Real Estate Sector in Bangladesh

A Brief Review on Real Estate Sector in Bangladesh The concept of Real Estate is developed to resolve the residential facility which is a big problem in a densely populated country like ours. Especially the cities where unavailability of land tends to rise the tendency of high rise apartments rather than private dwellings. At present 28% of the population of Bangladesh live in urban areas, which will be 34% in 2025. In our country real estate business started in Dhaka in late seventies. The Eastern Housing of Islam Group is the pioneer in this business.

During 1970s there were fewer than 5 companies in Bangladesh engaged in this business. In 1988 there were42 such developers working in Dhaka and now in 2005 there are about 250 companies engaged in this business. From the early 1980s the business has started to flourish and in 1990s it has reached its peak. Towards the end of year 2000 there was slight downfall in real estate sector. With the number of companies increasing gradually and various problems concerning the housing sector having cropped up requiring early solution, necessity was strongly felt for the formation of a trade association of the Real Estate business.

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Real Estate and Housing Association of Bangladesh or briefly REHAB was established in December 12, 1991 has solved the problem. The role of REHAB in Bangladesh: To obtain recognition for the Housing Sector as an industry, efforts of REHAB have met with partial success but there is hesitation in its implementation for lack of necessary regulating orders. Vat was to be recovered at the rate of 15% of the cost of an apartment.

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But REHAB took up the case with NBR and succeeded in convincing the NBR with all facts and figures to affect actual deduction of 1. 8% of the price of an apartment. VAT has been enhanced since July, 1999 to 3%. REHAB succeeded in this respect in a limited way in that it could convince the House Building Finance Corporation (HBFC) about a close cooperation between the developers and the HBFC. Representatives of REHAB were invited to participate in the formulation of National Housing Policy during 1993. It can be said with satisfaction that the recommendations of REHAB were quite constructive and were given due onsiderations in the policy. The REHAB members have met Ministers & Officials of the Ministry of Public Works and RAJUK many a times to put forward its views on policy guidelines on housing, expansion of housing sector targeting the low and low-middle income group through distribution of developed land by Government, compulsory membership of all developers of REHAB and uniform transfer modalities of land and apartment by Ministry of Public Works and RAJUK. General terms and conditions of RES allotment:

Application for allotment of apartments should be made on the prescribed application form duly signed by the applicant along with the earnest money. The company has the right to accept or reject any application without assigning any reason. On acceptance of an application, the company will issue allotment letter to the applicant and both parties will sign an agreement which includes all terms and references of ownership including the payment schedule and based on which the applicant shall start making payment as per the schedule of the project.

Payments of earnest money, installments, car parking cost, additional works and other charges should be made by bank-draft or pay-order directly in the name of the respective company against which the receipts will be issued Payments of installments and all other charges are to be made on due dates according to the schedule. The company may arrange HBFC/Bank loan (if available) for allotted ones according to the existing rules and regulations of the authority concerned. Delay in payments will make the allotted liable to pay delay charge (amount varies from company to company) for every 30 days on the amount delayed payment.

If the payment is delayed beyond 60 days the company shall have the right to cancel the allotment. Connection fees/charges security deposits and other incidental expenses relating togas, water, sewerage and electric connections are included in the price of apartments. The company will make those payments directly to the authorities concerned on behalf of the allotted. Limited changes in the specifications, design and/or layout of the apartments and other facilities may be made by the company considering overall interest or due to unavoidable reasons.

The company may cancel an allotment for non-payment of installments in disregard of reminders and after final intimation to the allotted by registered post at the address given in the application form. The allotted shall be required to sign an agreement with the respective company for safeguarding the interests. The possession of the apartment shall be duly handed over to the allotted on completion and full payment of installments and other charges and dues. The allotted will become shareholders of total acres of the scheduled land of the project which is equally divisible but undivided and not demarked.

After all the dues and installments are paid by the purchaser according to the requirements and schedule of payment and after the completion of the construction, the vendors shall execute a registered sale deed in favor of the purchaser transferring share of land of the project in the demised apartment. After taking over of apartment of the project, the allotted must consult the company prior to undertaking any structural or layout changes within the apartment complex. Failure to do so will be at the sole risk of the allotted.

Company shall not be liable if the completion period of the construction projects is affected by unavoidable circumstances beyond the control of the company, like natural calamities, political disturbances, strikes and changes in the fiscal policy of the country etc. For the purpose of effective management and maintenance of the building the purchaser of the apartment shall form and constitute a cooperative society under the Co-operative Society’s Act 1940. List of some Developers, members of REHAB: * Building Technology and idea Ltd (BTI) Advanced Development Technologies Ltd (ADTL) * Bashundhara * Navana Real Estate Ltd. Etc. The RES in Bangladesh is a well-established business. This sector is well organized under REHAB. REHAB is playing a significant role in coordinating Government policy and developers standards solely to the flourishing of this sector. Though this sector is small, it is contributing almost 9% in GDP and a major source of employment. Now Real Estate Developers are organized as REHAB and coordinating their efforts to solve the housing problems for the city dwellers.

REHAB is working closely with the Government to create a sound housing policy for the countries that will enable people have a place that they can call as home. Along the way Real Estate Developers are creating a lot of job and becoming a major player in our economy by contributing to our GDP. Strengthening the role of Private Sector Housing in Bangladesh Economy Major Challenges Before the Housing Sector In categorizing provision of shelter as one of the fundamental responsibilities of the state, the Constitution of the People’s Republic of Bangladesh recognized shelter to be among the fundamental human rights.

The UN Declaration on Fundamental Rights also reveals that every person has a right to an adequate standard of living, which includes housing. But making shelter available to all is increasingly becoming a significant challenge. Though population growth rate in Bangladesh has plateaued at 1. 6 per cent, an increasing expanse of living space at this rate will also be necessary to accommodate the “demographic momentum”. Statistics show that Bangladesh will need to construct approximately 4 million new houses annually to meet the future demand of the next twenty years.

Estimates for annual requirements for housing in urban areas vary from 3 lakh to 5. 5 lakh units. Along with population growth, urbanization is considered in the keynote as the next most alarming threat to the housing sector. Rather than being a phenomenon specific to Bangladesh, urbanization has now become an issue of global concern. The share of urban population in Asia is 37 per cent at present and is projected to be 45 per cent by 2015. In Bangladesh 25 per cent of the population (some 35 million people) now live in urban areas; this proportion will be 34 per cent (75 million) by the year 2015.

