How is construction of Rail Baltic coming along?

The objects for which we have contracts in place are largely on schedule. There are some problems with those that have not reached the contract phased yet. The pace at which things are coming along is not what we were promised.

Why?

There are several problems and challenges. One major issue is planning work coming along slowly. We are not receiving design documentation as promptly as we would like, this despite repeated promises. This in turn affects land acquisition as a precondition for construction and, therefore, when construction can be launched.

Why is planning not coming along?

While contractors used to put performance issues down to the coronavirus pandemic, this is no longer the biggest concern. We believe it boils down to what the contractor can get done and a miscalculation on their part in terms of being able to manage a pan-Baltic project with the resources available.

Do you mean that they are short-staffed?

Yes, primarily that, as well as chain of command and which employee should be working on which section of the project at a given time.

Which contractor are you referring to?

A lot of the work in the Baltic countries falls to Spanish engineering bureau IDOM. They are one contractor whose performance we are struggling to accept. They won the Rail Baltic joint venture RB Rail's tender.

What are your options in this situation?

Our part is to point to problems and make sure these concerns reach contractors. That is what we have been doing, with the latest such meeting on Monday. The contractor has assured us it can stick to the latest deadlines.

Which projects are the most critical today?

The problem is sharpest in Estonia regarding the first sites in Harju and Rapla counties where the state is in the process of land acquisition and closest to meeting the requirements for launching construction. The funding applications for these initial sections fall in the latest financing period. We will be in a hurry once they are approved.

Can you still acquire lands as projects are delayed, with things grinding to halt at the construction tender stage?

Let's say that land acquisition is coming along slower than it would with finished planning documentation. We are looking for alternative solutions and going through with acquisition where the project has reached a suitable level of maturity. But it would definitely be easier to do it in one go and with a finished project. The situation is forcing us to resort to backup plans.

Let us also talk about what has gone to plan?

Looking at the entire Estonian part of the Rail Baltic project, where it does not tie into specific contractors or the main route, we are largely on schedule. The major Ülemiste terminal tender went live in early March. Local stops are in the design phase. Planning work has or is about to be concluded for the other major terminals – the Pärnu international passenger terminal and the Muuga cargo terminal – and we are preparing construction tenders. We could describe it as following a textbook with plenty of challenges, while we have been able to overcome them and hit our milestones.

Has the raw materials shortage and price advance currently hounding the construction sector had any effect on Rail Baltic activities?

Yes, sanctions against Russia and Belarus and the ongoing war [in Ukraine] have impacted the Rail Baltic project as we share the same economic space. It has affected supply chains and the prices of some materials. We can give the examples of steel, cement and, of course, motor fuel, all of which are considerable items of expenditure in our project portfolio.

Have there been effects on ongoing activities in terms of things left unfinished, delayed or becoming more expensive?

We are monitoring the situation daily, and while prices are going up on the whole, every day brings a new reality. We are waiting for this process to plateau and supply chains to solidify again at some point.

Price advance has been factored into ongoing construction tenders. We are evaluating the situation and taking measures to better facilitate price hikes. But price advance cannot be escaped for these sites. Trying to tell you by how much prices will climb would be a thankless exercise as tomorrow will bring a new reality.

What are these measures for managing price advance?

We distinguish between soft and hard measures. Soft measures allow construction companies to better manage cash flow. We are talking about bigger advance payments and taking note of materials.

Hard measures include paying for additional expenses in contracts the force majeure clauses in which make it possible for contractors to charge more. These sport a very thorough burden of proof, of course, but it is a possibility in which case the contracting entity is willing to cover appreciation.

Of course, before we get to that point, there is the time factor. We will initially try to remedy the situation by giving contractors extensions, time for these supply chains to recover that could stave off major price advance.

How big of a price hikes buffer does your budget have?

We are talking about overpasses and wildlife crossings in the context of existing construction contracts. Because the process has been slower than planned, we still have a buffer, courtesy of some construction tenders not having been launched. We have no plans to cancel, suspend or terminate anything, especially since we already have these organic delays.

In other words, outstanding tenders will be launched as planned?

Yes, they will be executed according to plan, and we will be updating price levels based on price information at the time. We can achieve a measure of saving through project technical solutions. We have managed it in existing contracts and I believe we can do it again. I am quite confident that potential saving to be found this way can largely help even out price advance.

What does this potential saving entail? Will there be lower quality standards or will certain objects not be built?

There is no one correct path for arriving at the proper result. From an engineering point of view, there are n +1 feasible options and it is possible to find saving through use of creative solutions. For example, talking about wildlife overpasses, whether the arches are made on site or at a factory somewhere and then transported to the site can affect the price. We are talking about engineering-technical solutions for giving the builder flexibility in terms of finding the best way to get the object done in a given market situation.

This inevitably raises the question of why not plan for lower cost from the get-go?

This brings us back to the planning phase. Every designer has their own handwriting so to speak, their established portfolio of the kind of designs and products they use. More so in the case of foreign designers whose sensibility for local context is reduced, which can lead to somewhat more extensive than necessary solutions initially.

However, Rail Baltic construction will become more expensive on the whole?

It is too early to apply these effects to the project's entire budget. The effect I am talking about is local, tied to these specific objects. The question is the return of stability and whether it will affect the project's lifecycle. It is too early to say today as the project is massive and covers a long time period.

Since you are in charge of public funds, there must be a ceiling to how much more expensive the project can become. How much more expensive could the Ülemiste terminal or Estonia's share in Rail Baltic become?

We are rigidly tied to the state budget or the upper sums allocated for the project or its parts. Any increase in cost can come at the expense of saving. Those are the constraints. In other words, we have two options: to cut costs through greater efficiency, which we have managed in existing contracts, or to have fewer things. We have managed to save on costs in ongoing tenders and compensate for price advance that way. We will see whether that will prove possible moving forward.

Will Rail Baltic still be completed by 2030?

Yes, and because the situation is new and changeable, there are no grounds to apply these delays to such a lengthy period.

But I would emphasize once more that the aggression in Ukraine is clearly having an effect on the project. We are talking about prices, material availability but also the significance and weight of Rail Baltic changing. It is to be believed that more significance will now be attached to the missing link. It always included an element of military mobility, which aspect must now be amplified.

But again, price advance and certain delays today might not be the case tomorrow, or they may be even worse. It is thankless work to say anything concrete today.

It seems a bit incredible to be able to stick to the budget and deadlines in the conditions of raw materials price advance and planning delays.

It would be when looked at from this perspective, but it is still a local matter concerning the Estonian part of the project as construction has been launched at only a few sites and the situation could stabilize to the benefit of the project. It might not happen but remains one possible scenario.

When will we know?

I believe that prices hitting a plateau is a matter of the next few months.

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