Amatola & Magalies Water Boards 2017/18 Annual Reports

Water and Sanitation

13 March 2019
Chairperson: Mr M Johnson (ANC)
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Meeting Summary

Annual Reports 2017/18

The Department of Water and Sanitation (DWS) and the Amatola and Magalies Water Boards met to discuss the Boards’ annual reports.

Amatola Water reported that they had now undertaken secondary business activities as an implementing agent mainly for the DWS, particularly under the Regional Bulk Infrastructure Grant (RBIG) programme. It also worked for other clients such as the National Department of Public Works and the Eastern Cape Department of Education.

For the past six consecutive years, Amatola Water had achieved an unqualified audit outcome. The statement of comprehensive income for the year ended 30 June 2018 showed that labour costs dropped from 42% to 33%, water bulk purchases dropped from 19% to 17%, and electricity costs declined from 10% to 7%.

The programme expenditure trends showed that funds spent on primary projects were 48% of the total, secondary projects 13% and support projects 39%. Irregular expenditure amounted to R132.7  million in 2018 -- up from R114 million in 2017. Fruitless and wasteful expenditure amounted to R2.864 million in 2018, compared to R1.895 million in 2017. This was mainly in relation to interest on the late payment of invoices and other interest costs from court judgments.

Amatola Water had experienced two years of non-payment by the Amathole District Municipality (ADM). They had invoked the Intergovernmental Relations Framework Act (IGRFA) process, with communication to the DWS, Cooperative Governance and Traditional Affairs (CoGTA) and the National Treasury. Amatola Water had then implemented water restrictions, but ADM had applied for a court interdict for restrictions to be lifted, which were then lifted in January 2018 after an instruction from the Minister.

There would be an average percentage increase applied to all the schemes. This was caused by the rural versus urban scheme, particularly the geographical dispersion and financing. The consumer price increase (CPI) had been determined at 5.6%. DWS raw water increases were set between 1.9% and 14.4%. Electricity tariffs were set to increase by 5.7%. Salary increases were set on average at 6.6%. Other input cost increases would vary between the producer price increase (PPI) and CPI, which was an average of 5.6%. Proposed tariff increases for the Buffalo City Metropolitan Municipality (BCMM) and Ndlambe Municipality were 6.85% for potable water and 6.85% for raw water. The proposed tariff increase for ADM was 8.85% for potable and 8.85% for raw water, including 2% finance costs.

Magalies Water’s key successes include the implementation of a capital expansion programme to meet the prevailing water demand and address the current water shortages, collaboration with stakeholders from both the private and the inter-governmental sectors to deliver on infrastructure expansions, total asset value increasing to an amount of R3.36 billion to enhance the water services delivery capacity of Magalies Water, a growth in water sales volumes to above 90.6 billion litres/annum, the subsequent growth in revenue generated to R586 million, and its ability to generate positive cash flows from operations.

Non-compliance with supply chain policy had amounted to R263 112. All incidences were related to expenditure which arose because of non-compliance with Magalies Water supply chain management (SCM) policy. This was due to payments that were made to a service provider without a purchase order or contract, and in some instances after expiry of a contract.

Between 2014 and 2018, there had been a 20% more water sold,  a 91% increase in revenue, a 288% rise in gross profit, a 336% growth in the net surplus, a 412% decline in investments and a 281% rise in assets. Magalies Water was trying to move away from a scheme-based tariff to a uniform tariff that was charged for all the schemes from 2018/19.

A 15% increase had been requested by Eskom for the next three years. The National Energy Regulator of South Africa (NERSA) had approved an additional 4.41% tariff increase to Eskom, which would be added to the tariff. If NERSA approved an increase before final submission to the National Assembly, Magalies Water would factor the approved increase into the final tariff.

Meeting report


Amatola Water Board Financial Report

The Amatola Water Board’s 2017/18 financial report was presented by Luyolo Fokazi, Chief Financial Officer, and Nokulunga Mnqeta, Chairman of the Board.

They said that Amatola had four board committees -- the auditory risk committee, finance committee, service and business development committee, and human resources committee. The board was the management in the organisation.

Areas of operation and water supply
 
Amatola Water had undertaken secondary business activities to be an implementing agency to mainly work for the Department of Water and Sanitation (DWS), particularly under the Regional Bulk Infrastructure Grant (RBIG) programme. Amatola Water also worked for other clients such as the National Department of Public Works ,and the Eastern Cape Department of Education.

