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Friday 18.01.2019 | Name days: Antis, Antons

Opinion: railway electrification project’s costs may reach those of Parex Bank or MPC

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Baltic news, News from Latvia, BNN.LV, BNN-NEWS.COM, BNN-NEWS.RU«The railway electrification project may potentially leave Latvian taxpayers with nothing. Cost-wise this project comes close to the financial strife that was caused by Parex Bank’s liquidation or even mandatory procurement component system’s potential losses. The only difference is that it is still possible to avoid the potentially ruinous outcome of the electrification project. If I, as head of the responsible state institution, were asked by state institutions advice on what should be done, I would say this – the risk is so massive that the project needs to be halted immediately. It should remain idle until a re-assessment has been performed – the latest data collected, mistakes fixed and a repeated audit performed for the study used to base all current estimates on,» said Juris Iesalnieks, Director of Latvia’s State Railway Administration, in an interview to BNN.

«Latvian Railway’s attitude towards investments is not always serious»

In regards to the railway electrification project’s implementation in Latvia, Iesalnieks says that as head of the responsible state institution he cannot put it in either positive or negative category. «All those below should have strict and careful calculations, and generally our institution is in favour of the project. But will its benefits help cover the losses? Unanswered questions and information kept secret from state institutions only serve to crate concerns and doubts about the necessity of this project and its quality.»

It should be said that the State Railway Administration supervises the state policy in railway freight industry and the national transport development programme. However, in spite of that, no one in the institution has access to the study into the electrification project. Iesalnieks adds that the only institution that has expressed an interest for opinions in this matter is the State Audit.

«In spite of us having specialists of the necessary qualifications, we were not involved in the project’s evaluation. Can you imagine a situation when Latvia would design a nuclear power plant, but the State Environment Service was left out? How about Latvia designing a pulp mill without involving the State Forest Service? It is unlikely that such an absurd situation would be possible in the two aforementioned examples. With that said, I have no idea why the example works in the case with railway electrification, because the state institution responsible for it is kept in the dark.»

Isalnieks gets the impression that the electrification project was evaluated and developed rather unprofessionally. «European funding is available. Yes, at first it may seem that this money could bring economic benefits – builders will have work, companies that secure land will have additional income, etc… This will be true, but only for a moment. The problem is that we have to look not one step ahead, but rather 30 years ahead. Because of unanswered questions, losses that may appear as a result of a failed project may exceed benefits of European funding countless times. It seems to me people responsible for the project are driven by the desire to take from Europe everything they can without giving the thought of what might come afterward. The thought of living now and letting our descendants pay the bills is very short-sighted.»

Iesalnieks notes that bases his opinions on the publicly available information and statements he received from the study’s authors. «We sent an opinon to Transport Ministry around the end of July to explain how we feel that Latvian Railway’s attitude towards investments is not always serious. Electrification of the country’s railway is mentioned as one of the examples, specifically that the project is not taken seriously even though it will most definitely impact not just one company but the state budget as a whole.»

«We believe our duty is informing the ministry that the project is not as unambiguous as it is presented. About electrification as a whole, we have to consider two of the largest points that are not viewed in their entirety by society,» Isalnieks continues.


«Latvian Railway is no longer the way it was at the time of the study: if some problem appears, everything is covered from the state budget»

Latvian Railway is no longer the way it was at the time of the study. In accordance with changes made to the Railway Law in 2016, it is a state-subsidized company, says the director of the State Railway Administration.

«This means it is no longer strong enough to sustain itself, sponsor others and take risks. Starting from 2019, Latvian Railway will be a state-subsidized company. This means all business risks will be taken on by the state budget, which is explains in Section 9 of the Railway Law,» Iesalnieks explains.

«Right now it seems the government and Transport Ministry, which have either fully or partially supported projects, have not taken this into account. Nor have they taken into account that Latvian Railway is this project’s main driving force. In spite of that, however, it carries no financial responsibility. The entire weight of responsibility is instead put on the shoulders of Latvia’s state budget.»

