Baltic, Construction, Estonia, Funds, Railways, Transport

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, the authority said.

For example, the Estonian activity that will be delayed by five years according to the forecast are the construction of the passenger terminals in Parnu and Ulemiste. Still, the Ministry of Economic Affairs and Communications 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 OU, the main implementer of the Estonian part of the Rail Baltic project, another reason for the delays is that the project coordinator RB Rail AS, 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, the National Audit Office said.

However, if a member state does not 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 is 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.

According to the National Audit Office, the forecast costs of the activities of the Rail Baltic project for which Estonia is responsible have increased by 31.7 mln euros, that is 13.9%, when compared to the budget agreed in the three funding agreements entered into with the European Union. For example, the first construction stage of the railway crossings with other infrastructures will cost 20.5 mln euros more than agreed in the funding agreement, and the construction of the Parnu and Ulemiste 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 RB 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 National Audit Office said.

The authority said in the audit that 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, that is for five years in advance, the National Audit Office said.

Altogether 433.9 mln 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, including 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 OU is responsible for the organization 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, according to the National Audit Office, there are problems in the organization 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 OU, 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 ministry has not established how the activities of Rail Baltic Estonia 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 organization for the management of changes in the project and supervision, including determine the role of the ministry and the necessary procedures, in order to develop the Rail Baltic project more efficiently. The National Audit Office also advised the Ministry of Economic Affairs and Communications and the Ministry of Finance to analyze 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 Ministry of Economic Affairs and Communications as well as the other parties of the project are constantly working on the completion of the Rail Baltic 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 Rail Baltic 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 analyzing 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.

Similarly to the National Audit Office, the minister also found 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, 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 finance minister also found that if the EU support to the implementation of the Rail Baltic 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 is 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 finance minister.

The National Audit Office advised the main implementer of the Estonian part of the project, Rail Baltic Estonia, 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 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.

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.

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 organization of procurements and the management of contracts has been organized. At the same time, the National Audit Office analyzed the implementation of the project in Estonia and prepared a separate report on this.