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Saatja: "Alar Veraksits" <[email protected]> Saaja: "Info - RAM" <[email protected]> Teema: Lp hr Jürgen Ligi Kuupäev: 2025-08-28 18:12 Tähelepanu! Tegemist on välisvõrgust saabunud kirjaga. Tundmatu saatja korral palume linke ja faile mitte avada. Tervist! Pöördun seoses alanud eelarve läbirääkimistega kuid mitte niivõrd tulevase aasta kohta vaid edasipidise. Reformierakond on seisnud kindlalt RailBalticu poolt. Viimane rahvusvaheline analüüs on andud hinnangu, et aastatel 2031-2080 vajab kogu RailBaltic ca 466 miljonit dotatsioone aastas, millest Eestile jääb ca ¼ tulenevalt trassi proportsioonist. Sama uuring on näidanud et praeguste (!) prognooside kohaselt kulub RB-le ca 18 miljardit, kuid nagu on väidetud analüüsi esitlusel viibinute seast, kõlas siis hinnanguline maksimaalne number 32 miljardit €. Toon esile, et need on hetke hinnangud – milline on lõplik tegelik summa on lahtine kuid ükski senine kogemus ei kinnita sääraste megaprojektide ühegi algse ega valmimiseelse hinnangu paikapidavust. Vastupidi – lõplik reaalne hind on reeglina kordades kõrgem algsest. Antud uuring hindab RB majandustulu kõigest 15,5-23,5 miljardit – seega ilmselgelt vähem kui projekti kogumaksumus. Seega minu küsimus kõlab, mis on Teie arvamus selle projekti mõttekuse kohta säärase hinnaga? Kuidas te näete sellise lisakoorma mõju Eesti eelarvele, ¼ ca 466 miljonist = 116,5 miljonit aastas lisa kulu vähem kui 200 km taristu dotatsiooniks. 10.9.3 Financial Sustainability Analysis Lk 144 alates Huviga Teie arvamust ootama jäädes. Lugupidamisega, Alar Veraksitš Economic Appraisal and Cost-Benefit Analysis February 2024 (v1.0.1) 2 1 Table of Contents 1 Table of Contents _________________________________________________________________________________________ 3 2 List of Abbreviations and Glossary 8 3 Executive Summary ______________________________________________________________________________________ 11 4 Economic Appraisal Introduction ______________________________________________________________________ 13 4.1 Purpose of the Economic Appraisal _________________________________________________________________ 13 4.2 Structure of the Economic Appraisal ________________________________________________________________ 14 4.3 Methodology and Reference Framework ___________________________________________________________ 16 5 Project Context __________________________________________________________________________________________ 18 5.1 Project Definition _____________________________________________________________________________________ 18 5.2 The Baltic Sea Region _________________________________________________________________________________ 20 5.3 Macroeconomic Overview ____________________________________________________________________________ 23 5.3.1 Population Decline ____________________________________________________________________________________ 23 5.3.2 GDP Growth ___________________________________________________________________________________________ 24 5.3.3 Inflation _______________________________________________________________________________________________ 25 5.3.4 Construction Market Capacity ________________________________________________________________________ 26 5.4 Geopolitical Overview and Effects of the War in Ukraine _________________________________________ 27 5.4.1 Geopolitical Overview ________________________________________________________________________________ 27 5.4.2 Effects of the War in Ukraine _________________________________________________________________________ 28 5.5 Transportation Market _______________________________________________________________________________ 30 5.6 Value Proposition of Rail Baltica ____________________________________________________________________ 34 5.6.1 Passenger _____________________________________________________________________________________________ 35 5.6.2 Freight ________________________________________________________________________________________________ 47 5.7 Stakeholder Mapping _________________________________________________________________________________ 53 5.7.1 Project Stakeholders __________________________________________________________________________________ 54 5.7.2 The Broader Audience ________________________________________________________________________________ 57 5.8 Regulatory & Compliance ____________________________________________________________________________ 58 6 Objectives ________________________________________________________________________________________________ 60 6.1 Operational and Financial Objectives _______________________________________________________________ 60 6.2 Socio–Economic Objectives __________________________________________________________________________ 63 6.2.1 Direct Socio-Economic Objectives ____________________________________________________________________ 64 6.2.2 Wider Socio-Economic Objectives ____________________________________________________________________ 66 7 Project Specification _____________________________________________________________________________________ 69 7.1 Project Governance ___________________________________________________________________________________ 69 7.2 Geographic Scope _____________________________________________________________________________________ 70 7.3 Connectivity to Adjacent Transport Infrastructure _________________________________________________ 72 3 7.4 Technical Design ______________________________________________________________________________________ 74 7.5 Timeline and Phased Delivery Implications _________________________________________________________ 76 8 Assumptions _____________________________________________________________________________________________ 80 8.1 Core Assumptions _____________________________________________________________________________________ 80 8.1.1 Price Levels____________________________________________________________________________________________ 80 8.1.2 Financial Discount Rate _______________________________________________________________________________ 80 8.1.3 Social Discount Rate __________________________________________________________________________________ 81 8.1.4 Useful Economic Life and Reference Period __________________________________________________________ 83 8.1.5 Residual Value ________________________________________________________________________________________ 83 8.1.6 Geographic Scope and Catchment Area _____________________________________________________________ 83 8.2 Operational Assumptions ____________________________________________________________________________ 89 8.2.1 Passenger Services ____________________________________________________________________________________ 89 8.2.2 Freight Services _______________________________________________________________________________________ 90 8.3 Financial Assumptions ________________________________________________________________________________ 90 8.4 Socio-Economic Assumptions ________________________________________________________________________ 94 8.5 Transport Mode Characteristics______________________________________________________________________ 96 8.6 Environmental Assumptions _______________________________________________________________________ 104 9 Traffic Demand Forecasting __________________________________________________________________________ 108 9.1 Objective of Traffic Flow Modeling________________________________________________________________ 108 9.2 Modeling Approach _________________________________________________________________________________ 109 9.3 Validation of the RBM Demand Model ____________________________________________________________ 110 9.4 Model Inputs and Assumptions ____________________________________________________________________ 111 9.4.1 Macroeconomic Environment _______________________________________________________________________111 9.4.2 Infrastructure Network _______________________________________________________________________________113 9.4.3 Rail Baltica Services __________________________________________________________________________________113 9.4.4 Microeconomic Assumptions ________________________________________________________________________115 9.5 Output Analysis _____________________________________________________________________________________ 116 9.5.1 Passenger Demand __________________________________________________________________________________117 9.5.2 Freight _______________________________________________________________________________________________122 10 Financial Analysis ______________________________________________________________________________________ 133 10.1 Infrastructure Manager Financial Analysis ________________________________________________________ 133 10.1.1 Track Access Charge Calculation ____________________________________________________________________135 10.1.2 Asset Renewal & Maintenance ______________________________________________________________________138 10.1.3 Train Services ________________________________________________________________________________________141 10.2 Capital Expenditure _________________________________________________________________________________ 141 10.2.1 Capital Expenditure Changes ________________________________________________________________________142 10.2.2 Mainline Capital Expenditures _______________________________________________________________________145 10.2.3 PTO Capital Expenditures ____________________________________________________________________________146 4 10.2.4 Global Project Activities Capital Expenditures _______________________________________________________147 10.2.5 CAPEX Phasing _______________________________________________________________________________________147 10.3 Passenger Carrier Financial Analysis _______________________________________________________________ 148 10.3.1 High-Speed Carrier __________________________________________________________________________________149 10.3.2 Night Carrier _________________________________________________________________________________________150 10.3.3 Regional Carrier ______________________________________________________________________________________151 10.4 Freight Carrier Financial Analysis __________________________________________________________________ 152 10.4.1 Unitised Freight ______________________________________________________________________________________153 10.4.2 Non-Unitised Freight ________________________________________________________________________________154 10.5 Electricity Resale Analysis __________________________________________________________________________ 155 10.6 Facilities Financial Analysis _________________________________________________________________________ 156 10.6.1 Passenger Stations Financial Analysis _______________________________________________________________156 10.6.2 Freight Terminals Financial Analysis _________________________________________________________________157 10.7 Country-Level Financial Analysis __________________________________________________________________ 159 10.7.1 Estonia _______________________________________________________________________________________________159 10.7.2 Latvia _________________________________________________________________________________________________161 10.7.3 Lithuania _____________________________________________________________________________________________163 10.8 Financial Analysis Results __________________________________________________________________________ 165 10.8.1 Financial Net Present Value __________________________________________________________________________165 10.8.2 Financial Rate of Return _____________________________________________________________________________169 10.9 Financing Plan _______________________________________________________________________________________ 169 10.9.1 Introduction __________________________________________________________________________________________169 10.9.2 Key Financing Sources _______________________________________________________________________________169 10.9.3 Financial Sustainability Analysis _____________________________________________________________________174 10.9.4 Financing of the Construction and Operational Phases _____________________________________________177 10.9.5 Financing Sensitivity Analysis ________________________________________________________________________181 10.9.6 Conclusions __________________________________________________________________________________________184 10.10 Sensitivity analysis __________________________________________________________________________________ 185 10.10.1 Passenger TAC _______________________________________________________________________________________187 11 Socio-Economic Analysis ______________________________________________________________________________ 188 11.1 Methodology Overview ____________________________________________________________________________ 188 11.2 Socio-Economic Impact Summary (NPV) _________________________________________________________ 189 11.3 Socio-Economic Impact Components _____________________________________________________________ 190 11.3.1 Transport Value Chain Impact _______________________________________________________________________191 11.3.2 Passenger Impacts ___________________________________________________________________________________193 11.3.3 Freight Shippers’ Impact _____________________________________________________________________________201 11.3.4 Environmental Impacts ______________________________________________________________________________205 11.3.5 Labor Market Impacts _______________________________________________________________________________213 11.4 Socio-Economic Impact Analysis Results and Sensitivity Analysis ______________________________ 214 5 12 Conclusion of Economic Viability and Key Performance Indicators _______________________________ 216 13 Scenario Analysis ______________________________________________________________________________________ 218 13.1 Prolonged War Impact _____________________________________________________________________________ 218 13.2 Optimistic Operational Assumptions and Passenger Preferences ______________________________ 219 14 Risk and Regulatory ___________________________________________________________________________________ 221 14.1 Risks and Mitigation ________________________________________________________________________________ 221 14.1.1 General Risks _________________________________________________________________________________________223 14.1.2 Construction Phase Risks ____________________________________________________________________________226 14.1.3 Operation Phase Risks _______________________________________________________________________________229 14.2 Regulatory and Compliance ________________________________________________________________________ 230 14.2.1 Environment _________________________________________________________________________________________231 14.2.2 Railway _______________________________________________________________________________________________235 14.2.3 Competition__________________________________________________________________________________________238 15 Wider Economic Impact Analysis _____________________________________________________________________ 239 15.1 Introduction _________________________________________________________________________________________ 239 15.2 General Literature Overview _______________________________________________________________________ 239 15.3 Wider Economic Impact Overview _________________________________________________________________ 241 15.4 Economic Growth in the Catchment Area _________________________________________________________ 245 15.4.1 GDP Contribution of Rail Baltica _____________________________________________________________________245 15.4.2 Land Value Increase__________________________________________________________________________________249 15.4.3 Tourism and Hospitality _____________________________________________________________________________250 15.4.4 New Business Creation and Innovation _____________________________________________________________250 15.4.5 Productivity Growth and Agglomeration Effects ____________________________________________________251 15.4.6 Inflow of Residents __________________________________________________________________________________252 15.4.7 Increased Market Competition ______________________________________________________________________252 15.5 Enhanced Military Mobility ________________________________________________________________________ 254 15.5.1 Enhanced Military Mobility in Armed Conflict _______________________________________________________254 15.5.2 Enhanced Military Mobility in Peacetime ____________________________________________________________256 15.6 Improved Global Supply Chain Integration _______________________________________________________ 259 15.6.1 TEN-T Core Network and Baltic-Adriatic Corridor ___________________________________________________259 15.6.2 Asia – EU Land Corridor _____________________________________________________________________________260 15.6.3 Economic Rehabilitation of Ukraine _________________________________________________________________261 15.7 Improved Social Equity _____________________________________________________________________________ 263 15.7.1 Affordability __________________________________________________________________________________________263 15.7.2 Accessibility for Reduced Mobility Passengers ______________________________________________________265 15.7.3 Social Cohesion and Equal Opportunity _____________________________________________________________266 15.7.4 Wellbeing and Environmental Equality ______________________________________________________________267 15.7.5 Safety and Security __________________________________________________________________________________267 15.8 Environmental sustainability _______________________________________________________________________ 268 6 15.8.1 Reduced Demand for Fossil Fuels ___________________________________________________________________268 15.8.2 Induced Investment in Renewables__________________________________________________________________269 15.8.3 Short-Haul Flight Replacement ______________________________________________________________________270 15.9 Corridor Synergies __________________________________________________________________________________ 271 15.9.1 Telecom Synergies ___________________________________________________________________________________271 15.9.2 Local Transport Connections ________________________________________________________________________271 15.10 Conclusions and Recommendations _______________________________________________________________ 273 16 Appendix _______________________________________________________________________________________________ 275 16.1 Risk mapping ________________________________________________________________________________________ 275 16.2 Detailed macroeconomic overview ________________________________________________________________ 290 16.2.1 Population Decline in the Baltics ____________________________________________________________________290 16.2.2 GDP Growth __________________________________________________________________________________________292 16.2.3 Effects of the War in Ukraine ________________________________________________________________________294 17 Bibliography ___________________________________________________________________________________________ 304 7 2 List of Abbreviations and Glossary Abbreviation Meaning AI Artificial Intelligence AsBo Assessment Body, a body responsible for evaluating and assessing the safety levels of specific railway components or subsystems ASTRA ASsessment of TRAnsport Strategies, an integrated assessment model designed by the EC for strategic policy assessment of transport policies and investments B2B Business to Business B2C Business to Customer BEV Battery Electric Vehicle CAGR Compound Annual Growth Rate CAPEX Capital Expenditures CBA Cost-Benefit Analysis CCI Construction Cost Index CCS Command-Control and Signaling system CER Community of European Railway and Infrastructure Companies CEF Connecting Europe Facility CPI Consumer Price Inflation EBRD European Bank for Reconstruction and Development EBT/EBIT Earnings Before Taxes/Earnings Before Interest and Taxes EC European Commission ECBA Economic Cost-Benefit Analysis EIA Environmental Impact Assessment EIB European Investment Bank EIM European Rail Infrastructure Managers END Environmental Noise Directive ENE Railway Energy Costs ENPV Economic Net Present Value ERDF European Regional Development Fund ERFA European Rail Freight Association ERTMS European Rail Traffic Management System EU European Union EU ETS EU Emissions Trading System EU TEN-T European Union's Trans-European Transport Network FCBA Financial Cost-Benefit Analysis FCV Fuel Cell Vehicle FDI Foreign Direct Investment FDR Financial Discount Rate 8 FNPV (C) Financial Net Present Value on Investment FNPV (K) Financial Net Present Value on National Capital FRR (C) Financial Rate of Return on Investment FRR (K) Financial Rate of Return on National Capital GDP Gross Domestic Product GDP PPP Gross Domestic Product based on Purchasing Power Parity GHG Greenhouse Gas GNI Gross National Income GTFS General Transit Feed Specification H&S Health and Safety HSR High-Speed Rail ICT Information and Communication Technology IM Infrastructure Manager MDST MDS Transmodal, a firm of transport economists which specialises particularly in freight modes of transport, providing datasets for RB’s traffic demand model MFF Multiannual Financial Framework Notified Body, an organization that assesses the conformity of rail subsystems or NoBo components with technical specifications for interoperability (TSIs) in the European Union NGO Non-Governmental Organization NPV Net Present Value NUTS-3 Classification level of small regions for specific diagnoses within the Nomenclature of Territorial Units for Statistics O&M Operations and Maintenance OD Origin-Destination pair OEM Original Equipment Manufacturer OPEX Operating Expenses PAX Passengers (unique passenger trips) Project Implementation Support Measures activities, it covers organization-related PISM expenses and RB global project management expenses for RB Rail core organization and implementing bodies pkm Passenger-kilometers PPP Public-Private Partnership PSO Public Service Obligation PTO Point-Type Objects Rail Baltica, intended to be used when referring to the global project and its full internal RB stakeholder group as per governance structure. For the coordinating entity, RB Rail, the abbreviations RBR or RB Rail are used RBGP RB Global Project 9 RBM RBR's Traffic Demand Model RBR RB Rail AS ROSCO Rolling Stock Company RRF Recovery and Resilience Facility RU Railway Undertaking SAC Special Areas of Conservation SAF Sustainable Aviation Fuel TAC Track Access Charge TCO Total Cost of Ownership tkm Ton-kilometers TSIs Technical Specifications for Interoperability TTR Timetable Redesign UIC International Union of Railways UNIFE European Railway Supply Industry Association vkm Vehicle-kilometers WACC Weighted Average Cost of Capital WEI Wider Economic Impact 10 3 Executive Summary Rail Baltica (RB) is an international greenfield rail transport infrastructure project with an objective to connect the Baltic region with the European rail network. Offering high-speed, cross-border transportation for both passengers and freight via a fully electrified, European-standard gauge railway line stretching from Tallinn to Warsaw, the project is expected to yield significant economic benefits for the region. This economic appraisal assesses the financial and socio-economic benefits and costs of the Rail Baltica Global Project, focusing specifically on the segment of RB within the three Baltic states, from the perspective of future infrastructure managers. The study establishes a rigorous cost-benefit analysis (CBA) framework adhering to applicable European Union guidelines to provide a comprehensive overview of the project’s economic, environmental, and social impact. CBA results suggest that RB is expected to generate an economic net present value1 (ENPV) of EUR 6.6 bn throughout the assessed timeframe of the project, including 7 years of construction and 74.2 years of operations, determined based on expected asset lifecycles. This value arises from a combination of the financial impact of construction, infrastructure usage, and the socio-economic impact stemming from demand for passenger and freight transportation. • The financial net present value (FNPV) of the investment is estimated at EUR -21.5 bn, primarily due to construction CAPEX (92.1%), as well as overall loss-making future operations (9.9%), and a positive residual value of the infrastructure (-0.04%2). Future operations of the infrastructure are projected to incur losses, primarily due to unprofitable passenger segments TAC revenues, forecast at EUR -2.5 bn NPV. This expected to be partially offset by profitable freight operations, at EUR 0.4 bn NPV, and other revenues (passenger stations, terminals, ancillary services, and electricity resale) with EUR 0.4 bn NPV. These projections indicate a potential requirement for state subsidies during the operational phase. • However, this financial outlook is compensated by net socio-economic benefits, valued at EUR 28.1 bn NPV. Benefits include transport value chain profits (0.4% of total socio-economic impact), passenger benefits (time savings at 41.0%, reduced travel costs at 16.5%, accidents reductions at 11.8%, increased accessibility at 11.0%), impact on freight shippers (cost reduction 3.2%, time savings 0.9%, accident reductions 0.3% and induced freight flows 0.4%), environmental impact (including air, GHG and noise impact over construction and operations making up 13.6% of total socio-economic impact) and direct labor benefits (0.8%). Positive socio-economic advantages underscore the project’s broader value beyond its financial aspects. The EUR 6.6 bn ENPV generated from financial and socio-economic impact is expected to be resilient to changes in underlying parameters, moving in a range between EUR -3.1 and 16.1 bn in worst- and best-case scenarios respectively, with the most significant sensitivity to discount rates, CAPEX overrun and construction delays. Further, the economic case for the project remains stable in case of a prolonged war impact scenario, with 7.7% decrease in the ENPV to EUR 6.1 bn. 1 as of the end of 2023 2 The share of the residual value within FNPV is negative due to the residual value being positive in contrast to the negative overall FNPV. 11 While financial impact is directly driven by construction and train services using the infrastructure, socio-economic impact is the result of underlying traffic demand, projected at 51.7 mn passenger trips (3.76 bn pkm) and 10.9 mn tons (2.9 bn tkm) of cargo annually (in 2046). Beyond the positive ENPV estimated within the CBA framework, RB Global Project is expected to generate a substantial wider economic impact, including tangible monetary economic benefits such as EUR 20-28bn in induced GDP growth, as well as geostrategic benefits in the context of military mobility, both during peacetime and emergency situations, Further, the project is expected to benefit the region in terms of supply chain efficiency, social equity, corridor synergies, and environmental sustainability. Consequently, RB Global Project is a major advancement in integrating the Baltic region's infrastructure with the broader European network. It not only connects the Baltic states more effectively but also enhances regional connectivity, positioning the Baltics as a strategic link within Europe. Beyond current expectations, the project holds potential for even greater impacts contingent upon further development of the Trans-European Transport Network (TEN-T) and adjacent infrastructure in the Baltics. Large-scale infrastructure initiatives such as Rail Baltica inherently carry risks, including potential delays, coordination difficulties stemming from variable decision-making and absence of standardized processes or data management. However, the implementation of robust mitigation measures ensures that these risks are effectively managed, enabling the successful realization of the project's extensive benefits. To provide a detailed context for the presented findings, the report starts by outlining the CBA methodology and then presents the Rail Baltica (RB) project's context, objectives, and setup. Key assumptions and traffic demand modeling methodology are then explained, laying the foundations for financial and socio-economic impact analyses. The conclusion on the economic viability of the project is followed by a detailed analysis of sensitivities, scenarios, and risks. Finally, wider socio-economic impacts are assessed to understand broader implications of the project beyond the standard CBA framework. 12 4 Economic Appraisal Introduction 4.1 Purpose of the Economic Appraisal This economic appraisal aims to assess the financial and socio-economic impact of Rail Baltica Global Project within a rigorous CBA framework adhering to applicable EU guidelines required for funding applications. The appraisal not only follows these standards but frequently exceeds them, offering a comprehensive overview of the project’s wide-ranging economic, environmental, and social benefits. Therefore, the appraisal comprises two components: a standard, EU-compliant CBA, and an extended wider economic impact analysis (WEI) report. These components, while distinct, serve complementary purposes in evaluating the project's financial and socio-economic implications. Figure 1: Purpose of the Economic Appraisal Adhering to EU guidelines, the CBA focuses on direct financial revenues and costs of RB, alongside its direct economic impact within the transport ecosystem, including impact on transport value chains, passengers, freight shippers, labor force and the environment. Such a thorough evaluation provides decision-makers with a robust understanding of the project's economic viability and potential benefits to society. The economic appraisal also extends to a WEI analysis, going beyond the standard EU framework by incorporating context-specific impacts. Thereby, it captures the true extent of the project's broader socio- economic effects such as indirect and induced economic impact, military mobility, energy security, and urban revitalization. This comprehensive approach provides a more holistic understanding of the project's potential impact on communities, local economies, and the wider society. While the EU-compliant CBA and the WEI report serve distinct purposes, they are interrelated in their evaluation of RB Global Project. While the CBA provides a rigorous and standardized assessment of the project's costs and benefits to determine financial and economic performance indicators, the WEI analysis offers a broader perspective, encompassing the indirect and wider socio-economic effects. Combined, they create a robust evaluation framework that enables decision-makers to make informed choices, allocate resources efficiently, and ensure that the project aligns with the EU's broader economic and developmental objectives. This approach 13 ensures that the economic appraisal's results not only guide decision-making for funding applications but also offer valuable recommendations for entities evaluating economic appraisals. These recommendations put forth in the report suggest integrating the broader socio-economic impacts outlined in the WEI into the standard cost-benefit analysis framework for large infrastructure projects. By proposing these enhancements, the appraisal acknowledges that the ultimate objective of such projects extends beyond just financial profitability and direct economic impacts within the transport ecosystem. It emphasizes the importance of capturing the full range of benefits and costs associated with such projects. 4.2 Structure of the Economic Appraisal The economic appraisal is conducted through key steps to ensure a comprehensive and robust evaluation. This approach is grounded in the standard EU CBA framework, augmented by an additional WEI analysis. Bac ground, Sensitivit conte t and emand Financial conomic scenario ider o jectives and forecast anal sis anal sis and ris economic impact anal sis identification assessment ransport Sensitivit Induced value chain anal sis economic profits growth Socio economic urrent rolonged war eopolitical traffic flows assenger impact eopolitical impact scenario strateg Infrastructural odal shift militar and induced Freight anal sis shippers mo ilit demand Ris impact assessment Suppl chain rowth integration projections rac ccess a or impact and mitigation harge for RB measures nerg emplo ees securit ncillar Functions nvironmental Social e uit polog impact orridor rere uisites s nergies Standard re uirements ider economic and social for compliance impact e ond re uirements Figure 2: Economic Appraisal structure (Consultant team analysis) The first step provides an overview of the project's context, outlining the current transportation system, regional characteristics, and policy objectives. It lays the groundwork for understanding the project's value proposition and the socio-economic context in which it will operate. The appraisal proceeds with defining clear and measurable objectives for RB. It identifies economic, social, geopolitical, and environmental goals, as well as financial and operational goals. Defining desired outcomes helps align the appraisal with the project's intended goals and facilitates the evaluation of its performance against these targets. Then, the specific details of RB Global Project are identified to provide a thorough understanding of how it will achieve its strategic objectives. This includes the project’s geographic scope, functions, timeline and implications of technical design project typology and physical realizations. 