A FEASIBILITY STUDY FOR A STANDARD GAUGE SEPARATE

A FEASIBILITY STUDY FOR A STANDARD GAUGE SEPARATE RAILWAY LINE IN ESTONIA, LATVIA AND LITHUANIA 28 June 2011

Objective of the Feasibility Study • The main objective of this feasibility study is to identify the most desirable feasible development option for a 1435 mm gauge line in the Rail Baltica corridor evolving from a “top-down” transport strategy covering all the three Baltic States and an EU-wide rail network rationale, and • to give a complete and substantiated picture for the authorities of the 3 Baltic countries and the EU if the project seems viable enough to justify a more detailed analysis on the respective national levels and to propose a possible period for implementation of further studies at the national levels.

Sustainable Mobility • The overall objective of the Core Network is to enhance the “European added value” of the Trans-European Transportation Network (TEN-T). This is defined as a benefit that goes beyond those achieved at national level and includes not only economic benefits, but also those derived in the cohesion, environmental and safety and security areas. • Principles of the TEN-T core network: – integration, – sustainability, – territorial cohesion and – openness to third countries

Macro – Economic Context in the Baltics POPULATION Population in the Baltic region is shrinking GVA Growth in GVA is stronger in the urban areas than in the rural areas URBAN RURAL GDP Average long term growth in GDP is 2. 3% in the Baltic States GOODS N/S freight market is containerised E/W freight market is bulk

Analysis of the Supply of Transport Services RAIL Int’l passenger rail service is poor. Regional rail is infrequent, yet cheap. N/S rail freight service is poor. E/W rail freight service is good. AIR Reasonable network of routes for international air movements. Air service is less attractive for shorter distances. ROAD Road network quality is poor, yet permits reliable journey times. Good regional and int’l coach network. SEA E/W freight from ports to inland CIS. N/S freight is regional to Baltic ports. Sea cargo is mainly bulk cargo.

Existing Demand PASSENGER Passenger demand is generally low for cross border movements. Road is the preferred mode for shorter distances but changes to air for longer journeys FREIGHT There is a reasonable N/S freight demand which is currently carried by road and sea Global recession has had a negative effect on demand

Constraints ECONOMIC Funding Government EU Other sources ENVIRONMENTAL Noise Emissions Protected Territories Sustainability REGULATORY Planning Land expropriation Setting of Tarrifs Infrastructure Access Passenger Tariffs Freight Tariffs TECHNICAL (TSI) New core TEN-T mixed traffic line: Line Category IV-M Structure Gauge GC (1435 mm) Maximum axle load 25 tonne Maximum design line speed 240 kph FAST CONVENTIONAL RAIL

Three Track Layouts Under Consideration New Dual Track Adjacent to Existing Track Dual Guage/ Dual Track

Option Identification

Options Identification Distance/Passenger Journey Time Comparison

Technical Analysis Passenger Results – Flow Summary 2 -way Daily Flow Red Orange 2030 2040 2020 2030 Yellow 2040 2020 2030 Green 2020 2040 2020 2030 2040 Tallinn to Parnu 3, 015 3, 361 3, 721 2, 261 2, 485 2, 755 - - - Parnu to Riga 2, 168 2, 432 2, 695 1, 510 1, 672 1, 867 - - - Tallinn to Tartu - - - 3, 068 3, 378 3, 716 2, 144 2, 305 2, 545 Tartu to Valmiera - - - 1, 819 2, 088 2, 276 1, 043 1, 150 1, 272 Valmiera to Riga - - - 2, 735 3, 062 3, 314 1, 805 1, 926 2, 083 Riga to Jelgava - - - 3, 067 3, 324 3, 625 - - - 3, 325 3, 581 3, 867 Jelgava to Kaunas - - - 2, 034 2, 211 2, 402 - - - 2, 157 2, 343 2, 530 Riga to Panevezys 2, 566 2, 837 2, 945 - - - 2, 603 2, 883 2, 989 - - - Panevezys to Kaunas 4, 611 4, 972 5, 120 - - - 4, 649 5, 018 5, 165 - - - Kaunas to Poland 1, 114 1, 038 857 768 844 751 694 856 Based on Optimized Fares 710 1, 104 1, 021 836

Technical Analysis Freight Total tonnages over all flows for each of these scenarios are: Route 2020 2030 2040 Red Route 9. 8 m 12. 9 m 15. 8 m Orange Route 7. 6 m 10. 1 m 12. 6 m Yellow Route 8. 1 m 10. 6 m 13. 2 m Green Route 6. 6 m 8. 7 m 10. 9 m

