, PRASA, National Treasury, DTI

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Trade and Industry

05 March 2019
Chairperson: Ms J Fubbs (ANC)
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Meeting Summary

The Portfolio Committee had a tightly packed agenda as the intention was to close off on localisation so that the Committee could prepare an interim report on the topic. The Department of Trade and Industry, National Treasury, the Office of the Auditor-General and PRASA briefed the Committee on progress and challenges in localisation.

The Department of Trade and Industry provided specific details of products designated for local production and the verified totals of designated products procured. It was pointed out that products were designated, not tenders, and so implementation was expected, regardless of the method of procurement. The South African Bureau of Standards had declared the technical specification on the Measurement and Verification of Local Content (SATS 1286:2011) a National Standard although the delays in verification still created challenges.  The Department was also working closely with the Office of the Auditor-General and Proudly South African to monitor non-compliance.

The Department referred to Section 14 of the Preferential Procurement Policy Framework Act Regulations, 2017, that allowed for remedies where there was non-compliance. The 2011 Regulations had not addressed non-compliance. The impeding Public Procurement Bill created an opportunity to strengthen the leveraging of public procurement to support transformation, economic and industrial development.

National Treasury briefed the Committee on the new reporting framework to ensure that departments and entities complied with local content and production requirements. The reporting framework would glean information from organs of state relating to the implementation of the requirements of the regulations. National Treasury was responsible for development and administration of public procurement prescripts while DTI was responsible for implementation and monitoring of Industrial Policy, including conducting studies on local production and content, and monitoring the implementation and awareness via circulars.

The Office of the Auditor-General discussed the impact on supply chain management processes and noted that there were several points in a tender process when the local content requirement could and should be checked. The Auditor-General normally audited local content as part of the compliance audit and had added new key requirements to be tested. They included the requirement that the procuring institution should have defined and implemented measures to monitor that the supplier was delivering goods that complied, and the defined monitoring measures were sufficient to ensure effective contract monitoring of compliance by the supplier.

According to the Office of the Auditor-General, the supply chain management findings during the audits indicated that in 13% of audits, the bid documentation did not stipulate the minimum threshold for local production and content. In 2017/18, 67 out of 131 auditees had failed to comply with requirements on the promotion of local productions and content on awards amounting to R 450 million.

PRASA had prepared an extensive presentation with many visual illustrations on its Rolling Stock Fleet Renewal Programme and the Economic Development Achievements. However, the Committee was merely looking for an update on the issue of local content and production as the Committee had recently been briefed by PRASA. PRASA informed the Committee that the Rolling Stock Fleet Renewal Programme had created 65 000 direct and indirect jobs. The focus was on industrialisation through long term procurement aiming for above 65% of the value of a coach to be produced locally. A contract to the value of R 59 billion for 600 new trains, i.e. 3 600 vehicles, had been issued. The project had a 15-year delivery programme.

PRASA also referred to the supplier development and support programme of the contractor, PRASA’s bursary scheme and Mathematics and Science programme.

Members asked what processes and plans the Department and National Treasury were putting in place to prevent billions of Rand that was meant for South African companies from leaving the country. The Committee wanted an assurance that it would never happen again.

Members asked how government could use tools, such as strategic planning, to embed local content and local production. National Treasury had called for procurement plans but how credible were the procurement plans? What was the input of National Treasury and DTI in those procurement plans? What was the role of the South African Bureau of Standards in certifying that a product was actually a South African product? The local content programme had been declining and results had worsened over the past two years. Was there anything that could be done to stop the trend? What capacity did DTI have to follow up on the policies that it was supposed to monitor? Where an entity did not provide a report, did DTI have the capacity to deal with those issues?

Members also asked which Department was dealing with non-compliance and who was ensuring that enforcement of the local content requirement legislation was adhered to. Had there been any remedial action in the PRASA train contract as the country had lost a lot of money with that contract?

One Member asked about the absorption of youth in PRASA’s Ekurhuleni factory. How many bursaries had PRASA provided in 2019?

Meeting report

Opening remarks
The Chairperson noted that the intention for the meeting was to close off on localisation so that the Committee could prepare the interim report on the topic. The issue would also be included in the legacy report for it to be picked up by the next Committee.