14 After this, a traffic demand model is employed to serve as the backbone of the economic appraisal, forecasting the project’s impact on passenger and freight transportation. The outputs of the demand model are vital for assessing the costs and benefits of RB. Financial and direct socio-economic costs and benefits of RB are evaluated using a CBA framework, in accordance with EU guidelines, and complemented by a wider economic impact analysis (see next figure). They uild on the project’s specific conte t and details, incorporating with and without project scenarios derived from the demand forecast model, enabling decision-makers to make informed choices about project viability and its socio-economic impacts. Within the CBA framework, the financial and socio-economic analyses of the project determine the project’s e financial and economic performance indicators such as the financial net present value (FNPV), economic net present value (ENPV), economic rate of return (ERR), and the benefit-cost ratio (BCR). • The financial analysis quantifies the internal costs and benefits of RB in monetary terms, focusing on investment costs, operational costs, and direct revenues collected by RB. It assesses the financial viability of the project to identify potential funding gaps and calculates financial performance indicators such as the FNPV. • The socio-economic analysis is also required by EU regulations to extend the analysis beyond financial aspects, including performance indicators such as benefits for passengers, freight users and carriers, direct environmental externalities, and labor impacts. To calculate the ENPV, BCR and ERR, the socio- economic analysis considers impacts occurring within the transport ecosystem, while excluding indirect and induced effects on other industries and society. The WEI analysis expands the evaluation further beyond the CBA framework proposed by EU guidelines, capturing both monetizable, quantitative, and qualitative impacts such as indirect and induced economic impact, military mobility, land value appreciation, global supply chain integration, environmental sustainability, regional development, and social inclusion, tailored to the specific context and objectives of RB. The following figure shows the decision tree for determining the right analysis for an inspected impact type. Figure 3: Categorization framework of costs and benefits (Consultant team analysis) Results of the three assessments are additive if not stated otherwise. The FNPV, derived from the financial analysis and net direct economic benefits calculated in the socio-economic analysis, determines the ENPV of the 15 project. The WEI analysis provides a comprehensive understanding of the indirect and induced impact, offering incremental monetary impacts in addition to the ENPV, as well as quantitative (but not monetized) and qualitative assessments of wider socio-economic impact components. To guarantee the framework's robustness and adaptability, the study applies sensitivity and scenario analyses, complemented by a comprehensive risk assessment. This sensitivity analysis gauges the resilience of economic performance indicators to changes in key parameters such as construction costs, discount rates, and ridership forecasts. To reflect the project’s sensitive geopolitical conte t, the impact of a potentially prolonged war in Ukraine is assessed as an additional scenario. Furthermore, key risk factors of the project are identified along occurrence probabilities and mitigation measures. Based on these assessments, the appraisal concludes by summarizing the findings, drawing conclusions on project viability, and providing recommendations to decision-makers. 4.3 Methodology and Reference Framework The outlined analysis framework is grounded in rigorous methodologies to comply with EU CBA guidelines and to also provide a comprehensive, context-specific economic appraisal of the RB project. The core study framework is developed based on the relevant guidelines of EU bodies, scientific literature on economic appraisal, official and proprietary databases, inputs from the RB project team and stakeholders, as well as information gathered by the consultant team and provided by external industry experts. The study rigorously follows reference EU guidelines for the economic appraisal of large infrastructure investments, including the Guide to Cost-Benefit Analysis of Investment Projects (European Commission, 2014a), the Economic Appraisal Vademecum (European Commission, 2021a) and the CINEA Guide on Economic Appraisal for CEF-T Transport Projects (European Commission, 2022). Furthermore, the study leverages key sources referenced by the guidelines above to define CBA assumptions such as the Handbook on the External Costs of Transport (European Commission, 2019a), The Economic Appraisal of Investment Projects at the EIB (European Investment Bank, 2023a) or the EIB Carbon footprint methodologies (European Investment Bank, 2023b). In the wider economic impact analysis, the study relies on scientific literature advocating for the integration of wider economic impacts in standard economic appraisal framework. Venables (2016) highlights the shortcomings of traditional cost-benefit appraisals in capturing the full economic impact of large transport projects. The UK Department for Transport's Transport Analysis Guidance (2019) emphasizes the importance of the WEI assessment in certain market conditions and potential indirect and induced impacts on GDP. The European Commission's Economic Appraisal Vademecum (European Commission, 2021a) suggests the inclusion of induced and indirect impacts in economic evaluations of transport projects whenever boosting the economic activity of the region is a key objective of the project. Lastly, Graham (2019)critiques the conventional consumer surplus- based approach in the CBA, advocating for a broader perspective that includes externalities and imperfect competition. These sources collectively shaped the understanding and methodology for assessing WEIs in transport infrastructure projects. To offer a detailed analysis of project-specific impacts, the study incorporates all available data from the RB project team and stakeholders, including key project objectives, planned physical realizations, timelines, services, schedules and operating models, as well as results of traffic demand forecasting, environmental impact assessments (EIA) and all relevant studies conducted by the RB project team. Furthermore, the study also integrates insights from stakeholder and external expert interviews, including experts on military mobility from 16 national and allied armed forces, on logistics and trade patterns in the Baltic region, representatives of national transport entities, as well as air, and maritime transport industry players. To ensure the accuracy and reliability of the core methodologies and assumptions used in the CBA, the study involves benchmarking against guidelines, literature, and inputs from the RB project team. Additionally, it includes extensive review process involving all major stakeholders of RB, consultations with leading experts in the rail and transport industry, and the use of both official and proprietary datasets for validation purposes. 17 5 Project Context This chapter provides a systematic evaluation of various factors impacting the project, beginning with the definition of RB Global Project (RBGP) and its boundaries. Further, the analysis of the Baltic Region establishes the geographical context essential for understanding the project's scope. The report then progresses to a Macroeconomic Overview, offering a critical assessment of the economic environment in which RB will operate. Subsequent sections include a detailed Geopolitical Overview and an assessment of the Effects of the War in Ukraine, both crucial for appreciating external influences on the project's feasibility and outcomes. The chapter further delves into Transportation Market analysis for both passenger and freight services, a core component to gauge the project's impact potential. This is followed by an exposition of Rail Baltica's Value Proposition, aligning the project's objectives with identified needs. Stakeholders Mapping is conducted to precisely identify and analyze the interests and influences of various parties involved. The chapter concludes with a thorough examination of Regulatory & Compliance issues, ensuring that the project adheres to necessary environmental, railway, competition, and national guidelines. 5.1 Project Definition RB is a greenfield high-speed rail infrastructure project connecting the capitals of the three Baltic states and Warsaw, with tracks to be shared by both passenger and freight services. The fully electrified, ERTMS-equipped, 1425 mm gauge double track line is designed to integrate with the European TEN-T railway network, through the 18 North Sea – Baltic and Baltic – Adriatic priority corridors and to offer direct connectivity to and from the three Baltic states (see next figure). Figure 4: RB’ to TEN-T priority corridors The line spans across 4 European countries: Estonia, Latvia, Lithuania, and Poland, connecting the major cities of allinn, ärnu, Rīga, anevėž s, Kaunas, Vilnius, Bial sto and arsaw 3. The Baltic part of the RB project is referred to as the RB Global Project. With a total track length of 909 km, RB Global Project is considered the largest infrastructure project in the Baltic region in the last 100 years. RB is designed to provide infrastructure capacity to both passenger (high-speed and regional) and freight services, with the infrastructure supporting speeds up to 249 km/h for passenger trains and up to 120 km/h for 3 These are only major cities highlighted through the corridor; for a more detailed overview of the cities connected though Rail Baltica infrastructure by passenger and freight services, please refer to Geographic Scope section within the Project Specification chapter. 19 freight trains. The development includes 54 international and regional passenger stations, along with 9 freight terminals, strategically located to improve international and regional connectivity and economic growth. The implementation of RB Global Project is enabled by agreements among Estonia, Latvia, and Lithuania. Transport ministries or equivalent bodies of each state serve as the project's key decision-makers and beneficiaries. They have established publicly owned national project companies, which collectively formed the joint venture RB Rail to oversee the railway line's development. These companies also function as the Implementing Bodies, executing the project in their respective countries, with RB Rail providing oversight. Moving from the specifics of Rail Baltica, the subsequent chapter examines the Baltic Sea region, focusing on its economic and geographic characteristics and existing infrastructure. This analysis positions Rail Baltica within a regional context, highlighting its potential influence and role in improving the region's connectivity and development, and offers insights into the wider environment where Rail Baltica will operate. 5.2 The Baltic Sea Region Building upon the detailed description of the Rail Baltica project, this chapter shifts focus to the Baltic Sea region, examining it from economic, geographic, and infrastructure perspectives within Europe. This analysis is crucial to understand the broader context in which Rail Baltica operates. It explores the regional economic and geographic landscape, as well as existing infrastructure, factors that are integral to assessing the project's potential impact and alignment with regional development goals. This examination not only contextualizes Rail Baltica within the larger framework of regional connectivity and development but also highlights the project's role in enhancing the economic and infrastructural dynamics of the Baltic Sea region. The Baltic region, due to its unique geographical location, faces certain challenges in seamlessly integrating with the rest of continental Europe. The region is positioned in a strategic location between Asia, Western Europe and the Nordics and relies heavily on east-west oriented transportation infrastructure based on 1520 mm railway gauge. In this context, the lack of interoperable rail infrastructure with the rest of Europe deepens socio- economic distances and hinders further cohesion. 20 Economically, the lower GDP per capita observed in the Baltic states compared to the rest of continental Europe (see next figure), combined with demographic challenges such as high emigration and an aging population, underscores its unique socio-economic situation. While on par with other Eastern European countries, geographic and socio-economic characteristics hinder the region’s development potential. The accompanying map visually represents the GDP per capita across EU regions, clearly depicting the Baltic countries' economic position relative to the more prosperous Western Europe. Figure 5: GDP per capita in EU regions, 2021 (Eurostat, 2021) Existing rail infrastructure in the Baltic region, predominantly using the 1520 mm broad-gauge, contrasts with the European standard gauge of 1435 mm (see next figure). This discrepancy hinders direct train travel into Europe, necessitating facilities connecting 1520 mm and 1435 mm gauge networks, for both passengers and freight. The region's predominantly single-track broad-gauge system requires intricate train scheduling for opposing directions, leading to slower operations and increased downtime. Notably, Baltic capitals and adjacent 21 countries, as shown in the figure below, lack direct rail connections 4 among themselves and with the rest of Europe, adding pressure to the highway system, resulting in increased traffic flows and reduced efficiency in passenger and freight movement, further emphasizing the region's infrastructural challenges. Figure 6: European rail infrastructure systems by gauge type (openrailwaymap.org)5 In this context, adopting the 1435 mm gauge in Estonia, Latvia, and Lithuania would not only enable direct connections to Europe, but also upgrade the quality of rail services, eliminating the need for train changes at the LT/PL border. Implementing a high-speed line would significantly improve connectivity within the Baltic states and offer a viable alternative to existing transport modes, crucial for their integration into the European high- speed rail infrastructure. This enhancement is particularly pertinent given the prevalent high-speed rail developments in Western and Central Europe, in contrast to the absence of such advancements in Eastern Europe and the Baltic region. Further, the development improves the rail freight route between the Baltics and major European cargo hubs including further Baltic Sea (e.g., Gdansk, Rostock) and North Sea ports (e.g., Rotterdam, Hamburg, Antwerp), as well as inland ports such as Duisburg. It also enhances connections to Finland via short sea shipping links across the Gulf of Finland. Additionally, extending this corridor northward could pave the way for future connections with the emerging Arctic corridor, especially considering the potential of the Northern Circle maritime route as a new link between Europe and Asia. 4 Except Rīga-Vilnius line. 5 Bold lines refer to RBGP tracks within EE, LV, LT. Track from LT/PL border to Warsaw go through Elk and Bialystok. 22 The implementation of high-speed rail across the Baltics stands to establish a precedent for Eastern Europe, potentially incentivizing future railway network developments. This advancement would facilitate further economic growth and stimulate increased demand for rail services. The maps provided below showcase the potential impact and reach of high-speed rail in Europe, emphasizing its significance for the Baltic region's connectivity and economic progress. Figure 7: High-Speed rail development in Europe (railtech.com) After examining the Baltic Sea region's geographic and economic role within Europe, its current rail infrastructure and the potential impact of high-speed rail, the subsequent chapter transitions to an in-depth analysis of the macroeconomic landscape and trends in the Baltic states. 5.3 Macroeconomic Overview This section presents a detailed analysis of the macroeconomic landscape and trends in the Baltic states, focusing on Estonia, Latvia, and Lithuania. This comprehensive overview examines key economic indicators, economic policies and strategies of each state, their impact on regional development to contextualize potential benefits and challenges of infrastructure projects like Rail Baltica within the region's economic framework. The future progress of Rail Baltica will be significantly shaped by four key macroeconomic drivers in the transportation industry: population decline, GDP growth, inflation, and shifts in the construction market. These elements are not only anticipated to critically influence the trajectory of the overall transportation and infrastructure market but will also determine the extent of impact RB can achieve in the region. 5.3.1 Population Decline Declining population in the Baltic states (following figure) emerges as a significant trend6. Between 2010 and 2022, Lithuania and Latvia witnessed a population decline, demonstrating a CAGR of -1.1%. Estonia experienced a more gradual decrease, recording a CAGR of -0.03%. Projections for the future indicate a continuation of this 6 To understand historical and projected population trends, data from S&P Capital IQ were primarily utilized, especially for GDP forecasts in the traffic demand model. In instances where S&P Capital IQ data are not available, alternative sources are employed to ensure analytical consistency. A comparison between S&P Capital IQ and UN data for population analysis reveals a close alignment. For more detailed insights into fertility, mortality, life expectancy, median age, and net migration, UN data is used, as detailed in the appendix. 23 trend. It is anticipated that Latvia and Lithuania will both sustain a population decline from 2022 to 2080, with projected CAGRs of -0.9% and -0.8%, respectively. Estonia's population is also expected to decrease, albeit at a slightly slower pace, with a projected CAGR of -0.6% in the same time frame. Figure 8 - Population decrease in the Baltic states until 2080 (S&P Global, 2023)7 This demographic trend might pose challenges to the RB project, as a decreasing population could translate to lower demand for rail services. However, the effect of declining population is offset by expected GDP/capita growth, explored in the following subsection. 5.3.2 GDP Growth From 2010 to 2022, the Baltic states experienced consistent GDP growth despite a decreasing population (following figure), a trend offset by increase in GDP per capita. Estonia recorded a real GDP growth with a compound annual growth rate (CAGR) of 1.3%, Latvia at 0.9%, and Lithuania led with a growth rate of 1.6%. Projections until 2053 indicate a continued upward trajectory: Estonia is expected to see real GDP growth at a CAGR of 2%, with Latvia and Lithuania following closely with a CAGR of 2.1%. This pattern of economic growth, 7 Data from 2010 to 2022 is categorized as historical, while projections for 2023 to 2053 are provided by S&P Capital IQ. Beyond 2053, the data is based on assumptions from the consultant team. 24 largely driven by rising GDP per capita, is projected to sustain until 2105, demonstrating a balance against the demographic decline. Figure 9: Evolution of real GDP (2010-2060) in the Baltic region by country (S&P Capital IQ, 2023) To sustain GDP growth in the Baltic states despite population decline, three key factors are expected to drive economic development: enhanced productivity through improved skills and technology, increased foreign capital and investment fostering sectoral growth, and deeper integration with European markets enhancing trade and economic practices. These elements collectively boost economic resilience and growth, effectively countering the demographic challenges. GDP, encompassing both population and GDP per capita, thus reflecting welfare growth, emerges as a critical direct driver of passenger traffic volumes. Its influence extends indirectly to freight volumes as well, primarily through its impact on trade. This makes GDP a pivotal factor in shaping both passenger and freight traffic dynamics in the region. 5.3.3 Inflation Following the analysis of population and economic outlook in the region, this subsection addresses inflation in the Baltics. Inflation directly affects construction and operational costs, crucial for the financial planning of large infrastructure projects like Rail Baltica. This subsection provides key insights into inflation trends, essential for understanding their effect on the economics of infrastructure development in the region. 25 The Baltic economic landscape has been recently characterized by significant inflationary pressures and rising construction costs. The Consumer Prices Index (CPI) has seen a significant jump in all three Baltic countries from 2021 to 2022, with Estonia and Lithuania experiencing a 19% rise, and Latvia experiencing 17% growth. Inflation is however expected to return to normal levels (2% target rate) in the following years. Figure 10 - Projected inflation between 2020 and 2080 Concurrently, the Construction Cost Index (CCI) has also escalated in each state, with Estonia reporting a 14.1% increase, Latvia 11.8%, and Lithuania a significant 17.5% hike. These rising costs in the construction sector are particularly relevant for the financial planning of RB, as they may necessitate budgetary revisions and financial recalibrations. 5.3.4 Construction Market Capacity Total construction output value8 in the Baltics was EUR 22.59 bn in 2022. On a national level, Estonia's construction sector output value was EUR 7.6 bn (GlobalData, 2023a), Latvia's EUR 5.5 bn (GlobalData, 2023b), and Lithuania's EUR 9.4 bn (GlobalData, 2023c). Estonia, Latvia and Lithuania are forecasted to have a construction output value decline of -5.3%, -1.3% and -0.5%, respectively in 2023 followed by an average real growth of 4.5%, 4.1% and 4.9%, respectively from 2024 to 2027 (GlobalData, 2023a). 8 Construction output value is defined in general as the total value of construction activity in any given period, including costs related to all materials, equipment and services used. It is synonymous with measures such as construction value put in place or value of construction work done (GlobalData, 2023a). It's a measure of the industry's total capacity to undertake construction projects. 9 Values presented are real values in 2023 prices. 26 The figure below shows how the construction market output value compares to CAPEX values from 2025 to 2030. Since lo al ata doesn’t provide construction output value data from 2027 to 2030, those values are h pothesized to grow ased on the average growth from 2022 to 2027 according to lo al ata data. stonia’s construction output values are h pothesized to grow at an average R of 3.7% from 2027 to 2030, atvia’s at a R of 4% and ithuania’s at a R of 4.4% in the same time period. 2025 2026 2027 2028 2029 2030 RB’s 3.31 4.57 5.59 4.98 3.65 0.89 (in bn EUR)10 Construction output value in the Baltics 24.00 25.15 26.38 27.23 28.40 29.66 (in bn EUR)11 RB share of the construction output 13.8% 18.2% 21.2% 18.3% 12.9% 3% value in the Baltics Figure 11: RB share of the construction output value in the Baltics (GlobalData, 2023) The potential strain on construction resources posed by the RB project is recognized as a strategic risk. For strategies that can be applied to minimize this effect please refer to the Risk and Regulatory Chapter. 5.4 Geopolitical Overview and Effects of the War in Ukraine As critical dual-use rail infrastructure, Rail Baltica holds significant geopolitical importance, requiring the understanding of the geopolitical context of the region, how Rail Baltica's strategic role is shaped by the current landscape, particularly in the context of the ongoing conflict in Ukraine. While acknowledging the devastating consequences of the war, this study focuses on examining specific impacts relevant to RB, aiming to understand their implications for the project's development and impact. Following a brief geopolitical overview, this section analyzes the potential impacts of the war along four key dimensions in the context of RBs: the development of alternative trade routes, increased costs due to trade disruptions, rising electricity prices, and shifts in population and labor market dynamics. 5.4.1 Geopolitical Overview The Baltic states, strategically located between Northern, Central, and Eastern Europe, hold a key position due to their access to major Baltic Sea shipping routes and their proximity to Russia and Belarus. This places them at the forefront of NATO's eastern defense line. Since gaining independence from the Soviet Union in 1991, they have actively worked towards integrating with Euro-Atlantic institutions, distancing themselves from Russian 10 CAPEX values used are real values in 2023 prices and they represent total CAPEX, including both material and non-material assets 11 Values are real in 2023 prices 27 influence. Their accession to NATO and the European Union in 2004 marked a significant shift, yet their intricate history and geopolitical stance still heavily influence their foreign policy and security strategies. The annexation of Crimea by Russia in 2014 and the subsequent invasion of eastern Ukraine have escalated tensions in the Baltic region. Russia's military buildup along the Baltic border and the ongoing conflict in Ukraine have intensified fears of a possible Russian advance into NATO territories. In response, the Baltic states have ramped up their defense spending and enhanced military collaboration with NATO allies. The following subsection provides an analysis of the effects of the war in Ukraine on this region. 5.4.2 Effects of the War in Ukraine In response to trade sanctions on Russia and Belarus, there is a shift towards alternative trade routes, impacting both global and Baltic trade dynamics. The conflict in Ukraine has particularly disrupted the Northern Corridor through Russian and Belarusian territories, leading to a renewed focus on the Middle Corridor. The future role of Rail Baltica in this evolving trade landscape will depend on the development trajectories of both the Middle and Northern Corridors. Figure 12: Alternative routes from China to Europe (Stiftung Wissenschaft und Politik, 2022) Additionally, in the event of a prolonged war in Ukraine, the development of infrastructure in the Baltic region, including Rail Baltica, could become crucial in expanding grain export capacity. As traditional Black Sea routes face disruptions, the Baltic ports offer a viable alternative, especially as Polish ports approach full capacity. This shift would significantly enhance the Baltic region's role in maintaining critical global grain supply chains during geopolitical crises. In terms of trade disruptions, historical data and projections suggest that the impact of the current war is temporary, with trade volumes in the Baltic countries expected to recover and resume their upward trend. This 28 resilience, coupled with an anticipated global economic recovery and easing geopolitical tensions enables a positive outlook for future trade growth, with CAGR projected in Estonia and Latvia at 1.7% and Lithuania at 2.7%. Figure 13: Trade evolution and forecast between years 2005 and 2040 (S&P Global, 2023) The war in Ukraine has also impacted the Baltic economies through increased electricity prices. Observing the trend, electricity prices were normal until 2020. In 2021, there was a notable increase, primarily attributed to the impact of COVID-19. Subsequently, following Russia's invasion of Ukraine in February 2022, electricity prices were driven even higher. However, in 2023, recent data indicates that electricity prices in the Baltic States have begun 29 to return to the levels observed in 2021, as shown in the figure below. This suggests that the war has not had a lasting effect on electricity costs in the region. Figure 14: Electricity prices in Lithuania, Latvia and Estonia (Consultant team analysis12) Further, the war in Ukraine has influenced the population and labor market dynamics in the Baltic states. As of November 2023, the Baltic states are hosting 73,627 Ukrainian citizens, accounting for about 1% of their total population, with most Ukrainian war refugees planning to return to Ukraine (Statistics Estonia and Estonian Ministry of Economic Affairs and Communications, 2023). Ultimately, the analysis of the geopolitical landscape and the effects of the war in Ukraine indicates that the long- term disruptions impacting Rail Baltica's viability are relatively contained. Moreover, there is potential for Rail Baltica to enhance the flexibility of trade corridors, such as those from Ukraine, adapting to changing geopolitical circumstances. 5.5 Transportation Market Following an overview of the macroeconomic and geopolitical environment, this chapter assesses trends in the passenger and freight transportation market in the Baltics. The section begins with a historical review that considers the impact of the COVID-19 pandemic. Despite initial disruptions caused by the pandemic, there is an expectation of recovery. Subsequent paragraphs provide insights into both markets separately, exploring the varying dynamics and forecasts among the Baltic countries. To understand freight dynamics driving traffic volumes, the subchapter also analyzes key trade patterns, identifying major routes and commodities handled in the Baltic region through specific transport corridors. 12 For a comprehensive understanding of the methodology and sources behind the electricity price data, please see the Electricity Price Forecasting subsection. 30 Passenger From 1995 to 2020, the land-based passenger transportation sector (including cars, buses and trains) in the Baltic region experienced a 1.7% CAGR in passenger-km. Estonia recorded the most rapid expansion with a CAGR of 2.5%, while Latvia and Lithuania experienced CAGRs of 1.75% and 1.4%, respectively. The growth trajectory, however, has not been straightforward. From the late 1990s to the early 2000s, transportation demand consistently increased. Yet, the effects of the global economic downturn after the 2007 peak with 75.9 bn pkm made their impact felt in the Baltic transportation sector, resulting in a noticeable decline in demand. As shown in the figure below, after the 2008 downturn the demand increased slowly until 2019 to 70.8 bn pkm (Eurostat, 2023d). And, in 2020, the COVID-19 pandemic had a significant impact on the passenger market. Overall, the traffic decline is more pronounced in Estonia. On average, passenger-km fell by 14% across the Baltics, with a 19% decline in Estonia, a 10% decline in Latvia, and a 13% in Lithuania from 2019 to 2020. These trends highlight the sector's vulnerability to global economic fluctuations. Figure 15: Development of land-based passenger transportation in Estonia, Latvia and Lithuania (Eurostat, 2023d)13 To understand the future evolution of transport demand, RBR’s traffic demand model is utilized. Differences etween the historical data presented and the RBR’s model output can e attri uted to methodological variations in the calculation process. Notably, while Eurostat data focuses solely on land transportation, this study also forecasts demand for air transportation. ccording to the RBR’s model, the total passenger transportation market for the Baltic region is expected to reach approximately 100 bn pkm in 2031, coinciding with the start of operations. Lithuania is projected to have the largest share at 50 bn pkm, followed by Latvia with 31 bn, and Estonia with the smallest share at 22 bn pkm. 13 This is the most recent data available from Eurostat 31 The passenger market is forecasted to grow from about 100 bn pkm in 2031 to around 130 bn by 2080, as depicted in the figure below. This growth is expected to follow a 0.5% CAGR trajectory, indicating a steady increase in demand for passenger transportation services over the next five decades. Each country in the Baltic region is projected to experience nearly simultaneous growth. Figure 16: Passenger demand forecast until 2080, all transport modes (RB, 2023) Freight Historical data (see figure below) reveals an upward trend in land-based freight transportation in the Baltic region in the period 2013-2022. The growth in land freight transportation volumes from 2013 to 2022 is led by Lithuania, experiencing a 4.9% CAGR. In contrast, Latvia witnessed a substantial decrease in land freight transportation, experiencing a CAGR of -4.2% during the same period. Estonia, on the other hand, faced an even more pronounced decline, with a CAGR of -6.5% from 2013 to 2022. The COVID-19 pandemic moderately influenced the Baltic freight market during 2020, with significant differences between the countries. Latvia experienced the most significant decline in freight volumes (-28% in tkm), while Estonia saw its demand declining by 14%. Between 2020 and 2019, Lithuania experienced instead a 3% increase (in tkm). 