The secondary business activities included the King Sabata Dalindyebo Presidential Intervention, which aims to unlock housing and commercial development for the region, as well as Mthatha. The aim of the project is to expand Mthatha’s existing bulk water supply system operated by the OR Tambo municipality to create a regional scheme extending along five development “corridors” and serving just over one million people.

Amatola Water is responsible for the King Sabata Dalindyebo: Mthatha Pipe Replacement project in replacingt failing old dilapidated pipes, associated monitoring mechanisms and the rehabilitation of leaking reservoirs. The project aims to improve the level of service to the community and reduce the number of pipe bursts.

Nooitgedagt/Coega Low Level Supply Scheme project, where Amatola Water is responsible for Phase 3: Construction of the wastewater treatment works (WTW) 45Mℓ reservoir, and the AC pipeline mitigation. There is a current supply of 310Ml/d of treated water to some 1.23 million consumers and smaller municipalities around the metropolitan boundaries. The new extension of the WTW will be upgraded from 70Ml/d to an average capacity of 160Ml/d (10Ml/d peak), with new associated mechanical and electrical works.

The DWS Dam Management project, where Amatola Water is responsible for the operations and maintenance of 21 dams within the Eastern Cape province, and manages the safety integrity of dams under this contract.

The National Department of Public Works (NDPW) operation and maintenance of state-owned properties project, where Amatola Water is responsible for the operations and maintenance for the water care facilities on state-owned properties, the assurance of potable water supply that complies with SANS 241 and the Blue Drop Standard, a safe and hygienic environment, and a safe discharge of treated effluent that complies with SANS 241 and the Green Drop Standard.

The Eastern Cape Department of Education’s support operations and maintenance, where the Amatola Water was responsible for the assessment, refurbishment and/or upgrading of bulk water and sanitation infrastructure, as well as the provision of operations and maintenance services to the Eastern Cape schools, as identified from time to time for 140 schools, with 223 contracts. This gives the assurance of a potable water supply that complies with SANS 241 and the Blue Drop Standard, a safe and hygienic environment and a safe discharge of treated effluent that complies with SANS 241 and the Green Drop Standard.

Chairman of the Board’s overview

In past six consecutive years, Amatola Water has achieved an unqualified audit outcome. The Board is committed to zero tolerance on fraud and corruption and has approved the revised anti-fraud and corruption strategy. Also, the Board places a great deal of emphasis on accountability to its communities, customers, employees, the DWS and other key stakeholders.

Achievements from ATP implementation includes the appointment of a permanent Chief Executive Officer and key critical staff to strengthen leadership and organisational effectiveness. Amatola Water has a leadership change management programme that is being implemented to create support and buy-in, as well as leadership cohesion and a team culture. The stakeholder and client relations are being conducted in line with the approved stakeholder relations and communication policy. An interim structure to rebuild and support the organisational stability has been developed and is awaiting consultation and Board approval.

The Amatola Water Infrastructure Master Plan is being developed and is expected to be completed in 2018/19. The Infrastructure Procurement Policy, which is aimed at promoting operational efficiencies, improved turnaround times and compliance with procurement legislation, has been approved by the Board planning and development (P&D). War rooms have been established to focus on improving delivery for secondary projects. Four professional registered and experienced engineers have been appointed to augment P&D’s capacity to accelerate project implementation. One of these engineers is heading the Project Management Unit. A financial recovery plan has been developed to implement cost containment measures and improve debt and credit management controls. Supply chain management (SCM) war rooms have been established to improve the effectiveness and efficiency of procurement processes and those relating to secondary projects.

Overview of financial performance

The statement of comprehensive income for the year ended 30 June 2018 showed that
labour costs dropped from 42% to 33%, water bulk purchases dropped from 19% to 17%, and electricity costs declined from 10% to 7%.

The programme expenditure trends spent on primary projects is 48%, secondary projects 13% and support projects 39%.

Irregular expenditure reached a total of R132.7 million in 2018, and R114.1 million in 2017. Fruitless and wasteful expenditure amounted to R2.864 million in 2018 compared to R1.895 million in 2017. Also, there was payment on adverts on cancelled bids due to delayed procurement and flawed specifications that resulted in the inability to evaluate the submitted bids.