She noted that many Members were engaged with party business, and she and Mr Mahlobo would be leaving for a strategy meeting at 12:30. However, the agenda was very full, and she asked that questions be succinct and without preambles.

The Chairperson welcomed the team from the Department of Trade and Industry (DTI): Acting Group Chief Operating Officer, Ms Ntombi Matomela, Acting Deputy Director-General (DDG) for the Industrial Development Division, Ms Thandi Phele, Chief Director: Industrial Procurement, Dr Tebogo Makube, and the Industrial Development Policy and Strategy Advisor in the Office of the Director-General Dr Nimrod Zalk.

The Chairperson informed the meeting that the briefing by DTI would be followed by briefings by the Office of the Auditor-General, National Treasury, and PRASA.

Briefing on the Localisation Drive by DTI
Ms Phele said that as DTI concluded the conversation with the Committee on localisation, the presentation would refer to the high-level procurement levers, information about those products designated for local production and how the policy had been implemented. The presentation also looked at the progress made, the challenges experienced and the remedies for non-compliance. The Department would conclude by addressing key areas of opportunity for localisation. She noted that DTI had worked well with the Office of the Auditor-General and with National Treasury on localisation issues.

Dr Makube reminded the Committee about the key procurement levers:
-Government purchasing power through public procurement
-National Industrial Participation Programme
-Defence Industrial Participation
-Competitive Supplier Development Programme managed by the Department of Public Enterprises in conjunction with State Owned Companies
-Designation and Local Production
-The Renewable Energy Independent Power Producer Procurement Programme.

Dr Makube provided specific details of products designated for local production and the verified total of designated products procured.  He stated that products were designated, not tenders, and so implementation was expected, regardless of the method of procurement.

The South African Bureau of Standards had declared the technical specification on the Measurement and Verification of Local Content (SATS 1286:2011) a National Standard, although the delays in verification still created challenges.  DTI was also working closely with the Office of the Auditor-General and Proudly South African in monitoring implementation of the localisation requirements and non-compliance.

Dr Makube referred to Section 14 of the Preferential Procurement Policy Framework Act Regulations, 2017, that allowed for remedies where there was non-compliance. The 2011 Regulations had not addressed non-compliance.
The Automotive, Clothing and Textile Master Plans, as well as the Rail Rolling Stock exports to the African continent, provided an opportunity to deepen localisation. Properly implemented, that would integrate local manufacturers and suppliers into the global value chain of original equipment manufacturers.

The impending Public Procurement Bill created an opportunity to strengthen the leveraging of public procurement to support transformation, economic and industrial development.

The Chairperson stated that she would take questions.

Mr D Mahlobo (ANC) noted that the presentations were inter-related and asked that all presentations be made before any discussion took place.

This proposal was accepted.

The Chairperson welcomed the Deputy Business Executive Mr Fhumulani Rabonda, Audit Manager Mr Sizwe Nxumalo, and Senior Manager Mr Mthokozisi Sibisi from the Office of the Auditor-General (AGSA).

Presentation on the Audit of Local Procurement by the Office of the Auditor-General
Mr Rabonda discussed the impact on supply chain management processes. He noted that there were several points in a tender process when the local content requirement should be checked: Demand Management, Bid Specification, Submission of Bids, Evaluation of Bids, and Contract Management. There was no reason for non-compliance with local procurement if each process addressed the local content requirement.

The AGSA normally audited local content as part of the compliance audit. Newly introduced requirements included the requirement that the procuring institution had to have defined and implemented measures to monitor that the supplier was delivering goods that complied, and the defined monitoring measures were sufficient to ensure effective contract monitoring of compliance by the supplier.

Mr Rabonda stated that supply chain management findings indicated that in 13% of audits, the bid documentation had failed to stipulate the minimum threshold for local production and content. In 2017/18, 67 out of 131 auditees failed to comply with requirements on the promotion of local productions and content on awards amounting to R 450 million.

The Chairperson welcomed the National Treasury team from the Office of the Chief Procurement Officer: Ms Mpho Nxumalo, Acting Chief Director for Supply Chain Management Policy and Legal and Ms Leanda Pietersen, Director for Supply Chain Management Policy and Legal.

