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Yaroslav Shedov

MSc MGIMO University and University of St. Andrews

The new rail project in the Baltics is considered to bring better rail connectivity between Estonia, Latvia, Lithuania with the rest of Western Europe helping to integrate Baltic states with the rest of the EU. For freight traffic, it may help to increase the capacity of the rail network and develop trade within the Baltics and with other European countries. For passengers, it will reduce the journey time to Poland and Germany. For the environment, it is planned to reduce the volume of the road traffic, which will contribute to the reduction of the CO2 emissions in the region. But will this project be feasible enough to be called a successful and sustainable endeavor?

There is no doubt that the Rail Baltica is an extremely ambitious project which will be the new economic and social stimulus for the Baltic States. It will finally help to reintegrate the transport systems of Estonia, Latvia, and Lithuania with the rest of the European Union.

Nonetheless, the need to ensure not only a constant high level of passenger traffic but also make sure that a large amount of freight goes via the Baltic States puts the whole project in dangerous waters. As it has been discussed previously in this article, the EU auditors questioned the economic viability of the project due to the low demand for the north-south of the traffic of cargo and passengers. The EY suggested that the project would be feasible saying that only the constantly high numbers of freight transiting the Rail Baltica would make the project more profitable. While the trains may come to the Baltic States with imported goods, the problem will be that the Baltic States do not have a large number of goods to offer for exports. Therefore, the freight trains will have to come back to their home destination point empty, which raises the question of the expediency of importing goods via Rail Baltica.

Rail Baltica will help to unite the railway systems within the Baltic countries and integrate them with the European transport system, but will it be feasible enough to be independent of the third countries? That is the question which has to be addressed in more detail.


The new rail project in the Baltics is considered to bring better rail connectivity between Estonia, Latvia, Lithuania with the rest of Western Europe helping to integrate Baltic states with the rest of the EU. For freight traffic, it may help to increase the capacity of the rail network and develop trade within the Baltics and with other European countries. For passengers, it will reduce the journey time to Poland and Germany. For the environment, it is planned to reduce the volume of the road traffic, which will contribute to the reduction of the CO2 emissions in the region. But will this project be feasible enough to be called a successful and sustainable endeavor?

1. The Rail Baltica at a Glance

The EU’s Common Transport Policy was set out in the Treaty of Rome in 1957. It was created to establish a common transport system, and achieve sufficient mobility in Europe. The Trans-European Transport Network (TEN-T) was set up to address the development and implementation of a European network of roads, airports, ports and railway lines. The TEN-T consists of two network layers: the Core Network and the Comprehensive Network. The Core Network includes the most important transport connections, and is to be completed by 2030. The Comprehensive Network will cover all European regions and be completed by 2050. There are at least nine Core Network Corridors in the Trans-European Transport Network, and each one covers several modes of transport, including rail transport (see Figure 1). The rising greenhouse emissions from the transport sector may undermine the European Union’s effort to combat global warming and achieve its sustainable development and climate goals. Therefore, it has become essential to boost the construction of sustainable means of transport, and indeed, the development and modernization of the railway lines are one of the ways of doing it.

Figure 1. The Core Network Corridors

Source: https://ec.europa.eu/transport/infrastructure/tentec/tentec-portal/map/maps.html

The Rail Baltica project will become part of the North Sea-Baltic TEN-T corridor. In 1994, the concept of Rail Baltica was proposed as part of the document “Vision and Strategies around the Baltic Sea”. It was considered to be a catalyst for the economic development of the region. Despite its potential, the project has matured slowly. Only in 2010, it gained back its momentum. In that year, the transport ministers of the Baltic States, Finland, and Poland signed a memorandum that expressed their political will to carry on with the development of the Rail Baltica project. At the moment, the design stage is expected to be completed in 2022, the construction phase has already started and is planned to be concluded in 2026. By 2030, the Rail Baltica project is expected to be fully integrated within the North Sea-Baltic TEN-T transport corridor.