The consequence management for irregular, fruitless and wasteful expenditure resulted in four senior officials being dismissed, disciplinary enquiries took place, civil claims were instituted, and criminal charges were laid, and several investigations are currently under way.

The remedial action taken is that the SCM policy and delegations are being reviewed, the turn-around intervention is focusing on strengthening management, improving controls in SCM and the project environment, appointed an SCM manager, and established a project management office (PMO) to monitor compliance on project implementation.

Update on Amathole District Municipality (ADM) debt

Amatola Water has experienced 2 years of non-payment by Amathole District Municipality (ADM). Amatola Water invoked the Intergovernmental Relations Framework Act (IGRFA) process with communication to the DWS, Cooperative Governance and Traditional Affairs (CoGTA) and the National Treasury.  ADM had followed the payment plan for three months -- from June to September 2017 -- and defaulted in October 2017. Amatola Water then implemented water restrictions on ADM water supply on 1 January 2018, based on the affordability of R5.8 million. ADM had applied for a court interdict for restrictions to be lifted, which were then lifted on 11 January 2018, after an instruction from the Minister.

An urgent meeting was convened on 12 January 2018 with the Premier, Minister of Water and Sanitation and the Executive Mayor of ADM, the Board Chair of Amatola Water and respective officials. ADM was instructed to seek a council resolution for the payment plan and to work with Amatola Water to develop a restriction plan, based on affordability. ADM was also instructed to withdraw the application for interdict.  

There have been more than six engagements with ADM since March 2018, to date. The legal process, to deal with the historical debt, has been explored with major delays caused deliberately by ADM. Interest is charged monthly on outstanding debt. Amatola Water had implemented 20% water restrictions after ADM defaulted on the current payment agreement. Current billing was at approximately R8.3 million per month, after restrictions. ADM was not sticking to the R5.8 million per month arrangement, which had been paid/exceeded for only five months since January 2018. A notice to effect second restrictions of another 20% was issued on 26 November 2018.  Summons had also been issued to recover historical debt up to December 2017. National Treasury and Provincial Treasury had been engaged by AW.

Tariff proposal for 2019/2020
 

There will be an average percentage increase applied to all the schemes. This is caused by the rural versus urban scheme, particularly the geographical dispersion and financing.

The consumer price increase (CPI) has been determined at 5.6%. DWS raw water increases are set between 1.9% and 14.4%. Electricity tariffs are set to increase by 5.7%. Salary increases are set on average at 6.6%. Other input costs increase will vary between the producer price increase (PPI) and the CPI, which is an average of 5.6%. Proposed tariff increases for the Buffalo City Metropolitan Municipality (BCMM) and Ndlambe Municipality are 6.85% for potable water and 6.85% for raw water. Proposed tariff increases for ADM are 8.85% for potable and 8.85% for raw water , including 2% finance costs.

Looking forward
 

Amatola Waters intends to move towards a sustainable organisation. Sustainability is at the core of Amatola Water’s priorities to ensure that operations are compliant with sustainable management of the environment. It is exploring innovative ways to be financially sustainable through a growth strategy and financial recovery plan. It is fast-tracking the developiment of an integrated infrastructure masterplan for the province and a business case to leverage funding. It aims to complete the infrastructure upgrades to realise an increase in volumes towards improving access, institutionalise effective risk management at the strategic and operational level, to repair its capability and competence towards being a regional water utility for the Eastern Cape province, and to research and invest in new technologies towards enhancing its operational efficiencies and effectiveness.

The Board thanked the Portfolio Committee for the constructive engagement in playing its oversight role and holding the Board accountable in discharging its mandate. It appreciated the support in transforming Amatola Water into a regional water utility, and increasing its financial viability and sustainability.

Magalies Water 2017/18 financial report

Mahomola Mehlo, Chief Operating Officer: Magalies Water, presented the 2017/18 financial report, and said the mandate and strategy is to offer bulk water services infrastructure. The key customers are water services authorities, Moses Kotane Local Municipality, Rustenburg Local Municipality, Thabazimbi Local Municipality, City of Tshwane Metropolitan Municipality, Modimolle-Mookgopong Local Municipality and Bela Bela Local Municipality. It operates in an area of 42 000 km2 across three provinces -- North West, Limpopo and Gauteng. It supplies raw water from two major catchments, the Crocodile and the Pienaars River. It employs 306 people. The technical expertise and skills include engineering and technical experts, planning engineering, project management and design engineering, and water and scientific services.