Presentation on the Inquiry into Compliance with Localisation and Local Public Procurement by National Treasury
Ms Nxumalo briefed the Committee on the new reporting framework to ensure that departments and entities complied with local content and production requirements. The reporting framework would glean information from organs of state relating to the implementation of the requirements of the regulations.

Current instructions or circulars on designated sectors required Accounting Officers and Accounting Authorities to provide to the DTI information on procurement involving designated sectors, including copies of the contract and standard bidding documents. DTI was required to conduct compliance audits and to monitor the implementation of the industrial development strategies. Service providers that experienced challenges in meeting the stipulated minimum threshold for local content were required to inform DTI.

Ms Nxumalo explained that National Treasury was responsible for development and administration of public procurement prescripts while DTI was responsible for implementation and monitoring of Industrial Policy, including conducting studies on local production and content and monitoring the implementation and awareness via circulars.

The Chairperson welcomed the Group Executive from PRASA, Mr Piet Sebola, and from the Department of Transport, Acting DDG: Rail Transport, Mr J de Villiers, and Acting Chief Director: Rail Infrastructure, Ms Constance Maleho.

PRASA had prepared an extensive presentation with many visual illustrations on its Rolling Stock Fleet Renewal Programme and the Economic Development Achievements. However, the Committee was merely looking for an update on the issue of local content and production as the Committee had recently been briefed by PRASA.

Presentation by PRASA
Mr Sebola informed the Committee that the Rolling Stock Fleet Renewal Programme had created 65 000 direct and indirect jobs. The focus was on industrialisation through long term procurement aiming for above 65% of the value of a coach to be produced locally. The Manufacture and Supply Agreement had been contracted to a contract value of R 59 billion (including VAT, and excluding inflation) for 600 new trains, i.e. 3 600 vehicles. 20 of the trainsets came from a plant in Brazil and 580 train sets would come from a local factory. The project had a 15-year delivery programme.

Local content was measured throughout the supply chain, i.e. up to the raw materials used within a component. Local content requirements meant that South African value-add on components was measured, i.e. if the raw material was foreign, but there was local manufacturing, only the local manufacturing portion would count as local content. Gibela, the contractor, would require companies within its supply chain to have local content commitments on their products.

Mr Sebola pointed out that the construction of the factory at Dunnottar Park, Ekurhuleni, had advanced since the last report on it. The construction of the Training Centre and main car-body shell building was complete. Basic operations, including testing of manufacture processes, had begun in January 2018. The Supplier Park was a critical enabler for the development of a central industrial rail hub which would support localisation. Seven companies already had in-principle agreements to move to facilities in the Supplier Park. He also provided details of Gibela’s Supplier Development and Support programme.

Mr Sebola informed the Committee that since the inception of the programme, Gibela had contracted 650 bursars and spent R 51 million on the bursaries. The gender distribution for bursary candidates was 46% female and 54% male. 43% of bursary holders were at university and 57% were students at Technical and Vocational Education and Training institutes.

The school Maths and Science Programme had proved a success with 17 schools in the Ekurhuleni district, and a further two schools in Tshwane and Soweto participating. 450 learners had engaged in the programme in 2016 and an additional 150 learners each year post 2016.

The Chairperson called for questions and comments.

Discussion
Mr A Williams (ANC) thanked all the presenters for their input. He noted that it was always the Auditor-General that stepped up to the plate with information for Committees. In his nine and a half years in Parliament, he had found that the AGSA was the best tool in the arsenal of oversight. The Committee had heard all about state capture and corruption before and years later the Auditor-General stated that of 131 entities, 67 entities had failed to meet the requirements. What processes and plans were DTI and National Treasury putting in place to prevent billions of Rand that was meant for SA companies from leaving the country? The companies appointed did not provide jobs but just imported everything.

The Committee also wanted the answer in writing to prevent it to happening again. The corruption had happened on the watch of that Committee and everyone had to take some responsibility. And it should never ever happen again.

Mr Mahlobo thanked the presenters. He had hoped that people would be more succinct and could say what the policy intent was and what had been learnt because the results were not the desired results.
One piece of legislation was about procurement and then there were tenders. The Auditor-General did a good job, but it was always in the past tense. How was government addressing local content and local production? Government needed to look at both local content and local production. The words should be used synonymously.

