Analysis: Rail Baltic project to have €3.96 billion gap ({{commentsTotal}})

Render of the
Render of the "Water Strider" design for the Rail Baltic station in Pärnu.

The international Rail Baltic railway project is projected to have a financial gap of €3.96 billion over its life cycle, it appears from the executive summary of the Rail Baltic Global Project Cost-Benefit Analysis conducted by Ernst & Young (EY).

Rail Baltic is not financially viable without public co-financing, which means that its discounted net revenues do not cover discounted investment costs over the life cycle of the project, which is partially attributable to the infrastructure charging principles stipulated by EU transport policy, it stands in the executive summary.

"However, after the investment has been made, the infrastructure manager reaches a breakeven point in the year 2031 and could be financially sustainable from this point," the summary states, noting that annual revenues from railway undertakings would exceed annual operating costs at this point.

An estimate based on discounted costs puts the value of the necessary investment in constructing the railway at €4.2 billion, to which costs for the maintenance of the railway in the amount of €909 million will be added. The revenues of the project, however, are estimated to total just €898 million and the residual value €255 million, which shows the expenses not covered by net profit to total €3.96 billion.

On the basis of undiscounted value, building and maintenance costs would total €7.94 billion, surpassing by €4.05 billion the sum total of estimated revenue, €2.61 billion, and undiscounted residual value, €1.28 billion.

Thus the project's profitability lies in its wider economic effects.

According to EY, the socio-economic benefits of the project would total €16.22 billion, which includes €3.27 billion resulting from reduced air pollution, €3.02 billion from mitigating climate change, €2.87 billion from reduced travel times in freight transport and €2.41 billion in passenger transport, €2.38 billion as a result of additional personal transport savings, €892 million from safety improvement and €843 million from reduced noise.

In a situation where the project qualifies for EU co-financing in the amount of 85 percent, which depends on subsequent decisions of the EU, the project would not be profitable even when considering only the discounted value of the contributions made from the state budgets of the respective countries, and would have a gap of €386 million. Undiscounted, the project would be profitable by a margin of €357 million for the Baltic countries taken separately.

The executive summary says that due to the gradual uptake of potential passenger and freight flows, in its first years of operation, from 2026-2030, public contribution is needed in order to ensure the financial balance of the infrastructure manager. The amount and length of such contribution is significantly impacted by the ability of Rail Baltic to shorten the period or intensify the rate of uptake, which according to evidence from Eurostar might take a least five years. In order to facilitate the uptake, early commercialization of the new infrastructure along with the establishment of efficient and effective infrastructure management is needed.

Due to the gradual uptake of passenger and freight traffic and the warranty period of construction works, it is expected that the level of infrastructure manager's maintanace expenses will be lower initially and will gradually increase to the benchmark level of approximately €69,000 per track kilometer, measured in 2016 prices.

A sensitivity analysis conducted by EY indicates that the project does not reach economic viability if CAPEX increases over 26 percent as compared to the figures used in the analysis. Freight and passenger flows are also key determinants of economic viability.

Total socio-economic benefit for Baltics €16.2 billion

EY presented the new cost-benefit analysis of Rail Baltic on Monday. Estonian Minister of Economic Affairs and Infrastructure Kadri Simson described Rail Baltic as being very high among the financing priorities of the transport sector in the next EU budgetary period as well.

"The results of the fresh cost-benefit analysis showed once again that the Rail Baltic project is financially and economically viable," Simson said in the ministry's commentary. "The new feasibility study once again confirms the economic feasibility and very profitable nature of the project, setting the required timely parameters for continued EU and national co-financing of the project."

With an EU cofinancing rate of 85 percent, Estonia would have to pay €268 million of the project's total cost of €5.8 billion, with Latvia paying €393 million and Lithuania €493 million, respectively. According to EY, the project's total socio-economic benefit for the Baltic countries would amount to €16.2 billion.

Editor: Aili Vahtla

Source: BNS



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