32  Figure 17: Total land freight transportation market per Estonia, Latvia and Lithuania (Eurostat, 2023a) To extend on land-based freight transport volumes, analyzing the short sea market in the Baltic area is essential for a well-rounded understanding. From 2013 to 2022, the Baltic region saw a reduction in the total tonnage handled, from ~150 mn tons to ~ 120 mn. This decline coincides with a negative CAGR of -2%. In this timeframe, Estonia encountered a decline in handled goods with a CAGR of -3%, while Latvia had an even more sustained decrease, with a -4% CAGR. In contrast, Lithuania stayed at approximately the same level, as illustrated in the figure below. Figure 18: Total freight handled in ports per Estonia, Latvia and Lithuania (Eurostat, 2023e) Overall, the Baltic freight market between 2013 and 2022 showcases mixed trends; while land transportation volumes rose in the region, short sea volumes experienced a downward trend during this timeframe. Lithuania stands out as the primary driver of growth in both transportation modes, achieving increased freight volumes across the board. 33 Future developments in freight demand are projected using RBR’s traffic demand model 14. According to the model, the cumulative freight demand for the Baltic region is expected to amount to ~450 bn ton-kilometers by 2031, coinciding with the start of RB operations. Among the Baltic countries, Latvia holds the largest share of this volume with 205 bn ton-kilometers, closely followed by Lithuania with a contribution of 187 bn ton-kilometers. Estonia is expected to have the smallest share, accounting for 56 bn ton-kilometers of the freight market. The overall growth in freight demand across these countries is anticipated to follow an approximate 1% CAGR, with each country experiencing nearly simultaneous growth. Figure 19: Freight demand forecast until 2080 (Rail Baltica – internal document) In total, the Baltic region's freight transportation landscape, while experiencing mixed developments over the past decade, is expected to evolve in an upward trend. Forecasts indicate a continued increase in freight demand for the coming decades. In conclusion, this analysis of passenger and freight transport markets has highlighted the substantial potential of RB in transforming transportation dynamics. The following section will focus on the value proposition of RB, exploring its strategic advantages and the benefits it is expected to bring to the region. 5.6 Value Proposition of Rail Baltica This section evaluates RB’s potential to become a preferred option in passenger and freight transportation. It differentiates RB from other modes, preparing for an analysis of RB's competitiveness in time, cost, and reliability, 14 Also for freight transportation, the disparity in total volume between the historical overview presented and the data from the RBR’s traffic demand model is to be attributed to methodological variations in the calculation process. RBR’s traffic demand model considers indeed all transport modes at aggregate level, while Eurostat splits land and sea transportation. 34 alongside a review of current market players and their shares, offering a clear overview of the competitive landscape RB will face. 5.6.1 Passenger In this subsection, the competitiveness of passenger services is assessed, with car transportation identified as a significant competitor to RB due to its cost-effectiveness and flexibility. Air travel, while faster on some routes, is less competitive in cost-effectiveness, flexibility, and reliability, and is mostly limited to major cities in the Baltic region. In this context, the potential reduction of certain short-haul air routes, influenced by low profitability and environmental concerns, further strengthens RB's position. Good connectivity is offered by buses, but they are impacted in terms of speed and reliability due to road traffic. Existing train services in the Baltics, while reliable, do not pose a significant challenge to RB due to the scarcity of the 1520 mm network (Grandsart, 2021). he assessment of RB’s competitiveness centers on e rigin-Destination pairs (ODs) in the region for high- speed train services, with a focus on transport modes competing with RB on these routes. Evaluation criteria encompass time, cost, reliability, and accessibility15. • Travel time measures the duration of journeys on various routes, assessed through the planned service data from the RBR project team and additional research. • Travel cost anal sis is ased on RB’s demand model and pricing assumptions for competing transport modes, reviewed and validated by industry consultants. • Reliability evaluates gauge the punctuality and dependability of the transport services. • Accessibility assesses the convenience of accessing and utilizing the transportation system, including connectivity and ease of use. 15 Environmental aspects are not taken into consideration, as they are not expected to directly influence passenger decisions. In this context, the environmental impact of RB is analyzed in the Socio-Economic Analysis chapter. 35 Results of evaluation are derived from ranking alternative transport modes against each other along the dimensions listed above. A summary of the overall assessment is provided in the figure below. Figure 20: Summary of the competitiveness assessment of passenger transportation modes (Consultant team analysis) Reflecting the characteristics of each transport mode and passenger preferences, the attractiveness of rail travel is strongly associated with the distance of the journey. Empirical benchmarks indicate that rail becomes highly competitive with travel time for journeys ranging between 450 and 900 kilometers against road-based travel mode. For shorter distances, cars often have the advantage due to the convenience of first and last mile travel, whereas longer distances are more efficiently covered by air travel in terms of time. Rail transportation can also be effective for distances shorter than 450 km, thanks to its fixed routes which are less affected by traffic jams, unlike car journeys. Additionally, the competitiveness of rail travel depends on various factors such as the state and layout of the infrastructure, the number of stops along the route, and how well it connects with other modes of transportation. Next, each scoring aspect (time, cost, reliability, accessibility) is introduced in detail to provide insights into passenger modal choice parameters across different route lengths and types. These analyses aim to deepen the understanding of the transportation market supply and demand, yet only indirectly impact CBA calculations, which are based on more specific analyses detailed out in respective chapters and sections including their respective assumptions. Time- and cost-based comparison Next, travel modes are comparatively analyzed from time and cost perspective, using RB’s traffic demand model and open-source research16. In terms of travel costs, car and bus are the most competitive transport modes 16 To validate RB Traffic Demand Model assumptions for cost and time of travel, desktop research was conducted to collect average travel times and distances with different transportation modes, including sources like Google Maps, Skyscanner, Air Miles Calculator. 36 in the Baltics17. While high-speed rail is pricier than bus or car, it connects major cities, offering an advantage on routes like Kaunas-Vilnius and Rīga-Kaunas where flights are not available. Additionally, train fares are significantly lower than airfares on average, positioning Rail Baltica as a moderately priced and very fast, therefore competitive choice for passenger travel between cities with the Baltic countries. Other aspects, such as infrastructure condition, comfort can also play a role in decision making for passengers. Figure 21: Time- and cost-based transport mode comparison (Rail Baltica – internal document, 2023; Desktop research, 2023; Consultant team analysis) The analysis of travel time data reveals a strong correlation between travel distance and efficiency of different modes. For distances up to 529 km by air (681 km by RB), RB's high-speed service emerges as the fastest option among the listed destinations, with air travel as its nearest competitor, when available due to high fixed costs of air travel (early arrival and security checks). Rail travel remains the more economical option also, compared to air travel. Air travel becomes faster but significantly more expensive beyond this distance. RB outperforms other modes (excluding air travel) in terms of travel time across all distances evaluated. Further, most routes serviced by RB currently lack existing train services. Where trains do operate, they are significantly slower due to the absence 17 In the context of competitiveness comparison, the study evaluates direct variable costs attributed to trips across each transport mode. This approach has significant implications in the case of car trips, where fixed or hidden semi-variable costs, such as amortization, maintenance and other costs of ownership were not considered as their impact is limited on modal choices for a particular trip. In long-term economic impact calculations, full ownership costs are considered to capture the full socio-economic impact of ownership decisions. 37 of north-south connectivity and high-speed rail infrastructure in the region. Consequently, for high-speed rail comparisons on these routes, existing rail is not considered a direct competitor. In the above analysis for bus, train, and air travel, the calculations of travel time incorporate waiting and feeder travel times. For bus and rail trips, waiting and feeder times are assumed at 60 minutes (for shorter trips under 100 km, such as the Kaunas-Vilnius route, this additional time is reduced to 30 minutes). In the case of air travel, an average of an additional 170 minutes is factored in for feeder travel, early arrival, pre-flight procedures including baggage claim and security checks. While waiting times and other additional times to reach the stations from home, or destination from stations influence choices between travel modes, as an overview travel times (only considering time spent in the vehicle of the travel mode) are summarized in the table below. Figure 22: Net time- and cost-based transport mode comparison (Rail Baltica – internal document, 2023; Desktop research, 2023; Consultant team analysis) On routes served by regional services, RB fares are competitive, often matching or slightly undercutting the costs of car and bus travel. Air travel options are not available for regional routes. In areas where RB's routes coincide with existing regional train services, RB aims to align its pricing with that of the existing regional network to encourage the adoption of the new infrastructure. Furthermore, RB serves routes currently not covered by the existing rail network, which is a significant draw for potential travelers. RB is also expected to offer a more comfortable travel experience compared to existing regional rail services, potentially further enhancing its competitive position. While this comparison primarily addresses travel costs and durations, aspects like comfort, reliability, and accessibility are also crucial for a comprehensive evaluation and are anticipated to be among RB's primary advantages. Subsequent figures provide an analysis of transportation modes, characterizing OD pairs by travel time and costs, along with projected modal shares for the year 2046 ased on RB’s traffic demand model. The analysis of modal shares for key O-D pairs integrates more optimistic assumptions compared to the base case used for CBA calculations (outlined in section Optimistic Operational Assumptions and Passenger Preferences) to capture the total market share potential of RB. This consists of updated service assumptions with direct routes, such as Tallinn – Warsaw and Vilnius – Warsaw, aiming for near-ideal scheduling, and the recalibration of passenger utility curves by easing constraints on rail attractiveness. 38 For all destinations from Tallinn, car travel remains the most favored mode of transport, primarily due to its cost efficiency. Nevertheless, in accordance with projected modal share trends, Rail Baltica is forecasted to gain the highest modal share on routes to Rīga, Kaunas and Vilnius, reflecting a shift in passenger preference towards rail for these specific journeys. Figure 23: Comparison of travel modes between Tallinn and key destination cities (Rail Baltica – internal document, 2023; Desktop research, 2023; Consultant team analysis) For journeys m Rī , rail travel, when assessed in terms of time and cost, emerges as an advantageous option, offering quicker transit times and substantially lower costs compared to air travel. However, 39 other factors like flexibility, accessibility, and the potential duration of stay in the destination city contribute to a considerable preference for car-based travel. Figure 24: Comparison of travel modes between Rī and key destination cities (Rail Baltica – internal document, 2023; Desktop research, 2023; Consultant team analysis) Travel options from Kaunas are more constrained due to the limited availability of flights to major cities in the region. This limitation positions Rail Baltica's high-speed service as the fastest mode of transportation for passengers departing from Kaunas. However, it's noteworthy that the cost of this service is nearly twice that of car and bus travel. An exception is the Kaunas-Vilnius route, where the combination of short distance and high speed 40 with a low-ticket price results in only a marginal cost difference from road travel options, while significantly reducing travel time by more than half compared to road-based modes. Figure 25: Comparison of travel modes between Kaunas and key destination cities (Rail Baltica – internal document, 2023; Desktop research, 2023; Consultant team analysis) Finally, travel options from Vilnius are evaluated based on the available transportation modes. For the Vilnius- Warsaw route, both the cost and travel time of RB HSR service are potentially more favorable compared to air travel. In terms of time, the rail journey is twice as fast as traveling by car or bus. Similarly, for the Vilnius-Tallinn 41 route, while the travel time via rail is comparable to air travel, it is nearly twice as quick as journeying by bus, coach, or car. In terms of cost, Rail Baltica’s HSR service is e pected to e significantl less e pensive than air travel. Figure 26: Comparison of travel modes between Vilnius and key destination cities (Rail Baltica – internal document, 2023; Desktop research, 2023; Consultant team analysis) When R ’ p m w m HSR modal shares based on air distance categories for locations served by the network, RB aligns well with these benchmarks. This comparison suggests that while RB modal shares are aligned with standards set by international examples, there is still potential for increased rail share in the long term. Additionally, it is important to note the growth potential in most distance buckets to be realized through further development of adjacent infrastructure, as well as the prominence of large OD pairs in the modal share 42 curve, including the ferry connection between Helsinki and Tallinn, representing a significant element in the network's overall connectivity and modal share dynamics. Rail modal share Benchmar HSR share 0% HSR share RB arsaw allinn, arsaw Riga, Helsin i Vilnius arsaw Vilnius, Helsin i Riga 40% rowth potential Vilnius Riga allinn, Riga Vilnius 20% Kaunas 0% 0 4 0 00 0 200 2 0 300 3 0 400 4 0 00 00 700 00 000 200 00 00 4 24 2 34 3 44 4 7 4 7 Figure 27: Rail modal share by distance buckets, % of total pkm (Rail Baltica – internal document, 2023; Consultant expert analysis) Reliability Reliability also plays a crucial role in evaluating the competitiveness of alternative transport modes. For the p, reliability is assessed by looking at punctuality. For medium and short-distance passenger trains, the Baltics are reported to be at the top spot at the European level in terms of reliability, featuring a punctuality rate above 98% as of 2019 98% as of 2019 (Grandsart, 2021). In long-distance passenger services, Lithuania and Latvia also emerge among the top three European countries, with respective punctuality rates of 99% and 94%, though data for Estonia are unreported. For a comparative analysis of EU performance in terms of passenger trains performance, refer to the next figure. Reliability is a key factor in assessing the competitiveness of various modes of transport. In this analysis, reliability is evaluated through punctuality metrics. For medium and short-distance passenger trains, the Baltic states have achieved a leading position in Europe regarding reliability, boasting a punctuality rate exceeding 98% as of 2019 (please see following figure). For long-distance passenger services, Lithuania and Latvia rank among 43 the top three European countries, with punctuality rates of 99% and 94%, respectively. However, data for Estonia in this category is not available (Grandsart, 2021). Figure 28: Punctuality for passenger trains (max. 5 min. delay except for Switzerland) – proportional distribution (European Commission, 2019b) In the context of air travel, two key airlines operating routes relevant to RB are LOT18 and airBaltic. LOT was recognized as the 9th most punctual airline in Europe in 2022, with a punctuality rate 19 of 75%, according to OAG's 2023 report. This performance is notable as air travel typically shows less reliability than train services, yet LOT's punctuality stands out positively among its European counterparts. In contrast, airBaltic experienced a decrease in punctuality in 2022. The airline's 3-minute punctuality rate fell to 54.5%, a decline from 66.3% in 2021, and its 15-minute punctuality rate reduced to 72% from 85% in the previous 18 LOT Polish Airlines 19 On-time punctuality refers to level of success of the service remaining on the published schedule 44 year. This downturn in reliability is largely due to a range of operational challenges, including airport restrictions, reduced airport slots, aircraft rotation issues, technical difficulties, and staff shortages at airports (airBaltic, 2022). Figure 29: European airlines by OTP (OAG, 2023) Regarding buses, specific punctuality data are not readily accessible. Nevertheless, it is recognized that buses are frequently affected by road traffic conditions, potentially leading to significant punctuality issues. In urban areas, where traffic congestion is common, buses are prone to delays, generally resulting in lower punctuality compared to trains and planes. Consequently, bus services are expected to exhibit lower punctuality rates. A similar logic applies to car travel, which is also susceptible to variations in traffic conditions, affecting its punctuality and reliability. Accessibility Moreover, accessibility plays a crucial role in determining the competitiveness of different transport modes. Car travel is notably versatile, offering unmatched accessibility thanks to its ability to reach almost any area connected by a road network. Rail Baltica, while not as flexible as car travel, still offers significant accessibility due to its integration with other European rail networks, enabling seamless cross-regional and international travel with fewer transfers. In contrast, the existing railways in the Baltics are less appealing for regional travel due to limited coverage and inadequate network integration. Coaches, however, emerge as an attractive option for accessibility; they are the preferred transport mode for most daily commuters in areas with scarce rail connectivity. Air travel, although efficient for longer distances, can be less accessible in rural areas or smaller towns without nearby airports, thereby limiting its overall reach. Competition A high-level analysis of the Baltic passenger transportation sector unveils a diversified competitive landscape. While the air travel market is somewhat consolidated with key players like Ryanair and airBaltic holding significant shares, it still encompasses a variety of operators targeting distinct geographies. Similarly, the rail sector is mostly served by state-owned companies with an established presence in the region. In contrast, the road transportation sector is experiencing a high degree of fragmentation, indicating a densely populated market. 45 In the region, the air travel market is showing signs of concentration, with Ryanair and airBaltic emerging as popular choices for travelers as shown in the figure below. While Ryanair mainly provides routes to destinations outside the Baltic area, airBaltic has a strong grip on domestic and intra-Baltic routes, offering direct flights between the Baltic states, together with LOT. RB is thus going to face competition from these players. An aggregated view on the region suggests that Ryanair holds the highest market share, with 33%, followed closely by airBaltic, with 28% (Statista, 2023a). Players with lower market share include Norwegian, Wizz Air, LOT, and Finnair, indicating a competitive yet somewhat consolidated market landscape (Statista, 2023a). Figure 30: Market share of key players in the Baltic passenger air travel segment as of 2022 (European Commission, 2023a) The coach passenger market in the Baltics is moderately fragmented with many small companies operating within this sector. The total annual value of the market is estimated to be around EUR 1.1 bn as of 2022 (Bureau van Dijk, 2023); however, this figure encompasses both urban transportation and intercity or long-distance transport20. As of 2022, the companies offering predominantly inter-city transportation report similar turnover figures, indicating no dominant market leader. One contributing factor to the fragmentation of the market is the presence of numerous small- or medium-sized enterprises. Although individual firms often specialize in specific routes and might have limited regional outreach, when viewed collectively, they offer comprehensive coverage and multiple travel options for passengers. Competition is likely to be faced by companies like Ecolines, Kautra, Infobus, Lux Express, GoBus and Flixbus (via its Estonian branch), which have a slightly higher market share and also offer inter-regional passenger services. Out of them, GoBus, LuxExpress and Kautra emerge as the players with the most significant 2022 turnover, amounting to approximately EUR 43 mn, EUR 27 mn, and EUR 31 mn, respectively (Bureau van Dijk, 2023). The rail passenger market in the Baltics can be characterized as concentrated, with dominant state-owned RUs in every state. At the same time, the level of competition is low, as most of the traffic is captured by the below- mentioned entities. In Estonia, the rail passenger market is mainly served by AS Eesti Liinirongid, also known as Elron. Elron, a state- owned company, operates various routes in Estonia including East, West, Southeast, and Southwest directions from main stations in Tallinn and Tartu. As an example, one of the routes, Tallinn–Tartu–Valga, connects to the asažieru Vilciens trains, which further lead to Rīga, Latvia. As of 2022, the company's turnover totaled EUR 56 mn (Bureau van Dijk, 2023), and it carried over 7 mn passengers (Rail Target, 2023). 20 Market size has been approximated by considering the 2022 turnover of all active companies with headquarters in Latvia, Estonia and Lithuania registered under NACE codes 493, 4931, 4939, indicating that their primary activity is urban/suburban/other passenger land transport. This is only an estimate number as foreign companies operating in the region are excluded from the calculation. 46 In atvia, asažieru Vilciens is the state-owned company which specifically handles passenger services. asažieru Vilciens transported around 15.7 mn passengers in 2022 atvijas dzelzceļš, 2022 , generating EUR 54 mn in turnover for that period (Bureau van Dijk, 2023). This entity is the main carrier for passenger rail services in Latvia. Finally, LTG is the national railway company of Lithuania, managing most of the country's railway network. Its subsidiary LTG Link provides passenger services. It made around EUR 72 mn in turnover cumulatively in 2022 (Bureau van Dijk, 2023). In the same year, 4.7 mn passengers used LTG Link's services (LTG Link, n.d.). In December 2023, LTG Link launched a new route operating directly between Vilnius and Rīga, having signed an agreement with the Latvian IM to facilitate this development (LTG Link, 2023). Since the R s for RB’s future operations have not een esta lished, it is currentl not feasi le to determine if RB s RUs will encounter competition from these entities or what their involvement in train operations will be. However, it can be noted that as of 2023, these players do not offer direct connections between the Baltic capitals, except for the recently launched Vilnius - Rīga connection. 5.6.2 Freight RB’s shared trac s, accommodating oth freight and passenger transportation, offer a seamless and efficient freight transit solution. This setup not only minimizes delays but also reduces the risk of goods damage during transit, crucial for maintaining the integrity of freight. Additionally, rail transportation presents a more sustainable alternative compared to other carbon-intensive transport modes, contributing to the reduction of carbon footprints and aligning with the EU's green initiatives. Furthermore, RB’s connectivity with the existing 1520 mm rail, road, and maritime networks supports intermodal connections. This integration enables door-to-door logistics, providing businesses with comprehensive supply chain solutions. In evaluating the competitiveness of freight transport, four key modes are pivotal: road-based (truck) freight, air-based transportation, maritime transportation, and rail transportation. These transportation modes are evaluated based on time, cost, capacity, and accessibility. Transport time denotes the total duration required to transport goods along specific routes. Transport cost involves the expenses incurred per unit of goods transported over selected distances. Transport capacity represents the maximum volume that can be carried using a particular mode. Accessibility indicates the adaptability and flexibility of transport routes to different destinations. Distance plays an important role as a differentiator in the competitiveness of freight transport modes due to different fixed cost components. Therefore, these modes are analyzed in three distinct distance categories: • Short distance: 0-450 km. • Medium distance: 450-900 km. • Long distance: above 900 km. For short distances (0-450 km), truck transportation is expected to remain the optimal choice based on the evaluated aspects, followed by rail transportation. On short-distance routes freight is usually faster and can provide cheaper delivery fees combined with easy accessibility, mainly due to first and last mile convenience. Rail 47 on the other hand can deliver higher volumes and performs relatively well regarding accessibility compared to other modes. Figure 31: Summary of the competitiveness assessment of freight transportation modes on short distance 21 (Consultant team analysis) In the medium-distance range of 450-900 km, selecting the most suitable mode between truck and rail freight transportation presents a complex decision. Trucks often provide faster transit times, making them a favorable option for time-sensitive deliveries. However, rail transportation tends to be more cost-effective and offers greater capacity, making it a preferable choice for larger or less time-critical shipments. Maritime transport, while not always applicable in this distance range, can offer significant advantages in terms of capacity and cost for suitable routes, particularly for bulk or heavy goods. This comparison highlights the importance of weighing time efficiency against the economic and capacity benefits of rail and maritime options in medium-range freight logistics. Figure 32: Summary of the competitiveness assessment of freight transportation modes on medium distance (Consultant team analysis) For long-distance freight transport over 900 km, rail emerges as an increasingly competitive choice due to its cost efficiency, high capacity, and good accessibility, particularly for bulk or non-urgent shipments. Maritime transport, however, plays a crucial role in this range, offering substantial benefits in terms of cost and capacity, especially for international shipping and heavy or voluminous cargo. 21 The blue box with dotted line highlights the most competitive transport mode within the respective distance ranges. 48 While rail and maritime are strong contenders for efficiency and volume, trucks retain an advantage in terms of flexibility and direct access, making them ideal for certain time-sensitive or specialized deliveries. Air freight, though often the most expensive option, provides the quickest transit times, suitable for high-priority or lightweight shipments. This scenario highlights the need to carefully consider each mode's strengths—cost and capacity for rail and maritime, and speed and flexibility for truck and air freight—in long-distance freight transportation decisions. Figure 33: Summary of the competitiveness assessment of freight transportation modes on long distance (Consultant team analysis) Overall, maritime transportation has a high limitation as access to water is a key enabler. Similarly, air-based transportation requires built infrastructure for airport connection. Concerning land-based freight transport, the expected routes of RB – identified based on RBR project team input – will face competition primarily from the trucking industry. These are inland routes where maritime transportation is not a significant rival. Existing rail networks22, despite representing theoretical competition, do not cover the same routes and are therefore excluded from the analysis in the following subchapters. Next, land-based freight transport modes are analyzed comparing RB freight service and truck freight transportation in detail based on time, cost, accessibility, capacity, and competitive environment. Transport time When considering the time dimension, it becomes evident that trucks hold a competitive advantage over RB freight services. This advantage is primarily attributed to the extended loading, unloading, and maneuvering times associated with the latter, resulting in an average speed difference of approximately 15% (with an advantage 22 Referred to the 1520 mm gauge infrastructure. 49 over truck transport). Despite truck transport being usually faster, Rail Baltica can still provide high value for customers through potentially lower costs, high reliability and higher capacity potential. Figure 34: Transport time on routes planned on RB (RBR Project Team input, 2023; Consultant team analysis) Cost In terms of transport costs, rail transport's higher fixed expenses render it a more viable option over longer distances. Rail Baltica's (RB) traffic demand model, backed by consultant expert analysis, indicates that RB becomes a more economical choice than trucks for dry bulk23 transport on average journeys exceeding 50 kilometers. For 23 Materials like grains, coal, or minerals in large quantities, usually without packaging. 50 liquid bulk24 transport, RB's cost advantage becomes apparent for distances beyond 175 kilometers, and for semi- bulk25 goods, the cost-effectiveness of RB over trucks is seen at distances surpassing 300 kilometers. 2 0 00 0 200 400 00 00 0 ruc i uid ul ruc r ul ruc Semi ul Rail i uid ul Rail r ul Rail Semi ul Figure 35: Cost efficiency curve for rail and truck transport modes (Rail Baltica TDM, 2023) Accessibility After evaluating cost and time, the study shifts its focus to accessibility, an important aspect of freight transport. Here, trucks stand out for their ability to provide door-to-door logistics, efficiently managing first and last-mile operations, collecting goods from various locations, including urban and remote areas, and delivering them directly to final destinations like retail outlets, homes, or business centers. This direct delivery approach, with fewer deliveries of goods, offers significant advantages to customers. In contrast, while trains are effective for transporting bulk cargo over long distances, they often rely on other modes, such as trucks, for the beginning and end of the journey. This reliance hinders their capacity to offer complete door-to-door service. For Rail Baltica to remain competitive, enhancing intermodal connectivity at terminals, ports, airports, and yards is critical. Addressing the need for transloading to adjust to different track gauges is also a key consideration for RB. The availability of necessary transloading facilities, particularly cranes, is essential to counter this potential long-term limitation and ensure effective service. 24 Liquid-bulk cargo is usually oil, petroleum products, chemicals, LNG, etc. and it is packaged in tanks. 25 Semi-bulk cargo is usually wood chips, lumber, steel coils, etc. and it is mostly packaged in large containers or pallets. 