Dhaka, with a total population of 10 million, is now the 22nd largest city in the world. The paper identified this a consequence of high rate of in migration to Dhaka. By the year 2015 Dhaka is projected to rank as the 5th largest city in the world, where 19 million people will have to find their house. On the other side, with the continued growth of population land for agriculture and forest will shrink in tandem. This calls for high density settlement either in high rises or in small unit low rise apartments. The area occupied by human settlements and supportive infrastructure in Bangladesh is quite high at 30 per cent.

Land is becoming increasingly inadequate to provide individual housing solution to all and as a result demand for apartments is growing rapidly. Inheritors are inclined to building apartments as a means to share common property. Remittance flow which is clocking a high growth also drove up demand for housing. The paper also shed light on the downside of housing development pointing to the existence of slums, an unavoidable reality of city life. As of now about 30 per cent of the urban population of Bangladesh are slum dwellers with very poor living condition, in stark contrast to the high rise life-style of some of the fortunate.

All these call for urgent attention to arrange decent living condition and housing facilities for the poor and the extreme poor. Growth in the Real Estate and Housing and the Construction Sector In the keynote paper Dr Bhattacharya illustrated the growth trends in the construction and the real estate and housing sector. While comparing the growth of the real estate and housing and the construction sector with that of GDP it was found that trend growth in the two sectors for the period FY 1992-2002 was 4. 8 and 7. 5 per cent respectively, which is much higher than the trend growth in GDP of 4. per cent for that period. The shares of the real estate and housing sector and the construction sector in the GDP were quite high in the year 2002 and accounted for 8. 3 and 8. 0 per cent respectively. However, the incremental contributions of these two sectors in the same year were also considerably high at 6. 0 and 12. 8 per cent respectively. Size and Contribution of the Real Estate Sector Dr Bhattacharya discussed the size of the real estate sector and its contribution to the economy in terms of employment generation, accrual of investment, contribution to exchequer, output trends and linkage ontribution of this sector. (i) Employment Generation The real estate sector is at present creating employment for about 10 lakh people who are directly or indirectly involved in the sector. According to the LFS, in 1999-2000, 2. 1 per cent of the labour force was engaged in construction whereas for 1995-1996 the figure was 1. 8 per cent. These figures include workers engaged in brick chipping and working in delivery trucks to architects, engineers and entrepreneurs. Some 5,000 engineers and 6,000 management staff are engaged in this sector. ii) Investment Recent information concerning investment in the housing sector shows steady growth both in absolute terms and as a percentage of total private investment and GDP. Private investment in housing and construction has more than doubled during the Fourth Five Year Plan period, from Tk 700 crore in 1989-1990 to Tk 1589 crore in 1994-1995. During the first three years of the Fifth Five Year Plan period the average investment in housing and construction was Tk 7,642 crore. As a share of total private investment, private investment in housing and construction in the 1997-1998 to 1998-1999 period accounted for 47. per cent which far exceeded the target of 16. 35 per cent for this period. The proportion of investment in housing and construction in the national GDP increased from 3. 4 percent in FY 1997 to 4. 1 per cent in 1999. (iii) Contribution to Exchequer The keynote paper indicated that the contribution of the real estate sector to the exchequer is a substantial one. Various revenues like VAT, registration fees, utility connection fees etc. generated in the real estate sector amount to about Tk 36 crore per year. Regarding payment of corporate income tax of the real estate companies no ready information was available. iv) Output Trend Trends in the output of the real estate business, which is undergoing a protracted slump, were not as impressive as the trends in investment in the sector. During the peak years of the early 1990s, over 3,000 apartment units were built by developers every year. Today around 2000 units are built, which indicates a 30 per cent drop in output. Beside the general consequences this slump leads to delayed delivery of apartments by an average of six months. Dr Bhattacharya considered this sorry state of business to be a consequence of the economic downslide, global recession, and the poor law and order situation.

In addition to these, the uncertainty felt by the remitters after the incidence of 9/11 made them reluctant to part with their dollars and encouraged savings. This has reduced remittance flow which further worsened the situation. However, Dr Bhattacharya informed the audience that Fiscal Year 2003 gave a fillip to the sector. (v) Linkage contribution The real estate sector has also made substantial contributions to the growth of a host of backward and forward linkage sectors which include paints, ceramics, aluminium, furniture, consultancy and many others.

In this context, he provided examples of catalytic influence of the real estate and housing sector in development of linkage industries whereby the sector is immensely contributing to employment and the GDP. Those include: a) Bangladeshi state-of-the-art ceramic industries largely meeting the local demand for ceramics b) Thai and Kai aluminium meeting demand for door and window frames c) More than a dozen paint industries, many of them multinationals, are catering to local demand d) A large number of furniture making and interior design companies supporting the housing industry ) An exponentially growing cement sector, which is helping the country to attain self-sufficiency in this important input. Market Structure As regards the characteristics of the housing sector Dr Bhattacharya informed the audience that 19 per cent of the dwelling units are located in urban areas. Per capita floor space in urban areas is only 62. 3 sq ft. About 46. 4 per cent of urban dwellings are made of brick/cement. About the market concentration in the real estate sector Dr Bhattacharya mentioned that Real Estate business, especially apartment projects, took off in the Dhaka City in the late 1970s.

From the early 1980s the business started to flourish and showed robust growth. At present, more than 250 companies are active in the real estate business in the country. About 95 per cent of this business is still dominated by the top 10 companies. Dr Bhattacharya also observed that the market is highly segmented, primarily based on location, price of the land and size of the apartments. He stated that the main reasons for the development of real estate business in Dhaka city were: ? Scarcity of open spaces in important parts of the city. Hazards of purchasing land. ?Rapid increase in the population of Dhaka. ?Fiscal-Financial incentives such as the decrease in the rate of bank interest. ?Derestriction of remittance flows which financed the sector. Dr Bhattacharya noted that rent of apartments had been relatively high compared to the opportunity cost of privately constructed flats. Service facilities which are enjoyed collectively, such as garbage disposal facilities, central satellite connection, security, roof top facilities and lift, save time and reduce costs. Legal and Regulatory Framework

The legal and regulatory framework concerning the housing and real estate development includes laws such as Building Construction Act (1952), Town Improvement Act (1953), Dacca Master Plan (1959) and Building Construction Rules (1984). These laws, as Dr Bhattacharya observed, are not adequate to facilitate resolving habitation problems. Other limitations of these rules included a lack of appreciation about the differences between planning and building rules, the outdated nature of such rules and the inability of the rules to address the demands of an expanding city and targeting only the middle and high-income groups.