Key successes include the implementation of a capital expansion programme to meet the prevailing water demand and address the current water shortages; collaboration with stakeholders from both the private and the inter-governmental sectors to deliver on infrastructure expansions; total asset value increasing to an amount of R3.36 billion to enhance the water services delivery capacity of Magalies Water; growth in water sales volumes to above 90.6 billion litres/annum; the subsequent growth in revenue generated to R586 million; and the ability of Magalies Water to generate positive cash flows from operations.

Strategy implementation challenges

There are still communities within Magalies Water’s area of supply who do not have access to water services  -- Kgetlengrivier LM, Madibeng LM and Lephalale LM. This is due to the infrastructure capacity constraint to supply the growing population and meeting the prevailing demand. There was also a funding constraint to execute infrastructure expansion to address capacity constraints which affected the Pilanesberg Phase 2- Rustenburg & RBA and MKLM, the Phase 3-Kgetlengrivier LM, the Moretele South Bulk Project- Moretele LM, the Klipvoor Bulk Scheme-Moretele north, and the Bela-Bela and Modimolle-Mookgopong LM.

Overview of financial performance

The revenue for 2018 was R651.9 million and R570 million for 2017. Expenditure was R394.3 million for 2018 and R477.8 for 2017, resulting in a surplus of R114.8 million for 2018 and R92.2 million for 2017. The current and non-current assets amounted R3.357 billion for 2018 and R3.145 billion, with liabilities being R1.907 billion for 2018 and R1.809 billion for 2017.
 
Analysis of Irregular expenditure

Non-compliance with supply chain policy amounted to R263 112. All incidences were related to expenditure which arose because of non-compliance with Magalies Water SCM policy. This was due to payments that were made to a service provider without a purchase order or a contract, and in some instances after expiry of a contract.

Non-compliance with preferential procurement regulations related to procurement done on behalf of the DWS, where Magalies Water is the implementing agent. All costs incurred were recovered from the Department and the irregular expenditure will be reported in the DWS financial statements. The total payments made in the current financial year relating to these contracts concluded on behalf of the Department amounted to R10.9 million. 

Investigations will be conducted in accordance with National Treasury guidelines, and action will be taken against the employees who transgressed the regulations. The fruitless and wasteful expenditure condoned during the 2018 financial year was R4 000.

Overview of performance (Shareholder compact)

The predetermined strategic key performance areas (KPAs) and key performance indicators (KPIs), as articulated in the corporate plan and its related shareholders compact (SHC) formed the basis for measuring the level of success in the execution of Magalies Water’s strategy implementation plans. Both the corporate plan (2017/2018 – 2020/2021) and the adapted SHC (2017/2018) share the definition of the following strategic perspectives: organisational efficiency and effectiveness, financial and governance, customer and stakeholder interaction, and organisational capacity.

Between 2014 and 2018, there had been a 20% more water sold,  a 91% increase in revenue, a 288% rise in gross profit, a 336% growth in the net surplus, a 412% decline in investments and a 281% rise in assets.

The cost of producing water had increased by 14%. This was attributable to increased supply as well as the increase in prices of input production commodities, such as electricity, chemicals and raw water.  

Tariff management and determination

The funding philosophy of Magalies Water is that it is a self-funding entity. It should not rely on national government grants or subsidies for operations. The entity operates on a commercial basis and it has adequate reserves to continue as a going concern.

The increases in the price of raw water are determined by the DWS in terms of the raw water pricing strategy. The affordability to end users was considered. The increases are to give financial sustainability to ensure recovery of operations and maintenance costs. Cost drivers informing the tariffs are competitive and are determined by the market forces. Prevailing economic conditions are considered in determining the tariffs.

Magalies Water is trying to move away from a scheme-based tariff to a uniform tariff that is charged for all the schemes from 2018/19.

A 15% increase has been requested by Eskom for the next three years.  NERSA has approved an additional 4.41% tariff increase to Eskom, which will be added to the tariff.  If NERSA approves the 15%, tariffs can increase by 15%, plus 4.41%. If NERSA approves an increase before final submission to National Assembly, Magalies Water will factor the approved increase into the final tariff.