«Had Finance Ministry taken it into accounted and accepted it, I doubt it would have gone through as smoothly as it did. Perhaps the old stereotype – that the state has never given and will never give any money to railway – is in play. It will no longer be in place after 2019, because provision of funding to railway will become a duty for the state. If some problem appears, the costs of it will be covered from the state budget.»


«This is not about new technologies that will grow rapidly in the future; rather it is about 100-year-old technologies»

Iesalnieks reminds that Germany sent on its first trip a train powered by hydrogen on 16 September. «It was an enormous development for the world’s railway industry. We might go as far as to say a new era has begun. Five or ten years ago hydrogen-powered trains were still in testing. Now they are manufactured industrially. On 16 September Germany commenced commercial trips using hydrogen-powered trains. Railway electrification, however, is technology from the first half of the last century. We have to understand: this is not about new technologies that will grow rapidly in the future; rather it is about 100-year-old technologies.»

Iesalnieks stresses that in spite of the fact that he cannot access the study on the electrification project, he is still able to say that it uses outdated information. «Those freight volumes are likely from 2015 or even 2014. Since then, volumes have dropped 20%. The laws have changed as well – everything associated with tariffs for users of infrastructure has been turned upside down.»

Iesalnieks also mentions several risk factors Latvia will have to face if a repeated study is not performed.

Economic assumptions

«The study contains fundamental errors. Estimates there are based on full-cost principle – that all carriers will be using the electrified network. Currently new laws do not allow separate collection per segment. Only direct payments are allowed from other segments. Meanwhile, return of investments is based on full costs,» said Iesalnieks after talks with study authors.

«Other economically unjustified assumptions worth mentioning include the belief that carriers will immediately start using the network once it has been commissioned. This is a completely unjustified assumption, because it has already been reported on the public space that one of the three freight carriers – Baltic Express – has performed its own estimates and has concluded categorically that the project is not worth with current freight volumes. Baltic Express has stated that it will not use the network,» Iesalnieks adds.

«What does this mean? In a situation when one freight carrier with 25% of market share refuses to use the electrified network, the remaining ones will have to cover the costs, because full-cost principle means that everyone will be using it and everyone will be paying for it. We need exact estimates – how much companies will have to pay if one of them – Baltic Express in this case – refuses to participate?» asks the director of the State Railway Administration.

A line of questions

The first question that remains unexplained: how much will railway lines cost? The cost of railway lines will be put on the shoulders of Latvian residents – including those who will not use the electrified network, said Iesalnieks.

«The largest costs have been estimated for the extension of railway lines, of course. This is because the main advantage of electrified lines is pulling longer trains. Let’s say we may expect 9,000 tonnes instead of the current 6,000. All advantages of the electrification project are based around this. This means that without stations, railway extension’s alleged advantages are useless and cannot be used. Still, it is a very expensive undertaking, because we would have to replace not only bearers by also the entire bearing movement blocking system. This has been done thanks to immensely expensive assistance from western companies, because without them we cannot move a finger – such an expensive pleasure this is.»

Iesalnieks says it can be added to mistakes – this particular portion of work was not included in estimated costs. «The benefits from electric trains have been calculated, but the costs haven’t been. A first year student of an economic faculty would have been kicked out for such a mistake. There is no way to calculate benefits without also calculating costs. In this case, the biggest benefit is having longer trains, but the cost of hauling them across the railway have not been calculated, which means we are dealing with incorrect calculations,» says Iesalnieks.

«What does this mean for railway routes that will not be electrified?»

«Even without looking at the project’s chances of being successful, it should be said that freights to Ventspils and Liepaja will not be economically viable, and they will be affected by increased prices. This means that we may very well lose a lot of potential freight to these directions when compared to other routes. The study offers no answer as to what might happen in this situation.»

Iesalnieks also adds that the study has no answer as to how electrification will affect passenger transportation. «As it becomes more expensive, how will this change state budget co-funding to ensure continued passenger transportation? There are many factors that will affect prices.»