There is no standard housing plan for Metro Dhaka. The Master Plan (1959) was, in general, prescriptive in nature, with particular public provision proposed on an individual basis for specific places, with exceptions made for schools and open spaces for which generous standards were proposed. The rigid land use zoning of the Master Plan (1959) is out of date as a basis for development management. The Bangladesh National Building Code (1993) which was intended to ensure safety in construction, has not been made mandatory.

The Building Construction Rule (1984) demands a great deal of information from the applicant, but imposes very few compliance requirements on him. The procedures involved in the enforcement of law such as taking permission before development and construction were felt to be cumbersome. It was found that a developer has to apply to eight different authorities including WASA, DESA, Titas, Fire Department, civil aviation authority and ward commissioner for permission, which costs money and time. Moreover, the information solicited by the agencies relate mainly to ownership, rather than providing guidance for strategic and development control.

Since the housing plans are not detailed, there is ample scope for breach of rules. Lack of adequate staff capacity of the oversight agencies limits monitoring and leaves scopes for non-compliance with the rules and regulations. Financing the Housing Sector Dr Bhattacharya noted that financial intermediation in the housing sector is not found adequate because of high interest rates and limited sources of funds. This is true both for the financing of the developers and the purchasers. The state-owned House Building Finance Corporation (HBFC) is burdened with bad loans, and loan disbursement has tended to be low in recent years.

Delta-BRAC Housing came into this market as a private-NGO collaboration, but their interest rates are as high as 16 per cent which is higher than even that of the HBFC by one per cent. The major financing organisations for housing are the HBFC and the Commercial Banks while financing by other organisations like Delta-BRAC, National Housing and Micro credit lenders are insignificant. Policy Challenges and Critical Issues In the closing part of his presentation Dr Bhattacharya identified some policy challenges and issues that are critical to the housing industry.

He felt that the present rate of housing interest is very high and provision of housing finance at competitive rates will prove to be useful. He also observed that lack of mortgage financing is perceived to be holding back housing opportunities for middle-income groups. He also argued in favour of making land available for developers through RAJUK rather than the prevailing practice of allocating land to individuals. Procedural delays in getting permission from authorities such as RAJUK, police, fire service, environment directorate and utility authorities were suggested to be removed.

He also underscored the need to make a detailed plan for urban areas, and articulating the demands in the area of utility and infrastructure services from a futuristic perspective. A public-private collaboration is essential in this regard. While making room for more housing projects the issue of environmental sustainability should be ensured. He also suggested a detailed plan which would evaluate the role of low-lying areas and the ways to utilise them by taking into cognisance both the pressure of housing and flood management needs. He also underscored the need to undertake a plan to address the slum problem.

He argued in favoured of curbing the growth of slums and facilitating the process of rehabilitating the existing ones. Towards this end, an energetic policy in support of low cost housing was considered to be critically important. The need for a future-looking housing strategy that would cater to the needs of people with various levels of purchasing power was also stressed. Finally Dr Bhattacharya proposed that a comprehensive study be undertaken which will allow the policy makers to make informed policy decisions for the development of the sector.

Housing – Nobody’s Problem “Housing is nobody’s problem” – Professor Shahidul Amin quoted the comment of two eminent professors of AIT, which was made some twenty-five years ago. He observed that this is true today as well. He complained that RAJUK, the supreme authority of Master Plan, has itself violated it repeatedly. He accused RAJUK for not making the Master Plan a public document. An appropriate land policy is yet to come with appropriate responses to the issues that concern the general public. He questioned the role of RAJUK in this regard.

Referring to the opinion of Dr Seraj on the need for an institution or monitoring agency, Professor Amin wondered about the role the National Housing Authority could play. Dwelling on the slum issue he noted that not a single organisation appears to be concerned with this important area of wide interest. The role, organisation and activities of the National Housing Authority were not clear and it is also not clear to whom we are really complaining in our discussions at the various fora, he regretted.

Professor Jahan noted that we have a land use policy but because of lack of appropriate institutions, skilled manpower and proper operational mechanisms its proper implementation is not possible. He mentioned that even some of the RAJUK officials think that the role of RAJUK is just to subdivide plots, sell them and give permission for new buildings. Referring to the general complaint about unauthorised and unplanned housing development Brigadier Momen commented that it happened because the authorities were permitting such behaviour. Control over the Real Estate Sector

Dr Shayer Ghafur, Associate Professor of Architecture, BUET referred to the section in the keynote which informed that about 95 per cent of the business in the real estate sector is controlled by 10 companies and 47. 3 per cent of total private investment is in the housing sector. Accordingly he observed that, these ten companies have a large share of total private investment. We have to decide whether our discussion should be limited to these 10 companies only, he commented. In recent days, more and more companies and many corporate bodies with surplus capacity to invest have entered the real estate sector.

They are buying hundreds of acres of wetland for filling and development. However, this will not contribute to a sustainable environment, he commented. Housing – Scope of Definition Some of the discussants believed that the definition of housing should not be limited to shelter or living space. Professor Jahan, Head of URP Department, BUET informed that though in general terms housing is meant for shelter, in an academic sense housing entails house of many kinds comprising educational institutions, recreational centres, shopping centres, and many others.

Picking up on this point, Ms Sultana Alam of Dhanmondi Poribesh Unnayon Jote stated “We don’t only sleep, we need housing, schools, hospitals, shops and many such things”. She feared that with such a narrow focus on housing that dealt with only residential use, at some point we may find that illegal shops, schools or colleges have taken over the sides of the highways. Utility Services Brigadier Momen informed that it is not the developers, rather the inadequate capacity of the utility lines which is responsible for blockages in sewerage lines.

The utility providers should properly project the demand, he suggested. He commented that Government should support this sector adequately. It is very difficult to have philanthropic expectation from the developers. Referring to Mr Zamir’s suggestion for infrastructure development by the developers he mentioned that apartment buyers will be ultimately charged for this and they will not agree to pay. Mr Faruk Khan, MP mentioned that getting gas and electricity connection for houses is still very difficult and unnecessarily lengthy which is mainly because of corruption, he added.

