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Wednesday 01.04.2020 | Name days: Dagne, Dagnis

Rail Baltica project could potentially exceed approved budget and implementation schedule

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Rail Baltica, RB Rail, Latvia, Lithuania, Estonia, management, auditThe problems with Rail Baltica project’s management create the risk of exceeding the approved budget and implementation schedule, as concluded by Latvian State Audit (VK).

VK reports that Estonian, Latvian and Lithuanian audit institutions have completed the joint audit that helped outline duties and responsibilities, as well as develop procedures for the management of Rail Baltica project.

Rail Baltica project is the biggest infrastructure project in the history of Baltic States’ independence. The 870 km long railway line from Tallinn to the Lithuanian and Polish border, according to current estimates, will cost EUR 5.79 billion. Rail Baltica project is 85% co-financed by the European Union from Connecting Europe Facility finances. According to financing documents, Rail Baltica co-financing recipients are member states’ ministries that are responsible for the project’s implementation, as well as the joint company AS RB Rail.

Until now project’s implementers have not been able to ensure activities outlined in financing agreements are implemented in accordance with the schedule and the approved budget, notes VK.

Rail Baltica project is one and half year behind the initial schedule detailed in the financing agreements. In June 2019, AS RB Rail estimated that the project’s implementation may be slowed as far as 2030 if risks remain and necessary financing is not made available. The budget outlined in the 2017 cost/benefit analysis and approved project implementation term – 2026 – remain unchanged. The project’s financing has been agreed upon in four financing contracts, one of which is binding solely for Lithuania.

Read also: Rail Baltica employees: the project is in critical state due to poor management

According to estimates, the budget of the first signed financing contract will likely exceed the budget by EUR 59.3 million, whereas the second financing contract’s use of funding will be around EUR 0.231 million below what is outlined in the financing contract.

Legal analysis of the project shows that the project’s implementation structure does not go against Baltic States’ legislative acts and its management system was not found to have any major conflicts of interests.

Nevertheless, the analysis also revealed that there is no effective mechanism to resolve dead-end situations, when ministries that are beneficial owners of Rail Baltica are unable to agree on a joint solution to a problem. Baltic States have had different views on the project’s management lately, for example, when making the decision regarding the best solution for RB Rail financing or infrastructure management model. This cost valuable time, VK states.

The audit also found that although all three Baltic States have included Rail Baltica in their medium-term budget plans, none of them have prepared a long-term project financing plan all the way to the project’s end. Baltic States also have no officially approved plans for re-financing in case project costs increase or if EU funding turns out lower than planned.

The audit found that AS RB Rail has developed and improved procurement and contract management procedures. RB Rail has also adopted a quality control system. The company is currently working on a risk management system.

Supreme audit institutions provided recommendations to RB Rail, its shareholders, Rail Baltica project’s beneficial owners – ministries of all three transport ministries.

State Audit urges an agreement on clear decision-making rules for Rail Baltica project’s implementation on all levels, as well as clear change and risk management plans to reduce the length of the implementation schedule and the risk of exceeding the approved budget. VK also believes it is necessary to plan state budget’s accessibility for the project in a long-term perspective, including cases when the project’s costs increase or EU funding is lower than planned. Audited units generally agreed with provided recommendations. Nevertheless, responses from the audited units also showed the unwillingness of ministries to perform long-term financing plans.

On 6 June 2018, Estonian, Latvian and Lithuanian state auditors agreed to perform a joint audit about Rail Baltica Project. The goal of this joint audit was to assess Rail Baltica project’s internal control systems and public procurement management.

The joint audit looks into the efficiency of Rail Baltica project and its associated contracts to help improve the project’s implementation. The audit also focused on the use of state budget financing.

Estonian, Latvia and Lithuanian supreme audit institutions have performed an audit of Rail Baltica project’s implementation in each participating country; two of them took place in parallel to the project’s international audit. Lithuania’s audit report was published in 2018, Estonia’s was published in 2019 and Latvia’s report was published in 2020.

