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25. November 2013

Rail Baltic – Big Plans in Assumption Even Bigger Benefits

During recent months Estonia, Latvia and Lithuania have been intensely negotiating on the establishment of the Rail Baltic joint venture, to construct the new fast rail connection with 1,435 mm gauge double-track, running from Tallinn to the Lithuanian-Polish border and which already now is called the regional project of the century. 

As the Baltic transport ministers agreed in September, and the three prime ministers very recently reiterated, the joint venture must be incorporated by the end of this year with headquarters in Riga, Latvia. 

Long time in the making

January 1st, 2014 is by far not the first deadline that the governments of Estonia, Latvia and Lithuania have agreed for establishing the Rail Baltic (RB) joint venture. The previous deadline – the end of 2012 – came and went but regardless of periodic meetings of ministers, presidents and the inter-governmental task-force, the joint Baltic railway company has still not been founded. Negotiations between the three Baltic States have proven to be much more complicated than assumed at first.

Now, the long negotiations have yielded an agreement that only Estonia, Latvia and Lithuania will be participating as shareholders in the RB joint venture. Poland and Finland have decided not to join as initial equal partners and instead to continue in the project as observers, although with the right to join the circle of shareholders later.

The time scope and the estimated cost of the grand project have also become clearer – if design and preparatory works would start in 2015, the first trains could be running from Tallinn towards Warsaw as soon as in 2025. The planned cost of constructing the new electrified railway with two tracks for the entire distance is estimated at ca 3.6 billion euros.

Upon establishment of the joint venture the management board of the new company will be assigned with immediate tasks of preparing a business plan and a financial plan for the Rail Baltic, applying for EU support for the project from the Connecting Europe Facility (CEF), co-ordinating information and marketing affairs of the future railway, etc.

Big interests of small countries

In time, the national interests of the participant countries have been mapped. For Latvia, it’s important to connect RB with the Riga Airport, among other things. For Estonia, it’s important that the railway with European track-width would reach the cargo port of Muuga, as well as increasing the speed of passenger trains to a level actually competing with regional airlines (i.e. the RB route should run as straight as possible and with a minimum number of stops). Lithuania is worried that the railway to be constructed on its territory should absolutely belong to a local state railway enterprise and that RB must not become a hindrance to the existing big plans of making Kaunas a regional logistics hub at the crossing of East-West and North-South multimodal freight corridors.

While in Estonia the principle dispute over the route (Tartu vs. Pärnu) was already held some time ago and the discussions today revolve around the local co-ordinates of the specific railway corridor (so that children would get to their schools and cattle to their pastures, Natura 2000 areas remain unaffected, etc), Lithuania only recently erupted in (political) discussions that RB should also include a connection to the capital city Vilnius in the scope of the project.

Hopefully the Lithuania leaders will see the big picture regarding RB and that the historical opportunity would not be missed to connect the three Baltic States (and Finland) to the heart of Europe in a fast and environment-friendly way (and with considerable support from the European taxpayers).

The required studies are completed and plans are in the works

Despite the delays in the final agreement over the RB joint venture a lot has already been done. Estonia is already preparing spatial plans along the RB route and holding public discussions on the final choice of track corridors at a local level, Latvia has selected the winner of a planning competition this autumn, and Lithuania has started an analysis of track routes and preparations for planning procurements. 

Furthermore, essential studies necessary for the new railway are completed: a feasibility study prepared by an international consultancy AECOM, in 2011 which also compared the viability of different route options, and a legal analysis of the Rail Baltic joint venture (Rail Baltic Joint Venture Study) prepared by our pan-Baltic legal alliance TRINITI.

In co-operation with our Latvian and Lithuanian TRINITI colleagues, we completed the RB Joint Venture Study for Baltic governments in March 2013. The analysis was commissioned by the Estonian Technical Surveillance Authority under a procurement contract (download the report here). 

One of the main recommendations of our study is to establish the RB joint venture as soon as possible as it will take time to prepare the business plan, the team and the competences required for establishing and operating the railway and it is also crucial from the viewpoint of funding to submit the application for the Connecting Europe Facility (CEF) financing on behalf of the joint beneficiary in time for the next budget period (2014-2020).

Within the scope of that study, we analysed several aspects related to establishing and future management of the joint venture, ranging from the optimal corporate structure and financing to railway legislation and taxation. Specific issues such as compulsory expropriation of land, planning and zoning for the new railway and conducting public procurements were also analysed. 

As the primary option for funding the construction of the new railway (up to 85% of total cost), we proposed to combine the financing from the CEF with loan contributions from international finance institutions such as the European Investment Bank, the Nordic Investment Bank, etc.

There are no big hindrances to founding the joint venture

For the completion of the TRINITI study we involved also several other reputable international partners: Deloitte analysed tax issues, Keystone Advisors performed the economic and financial analysis, Innopolis investigated matters related to EU funding, leading international law firm Norton Rose Fulbright studied European Union legislation and Poland’s largest law firm Domanski Zakrzewski Palinka gave an overview of Polish railway legislation. As part of the analysis, we also prepared draft founding documents for the future joint venture. The detailed report allows the Baltic governments to conclude the negotiations over establishing the Rail Baltic joint venture.

The comparative analysis highlighted several notable differences between the three Baltic States in terms of taxation, public procurements, business law and especially railway regulations, but none of those issues should be an insurmountable problem when establishing the RB joint venture, given good co-operation between the countries and some required amendments to legislation.

For example, the current legislation in all three Baltic States does not allow for direct state ownership in companies registered overseas, but this could be mitigated by respective legislative changes or by establishing intermediate associations, etc. 

One Rail Baltic vs. three Baltic railway sections

Our study identified that regardless of having been part of the European Union for nearly a decade, the railway legislation in Estonia, Latvia and Lithuania is still largely different. For historical reasons, the current 1,520 mm track gauge railway network operating in the Baltic States was historically built for serving East-West traffic; the North-South train connection is currently underused as it is too time-consuming and costly in its current state. 

Another hindrance to railway traffic on the existing infrastructure is the need to change locomotives/drivers at the borders of three small countries (on the European scale), to follow different technical and legal requirements, apply different railway tariffs and capacity allocation rules and so on.

We highlighted a need for the creation of an unified cross-border railway regulation, designed specifically for Rail Baltic, as one of the most important suggestions. Based on previous international experience with European large cross-border infrastructure projects (the Öresund bridge between Sweden and Denmark, the Channel tunnel between England and France, the Brenner tunnel between Austria and Italy, etc.), we recommend establishing an international organisation based on a treaty between the stake-holder countries already in the initial stage of the project. The competencies of the “Rail Baltic Commission” would include determining the operating fees for the Rail Baltic infrastructure, allocating the railway capacity, dispute resolution and co-ordinating further co-operation between the countries in the RB corridor.

The plans for the Rail Baltic are big, but if implemented right, the benefits and potential of the megaproject for the whole region would be vast. Every specific step taken in the right direction will bring us closer to the goal what seemed just an unattainable dream only a few years ago.

Tõnis Tamme, partner at TRINITI Estonia
Co-ordinator of the TRINITI Rail Baltic Joint Venture Study

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Any information in this newsletter is provided as a general guide only. It should not be relied upon as a substitute for specific legal advice. If you would like any further information on any of the matters raised in this newsletter please contact Law Firm Tamme Otsmann Ruus Vabamets.