Rules – Inadequate and often Violated Substantial inputs were made on the issue of legal and regulatory aspects of housing development. Most of the discussants highlighted the inadequacies and implementation related issues of the legal framework. Brigadier Momen noted that developers are violating the stipulated set back rules of RAJUK by not leaving undeveloped spaces as stated in the set back rules. The Finance Minister felt that the problems stemming from private real estate development occurred due to inadequacy in the legal and regulatory framework and the absence of overseeing organisation.

He also admitted that RAJUK officials in many cases illegally give permission for building of houses in exchange of bribes. The Minister argued that unlimited use of land by a small number of people taking advantage of remittance flows or inheritance is not desirable and therefore should be restricted with the help of legal and regulatory measures. Urban Planning Ignored Professor Golam Rahman, President, BIP, noted that if the Structure Plan formulated in 1995 could be implemented many of our problems would be solved.

He informed that the Dacca Master Plan formulated in 1959 was burdening us for 35 years but it was never reviewed which was supposed to be done every five years. For this the Master Plan created many problems for us. Professor Jahan of BUET informed that though planning is an important aspect, for planning of Dhaka City there is no defined system of budgeting. Therefore, it is quite impractical to expect the general public to do something by their own initiative unless the government comes forward.

Professor Jahan informed that before liberation when only 5 per cent people lived in urban areas, the Urban Development Directorate was formed with a Director in the status of Secretary. At that time, urban planning was well in practice, but several efforts have since been taken to close down this organisation. He observed that over the last 30 years this organisation has not had any planner and therefore could not render functionality. Corruption in Real estate sector in Bangladesh: An Empirical Evidence Corruption is a much-discussed topic in Bangladesh in recent years.

After being rated as one of the most corrupt countries of the world for several successive years by the Transparency International, there has been a heightened awareness about it. To fight against corruption governments generally consider tighter control and prosecution as effective means. Such regulations, however, may culminate in more corruption instead of reducing it (Haque ; Muzaffar, 2008). The present study on the real estate sector of Dhaka city makes an attempt to investigate corruption that exists in the regulatory bodies and tries to quantify the economic loss associated with corrupt practices.

Corruption is defined as the use of public power to obtain private profit, preferment or prestige or for benefit of a group or class in a way that constitutes a breach of law or standard of high moral conduct (UNESCO, 1974). The Anti-Corruption Act of 1947 (Section 161) defines bribery as the gratification other than remuneration for doing or forbearing to do or for showing or forbearing to show favor or disfavor to any person (cited in Mansur, 2000). In common usage the word corruption is used to mean different things in different contexts. In this paper corruption mainly refers to taking bribe and extortion fee.

The process of bribery brings two parties together who have the intension to engage in some form of illegal transaction between them for a consideration that benefits or promises to benefit the public servant. The benefits received by the payee may be legal or illegal. Limited access to information on corruption by the citizens of the country is one potential reason for persistent corruption (Olken, 2009). Accurate information on corruption, as Olken (2009) suggests, may help prevent it through democratic process, providing incentives for politicians to limit it.

Findings from Billger ; Goel (2009) suggest that blanket corruption control policies are unlikely to succeed equally across countries with different corruption levels. The transition of the countries from a poor, stand-still, traditional society to a rich, modern, market democracy may also help explain the pattern of corruption. According to Hofstaedter (1948), corruption in the US grew to reach a peak about a century ago, but since then it has fallen steadily, as predicted by the transition hypothesis (Paldam, 2002).

Economic chaos may cause corruption as in the case of Russia where state of corruption deteriorated in previous decades (Levin ; Satarov, 2000 cited in Paldam, 2002). Khan (1998) investigates the issue of corruption in the Indian subcontinent, Malaysia, Thailand, and South Korea and using a patron client network model tries to explain why in some countries corruption has attended rapid growth while in others it has implied transfers which are very damaging for growth. Dreher et al. 2007), using a structural equation model, provide a ranking of the countries showing Switzerland, Japan, Norway, Denmark, Germany among the least corrupt countries while Guinea-Bissau, Nigeria, Syria, Zambia, Ghana among the most corrupt countries. Dhaka, the capital city of Bangladesh, has witnessed a large influx of people over the past decades, becoming one of the fastest growing and densely populated cities in the region. Access to proper housing facilities is an acute problem for its large number of inhabitants.

The growth in the apartment units delivered shows a moderate pace since the mid 1990s, considered as insufficient to meet the growing demand for housing facilities (Figure 1). A conducive business environment is important for the development of real estate sector thus assisting in alleviating the housing problem. A Review of Related Literature Evidence of written work on corruption can be as ancient as “Arthasastra” by Kautiliya in the fourth century B. C. in India, identifying the irresistible temptation by the government servants to receive bribe (cited in Bardhan, 997). Oldenburg (1987) argues that corruption has always been present, in different forms, having an adverse effect in different times at different places with varying degree and consequences. Government institutions which are corrupt and malfunctioning may impede or protract investment, entrepreneurship, and innovation (Lien, 1986). Bardhan (1997) points out that persistent corruption in certain cases may result into a sense of despair and helplessness amongst people who are concerned with it and ultimately turning the country into a mafia state.

Corruption may lead to lower economic growth (Shleifer ; Vishny, 1993) and the country’s growth may slow down where people with talent are engaged in rent seeking activities (Murphy, Shleifer ; Vishny, 1993). Limiting corruption might be a difficult task where it is economically desirable (Rose-Ackerman, 1978). Taslim (1994) argues that corruption in the form of bribe taking is like sand in a machine rather than oil because it drives out firms with lower entrepreneurial skills from the market (cited in Khan ; Toufique, 1995).

On the other hand, several studies provide evidence of positive consequences of corruption. Mauro (1993) suggests that corruption may raise economic growth in two ways: by acting as a speed money allowing individuals to overcome bureaucratic delays and by making government officials work harder leading to a greater efficiency. Khan (1998) states that in some North East Asian countries such as South Korea widespread corruption has accompanied decades of very high growth. Does Corruption lead to welfare Loss? Empirical evidence from eal estate sector of Bangladesh Ahmed Taneem Muzaffar* East West University, Bangladesh University of Western Sydney, Australia S S M Sadrul Huda East West University, Bangladesh Abstract. Regulation may give rise to corrupt practices thereby resulting in welfare loss in an economy. This research aims at measuring the impact of corruption on the real estate sector of Dhaka city, the capital of Bangladesh. It makes an attempt to measure the welfare loss resulting from corrupt practices exercised mainly by government regulatory agencies.