51 Capacity From a capacity perspective in freight transportation, maritime shipping stands out as the most capable, followed by train, and then truck. Maritime transport excels in handling large volumes, making it the preferred choice for bulk cargo. Trains, including those on RB, offer significant capacity as well, with an average load capacity of 820 tons, far exceeding that of trucks. Trucks, with their average capacity of 14 tons, are more suited for smaller loads and provide flexibility but cannot match the volume capacity of maritime and rail transport. This hierarchy of capacity underscores the importance of RB in managing substantial cargo volumes and highlights the ongoing reliance of certain industries on rail, especially for transporting dangerous goods, where capacity is a critical concern. Competition The road freight transportation landscape in the Baltics is fragmented, indicating the presence of numerous national and international carriers operating in the region, with no major large international players dominating the market. It is also highly competitive – this competitiveness stems from various factors including the presence of numerous service providers, fluctuating fuel prices, advancements in technology, and evolving customer expectations. Moreover, the industry is characterized by thin profit margins, which drive companies to constantly improve efficiency and seek improvements to gain an edge over competitors. According to a report by GSCi, as of 2022, the total road transport market size in Estonia is EUR ~2 bn, in Latvia EUR ~1.3 bn, and in Lithuania EUR ~2.2 bn, which amounts to EU ~5.5 bn for the entire region (GSCi, 2023). Across the Baltics, the carriers serving similar routes to the proposed one for RB may be divided into two major segments, depending on their origin – SMEs from the Baltics, and international operators. While large international players, such as CEVA Logistics, DHL freight, DSV, LKW Walter, and Girteka26 have a substantial presence due to their extensive networks and resources, SMEs also hold a significant share as they can offer specialized services and have a deeper understanding of the local market dynamics. As mentioned in the beginning of this part, RB is expected to face competition from trucks. Therefore, a few examples of road freight companies of Baltic origin, 26 Despite Girteka being a local player headquartered in Lithuania, it could not be classified as a SME. Girteka has extensive operations across Europe, with a reported turnover of EUR 1.93 bn as of 2022, indicating its significant scale in the transportation industry. 52 which operate across the three states and on similar routes as RB, can be found in the table below, including their country headquarters, as well as their fleet size, and turnover as of 2022. Figure 36 – Largest road freight carriers (by 2022 turnover) of Baltic origin operating regionally (Bureau van Dijk, 2023)27 As this chapter concludes with a comprehensive understanding of Rail Baltica's value proposition, it becomes evident how Rail Baltica is expected to reshape the transportation landscape in the Baltics. The next chapter on stakeholder mapping builds upon the value proposition presented above to maximize the project’s potential and address challenges identified in the competitive analysis, thereby ensuring Rail Baltica's successful integration into the regional transportation network. 5.7 Stakeholder Mapping A large-scale project like RB has a large variety of stakeholders to manage. In the following section, major stakeholders are identified to highlight the widespread impact and complexity of the project and to further reinstate the priorities of each actor participating in it. Relevant stakeholders are identified through several iterations in a collaboration with the RB Communication Department. To reflect the characteristics of the project, RB stakeholders are categorized in two groups: project stakeholders and broader audience. 27 All logos and trademarks displayed herein are the property of their respective owners and are utilized for illustrative purposes only. 53 5.7.1 Project Stakeholders The stakeholders of the project have different degrees of support and influence towards the project and can be thus further classified into four groups, as seen in the figure below. Figure 37: Classification of project stakeholders based on their attitudes Major skeptics, crucial in the Rail Baltica project, have low support but significant influence. This group includes municipalities, NGOs, and multimodal partners, key in shaping public opinion and outcomes. Their skepticism often centers around the project's cost, environmental impact, and effect on existing services. Addressing their concerns through open, evidence-based discussions is vital for positive public perception, while monitoring their attitudes and engaging proactively in perception management is essential for project success. Change agents, with high support and influence, are another key stakeholder category, including a wide array of entities like internal stakeholders, the European Commission, regulators28, financial institutions, and various industry stakeholders. As influential advocates, their role in swaying major skeptics is crucial. Engagements should focus on building strong relationships and effective communication. Regular contact and public recognition of their support can maximize their contribution to the project. Change facilitators, although not directly critical, are valuable for building a positive project ecosystem. This group comprises governments, ministries, municipalities, educational institutions, and contractors. Keeping them informed and involved is recommended to ensure their ongoing support aligns with RB's goals. Their input and support can significantly enhance public perception. Finally, minor skeptics, who exhibit low support for the project and are not crucial for its overall success, can be approached with less intensive influencing strategies. While their support may not be pivotal, it's still worthwhile 28 It is important to note, particularly in the case of regulators, that while they are typically seen as change agents, their role may sometimes align more closely with that of skeptics or facilitators of change, similar to ministries. Therefore, when strategizing engagement with regulators, it is beneficial to consider approaches that are adaptable and responsive to their unique position and perspective within the project. 54 to engage with them in a more moderate manner to address concerns and potentially convert them to more favorable attitudes. The following table categorizes each stakeholder of RBGP, emphasizing their interests and goals. Identifying their position within this matrix helps tailor engagement strategies, ensuring effective and successful project delivery. Background Influence / Members Interests / goals support Ministry of Transport & • Physical implementation Comm. of Lithuania, of the project Beneficiaries Ministry of Transport of Change agents • Creation of an economic Latvia, Ministry of Climate corridor of Estonia 6 members: 2 shareholder • Delivery of the game- RB Rail representatives per each Change agents changing RB project in a Supervisory Board Internal stakeholders country coordinated manner • Central coordination of Central coordinating the RB project and RB Rail authority with 3 national Change agents delegation of branches implementation National Rail Baltic Estonia, Eiropas • Physical implementation implementing zelzceļa līnijas, LT Infra Change agents of the project bodies (Rail Baltica Statyba) • Contribution to the Infrastructure Entities responsible for efficient RB project management infrastructure management Change agents delivery entities yet to be formed • Ensuring long-term operations • Socio-economic benefits National non-beneficiaries, of the project related to ministries (e.g., economy, their areas of work (e.g., Governments - defense); special country Change military mobility, Sectoral ministries formats created to support facilitators Public institutions increased geopolitical cross-sectoral & sectoral power, new job cooperation opportunities) Procurement monitoring offices, state audits, rail • Delivery of the RB project regulators and safety Regulators Change agents in line with all relevant authorities, cultural laws heritage and env. protection offices, etc. 55  Background Influence / Members Interests / goals support Change agents/ • Socio-economic benefits Municipalities related to Change related to their areas where railway facilitators / Municipalities municipalities (e.g., better stations or the tracks are Major sceptics connectivity, job built (varies per opportunities) municipality) • European integration of Baltics, improved mobility and increasing of the sense of common European DG MOVE & DGs, TEN-T European identity Change agents Commission coordinator • Showcasing RB as a catalyst for new rail standards, military mobility and socio- economic benefits Authorities in countries • Derive positive socio- Neighboring with socio-economic economic benefits from Change countries and interest in RB (e.g., Ukraine RB's influence on their facilitators other authorities with military mobility, country (e.g., geopolitical, Poland and Finland) economic) International railway • Delivery of the RB project International partnerships Railway industry industry associations, e.g., Change agents in line with industry best associations UNIFE, CER, UIC, EIM, ERFA, practices etc. • Alignment of all Various providers of non- Infrastructure components of wider RB railway infrastructure, e.g., Change agents providers infrastructure with the telecom, energy providers existing infrastructure • Delivery of the RB project in line with the industry Institutions providing standards Change Certificators certificates indicating • Setting up of new facilitators satisfied standards standards for game- changing modern railways Various banks potentially • Achieve the desired Banks Change agents providing funding financial rate of return institutions Financial • Achieve the desired European Investment Bank Infrastructure financial and/or internal and other infrastructure- Change agents investment funds rate of return for the related investment funds community 56  Background Influence / Members Interests / goals support Schools and universities • Collaborate with RB in its Schools & Change educating potential future employer branding for universities facilitators RB users and employees future project workers Non-profit • Improve net RB project Major sceptics / environmental Various national and Change agents externalities international NGOs (depending on • Improve governance and environmental and social country and accountability of internal NGOs entity itself) stakeholders responsible for project delivery • Profit making based on Various procurement Change Contractors procurement partners facilitators partnerships with RB Major sceptics / Businesses Change agents (depending on • Maintaining or increasing Airplane, maritime and whether they Multi-modal the demand for their truck partners perceive RB as a partners services and improving collaborating with RB competitive their quality threat or a cooperating partner) Figure 38. – Stakeholder mapping (based on interviews with RBR communication department) 5.7.2 The Broader Audience The second group of stakeholders relevant for RB is the broader audience. Broader audience includes end users, NGOs, suppliers, and media. End users of the project encompass a diverse group with distinct needs and expectations. Passengers, mainly representing the B2C category, are the individuals who will directly benefit from the improved transportation services. Their primary concern is convenience, reliability, and efficiency in transportation. They expect seamless and comfortable travel experiences, with a focus on accessibility, safety, and affordability. On the other hand, freight clients, falling under the B2B (business-to-business) umbrella, are focused on efficient logistics and cargo transport. They require reliable logistics and timely delivery, with a keen eye on cost-effectiveness. Future end users, including schoolchildren and kindergarteners, represent a generation that will grow up with the project's offerings, impacting their future mobility. Their priorities include safety in transportation, environmental responsibility, and accessible infrastructure, which will impact their mobility as they grow up. Lastly, the general public also has to be targeted to foster a core understanding of the project's benefits (balanced with costs) for widespread support. Furthermore, NGOs, encompassing environmental, social, and governance (ESG) sectors, consist of both for-profit and non-profit associations and business chambers. Environmental NGOs focus on ecological sustainability and conservation, social NGOs prioritize community well-being and social equity, while governance-oriented NGOs 57 aim to ensure responsible and ethical practices in both public and private sectors. Their collective goal is to advocate for a more sustainable and responsible future, addressing a wide range of issues, from environmental protection to social justice and corporate governance. Suppliers, both existing and potential, play a crucial role in the project's procurement work. Their primary objective is to provide the necessary goods and services efficiently and effectively, contributing to the project's successful implementation by ensuring a consistent supply chain and meeting the project's material and service requirements. Therefore, they are the ones more concerned with the commercial dimension, or the market appeal of RB. Finally, media, comprising national, regional, and international channels, serve as the diverse conduits for information dissemination. They cater to distinct audiences and perspectives. Their mission is to provide accurate and relevant information to their respective audiences. Hence, their specific interests are contingent upon the audience they serve. 5.8 Regulatory & Compliance Navigating the complex environment of regulations and ensuring compliance are fundamental for successful project implementation. This chapter explains the most relevant regulatory frameworks affecting RB involving environmental, railway, and regulations related to the usage of road29. The objective of this section is to present a foundational overview of key regulatory aspects, with an in-depth analysis of each regulatory area and its implications provided in the appendix. While the chapter does not aim to provide legal advice, an overview of the main regulations governing these sectors is presented. Environment related regulations are the uropean reen eal and "Fit for " pac age. hese contain the ’s goal of reducing greenhouse gas emissions by 55% by 2030. RB can emerge as a sustainable transportation alternative in the Baltic states, by reducing CO2 emissions in the passenger and freight sectors. Moreover, policies like taxation on fossil fuels could further boost RB's appeal by making traditional fossil fuel-dependent transportation less economically attractive. However, discussions surrounding fossil fuel subsidies are pertinent as they may pose a challenge to RB by potentially diverting resources away from the transportation sector., Regulations like Directive 2008/68/EC, for handling hazardous goods transportation, promote the safe transportation of several goods on the RB line. Additionally, the Environmental Noise Directive requires the assessment and management of noise pollution from infrastructure projects, ensuring that RB adheres to standards that protect human health and the environment from excessive noise. The Habitats Directive focuses on protecting environmental and ecosystem integrity during RB's construction phase, emphasizing RB's commitment to preserving natural habitats. Finally, the EU's Environmental Impact Assessment Directive mandates assessing major infrastructural projects like RB for environmental impacts. Together, these regulations guide RB towards achieving its sustainability goals and aligning with broader EU environmental requirements. Railway related regulations contain the 4th Railway Package, alongside the EU Directive 2012/34. These regulations aim to ensure competitiveness and interoperability within the European rail sector. The minimum access package ensures fair and non-discriminatory practices for European networks. The alignment with the EU's technical standards, especially the revised Technical Specifications for Interoperability (TSIs), is important for ambition to harmonize operations across Estonia, Latvia, Lithuania and the European network. Finally, EU's state 29 Please refer to chapter Risk and Regulatory for a detailed overview of related aspects of the project. 58 aid railway guidelines aim to transition towards sustainable transport modes, allowing member states to subsidize operations like RB. Transport-related regulations play an important role in shaping the transport landscape. RB stands to gain as bans on heavy goods vehicles are on the rise, primarily for environmental reasons. Such bans could channel more traffic onto rail routes. In peak traffic times, some EU countries like Austria impose restrictions on trucks on busy roads under Regulation (EC) No 561/2006. This regulation seeks to prevent overburdening of road infrastructure and enhance safety by improving both drivers working conditions and road safety standards. While these measures could nudge industries towards alternative transport modes, it is crucial for the Baltic states to uphold a regulatory environment that promotes rail competitiveness. Decisions favoring road transport could potentially decrease RB's competitiveness. This chapter has evaluated key factors affecting Rail Baltica Global Project, providing essential context for its implementation. The analysis covered RBGP's definition as a project, geographic context within the Baltic Sea region, macroeconomic and geopolitical environments, transportation market dynamics, the value proposition of the planned infrastructure, stakeholder structure and regulatory compliance, all crucial for understanding the project's situation, challenges and potential. The subsequent chapter presents project objectives, clearly linked to this established context, emphasizing the importance of these insights for achieving RBGP's goals. 59 6 Objectives Building on the analysis of contextual elements, this chapter assesses the regional and sectorial needs that Rail Baltica aims to address. Within this context, operational, financial, and socio-economic objectives are identified to meet these needs, providing a robust performance measurement framework. The objectives also define the impact components assessed in the CBA, offering quantifiable insights into the project’s expected performance in various dimensions. Ultimately, the goal of RB is to induce socio-economic benefits in the Baltic region and Europe, building on the contextual elements outlined in the previous chapter. To realize these benefits, RB needs to set and meet operational and financial targets. Balancing these objectives, RB aims to bring economic benefits that outweigh operational and financial costs, resulting in a positive return on investment from a social perspective. While achieving a positive benefit-cost ratio can be realized through various cost and benefit compositions, the following socio-economic, operational, and financial targets provide a structured roadmap to ensure a desired outcome for the Baltic region. p m Fre uenc Secure funding mp mp Relia ilit everage ransport value chain conomic growth Renewa le energ ost efficienc assengers ilitar mo ilit source Reduced su sid Freight shippers Suppl chain ross order need for operations integration cooperation a or mar et Increase freight Social e uit ccessi le transport connectivit nvironment nvironmental Safet sustaina ilit orridor s nergies Figure 39: Overview of operational, financial, and socio-economic objectives 6.1 Operational and Financial Objectives Operational and financial targets are essential in both planning and gauging the performance of the investment, as they directly drive socio-economic impacts. RB is committed to providing the Baltics with a competitive mode of transportation that adds value for both passengers and the freight value chain. To achieve this, RB needs to set and meet operational targets regarding capacity offered to railway undertakings, train frequencies, and physical realizations of mainline and point-type objects. From a financial perspective, RB’s goals encompass benchmarks for cost-efficiency, cash flow management, and subsidy needs. p Fre uenc Secure funding Relia ilit everage Renewa le energ source ost efficienc ross order cooperation Reduced su sid need for ccessi le transport operations Safet Figure 40: Operational objectives overview 60 Frequency RB targets to offer frequent rail services to its passengers to accommodate a broad user base and present a competitive alternative to other transport modes. To ensure a frequent service, RB must have a strong operational plan with enough trains along its routes. Currently, 218 trains per day are planned for passenger services. RB should aim to expand the number of services while facilitating track capacity to accommodate growing demand for freight. Reliability To achieve operational efficiency and satisfy both passenger and freight needs, RB aspires to be a reliable mode of transport with limited delays. This reliability can be attained through efficient coordination across stations and robust centralized planning. RB should target a punctuality rate of 98% within the last 10 minutes of scheduled arrival times as previously observable in other rail transportation in the Baltic. Renewable Electricity Source The newly constructed railway plans to be fueled entirely by electricity. More specifically, RB has set a target for 100% renewable electricity to power the project. This means that RB will need to be able to buy Guarantees of Origin to cover electricity usage. Furthermore, this requires a potentially induced investment in the region to accommodate the renewable electricity requirement for operating RB. The latter is detailed in the WEI report, presented in subsequent chapters in this report. Cross Border Cooperation Cross-border cooperation is crucial for achieving operational efficiency in RB. Given that the railway traverses multiple Baltic countries, effective collaboration and coordination among the infrastructure managers of these countries are essential, especially when trains cross from one nation into another. For RB, it will be particularly important to establish a dedicated corridor management system to address these cross-border operational aspects. Affordable transport As RB strives to become a competitive alternative to traditional transportation modes in the Baltic region, it is crucial to ensure the affordability of the service for low-income passengers. To that end, RB is focused on optimizing costs to ensure competitive prices for railway undertakings and carriers alike. In turn, this would enable the provision of competitive fares for the end-users, namely passengers or freight shippers. Safety RB is set to be the largest infrastructure undertaking in the Baltics in the last 100 years via providing state-of-the- art transportation to the region. Safety is a key consideration of the project as it aims to offer a competitive and accessible alternative to all residents regardless of their financial means. Consequently, it is essential for the project to ensure the highest degree of safety during both the construction and operational phases. During the latter, it will be important for RB to guarantee timely maintenance of the rail infrastructure, which is to be ensured through effective collaboration between the infrastructure managers. 61 Secure funding The primary financial objective for RB is to secure adequate funding, as the project will require substantial investments throughout the construction period to establish an operational rail connection on the new line by the end of 2030. Ensuring a steady flow of funding over that period is essential to meet the capital expenditure needs and prevent any capital shortages that could potentially delay the construction process. Leverage Given the recent macroeconomic environment characterized by higher-for-longer interest rates, RB targets to have limited exposure to debt, with a preference towards national or supranational funding such as grants or governmental subsidies. Cost efficiency Given the magnitude and operational complexity of the project, it is important for RB to maximize cost efficiency. It aims to do so by analyzing cost efficiency according to three metrics and setting a targeted goal for each. The relevant metrics are detailed below: • Overall cost efficiency: RB plans to assess overall cost efficiency by maximizing the train kilometers by total operating cost (train-km/EUR). More specifically, it aims at an average cost of between 0.10 train- km/EUR and 0.14 train-km/EUR. • Passenger cost efficiency: The project aims to consider cost efficiency for its passenger services by calculating passenger volumes enabled by a unit of passenger operating costs (pkm/EUR). The specific target for its passenger business is an average cost of between 9 pkm/EUR and 12 pkm/EUR. • Freight cost efficiency: Much like its passenger business, RB focuses on assessing and increasing freight volumes handled per unit freight operational cost (tkm/EUR). Consequently, it aims to achieve an average between 95 tkm/EUR and 120 tkm/EUR. Other focus areas for cost efficiency include the optimization of maintenance and asset renewal expenses over time. The forecasted annual asset renewal and maintenance per route-km is EUR ~350,000. RB should aim to decrease this as operations become more established to EUR ~300,000 annually. To achieve indicated results from the analysis, the following initiatives could improve overall cost efficiency: • Predictive Maintenance: Utilize predictive analytics and IoT sensors to anticipate maintenance needs before they become critical, reducing downtime and associated costs • Collaborative Scheduling: Collaborate with train operators to develop efficient scheduling systems that can minimize wear and tear on the infrastructure • Streamlined Procurement Processes: Streamline procurement processes through the adoption of digital platforms, reducing administrative overheads Reduced Subsidy Need for Operations RB aims to progressively decrease its dependence on subsidies by enhancing operational efficiency, and, consequently, increasing its average cash flows over time. Additionally, the project intends to enable railway 62 undertakings and carriers to run profitable businesses independently, without needing government subsidies. This approach would alleviate the financial strain on the Baltic governments, contributing to the long-term sustainability of the project. Increase Freight Connectivity According to current plans, there is limited connectivity to other modes of freight transportation. A long-term goal for RB should include the expansion of such connection points (e.g., connection to the Rīga port) to attract additional traffic to the line. This would not only support financial and sustainability targets but would also significantly facilitate the unequivocally important shift of freight transportation from trucks to trains. Indicator Unit Target, 2050 Train capacity utilization % 80% Maintenance and asset renewal EUR/route-km per annum 300,000 Last 10-minute punctuality % 98% Passenger train frequency # of trains per day 250 Figure 41: Operational and Financial target objectives for 2050 Some initiatives to increase train capacity utilization could include: • Network Integration: Collaborating with other transport modes (like buses) to ensure seamless connectivity, encouraging more people to use trains • Flexible Pricing: Implementing dynamic pricing strategies for track access charges during off-peak hours in collaboration with train operators to provide lower ticket prices 6.2 Socio–Economic Objectives Reaching financial and operational targets outlined in the previous section is set to enable RB to further increase social well-being and spur economic development through improved connectivity within the Baltic countries and across Europe. Furthermore, it aims to offset the potentially negative financial outcomes with substantial socio-economic benefits. Therefore, targets set for the project refer to both the direct impact of the development and the wider economic benefits attributable to RB over the project’s lifetime (stated in discounted NPV where targets are monetized). m mp mp ransport value chain conomic growth assengers ilitar mo ilit Freight shippers Suppl chain a or mar et integration nvironment Social e uit nvironmental sustaina ilit orridor s nergies Figure 42: Socio-economic objectives overview 63 6.2.1 Direct Socio-Economic Objectives Direct socio-economic targets of the RB project are identified in the context of transport value chains, passengers, freight shippers, the labor market, and the environment. Economic impacts related to the direct socio-economic targets listed below are detailed in the Socio-Economic chapter. Transport value chain impact Players across the transport value chain are expected to be directly impacted by RB due to the ability to operate on the new rail infrastructure connecting the Baltics to the European rail network. To assess the impact on transport operators, targets are outlined for both passenger and freight transport players: • Passenger transport value chain: RB aims to provide state-of-the art rail infrastructure to support both high-speed rails, and regional and night train services across the Baltic region. Consequently, players along the passenger value chain are set to benefit from the induced demand for the service given the benefits it provides for passengers compared to traditional transportation modes. Therefore, RB aims to generate between EUR 0.02 bn and EUR 0.03 bn in passenger transport value chain benefits. • Freight transport value chain players are set to benefit in terms of revenue and profitability from the newly built railway, as a modal shift towards rail is anticipated across the region. Therefore, RB targets to generate between EUR 0.07 bn and EUR 0.09 bn in benefit for carriers. Passenger impacts Passengers are key beneficiaries RB and at the heart of the socio-economic objectives of the project. The introduction of the new railway will impact their daily lives in various ways, including time savings, reduced travel costs, enhanced accessibility, and a decrease in the number of accidents, among aspects. The main socio- economic targets related to passengers are detailed below: • Travel cost savings: limited cost-efficiency and connectivity of public transportation systems often lead to citizens incurring excessive expenses on inefficient commutes. RB aims to provide a competitive service that enables passengers to save by travelling by rail. Therefore, the project aims to realize between EUR 4 bn and EUR 5 bn in travel cost savings. • Time savings: congested roads and limited efficiency of public transportation options curtail the potential productivity of citizens. By providing a reliable and time-efficient alternative, RB aims to achieve EUR 10 bn to EUR 12 bn in net discounted time savings benefits. • Reduction in accidents: RB aims to reduce the annual number of fatalities and severe accidents, alongside the related property damage, by providing a safer option compared to traditional transportation modes. More specifically, the project targets achieving between EUR 2.7 bn and EUR 3.4 bn in accidents and property savings. • Job accessibility: by connecting underserved areas to larger urban centers and offering shorter commuting times, RB has the potential to provide citizens with access to a wider range of job opportunities, thereby enabling them to better meet their employment needs. Therefore, the target for job accessibility benefits is set between EUR 0.13 bn and EUR 0.17 bn. 64  • Leisure accessibility: the newly constructed railway has the potential to enhance accessibility to leisure opportunities, fostering cross-cultural integration, and providing improved access to healthcare services. RB aims to increase non-business-related commutes and thus realize leisure benefits between EUR 2.5 bn and EUR 2.8 bn. • Education accessibility: efficient public transportation enables citizens to gain better access to a wider range of educational opportunities, which in turn may lead to better employment opportunities. Consequently, this is a key objective for RB as it aims to achieve between EUR 0.13 bn and EUR 0.16 bn in education accessibility benefits. Freight shippers Freight shippers are essential market players in the value chain for rail freight. RB aims to provide freight shippers with a more efficient and safer transportation mode that connects the Baltic states with one another and to the rest of Europe. To clearly outline the objectives concerning these stakeholders, they have been categorized into three key areas: time savings, cost savings, and volume expansion. The specific objectives for each category are detailed below: • Cargo time savings: road congestion and inefficient travel modes lead freight shippers to higher interest expenses on capital invested in freight transit. By providing a more connected and efficient alternative, RB aims to realize benefits of between EUR 0.2 bn and EUR 0.3 bn in cargo time savings. • Shipping cost savings: freight shippers often incur substantial costs related to environmental, stockholding, and insurance expenses, among others, when transporting cargo over medium to long distances. RB aims to provide a safer and cost-competitive transportation option with the target of achieving a benefit between EUR 0.8 bn and EUR 1 bn for freight shippers in shipping cost savings. • Reduction in accidents: RB aims to reduce the annual number of severe freight-related accidents, alongside the related property damage, by providing a safer option. More specifically, the project aims to achieve between EUR 0.07 bn and EUR 0.09 bn in accidents and property savings. • Trade volume expansion: an increase in induced trade flows in the region has a direct positive impact on freight shippers as they can increase revenues and benefit from additional capacity and network flexibility. RB has the potential to generate such an increase in trade volume and aims to realize between EUR 0.10 bn and EUR 0.14 bn in benefits for freight shippers. Labor market RB is set to be the largest infrastructure undertaking in the Baltic States in over 100 years and, as such, will support the local economy by providing a substantial supply of employment. As for RB employees, 4.3% of them are expected to be hired from the ranks of the unemployed. Additionally, a further 45% of RB employees are expected to experience