Funding opportunity rolling out of view

Funding opportunity rolling out of view

Estonian official warns that EU mega-project Rail Baltica risks missing the train for funding, as BQ Baltic’s Colin Donald reports

Rail Baltica, the €3.7bn EU scheme to connect the Baltic States to Western Europe, already “on the edge” of standard value-for-money assessments, is now in danger of missing its funding opportunity altogether, a senior Estonian official has warned.

Indrek Sirp, counsellor of Estonia’s Ministry of Economic Affairs and Communications told BQ Baltic that the fragile economic case for the project required a speedy resolution of its remaining challenges. He singled out a decision on the route through Lithuania, where the government has proposed revising – and lengthening – the track to connect the capital Vilnius. Describing the project as “a strategic and political aim... not strictly an economic project” Mr Sirp, who was appointed in August 2013, pointed to a consultant’s report showing the project’s benefit to cost ratio (BCR) and [investment] return rate at only 1.75% and 9.3% respectively. The lower-than-usual figures suggest only marginal gains for
Baltic economies.

Sirp said Rail Baltica was already “pretty much on the edge [of value for money criteria] which tells us that, every kilometre of additional track, or tunnel, each piece of construction [additional to the original plan] makes it less possible to achieve. We have to be very careful that we don’t make it too expensive.”

The project has been thrown into doubt by an apparent change of mind by the Lithuanian government, which is proposing changing the route agreed by the three Baltic States in 2011. The change puts the onus on Vilnius to source evidence of the economic impact of
the amended route. Sirp expressed concern that a delay in carrying out the work could lead to the pan-Baltic “common structure” being unable to meet EU deadlines for funding applications.

“If [the Lithuanians] now say they are going to connect Vilnius as well, then I think there is a justified question as to how much it would cost, what would the benefits be, what would then be the cost to benefit ratio? We need to know it when we go to [Brussels] with our application, we need to set certain parameters of the project. We need to know it by the time we submit the first application which is the middle of this year or early autumn. So far there is no analysis of the Vilnius connection.”

The 950km standard-gauge railway project has already missed two significant project deadlines, for the formation of a Joint Venture (JV) partnership capable of accessing up to €2bn of European funds. Sirp said that the establishment of a JV was urgently needed “by the summer”, or the project could miss its chance to access the EU’s €11.3bn fund for transport projects in “cohesion fund countries”. Under complex EU rules, member states must commit and apply for their own allocation or “national envelope” by a set date – in the case of the current EU financial period, the end of 2016 – or make their funds available to rival projects in other new accession countries. Sirp said Estonia’s application will be dependent on meeting a chain of previous deadlines, starting with the launch of a JV in mid-2014.

He said: “The first round of calls by the European Commission will be done some time this year. They are talking about the beginning of summer in May-June, which requires us to have our application available sometime in the summer, because you have some months once the [process] is opened to submit this application. We need to submit it in the middle of this year to be a competitor for this money, because you have a fund, called the Connecting Europe Facility, which was established to support projects, like Rail Baltica.”

“We need to have all three Baltic States getting their act together and agreeing the route, to make this joint venture. All of these things need to fall into place.”

Estonia, the northernmost Baltic state appears to be the furthest advanced in preparing the ground for the Rail Baltica project, which has been a dream of planners since at least 1994.

Having decided on a route, which does not include Estonia’s second city of Tartu, the government has been pressing ahead with planning processes via public meetings and environmental studies, progress which, Sirp suggested, is not matched by its larger neighbours Latvia and, to a greater extent, Lithuania. Although careful to emphasise Lithuania’s right to propose changes to the route that formed the original proposal, Sirp echoed the Estonian Prime Minister Andrus Ansip in urging the Lithuanians to construct a revised economic case for connecting their capital.

“[As well as] the feasibility study [about diverting the line to Vilnius from Kaunas], Lithuania has to talk to the European Commission, in order to make sure this Vilnius connection is do-able as part of the Rail Baltica project. This has been the message from our prime minister. We have a project that is more or less well-defined by now and if you want to change it to a considerable extent then Lithuania has to hurry up and start doing something about it”.

The Rail Baltica project was launched in earnest with a project feasibility study in 2009, which reported in May 2011. Despite political support for a passenger and freight railway using the ‘standard’ or ‘European’ 1435mm gauge rather than the Baltics’ existing 1524mm or ‘Russian’ gauge, critics of the project question Rail Baltica’s ability to create the intended ‘modal shift’ – persuading freight operators to switch from road to more environmentally-friendly rail.

Sceptics, some of whom advocate improving the Baltics’ road connections, also speculate whether a train with an average speed of only 176kph (top speed 240kph) would shorten journeys between the Baltic capitals and Warsaw and Berlin enough to persuade travellers to switch from short-haul flights between the Baltics and Europe’s capitals.

But Sirp said that he expected the project to be profitable and emphasised its significance to more general EU criteria, such as the promotion of green transportation, and
East-West connectivity.

Sirp told BQ: “We belong to the European Union, the majority of our trade is with European member states so it would be quite logical to be connected by railway to this economic space or zone we belong to. It is one of the major missing link projects.”

In its May 2011 ‘final report’ on the feasibility of Rail Baltica UK-based consultants Aecom wrote: “In normal circumstances to attract EU funding for transportation projects the EIRR [economic internal rate of return] would normally have to be greater than 11.0% and the BCR higher [than 1.75]. 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”.