Bribe and extortion fee are the two main indicators whereby welfare loss is measured. Evidence from the study reveals that around 8 floors are lost due to payment of bribe and other such payments. Introduction Corruption is a much-discussed topic in Bangladesh in recent years. After being rated as one of the most corrupt countries of the world for several successive years by the Transparency International, there has been a heightened awareness about it. To fight against corruption governments generally consider tighter control and prosecution as effective means.

Such regulations, however, may culminate in more corruption instead of reducing it (Haque ; Muzaffar, 2008). The present study on the real estate sector of Dhaka city makes an attempt to investigate corruption that exists in the regulatory bodies and tries to quantify the economic loss associated with corrupt practices. Corruption is defined as the use of public power to obtain private profit, preferment or prestige or for benefit of a group or class in a way that constitutes a breach of law or standard of high moral conduct (UNESCO, 1974).

The Anti-Corruption Act of 1947 (Section 161) defines bribery as the gratification other than remuneration for doing or forbearing to do or for showing or forbearing to show favor or disfavor to any person (cited in Mansur, 2000). In common usage the word corruption is used to mean different things in different contexts. In this paper corruption mainly refers to taking bribe and extortion fee. The process of bribery brings two parties together who have the intension to engage in some form of illegal transaction between them for a consideration that benefits or promises to benefit the public servant.

The benefits received by the payee may be legal or illegal. In certain cases, bribe may turn out to be a de facto payment or a payment parallel to the legal fee (Muzaffar, 1999). Despite the fact that corruption is a significant problem in many of the developing countries, combating corruption has proved to be very difficult in most cases. In as much as it creates of burden of tax on public services and private activities, it also leads to potentially severe efficiency consequences (Krueger, 1974; Shleifer ; Vishny, 1993; Bertrand et al. 2006). Limited access to information on corruption by the citizens of the country is one potential reason for persistent corruption (Olken, 2009). Accurate information on corruption, as Olken (2009) suggests, may help prevent it through democratic process, providing incentives for politicians to limit it. Findings from Billger ; Goel (2009) suggest that blanket corruption control policies are unlikely to succeed equally across countries with different corruption levels.

The transition of the countries from a poor, stand-still, traditional society to a rich, modern, market democracy may also help explain the pattern of corruption. According to Hofstaedter (1948), corruption in the US grew to reach a peak about a century ago, but since then it has fallen steadily, as predicted by the transition hypothesis (Paldam, 2002). Economic chaos may cause corruption as in the case of Russia where state of corruption deteriorated in previous decades (Levin ; Satarov, 2000 cited in Paldam, 2002).

Khan (1998) investigates the issue of corruption in the Indian subcontinent, Malaysia, Thailand, and South Korea and using a patron client network model tries to explain why in some countries corruption has attended rapid growth while in others it has implied transfers which are very damaging for growth. Dreher et al. (2007), using a structural equation model, provide a ranking of the countries showing Switzerland, Japan, Norway, Denmark, Germany among the least corrupt countries while Guinea-Bissau, Nigeria, Syria, Zambia, Ghana among the most corrupt countries.

Real estate can be considered as an economic good since it is scarce in nature (Brueggeman ; Fisher, 2002). The scarcity in turn may give rise to corrupt practices. Although real estate may have many dimensions, this study only considers the construction aspect of the real estate sector. This sector in Bangladesh has been one of the fastest growing sectors since the 1990s and has helped provide housing facilities to the urban dwellers and create employment in both formal and informal sectors of the economy through its forward and backward linkages.

Dhaka, the capital city of Bangladesh, has witnessed a large influx of people over the past decades, becoming one of the fastest growing and densely populated cities in the region. Access to proper housing facilities is an acute problem for its large number of FIGURE 1: Growth rate of apartment units delivered in Dhaka city Source: Various issues of REHAB newsletters and publications. Inhabitants. The growth in the apartment units delivered shows a moderate pace since the mid 1990s, considered as insufficient to meet the growing demand for housing facilities (Figure 1).

A conducive business environment is important for the development of real estate sector thus assisting in alleviating the housing problem. A review of related Literature Evidence of written work on corruption can be as ancient as “Arthasastra” by Kautiliya in the fourth century B. C. In India, identifying the irresistible temptation by the government servants to receive bribe (cited in Bardhan, 1997). Oldenburg (1987) argues that corruption has always been present, in different forms, having an adverse effect in different times at different places with varying degree and consequences.

Government institutions which are corrupt and malfunctioning may impede or protract investment, entrepreneurship, and innovation (Lien, 1986). Bardhan (1997) points out that persistent corruption in certain cases may result into a sense of despair and helplessness amongst people who are concerned with it and ultimately turning the country into a mafia state. Corruption may lead to lower economic growth (Shleifer ; Vishny, 1993) and the country’s growth may slow down where people with talent are engaged in rent seeking activities (Murphy, Shleifer ; Vishny, 1993). Limiting corruption might be a difficult ask where it is economically desirable (Rose-Ackerman, 1978). Taslim (1994) argues that corruption in the form of bribe taking is like sand in a machine rather than oil because it drives out firms with lower entrepreneurial skills from the market (cited in Khan ; Toufique, 1995). On the other hand, several studies provide evidence of positive consequences of corruption. Mauro (1993) suggests that corruption may raise economic growth in two ways: by acting as a speed money allowing individuals to overcome bureaucratic delays and by making government officials work harder leading to a greater efficiency.

Khan (1998) states that in some North East Asian countries such as South Korea widespread corruption has accompanied decades of very high growth. Bhadra ; Bhadra (1997) argue for legalizing bribery. Since South Asia as a whole typically ranks high on surveys designed to measure the extent of bribery and corruption in business, their argument is that it is neither moral nor efficient to keep a widely prevalent system under the rug (Bhadra ; Bhadra, 1997).

The paper by Haque ; Muzaffar (2008) searches for a rationality of paying bribe and using data from the real estate sector of Bangladesh measures the loss to the government as a result of corruption. The research method In order to measure the welfare loss due to corruption which in turn results from regulations and extortion, the research makes an attempt to collect information on completed projects of real estate companies in Dhaka city. A structured questionnaire was designed to collect data relating to payment of legal fee, bribe, extortion fee, and other such information.