an average salary increase of 43%. Therefore, RB aims to foster employment growth and is projected to generate an incremental labor benefit valued between EUR 0.19 bn and EUR 0.25 bn. Environment Transportation modes significantly impact the environment, and a shift towards greener alternatives will play an important role in achieving policy objectives to move towards a more sustainable future. In particular, the 65 EU aims to achieve carbon neutrality by 2050 and, as an important step in that direction, it has decided to ban the sale of gasoline and diesel-powered vehicles 2030. RB is designed in alignment with the ’s o jectives and has environmental sustainability at the center of its strategy. Specific socio-economic objectives of RB in this respect are outlined considering GHG emissions, noise pollution, and air pollution: • GHG emissions: traditional modes of transport depending heavily on combustion engines have contributed over time to the acceleration of climate change by fostering a rapid increase in GHG emissions. RB is set to be powered entirely by renewable electricity and provide a greener alternative to transportation methods based on the use of internal combustion engines. The RB project aims to reduce GHG emissions through a modal shift towards rail and consequently to realize between EUR 2.7 bn and EUR 2.9 bn in net GHG cost reduction. • Noise pollution: combustion engine vehicles and public transportation systems contribute towards increasing noise pollution in cities, impacting the well-being of the residents. RB tracks are primarily planned to be situated at a considerable distance from densely populated areas, while the implementation of noise barriers alongside railways further mitigates the impact of vibrations and noise compared to traditional transport modes. This is further supported by the absence of a motorway system in Estonia and Latvia causing increased traffic near households. By reducing noise pollution through a modal shift to rail, RB plans to achieve between EUR 0.5 bn and EUR 0.6 bn in net noise pollution cost reductions. • Air pollution: traditional modes of transport, relying heavily on the combustion of fossil fuels, emit harmful pollutants such as nitrous oxides, particulate matter, and volatile organic compounds into the air, degrading air quality and posing a serious health risk to both urban and rural populations. RB aims to provide a less harmful alternative and, therefore, to realize a net air pollution cost reduction of between EUR 0.2 bn and EUR 0.3 bn. 6.2.2 Wider Socio-Economic Objectives Wider socio-economic objectives of RB are categorized based on the project’s potential impact as identified in the WEI analysis. This analysis, which is detailed in a separate section in this report and distinct from the ECBA calculations, offers insights into additional economic and strategic benefits not fully captured in the ECBA. The following chapter will delve into RB’s wider objectives related to economic growth, social equity, military mobility, and environmental sustainability. Economic Growth Rail development has the potential to enable economic growth in its catchment area30. RB aims to create additional GDP growth in the Baltics states through positive induced effects on the local economies. To achieve such economic benefits, RB has set specific objectives pertaining to the various drivers of economic growth. More 30 See the Assumptions chapter for a detailed explanation of the RB Catchment Area 66 specifically, the project has established targets for land value appreciation, tourism, business innovation, increased market competition, inflows of new residents, and enhanced productivity. The targets are outlined below: • Land value appreciation: rail infrastructure projects like RB have the potential to enhance connectivity in rural regions, thereby boosting underserved economies and leading to an increase in land and property values along the railway. RB aims to achieve land value appreciation impacted rural areas. • Tourism and hospitality: tourism and hospitality represent important economic drivers that may boost local economies’ GDP. In this context, RB could aim to boost both tourism to and from Europe and flows between the Baltic states. • Business creation and innovation: innovation and new business creation are essential components in economic development as they boost competition and enhance productivity. RB aims to foster innovation across the Baltics alongside the formation of new businesses along the railway and in the stations. • Productivity: as a main driver for economic development, enhanced productivity represents a key step in achieving GDP growth in the Baltics. RB aims to increase productivity in the region by leveraging agglomeration economies and providing a more efficient and greener mode of public transportation. • Inflow of residents: by connecting remote regions to economic centers, rail infrastructure projects can unlock broader employment and service access, leading to improved living standards. RB aims to increase the inflow of residents in the Baltic Region. • Market competition: by providing a more efficient alternative to traditional transport modes, RB aims to increase market competition in transportation. This could lead to an increase in service standards and competitive pricing dynamics. Social equity The RB project aims to advance social equity by providing affordable and sustainable transportation, especially for communities with inadequate public transportation. To accomplish such an ambitious objective, RB has set specific targets according to the three main drivers of social equity, namely accessibility, affordability, and social closeness. The detailed targets are outlined below: • Accessibility: accessibility for reduced mobility passengers is an aspect that is frequently neglected in public transportation despite its importance for social inclusion. RB aims to stand out in this regard by providing an accessible service for reduced mobility passengers in the Baltics. • Affordability: public transportation is broadly designed to be accessible, catering to the needs of a diverse population by linking various areas, including urban and rural locations. It is particularly vital for individuals with lower incomes have access to affordable but enhanced services and to opportunities in urban centers. RB seeks to improve this accessibility for all income groups, providing a cost-effective and well-connected travel option in urban, suburban, and rural areas. • Social closeness: accessible rail systems play an important role in providing equitable access to education and enhancing employment opportunities. RB aims to facilitate social connectivity by encouraging residents to pursue university education, thanks to improved accessibility to urban centers. 67 Military mobility Alignment to the European 1435 mm rail network poses an opportunity for RB to enhance the military logistics strategy in the region. RB is dedicated to enhancing military mobility in the region, both during peacetime and in an armed conflict. To assess RB’s military mobility objectives, they have been categorized based on the time efficiencies gained and the increased transport capacity for both passengers and freight. The detailed description of the specific objectives is outlined below: • Military transport time savings: enhanced efficiency provided by RB aims to reduce transit times in peacetime as well as in an emergency situation for both passengers and freight. • Increased civilian movement capacity: railways by design can efficiently and safely move significant amounts of passengers between destinations. In the event of an armed conflict, RB aims to provide efficient transport between the Baltic capitals and the Polish border for both residents and strategic goods. • Increased freight transport capacity: transporting large amounts of cargo such as heavy military equipment and emergency supplies over long distances is a challenge for military logistics planning when considering the efficiency and capacity of other modes of transportation. RB aims to provide an efficient alternative with superior transport capacities. Environmental Sustainability As the EU is transitioning to renewable energy sources to achieve carbon neutrality by 2050, Baltic states aim to limit their reliance on fossil fuels. This move would also enable the region to achieve a higher degree of energy security. RB aims to contribute to this goal as the wider economic impact of the project extends to several aspects of environmental sustainability: • Reduced demand for fossil fuels: As RB aims to capture a portion of the demand for transport in the region by providing a greener source, it delivers an induced reduction in fossil fuels. • Induced renewable investment: RB plans to operate entirely on renewable electricity. This will lead to an increased demand for such electricity in the Baltic region. Consequently, the project aims to stimulate investments in the region to meet the electricity needs of RB for renewable electricity. • Replacing short-haul flights: An integral part of RB's sustainability objectives is to serve as an efficient alternative to short-haul flights in the region. By providing a rapid, reliable, and environmentally friendly mode of transport, RB aims to enable the limitation of these flights, leading to a further decrease in carbon emissions. In conclusion, objectives defined for RB serve as critical cornerstones for the CBA framework. They provide essential dimensions against which the project's effectiveness and impact can be measured. This alignment ensures that the CBA is not just a financial evaluation, but a comprehensive assessment of how well Rail Baltica meets its intended goals and contri utes to roader o jectives. his approach underscores the project’s commitment to delivering a financially viable project fulfilling its strategic objectives while generating tangible added value for the region. The next chapter on RB's project specification defines how the project is planned and structured to achieve the objectives outlined above, detailing its key components, phases, and resources. 68 7 Project Specification This chapter provides a detailed overview of the key project specifications required for fulfilling the objectives outlined in the previous chapter, across five key dimensions. Project specifications encompass the analysis of the governance structure, ensuring effective management and accountability throughout the project lifecycle. Further, the geographic scope details the areas covered by the project, while technical design description lays out the infrastructure and technology integral to operational success. A project timeline and phased delivery approach is outlined to establish a clear progression roadmap. Finally, detailed section plans and information on ongoing developments is provided, informing about continuous advancements. 7.1 Project Governance The governance structure of Rail Baltica, a complex, cross-border project jointly implemented by Estonia, Latvia, and Lithuania, plays a pivotal role in its execution. The project's governance framework includes beneficiaries, a central project coordinator, and national implementing bodies, reflecting the intricate collaboration between the three Baltic states (please see the following figure). Project beneficiaries consist of the respective ministries of each country namely the Estonian Ministry of Climate, the Latvian Ministry of Transport and the Lithuanian Ministry of Transport and Communication. In 2014 the Baltic ministries established a joint venture, RB Rail AS, to act as the central project coordinator in charge of ensuring the successful completion of RB. The shares of RB Rail AS are divided equally between Estonian Ü Rail Baltic stonia, atvian SI “ iropas zelzceļa līnijas” and ithuanian B RB Statyba owned by Lietuvos eležin eliai B. Estonian OÜ Rail Baltic Estonia is a 100% state-owned capital company, represented by the inistr of limate of the Repu lic of stonia. SI “Eiropas Dzelzceļa līnijas” is a 00% state-owned capital compan , represented the inistr of ransport of the Repu lic of atvia. ietuvos eležin eliai B is a state-owned group of cargo, passenger transport and infrastructure management companies in Lithuania, 100% owned by the Republic of Lithuania, represented by the Ministry of Transport and Communications of the Republic of Lithuania. 69 Rail Baltic Estonia OÜ in stonia, SI “ iropas zelzceļa līnijas” in atvia, and LTG Infra AB31 in Lithuania are the national Implementing Bodies. All construction carried out by implementing bodies is done under the supervision of RB Rail and is based on common procurement principles, rules and contract templates. Figure 43: RB governance structure In conclusion, understanding the governance structure of RB is crucial for grasping the project's collaborative and operational dynamics. The outlined governance structure enables implementation though adapting to the complex, cross-border geographic scope of the project. The next section is identifying the geographic scope of the project within the Baltic region. 7.2 Geographic Scope Building on the understanding of Rail Baltica's governance structure from the previous chapter, this section defines the project's geographic scope. The geography of Rail Baltica is not only a physical demarcation of its reach but also a reflection of its strategic objectives and operational planning within the governance framework. While RB is planned to extend from Tallinn to Warsaw, this study specifically focuses on the Rail Baltica Global Project, which refers exclusively to the sections within the Baltic states as the European standard rail infrastructure is missing from these countries. 31 LTG Infra AB is also 100% state-owned and associated company of ietuvos eležin eliai B . 70 Rail Baltica Global Project spans across Estonia, Latvia, and Lithuania, intricately linking major cities including Tallinn, Pärnu, Rīga, anevež s, Kaunas and Vilnius. At its core, Rail Baltica aims to integrate the Baltic states into the European standard railway system, transitioning from the current 1520 mm gauge to the standard 1435 mm gauge. This necessitates the development of a new track within the Baltic region, creating a seamless standard gauge connection to Poland and the broader European network. To provide access to the line for passengers and freight, project is expected to include the construction of 7 international and 47 regional passenger stations32, as well as 9 freight terminals, enhancing connectivity and fostering economic development across the region. Each country is set to have over 10 stations, significantly boosting both international and regional integration: Estonia: • International passenger stations: Tallinn, Ülemiste and Pärnu • Regional passenger stations: Assaku, Luige, Saku, Kurtna, Kohila, Rapla, Järvakandi, Kaisma, Tootsi, Kilksama, Surju, Häädemeeste • Freight terminals: Muuga, Soodevahe, Pärnu Latvia: • International passenger stations: Rīga entral R S and Rīga irport RI • Regional passenger stations33: Saurieši, ūja, Salaspils, Slāvu tilts, orņa alns, Zasulau s, Imanta, Jaunmārupe, laine, Ķe ava, Baldone, Iecava, Baus a, Salacgrīva, S ulte, Vangaži • Freight terminal: Salaspils Lithuania: • International passenger stations: anevėž s, Vilnius, Kaunas main station • Regional passenger stations: maliai, Joniš ėlis, Kėdainiai, asraučiai, Ručiūnai, Kazlų Rūda, Vaš ai, Šešto ai, oc ava, Kaunas airport K N , Neveron s, Jonava, Jonava stop, alemonas, Kaišiador s, Vievis, entvaris, arijampolė, Vilnius airport • Freight terminals: anevėž s, alemonas, arijampolė, Vilnius, Šešto ai Overall, the outlined geographic scope of RB Global Project clearly demonstrates its ambitious goal to connect the Baltic states with the larger European rail network. Consequently, the next section details the technical design of RB across its mainline and point type objects. 32 Additionally, there is a facility located at the Lithuania-Poland border. However, it is not classified as a passenger station, as it does not allow passengers to board or disembark. 33 In addition to RB stations, and financial anal sis calculations also include Āgens alns, a station planned on the 1520 mm network only, with a negligible impact (CAPEX of under EUR 5 mn and annual revenue of under EUR 0.1 mn). List and naming of passenger stations and freight terminals is subject to change during final design stages. 71 7.3 Connectivity to Adjacent Transport Infrastructure Building on the outline geographic scope of RB, this section analyzes the connectivity of the new railway line to adjacent transport infrastructure. Links to rail, air, water and road transport enable stations and terminals to integrate with surrounding networks, creating multimodal hubs that enhance connectivity and efficiency for passengers and freight. The Rail Baltica line features nine freight terminals spread across three countries, with eight dedicated solely to freight and one, Šešto ai Station, serving oth freight and passenger needs. dditionall , the line includes 54 passenger facilities, encompassing international and regional passenger stations. As for Rail-to-Rail connectivity, desktop research and RB Rail team input confirmed there are already stations in several cities where Rail Baltica project plans to have stations and freight terminals. Based on already existing plans, there are 2 freight terminals and 6 stations with planned connectivity to existing rail networks. However, based on the desktop research conducted and alignment with RB Project team there are 4 additional freight terminals with potential Rail-to-Rail connectivity and 12 stations in addition to the planned 6 with Rail-to-Rail potential. Connectivity potential is assessed based on other train stations or terminal availability within the same city; however, distance from RB planned stations is not assessed. Rail-to-Air connection is analyzed based on the availability of airports in given cities. According to this aspect, there are 4 passenger stations (in Tallinn, Rīga, Vilnius, and Kaunas) with flight connectivity opportunities. At the time of the evaluation, only Riga Airport has a direct connection between the airport and railway terminals to ensure Air to Rail service. Vilnius airport also has this potential; however, it is dependent on future development plans. Handling air cargo and its initial or subsequent rail transportation is possible in all Baltic countries. In the case of stonia, Soodevahe dr port can e used for this as it’s close to allinn airport. Rail-to-Water connectivity is researched based on availability of ports in analyzed cities. With this assumption and assessed potential, there are 2 freight terminals (in Muuga and Pärnu) with water transportation related connectivity opportunity and 3 passenger stations (in Pärnu, Salacgrīva and S ulte . Rīga has the potential for water connection, however it is not considered at the current state. Regarding Rail-to-Road connections, all stations and freight terminals are assumed to have the potential to be reached by road-based transportation methods. On the long term, the assumption is taken that infrastructure for road transportation can develop and adapt to the routes and stops of Rail Baltica. The connectivity map for Rail Baltica outlines the integration potential at planned freight terminals and passenger stations, revealing a strong capacity for linking with existing rail networks. This analysis not only identifies current stations and terminals in cities where Rail Baltica will have a presence, but also highlights the need for further evaluation to ascertain the feasibility, cost-effectiveness, and benefits of establishing these connection points. By effectively leveraging this potential, Rail Baltica could significantly enhance long-term demand for the line and notably improve mobility across the region. The figure below represents the connectivity potential of these stations and terminals, further details on the list of facilities can be found in the Geographic Scope section. 72 Figure 44: Connectivity of Rail Baltica 73 In addition to bolstering local connections, RB places a significant emphasis on establishing seamless international connectivity to fully realize its infrastructural potential. Several key aspects are crucial in achieving this goal. Firstly, operational harmonization is essential, particularly in aligning standards with neighboring countries such as Czechia, Slovakia, and Poland. Physical connectivity is another critical factor, encompassing the alignment of track gauges and train control systems, along with ensuring the interoperability of electrical systems between countries. Digital integration also plays a vital role, especially in providing unified customer information and ticketing services, and in achieving technological consistency across national borders for a seamless passenger experience. Additionally, the simplification and streamlining of customs processes are imperative to facilitate the smooth transit of freight and passengers across international boundaries. By focusing on these areas, RB can enhance its connectivity and maintain operational consistency with other countries, strengthening its position as an effective transport corridor in the region. Exploring the expansive connectivity goals of RB highlights the project's potential impact on regional integration and growth. The Technical Design section that follows provides an overview of the design elements critical to making this vision a practical and innovative reality. 7.4 Technical Design To understand the details of the constructed infrastructure with respect to the geographic scope of Rail Baltica, this chapter explores how the technical design is intricately linked to the geographic dimensions outlined in the previous sections. The technical design is a crucial component that ensures project feasibility and efficiency across its extensive geographic spread, addressing infrastructure, technology, and operational aspects of Rail Baltica's successful implementation. RB Global Project is engineered to extend approximately 909 km across four countries, featuring a design speed of 249 km/h for passenger trains and 120 km/h for freight trains. This railway adopts the 1435 mm European standard gauge and incorporates a double-track electrified rail system operating at 2x25 kV AC34. In addition to the mainline, the technical design of RB includes a variety of structural elements such as bridges, tunnels, and Point Type Objects (PTOs). PTOs encompass key infrastructure components like international passenger stations, regional passenger stations, freight terminals, and infrastructure maintenance facilities including depots. The project's technical designs are subdivided into 12 sections. The following section will examine the specifications of these designs on a country-by-country basis to better understand the current state of development. Estonia Rail Baltica crosses Estonia over approximately 214 km, comprising 23% of the railway's entire length. The Estonian section includes 14 stations, with international stations in Tallinn and Pärnu, alongside three freight 34 Alternating current at 25 kilovolts 74 terminals and three infrastructure management facilities. Additionally, this segment encompasses 26 bridges and two tunnels, which make up two-thirds of the railway's total tunnel passages. Figure 45: Estonia technical design overview (RBR Project Controls Estimation Team input) Latvia Rail Baltica spans 263 km through Latvia, constituting 29% of the railway's total length. This section includes 18 stations, featuring two international stations in Rīga and Rīga Airport, along with one freight terminal and three infrastructure management facilities. Latvia also hosts one tunnel and 50 bridges, which constitute approximately 46% of the total number of bridges on the route. Figure 46: Latvia technical design overview (RBR Project Controls Estimation Team input) Lithuania The remaining 432 km of Rail Baltica crosses through Lithuania, making up 47.5% of the railway's total length. This section features 22 stations, including international ones in Vilnius, anevėž s, and Kaunas main station. 75 Additionally, Lithuania includes five freight terminals and four infrastructure management facilities, the highest among the three Baltic countries. The country also features 23 bridges. Figure 47: Lithuania technical design overview (RBR Project Controls Estimation Team input) To understand the details of implementing the infrastructure described in this section, the next section focuses on construction timeline and phased delivery. 7.5 Timeline and Phased Delivery Implications Following the overview of the technical design, this chapter outlines the scheduled timeline and the structured phases of construction, essential for the physical implementation of the project's technical planning. The timeline for the project is structured into six distinct steps, each representing a key phase in the process: procurement, design, land acquisition, permits and assessments, construction (differentiated between mainline and PTO construction), and testing and commissioning (see figure below). Procurement phase includes the selection of manufacturers and suppliers and the finalization of contracts, ordering materials for timely delivery. On average, for RB, it takes ~3 years and partially can take place parallel with other activities, such as design or land acquisition. Design phase transforms the initial concepts into engineering blueprints and provides technical specifications for the railway infrastructure, laying the groundwork for construction. For RB it takes on average ~5 years, however, similarly to the earlier mentioned procurement activity it can overlap with other activities and can take place in parallel with them. Land acquisition involves a detailed and extended process, encompassing thorough site surveys and negotiations for land procurement. This process ultimately leads to obtaining legal clearance, ensuring compliance with regulatory standards. On average, it takes ~4 years. Permits & assessments includes the assessment and mitigation of environmental impacts and the acquisition of necessary permits; public consultations are also conducted in this phase to align the project with the community and environmental standards. The average time needed for this phase is ~4 years. The key phase within the construction period is the construction phase itself, which includes site preparation, establishing essential infrastructure and facilities, and laying the groundwork for the operational setup of the railway. On average, this phase takes ~6 years, and as all other listed phases, it may also overlap with other steps. 76 Finally, the last phase is testing & commissioning, which includes comprehensive system testing and safety checks, culminating in operational trials and the final commissioning of the railway, upon satisfying all regulatory criteria. This is one of the shortest phases, on average it takes ~2 years. Figure 48: Project phases and their average duration (based on RBR CMR department) As several activities are carried out in parallel, this makes the project delivery shorter, than the sum of average years within the construction period. Therefore, overall completion is expected by 2030. After understanding the key phases during the construction period, on the following figure the proposed project completion timeline is introduced for providing an overview on the project phases on section level breakdown. The proposed project timeline is outlined in the figure below. 77  Section Construction phases Year Country From To # Construction activity 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 EE Tallinn Rapla 1 Procurement 2 Design 3 Land acquisition 4 Permits and assessments 5 Mainline construction 6 PTO construction 7 Testing & commissioning EE Rapla Pärnu 1 Procurement 2 Design 3 Land acquisition 4 Permits and assessments 5 Mainline construction 6 PTO construction 7 Testing & commissioning EE Pärnu EE/LV Border 1 Procurement 2 Design 3 Land acquisition 4 Permits and assessments 5 Mainline construction 6 PTO construction 7 Testing & commissioning LV EE/LV Border Vangaži 1 Procurement 2 Design 3 Land acquisition 4 Permits and assessments 5 Mainline construction 6 PTO construction 7 Testing & commissioning LV Mainline through Rīga 1 Procurement 2 Design 3 Land acquisition 4 Permits and assessments 5 Mainline construction 6 PTO construction 7 Testing & commissioning LV Vangaži Salaspils/Misa 1 Procurement 2 Design 3 Land acquisition 4 Permits and assessments 5 Mainline construction 6 PTO construction 7 Testing & commissioning LV Misa LV/LT Border 1 Procurement 2 Design 3 Land acquisition 4 Permits and assessments 5 Mainline construction 6 PTO construction 7 Testing & commissioning LT LV/LT Border Ramygala 1 Procurement 2 Design 3 Land acquisition 4 Permits and assessments 5 Mainline construction 6 PTO construction 7 Testing & commissioning 78  Section Construction phases Year Country From To # Construction activity 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 LT Ramygala Kaunas 1 Procurement 2 Design 3 Land acquisition 4 Permits and assessments 5 Mainline construction 6 Point type object construction 7 Testing & commissioning LT Kaunas Urban Node 1 Procurement 2 Design 3 Land acquisition 4 Permits & assessments 5 Mainline construction 6 PTO construction 7 Testing & commissioning LT 1 Procurement Kaunas Vilnius Urban 2 Design Urban Node Node 3 Land acquisition 4 Permits & assessments 5 Mainline construction 6 PTO construction 7 Testing & commissioning LT Jiesia LT/PL Border 1 Procurement 2 Design 3 Land acquisition 4 Permits & assessments 5 Mainline construction 6 PTO construction 7 Testing & commissioning Figure 49: Proposed project completion timeline (based on RBR CMR department) The present timeline outlines the planned schedule for the RB project, targeting the full completion of the Rail Baltica project by 2030. For the subsequent analysis in this document, it is assumed that operations will start concurrentl across the entire line from 203 . In practice, RB’s construction follows a phased approach, where different segments of the project will be completed at different stages before the overall project's completion in 2030. The capital expenditures are distributed over a nine-year period, from 2022 to 2030. A detailed breakdown of this allocation can be found in the CAPEX Phasing subsection. Additionally, it is crucial to recognize that potential delays to construction and operation represent a great risk for RB. This risk is discussed in greater detail in the Risks and Mitigation section within the Risk and Regulatory chapter. Concluding the chapters on project context, objectives, and specification, the first part of the report provided a foundational understanding of the project's environment, aims, and structural plans. These elements form the asis for the ne t chapter on B assumptions, closel connected to RB’s characteristics as previousl outlined, providing a critical framework for evaluating the project's feasibility and impact. This connection ensures the B is grounded in the project’s specifics, allowing for an accurate and meaningful assessment of RB’s potential enefits and costs. 79 8 Assumptions Building upon insights from the previous chapters regarding project context, objectives, and specifications, this chapter introduces assumptions for the parameters representing this environment in the traffic demand model and the cost-benefit analysis (CBA) for Rail Baltica. These assumptions adhere to EU guidelines where relevant and are grounded in context-specific research, including proprietary databases, benchmarking, interviews, and insights from industry experts. Key assumption categories for the CBA include core, operational, financial, socio-economic, transport mode characteristics, and environmental assumptions. Each category is essential in providing a comprehensive and realistic framework for the CBA, ensuring that the analysis is both robust and reflective of the project's unique context and objectives. Assumptions used for traffic demand forecasting and financial and economic analyses are also provided in the report's respective chapters. 8.1 Core Assumptions This section outlines general input definitions employed to establish the CBA framework, including price level assumptions, discount rates, reference period, geographic scope, and catchment area. 8.1.1 Price Levels All prices employed in both the financial and economic analyses are real prices in euros as of the end of 2023, in alignment with EU guidelines (European Commission, 2021a). 