Figure 2. The Rail Baltica Project

Source: https://www.railbaltica.org/wp-content/uploads/2017/04/R_B_buklets_21x21.pdf

Rail Baltica is an ambitious railway project which is inspired by the idea of connecting the Baltic States by railway lines and integrating Estonia, Latvia, and Lithuania into the European rail network. The 870 km rail project will connect Helsinki (Finland), Tallinn and Pärnu (Estonia), Riga (Latvia), Kaunas, Vilnius (Lithuania), and finally Warsaw (Poland). The passenger trains will be able to reach the speed of 240 km/h. It will bring higher-speed transport connections to the Baltic States and be competitive with other transport modes traveling in the region (see Figure 3).

Figure 3. Transport Mode Travelling Time Comparison for Selected Journeys

Source: https://www.railbaltica.org/wp- content/uploads/2017/04/RB_CBA_FINAL_REPORT_0405.pdf

It may sound simple to connect Poland to Finland via the Baltic States, but in fact, it has already faced two main challenges, which the management of the Rail Baltica project has overcome successfully. First, the Baltic States have a 1520 mm Russian railway gauge network. Therefore, the new railway line has been designed with the 1435 mm gauge to fully integrate the Baltic States’ railway network into the European gauge system. In order to connect Helsinki and Tallinn, the tunnel will have to be built. The construction of the tunnel is managed as a separate project. However, it is one of the most important EU transport projects, which will be part of the Trans-European Transport Network.

Figure 4. FinEst Link Project

Source: http://www.finestlink.fi/en/

An undersea train tunnel between Estonia and Finland is expected to be launched into operation sometime after 2030. It will be 103 kilometers long, twice the length of the Eurotunnel. Two single-track tunnels and one service tunnel will operate on the European 1435 mm gauge tracks. When the train arrives close to the airport line in Helsinki, some part of the tunnel, which is close to the Finnish side will have both tracks: the Finnish gauge (1524 mm) and the European standard tracks), while also two artificial islands have to be constructed in the Gulf of Finland. The trains arriving on the the Finnish and Estonian coasts will have a direct connection to the freight terminals and international airports in both the capitals of both countries. Current links between Tallinn and Helsinki are only by ferry. During April-October, when there is less chance of rough sea, it takes 1h 40min to complete the voyage, while in the rest of the year the ferry may need up to 2 hours to complete the journey. The expected time of train travel under the Gulf of Finland will be 30 minutes.

The increasing mobility of households between two states may potentially become the economic breakthrough for Finland and Estonia. The tunnel will be able to bring two cities, inhabited by people belonging to the same ethnic group–the Finno-Ugric people–into one large metropolis. It is estimated that 12.5 million passengers will use this tunnel. The economic benefit may be quite significant, coming as a result of both increased mobility for households and improved communications between the Baltic states and Southern Finland. Besides, a rail freight link between Finland and the rest of Europe—via a tunnel under the Gulf of Finland—may play a role here.

2. The Feasibility Dilemma

When such enthusiastic projects are designed, the cost of such endeavors becomes the primary concern. At first, it was estimated that the total cost of that project would be 5.8 billion euros. 85% of that sum is financed by the EU. In 2017, Ernst & Young (EY) carried out the cost-benefit analysis of the Rail Baltica project. It reaffirmed that the project would be economically viable and highly beneficial. EY estimated that the measurable socio-economic benefit of that project would be 16.2 billion euros. It would outweigh the initial investments of 5.8 billion euros.

Meanwhile, the sum of the net socio-economic benefits may exceed 16 billion euros. According to EY, benefits from the project will cover all of the key stakeholders: travelers will save time and money spent on the tickets, while freight shippers will also reduce their costs and save approximately 16% of their time spent on transportation of their goods. In the long run, this project will help to mitigate climate change in the region. It is considered that 30-40% of truck traffic will shift to the railway, which will help to cut CO2 emissions. It may create air pollution reduction benefits worth 3.3 billion euros and CO2 emission reduction benefits worth 3.0 billion euros, which will contribute to the EU’s climate and sustainable goals.