Technical Analysis Sensitivity Analyses Various Sensitivity Analyses were run for both Passenger and Freight: Passenger: 1. Train Frequency – changed to a one hour service 2. Increase in train speed – a 15% and 30% reduction in journey time was considered Freight: 1. Price – various scenarios (low/medium/high) 2. Increase in speed – from 70 kph to 90 kph 3. Variation in induced demand – change from 15% to either 0% or 30% 4. The green agenda – a change to a strong green agenda

Technical Analysis Revenues in year 2040 in millions of euro Route Option 1 - Red Option 2 - Orange Option 3 - Yellow Option 4 - Green Passenger 97 66 108 70 Freight 222 188 187 160 Total 319 254 295 230 • Freight calculated using medium scenario and average distance • Passenger revenue based on optimised fares

Technical Analysis Initial Option Comparison RED Option 1 Destination and Connectivity Primary Cities ORANGE Option 2 YELLOW Option 3 GREEN Option 4 X X X Secondary Cities Airports Journey Times X X Comments X X Passenger X Freight X X X X Capacity Passenger Freight Capability Compliant with TSI Gauge Transfer Facilities Estonia/Latvia/Lithuania Terminal Facilities Tallinn/Riga/Kaunas Environmental X X (initial targets overestimated) X X X X 8 9 7 Noise/Emissions X Protected Territories X FRS Compliancy 10 Min Operating Costs X Min Capital Costs X X Max Journey Time Savings Max Revenue Generation X X Max Passenger Trips Max Freight Volumes X Min Technical Constraints X X Min Expropiation X Min Spatial Planning Approvals Max International Movements X X Max inner-country Movements Analysis Indicators 6 1 3 1 Total 16 9 12 8

Preferred Option – Red Route It was agreed at the Steering Committee meeting on 17 th March 2011 that Option 1, the Red Route should be the subject of the full Cost Benefit Analysis. The key features of the red route are: • Overall length of new track 728 km • The route is a mixed traffic conventional route, with a maximum design speed of 240 kph • Journey times between Tallinn and the Lithuanian/Polish Border » Passenger 4. 13 hrs (4 hrs: 8 mins) » Freight 10. 38 hrs (10 hrs: 23 mins) • Average speeds » Passenger 170 kph » Freight 68 kph • New/Upgraded passenger stations at Palemonas (serving both Kaunas Centre and the Airport), Panevežys, Riga Central Station, Parnu, Tallinn Airport and Tallinn Central Station. • The route is twin track for its entire length on mainly new alignment • Some dual gauge (1520/1435) sections are required mainly in congested areas adjacent to existing major stations.

Preferred Option

Preferred Option – Latvia/Riga

Preferred Option Proposed Service Provision A draft timetable has been produced based on the following assumptions: – – – Full operations will take place over a 24 hour period, 6 days per week Track inspections will take place approximately once per week A limited service will operate on Sunday to enable planned/reactive maintenance Periodic Blocks of 18 -27 hours will be available but not on a planned weekly basis A two hourly passenger service will be provided starting at 05. 30 or 06. 00 from the key cities on the route with the last trains arriving between 23. 00 and 24. 00 hrs – The freight service will operate predominately during the night to minimise interference with the passenger service.

Preferred Option Infrastructure Requirements – Latvia Passenger – Riga Central Station • 2 European gauge tracks and platforms (dual track if required) • Additional crossover/passing opportunities will be provided off of the mainline on the Riga spur between Upeslejas and Riga Central Station. Freight – Riga Bulk Terminal (via 1520 mm gauge line) • 2 track double ended siding and engine runround – Riga Intermodal Terminal (Salaspils) • 2 track double ended siding and engine runround – Possible Riga Port Siding and engine runround (via 1520 mm gauge line) – Freight loop – Maintenance facility for bulk trains and rail infrastructure (Krievupe/Riga) – A domestic siding in south Latvia in the vicinity of a freight loop (Iecava)

Cost Benefit Analysis Capital Cost Summary Per Country CAPEX SUMMARY (M EUR) ESTONIA LATVIA LITHUANIA TOTAL CONSTRUCTION LAND TOTAL % € 935 € 108 € 1 043 29% € 1 196 € 26 € 1 222 35% € 1 259 € 15 € 1 274 36% € 3 390 € 149 € 3 539

Cost Benefit Analysis Stages of Implementation The economic cost benefit analysis sums costs and benefits over a 30 year horizon period, with all data presented in years. The stages of implementation are: • Investment period (13 years): 2012 – 2024; • Operational period (30 years): 2025 – 2054.