A number of government agencies are identified from the study of Haque ; Muzaffar (2008), responsible for providing different kinds of permission to the builders of apartments. These include: Design: The design of the project needs approval from the regulatory agency called RAJUK (Dhaka Development Authority). Water, Gas, and Electricity: To supply the utility services such as water, gas, and electricity a builder requires to take permission from Dhaka WASA (Dhaka Water Supply Authority), TITAS Gas Supply nd Distribution, and Dhaka Electric Supply Authority (DESA) respectively. Leaving equipment on the roadside: In order to leave the construction equipment, such as rods, bricks, and cement, on the roads adjacent to the construction site, the builder needs a temporary permission from the Dhaka City Corporation. Hand-over of the apartment to the client: At the time of hand over of apartments to flat-owners, the builder sometimes requires to pay a fee on the basis of per square foot to RAJUK.

This fee sometimes is paid by the flat-owners depending on how the contract is signed. Registration of the project: The Registry Office located at Tejgaon, Dhaka charges a fee from the builder at the time of registration process. Value added tax (VAT): The builder needs to pay VAT at 3% rate of the apartment price quoted when the hand-over is done. The agency responsible for collecting the VAT is the Circle Zone Office at Shegunbagicha, Dhaka. Apart from the above government regulatory agencies where payment of legal fee and bribe (the ossibility of it) is involved during the completion of a project, the other two areas where a builder might require to pay bribe or extortion fee are the police and local extortionists (the “mastans”). Using the structured questionnaire a survey was conducted during the months of November and December 2008 on companies, enlisted with the Real Estate and Housing Association of Bangladesh (REHAB), in Dhaka city. Although a random selection process of companies was followed, collection of information was possible only from the companies who were willing to respond and provide such data.

The data was analyzed using spreadsheet and software such as SPSS. The Theoretical model The model used for the purpose of analysis assumes that a builder has a marginal cost (MC) curve which is also its supply function in a perfectly competitive market. The existence of a large number of builders in the city of Dhaka supports the notion of a competitive market. Figure 2 shows marginal cost curves with bribe and without bribe, MC1 and MC2 respectively. MC1 is constructed using the data collected from the field survey while MC2 is an estimated function.

The area of the triangle ABF measures the welfare loss. Welfare loss = ? ? Difference in MC Curves ? Difference in quantities To derive the marginal cost functions it is assumed that the cost function for constructing the apartments is as follows: C = C (Q, R, F), Where C is the cost of apartment construction, Q is the area of the apartment measured in square foot, R stands for bribe and extortion fee paid, and F refers to legal fee. Cost P(=MC) C2 MC1(=SS) MC2 AB F 0 Q1Q2Quantity FIGURE 2: Measuring Welfare Loss Using Marginal Cost Curves The research findings

The survey reveals information on 27 completed projects, 21 residential and 6 commercial, of the companies who were willing to provide data (Table 1). Table 2 provides information on payment of bribe and extortion fee during the course of the completion of the projects. It shows that in 77. 8% cases the builder requires to pay bribe to RAJUK for the approval of the project design. It also depicts a high degree of corruption while paying for taking connection for utility services. The figures show that in 100 percent cases builders need to TABLE 1: nature of the project Typefrequency Residential21 (77. 8) Commercial6 22. 2) Total27 Source: Field survey, November and December 2008. NB: Figures within parentheses show percentage of the total. TABLE 2: payment of bribe Areas where legal fee or bribe, Extortion fee was paid Design Water Gas Electricity Use of adjacent road Registration VAT Mafia fee to the extortionists Illegal payment to the Police Total number of responses Pay bribe in order to obtain permission for Water and electricity. In contrast, as Table 2 suggests, reported cases of payment of bribe and extortion fee for VAT, police, and local extortionists are relatively low. Table 3 states the reasons for paying ribe or extortion fee. 25. 9% of the cases report that the reason behind paying bribe is to speed up the process. 3. 7% say that it is a necessity, in other words, without the Bribe/extortion fee paid YesNo 216 (77. 8)(22. 2) 270 (100)(0) 243 (88. 9)(11. 1) 270 (100)(0) 1710 (63)(37) 234 (85. 2)(14. 8) 324 (11. 1)(88. 9) 918 (33. 3)(66. 7) 423 (14. 8)(85. 2) 27 Source: Field survey November and December 2008. NB: Figures within parentheses show per- Centage of total. The item hand-over is not shown since no information was revealed in this regard. Bribe the respective work would not have been done. 3% state both of the factors as a reason. According to Table 4, 81. 5% of the cases report that they performed the process of giving bribe through a package deal while 11. 1% say that it was done through a personal effort from desk to desk. Table 5 states that 40. 7% of the total number of projects paid the bribe in two installments, 29. 6% of them paid in 3 installments, and 18. 5% of them paid in 4 installments. Only 3% of total paid the whole sum before the job was done. TABLE 3: reasons for payment of bribe/extortion fee Reasonsfrequencypercentage (%) To speed up the process725. 9 It was a necessity13. Speedup + Necessity1763. 0 Others27. 4 Total27100 Source: Field survey, November and December 2008. TABLE 4: type of deal to pay bribe/extortion fee Typefrequencypercentage (%) Package2281. 5 Personal311. 1 Both27. 4 Total27100 Source: Field survey, November and December 2008. TABLE 5: mode of payment of bribe/extortion fee Number of installmentsfrequencypercentage (%) In 2 Installments1140. 7 In 3 Installments829. 6 In 4 Installments518. 5 Payment before the work done311. 1 Total27100 Source: Field survey, November and December 2008. The paper uses the following cost function for estimation. Log C = 9. 64 + 7. 84E-06 Q + 1. 16E-11 R ? Q + 8. 24E-13 F ? Q Std error: (0. 255) (7. 64E-06) (3. 27E-12)(3. 13E-13) T stat:(36. 67)(1. 02)(3. 54)(2. 63) N: 27 R2 = 0. 6138Adjusted R2 = 0. 5612 Here, C stands for cost in thousand taka, Q is area in square foot, R stands for bribe paid because of regulation, and F stands for Fee that is required as a legal payment. The cost function has a constant term since not all cases report of paying bribe and also there is a fixed cost involved. The coefficient of Q is positive reflecting the fact that higher level of production would lead to higher cost.