However, it is not as perfect as it sounds at first. On June 8, 2017 Raul Vibo, Priit Humal, Karli Lambot, and Illimar Paul, experts in engineering and logistics, members of the Estonian pro-transparency NGO Avalikult Rail Balticust (NGO Openly About Rail Baltic), scrutinized the cost-benefit analysis (CBA) produced by EY. They prepared a report where it was suggested that there were fundamental mistakes made by EY in the CBA. In its CBA, EY indicated that one of the biggest benefits that will come from the implementation of the Rail Baltica project is the reduction of air pollution.

In the report where the data was analyzed by a group of experts, they came to the conclusion that the trucks traveling through the region do not produce the claimed amount of air pollution. Intentional or unintentional manipulation of the information of trucks’ fuel consumption and emission standards by EY “has increased the socio-economic impact” of Rail Baltica (MTÜ ARB 2018). Members of ARB pointed out that EY, in its calculations, has used the emissions costs of the vehicles produced in the last century. Most of them use the fuel of EURO I and EURO II standards. However, it should be taken into account that, according to the Directive 1996/96/EC of the European Parliament and of the Council of 13 December 1999, all vehicles with an emission class of EURO II or lower standards are not allowed to be sold in the EU since 1 October 2000 (EU 1996). According to EY’s CBA, around 20 percent of the vehicle kilometers are driven by vehicles that are older than 10 years. However, it is crucial to understand that this claim does not prove the fact that most of them are EURO I or II vehicle classes. ARB has used Eurostat data, which shows that only 6 percent of the vehicle kilometers are driven on tracks that are EURO I or II class and are older than 15 years (see Figure 5).

Figure 5. Annual Road Freight Transport, by Age of Vehicle

Source: https://avalikultrailbalticust.ee/PDF/ARB_MMistakesRB_CBA_by_EY.pdf

The trucks that are sold and produced in the EU must comply with the requirements of the EURO VI standards. In its CBA, EY has not provided a detailed analysis of the future number of vehicles (its emission standards) driven in the Baltic states during the Rail Baltica payback period. ARB in its report highlights that “97.7% of the freight volume during 2026–2055 will be transported using at least EURO VI emission class vehicles…while the weighted average pollution cost will be 0.35€ct per vehicle km…which is below the value proposed by EY- 10 €ct/km”. (MTÜ ARB 2018).

Such contradictions between EY’s assumptions of the fuel pollution in the Baltic states and reality resulted in miscalculations and the exaggeration of the socio-economic benefit from air pollution by €3 billion (see Figure 6). ARB argued that EY had also underestimated the negative impact of the potential decrease in truck traffic in the region, as it would lead to “the reduction of the Baltic States budget revenues on the fuel excise tax”, which in itself would mean that there would be another €1.1 billion costs associated with the implementation of the Rail Baltica project. (MTÜ ARB 2018).

Figure 6. Socio-Economic Impact of Rail Baltica (Cost and Benefits, Undiscounted)

Source: https://avalikultrailbalticust.ee/PDF/ARB_MMistakesRB_CBA_by_EY.pdf

If we consider the remarks made by ARB, the project’s feasibility will be significantly undermined. For the project to be feasible, the discounted revenue (including the project’s socio-economic benefits) has to exceed the discounted investment costs, the running costs, and the environmental impact costs of the project. Taking into account the potential mistakes made by EY in the CBA, there is a high risk that the project’s net present value (NPV) might be negative (see Fig.8). It will essentially mean that the costs of the Rail Baltica project will be more than the socio-economic benefits, which will undermine its expediency.

Figure 7. The feasibility of the Rail Baltica project (by EY)

Source: https://www.railbaltica.org/wp-content/uploads/2017/04/Nauris_Klava_RB_Forum.pdf

Someone may raise the fair point that the argument provided by NGO ARB can be biased, but it will be much harder to argue with the opinion of the EU auditors who raised concerns about the project feasibility. According to the report made by the EU auditors in 2020, the project’s cost may rise to 7 billion euros. It will be significantly more than initially expected. At first, the original budget was 4.65 billion, which has been revised up to 5.8 billion. Now the results of the EU watchdog make this project even more costly by 1.2 billion euros, and “there is a risk of the project’s costs increasing even more”, said Luc T’Joen, the representee of the European Court of Auditors.

