National Audit Office: the completion of the Rail Baltic project by the deadline is not realistic

Rail Baltic. Photo: Rail Baltic

The audit of the National Audit Office of Estonia indicated that in the case of the Rail Baltic railway project delays have occurred and the forecasts of some activities have increased, including in the section for which Estonia is responsible.

According to the Ministry of Economic Affairs and Communications (MEAC), the parties to the project are making every effort to complete the project by its deadline, i.e. 2026. However, the facts identified during the audit indicate that the completion of the project by the deadline is probably not realistic and the cost of the activities exceeds the initial forecasts, but this has usually occurred in the case of such major projects.

The analysis of the National Audit Office indicated that the activities for which Estonia is responsible have exceeded or are about to exceed the deadlines agreed in the funding agreements by more than two years on average.

For example, the Estonian activity that will be delayed by five years according to the forecast are the construction of the passenger terminals in Pärnu and Ülemiste. Still, the MEAC claims that they will be built by 2026 at the latest. The reasons for the delays highlighted in the reports sent to the European Commission are the need to carry out more thorough research, the failing procurements or contests and the fact that the Acquisition of Immovables in Public Interest Act was enforced later than expected. According to RB Estonia OÜ, the main implementer of the Estonian part of the RB project, another reason for the delays is that the project coordinator RB Rail AS (RBR), which is based in Latvia, was late with the preparation of the common technical standards.

The activities of the entire Rail Baltic project are a year and a half behind the schedule agreed in the funding agreements. Estonia has tried to move forward with the Rail Baltic project as fast as possible and has therefore undertaken more activities pursuant to the funding agreements than the other Baltic States –Estonia is responsible for 27 of the 71 activities agreed in the funding agreements.

However, if a Member State doesn’t manage to use the co-funding at the right time, the European Commission has the right to demand the return of the funds. At the same time, it’s possible to amend the funding agreements with the consent of the parties, including to extend the deadlines for completion of activities and to divide the activities into parts. The ministries and the project coordinator – the company RB Rail AS – have already requested extension of the funding agreements.

The forecast costs of the activities of the Rail Baltic project for which Estonia is responsible have increased by 31.7 million euros, i.e. 13.9%, when compared to the budget agreed in the three funding agreements entered into with the European Union (EU). For example, the first construction stage of the railway crossings with other infrastructures will cost 20.5 million euros more than agreed in the funding agreement, and the construction of the Pärnu and Ülemiste terminals is also going to be more expensive according to the forecast. The European Commission funds the project's activities within the scope of the budget agreed in the funding agreements and Member States have to cover any extra expenses themselves. The increasing cost and delays have, among other reasons, been caused by delays in the activities to be implemented by RBR Rail AS and the specification of the cost forecasts. However, increasing costs and extending deadlines have been rather ordinary in the case of major projects.

The funding of the establishment of the Rail Baltic railway until its completion has not been thought through. The implementation of the Rail Baltic project is funded by the Connecting Europe Facility (CEF) of the EU according to activities and on the basis of applications in the different budget periods of the EU, which is why there is no certainty about the volumes in which and the rate at which it is possible to obtain EU co-funding for the completion of the railway. However, the European Commission has repeatedly expressed its political support for the completion of Rail Baltic and considers it a priority infrastructure project in the EU. The funding of the project is planned in the state budget strategy and in the state budget, i.e. for five years in advance.

433.9 million euros have been spent and, according to plans, will be spent on the development of the Estonian part of the project from 2010 to 2023, which comprises 32.1% of the estimated cost of the Estonian part of the project. This in its turn indicates that at least 67.9% of the more detailed forecast of the project, incl. the possible sources of own funding, are missing at present. In its overview of 2017, the National Audit Office advised the state to develop a plan for funding the Rail Baltic project and scenarios for the cases where the rate of EU co-funding proves to be smaller than planned or the project becomes more expensive. This has not been done yet.

The audit of the National Audit Office also indicated that the functions and responsibility related to the organisation of procurements for the Rail Baltic project and the management of contracts have been divided and the activities completed have generally been in line with laws and the agreed rules. Rail Baltic Estonia OÜ (RBE) is responsible for the organisation of most procurements and the management of contracts, and it has performed its functions rather well so far. Internal procedures and guidelines have been established and they have been generally complied with in the organisation of procurements and management of contracts.

However, there are problems in the organisation of supervision of the Estonian part of the project and the management of risks and changes. Although most of the activities related to the Rail Baltic project for which Estonia is responsible are carried out by Rail Baltic Estonia OÜ, the Ministry of Economic Affairs and Communications is still responsible for the timely completion of the activities within the scope of the budget.

However, the MEAC has not established how the activities of RBE are supervised and how the important changes occurring in the project are managed, e.g. significant extension of the deadline or the increases in costs. The steering group of the project was reinstated during the audit and its main goal is to guarantee regular information exchange between the parties of the project and the achievement of agreements at the level of management, but the National Audit Office could not assess the results of this work.

