Facilitating Cross-Border Investments: Case Study of Rail Baltica

Rail Baltica is known to many as the project of the century. A global greenfield project that will build new European-gauge railways from Tallinn- through Parnu, Riga, Panevezys and Kaunas with a link to Vilnius then on to Bialystok and Warsaw -it is seen as the overarching project for the three Baltic countries: Latvia, Estonia and Lithuania. Rail Baltica is a EUR 5 bln expected investment with no current Public-Private-Partnership (PPP) financing; instead, it is 85% financed by ‘Connecting Europe Facility’ (CEF) grants, with co-financing from the three Baltic countries themselves.

GEORGIA TODAY attended the Regional Transport Investment Conference held in Sofia in March, and heard from Ms. Baiba Rubesa, CEO of ‘Rail Baltica Joint Venture’.

Governance

“At the heart of the project, we have three shareholders: three relevant ministries from each of the Baltic countries, which created special purpose vehicles- investors in a company that has its headquarters in Latvia, Riga, and works under Latvian commercial law. ‘Rail Baltica Joint Venture’ is the central project coordinator working alongside national implementing bodies.”

What is unique is that the ‘Joint Venture’ between the Baltic countries was intended to be not only the project coordinator but also the implementing body for the entire project.

“We now have many national implementing bodies, some of whom are also shareholders in the company,” Rubesa says.

The three Baltic countries are the beneficiaries of the project and current shareholders. In the shareholders’ agreement is the option to have two observers; in this case, one from Finland, the other from Poland.

“There is no other cross-border project in Europe that has so many stakeholders involved,” Rubesa says. “When you take into account that the EU is the key investor with 85%, it presents a lot of complexity.” Not least when you take into account potential political interests and adjustments. But she is fairly optimistic in this regard: between now and end of the project, Rubesa expects approximately 35 more elections in all three Baltic countries and the EU itself; “In the course of the last year, we’ve already had three political changes and I can tell you, each political change brings a new wind to the project”.

Structure

Rail Baltica is a European commitment to deliver a future-driven economic corridor to north-eastern Europe by building European gauge infrastructure. It connects north-eastern Europe, from Finland to Poland, with the rest of Europe, and aims to enhance economic development more than ever before.

“The three Baltic countries together have a territory that is larger than the Belgalux countries, but of course the population is significantly smaller. So, this is all about resource efficiency and effectivity: resources in terms of time, money invested and potential for delivery. Here, we see that there are a lot of economies of scale possible with a very collaborative environment for such a project in terms of finance management, procurement, the expertise needed for such a project, and deployment of project personnel. The joint venture and structure of this project was created to ensure inter-operability, which in previous projects has been a challenge”.

Recognition

Specific to Rail Baltica, building the railway and developing the economic corridor, it is important for the Baltic countries to be recognized at the regional level.

“It is very hard for small countries. We are seen as stronger if we perform and present ourselves regionally. To our neighbor to the south in Poland, and to the many other stakeholders that might have an interest in the business this [project] will generate”.

Challenges

One of many questions that need to be addressed from the outset include: is this a global project- are we looking at it in its totality or is it a jigsaw puzzle that comes together from its individual national parts?

“It’s extremely difficult for any country anywhere in the world to move beyond national interests; to look a bit higher and see where collaboration; genuine collaboration, not negotiation, between different countries brings benefit,” Rubesa says. “It is difficult to agree on genuine alignment and enforcement of project goals, processes, organization, even business assumptions. It is difficult to align permits and studies in the region; to deliver effective and economic technical design and optimized construction cost- if it’s done together, it is more optimal; if it’s done in each nation alone, it will be more expensive and it will take longer to do and there will likely be interoperability challenges”.

Another question: How do you deal with project governance that has inherent conflicts of interest with national bodies?

“What I’m learning from other projects is that there is actually a lack of experience and understanding of cross-border project management and matrix organizations,” Rubesa says. “I come from the oil, gas, and retail business where there is a very strong and good understanding and framework for collaboration, even if you are fierce competitors. In transportation, however, there is still a long way to go to that end”.

She also points to the latent competition between nations and/or existing large infrastructure companies.

“The Baltic countries are seeking to attract Chinese investment. I say to others: Get your acts together and talk to the Chinese! Such collaboration will ultimately bring greater benefit! But I do understand that each individual country wants to have its own approach; to have a smaller slice of the pie, but its own slice of the pie”.

Rubesa went on to invite the EU Commission to establish a corporate governance mandate that “is very clear up front: a two-tier management, with professionals on the management board, independent supervisory board members which should include at least one neutral observer from the European Commission, and common strict guidelines to eliminate conflicts of interest”.

Recommendations

There are a lot of areas of value to the European tax payer in cross-border projects of this nature, Rubesa believes. But the legislative framework needs to change.

“There should be a move toward one common legislative framework for cross-border projects, one that could be cross-sectoral, beyond transportation: essentially a one-stop cross-border standard service unit where there is clarity on financing commitments; one tax regime which differs from national regimes; and common procurement regulations. We have a new EU procurement directive and, boy, does it take a lot of discussion in the detail when you’re doing procurement with each of the national entities, each of which has own tiny little regulations!”

It’s challenging in time, resources and understanding, particularly when it comes to the application of language.

“If you are into very technical issues, mistakes can be made in translating back-and-forth. We need to find a better way to move forward with this in light of procurement regulation”.

Rubesa also believes that it is important to create common templates for reporting, benchmarking, and best practice from previous projects, and that legal agreements need to be standardized.

“There are always legal differences between countries, but the basic standards should be agreed on in policies,” she says.

She adds that there needs to be better regulation of corporate governance for project coordinators; a clarity of roles, particularly in cross-border projects, with the special purpose vehicles of shareholders and joint ventures laid out in detail.

Clear, too, should be who is going to invest and how, and what the financial modalities will be for the entire duration of the project. For Estonia, Latvia and Lithuania, co-financing a project like Rail Baltica has a huge impact on their national budgets. Clarity, for them, is essential.

“Right now, though we’re not far into the project, we’re in the process of renegotiating a renegotiation of the negotiation,” Rubesa laughs. “It just delays the project”.

The World Economic Forum recently published a study of the most innovative countries in entrepreneurship. Number 1 is Estonia, number 2 is Sweden and number 3 is Latvia. “So, I think we’ll do pretty well to deliver on the project expectations,” she concludes.

Katie Ruth Davies