From a pro-active point of view, Mr Mahlobo said that one should ask where government should intervene. All departments used the medium-term strategic framework for planning. How did one use that tool to embed local content and local production? Departments were currently planning for their five-year strategic plan, including the Annual Performance Plans. When did one use the Department of Planning, Monitoring and Evaluation to assess those plans? It was very important that that was done. The question had to be asked: How could one use performance agreements as a tool to ensure a change in culture when it came to procurement?

Mr Mahlobo added that there was also the question of capacity. The Auditor-General had reported on the performance issues while National Treasury called for procurement plans. But how credible were the procurement plans? What was the input of National Treasury and DTI in those procurement plans? One could not hold people accountable unless one had the correct instrument to do so. What about the capacity of those people who spoke of local content? From a technical point of view, did people know what was meant by local content? What was the role of the South African Bureau of Standards to certify that a product was actually a South African product? Using the word ‘component’ was often obfuscation. What was the end game?

Mr Mahlobo noted that most technical tenders were done by technical experts from the service providers but then one had the Bid Evaluation Committee and the Bid Adjudication Committee where those committee members had no technical knowledge. So, what were the balances and checks in that system? To put balances and checks in the system at that point would be the proactive part.

Finally, Mr Mahlobo liked what the Auditor-General had presented as the end part. The end point had to be used for two purposes: the consequences for failure to adhere to regulations, and for improvement purposes.  His last point was about the disjuncture between the Public Procurement Act and the B-BBEE Act. The former looked at price and only 10% was about the empowerment component. Where did the imperatives of B-BBEE come in? What was the strategic outlook and architecture?

Mr P Atkinson (DA) referred his question to the AGSA. Looking at the presentation it was obvious that compliance with the local content programme had been declining over the last two years and results had worsened over the last two years. Was there anything that could be done to stop the trend? The presentation had mentioned that 131 auditees were audited for local content. Were the 131 auditees the full number that had participated in the programme over that period or just a sample? Could that sample be increased in size or was that all those subjected to audit?

Mr B Radebe (ANC) appreciated the presentation but what was worrying him was that DTI was not sure that all entities were submitting their reports. One had to be sure when it came to issues relating to money. South Africa had already lost about R 1.3 trillion. What capacity did DTI have to follow up on the policies that it was supposed to monitor? Where an entity did not bring in a report, did DTI have the capacity to deal with those issues? He appreciated that National Treasury was coming up with a report, but DTI could not rely on another Department to do its job. It was DTI’s mandate to ensure that policies were implemented.

Mr Radebe commended PRASA on the work done, particularly in the supply park in Ekurhuleni. It was important because manufacturing took place on one side and, on the other, suppliers were developed. That was what SA had needed all along. How sure could one be that the components were genuinely South African? But, in the supply park, the goods were created right there. Could PRASA increase the uptake of bursaries as there were a lot of young people not at school and unemployed?

Mr S Mbuyane (ANC) asked, of the three Departments that had presented, which Department was dealing with non-compliance? Who was ensuring enforcement of the local content requirement legislation? He asked about the 53 locomotives that had not included local procurement. Was there any remedial action as the country had lost a lot of money with that contract?

Ms L Theko (ANC) said that she knew of the bursary project in Ekurhuleni. How many had benefitted from the project? Was any progress being made? And what about the rest of the country, how could they benefit?
She noted that National Treasury had to decide whether to restrict non-compliant tenderers for 10 years but PRASA had a long-term programme which meant that it would continue for more than 10 years. Could a previously non-compliant tenderer be awarded a tender after 10 years or what would happen? What was the meaning of that intervention? Lastly, she had heard PRASA talk about companies being black-owned. What was the meaning of black-owned?

The Chairperson stated that the presentation by PRASA contained full details of jobs. Did Ms Theko specifically want the details about Ekurhuleni?

Ms Theko asked about youth absorption in Ekurhuleni as the State President had said in the State of the Nation Address that that was very important.

The Chairperson congratulated PRASA on the Maths and Science Programme and the various schools that received training and support. It would be helpful to link the Auditor-General’s report, especially the findings, to PRASA’s report. The Auditor-General had noted its findings such as the bidding issue and the local content. In respect of the Auditor-General’s report, what was the response of PRASA to each of those? What measures had PRASA developed to address those issues, especially those that might turn out to be a major problem for PRASA?

