Latvia State Audit says railway electrification project was undermined by Transport Ministry’s and LDz’s decisions

Latvia State Audit says railway electrification project was undermined by Transport Ministry’s and LDz’s decisions

The railway electrification project in Latvia was undermined by the geopolitical situation and also the decisions made by Transport Ministry and Latvian Railway (LDz), as concluded by State Audit (VK).

The massive Latvian Railway infrastructure modernization projects that were planned to receive investments of at least EUR 534 million, including EUR 454 million provided by the European Cohesion Fund, will not be implemented on time and within their planned extent. VK concluded after performing an audit in the middle of March that this was caused by problems with planning of the railway sector’s development, as well as the lack of active involvement from sides involved in this process.

“Transport Ministry did not act as a responsible planner should have to enhance the competitiveness of the infrastructure and assist with preparations for changes in the industry. For years the ministry has been aware of the negative trend with freights in Latvia, which will be further impacted by the port development plans of countries of freight carriers.” says VK

In 2019 there was a negative tendency observed for railway freight transports, as the freight volumes had declined 15.8% when compared to 2018, reaching only 41.5 million tonnes, which was the lowest volume of freights carried by rail since 2002, VK notes.

LDz has already dropped the most financially demanding investment project – Latvian railway network’s electrification. Preparations for this project lasted for five years. The reason for dropping the project is the currently financial situation. According to the original financing contract, this project’s costs should have reached EUR 440 million. The project intended to implement the first electrification section along Daugavpils – Krustpils, Rēzekne – Krustpils and Krustpils – Rīga railway lines.

As noted in the audit, the situation observed in May 2020 shows that the plans include only one of the initially intended and commenced four railway infrastructure modernization projects. By implementing the project to modernize Riga’s railway hub’s section Sarkandaugava – Mangaļi – Ziemeļblāzma, it will be possible to increase the processing capabilities and capacity of the TEN-T railway network’s section, as well as improve efficiency and traffic safety, not to mention reduce pollution in the area.

“To improve the competitiveness of the railway infrastructure, comfort for passengers and railway fitness for environmental requirements, between 2014 and 2020 the railway sector was planned to be provided twice the amount of its normal financing available from EU funds in the past. Unfortunately, the planned railway industry’s development has remained mostly on paper. If preparation and implementation of investment projects does not improve, the remaining structure fund accessibility period may not be enough to review plans for railway development. In spite of Latvia’s geographical location and historic traditions in transit and freight carrying, Latvia has been losing its positions for at least two decades. The audit suggests the geological situation, which is often mentioned as a reason for this, is not the only one. We found out consequent and planned actions for the modernization of Latvian railway infrastructure lacked in decisions of the Transport Ministry and LDz,” admits state auditor Elita Krūmiņa.

She continues: “In 2018 there was a transport and logistics conference organized in Riga. Both the prime minister and transport minister had participated in it. The conference helped develop visions for Latvia as a hyper-modal regional logistics centre. Transit and logistics sectors were on the agenda of Latvian governments in the past 30 years. It is clear we can dream, but there have been problems with achieving results.”

The State Audit, performing the audit, identified weak capacity for major, important and financially significant railway infrastructure projects. Projects included in the audit and distributed among institutions had experienced multiple changes for their terms and implementation conditions. For months there have been no important decisions made for important projects.

Transport Ministry has also performed no analysis of competitiveness of Latvia’s chosen fare for use of public railway infrastructure, its influence on railway passenger and freight transport volumes or influence on transport industry’s policy for accomplishment of goals and the state budget even though experts admit it to be one of the most important railway infrastructure’s economic aspects, VK stresses.

VK also adds Transport Ministry has not outlined activities and stimuli that could contribute to unloading of roads and diverting freights to the railway. ‘Railway freights ratio declines every year when compared to the total volume of freights. The volume of freights carried by road continues increasing accordingly. While in 2014 the volume of freights carried by rail accounted for 48% of the total volume of freights, in 2018 it was only 39%. Although Transport Ministry believes on the of the measures that could contribute to unloading roads from freight transports is reviewing the fare for the use of railway infrastructure, it was done only in July 2019 and after EU requested it, not because they thought it was a good idea.’

Transport Ministry plays an important role in operating and monitoring the public use railway infrastructure financing model. Following the change of the public use railway infrastructure model in July 2019 it was necessary to ensure balance between the cost and revenue from LDz infrastructure.

In reality the financial balance mechanism was planned out by LDz using the opposite development of the situation. The company assumed freight volumes would not reduce, instead they would increase, and that LDz would work with profits and decisions would be made to use dividends to secure public needs, VK notes.

During the audit, VK noticed considerable risks for such an optimistic development scenario. The institution believes the state budget’s involvement in LDz financial balance could be required in the near future.

The current situation, which is further impacted by the economic crisis caused by the pandemic shows the State Audit’s concerns were justified because the massive initiatives have dispersed and further decisions about the future of LDz remain in the form of political choice.

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