The National Audit Office advised the Ministry of Economic Affairs and Communications to develop an organisation for the management of changes in the project and supervision, incl. determine the role of MEAC and the necessary procedures, in order to develop the Rail Baltic project more efficiently. The National Audit Office also advised the MEAC and the Ministry of Finance to analyse possible funding scenarios to reduce the project funding risks and to prepare funding forecasts.

In the opinion of the Minister of Economic Affairs and Infrastructure, the deadlines previously agreed for the establishment of the Rail Baltic railway are still realistic and the MEAC as well as the other parties of the project are constantly working on the completion of the RB railway by 2026. In the opinion of the minister, the roles and responsibility of the Estonian parties of the project are regulated with contracts and the ministry has planned the funding of the RB railway well in advance whilst complying with all of the obligations and options provided for by law. However, the minister also said that the recommendations made by the National Audit Office for analysing project funding scenarios are questionable from the viewpoint of the state budget planning and preparation principles established by laws and regulations, incl. the principle of universality of the state budget, and compliance with them may breach the principles of materiality and the financial competencies of the Riigikogu. In the opinion of the National Audit Office, a more detailed analysis of the project budget and the preparation of scenarios would not restrict the rights or decision-making competency of the Riigikogu.

The Minister of Finance replied to the National Audit Office that the situation described in the audit report, where the forecast for the project period with higher costs is missing, is caused by the lack of political will and an international agreement on whether the project will continue if self-financing increases. Similar to the National Audit Office, the minister also finds it problematic that there are no scenarios that could be implemented if the amounts to be allocated from the budget of Estonia would have to be considerably larger than planned for now. According to the Minister of Finance, there is no reason to doubt that self-financing to the extent of up to 19% of the construction costs will be found in the state budget in the coming years. However, the Minister of Finance also found that if the EU support to the implementation of the RB project ends up being smaller than expected, the socioeconomic cost-effectiveness, reasons and track selections of the entire project would have to be thoroughly checked again. The opinion of the Ministry of Finance is that the project parties must negotiate and agree on a new, amended schedule for the implementation of the project or suspend the project, because it’s highly likely that the Baltic States would be unable to finance the implementation of the project from their budgets if the participation rates and volumes differed significantly from the ones highlighted in the cost-benefit analysis. The opinion of the Ministry of Economic Affairs and Communications that the railway will be built even without European Union support is groundless in the opinion of the Minister of Finance.

The National Audit Office advised the main implementer of the Estonian part of the project, Rail Baltic Estonia OÜ, to develop the risk management system for the timely detection and management of risks further in such a manner that it would help mitigate the increasing costs of the project and the delays in the activities. The National Audit Office also advised the company to document the discussions and decisions concerning the organisation of procurements and management of contracts, the meetings of the working group on risk, the election of members of the procurement committee and the reasons for changing the procurement plan in order to ensure that activities are transparent and can be verified. The CEO of Rail Baltic Estonia OÜ agreed with most of the recommendations made by the National Audit Office and noted that the company plans to regularly update its internal rules and guidelines as the project develops and take the recommendations of the National Audit Office on board.

When commenting on the audit results the Auditor General of Estonia Mr Janar Holm said: «The scenario where Rail Baltic ends in Riga, coming from the heart of Europe, is also something we don’t really want to think about. In this case, the territory between Riga and Helsinki would be an isolated wasteland, a province.

We need extremely strong political will and support to ensure that this will not happen to Estonia. The National Audit Office already emphasised in its overview of 2017 that geopolitical considerations have always been at the centre of the decisions made about Rail Baltic.

We cannot just sit around and hope that nothing will derail the train. The train has to have a driver who understands that they must drive, that they are responsible, and they must see the journey ahead and any risks that may lie in wait.

The joint audit of the Estonian, Latvian and Lithuanian supreme audit institutions of the management of the Rail Baltic project will be completed soon. It will give an idea of what will happen if there are too many drivers pulling at the levers, each of them trying to steer the train in a different direction.»

Background

The supreme audit institutions of Estonia, Latvia and Lithuania started a joint audit of the Rail Baltic project in 2018 in order to analyse how the funding of the project, the organisation of procurements and the management of contracts has been organised. At the same time, the National Audit Office analysed the implementation of the project in Estonia and prepared a separate report on this.

The implementation of the entire project is described by the joint audit report of the supreme audit institutions of the three Baltic States, which will be published at the same time in Estonia, Latvia and Lithuania in January 2020.

Rail Baltic is the biggest infrastructure project in the history of the independent Republic of Estonia both in terms of cost and scale. The planned total length of the railway from Tallinn to the border between Lithuania and Poland is 870 kilometres, 213 kilometres of which will be in the territory of Estonia. The implementation of the Rail Baltic project costs 5.79 billion euros according to the cost-benefit analysis prepared in 2017. 1.35 billion of this will be spent on the construction of the railway in Estonia, 1.97 billion in Latvia and 2.47 billion in Lithuania. The three Baltic States entered into an agreement in 2017, with which the assumed the obligation to complete the Rail Baltic railway by 2025 and guarantee that it’s ready for use by 2026. The project will be funded by the European Union to the extent of 85% and the rest must be paid by Estonia, Latvia and Lithuania themselves.