«Outdated technologies, fundamental errors, unjustified assumptions and a lot of unanswered questions – these are the risk factors. One other topic I would like to add and which not been taking into consideration are risk estimates. I cannot imagine for someone to open an ice cream shop at Riga Central Market without first calculating the risk of someone else opening a second ice cream shop next door. The electrification plan has no risk estimates. I would go as far as to say risks have not only haven’t been estimated – they have not even been identified. Any competent railway specialist would be able to list three or four considerable risks in five minutes. On top of that, it is not just Latvian Railway that takes on the risks – it is the entire state budget.»

«This project is insurmountable without state budget funding»

Currently those supervising the project’s progression base their assumptions on multiple myths as to why Latvia should undertake it.

1st myth: because European Commission has approved it

«I don’t know if it has, but it is known that the inspection was performed by European agency Jasper. This agency’s objective was not approving or checking how beneficial this project is for carriers and the state. This agency assisted in preparing the project to meet European requirements. Jasper also observes to make sure the project is implemented in accordance with European regulations. This is an environmental project, not an economic one. This agency does monitor the amount of emissions and whether or not the amount complies with environmental requirements, as well as any cases of theft. Additionally, one European requirement is that the state budget is to be used to maintain infrastructure. From his point of view things are in order, but what about Latvia’s taxpayers? We want to know if the state budget could be used to pay extra for the project. It has been said on the public space that ‘no, it will not’. I would say that this confidence may have come from old pay methodology, whereas the new one does not allow for such a possibility. This project is insurmountable without state budget funding. With that, a great deal of residents is rightfully confused. The new methodology does not allow for it even under the best of conditions,» Iesalnieks says.

«No one can tell how this project’s implementation could affect the governance of state subsidized infrastructure or economic state of Latvian Railways. The study offers no answer,» concludes the director of State Railway Administration.

«Comparing Latvian and Lithuanian markets is unprofessional»

2nd myth: we cannot afford falling behind Lithuania

«First of all, Lithuania has a completely different guaranteed freight volume. While for us it is no more than a couple of percent, which consists of domestic cargoes and our own economic environment, in Lithuania they reach 30%. Additionally, they have guaranteed Russian freight volumes, because there is no way to transport cargo to Kaliningrad – it is geographically impossible to go around Lithuania. Putting all that together, the volume of guaranteed freight in Lithuania reaches 70-80%. This means they have no reason to worry,» Iesalnieks explains.

«Secondly, they are much closer to Belarus, both in relations and geographically. Thirdly, there is already an electrified railway line reaching Lithuania from Belarus. Fourthly, they have a completely different locomotives park. They require rail extension for existing park of diesel locomotives, because they have Siemens locomotives, which require long railway lines for optimal use. There are no reasons to believe they might go with the second stage – electrification. They have already told us as much. They started with rail extension, which is needed for their locomotives because without it they would become economically unviable. Because of that comparing Latvian and Lithuanian markets is unprofessional.»

«Look before you jump, I would say. Currently it seems people have jumped but are afraid to open their eyes, lest they see the rocks below.»

3rd myth: estimates were performed by the world-renowned auditor firm Ernest & Young!

As noted by Iesalnieks, the third argument often mentioned in favour of the project is that the estimates were performed by Ernest & Young – a world-class auditor firm. «This is also a myth. We all know even a company of this kind of level can still make mistakes. Remember Baltija Bank? Some of our countrymen still haven’t received their money back.»

«Ventspils and Liepaja might lose their competitiveness»

Question – will carriers have the money to finance the construction of new depots and electric locomotives should the project succeed? This presents another risk, because it depends of bank funding.

«The problem is that distant freight destinations – Ventspils and Liepaja – might lose their competitiveness, because freight costs may increase under such conditions. As a result we might end up in a situation when we will have extended railway lines that become beneficial for Lithuania, not us. Lithuania will be able to use its Siemens locomotives to carry freight from Belarus to Riga port. Our own locomotives will not be able to pull 9,000, whereas Lithuanian ones will. And they won’t pay for this network. They will carry cargoes to the port. This risk should have been calculated.»

In conclusion, the director of State Railway Administration notes: «Risks were taken into account when establishing an ice cream kiosk in the Central Market. Unfortunately, the same was not done for the billions worth project. And this is shocking.»

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