March 11, 2014

Governments edge towards consensus on Rail Baltica

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The Baltic States are seeking to end their isolation from the European railway network with a new standard-gauge line from Tallinn to Warsaw, but governments have struggled to reach a consensus on the region's biggest-ever infrastructure project. Keith Barrow reports from Brussels and Vilnius on the quest to find common ground on Rail Baltica.

LOOK at a railway map of the Baltic countries and it's immediately clear that the network is configured for traffic heading east towards St Petersburg, a reflection of the the system's origins in the 19th century, when the region was under Russian rule. With the break-up of the Soviet Union in the early 1990s, Latvia, Lithuania and Estonia gained independence, and in 2004 the three states joined the European Union (EU).

With their 1520mm gauge and the lack of direct links between their capitals, the region's railways continue to look eastwards for most of their business, but they remain relatively isolated from the markets of the west.

This is an issue that has concerned governments in the region ever since they gained independence. In 1994 discussions began on converting the existing route between the Polish-Lithuanian border, Lithuania's second city Kaunas, the Latvian capital Riga, and the Estonian capital Tallinn to dual-gauge. With the indirect nature of the route, these proposals were aimed primarily at freight traffic but Rail Baltica, as it became known, subsequently developed into two projects - the dual-gauge conversion, known as Rail Baltica 1, and Rail Baltica 2, a new-build mixed-traffic railway providing a direct link from Poland to Lithuania, Latvia and Estonia.

Work is already underway on the first phase of Rail Baltica 1 from the Polish-Lithuanian border to a new intermodal terminal at Kaunas, which is due to be completed in 2015. The next phase of the project will extend 1435mm-gauge tracks east to the marshalling yard at Palemonas.

Rail Baltica 2 will be designed for operation at up to 240km/h and is expected to reduce Tallinn - Riga journey times to around two hours, while Tallinn - Warsaw will be cut to around six hours.

In June 2010, the transport ministers of Poland, Lithuania, Latvia, Estonia, and Finland signed a memorandum expressing their political intent to go ahead with Rail Baltica 2, and guidelines for the development of the project were agreed in November 2011.

With an estimated pricetag of around €3.67bn, it is no exaggeration to say that this is the largest infrastructure project ever implemented in the Baltic States, but with Lithuania, Latvia and Estonia all eligible for European cohesion funding, as much as 85% of the bill could be covered by the EU through its Connecting Europe Facility (CEF).

Rail Baltica is one of the key projects in the EU's new TEN-T core network and is therefore widely considered to be a leading contender for a big chunk of the €26bn allocated to transport projects under the CEF for transport projects during the EU's 2014-2020 funding period.

"All the member states recognise that Rail Baltica is one of the most important transport corridors for Europe because when it comes to infrastructure the Baltic countries are still very much part of Russia," European Commission vice president for transport and mobility Mr Siim Kallas told IRJ in an interview in Brussels last month. "The railways are still part of the Russian network, with the same gauge and most of their business coming from the east. The same is true of the energy network and highways. These are isolated islands. Some people, including myself, think that as members of the European Union the Baltic States need to be connected to Europe, not just politically but through their infrastructure. This is a basic and fundamental issue that needs to be addressed."

KallasAn initial feasibility study and benefit-cost analysis on Rail Baltica 2 was carried out by Aecom in 2011, which also identified a preferred corridor for the route running from the Polish border to Lithuania's second city Kaunas, then on to the east of Riga, before following the coast towards Pärnu, and Tallinn. This option has a benefit:cost ratio (BCR) of 1.75 and an economic internal rate of return (EIRR) of 9.3%, both of which are below the threshold required for EU funding. The study notes that "Political factors will be a serious factor in the future of this project, both in terms of the desire of the EU to link the Baltic States with the rest of the EU using a standard-gauge railway and in terms of the individual Baltic States, whose development could be stimulated by this project."

Following the publication of this report, an interministerial task force was formed between the three Baltic countries and Poland. Talks continued on the basis of the preferred route until the middle of last year, when the Lithuanian government announced that it wanted to include the capital Vilnius in the project with a 100km branch from Kaunas.

This not only shifted the course of negotiations between the Baltic countries, leading to tensions between ministers, but was an issue for the European Commission because Vilnius was not included in the TEN-T core network which had been agreed by the member states.

"For three years we negotiated with the member states, including Lithuania, on the TEN-T core network and I sometimes wondered why Vilnius was not included," says Kallas. "Now we have finalised a TEN-T network which includes Kaunas but not Vilnius. Our philosophy is of course to connect capitals, but the Lithuanians chose to do it this way. Then suddenly last summer they asked "where is Vilnius in this network?"

"Our hands are tied because this decision has already been made. On behalf of the commission I have to say we have tried to find a solution to bring Vilnius into the network, but it was a Lithuanian decision at the outset not to include the capital. If we build a branch it will be very costly, but let's negotiate."

Lithuania's vice-minister for transport Mr Arijandas Šliupas says that the Vilnius link could be vital to the business case for the overall project. "Vilnius plays a major role in closing the gap between the figures in the Aecom study and the figures that are required to reach the minimum level of viability," he told IRJ in Vilnius last month. "This is the biggest population centre in Lithuania and it generates 40% of the country's GDP, so a high-speed passenger rail link is needed. The viability of the project depends on attracting the biggest possible passenger flows.