The Chairperson noted that PRASA had made a reference to 20 trains being built in Brazil and had spoken about local content. Whose local content: SA’s or Brazil’s? Was SA sending local content to Brazil and then the trains were being sent to SA on completion or were the trains being sent to SA half-built? The Committee knew what had been done pre-2015 and that other countries had benefitted from the building of trains, but what measures had PRASA taken post-2016, to do things differently?

The Chairperson handed the Chair to Mr Radebe.

Responses
PRASA
Mr Sebola responded on behalf of PRASA. He indicated that even the trains made in Brazil had been made out of SA steel, glass and luggage racks sent to Brazil for building the trains. Four weeks ago, PRASA had adopted its new supply chain management policy to make sure that the local content element was based on the three changes from DTI. The Auditor-General had never indicated that PRASA was not adhering to regulations. In terms of jobs, in Ekurhuleni there were 850 people working at the PRASA factory, and 85% of those people were younger than 35. The youth was benefitting. In terms of construction, as the most of those who had been involved in the construction had been youth. PRASA was very mindful of the need for the youth to be employed because of the high-levels of unemployed youth, especially in Ekurhuleni.

Mr Sebola explained that black-owned companies were those where there was a 51%+ black ownership. He took the point about the bursary schemes. Bursaries would be increasing every year. There had been 650 bursaries in last three years, but that number would increase. He did not have the number for 2019. There were 65 apprentices, but those numbers would increase and by 2021, when the trains would be in full production, the numbers would be four or five times that.

Department of Transport
Mr de Villiers informed Members that there was an intergovernmental steering committee, consisting of senior officials from the National Treasury, Department of Transport, PRASA, Department of Trade and Industry, Public Enterprises and the Railway Safety Regulator, that was overseeing the process and ensuring compliance.

Concerning compliance, Mr de Villiers stated that PRASA had to comply to access capital funding. PRASA had to report back on compliance. It was critical that the structures be put in place and the fights were fought there.

National Treasury
Ms Nxumalo focused on the questions on compliance. The compliance mechanism that had been developed was a joint venture between National Treasury and DTI. National Treasury relied on DTI for the technical details of what local content was required. When it came to remedies, Regulation 14 of the Preferential Procurement Regulations, 2017 regulated how to deal with non-compliance. An Accounting Officer had to use the criteria outlined in Regulations to make decisions on awarding contracts. In a case where a decision was informed by false information provided by the bidder, the Accounting Officer was obliged to inform National Treasury which would decide whether penalties should be applied, whether the contract should be terminated, or it could result in a restriction on that supplier that had used false information to win a tender. Currently National Treasury relied on the organ of state to provide that information, but the pending Bill provided for Treasury to intervene to view a decision made by the Accounting Officer and to set strict timelines for action to be taken by the Accounting Officer.

Ms Nxumalo responded to the question about black businesses. The definition used by National Treasury was derived from the B-BBEE Act, i.e. Africans, Coloured and Indians provided they are citizens of the Republic of South Africa by birth or descent or who became citizens of the Republic of South Africa by naturalisation before 27 April 1994 or on or after 27 April 1994 and who would have been entitled to acquire citizenship by naturalisation prior to that date.

Ms Pietersen addressed the disjuncture between the Public Finance Management Act (PFMA) and B-BBEE. In the 2017 Regulations, one of the criteria, was that an organ of state could decide to apply pre-qualifying criteria to advance certain designated groups. That organ of state had to advertise the tender with a specific tendering condition that indicated the required B-BBEE status, e.g. only B-BBEE Level 1 suppliers could apply. The categories indicated in Regulation 4 were aligned to the B-BBEE categories.

Auditor-General
Mr Rabonda replied that one of the reasons for lack of compliance was a lack of understanding of the requirements, and that required DTI to make entities aware of the requirements. In other cases, there was a lack of compliance because there was a disregard for the requirements, and that linked to the issue of penalties. The Auditor-General had to undertake an investigation to find out if anyone was liable for the expenditure and if anyone had to be disciplined.

Mr Rabonda informed Mr Atkinson that the 131 auditees were not part of a sample but were all the entities where the use of local content applied. The AGSA looked at the spend of entities to see if they were purchasing anything where local content applied.

Mr Radebe thanked Mr Rabonda for his response but pointed out that once a law had been gazetted, one had to know the law. No one could claim lack of understanding and punitive measures had to be applied.