The coefficient of (R? Q) is positive revealing that cost increases as bribe and extortion fee associated with tighter regulation goes up. The coefficient of (F? Q) is positive as higher fee leads to greater costs. A summary of the results estimated is provided in Table 6. The average values for Marginal cost with bribe and without bribe are approximately Taka 832 and Taka 545 respectively thus implying that the burden is Taka 287. The results also show that on average 8 floors are lost due to payment of bribe and welfare loss per square foot is 552. 89.

TABLE 6: summary of findings Meanmedianmaxminstd Dev Cost of the project (in lac)338. 8926025027233. 78 Area (Q)33367. 4833600100800840021645. 66 Bribe/extortion fee593611. 11491000157800021000473449 Legal fee5111046. 56387500018310200760005048612. 46 Marginal cost with bribe/831. 78575. 873330. 5639. 41822. 78 Extortion fee Marginal cost without544. 72362. 481989. 2632. 90476. 88 Bribe/extortion fee Area (Q) without bribe/46959. 5846025. 78122041. 588475. 9725681. 24 Extortion fee Differences in Areas (Q)13592. 1014408. 1325457. 2975. 976353. 06 Welfare loss2505045. 11223269. 8613015180. 3939. 893494654. 41 Average floor lost7. 9259—- Welfare loss per square foot552. 89—- Source: Data collected from field survey and calculation by the author. NB: Figures expressed in Bangladesh currency Taka; 1 Dollar = 70 Taka (approx. ); 10 lac = 1 million. Concluding remarks The paper provides information on taking bribes in government regulatory agencies and the amount of loss incurred as a result of it. The primary objective of the study was to show a quantitative measure of welfare loss studied in economic literature.

Despite several limitations, such as information on a few completed projects and availability of confidential data, the study reveals evidence of significant amount of welfare loss in the construction of apartments in Dhaka city. Perhaps what is required is to identify critical governance capacities of the institutions and set realistic and feasible institutional reforms and anti-corruption strategies to combat corrupt practices. Housing Finance in Bangladesh Improving Access to Housing Finance by Middle and Lower Income Groups Marja C. Hoek-Smit Prepared for The Government of Bangladesh

Ministry of Local Government, Rural Development and Co-operatives) and UNDP/UNCHS (Habitat) December 1998 IBACKGROUND AND CONTEXT The lack of available and accessible housing finance has been identified by the Government of Bangladesh (GOB) as one of the important hurdles in improving the housing conditions for middle and lower income households. In that connection, the Ministry of Local Government and Rural Development, and Cooperatives, recently requested UNCHS to provide policy advice on the housing finance sector, with a particular focus on policies to increase access to housing finance by middle and lower income households.

UNDP agreed to provide funding for the study. The housing finance consultancy is to a) provide a brief overview of existing housing finance systems in Bangladesh, including those available to the urban and rural low-income households, and, b) to make suggestions for the improvement of housing finance mechanisms for lower-middle and lower income groups suitable to the conditions in Bangladesh. The consultancy took place from November 11 through 23, 1998 in Bangladesh. UNCHS has been involved in the shelter and urban sector of Bangladesh since 1979.

It conducted an Urban and Shelter Sector Review in 1993, and has recently formulated an Urban Poverty Alleviation Project which is awaiting final approval by the GOB. In addition, UNCHS has completed a Shelter Rehabilitation Assessment Study after the recent floods. A housing finance component that would increase access to housing credit for lower income groups, would complement projects by the GOB and International Agencies that already include micro-credit, infrastructure and services provision.

The need for improvements in the housing finance system has been expressed in several studies and by different government and international agencies. The Asian Development Bank prepared a comprehensive urban institutional improvement project in 1993, of which an analysis of the housing finance sector was a part. Detailed recommendations for action were made. However, the project was not approved and government did not take up the proposed actions.

The World Bank is presently assisting Bangladesh in the formulation of an Urban Strategy. The draft report also identifies housing finance as one of the constraints in improving housing in urban areas, but it does not include an analysis of the sector. The present study builds on these efforts and attempts to formulate recommendations for improving access to housing credit for various groups of presently underserved urban and rural households.

The analysis and related recommendations fall into four categories: 1) the macro- economy and the efficiency of capital markets generally as these relate to the functioning of the formal housing finance market, 2) the way housing is supplied in urban and rural areas, 3) the structure and efficiency of the housing finance system, and, 4) micro- finance mechanisms for housing accessible to households that are unable to be served by the formal finance system.

This brief consultancy cannot do justice to the complexity of these four different areas, but attempts to provide a coherent picture of present practices and potential improvements that might be explored in both the formal mortgage market and the alternative housing credit programs offered by micro-finance providers. IICURRENT TRENDS IN HOUSING FINANCE Over the last few decades, comprehensive studies of housing markets and housing finance systems across the world have created a shared body of knowledge on what constitute effective and non-effective housing policies and housing market regulations.

In particular, programs to finance social housing are perceived differently today than a few decades ago, both in developing countries and advanced economies. The focus is on creating well- functioning housing markets and the expansion of a safe and sound housing finance system. Housing finance systems in many developing and emerging economies share several characteristics.

First, most housing finance systems are, in Renaud’s words, “institutional patchworks” that comprise private sector lenders as well as several government-managed housing finance institutions or programs (Renaud, 1997), in the form of special government housing “banks” or special housing funds capitalized by payroll taxes. These institutions stifle competition in the financial system because of their access to low-cost government funds and prevent innovations in the way housing finance is provided.

In most countries these programs are dominated by special interests, and allocation of funds to either private borrowers or construction firms no longer focuses on disadvantaged groups. The private banks do not consider long-term lending for housing a priority because of the associated risks in non- integrated financial systems and the predominance of government finance programs catering to the same professional middle class to which the financial sector might want to extend their services.

Second, many government programs use interest-rate subsidies on fixed-rate long-term mortgages which have some negative characteristics: 1) the funding and cost of special government lending programs to the economy is non-transparent, i. e. , it is not on the budget and increases with inflation; 2) the subsidized interest-rate programs stimulate debt acquisition rather than savings, in other words the more one borrows, the higher one’s subsidy (see Renaud, 1984, 1997; Diamond, 1997; Hoek-Smit, Diamond and Bovet, 1997; Hoek-Smit, 1998 for analyses of housing finance systems in Latin America, Asia and Africa).