Challenges in collection of long outstanding Debt

The financial position of certain local municipalities supplied by Magalies Water has contributed to the increase in the debtors’ balance. There is difficulty in the implementation of water restrictions on defaulting local municipalities. For example, there has to be approval from the Minister before any action can be taken against a delinquent municipality.

Through the development and implementation of the debt collection policy, there is continuous engagement with local municipalities and finalising of payment plans / payment commitments. The policy includes the implementation of restrictions on defaulting customers, instituting legal action (Madibeng LM and Rustenburg Water Services Trust) and terminating service offerings (Madieng LM).

Infrastructure expansion

Magalies Water will continue with the implementation of the Pilanesberg Bulk Water Scheme: Phase 2-Mafenya to Tlhabane Resevoir, Moses Kotane Area, and Phase 3- Mafenya Reservoir to Kgetlengrivier LM. There would be implementation of the Klipvoor Bulk Water Supply Scheme to address the needs of Madibeng, Modimolle-Mookgopong, Bela Bela, Dr JS Moroka and Moretele Local Municipalities. The board would improve efficiencies for sales volumes growth, mobilise resources to implement the capital expansion programme, and regarding institutional reforms and realignment, it will expand to Lepalale LM, Madibeng, the City of Tshwane Metro and Kgetlengrivier LM.

Magalies Water’s intended outputs are to increase its footprint/area of supply, expand service offerings, reduce financial inputs for service delivery and revenue and profitability, and increase the target of R2 billion in 2020.

Discussion

Amatola Water questions and comments

The Chairperson commented that vandalism and theft should have long been dealt with. In February, 2015, Gauteng had been affected by copper theft, and it had been made clear that the Department should declare all water infrastructure as a national key point. It was also made clear that other countries had the army guarding any water infrastructure 24/7. He asked the Amatola Water board what action had been taken to ensure that the water infrastructures are declared as a national key point.

Mr M Koyo, Speaker of the Chris Hani District Municipality, replied that the Minister of Sanitation and Water wrote to the President requesting the water infrastructures to be declared as a national key point. However up to today, no response had been received a from the office of the President. Parallel to that, there was an engagement with the South African National Defence Force (SANDF) secretary, but without approval from the President, the DWS and the SANDF they could not move forward.

Mr L Basson (DA) asked if the 2% risk for the non-payment effected would mean that those that
always pay, will also pay or help those that do not pay, and whether there is no other
solution. For example, those municipalities that do not pay could be dealt with on a risk-based
percentage. On the Chris Hani Municipality project, he asked if the issue regarding the accounting system had been resolved.

He also commented that there is nothing wrong with the water treatment plant in Cradock -- the issue is maintenance. He gave an example from their visit to the Netherlands, wherethe country uses old infrastructure and the same infrastructure that South Africa uses, and it works well. He said that the DWS needs to work on disciplining the municipalities on this aspect.

Mr D Mnguni (ANC) commended the unqualified audits. However, he asked if Amatola is failing to follow procedures given by the Auditor General.

He also commented that before Amatola Water asks for assistance from the Portfolio Committee, it must try first to help itself. There are various ways to seek help before approaching the Portfolio Committee.  Parliament has got Chapter 9 institutions, like the Auditor General. The Auditor General must check and give advice, and this is the advice that Amatola Water must consider. The DWS also has a mandate to monitor Amatola Water. The last resort would then be the Portfolio Committee. He asked if the recommendations given by Portfolio Committee during its visits were considered by Amatola Water. He also asked if the board is recruiting quality leadership.

Mr D Mnguni (ANC) asked how it was possible for Amatola Water to be rated for non-performance but be in the winning line for debt collection.

He then commented that it is vital to give stakeholders annual reports.

The Chairperson commented about the concern over unionised managers and senior officials. He asked Amatola Water to respond to the comment.

He added another comment, saying that the water boards had strong buying power, and that they could come together and start a manufacturing plant to produce the needs of the water boards. This would help the performance of the water boards.

Ms N Mnqeta, Chairperson of Amatola Water, responded to the 2% risk cover questions, and said that she accepted and noted the suggestion given by Mr Basson, and welcomed him to investigate further solutions.