Meanwhile, RB Rail notes that audit results have been carefully assessed. «We fully trust and respect results of the joint audit in Estonia, Latvia and Lithuania,» said RB Rail interim executive director and board chairman Agnis Driksna. He adds: «We are prepared to act and we have commenced the necessary measures to reach tangible changes to the joint-company’s range of responsibilities as outlined in the audit report.»

«Although the audit report outlines planning and budge risks, Rail Baltica project’s implementation by 2026 remains our goal. We have identified the main pre-conditions needed to accomplish this goal, including improved decision-making in the design and construction stage, as well as timely financing accessibility.»

«If these pre-conditions are effectively implemented, it will be possible to implement Rail Baltica within the set term,» stresses Driksna.

In response to the audit’s conclusions about Rail Baltica costs, RB Rail finance director Ignas Degutis stresses: «Because Rail Baltica global project has reached the design phase, project developers now have more detailed information about the scale of planned tasks. There are also the requirements and needs of other organizations involved in the project. Based on new information, the costs of Rail Baltica in all countries will be updated after 2021 and future studies about predicted passenger and freight flows. At the same time, we have to admit that there are many opportunities to reduce project costs using joint procurements and smart planning solutions.»

As for the audit’s outlined budget increase in the first CEF co-financing contract, Degutis stresses: «On 17 December 2019 the joint company and European Commission added changes to the aforementioned co-financing contract and updated planned activities. Following the changes, CEF co-financing contract’s activities are in line with budgets and terms.»

The audit affirms that RB Rail has developed appropriate conditions for procurements and contract management. Additionally, the audit affirms the rules will be applied as needed. This is an important conclusion that provides confidence that RB Rail procurements are performed in line with requirements. At the same time, the audit also points to areas in which RB Rail should improve both procedures and their implementations to achieve an even higher quality for procurements and contract management.

The company notes that audit outlines the importance of having a comprehensive risk management system, which includes all of the project’s involved units. The audit concludes that RB Rail has identified, evaluated and prioritized risks associated with the global project’s implementation. This points to the need to use a unified risk management system. To develop a joint risk management system, RB Rail has procured planning, accounting and risk management software. It will be used to accurately define the schedule and budget across the project’s entire life cycle and make sure possible changes, problems and risks are recognized early and resolved in a timely fashion. It is expected for the system to be introduced by July 2020.

RB Rail as Rail Baltica global project’s central coordinator is prepared to provide the necessary contribution to the project’s owners – Baltic transport ministries – to perform the necessary changes in areas like decision-making, change management and long-term financial planning. The audit has also identified these areas as ones needing immediate attention from the project owners.

While the unified audit report outlines the need for decisive action to improve Rail Baltica implementation, in 2019 the project provided tangible results. It was thanks to the coordinated team work of all sides involved in the project.

The company also outlines what was accomplished in the project before the end of 2019: design work has commenced 411 km from the main line, six main route construction project contracts with experienced international design companies worth EUR 58 million have been signed, the design of the main passenger terminals in Tallinn and Pernava has commenced, and Riga Central Railway Station has commenced design and construction work.

Additionally, a procurement has been announced for the construction of Rail Baltica terminal at Riga International Airport. Estonia and Lithuania have commenced separate construction of road and railway infrastructure elements. Territorial planning has also commenced in Lithuania.

Rail Baltica has developed a train movement schedule, providing that Rail Baltica is to ensure quick connectivity among Baltic capitals every two hours.

The company also points that Rail Baltica construction projects are created digitally, using smart technologies. Work is also put into the next CEF application for February 2020.

In 2019 RB Rail signed 66 procurement contracts worth EUR 64.2 million. In according to RB Rail suppliers survey, nearly 70% of suppliers claimed in 2019 that the quality of procurements is either high or very high, the company notes.

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