8.1.2 Financial Discount Rate When evaluating investment opportunities in the Baltic states, it is crucial to have a financial discount rate specific to the region. The graph below presents the components that contribute to the calculation of the financial discount rate (FDR) for Estonia, Latvia, and Lithuania. The cost of debt is influenced by factors such as the corporate tax rate and the cost of debt itself, resulting in an after-tax cost of debt of 4.8%. The cost of equity is derived from parameters like the 10-year bond yield, country-specific risk premium, default spreads, equity risk premium, and the beta. Furthermore, the FDR calculation considers the capital structure, with debt constituting 10% (D/(D+E)) and equity making up 90% (E/(D+E)). This leads to a Nominal Weighted Average Cost of Capital 80 (WACC) of 10.22% and a real WACC of 8.04%. This ensures a more accurate and regionally relevant valuation of investments in the Baltic states, accounting for their unique financial landscapes. Figure 50: RB financial discount rate 8.1.3 Social Discount Rate The social discount rate (SDR) is a concept used in economic analysis to assess the intertemporal value of future costs and benefits. It reflects the opportunity cost of capital from a societal perspective, and thus represents the social view of how future benefits and costs should be valued relative to present ones. Consequently, any discount rate entails a judgment about the future and affects the weight given to future benefits or costs. If the social discount rate is set to zero, it is assumed that the utility derived from an investment is independent of the time of occurrence. Consequently, this means that consumption today is valued in the same way as consumption tomorrow. Alternatively, if the discount rate employed is positive, this entails a preference for present over future consumption. The opposite is true for negative social discount rates. From a theoretical standpoint, under equilibrium in a perfectly competitive economic environment, the social and financial discount rates are equal and equate to the interest rate observed in financial markets. Nevertheless, this is not the case in practice given the distorted nature of financial markets. The discount rate employed in this report is outlined in this subsection alongside the corresponding methodological approach. Selected SDR The social discount rate employed to assess the present value of costs and benefits generated by RB Global Project is 4.41%. This value is estimated by adopting the social rate of time preference (SRTP) approach (Catalano & Pancotti, 2022) proposed by the Guide to Cost-Benefit Analysis of Investment Projects (European Commission, 81 2014a) and Economic Appraisal Vademecum (European Commission, 2021a). The SRTP approach follows the formula from the Ramsey economic growth model (1928) outlined below: 𝑆𝑅𝑇𝑃 = 𝑝 + 𝑒 ∗ 𝑔 where 𝒑 indicates the pure time preference, 𝒆 is the marginal utility of consumption and 𝒈 is the expected consumption growth rate per capita. The model reflects the lower value of future vis-à-vis present consumption through the consumption growth variable and the pure time preference. The pure time preference 𝒑 employed for the RB project is the annual crude death rate for each of the Baltic countries, namely Estonia, Latvia, and Lithuania in 2019. This year is selected to avoid the idiosyncratic shock of the COVID-19 pandemic as it is believed to be a more accurate proxy of the future mortality rate in the region. The elasticity of marginal utility with respect to consumption 𝒆 anal zes the evolution of consumers’ utilit over time, derived from national taxation preferences. More specifically, it captures the decreasing marginal utility of consumption as wealth increases. For RB, the elasticity for each of the Baltic countries in 2019 is employed to ensure consistency with the estimate employed for the pure time preference parameter. Expected consumption growth per capita 𝒈 is estimated for the reference period of the RB project, taking as a proxy the GDP per capita growth of each country, in alignment with the Guide to Cost-Benefit Analysis of Investment Projects (European Commission, 2014a). Applied forecasts refer to S&P Capital IQ estimates as of September 2023, representing an up-to-date projection on per capita GDP growth (S&P Capital IQ, 2023). For each of the Baltic countries, the formula above is applied, resulting in a country-specific estimate of the SDR. Consequently, the three estimates are combined to have a Baltic SDR for the project via the weighted average of the respective catchment area GDPs. Alternatives to the Employed SDR Several potential alternatives to the SDR employed in the study are considered in the process of identifying an appropriate rate for the project. The 2017 CBA report for RB Global Project employs 5% as SDR based on a European average rate proposed by the Guide to Cost-Benefit Analysis of Investment Projects (European Commission, 2014a). To reflect varying economic conditions in the EU, the Economic Appraisal Vademecum (European Commission, 2021a) outlines that in absence of national values a generalized 3% SDR can be employed. This rate is applied in several similar studies, such as the cost-benefit analysis of the Three Seas Initiative in Poland (2023) or the Naples – Bari railway project in Italy (Venezia, 2023). Furthermore, to account for the regional context when calculating the discount rate, the Economic Appraisal Vademecum also proposes the usage of social discount rates defined at the national level. The study provided by the document (Catalano & Pancotti, 2022) estimates an average SDR for the Baltic states at 7.37%. This rate, however, is based on the mortality rate for 2020, which is affected by the impact of the COVID-19 pandemic, and a relatively high historical GDP per capita growth (2002-2021), ranging between 4% and 5% across the Baltic countries. The European Investment Bank, for projects within the EU, typically references a real social discount rate of between 3.5% and 5.5%, adjusted to the maturity and growth rate of the national economy. While these rates are 82 country-specific, deviations can be justified if national circumstances warrant it. However, project-specific characteristics alone do not justify a deviation from this 3.5% to 5.5% range. In this context, the approach for RB is developed to reflect GDP per capita forecasts for the project's reference period, as detailed in the preceding chapter, to determine the most suitable SDR for this analysis. The applied SDR is strongly supported by both relevant guidelines and similar infrastructure project benchmarks. 8.1.4 Useful Economic Life and Reference Period The reference period for the economic appraisal of RB is set at 81.2 years, spanning from 2024 to 2105, based on the weighted average useful life of the railway infrastructure. Specifically, costs and benefits for RB are modeled over a 50-year operational period until 2080 and a 7-year construction period (2024-2030), with subsequent cash flows aggregated and discounted for the remaining years. The determination of this reference period follows EU guidelines and is derived from the useful life of assets (74.2 years), influenced by capital expenditure (CAPEX) distribution and life expectancy assumptions specific to RB. These assumptions include: • civil assets worth EUR 14.0 billion with a 100-year lifespan, • other railway system assets valued at EUR 2.1 billion with a 40-year lifespan, and • technical components worth EUR 3.3 billion expected to last 30 years. 8.1.5 Residual Value The residual value of the RB project assets is calculated using the depreciation formula outlined in EU guidelines. This involves adjusting the asset value by adding back all maintenance costs and deducting depreciation from the expected book value at the end of the assets' useful life. The original real value of the assets is considered fully preserved at the end of the useful life due to the balance achieved through asset renewal (48%) and maintenance (52%). As a result, depreciation is effectively offset, ensuring that the asset's value at the end of its useful life equates to 100% of its original real value. This approach to calculating residual value is integral to the overall economic assessment of the RB project. Furthermore, as the infrastructure is forecasted to generate negative cashflows, all future cashflows are added until the end of the useful lifetime alongside economic benefits, also in line with applied CBA guidelines of the EU. 8.1.6 Geographic Scope and Catchment Area Geographic Scope of CBA Study The geographic scope of the study is defined to enable the accurate measurement of the impact of RB, based on passenger and freight flows within the Baltic countries. In particular, the approach allows the measurement of local benefits and the impact of integrating the Baltic rail network with Poland and Europe, while RB trips occurring within Poland are not considered to be reflected in the scope of RB Global Project. The framework to define the boundaries of project impact in the transport ecosystem is tailored to the characteristics of passenger and freight transportation. Passenger trips are considered if at least the origin or the destination is in Estonia, Latvia, or Lithuania. Due to traffic modeling considerations, freight flows are estimated based on territorial principle, i.e., only traffic (in tkm) occurring within the geographic boundaries of the Baltic states are considered for benefit calculations. To calculate these trips, the traffic demand model accounts for RB 83 passengers and freight from all origins and destinations globally (with estimation granularity respecting the distance from the focus region), post-processed and filtered to respect the boundaries of CBA calculations. Further, passenger catchment areas are defined on three layers to understand the geographic characteristics of the underlying passenger market. This area is highly dependent on distance and the willingness of people to travel to gain access to a certain service (Guerra, Cervero, & Tischler, 2011). Local catchment areas include potential passengers in the direct proximity of stations, while regional catchment area includes a wider range of population within driving distance from stations. The international catchment area represents urban hubs in Europe with connectivity to RB through Warsaw, Vilnius, or Tallinn. Finally, a broader interpretation of the freight catchment area is outlined to provide insights into freight corridors with the highest potential for the North-South axis. Local Passenger Catchment Area This area encompasses the main urban areas with RB stations and the surroundings of the smaller regional stations connected by RB. For cities with regional stations and a population exceeding 25,000, the entire population is included in the catchment area, while in smaller cities, a 4.8 km radius is used, regarding this as a feasible distance to travel on foot or by bicycle (dependent also on weather conditions). This methodology is further supported by academic studies (Brinckerhoff, 1996; Upchurch, 2004) detailing the use of a Euclidian surface buffer around stations to delimit the catchment area by estimating a reasonable distance people are willing to commute. The combined local catchment area encompassing all station stops is projected to reach a population of 521,958 for Estonia, representing 40% of the total population, 841,892 for Latvia, representing 45% of the total population, and 1,796,581 for Lithuania, representing 66% of the total population. This yields a total local catchment area of 3,160,431 people for all three Baltic states combined accounting for 53% of the total population. The following table presents a summary of the local catchment area for each country, including the aggregated population of cities as of the end of 2023. 84 Estonia Latvia Lithuania City p C y p C y p Tallinn 4 3, 4 Rīga 4, 7 Vilnius ,47 Pärnu 2,3 2 Imanta3 42, 02 Kaunas 30 , 20 Saku35 , 0 Salaspils 7,702 anevėž s 7, 3 Kohila35 7,72 laine 0,0 4 arijampolė 3 , 07 Rapla ,3 3 Baus a ,7 2 Jonava 27, 34 Häädemeeste35 4, 77 Zasulau s3 ,30 Kėdainiai 23,447 Luige37 ,337 orņa alns36 ,0 entvaris , 0 Järvakandi37 , 7 Iecava ,3 Kaišiador s , 0 Tootsi37 774 Ķe ava , Kazlų Rūda , 07 Soodevahe37 73 Baldone 3,70 Vievis 4,2 4 Muuga37 3 Vangaži 3,237 Neveron s37 2, 72 Assaku37 4 Jaunmārupe37 3, 02 Joniš ėlis 77 Kilksama37 42 S ulte35 2, 7 Šešto ai37 Kurtna37 3 4 Salacgrīva 2,4 Vaš ai37 4 Surju37 2 Saurieši37 ,732 Ručiūnai37 74 Kaisma37 0 ūja37 304 maliai37 Slāvu tilts3 n.a. oc ava37 0 asraučiai37 2 alemonas n.a. Sub-total 541,730 680,487 1,094,828 % of country 40% 3 % 3 % Total Baltics 2,317,045 % of Baltics 3 % Figure 51. Share of population within local catchment area (Statistics Estonia, National Statistical System of Latvia, Statistics Lithuania, City Population, 2023) 35 Population data refer to the rural municipality. 36 art of Rīga, population is alread accounted for in Rīga ur an population. 37 As of 2021, being the most recent available data. 85 Regional Passenger Catchment Area The second level considered for the purpose of defining a catchment area encompasses a wider area surrounding RB stations in the Baltics, Finland, and Poland, with a commute of up to 1 hour by car, bus, or train. This is deemed as a reasonable commute for underserved areas and thus in line with the Euclidian buffer methodology. The regional catchment area within the Baltic states has an estimated population of around 4.8 million people, representing approximately 77% of the total population. Of this total, 44% live in the cities of Pärnu, Tallinn, Rīga, Vilnius, Kaunas, and anevėž s, e cluding their su ur an and metropolitan areas. he remaining % live in the suburban and metropolitan areas of these larger cities, as well as in smaller cities and rural areas. A country-by-country breakdown of the population is presented in the table below: m p % C y m p p stonia ,3 4 4,0 2 ,0 ,447 7 % ativa ,37 0, 7 ,2 , 2 % ithuania ,4 ,4 , 2,47 ,4 4 % T 2,636,150 2,141,274 4,777,424 77% Figure 52. Share of population within regional catchment area, Consultant team analysis based on Eurostat (2023b) 86 Metropolitan areas alone account for a combined 53% of GDP and, with the addition of the surrounding area, the overall catchment area considered accounts for 80.7% of GDP, assuming non-urban areas contribute uniformly to GDP. Figure 53: Catchment area for RB considering a Local and Regional level, Consultant team analysis based on Eurostat (2023c) International Passenger Catchment Area The third level of the passenger catchment area covers countries connected to RB via adjacent rail connections through Warsaw, Vilnius, and Tallinn, including Finland, Poland, Germany, Belgium, the United Kingdom, the Czech Republic, Slovakia, and Austria. The following table shows that RB will be connected to a railway network (plus a connection to Helsinki) of major cities with a metropolitan population of approximately 72 million people. For trips longer than ~500km, air travel starts to become more attractive for select passenger segments. However, rail travel is often preferred for shorter trips due to its convenience, affordability, and environmental benefits. This international catchment area is also 87 important for the freight segment, as it will facilitate the transportation of goods between the Baltic states and the EU. Figure 54. International catchment area of RB (Consultant team analysis) Freight Catchment Area RB’s catchment area for freight transportation is defined by strategic transport corridors that are integral to the Baltic region's economic framework. These corridors facilitate the efficient transport of a wide range of goods and commodities, with potential to transit through the Baltic states along the North-South axis. Key corridors in the RB catchment area include: • Intra-Baltic Corridor • Baltics – Eastern Europe/Asia Corridor • Baltics - Finland Corridor • Baltics – Southern Europe Corridor • Baltics - Western Europe Corridor • Finland - Southern Europe Corridor • Finland – Western Europe Corridor Characteristics and traffic analysis of each freight corridor are provided in section Transport Mode Characteristics. Overall, while catchment areas are crucial for understanding the most likely users of RB, it is important to note that trips originating from outside these defined areas are also considered in the analysis. 88 8.2 Operational Assumptions 8.2.1 Passenger Services High-speed trains offer daytime express services for long-distance (international) routes, operating at the maximum line speed. Night services cater to overnight long-distance passengers, while regional trains provide passenger service within individual countries, and where relevant, they also facilitate cross-border regional passenger service. The following table presents the service concepts for passenger services 38: Figure 55 - Service concept for passenger train lines (RBR Project Team Input, 2023) 38 The presented frequency is bidirectional. The service lines are still under development; thus, it is subject to change. 89 8.2.2 Freight Services The service concept for freight transportation is reported in the following figure 39. On top of the scheduled freight services, RB is expected to accommodate a significant amount of demand-driven freight train transport, with more details provided in the Traffic Demand Forecasting chapter. Figure 56: Service concept for freight train lines (RBR Project Team Input, 2023) 8.3 Financial Assumptions The following section describes assumptions that underpin the revenues and costs estimated in the financial analysis. The assumptions listed below encompass inputs related to the main components of the financial analysis, namely capital expenditure, future operation revenues, and the value of the infrastructure. Category Assumptions Financial - Each country will be assigned one Infrastructure Managers (IM) to oversee their respective operating domains, and to foster cooperation and coordination. The establishment of a potential corridor model management model or entity is still in the decision-making phase and is currently an assumption assumption made for modelling purposes. Once implemented, its structure is expected to 39 Train configuration and/or the number of train journeys per week may differ. 90  Category Assumptions mirror the existing RB Rail framework, with enhanced functions for maintenance and operation. Furthermore, every participating country is slated to have local operations and maintenance units. The specifications for these functions have been derived from the Operations Plan of 2018 as per instructions by RB, considering necessary adjustments. Financial - High-speed trains offer mainline daytime express services for long-distance (international) passenger routes, operating close to maximum line speeds. Night services cater to mainline night-time services long-distance (international) express passenger needs. Regional trains provide passenger service within individual countries, and where relevant, they also facilitate cross-border regional passenger service. Financial - sections All sections are assumed to be completed by 31st of December 2030. mapping Financial - The evolution of the labor cost of the RB employees is assumed to differ by country every year labor cost and is calculated by considering the average nominal wage index equal to 100 in 2010 and then evolution accounting for variations net of CPI. Financial - Electricity evolution, measured in EUR/MWh, is derived from consultant expert analysis. It is electricity treated separately for every country, and is assumed to steadily decrease until year 2048, when evolution there are no future changes assumed. Financial - TAC benchmarks for alternative transports methods are derived from the Traffic Demand TAC40 Model. The table below outlines the data segmented by country and measured in EUR/pkm: benchmark Country TAC (EUR/pkm) s for passengers Estonia 0.09 (transport Latvia 0.08 modes) Lithuania 0.08 Country TAC (EUR/pkm) Personal car Coach Existing train Estonia 0.05 0.07 0.08 Latvia 0.04 0.05 0.03 Lithuania 0.04 0.07 0.06 Financial - TAC benchmarks on national level are derived from the RB Infrastructure Access Policies report TAC (Rail Baltica, 2022). Benchmarks for passengers are segmented by country (Germany, Italy, benchmark Spain, Sweden, Netherlands, and Belgium), and then the minimum, maximum, average, and s for median values for EUR/train-km are calculated. passengers 40 TAC = Track Access Charge 91 Category Assumptions Conventional passenger services: Minimum TAC Maximum TAC Country (EUR/train-km) EUR/train-km) Germany 3.18 7.02 Italy 1.44 4.21 Spain 1.24 5.71 Sweden 0.42 2.12 Netherlands 0.89 2.16 Belgium 1.85 10.36 Average 1.50 5.26 Median 1.34 4.69 HS passenger services: Minimum TAC Maximum TAC Country (EUR/train-km) (EUR/train-km) Germany 13.01 15.01 Italy 5.25 7.36 Spain 5.27 21.36 Sweden n. a n.a Netherlands 13.79 14.41 Belgium 3.64 21.66 Average 8.19 15.96 Median 5.27 15.01 Financial - TAC benchmarks for freight are derived from the Traffic Demand Model. These assumptions are TAC segmented by demand categories (dry bulk, liquid bulk, semi-bulk, trade cars, and unitised), benchmark measured in EUR/tkm, as shown in the next figure: s (freight Demand category Main mode (EUR/tkm) Feeder (EUR/tkm) truck cost parameter) Dry bulk 0.11 0.09 Liquid bulk 0.04 0.04 Semi-bulk 0.04 0.04 Trade cars 0.34 0.34 Unitised 0.68 0.48 92 Category Assumptions Financial - TAC benchmarks for freight are derived from the Traffic Demand Model. These assumptions are TAC segmented by demand categories (dry bulk, liquid bulk, semi-bulk, trade cars), measured in benchmark EUR/tkm, as shown in the next figure: s (rail Demand category Main mode (EUR/tkm) Feeder (EUR/tkm) freight non- Dry bulk 0.01 0.01 unitised Liquid bulk 0.01 0.01 cost parameters Semi-bulk 0.01 0.01 ) Trade cars 0.13 0.13 Financial - TAC benchmarks for alternative transports methods are derived from the Traffic Demand TAC Model. Variable costs are divided between unitised and non-unitised, and assumed among the benchmark three Baltic states as follows: s for freight Unitised: (alternative Country Existing rail (EUR/tkm) Truck (EUR/tkm) transport methods) Estonia 0.04 0.14 Latvia 0.04 0.14 Lithuania 0.04 0.14 Non-unitised: Country Existing rail (EUR/tkm) Truck (EUR/tkm) Estonia n.a 0.68 Latvia n.a 0.68 Lithuania n.a 0.68 Financial - Adjusted RB is assumed to employ 646 FTEs (full-time employees) divided per country, and per functions FTE or per qualifications, based on RB operational plan (2018). estimations Financial - RB is assumed to employ 201 FTEs (full-time employees) working at the satellite operations Operations control center, segmented per country, based on the RB operational plan (2018) staff RB is assumed to employ 237 FTEs (full-time employees) for central maintenance Financial - administration, 44 at the central operational control center, and another 122 in adjacent HQ staff functions, based on the RB operational plan (2018). Financial - It is assumed that 10% of the operational costs and another 10% of the HQ costs are allocated Materials to materials, according to the RB operational plan (2018). 93  Category Assumptions Financial - Electricity consumption (measured in kWh per train-km) is based on data from the RB 2018 Utilities Financial Model. It is categorized for passenger and freight trains, and further broken down (electricity according to the specific train type. consum- Passenger transport mode Electricity consumption (kWh/train-km) ption) High-speed 7.4 Night 7.4 Regional 7.4 Freight transport mode Electricity consumption (kWh/train-km) Unitised 15.0 Non-unitised 15.0 Financial – IT expenses are assumed to account for 2% of revenues, based on consultant expert analysis. IT expenses 8.4 Socio-Economic Assumptions Assumptions presented in this section are used to model R ’ socio-economic environment. While each assumption is derived from a cited source, it is crucial to acknowledge that socio-economic assumptions are inherently subject to a degree of uncertainty. Therefore, a sensitivity analysis is incorporated into the calculations to address this inherent uncertainty. Real GDP Real GDP and GDP-per capita projections are derived from S&P Capital IQ (2023), with data after 2053 extrapolated from the last five years of available forecasts. See graph below for real GDP projections. Figure 57: Real GDP forecast (S&P Capital IQ, Consultant team analysis) 94 Recent Socio-Economic Developments Recent socio-economic developments, such as Covid-19, the war in Ukraine, and the cost-of-living crisis have been considered for their impact on forecasted real GDP as of 2023. Regarding transport patterns, the model does not project significant changes attributable to recent events in its long-term forecasting period. This approach is supported by the absence of sufficient evidence to draw long-term conclusions based on observations from several volatile years. In this context, passenger transport patterns are already converging to pre-Covid trends as evidenced in the figure below (Road Transport Administration of Latvia), further supporting the reasoning behind a model of low sensitivity to outliers. Figure 58: Rebound of commuting traffic following COVID-19 in Latvia, mn pax (Road Transport Administration of Latvia, 2023) Trade Development Freight demand is linked to trade growth assumptions, derived from the MDS Transmodal World Cargo database, accounting both for regional GDP growth, international trade trends, and a long-term analysis of correlation between GDP and trade growth. Commuting Trip Purposes It is assumed that 85% of the commuting population travels for work, and 15% for educational purposes, based on the distribution of the population and the likelihood of using public transport for these purposes. Shadow Wages Shadow wages are calculated with wage data from each countr ’s respective national statistics offices, compared to the average RB salary. 95 Category Annual gross salary (EUR) Unemployed 0 Lower salary 16,979 Same salary 25,065 Working-age citizens are segmented based on their earnings compared to the wages RB offers. The percentage of the unemployed is sourced from national statistics offices. The proportion of workers earning more or less than the RB salary is determined through consultant expert analysis. Category Share of workers (%) Unemployed 4.3% Lower salary (70% of RB) 45.7% Same salary 50.0% 8.5 Transport Mode Characteristics The following table outlines the assumptions made regarding transport mode characteristics. These assumptions are mainly used as inputs for traffic-model forecasting and economic analysis, facilitating the calculation of passenger and freight demand, the impact of the modal shift, and induced demand. Category Assumptions Passenger demand across different transport modes is growing as a function of GDP growth, considering both population and GDP/capita evolution. Taking into account industry benchmarks, the availability of transportation infrastructure, and the geographic characteristics of the region being modeled, GDP growth elasticities have been defined for each mode of transportation over the modeled period. After 2056, passenger volumes are expected to reach a steady state in the model to conservatively account for uncertain demand growth in the very long term. Sensitivity to GDP growth Mode of transport Elasticity to GDP growth Air 0.5 Car 0.6 Bus/coach 0.6 Train (RB) 0.8 96 Category Assumptions Traffic on the RB line is expected to ramp up from 40% in year 1 to full capacity from year 6 onward for passenger trains while for freight it is expected to start at 15% in year 1 and reach full capacity in year 8. This discrepancy in scaling rates can be attributed to the inherent lag in response time associated with trade dynamics. RB traffic ramp- up Travel distances across all modes are determined in an origin-destination matrix based on GIS data provided by the RB project team. Travel time is calculated based on the origin- destination distance matrix and travel speed using a headway-based approach, considering Travel distances waiting, transit, loading and unloading times. and travel times According to data provided by the RB project team, the RB line is assumed to extend across 908.52 km through the Baltics. More specifically, the distance covered is 214.03 km in Estonia, 262.89 km in Latvia, and 431.60 km in Lithuania. 97 Category Assumptions Occupancy rate for cars is derived from RB traffic model assumptions. Mode of transport Occupancy (number of passengers) Car - commute 1.57 Car - local business 1.57 Car occupancy Car - local personal 1.78 rate Car – medium-long business 1.8 Car – medium-long personal 2.5 Car - very long business 2 Car - very long personal 3 The external costs of accident cost per passenger transport mode are derived from the EC Handbook on external cost of transport (2019a). For the evolution of externality costs over time, an 80% rate of elasticity to GDP per capita is assumed (European Commission, 2021a). Mode of transport Accident cost (EUR/pkm) Air 0.0004 Accident costs Car 0.0640 (passenger) Coach 0.0191 Day train 0.0035 Night train 0.0009 Furthermore, a linear decrease of accident rates over time is assumed because of the anticipated safety evolution of vehicle fleets. Accident rates is expected to reach 70% of the current rates by the end of the modeled period. The external costs of accidents per freight transport mode are derived from the EC Handbook on external cost of transport (2019a). For the evolution of externality costs over time, an 80% elasticity rate to GDP per capita is assumed (European Commission, 2021a). Mode of transport Accident cost (EUR/tkm) Air 0 Accident cost Train 0.00199 (freight) Truck 0.00711 Ship 0 Furthermore, a linear decrease in accident rates over time is assumed due to the safety evolution of vehicle fleets. Accident rates are expected to reach 70% of current rates by the end of the modeled period. 98 Category Assumptions Travel speed for each passenger mode is estimated using the RB traffic demand model, accounting for scenarios both with and without the inclusion of RB. Average speed is calculated as the weighted average of speed within the transport mix across all relevant origin-destination pairs, accounting for waiting and transfer times and congestion as applicable. Mode of transport Speed with RB (km/h) Speed without RB (km/h) Air – medium-long 209.9 208.0 Air - very long 343.3 329.9 Car - commute 46.3 46.2 Car - local business 49.2 47.9 Car - local personal 48.1 47.8 Car – medium-long business 62.1 60.5 Car – medium-long personal 62.8 62.2 Car - very long business 51.8 51.5 Car - very long personal 52.0 51.8 Coach - commute 49.9 49.9 Passenger transport speed Coach - local business 47.3 47.3 Coach - local personal 48.6 48.4 Coach – medium-long business 45.9 49.2 Coach – medium-long personal 44.2 44.8 Coach - very long business 71.1 71.1 Coach - very long personal 71.1 71.1 Day train - commute 61.7 55.7 Day train - local business 71.9 55.1 Day train - local personal 71.9 57.9 Day train – medium-long business 128.6 63.5 Day train – medium-long personal 128.6 63.5 Day train - very long business 128.1 53.0 Day train - very long personal 128.1 53.0 Night train – medium-long business 92.4 49.4 Night train – medium-long personal 92.4 49.4 Freight The travel speed for each freight mode is estimated using the RB traffic demand model. transport speed Average speed is calculated as the weighted average of speed within the transport mix 99 Category Assumptions across all relevant origin-destination pairs, accounting for waiting and transfer times and congestion as applicable. Cargo type and mode of transport Speed, with RB (km/h) DBK - train 49.6 DBK - ship 38.4 DBK - truck 58.3 LBK - train 49.7 LBK - ship 40.6 LBK - truck 53.0 SBK - train 49.6 SBK - ship 40.6 SBK - truck 56.9 Trade Car - train 49.7 Trade Car - ship 39.8 Trade Car - truck 66.9 Unitised - air 267.4 Unitised - train 54.3 Unitised - Ship 23.3 Unitised - truck 59.3 Travel costs are derived using the RB traffic demand model and information from online travel portals. For cars, the travel cost includes the total cost of ownership. Mode of transport Travel cost (EUR/pkm) Air - medium long business 0.203 Air - medium long personal 0.193 Air - very long business 0.198 Travel cost Air - very long personal 0.188 (passengers) Car – all segments 0.136 Bus - commute 0.063 Bus - local 0.063 Bus - medium/very long 0.051 Day train - commute 0.0238 Day train - local business 0.0755 100 Category Assumptions Day train - local personal 0.057 Day train - medium long business 0.0755 Day train - medium long personal 0.057 Day train - very long business 0.1044 Day train - very long personal 0.1044 Night train - medium long 0.1044 Profit margins in the passenger value chains are derived from Orbis for players in each transportation mode, including airlines, fuel suppliers, car manufacturing, bus operators, and passenger rail carriers. Public regional transport is assumed to be unprofitable. Mode of transport Profit margin (%) Air – medium long 0% Profitability (passenger Air – very long 1% transport value Car 5% chain) Bus commute/local 0% Bus medium/very long 5% Train – commute/local 0% Train – medium/very long 4% Assumptions for road damage caused by freight and passenger transportation, corresponding respectively to trucking and cars, is based on (Nilsson, Svensson, & Haraldsson, 2015). Road damage Mode of transport Road damage (EUR/vkm) Truck -0.006 Car -0.004 101  Category Assumptions The productive share of travel time for each transport mode is based on (Wardman & Lyons, 2015)to estimate the proportion of time spent in transit across different transportation modes that can be used effectively for work or other meaningful activities. This measure varies significantly based on the mode of transportation, individual tasks at hand, and the traveler's capability to perform these tasks while traveling. It assesses the extent to which travel time can be converted into productive time, considering factors such as focus requirements for the mode of transport (e.g., driving a car), available space, amenities, and internet connectivity. Productive Mode of transport Productive share of travel time41 share of travel Air – short haul 7% time Air – long haul 21% Car 12% Coach 10% Day train – local 28% Day train – medium/long distance 46% Night train 46% Freight transport costs are derived from the RB traffic demand model and industry benchmarks of consultant team experts and logistics industry experts. Cargo type and mode of transport42 Revenues (EUR/tkm) DBK - train 0.028 DBK - ship 0.025 DBK - truck 0.125 Transport cost LBK - train 0.028 (freight) LBK - ship 0.025 LBK - truck 0.046 SBK - train 0.04 SBK - ship 0.025 SBK - truck 0.046 Trade Car - train 0.14 41 Share of productive travel time is assumed to stay constant over time – while there is a potential for marginal improvements such as better internet connectivity on airplanes, trains and coaches, the most significant drivers (e.g., transaction costs such as feeder travel time, waiting and boarding times, available space) are expected to remain similar to conditions observed in the referenced study 42 DBK: dry bulk, LBK: liquid bulk, SBK: semi bulk 102 Category Assumptions Trade Car - ship 0.0125 Trade Car - truck 0.16 Unitised - air N/A Unitised - train 0.0186 Unitised - Ship 0.00714 Unitised - truck 0.0553 Profit margins in the freight value chains are derived from Orbis for each transportation mode player, including airlines, fuel suppliers, car manufacturing, bus operators, and passenger rail carriers. Profitability (freight Mode of transport Profit margin (%) transport value Train 6% chain) Truck 1% Ship 3% The value of time (VoT) is determined based on passenger surveys and literature reviews conducted as part of the traffic demand model. It is expected to increase in line with GDP/capita growth, exhibiting a 70% elasticity rate, based on EU guidelines (European Commission, 2021a) Purpose and trip length Value of time (EUR/h) Passenger value Commuting 6.8 of time Local Business 15.9 Local Personal 8.6 Medium long - Business 23.6 Medium long - Personal 10.8 Very long - Business 28.4 Very long - Personal 10.4 Cargo value of time is derived from the traffic demand model as the weighted average of goods by transported volumes, including capital lock-up costs and the time cost component for time-sensitive goods (e.g., reefer containers). Type of cargo Value of time (EUR/ton-h) Cargo value of Unitised 1.44 time DBK 0.04 SBK 0.02 LBK 0.02 Trade Car 0.12 103 8.6 Environmental Assumptions Assumptions related to environmental impacts are used to calculate the impact on three key environmental considerations: climate change, noise pollution, and air pollution, during both the construction and operational phases. These values are subsequently aggregated to determine the total discounted benefits to the environment. Category Assumptions Climate change Climate change emission metrics have been assumed based on the EIB Project Carbon (GHG emissions) Footprint Methodologies (2023b) as follows: Mode of transport (passenger) CO2 emission (gCO2/pkm) Air 183 RB 0 Other train 7.1 Car 128 Bus 97 Mode of transport (freight) CO2 emission (gCO2/tkm) RB freight 0 Other train freight 2.2 Truck 77 Ship 31.9 Furthermore, a linear decrease in emission rates over time is assumed due to the evolution of vehicle fleets. The emission rates are expected to reach 20% of the current rates by the end of the modeled period. CO2 emissions related to the construction phase have been assumed to amount to 0.83 t/10km/year based on the same suggestions. External costs of The external costs of GHG emissions are defined based on the EIB Carbon Footprint GHG emissions Methodologies (European Investment Bank, 2023b) Year CO2 emission (gCO2/pkm) 2030 250 2035 390 2040 525 2045 660 2050 800 104 Category Assumptions Noise pollution: Estimations for the number of impacted residents are derived from the RB Environmental impacted Impact Assessment and national statistical data. residents during Country Number of impacted residents construction Estonia 0 Latvia 4,153 Lithuania 1,730 Noise pollution External costs of noise pollution are derived from the EU handbook on the external cost of (passenger) transport (European Commission, 2019a) for each transport mode. For the evolution of externality costs over time, an 80% rate of elasticity to GDP per capita is assumed (European Commission, 2021a). Mode of transport Noise pollution cost (EUR/pkm) Air 0.007 Car 0.008 Bus 0.004 Train 0.001 Furthermore, a linear decrease in the emission rates over time is assumed due to the evolution of vehicle fleets. Emission rates are expected to reach 20% of the current rates by the end of the modeled period. Noise pollution The external costs associated with noise pollution for each transport mode are derived (freight) from the EU handbook on the external cost of transport (European Commission, 2019a). For trains, it is assumed that RB will account for 90% of the modal shift and induced demand. For the evolution of externality costs over time, an 80% rate of elasticity to GDP per capita is assumed (European Commission, 2021a). Mode of transport Noise pollution cost (EUR/tkm) Air N/A Train 0.0007 Truck 0.0121 Ship 0 Furthermore, a linear decrease in the emission rates over time is assumed due to the evolution of vehicle fleets. Emission rates are expected to reach 20% of the current rates by the end of the modeled period. Noise pollution During the construction phase, the average noise pollution level is assumed at 58 db for (construction) impacted residents, based on consultant expert elaboration on RB EIA. The price of exposure is derived using the EC Handbook on external cost of transport (2019a), amounting to 32 EUR/db/person/year. Based on consultant expert analysis, the share of exposed time during the operation phase is estimated at 20%. 