As a consequence, the formal housing finance system only provides mortgage loans for a small proportion of newly constructed houses and home purchases. A much larger proportion of households than necessary have to finance housing from savings or build incrementally and at a low standard because upfront finance that would allow them to purchase a higher quality home and pay for it over a longer period is not affordable or inaccessible. Of course, formal finance is inaccessible for many households in developing countries for other reasons.

These include insecure and undocumented incomes, a lack of land and housing options for middle and low income households that are acceptable as collateral to banks, and the high costs and related lack of interest by the banks to work with small clients, to name just a few. Increasingly, developing countries move towards a more integrated modern housing finance system. First, there is a trend to increasingly rely on capital markets as sources of funds for primary housing finance lenders rather than on depository institutions alone.

Second, it has been shown that, if assistance to low and moderate income households is necessary, subsidy programs are best designed to allow households to participate in the housing market, rather than provide public housing. Third, support to moderate income borrowers to acquire loans through the private financial sector has proven to be most efficient if it is provided as a direct demand subsidy in combination with other facilitating measures and incentives to the banks rather than as interest-rate subsidies through segregated government lending programs and institutions.

This way, mixing subsidized finance with market-based lending is avoided in order not to distort prices and create disincentives for expansion of the private finance sector (e. g. , preventing access to capital markets). Fourth, for those households who cannot use the private sector for their housing finance needs, even with incentive programs, special social housing funds or lending mechanisms are used that provide shorter-term and smaller loans, at concessionary rates if necessary, but which are clearly separated from the rest of the housing finance system.

Both types of finance subsidies are set up to be efficient, transparent and well targeted to those who cannot participate in the formal housing finance sector without such support. Many Latin American countries (e. g. Chili, Costa Rica) and several South Asian countries (e. g. Malaysia, Thailand, India) have initiated a fundamental restructuring of their housing finance systems according to these principles. Even though all countries have a different history in the development of their housing and housing finance system, it is important to make use of the experiences of other countries with a similar economic and financial background.

The analysis of the Bangladesh housing finance system is undertaken against the background of these international developments. IIITHE ECONOMIC CONTEXT Bangladesh is one of the poorest countries in the world with a per capita GNP of $260. It faces continuous challenges in maintaining economic stability, improving public sector efficiency and inducing economic growth sufficient to alleviate the desperate poverty of a large segment of the population. This section briefly reviews current trends in the economic and financial environment with a particular view to the housing sector. A.

Structure and Growth of the Economy Since the 1980’s Bangladesh has moved towards establishing a liberal market-based and private sector driven economy. Prudent macro-economic and fiscal policies have resulted in the highest foreign reserve in decades, increased contribution in GDP and a boost to the value of the Taka compared to other currencies in the region. It appears as if the economic turmoil in East Asia has had only a small impact on Bangladesh. The economy has been diversifying. The agricultural sector, which provided 62 percent of GDP in 1975 accounts presently for roughly 30 percent of GDP.

The services sector is the largest and fastest growing, contributing 50 percent of GDP and growing at a rate of at 6. 5 percent during 1996. Housing services have remained at 7 percent of GDP in constant prices. By far the largest export product are garments. The garment industry has seen an unprecedented increase during the last decade, employing an increasing proportion of the labor force of which the majority are female workers. Inflation has increased in recent years, but remained modest. However, in February 1998, the year-on-year rate was 8. percent, while in previous years it had declined steadily to below 5 percent. Housing costs have risen faster than the overall CPI. Several factors contributed to this rise in inflation according to the World Bank and Asian Development Bank; monetary expansion, a poor aman crop, and political instability (1998, p. 7). Foreign exchange levels have stabilized and government’s deficit has decreased gradually to a present low of 5. 3 percent of GDP for FY97. The GOB has contained spending by downwards adjustment of its Annual Development Program (ADP) (an 11. percent decrease between FY97 and 98 in Taka amount). Unfortunately, the efficiency and cost effectiveness of programming and implementation of the ADP is considered inadequate across sectors, including the housing sector (World Bank, 1996). For example, an increasing proportion of the public expenditure program for housing is allocated to “quick fix” supply-side programs that do not improve the longterm functioning of housing delivery to moderate and low-income households and lack an institutional “home” in which housing policies can be assessed.

Allocation to the housing sector are approximately 5 to 6 percent of the ADP. The ADP is increasingly dependent on foreign funds. The debt-GDP ratio in F97 was over 50 percent. However, most of the debt is official multi- and bilateral long-term debt provided on concessionary terms. Debt servicing is therefore low relative to the size of the debt and amounted to close to 11 percent of export earnings in FY97. These concessionary loans have, however, had a distortionary influence on interest rates in the country. Foreign lending for the housing sector directly is negligible.

The domestic savings rate has increased over the last few years, but is low compared to neighboring countries. It is estimated at 15 to 16 percent of GDP. When net factor income and transfers are included the national savings rate rises to approximately 20 percent. B. Employment and Household Income Distribution Bangladesh has a population of approximately 124 million people. Population growth decreased over the past decades and was 1. 6 percent per year during the 1990 -1996 period. The labor force grew with an average of 2. 1 percent during that time, due to an increasing number of female participants.

Over that same period, GNP at constant market prices increased at an average rate of 4. 8 percent and economic growth for 1998 was estimated at 5. 5 percent. However, the devastating floods, politically induced strikes or hartels, the poorly performing financial sector and losses in state-owned enterprises (SOE) have had a negative impact on the economic situation. There is a broad agreement that Bangladesh’s economy could and needs to perform better than it does presently in order to address the severe poverty problem (World Bank and Asian Development Bank, 1998, p. 1).

Indeed, these economic growth figures have had only a modest influence on the proportion of people living in poverty. While poverty is down from 42. 6 percent of the population in 1991/92, it was still 35. 6 percent in 1995/96. The World Bank estimates that close to half of the urban population (11 million people) falls under the poverty line with incomes of Tk. 3500 ($75) or less per month. The shift to a less agricultural economy is reflected in the increasing proportion of the population residing in urban areas. Urban growth rates are around 5 percent per year, compared to overall population growth rates of 1. percent and rural to urban migration is high. Still, approximately 80 per cent of the population lives in rural areas. Rural immigrants are increasingly comprised of young women who are attracted by the opportunities in the growing garment industry. However, urban formal sector employment has not kept up with urban population increase and the majority of the urban labor force is dependent on informal sector employment. 1 The 1990 census showed the pro

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