Cost Benefit Analysis Track Access Charge Assumptions Track Access Charge (€ per train km) Passenger Service 3. 95 € per km Freight Service 5. 92 € per km • TAC based on Art 31 and Art 32 of EC document 2010/0253(COD) • Mark up applied to minimise the financial losses of the rail manager whilst still providing financial return for the operators.

Cost Benefit Analysis CBA – Costs and Benefits Source of Cost / Benefit Rail Manager Capital Cost Maintenance Cost Track Access Charges Residual Value of the Project Economic Cost Benefit Analysis Source Cost of all elements of infrastructure including design and planning, land, construction, supervision and contingency Valued net of VAT on materials, and social cost on labour All ongoing costs of maintaining the infrastructure during the appraisal period Charge paid by the passenger and freight operators to the manager for use of infrastructure Calculated in accordance with EU standard and mark up applied to min. IM losses Value of infrastructure at the end of the appraisal period. Valued at a fraction of the construction cost depending upon the scale of the infrastructure. Rail Operators Operating and Maintenance Costs Revenues Costs of operating and maintaining the freight and passenger Valued net of VAT on materials, and social services, includes an elements to pay track access charge to costs on labour. manager Revenues generated over the appraisal period from fares paid by passengers and hauliers Transport Users Valued according to economic cost, by either savings to economy for business journeys, or value assigned by individuals for non business journeys HEATCO values of time used for each country Accident Savings Valued according to economic cost, i. e. direct cost of emergency services, loss of the economic value of the lost working time in the case of death or serious injury. An allowance for pain and suffering can also be included Benefits From Reduced Emissions Economic value assigned to the reduction in emissions of both IMPACT recommended value for CO 2 greenhouse gases and local air pollutants. . emissions and HEATCO recommended value for air pollution emissions used Travellers Time Savings External Effects

Cost Benefit Analysis – Economic Analysis - TOTAL Un-discounted Cost or Benefit Economic Impact (€, 000) Discounted Cost or Benefit Share in Total Costs/ Benefits 3, 496 -1, 238 1, 886 -117 353 2, 508 744 1, 764 61 521 170 351 103% -6% 3% 16% Operating costs (including track access charges) -1, 626 -372 -12% Revenues Freight Operator 2, 842 605 19% Operating costs (including track access charges) -3, 440 -685 -21% 5, 429 1, 627 4, 150 1, 652 704 1, 778 1, 142 1, 158 340 818 338 148 342 36% 11% 5% 11% Cost to Infrastructure Manager/Government Capital / Investment Costs Residual Value Maintenance Costs Benefit to Manager Track access charges Passenger Freight Benefit to Operator Passenger Operator Revenues Benefit to Users Value of Time Savings Passenger Freight External Impacts On Safety (Accidents) Air Pollution Climate Change Total Costs 1, 829 Total Benefits 3, 198 Net Present Value (NPV) EIRR Benefit/Cost Ratio 1, 368 9. 3% 1. 75

Cost Benefit Analysis – Economic Analysis - Latvia Economic Impact (€, 000 discounted) Cost or Benefit Un-discounted Cost to Infrastructure Manager/Government Cost or Benefit Discounted Cost or Benefit (per km of track) Commentary Capital / Investment Costs Construction cost per km: 5, 700, 000 Euro/km This is highest of the three nations due to a larger number of infrastructure elements required (e. g. the bridge over the Daugava. ) 1, 207 648 2. 76 Residual Value Maintenance Costs Benefit to Manager Track access charges Passenger Freight Benefit to Operator Passenger Operator Operating costs (including track access charges) -449 114 535 159 377 -43 20 111 36 75 -0. 18 0. 08 0. 47 0. 15 0. 32 -347 -79 -0. 34 Operating cost per train-km is the same for all countries Revenues 761 160 0. 68 Optimum fares are lower on Rail Baltica north of Riga -734 -146 -0. 62 Operating cost per train-km is the same for all countries Revenues 1, 618 339 1. 44 Revenues per km of track are lower than in Estonia due to a smaller domestic market; Benefit to Users Value of Time Savings Passenger Freight External Impacts 427 1, 282 340 88 252 1. 45 0. 38 1. 07 On Safety (Accidents) 514 105 0. 44 Over the 30 year appraisal period in Latvia 2, 028 accidents are expected to be avoided Air Pollution 142 29 0. 13 Benefits are slightly lower than in other countries Climate Change 565 108 0. 46 Benefits are slightly higher than in Lithuania and slightly lower than in Estonia 625 967 342 8. 4% 1. 55 2. 66 4. 11 Freight Operator Operating costs (including track access charges) Total Costs Total Benefits Net Present Value (NPV) EIRR Benefit/Cost Ratio Maintenance cost per km of track is the same for all countries Track access charge per train-km is the same for all countries Freight time savings are lower than in Estonia