Figure 8. Socio-Economic Cash Flows of Rail Baltica (Discounted)

Source: https://avalikultrailbalticust.ee/PDF/ARB_MMistakesRB_CBA_by_EY.pdf

The most worrying aspect of that report is the conclusion–the moment when the project is completed, it might not be economically viable as a thorough analysis of potential freight and passenger demand was not conducted. The north-south traffic and transportation of goods are not busy and intense enough to keep Rail Baltica occupied with rail freight transport, especially facing competition from sea and road transport, and Russian ports on the coast of the Gulf of Finland. T’Joen has highlighted that for the project to be economically sustainable “it needs to have a mixed-type passenger-freight transport line”. It is worth mentioning that a partner at EY, Nauris Klava, who conducted the CBA criticized by ARB, also emphasized that much of the project and its success would depend on freight carriage. The ECA in its reports has made estimations which suggest that in the most optimistic scenario, a maximum of “30 million tonnes of freight per year could be shifted onto rail”.

It is indeed a relatively solid number. However, as it has been stated above, there is no north-south rail freight traffic between the Baltic States, which makes it really hard for the Rail Baltica project to achieve that number of 30 million tons of freight per year and compete with road and maritime transport. The fact that Estonia, Latvia, and Lithuania have not yet agreed on the project’s infrastructure management model only undermines the project’s ambitions. At the same time, the Polish railway management has not taken any steps to coordinate a possible increase in “demand for rail freight transport generated” by this railway project on the Bialystok-Warsaw (Poland) line (ECA 2020).

Figure 9. Rail Baltica Passenger Flow Potential (Min. Passengers)

Source: https://www.railbaltica.org/wp-content/uploads/2017/04/Nauris_Klava_RB_Forum.pdf

Another important issue which was drawn attention to by the European Court of the Auditors is the fact that the steady traffic cannot be guaranteed due to the small number of “the population living within a 60-minute catchment area along the Rail Baltica railway” (ECA 2020). With 5.0 million passengers per year by 2030, as indicated in EY’s CBA (see Fig. 9), it will not be economically sustainable for the greenfield investment in the region. This only means that the RB project in its current structure will not be able to deliver the economic boost to the region. In terms of the data in connection to the catchment area, the EU auditors indicate that the overall catchment area along the new line is 3.8 million people (see Fig. 10) and it has become the lowest figure of any rail line they had the chance to audit. Based on that, for the rail project to be economically sustainable and feasible, traffic density would have to be higher. Otherwise, T’Joen suggested that “the Baltic States have no need for a high-speed train, but rather a slower train that is cheaper and more appropriate” (ECA 2020).

Figure 10. Catchment Areas Assessment for Rail Baltica

Source: https://www.eca.europa.eu/Lists/ECADocuments/SR20_10/SR_Transport_Flagship_Infrastructures_EN.pdf

In this case, the whole concept of the Rail Baltica is becoming shaky, especially considering the small travel volume of the north-south freight corridor.

It becomes even more uncertain taking into consideration the relatively low economic times between the Baltic states in comparison with the economic interconnections between Germany and Poland, and Finland and Germany (see Fig. 11). Still, if there is still a possibility that the tunnel can be a boost for the economic activity of the region, T’Joen’s suggestion will undermine the core principle of this project-the quick transportation of passengers and goods within the region. In the case of the switch of that paradigm to slower trains, then it will be highly likely that passengers will keep using buses and relatively cheap air travel (low-cost Air Baltic provides air travel in the region). As a result, it will create a vicious circle: slower trains will make the project even less feasible, while its ecological benefits to society will be reduced to a minimum as people will be using relatively cheap means of travel comparing to trains, but less eco-friendly (buses and planes).