105 Category Assumptions External costs of The external costs of air pollution are derived from the EU handbook on the external cost air pollution of transport (European Commission, 2019a). For trains, it is assumed that RB will account (passenger) for 90% of the modal shift and induced demand. For the evolution of externality costs over time, an 80% rate of elasticity is assumed to GDP per capita (European Commission, 2021a). Mode of transport and trip length Air pollution (EUR/pkm) Air - medium long 0.00481 Air - very long 0.00211 Car - all lengths 0.01327 Coach - commute/local 0.00628 Coach - medium/very long 0.00093 Day train - commute 0.00055 Day train - medium long 0.00003 Day train - very long 0.00037 Furthermore, a linear decrease of emission rates over time is assumed due to the evolution of vehicle fleets. Emission rates are expected to reach 20% of the current rates by the end of the modeled period. External costs of External costs of air pollution for freight transport modes are derived from the EC air pollution Handbook on external cost of transport (2019a). For trains, it is assumed that RB will (freight) account for 90% of the modal shift and induced demand. For the evolution of externality costs over time, an 80% rate of elasticity to GDP per capita is assumed (European Commission, 2021a). Mode of transport Air pollution cost (EUR/tkm) Air N/A Train 0.00006 Truck 0.00732 Ship 0 Furthermore, a linear decrease of emission rates over time is assumed due to the evolution of vehicle fleets. Emission rates are expected to reach 20% of the current rates by the end of the modeled period. 106 Category Assumptions Air pollution External costs of air pollution during the construction phase are derived from the EC (construction) Handbook on external cost of transport (2019a). Particle Emissions cost (EUR/t) PM10 70,000 PM2,5 70,000 NOx 4,400 Emissions per year for the construction period are derived from the RB EIA: Particle Emissions (t/year/10km) PM10 3.60 PM2,5 1.77 NOx 28.96 107 9 Traffic Demand Forecasting The previous chapter outlined assumptions applied to model the environment of RB Global Project. Consequently, this chapter focuses on how traffic dynamics are forecasted within this environment, generating necessary inputs for estimating financial and economic impacts of the project. The chapter offers a detailed overview of the traffic demand model used to predict changes in travel patterns and the resulting demand in the transport ecosystem. This includes the definition of the objectives of traffic forecasting, emphasizing its practical importance within the CBA framework. The approach used for modeling, the validation processes undertaken, the types of data inputs required, and the expected outputs from the model are also methodically discussed, providing a comprehensive understanding of the entire process. The chapter ends with the analysis of the traffic forecasts provided by the model and their interpretation in the context of impact assessment. 9.1 Objective of Traffic Flow Modeling Traffic demand analysis plays a key role in evaluating project viability. Considering all relevant variables, it identifies existing demand and projects it into the future. Forecasting traffic volume is an essential component of the framework, providing inputs on passenger and freight traffic flow for the CBA and WEI calculations. First, forecasting passenger and freight traffic enables the estimation of future financial revenue streams, including track access charges and ancillary revenues. These forecasts directly influence the financial analysis by providing critical inputs for the calculation of the project's financial viability and potential profitability. Second, traffic flow volumes play a fundamental role in driving economic impact. The movement of passengers and goods through the rail system plays a direct role in generating the economic impact modeled in the ECBA. Additionally, this movement facilitates broader economic benefits, including an increase in tourism, a boost in trade, and expanded business opportunities. Figure 59: Traffic flow forecasting in the Economic Appraisal process 108 9.2 Modeling Approach Traffic demand forecasts are modeled in R M, R R’ m m . RBM is a multimodal transport network model property of RB built in PTV Visum, a commercial software for transport modeling. The model is calibrated for 201943 as the base year and provides projections for 2031, 2046, and 2056. For the period between 2056 and 2080, it is assumed that demand will reach a steady state. For interim years, demand is interpolated to provide a continuous projection. RBM includes three distinct modules relating to three primary aspects of the RB project, namely passenger demand, freight demand, and the infrastructure network. n a geographic level, the model’s location-specific emphasis is set on the Baltic Corridor, spanning from Tallinn to Warsaw. Figure 60: Modular structure of the transport model As a transport network model, the RBM specifies an impact area and calculates demand by the integration of feedback loops. These loops encompass four stages: an estimation of generated demand, origin/destination distribution, mode split, and assignment to a multimodal network. This process is then iteratively repeated until equilibrium is reached. The demand generation phase divides modeled geographies into zones at NUTS-3/county level and determines trip rates by purpose and length based on national and European travel surveys in the passenger model. For freight, country-to-country trade flows serve as the basis of the model. Trip rates are sensitive to GDP/capita and trade growth for passenger and freight transport, respectively,and to the introduction of new transportation modes (i.e., RB). In the next step of the modeling process, passenger trips are distributed to destinations in a gravitational model. Passengers are distributed according to the characteristics of the set of destinations matching their trip purposes and trip length criteria, while freight flows are attributed considering NUTS-3 level economic activity. In the freight model, country-to-country trade flows are assigned to zones considering economic activity (production and consumption). 43 The selection of 2019 as reference year allows the assessment of long-term traffic patterns without the disruption effects of Covid-19 and the war in Ukraine. While these factors influence transport networks and demand in the short term, the base-case model scenario assumes limited impact in the modeled period (2031- 2105). 109 Lastly, all passenger trips and freight flows are assigned to transport modes in the modeled network based on a modal choice function considering factors such as transport costs, time, capacities, and further utility factors. In this context, the assignment of public transport trips to the network is unconstrained – while passenger and freight modal choices depend on the frequency and capacity of services, the demand for these services is not constrained by the capacity, i.e., the model can estimate higher volumes for certain services than they can accommodate. Capacity utilization is monitored to offer opportunities for demand-driven service offering as necessary. For private transport modes (i.e., car and truck), capacity constraints are considered and influencing modal choice through congestion feeding into travel times. 9.3 Validation of the RBM Demand Model To provide reliable traffic forecasts for the CBA and the financial plan, R ’ m m yz and validated across three output components – baseline traffic, induced demand and modal shift, and growth projections as per the following figure. Figure 61: Overview of analyzed output components In each dimension, target intervals are set based on official sources and industry best practices. Consequently, output gaps are established between the benchmark employed and RB model data to check the validity of the model. More precisely, current traffic flows are analyzed to validate the baseline for calculations, with 2019 as the reference year. The selection of 2019 as reference year allows the assessment of long-term traffic patterns without the disruption effects of Covid-19 and the war in Ukraine. While these factors influence transport networks and demand in the short term, the base-case model scenario assumes limited impact in the modeled period (2031- 2105). Modal shift and induced demand for RB are compared, considering scenarios both with and without RB, thus showing ceteris paribus the impact of the new railway on traffic flows. Lastly, growth projections are employed to forecast the traffic flows following the introduction of RB.44 44 Outputs of the traffic demand model (incl. modal shift and induced demand) are detailed in section 8.5. 110 The validity of the model's forecasts for both passenger and freight transport is affirmed by aligning them with established benchmarks. 9.4 Model Inputs and Assumptions RB’s traffic demand model is built on various assumptions to estimate future demand in the region for both freight and passenger traffic. More specifically, it relies on assumptions for the macroeconomic environment, current infrastructure network in the region, microeconomic implications, and mobility trends. For a detailed specification of the assumptions listed below, please refer to the assumptions chapter in this report. 9.4.1 Macroeconomic Environment Assumptions presented in this section are used to model the socio-economic environment of RB. Real GDP Real GDP and GDP-per capita projections are derived from S&P Capital IQ (2023), with data after 2053 extrapolated from the last five years of available forecasts. See graph below for real GDP projections. Figure 62: Real GDP forecast (S&P Capital IQ, Consultant team analysis) Traffic Growth Elasticity to GDP Growth Passenger demand across different transport modes is growing as a function of GDP growth, considering both population and GDP/capita evolution. Accounting for industry benchmarks, the availability of transportation infrastructure and geographic characteristics of the modeled region, GDP growth elasticities are defined for each transportation mode throughout the modeled period. After 2056, passenger volumes are expected to reach a steady state in the model to conservatively account for uncertain demand growth in the very long term. Mode of transport Elasticity to GDP growth Air 0.5 Car 0.6 111 Bus/coach 0.6 Train (RB) 0.8 Figure 63: Elasticities to GDP growth (Consultant expert analysis) Recent Socio-Economic Developments Recent socio-economic developments such as COVID-19, the war in Ukraine, and the cost-of-living crisis are taken into account for their impact on forecasted real GDP as of 2023. In terms of transport patterns, no significant changes are attributed to these events in the very long-term forecasting period of the model due to a lack of evidence to draw long-term conclusions from several years of very volatile conditions. Public transport developments are already converging to pre-Covid trends as evidenced in the figure below (Road Transport Administration of Latvia). This further supports the argument to limit model sensitivity with respect to outliers. Figure 64: Rebound of commuting traffic following COVID-19 in Latvia, mn pax (Road Transport Administration of Latvia, 2023) Trade Development Freight demand evolution is tied to trade growth assumptions sourced from the MDS Transmodal World Cargo database. These assumptions take into account regional GDP growth, international trade trends, and a long-term analysis of correlation between GDP and trade growth. While each assumption is derived from specific sources, it is crucial to recognize that socio-economic assumptions are inherently subject to a certain degree of uncertainty. To account for this, a sensitivity analysis is integrated into the calculations to address this inherent uncertainty. 112 9.4.2 Infrastructure Network The infrastructure network in the region is a key assumption to estimate both induced demand and the modal shift to RB. The main assumptions regarding the infrastructure network in the Baltic region have been collected by analyzing map databases, projected supply data and data from transport operators. Map databases primarily utilized for this project are Open Street Map and the HERE database. Open Street Map provided detailed data on rail infrastructure, including stations, transportation hubs, rail links, and existing railway connections. The HERE database offered comprehensive road network data, categorized by functional road hierarchies, and including attributes like spatial mapping, legal speed limits, and capacity indicators like lane numbers on links and junctions. The information pertaining to transport operators is collected from operators publishing their own services and via the General Transit Specifications databases (GTFS) on Google. The latter is available for Estonia, Latvia, and Poland. For Lithuanian regional and long-distance rail, online booking portal information is employed. For coach services, data is collected from the p ’w . Information on planned infrastructure and services is provided by RBR. 9.4.3 Rail Baltica Services Within the described infrastructure framework, special emphasis is placed on modeling services operating on the RB infrastructure. RB expects future carriers to operate high-speed, night, regional and freight services on the infrastructure. The following service plans outline routes and frequencies, serving as inputs for the traffic demand model, determining RB’s attractiveness toward passengers and freight shippers. Services are defined based on RB project team inputs, and are not responsive to demand (i.e., frequency and capacity do not increase if demand increases). Capacity utilization is monitored to ensure an appropriate balance with demand on the line. High-Speed Passenger Services Figure 65: High-speed passenger services on RB (RB project team input) 113 Regional Passenger Services Figure 66: Regional passenger services on RB (RB project team input) Night Passenger Services Figure 67: Night passenger services on RB (RB project team input) Freight Services Figure 68: Freight services on RB45 (RB project team input) 45 FT-6 and FT-7 are not included in traffic demand model as they do not provide unitised freight services. Non- unitised freight trains are modeled on a demand-driven basis (instead of service-driven approach for unitised freight). 114 9.4.4 Microeconomic Assumptions The model is developed based on several microeconomic assumptions ranging from the respective cost of each transport mode to the value of passengers’ time. Microeconomic assumptions employed in the traffic demand model are listed below, with further details provided in chapter Assumptions. • Passenger transport costs are segmented in the model by transport mode and demand segment. This segmentation includes trip length (local, medium-long, and very long) and purpose (commute, business, and non-business). • Freight transport costs are modeled based on transport mode and cargo type, including dry bulk, liquid bulk, trade cars, and unitised goods. • Value of passenger travel time is derived from passenger preference surveys conducted in Estonia, Latvia, Lithuania, and Poland between April and June 2021. This value is expressed in EUR/h for each country, varying with trip duration (local, medium-long, and very long) and purpose (commute, business, and non-business). • Cargo value of time is determined for each cargo type, using data from the MDST database. • Occupancy and load factors are used to convert numbers into passengers and tons. Car occupancy factors, expressed in passengers/car, are segmented by country and demand segment, including trip length and purpose. For truck and rail, load factors, expressed in tons/vehicle, are segmented by cargo type. • Travel time and distance: Travel times are calculated from infrastructure network data, considering distances traveled, speed per transport mode, road capacity, and waiting and transit times for both passenger and freight, including loading and unloading at terminals. To ensure the robustness of traffic forecasts, assumptions have been validated against benchmarks, including data from official and proprietary databases as well as insights gathered from interviews with industry experts. Trends Technological advancements in transportation, which significantly influence both emissions and energy consumption, are factored into the model. This consideration is especially important give the EU's commitment to achieving net-zero emissions by 2050 and its related incentivization of electric mobility, as evidenced by the goal to ensure all new road vehicles are zero-emission by 2035. 115  ach countr ’s projected composition of road fleets is based on ASTRA, a proprietary model developed by TRT, in alignment with the uropean ommission’s hand oo on the e ternal cost of transport (2019a). Under the base scenario, the average share of non-internal combustion engine cars (gasoline and diesel based, including non- plug-in hybrids) is projected to increase from 12.3% in 2031 to 46.7% in 2056. Among the Baltic countries, Estonia is anticipated to boast the highest proportion of non-internal combustion engine (non-ICE) cars in 2056, with an expected 50.7%. Figure 69: Non-ICE share of cars in the Baltics (2031-2056) (ASTRA, 2019) Assumptions detailed in this chapter all feed into the traffic demand model to provide the analysis with accurate forecasts. Consequently, the next chapter analyses and interprets key model outputs to understand traffic dynamics and thus the underlying traffic assumptions of the CBA. 9.5 Output Analysis Results of the traffic demand model form the foundational basis for the calculations conducted in both the financial and economic analyses. The following chapter outlines the results of the traffic forecasts for both passenger and freight demand, analyzing both modal shift and induced demand. Modal shift refers to people or goods transitioning from other forms of transportation, such as cars and airplanes, trucks, and ships, to rail. An example of this is people opting for RB for their daily commutes instead of driving. Such a shift significantly reduces travel times and road congestion and enhances environmental outcomes. Induced demand arises when the expansion of rail services or infrastructure results in an increase in rail usage beyond initial demand. For instance, the construction of a new rail line may not only attract existing commuters but also inspire more people to travel, people who may not have done so before. This leads to an overall increase in travel, rather than merely a redistribution of other modes. Induced demand thus enhances the accessibility of both the passenger and freight network. 116 9.5.1 Passenger Demand This chapter is dedicated to forecasting passenger demand for RB. It begins by providing insights into the anticipated traffic on the RB line, emphasizing the characteristics of typical passengers and analyzing the distribution of traffic along the line and at various stations. The chapter then examines the impact on modal share, comparing scenarios both with and without RB. This analysis involves assessing shifts among all relevant transport modes in the corridor to determine how RB influences travel choices. Finally, the concept of induced demand is explored to understand how the introduction of RB is expected to create additional travel demand. Forecasted RB Traffic Demand for passenger services on Rail Baltica is projected to experience consistent growth from 2031, stabilizing into a steady state by 2056. The distribution of passenger kms across services is homogenous throughout the modeled period, with regional and HSR services driving most of the traffic. Figure 70: Forecasted passenger traffic on RB services without ramp-up (Rail Baltica TDM, 2023) In terms of individual passengers, RB is expected to reach 51.7 mn trips by 2046 across three main passenger segments (see following figure). Non-business passengers constitute the majority of the traffic on RB across all 117 types of services, accounting for 33 mn trips annually. Commuters particularly contribute to the demand for short trips on regional services, whereas business passengers tend to prefer longer routes and HSR services. Figure 71: Passenger trips/year across demand segments in 2046 (Rail Baltica TDM, 2023) To understand the characteristics of passenger demand on a more granular level, the following chart outlines the distribution of passenger traffic (pax) across key RB sections in 2046, highlighting a strong concentration of traffic around the Rīga section (incl. Rīga Central and RIX airport), as well as Kaunas-Vilnius and Kaunas-PL border sections. This distribution underscores the necessity for high-frequency services around urban hubs. Figure 72: Yearly traffic on RB sections46 in 2046, mn pax (Rail Baltica TDM, 2023) Additionally, the model projects the daily traffic at RB stations, accounting for both the arriving and departing passengers. This projection is particularly important for benchmarking the project against other European rail 46 Schematic map of sections shows a limited number of stations to provide an overview of travel patterns at an aggregate level. Jonava – Kaišiador s and Kaunas – Kaišiador s sections both serve below 5 mn pax, and combine to feed 5-8 mn pax on the Kaišiador s – Vilnius section. 118 infrastructures and estimating the potential demand for businesses to be located inside or near the stations. The chart below illustrates the expected daily passenger traffic at the main RB stations in the steady state, in line with traffic distribution by sections shown in the previous figure. Figure 73: Yearly traffic at RB stations 204647, mn pax (Rail Baltica TDM, 2023) The outlined passenger traffic volumes are expected to be captured by RB from both modal shift from other transport modes and induced demand. Impact on Modal Share In the Baltic region's passenger travel market, RB is forecast to capture about 3.0% of total passenger volumes (in pkm) by 2031, more than doubling the formerly existing market share of railways. This share is slightly higher in Estonia and Latvia (3.2%) and lower in Lithuania (2.7%). RB’s increased attractiveness is due to its cost- effectiveness and reliability, making it a superior alternative to flights, and offering advantages in speed and comfort over cars. Crucially, this shift is part of a broader trend toward greater public transportation usage. u lic transport’s growing popularity is expected to contribute to an overall increase in its use, with trains and buses expected to see a rise in their respective market share by 0.3 pp by 2031. This shift aligns with RB's sustainability and congestion 47 Schematic map shows only stations explicitly modeled in the traffic demand model. 119 reduction goals, contributing to a wider movement towards public transport and decreasing reliance on air and car travel. Figure 74: Modal share of transport within the Baltic states with and without RB in passenger transportation in 2031, bn pkm (Rail Baltica TDM, 2023) The modal share impact is evaluated in several O/D segments across the North-South corridor in the following figure. This analysis aims to assess the impact of the various transport modes’ value propositions across varying distances. While there is only a moderate potential to capture modal share in domestic transport markets, primarily due to the low density of the existing rail transport network and the predominance of cars, the model forecasts underscore the impact of new cross-border services and high-speed infrastructure. Notably, rail travel is expected 120 to attract the most demand away from cars due to e.g., low-quality road infrastructure along the North-South axis. In contrast, air travel, being well-established and affordable, is likely to lose less of its share. Figure 75: Modal share impact of RB in O/D segments (Rail Baltica TDM, 2023) Induced Demand Besides the modal shift from other forms of transportation, induced demand also plays a key role in driving passenger volumes on RB services, thereby leading to additional socio-economic benefits. Induced demand describes the increase in passenger transportation directly attributable to the new RB infrastructure. It accounts for additional passengers who choose to travel due to the availability of RB, who otherwise might not have opted to travel in the absence of RB. In 2031, the RB project is expected to induce an additional 1.5% in total passenger demand (see following figure). This surge is due to the availability of the new infrastructure and is calculated by comparing scenarios with and without RB, while factoring in GDP per capita growth and demographic changes, such as a population decline. These factors somewhat limit induced demand as they affect the segment of the population that would travel solely because of RB. The peak of this induced demand is predicted to occur by 2046, when the induced demand is expected to reach 1.4% of total pkm and this level is projected to remain constant through to 2080. This trend indicates a moderate 121 but sustained impact of RB on passenger travel patterns over the long term, with a gradual stabilization as the market adjusts to the new infrastructure. Figure 76: Overall passenger transport demand and demand induced by RB (Rail Baltica TDM, 2023) Both modal shift and induced demand play a crucial role in boosting traffic volumes for RB, directly impacting its financial performance and the social benefits it brings to the passenger transport sector. Modal shift attracts travelers from various transport modes to RB, while induced demand generates new passenger journeys due to RB's availability. The upcoming subsection will examine RB's impact on the freight transport sector in a similar manner to provide a comprehensive understanding of both markets. This analysis will then conclude the groundwork for estimating the project’s financial and socio-economic impact. 9.5.2 Freight This chapter offers a comprehensive forecast of freight traffic on Rail Baltica, estimating the projected traffic on the Rail Baltica line, characteristics of typical cargo, and the traffic distribution across the various sections and stations. The chapter then assesses the impact on modal share by comparing scenarios with and without Rail Baltica, examining shifts among all relevant transport modes in the corridor. Additionally, the chapter explores induced demand to understand how Rail Baltica's introduction is expected to generate additional freight demand. 122 Forecasted Traffic on RB Freight demand on the RB network is projected to grow steadily from 2031 onward and reach a steady state by 2056. In this period, freight traffic will be predominantly driven by unitised goods, which account for 61% of the freight ton-kilometers, underscoring their importance in the RB freight system. Non-unitised goods comprise the remaining 39%, contributing significantly but to a lesser extent versus unitised freight. Figure 77: Forecasted freight traffic on RB services without ramp-up, bn tkm (Rail Baltica TDM, 2023) In terms of freight volume on the RB network, it's expected to handle 10.9 million tons of cargo annually by 2046 across two main freight types. While non-unitised (bulk) goods represent a higher volume with 6.8 million tons, reflecting their significance in terms of unique tons transported, unitised goods are still the primary revenue drivers with longer distances but lower, 4.1 million tons of cargo annually. Their importance is underscored by longer average trip distances and generally lower weight per shipment. This contrast highlights the varied cargo profile on the RB network, where unitised goods are key for efficiency and revenue despite non-unitised goods having a larger volume. Analysis of the sources of these freight volumes and load distribution on the RB network shows that most cargo is directed towards Europe. The southern flank of the mainline bears a heavier freight load, indicative of the substantial volume of cargo originating from this region. However, significant freight movement is also noted towards the northern part of the line, indicating that the RB network plays a crucial role in channeling cargo from 123 all three Baltic states towards European destinations. To accommodate freight flow dynamics, the number of freight trains is expected to vary by segment (see figure below). Figure 78: Freight volumes and number of trains on RB sections in 2046, tons (Rail Baltica TDM, 2023) To understand freight dynamics driving traffic volumes on the RB network, the next figure provides insights into the share of key origin-destination regions within freight volumes captured by RB. Movements between the Baltic states, Asia and Eastern Europe contribute 78% to total freight volumes, followed by flows connecting the 124 Baltics with Western Europe and Scandinavia. While these flows are dominated by bulk commodities, RB also plays an important role as a transit facilitator of unitised goods, between Eastern Europe and Asia in particular. Figure 79: Annual RB freight volumes by origin and destination 48, bidirectional, 2046, k tons (Rail Baltica TDM, 2023) Freight flows captured by RB are part of regional freight corridors with a potential to transit through the Baltic states. In this context, the next section analyzes major routes and markets served by RB. Subsequently, an assessment of modal share and induced demand is undertaken to determine how RB affects transportation choices and boosts freight volumes. This analysis will offer a comprehensive picture of RB's impact on both regional and international trade. Corridor Analysis Trade in the Baltic region is channeled through several key transport corridors enabling the efficient movement of diverse goods and commodities. A close examination of cargo volumes and types across these 48 Western Europe includes European countries west from Germany, Austria and Italy, as well as Americas. Asia includes Russia, Turkey and all countries eastwards. 