Cost Benefit Analysis – Financial Analysis The nature of the construction and operation of Rail Baltica mean that there are two sets of stakeholders, from whose viewpoint the financial analysis needs to be undertaken. These are: • The Rail Manager, who constructs and maintains the rail line, these costs are offset to some extent by the track access charges paid by the operators • The Passenger and Freight Service Operators who operate the services whose costs include maintenance of the train fleet and payment of access charges to the rail manager in exchange for the opportunity to run services on the track. These costs are offset to some extent by the revenue paid by the passengers and hauliers who use the service.

Cost Benefit Analysis – Financial Return on Investment

Preferred Option Financial Analysis – Sources of Funding As part of the financial analysis, identification of the different sources of funding is required in order to calculate the total financial resources available to the project. Within the framework of EU co-financed projects, the main sources of funding are: • Community assistance (EU Grant); • National public contribution (capital subsidies at central government level); • PPP; • EU loans; and • Local resources – not foreseen for this project.

Preferred Option Financial Analysis – Financial Return on National Capital Total (€ million) Indicator To Rail Operator To Rail Manager Total Freight Passenger Consolidat ed 3, 678 353 EU Grant -2, 070 Residual Asset Value -1, 569 2, 559 1, 676 882 2, 559 Investment Cost Maintenance Operating Costs Track Access Charges Total Outflows Track Access Charges Revenues 2, 508 1, 764 744 2, 508 392 5, 066 3, 440 1, 626 5, 458 2, 508 8, 270 5, 429 2, 842 8, 270 Total Inflows 2, 508 8, 270 5, 429 2, 842 10, 778 Net Cash Flows 2, 115 3, 204 1, 988 1, 216 5, 319 Net Cash Flows (discounted) -208 785 517 268 577 Financial NPV of Investments (FNPV/K) -208 785 517 268 577 3. 70% - 6. 22% 6. 18% 8. 17% Financial IRR of Investments (FIRR/K) Financial MIRR of Investments (MIRR)

Interoperability Assessment The objectives of the Interoperability Directive 2008/57/EC should be understood as a part of the EU approach to improve the performance of rail transport • Relevant TSI’s for Rail Baltica: – – – – Infrastructure: CR INF TSI, Infrastructure: PRM TSI (since the line includes stations) Energy: CR ENE TSI (since the line is electrified) Track side CCS: CR CCS TSI RST: CR LOC&PAS TSI, RST Noise TSI On board CCS: CR CCS Operation and Traffic Management Telematic Applications for both Freight and Passenger Services.

Implementation Plan Organizational Design Overview: Programme Steering Group (PSG) • Strategic Delivery • Member States and EU Representation Facilitation : Integrated Programme Organisation (IPO) • Technical based organisation to guide development • Independent from national and international bodies Assessment: Independent Review Group (IRG) • Review/Monitor business objective (over project lifecycle • Independent and commercial experts

Implementation Road Map

Implementation Programme

Conclusions – Key Metrics TOTAL PROJECT LATVIA % Length of Track 728 km 235 km 32% Investment Costs € 3 678 € 1 271 35% Economic Analysis - NPV € 1 368 € 342 Economic Analysis - EIRR 9. 3% 8. 4% Economic Analysis - B/C Ratio 1. 75 1. 55 Financial Analysis (FNPV/K) - NPV 577 229 Financial Analysis (FNPV/K) - IRR 8. 17% 9. 22% EU Contributions € 2 070 Member State Contributions € 1 608 € 563 35%

Conclusions • Social cost benefit appraisal gives a BCR of 1. 75 • EIRR is 9. 3% which is just below the 11% average for rail projects funded by the EU during the previous programming periods • Only 56% of the total investment cost can be financed by the EU. This would mean member state contribution of € 1, 608 million

Thank You