Figure 11. Foreign Trade in the Baltic Region

Source: https://www.railbaltica.org/wp-content/uploads/2017/04/RB_CBA_EXECUTIVE_SUMMARY_0405.pdf

3. Faded Lights at the End of the Tunnel

The situation around the tunnel between Helsinki and Tallinn is still unclear and changeable as weather in the tropics. A feasibility study concluded that the project would cost around 13 billion-20 billion euros, which is considerably more than had initially been expected. Despite the fact that it is expected to take 15 years for the tunnel to become operational, its construction will be justified if the EU pays about 40% of its costs.

At first, there was indeed plenty of room for optimism regarding the future of the tunnel. For instance, the former mayor of Helsinki, Jan Vapaavuori, in his interview with the Finnish newspaper Helsingin Sanomat, expressed his view on the tunnel, confessing that he used to call it a “mad dream”, but now he believes that there is nothing mad about it. The Estonian former Prime Minister, Juri Ratas, highlighted the importance of the tunnel as it would improve the economic performance of both cities.

However, concerns have started to rise when the question of financing has been discussed. In July 2020, the Estonian government appeared to reject the construction of the tunnel. The project has started to face more criticism because of its close proximity to Chinese interests as this tunnel is considered to be part of the Chinese Belt and Road Initiative. As it has been discussed in my previous article regarding China and its increasing presence in Europe and the Arctic, the Estonian government has become more skeptical. It has been found that funding for this project may come from “Chinese Investment Touchstone Capital Partners, with one third provided as private equity and two thirds as debt financing”. At the same time, in July 2019, the project received preliminary support from China Railway Group, China Communications Construction Company, China Railway International Group, China’s Touchstone Capital Partners, and Finnish developer Finest Bay. Indeed, such an extensive Chinese presence has not impressed the Estonian officials. Taavi Aas, the Minister of Economic Affairs and Infrastructure, “made it clear that the Estonian government needs an understanding of how transparent the funding of the project will be, while the Estonian State Ownership Ministry has started consulting with the Finnish government regarding the Chinese-backed financing of the tunnel.

Opinions regarding the construction of the tunnel changed 180 degrees in April 2021, when the Estonian Minister of Economic Affairs and Infrastructure, Taavi Aaas, and Finland’s Minister of Transport and Communications, Timo Harakka, signed a protocol of intent. This particular agreement means that the tunnel can be added to the TEN-T, which allows applying for European funding, as the Estonian Minister, Mr. Aas, said that EU funds would be crucial to the future of the tunnel as it would be complicated “to do this project with money from Estonia and Finland alone”.

After signing this memorandum, it is hoped that the construction of the undersea tunnel between Helsinki and Tallinn will be completed by December 2024. Indeed, it sounds very promising. However, taking into account how quickly the officials’ opinions have been changing regarding the future of the tunnel, it still raises concerns regarding the completion of this project. Nevertheless, the construction of this tunnel will become even more important, especially after the gloomy EU’s auditors report on the feasibility and future of the Rail Baltica.

4. Final Thoughts

There is no doubt that the Rail Baltica is an extremely ambitious project which will be the new economic and social stimulus for the Baltic States. It will finally help to reintegrate the transport systems of Estonia, Latvia, and Lithuania with the rest of the European Union.

Nonetheless, the need to ensure not only a constant high level of passenger traffic but also make sure that a large amount of freight goes via the Baltic States puts the whole project in dangerous waters. As it has been discussed previously in this article, the EU auditors questioned the economic viability of the project due to the low demand for the north-south of the traffic of cargo and passengers. The EY suggested that the project would be feasible saying that only the constantly high numbers of freight transiting the Rail Baltica would make the project more profitable. While the trains may come to the Baltic States with imported goods, the problem will be that the Baltic States do not have a large number of goods to offer for exports. Therefore, the freight trains will have to come back to their home destination point empty, which raises the question of the expediency of importing goods via Rail Baltica.

Rail Baltica will help to unite the railway systems within the Baltic countries and integrate them with the European transport system, but will it be feasible enough to be independent of the third countries? That is the question which has to be addressed in more detail.

Bibliography

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