Šliupas is keen to stress that Vilnius was not forgotten and says the Lithuanian government wanted to study the conclusions of the initial Aecom report before committing to the branch. "The study only gave us a conceptual line for the route and stated that further cost-benefit analysis was needed to define the precise route," he says "This is the stage where all major elements have to be considered and included to ensure Rail Baltica is economically viable. We also have to ensure we are in line with the EU Roadmap to a Single European Transport Area, approved in 2011, which clearly states that the core network must ensure efficient multi-modal links between EU capitals. The previous analysis was perhaps too general and too early to really consider the value of the Vilnius link."

Šliupas stresses that linking the Lithuanian capital to Rail Baltica will make the project more relevant to the economic needs of the region. "This isn't just about the connection of the Baltics to Western Europe, it's about establishing fast regional connections within the three countries and between our capitals because that's where the key economic relationships lie."

During January and February the three governments were eager to present a united front, stressing that a consensus has been reached on including Vilnius in Rail Baltica. Latvia's prime minister Mrs Laimdota Straujuma said during an official visit to Vilnius in February that the Latvian government understands Lithuania's position on linking Vilnius to the network and emphasised the urgency of meeting the 2016 deadline for the CEF application, a view echoed by Kallas. "It's quite normal for countries to have different views, but for us it's important to consider that the clock is ticking," he says. "Before 2016 the member states involved in Rail Baltica need to make firm decisions about the specification of the project, or the money will be distributed to other competing projects. I hope that the Baltic States are well placed to compete for funds, but you should never underestimate others, and I'm sure a strong argument will be made by other member states for investing the money in other projects."

Any remaining issues will certainly need to be resolved before the Baltic States can establish a joint venture company to complete the detailed studies which are essential to the CEF funding application. A joint declaration to establish this company was signed by the transport ministers in September 2013, and was formally endorsed by the prime ministers of the Baltic States last November.

The first task of the joint venture will be to clarify the scope of the project, carrying out detailed cost-benefit analyses and developing route alignment options, as the Aecom study provides only indicative figures on the viability of the new line. The joint venture will also develop the project implementation schedule, which will then need to be approved by the three governments before construction begins.

"There are certain technical elements that are still to be agreed on the joint venture, but the political will is there to get this done quickly," says Šliupas. "Some financial statements made in the Aecom study give us more questions than answers, particularly around BCRs and the internal rate of return, which do not currently meet the minimum requirements for EU funding, but the more detailed study will clarify this."

According to Šliupas, the Baltic States are now close to reaching an agreement on the shape of the joint venture, a crucial and long-awaited step forward for Rail Baltica. "At the moment we have nine outstanding issues on the creation of the joint venture, seven of which are technical issues," he says. "Two others - the Kanuas - Vilnius link and the connection to the Polish border have been raised by our partners as political questions. The prime minister of Poland has clarified the position on these two elements - and it's now up to the [interministerial] task force to finalise the agreement, which has to be done by the end of February or early March."

The governments of the countries involved have all now agreed to finance the operation of the joint venture for its first year of operation, and Šliupas says the Lithuanian government established a dedicated company in January to act as the shareholder on its behalf. "On our side, we are ready," he says.

With the deadline for the CEF application looming ever larger, it is clear the Baltic States cannot afford to further prolong discussion on the Vilnius branch. "The CEF is the most essential element for Rail Baltica 2," explains Šliupas. "The implementation of this project very much depends on the level of funding the CEF can provide. We will have to consider in the national contribution to the project that there will be non-eligible costs, which might come to a significant amount, and we will need to budget for these. The joint venture company will answer a lot of these questions as it clarifies the scope of the project."

It is unclear whether these non-eligible costs might include the Vilnius branch, or elements of it. Lithuanian prime minister Mr Algirdas Butkevicius said in January that Lithuania could not finance the branch using its own resources. "We need a final agreement for this section to be 85%-funded by the EU," he told LRT Radio. "If a smaller amount of money is allocated, this project will be economically irrational." The Lithuanian transport minister says he expects the Kaunas - Vilnius standard-gauge connection to cost around €290m. Butkevicius said last month that Lithuania will take responsibility for establishing the most cost-efficient way of integrating Vilnius into the project. According to Šliupas, the cost per kilometre of the Vilnius link will be similar to the figure for the Kaunas - Riga - Tallinn line.

Concern

According to local press reports the Estonian government has expressed concerns that Lithuania's attempt to include the Vilnius link in the project will jeopardise CEF funding for the remainder of the route, and has suggested that it should be added in a future phase, although this option has been rejected by the Lithuanians.

Not all of the hurdles facing Rail Baltica are political. Kallas warns that the project could also face delays from legal challenges, and suggests that how the Baltic States respond to this will be crucial to successful implementation. "You should not underestimate these things - look at Stuttgart 21," he said. "This was discussed at great length, but there were still many protests against it. This is a risk in Europe. If there are court cases against construction they can almost go on forever, and this should not be the case. This is probably the biggest risk to rail projects in all countries, not just the Baltic. We must find solutions in Europe which means that legal proceedings can be brought to an end at some point. Cases cannot just go on indefinitely."

Construction is expected to begin on Rail Baltica 2 in 2016, but with completion of the first sections not expected until 2024, funding will be spread across two EU budgets. "Construction needs to start as soon as possible," says Kallas. "If it is delayed, they will get less money from the current EU budget, so they will have to wait until after 2020. What will the conditions be like then? You never know. If the project implementation and use of funds before 2020 is seen to be poor, decision-makers might not support requests for more money. If the project encounters delay after delay after delay, the European council and parliament, and larger member states might reasonably ask why they should provide more money if this unique chance isn't taken. The cohesion money element in this EU budget is unique and I don't think that the next budget after 2020 will have the same provisions for cohesion countries, so if they don't use what is available now it is likely they will lose out. This is the big opportunity for Rail Baltica."

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