Mr Mbuyane had clarity on the issue of non-compliance but asked what the plans were to deal with non-compliance. The Auditor-General had referred to non-compliance in the presentation. Was it National Treasury or DTI that dealt with non-compliance? Also, he was not sure if they were talking about fronting or something else because 51% black-owned was not a B-BBEE category. The black person could be from Brazil and whites owned the remaining 49%. That had nothing to do with localisation.

Mr Radebe asked DTI to respond. A lot of things had happened under the guard of that Parliament that could not happen again.

DTI
Dr Makube said that the issue of non-compliance was multi-faceted. There was not a single form of non-compliance. He would confine his answer to what the law said. DTI implemented local content based on the Local Content Regulations that had come into effect on 7 December 2011. Those regulations had not dealt with non-compliance. When DTI began implementing the local content regulations, the gap in dealing with non-compliance became evident. The Regulations of 2017 corrected that gap.

Dr Makube stated that one aspect of non-compliance was when a tender was advertised without indicating local contact requirements. DTI had a list of institutions that did not comply. DTI had informed National Treasury and the regulations were amended. Regulation 8.2 stated that departments had to advertise with conditions of local content where local content had been designated by DTI. It was not a DTI policy; it was law. A system had been created whereby Proudly South African picked up tenders that were non-compliant in the advertisements and DTI asked the relevant departments to correct the advertisement. 

Regulation 8 (5) stated that a bid that failed to meet the required local content was unacceptable but the Auditor-General would only pick it up 18 months later that a non-compliant award had been made. That was another form of non-compliance. DTI had training programmes and guideline documents on local content, but DTI did not have regulations to cancel a non-compliant tender. DTI sometimes called in the Auditor-General to address non-compliance in a tender. Regulation 14 stated that National Treasury could intervene if it suspected non-compliance.

Another issue regarding non-compliance was in the supply chain management. Regulation 14 said that even the contracting body should report non-compliance if noted, but DTI did not have the authority to intervene in supply chain management issues. However, some cases had gone to court and contracts had been set aside because supply chain management had ignored government regulations.

Ms Phele added that non-compliance could take place in the implementation process even where a contract was compliant. There was a need to determine how to fund the monitoring of verification that the policy was being adhered to by the suppliers. Who funded the verification was a grey area. DTI had provided seed money to ensure that verification began. The sooner one picked up non-compliance in the delivery stage, the more effectively it could be dealt with and something could be got out of the contract. The point made by Mr Mahlobo about finding the point where one could embed local content, from the planning cycle to implementation and to execution, was a valid point. DTI would take that into account in the strategic planning for the next five years.

Mr Williams pointed out that regulations and legislation were being blamed for the billions of Rand that had been stolen from the people and, considering that developing regulations and legislation was the responsibility of the Executive, it was not good enough for DTI to say it would put measures in a new plan. The Executive had to come and explain to the Committee. What was going to be done to stop the situation? In five years’ time, a Committee similar to this one would be sitting here, and the departments would have another excuse. There should be no excuse. From 2011 to 2019 the Departments had been using the regulations and now the Departments said that the regulations were not good enough. Why had they not developed new regulations?

Mr Radebe thanked the three departments for their efforts to execute the legislation of government. There were serious loopholes that had cost the country billions of Rand. He had stories of how skills were not transferred despite that being part of an international tender agreement. Skilled work was done during the lunch hour to avoid transferring skills.

People had to be appointed who were experienced in contract management. He asked that officials ensure that, in whatever space they were covering, they protected the resources of the children. It was a serious matter that there might be no money for the children in the future. Everybody around the table would have to say what they had done to stop the corruption. He was, however, very pleased to see that the departments had learnt from their mistakes, but, clearly, the implementation part was very difficult.

When the Public Procurement Bill came, the Departments had to work as a team. DTI could not say that it could not implement its own policy. The Department could not wait for the Auditor-General as the Auditor-General only came at the end. The departments had to operate as a team to prevent the rot when it started. There could not be competition between Departments. The officials should go back and work hard, as they had been doing, for the sake of the children of South Africa.

Closing remarks
Mr Radebe reminded Members of the Committee meeting the following day.

The meeting was adjourned.

 

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