On the recommendations from the Auditor General, she said that they are implementing the recommendations that they were given by the Director General. Management does presentations to the board with key actions on how to implement the given recommendations. These key actions are then monitored by the audit and risk committee, which report quarterly to the board.

On the question of whether Amatola Water is assisting itself, she said they are assisting themselves and have taken every recommendation and points of guidance from the Portfolio Committee, and implemented them. The assistance requested is not forgoing the given recommendations and actions taken on them, but it is rather assistance on the matter in court between Amatola Water and the DWS that they need intervention on, considering that this is a matter involving two government entities taking each other to court.

On the leadership quality that Amatola Water attracts she replied and said that they do not compromise on quality, and assured the Portfolio Committee that it is important for Amatola Water’s sustainability.

Ms Mnqeta emphasised that energy costs are indeed an area of concern to Amatola Water and they are looking at research for innovative ways to try resolve this. She further replied that on this aspect that they are looking more at renewable energy.

Addressing the issue of unionised managers and other senior employees, she said they have tried to resolve this and are mindful of the employees’ constitutional right to join a union. They are delicately dealing with it, as they do not want to trample on peoples’ constitutional rights. The only area pulling Amatola Water down is the financial area related to ADM’s non-payment. To try and resolve non-payment further, they will in future request advance payment.

On contracts with irregular payments, transactions and disputes, Amatola Water has not yet made that payment. The standard and culture of invoices is that where there is no invoice dispute, such are paid within seven days.

On the stakeholder engagement question she said they do represent the challenges of the entity to the stakeholders and give them reports.

Makana Local Municipality said that they are experiencing challenges and confirmed the inherited historical debt that they owed Amatola Water. This was also caused by the challenges that the municipality has. The municipality is owed by government departments (R12 million), businesses (R39 million) and residences (R390 million) in total almost R450 million. They owe Amatola and Eskom around R70 million. To increase the revenue collection the municipality has adopted an incentive scheme, and where a residence has a 120 days’ old debt or older, they can come forward and 50% will be removed. This is just one of the ways to solve the repayment to Amatola and other creditors.

Magalies questions and responses

The Chairperson commented on the government entities being involved in litigation against each other. He said that it causes financial constraints on ligation bills. Amatola Water ‘s litigation bills since 2015 had started at R5 million and grown to R18.9 million, in 2016/17 it was R28 million, and in 2017/18 it was R46 million. He requested a written explanation, especially for the R46 million.

He also commented that the government entities do not want to accept assistance from the private sector, which is important and has the potential to benefit the water boards.

He asked what the plan is to paying debt and if there is a way that has been developed to address it.

Mr Mnguni  suggested that the water boards needed to speak to their legal representatives on contingency liability. Also, the boards should look at settlement agreements and consider time frames of litigation before they decide to litigate.  In addition to this, he urged the board to improve service delivery. Directing a comment to the DWS, he emphasised that they needed to pay Amatola Water and Magalies Water the money they owed them.

Mr Basson commented that the failure of water boards in delivering their mandates is a direct result of the non-payment of the DWS. The DWS appoints them to be implementing agencies but fails to pay them. For the past five years the Department has been failing to honour their agreements -- either with the municipalities or the water boards. He urged that this should stop, otherwise there would be no progress.

Mr Mnguni asked the DWS if they still have funds available.

Ms Lindiwe Lusenga, Deputy Director General, DWS, replied that at times there were disputes on payments, but where there were no disputes, the DWS pays.

Mr Mnguni asked again if the DWS still has funds available.

The Chairperson rephrased the question, and asked how much the DWS had.

Mr Paul Nel, Chief Director, DWS replied that the DWS does have grant money but did not have money for goods and services. There is extra money still left that the Department will have to submit to Treasury at the end of the month if not used.

Mr Basson asked, if there is money available, why there is no payment of the debts.

Mr Mehlo confirmed that the Department owes Magalies Water R50 million.

Mr Basson (DA) said that before the end of this Parliament, the DWS needs to sort out the payment issue and report back to the Portfolio Committee.

Ms Lusenga replied the following week would be late, so Magalies Water had to send invoices the next day.

Chairperson asked if at any point the water board writes off debt as bad debt.

Ms Lusenga replied that the debt is never written off.

The Chairperson adjourned the meeting.

 

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