Joint report: Rail Baltic project facing EUR 10-19 bln budget deficit

  • 2024-06-12
  • BNS/TBT Staff

TALLINN – The progress of the Rail Baltic project is at risk because the estimated cost has increased fourfold in seven years and may result in a budget deficit ranging from 10 billion to 19 billion euros depending on the scope of the project, the supreme audit institutions of Estonia, Latvia and Lithuania find in a joint report published on Wednesday.

The situation is aggravated due to the foreseeable two-year financing gap in 2027-2028 by the European Union, which demands greater contribution by the three countries.  

According to the estimates of the three supreme audit institutions, an additional 19 billion euros is needed to complete the Rail Baltic project in full. Considering the latest project budgets in each country and the already allocated funds, in Estonia 2.7 billion euros is needed, in Latvia 7.6 billion euros, and in Lithuania 8.7 billion euros.

To manage the increased budget and strict deadline to make the railway operational by 2030, the governments of Estonia, Latvia and Lithuania are preparing to reduce the scope of the work to be done by 2030 and have set the focus on building the main line of the railway. The scope reduction  means that local stops will be either built to minimal functionality or built later, and only one set of tracks will be built instead of two in some parts of the railway.

The planned reductions in the project’s scope, the first phase, would cut the expected deficit by almost half by 2030. The estimated deficit in the case of the first phase scenario would be 10.1 billion euros for the three countries combined: 1.8 billion euros in Estonia, 4.4 billion euros in Latvia, and 3.9 billion euros in Lithuania.

There is no certainty though of whether and how much money will be allocated to the Rail Baltic project from the Connecting Europe Facility -- the main financing tool for the project -- in the upcoming European Union funding period from 2028, nor is there any indication of the co-financing rate.

The on-time financing is at risk not only because the estimated costs have increased, but also because the current European Union funding period ends in 2027. As the next funding period will begin in 2028, there will probably be a gap in financing for the years 2027-2028 since grants are not normally awarded in the first year of a new Multiannual Financial Framework. Considering that the project’s delivery is under tight time restrictions as the operational railway must be ready by 2030 and the years 2027-2028 are expected to be full of intensive construction work, the financing gap needs to be filled.

Even considering the finalization deadline of the first phase, the project is at least five years behind the schedule fixed in 2017. The railway was planned to be built and ready to operate by the end of 2025. The general delay is caused mainly by consecutive delays in the design and territorial planning processes, which both also affect land acquisition progress.

According to the ministries responsible for the project, the second phase of the project’s implementation will take place after trains have started to operate on the railway and when freight volumes increase. However, there is currently no schedule for the second phase.

Delays can lead to the time limit being exceeded, so the funds allocated from the Connecting Europe Facility (CEF) may become ineligible. According to the current estimates of the national implementers and RB Rail AS, eight million euros is at risk of being ineligible in Estonia, four million in Latvia, and 71.5 million euros in Lithuania if not invested during the eligibility period. In Latvia, there is a risk of having to return already spent financing for design works because their expected completion date exceeds the allowable period.

Several key decisions needed to put the new railway infrastructure in operation in 2031 have still not been made. So far, the only decision about the infrastructure management taken by the three Baltic states is that each country will have a separate independent infrastructure manager. Yet, there is still only an interim infrastructure manager in Latvia. No mechanism is in place for the implementers -- RB Rail AS (the main coordinator of the project) and national implementers -- to urge the responsible ministries to make decisions faster. There is no decision that stipulates the roles and responsibilities of the project parties and the principles for managing the railway, including how profits and losses will be divided, conflicts resolved, etc.

Should the first phase of the railway construction be completed by 2030, there is a risk that no trains will be available to operate on the railway in 2031. Available assessments have indicated that it may take eight years to procure trains. Currently, the ministries responsible for transportation have not decided how the international trains should be acquired -- leased or owned. Passenger operators might also be required to have their own trains. It should be acknowledged that the cost of acquiring the trains as well as maintaining and operating the project is not included in the project's budget and cannot be financed from European Union funds.

The supreme audit institutions of Estonia, Latvia and Lithuania indicate that whole project risk and change management needs further development. An effective risk and change management system in complex projects means that corrective measures are taken quickly, if necessary, and cost increases and the use of contingency reserves are kept under control.

The 2019 cooperative audit acknowledged that, although risks had been identified, assessed, and prioritized, a risk management system that would tie the whole project into one was still under development. There were no mechanisms for change management at the entire project level. The current review shows that those shortcomings still exist and that the risk and change management on the whole project level have not notably improved since 2019.

The Rail Baltic project -- a the planned 870-kilometer railway line from Tallinn to the Lithuanian-Polish border -- is the largest infrastructure project in the history of the independent Baltic states. Of the total length of the main line, 213 kilometers will be in Estonia, 265 kilometers in Latvia and 392 kilometers in Lithuania.

Until now, the project’s main financing source has been the European Union funding instrument Connecting Europe Facility, with a financing rate up to 85 percent. The beneficiaries of the Rail Baltic project are the ministries in each of the participating countries responsible for the project implementation and a joint venture RB Rail AS, in accordance with the respective grant agreements. The project is implemented by three national implementing companies: Rail Baltic Estonia OU in Estonia, Eiropas dzelzcela linijas SIA in Latvia, and LTG Infra in Lithuania.

On Dec. 15, 2023, the auditors general of Estonia, Latvia and Lithuania signed an agreement on carrying out a joint review of the Rail Baltic project. The objective of the review was to collect facts about the progress and financing of essential aspects of the Rail Baltic project to make sure the national parliaments were aware of the risks concerning the current state of the project’s progress and their impact on the achievement of the project’s goals.

The supreme audit institutions of Estonia, Latvia and Lithuania have investigated the implementation of the Rail Baltic project on both the national and international level. Since this is a review and not an audit, the supreme audit institutions did not issue recommendations.