125 routes offers insights into the region's trade dynamics. Notably, RB's potential is derived from a combination of intra-Baltic trade and pass-through traffic. In this chapter, each corridor is analyzed, emphasizing their importance and the predominant commodities they handle. Figure 80: Trade flows across regions with RB transit potential and share of cargo types in 2046 (Rail Baltica TDM, 2023) The Intra-Baltic corridor, handling approximately 147 mn tons of cargo annually, is predominantly characterized by dry bulk commodities, accounting for 56% of its volume, making it responsible for a significant portion of the trade. Additionally, the presence of semi-bulk cargo, comprising 33% and including machinery, construction equipment, and packaged goods, highlights the vibrant internal trade within the Baltic region. In the context of intra-Baltic trade, RB services have a high potential to contribute to the movement of freight along the North- South axis. The Baltics – Eastern Europe/Asia corridor, handling around 62 million tons annually, leans heavily towards liquid bulk commodities at 46% of its volume, implying a substantial exchange of resources such as fuels, oils, or chemicals between the Baltics and the Eastern regions. Dry bulk at 22% of the overall volume further diversifies the corridor due to the extensive transportation of minerals or grains, reflecting the corridor's importance in resource exchange. In this corridor, RB is expected to serve as a connecting/last-mile/first-mile segment. Handling a volume of approximately 13 million tons annually, the Baltics - Finland corridor stands out with its dominant semi-bulk share at 38% of its volume, indicating frequent movement of large containers or packaged goods, possibly encompassing machinery or electronics. The presence of liquid bulk at 31% accentuates the diversified nature of trade between these regions, emphasizing the multifaceted trade relationship. While volumes across the Baltics – Finland corridor are limited, the geographic layout and the share of unitised and semi-bulk freight support the potential positive impact of modern rail infrastructure along the North-South axis. At 22 million tons annually, the Baltics – Southern Europe corridor is primarily an axis for the trade of dry bulk commodities, constituting 73% of the trade, driven by essential dry commodities like grains, coal, or ores, which 126 are frequently transported, marking the corridor's role as a primary route for crucial Baltic imports and exports. RB can contribute to delivering goods through Poland without changing gauges at the PL/LT border, increasing the competitive edge of rail transport along the corridor, as well as feeding deep-sea routes through Baltic port connections. Handling about 106 million tons annually, the Baltics - Western Europe corridor displays a balanced trade portfolio. With semi-bulk leading at 36% of its volume, it is likely that goods such as machinery or equipment are predominant. The added presence of dry and liquid bulk further indicates a balanced exchange of varied goods, making the corridor a bridge connecting the Baltics with Western regions. The Finland - Southern Europe corridor with managing the trade of its 9 million tons annually in volume, is predominantly a semi-bulk route, as that accounts for 64% of its volume. Such a high share reflects the frequent movement of machinery, equipment, or other packaged items, making the corridor vital for connecting Finland to the Southern markets and facilitating the trade of a diverse range of goods. While volumes across the Finland – Southern Europe corridor are limited, the geographic layout and the share of unitised and semi-bulk freight support the potential for a positive impact of a modern rail infrastructure along the North-South axis. Handling 101 million tons annually, the Finland – Western Europe corridor is distinguished by liquid bulk commodities at 39% of its volume. That significant share reflects the transportation of fuels, chemicals, or other liquids. The corridor's dry bulk and semi-bulk components further enrich its trade profile, making it a vital passage for a balanced exchange of goods with the Western regions. Offering the possibility to connect to maritime routes and the 1520 mm network in Muuga/Tallinn, RB would enhance freight routes between the two regions. While bulk commodities dominate in volume across Baltic trade corridors, the importance of unitised cargo in the RB context is undeniable. Although smaller in volume, unitised cargo often carries higher-value goods that demand speed, security, and careful handling. Businesses favor unitised cargo for its efficient transportation and quick turnaround at ports, which aligns with the demands of fast-paced international trade. This type of cargo, offering logistical ease, particularly benefits shipping operations. The next chapter on modal share explores how these types of cargo influence transportation choices in the freight market. With RB's introduction, understanding these preferences is key for assessing potential shifts in the regional freight market. Impact on Modal Share RB's introduction is expected significantly alter modal choices across various trade corridors and for diverse cargo types. For bulk commodities, RB offers a new, potentially dominant transportation option over ships and trucks with an efficient and faster alternative. This represents a considerable shift in bulk commodity transportation. In the case of unitised cargo, RB assumes a complementary role, acting as a feeder mode for maritime shipping. Its connections to Baltic and mainland European ports enhance maritime shipping efficiency. 127 This strategic integration not only facilitates the movement of unitised goods but also strengthens the entire maritime shipping ecosystem. Figure 81: Modal share across cargo types and trade corridors, without (left columns) vs with (right) RB (Rail Baltica TDM, 2023) As the analysis shifts from trade corridors, RB is projected to capture a 0.7% share of the total freight market, measured in ton-kilometers, within the three Baltic states. The highest market share for RB within the region is expected in Lithuania at 1.2%, followed by Estonia at 0.9%, and Latvia at 0.2% The market share will be predominantly drawn from ships, trucks, and existing trains, with air transportation anticipated to remain largely unaffected by the introduction of RB. Despite the skew in ton-kilometer measurements due to the longer distances associated with sea transport, these aspects have been accounted for in the modal share analysis for cost-benefit assessments. From 2031 to 2080, no significant changes in modal shifts are expected, indicating a consistent impact of RB on regional freight transportation. Figure 82: Market share of alternative transport modes with and without RB in freight transportation in 2031, without ramp-up (Rail Baltica TDM, 2023) 128 Analyzing the modal share impact of RB within the geographic boundaries of the three Baltic states, the focus is on the modal share within land-based transportation modes, encompassing road and train. In this context, RB is expected to achieve a market share of between 2%-6% in the Baltic states' land transportation sector. Estonia, in particular, with its lowest existing share of 1520 mm rail transportation, is anticipated to experience the highest market penetration by RB. Conversely, the market share potential for RB in Latvia and Lithuania is somewhat constrained by their existing rail infrastructure. Figure 83: Yearly tkm per transport mode 2056-2080 (Rail Baltica TDM, 2023) Induced Demand Beyond influencing modal shifts in existing trade flows, Rail Baltica (RB) is also anticipated to generate additional demand for land-based freight transportation. Analysis of this induced demand indicates RB will increase land freight market volumes. Upon the start of operations, an induced demand of 2.5% is expected, decreasing to 129 2% by 2056. These projections collectively highlight the positive impact RB is likely to have on freight market volumes in the region. Figure 84: Induced demand from RB on the land freight transportation market – in bn tkm (RB, 2023) Potential to capture grain flows from Ukraine In assessing anticipated freight volumes, the impact of a prolonged conflict in Ukraine on RB is also considered, focusing on the potential redirection of Ukrainian grain exports. These exports are likely to be distributed across several European corridors, offering RB a chance to capture additional freight volume, estimated to range from 0 to 5 million tons per year (considering a total annual Ukrainian grain export volume of 50 mn tons based on Consultant team analysis considering interviews with LT Ministry of Transport, Poland corridor capacities (Euractiv, 2023) and reports on potential transport routes (Politico, 2023; Fastmarkets.com, 2023)). This capture potential is contingent on specific conditions. 130 Potential yearly grain flows are summarized by the following figure: Figure 85: UA grain export flows via alternative transport routes Achieving the higher end of this spectrum at 5 mn tons would require targeted capacity investments in Latvia, Lithuania, and Estonia. It also assumes no similar investments in other potential transit countries such as Romania, Germany, and Poland. Furthermore, the maintenance and expansion of EU solidarity lanes, which require additional investment from the EU and its member states, plays a crucial role in this scenario. These potential investments, however, are excluded from the cost-benefit analysis of this report due to their uncertain nature and as they are outside of RBGP scope. In another, still optimistic scenario, if Baltic countries improved the efficiency of their infrastructure along with transit countries, RB could potentially handle an additional 2 million tons of freight. This figure aligns with the targets set by LV and LT to attract between 0.5 to 1 million tons each (lrt.lt, 2023; Reuters, 2023). 131 The following figure illustrates the impact of such flows compared to the tons in the freight base case49 Figure 86: Potential impact of optimistic Ukrainian grain flow scenarios on freight It's important to note that capitalizing on the Ukrainian grain exports requires a specific investment scenario falling outside of RBGP scope as detailed above. Moreover, a long-term war could lead to a decrease in freight flow to and from Russia, which might offset the increase in demand from Ukrainian exports. The detailed implications of a prolonged war on RB’s freight volumes are further e plored in the Scenario Analysis: Prolonged War Impact chapter, providing an in-depth analysis of these economic impacts. Following the demand analysis providing a clear understanding of freight volumes and modal shifts, including intra-Baltic, Baltic to/from external countries, and traffic between external countries transiting through the Baltics, the next chapter presents the financial analysis of RB within the CBA framework. This assessment will translate projected demand into specific financial outcomes and benefits. 49 Estimating the potential impact of this demand, the contribution of the Upper limit case (+5 nm tons of grain from Ukraine relevant for RB) would result in a contribution less than 1% of the total ENPV with assumptions of an average of 205 km travelled within the Baltics on Rail Baltica with cargo potential of 0.4-1.0 bn ton-km with an avg. train load of 1000 tons and avg. non-unitised TAC of EUR 20/km resulting in a 10-20% contribution to freight revenues and NPV leading to under 1% contribution of ENPV, which ENPV and its components will be introduced and analyzed in later chapters. 132 10 Financial Analysis The Financial Analysis chapter delves deep into fiscal dynamics, offering a comprehensive overview of the financial health and performance of its core components. This chapter explores three pivotal dimensions of RB’s landscape: passenger services, freight services, and the facilities that underpin its operations. All figures in this chapter come from financial cost-benefit analysis unless stated otherwise. 10.1 Infrastructure Manager Financial Analysis The IM financial analysis provides a comprehensive overview of the project's financial landscape, consolidating all revenue and cost elements associated with passenger and freight services, as well as facility operations. This holistic approach allows for a detailed examination of the project's financial performance across all service lines and infrastructure components. A particular focus is placed on the Asset Renewal & Maintenance subsection, as it plays a pivotal role in shaping costs. Additionally, the calculation of the track access charges is thoroughly explored, given its significant influence on revenue. The financial analysis of RB evaluates the operating profit generation of the project from the perspective of the IM. The operating profit is a financial indicator that reflects the health and sustainability of operations. In regular years, when no major maintenance event is taking place, the operating profit is typically positive. Operating profit does not consider interest expenses and asset renewal costs. This profit arises from the efficient utilization of assets, effective maintenance, and the consistent delivery of railway services. During regular years, the IMs strive to keep the operating profit positive. The revenue and cost components are detailed to reflect the most realistic picture of the operations, including passenger & freight service lines and passenger station & freight terminal management. Each component of cost is modelled separately to ensure transparency and visibility. The operating expenses (OPEX) components are the following: • Personnel costs • Cost of materials & Maintenance • Utilities • ICT Operating cost elements such as personnel expenses, cost of materials & maintenance, utilities, and ICT expenses are modeled at a country level, reflecting the practicality and accuracy of this approach. However, due to the complexity of allocating these costs directly to specific service lines, a more technical methodology is employed. All operating expenses are allocated based on the number of train kilometers per each service line within each country. This allocation method offers a transparent and equitable way to distribute costs, ensuring that each service line contributes proportionally to the expenses incurred within its respective country, aligning with operational realities and resource management in the railway project. The notable peaks in OPEX can be primarily attributed to the structured asset renewal and maintenance schedule. These planned maintenance activities, while essential for ensuring the longevity and reliability of the railway infrastructure, often result in concentrated expenditures during specific periods – in RB’s case, these would occur in ears 20 and 2072. he spi es in , therefore, reflect the project’s proactive approach to asset up eep and safety, underlining the significance of strategic asset management in maintaining the overall operational integrity of the railway network. Further detail can be found in the Asset Renewal & Maintenance subsection. The 133 large maintenance expenditures are spent across 3-5 years. Due to unpredictability of actual expenditure, it is modelled as a 1-year expense. The following graph shows the revenue generated and OPEX on an annual basis for the IM. Figure 87: RB infrastructure manager cash flow components, EUR mn In 2041, the ramp-up of each service line is completed, becoming the first steady-state year, forecasted to bring in EUR 257 mn in revenue. Passenger services, including high-speed trains, night trains, and regional trains, play a substantial role, bringing in EUR 55 mn in revenue when reaching their steady state. Freight segment revenue, both unitised (intermodal) and non-unitised (conventional), contributes to the project's economic stability in a more substantial way, as it is almost two times larger than its passenger counterpart. The majority of OPEX is contributable to cost of materials & maintenance (81% of OPEX through 2080). The remaining elements, which include personnel costs, utilities, ICT, and the operational expenses tied to passenger stations and freight terminals, collectively form a group of relatively minor contributors in comparison. An examination of the following table reveals that project revenues fall short of operational expenditures (OPEX) in most project years. Further revenue increases would cause decline in demand; thus, passenger fares must remain 134 accessible to reap not only the project's financial benefits but also the economic ones. Consequently, passenger ticket prices and freight charges will need to be subsidized by the states to ensure demand for project services. The following figure summarizes key cash flow components. 2041 UR m 2031 2040 2050 2060 2070 2080 ( y ) R 257 73 252 291 315 315 315 assenger trac 55 19 55 63 68 68 68 access charges Freight trac 94 12 92 110 123 123 123 access charges assenger stations 17 17 17 17 17 17 17 Freight terminals 60 7 59 71 78 78 78 ncillar revenues 7 7 7 7 7 7 7 lectricit resale 23 11 23 22 23 23 23 309 188 256 324 292 356 318 ainline 266 187 214 276 240 302 265 • ersonnel 15 8 15 15 15 15 15 costs • ost of 216 148 164 225 187 250 213 materials & aintenance • tilities 30 18 30 30 31 31 31 • I 5 - 5 5 6 6 6 assenger stations 9 9 9 9 9 9 9 Freight terminals 34 4 33 40 44 44 44 p p (53) (115) (3) (34) 23 (39) (2) Figure 88: RB infrastructure manager cash flow components, EUR mn 10.1.1 Track Access Charge Calculation It is important to clarify that the current document does not aim to formulate a track access charge methodology for RB. Instead, its primary objective is to assess potential track access charges from various perspectives, essentially establishing what can be regarded as a foundational, reasona le price charges to assess RB’s usiness case. The TAC is established within a predefined range, which is determined by benchmarking against alternative transportation modes and calculating the break-even TAC. The break-even charge is designed to cover the direct costs associated with railway infrastructure. If the break-even charge surpasses the defined range, Public Service Obligations (PSOs) may be utilized to provide subsidies, thereby balancing the attractiveness of railway transport in comparison to other modes. 135 TAC calibration is a crucial process that involves a comprehensive comparison with track access charges in various countries. By referencing charges in different regions, the aim is to fine-tune the TAC to conform with prevailing industry standards and market conditions. The overarching objective is to maintain a TAC that is not only competitive and appealing to rail users but also one that closely mirrors international benchmarks. The customer price assumptions are set on a per-country basis for the passenger and freight segments. For the high-speed and night train segments, a uniform tariff of EUR 0.10 per pkm (EUR/pkm) is applied across all three Baltic countries. A similar uniform tariff is maintained for the freight segment as well, standing at EUR 0.26 per tkm (EUR/tkm) for each of the three Baltic states. On the other hand, the regional train prices are country specific. They are set at EUR 0.08 per pkm for Estonia, EUR 0.03 per pkm for Latvia, and EUR 0.06 per pkm for Lithuania. Country High-speed Night Regional Freight Estonia 0.10 0.10 0.08 0.26 Latvia 0.10 0.10 0.03 0.26 Lithuania 0.10 0.10 0.06 0.26 Figure 89: RB final consumer price assumptions, EUR/pkm; EUR/tkm The validation of final customer prices for high-speed, night, regional, and freight segments involved a systematic examination of alternative transport method costs at an individual country level. For passenger services, a detailed analysis is conducted on personal car, coach, and existing train options. In the case of freight, the assessment included existing rail, truck, and ship services. The focus of the validation process is on quantifiable cost factors, considering variables such as fuel prices, maintenance, and operational expenses associated with each transportation mode. Country Existing regional train Coach Car Estonia 0.02-0.10 0.07 0.17 Latvia 0.02-0.04 0.05 0.14 Lithuania 0.03-0.08 0.07 0.14 Figure 90: Alternative passenger transport method costs, EUR/pkm Category Ship Train Truck Unitised 0.08-0.31 0.28-0.50 0.70-1.00 Non-unitised 0.02-0.05 0.03-0.12 0.02-0.06 Figure 91: Alternative freight transport method costs, EUR/TEU km; EUR/tkm The calculation of TAC involves adjusting the final customer prices assumed in the traffic demand model based on TAC incidents on the revenue of RUs, which are benchmarked against the index in each segment, encompassing both passenger and freight services. The objective is to establish a pricing structure that is sustainable and equitable. However, the results reveal a significant disparity in this regard. The calculated TAC indicates that the pricing structure falls far from the break-even point in the passenger segment. In contrast, in the freight segment, the TAC suggests that pricing is above the break-even point, contributing to positive revenue generation. These insights highlight the complexities of balancing cost-recovery in passenger services while maintaining a sustainable financial footing in freight operations. 136 Benchmarks show the range of 19-33% TAC incident for passenger services, while freight benchmarks emit 26- 43%. When applying the assume TAC incidents on revenue for both passenger and freight segments, the average is used for the most realistic scenario, 26% and 35% respectively. Category Minimum Maximum Average Passenger TAC incidents on revenue 19% 33% 26% Freight TAC incidents on revenue 26% 43% 35% Figure 92: RB passenger TAC incidents on the revenue of RUs (IRG-Rail, 2022)50 The calculation of TAC assumes a uniform TAC for passenger services as all service lines have cross-border routes. Furthermore, the uniform assumption serves as a measure to ensure the fluidity of services provided to potential RUs utilizing the infrastructure. In conclusion, the regional TAC for the passenger segment is the lowest (EUR 0.61), followed by the high-speed line (EUR 3.39), and finally the night line, whose TAC is approximately 10 times larger than the regional line. he following ta le summarizes each service line’s associated in the first stead -state year of the project: Category High-speed Night Regional TAC 3.39 6.87 0.61 Figure 93: RB passenger TAC per service line in 2041, EUR/train-km The pricing for the freight segment is significantly higher, with non-unitised cargo charges being higher than its unitised counterpart in each country. This is most likely driven by higher track occupancy times of non-unitised cargo. The highest unitised TAC is observable in Estonia (EUR 56.33) and lowest in Lithuania (EUR 53.23). For non- unitised, the highest value for TAC is in Lithuania (EUR 23.65) and the lowest in Estonia (EUR 4.39). Country Unitised Non-unitised Estonia 56.33 4.39 Latvia 55.58 19.27 Lithuania 53.23 23.65 Figure 94: RB freight TAC per service line in 2041, EUR/train-km The TAC structure incorporates two components: a section covering direct, and a TAC mark-up, applied when the primary TAC surpasses the portion covering direct costs. This mark-up is essentially an adjustment based on the maximum rate the market can bear, aligning the pricing strategy with market conditions to optimize profit margins. This approach facilitates a flexible and market-responsive pricing strategy, adept at navigating the fluctuating market dynamics. 50 TAC incidents on revenue (TAC cost for operators/revenue of operators) is based on non-subsidized TAC benchmarks 137 In Estonia, the break-even TAC for both unitised and non-unitised segment is 16.55, with a TAC mark-up of 39.78 applied exclusively to the unitised segment. As the actual TAC is lower than the break-even, no TAC mark-up is applier for the non-unitised segment. Similarly in Latvia, the break-even point stands uniformly at 20.70 for both segments, with a TAC mark-up of 34.88 for unitised. Meanwhile in Lithuania, a break-even TAC of 15.03 is observed for both segments, complemented by a TAC mark-up of 38.20 for unitised and 8.62 for non-unitised segments. Country Category Unitised Non-unitised Break-even 16.55 16.55 Estonia TAC mark-up 39.78 N/A Break-even 20.70 20.70 Latvia TAC mark-up 34.88 N/A Break-even 15.03 15.03 Lithuania TAC mark-up 38.20 8.62 Figure 95: RB freight TAC per service line in 2041, EUR/train-km Compensation Benchmarking The operation of the passenger segment is forecasted to need subsidies in the current understanding. This analysis is focused on evaluating the potential strategies for allocating the subsidies between RUs and IMs. It should be highlighted that the contemplated allocation does not imply a reduction in the subsidy amount. Rather, the intention is to explore different avenues for distributing the subsidy amount between RUs and IMs, without diminishing the overall financial support extended to the project. The following table delineates the distribution of compensation in various countries, segmented into two categories: the allocation to RUs and the allocation to IMs. On an aggregate level, the average compensation paid to RUs stands at a dominant 91%, leaving a relatively smaller share of 9% for IMs. Share of compensation paid Share of compensation paid Category to railway undertakings to infrastructure managers European average 91% 9% Figure 96: European compensation benchmarking (IRG-Rail, 2022) 10.1.2 Asset Renewal & Maintenance Asset renewal and maintenance of the infrastructure is a critical component of ensuring safety and efficiency. Based on constant collaboration with topic experts, the assumptions outlined are detailed below. To effectively manage this process, it is important to categorize the Capital expenditures (CAPEX) items into three distinct buckets: civil assets, other railway systems, and technology-related components. Each of these asset categories has its own expected lifetime, and asset renewal and maintenance schedule. Civil Assets 138  • Description: These are the foundational elements of the railway track, such as the tracks themselves, bridges, tunnels, and other structures. Given their long lifespan, they require less frequent replacement and extensive maintenance. • Useful asset lifetime: 100 years • Asset renewal schedule: Year 1-10: 0.2%, Year 11-20: 1%, Year 21: 10% Other Railway Systems • Description: This category encompasses components like signaling systems, electrification, and communication networks. These systems have a shorter lifespan and require more frequent updates to ensure the railway's operational safety and efficiency. • Useful asset lifetime: 40 years • Asset renewal schedule: Year 1-20: 2%, Year 21: 10%, Year 22-40: 2%, Year 41: 10% Tech-Related Components • Description: The technology aspect of railway operations, including software systems and electronic equipment, falls under this category. With rapid advancements in technology, these assets require more frequent upgrades to stay up to date and maintain operational integrity. • Useful asset lifetime: 30 years • Asset renewal schedule: Year 1-20: 3.1%, Year 21: 10%, Year 22-31: 3.1% To maintain the railway track's optimal condition, a rigorous asset renewal and maintenance schedule is applied, that ensures the overall depreciation of the assets is consistently addressed. The key principle is that the total annual expenditures for asset renewal and maintenance should add up to 100% of the depreciation of the respective asset category in each year keeping asset quality at its maximum. Additionally, major CAPEX events, which are scheduled every 20 years, present an important consideration. These events are typically substantial, involving a replacement or significant upgrade of assets, such as signaling systems, electrification infrastructure, safety equipment and others. The value of these major CAPEX events is typically set at 10% of the total value of the assets within the specified category. These events play a critical role in ensuring that the railway remains up to date and compliant with modern safety and operational standards. 139 The allocation between asset renewal and maintenance costs are the result of international benchmarking of high- speed operating European countries. The split between asset renewal expenses, accounted as CAPEX, and maintenance expenses, accounted as OPEX, is 48% and 52% respectively. Figure 97: RB asset renewal and maintenance schedule (Consultant expert analysis) In assessing the forecasted expenditures for RB in relation to the average high-speed maintenance and asset renewal expenditures across several European countries, it becomes evident that RB's projected costs are closely aligned with the average figures. The forecasted maintenance expenditure for RB stands at EUR 177.8 mn, which is slightly above the average maintenance expenditure of EUR 153.6 mn. This suggests a more conservative approach in maintenance when compared to its European counterparts. On the other hand, the asset renewal expenditure for RB, projected at EUR 168.5 mn, is marginally above the average of EUR 145.5 mn. This indicates a prudent yet adequate investment in asset renewal, reflecting a balanced strategy in sustaining long-term asset quality and operational efficiency. High-speed maintenance High-speed asset renewal Total expenditure per route Country expenditure expenditure kilometer Austria 130.6 136.1 0.71 Belgium 217.9 104.3 0.41 Denmark 55.07 23.68 0.37 France 108.0 67.1 0.40 Germany 120.2 177.5 0.39 Italy 2.3 69.3 0.26 Netherlands 457.2 182.3 0.98 Average 153.6 145.5 0.33 RB forecast 177.8 168.5 0.38 140  Figure 98: Maintenance and asset renewal annual high-speed expenditure, EUR mn (IRG-Rail, 2022) 10.1.3 Train Services The RB route is planned to have 14 lines, distributed across three distinct categories: high-speed, night, and regional trains. The regional service boasts the majority with 7 lines, and leads in train frequency, as lines 32 and 31 exhibit the highest frequency with 21 and 17 train pairs daily, respectively. Following this, the high-speed category has a total of 5 lines, with lines 11 and 13 being the most frequented, each having 8 train pairs per day. The night train category, however, consists of only 2 lines — 41 and 42 — each operating two train pairs. C y L m T p p y 4 High speed 2 7 3 3 4 4 2 Night train 4251 2 2 22 3 2 Regional 2 2 3 7 32 2 Figure 99: RB train service per day (RBR project team input) 10.2 Capital Expenditure This section provides an in-depth examination of CAPEX, offering a comprehensive overview of how expenses are categorized and phased across countries. It delves into the categorization of mainline expenses per country, providing insights into the allocation of funds for infrastructure development. Furthermore, the section explores the categorization of point-type of objects (PTO) per country (including all capital expenditures related to facilities, except for ENE and CCS expenses), shedding light on the distribution of investments in passenger stations, freight terminals, and other key elements. Additionally, it provides a detailed analysis of the phasing of CAPEX per country, covering the construction period spanning from 2024 to 2030. This approach ensures a thorough examination of 51 Service 42 is an addition due to the high demand forecasted in the night train segment. 141 how financial resources are allocated, ref lecting the project's commitment to efficient and strategic financial planning in its development. 10.2.1 Capital Expenditure Changes RB CAPEX estimates cover 909 km rail line with EUR 23.8 bn current expected cost excluding inflation. The CAPEX estimate received from RB without inflation (EUR 23.8 bn) includes adjustments of EUR 5.1 bn due to different estimation processes and varying design maturities. The mentioned CAPEX and related infrastructure elements are shared across three Baltic countries and twelve design sections. Lithuania accounts for the longest section with 432 km in length, while Latvia follows with 263 km and Estonia with 214 km length. Most of the international stations are in Lithuania, as well as most regional passenger stations and freight terminals. The table below summarizes data received on capital expenditures, without validation. Typ C m LV LT T ainline sections, structures 2,433 6,930 6,287 15,649 and elements onstruction supervision 49 149 126 324 M 2% ifferent studies 0,2 % 6 18 16 40 esign contracts with IVN 48 113 138 300 s e pertise International passenger 198 354 760 1,312 station Regional passenger station 37 82 633 752 T Freight terminal 135 262 306 703 I F 105 98 92 295 epot - 162 161 323 ther 54 5 83 142 sBo, NoBo 3 4 3 11 N 253 329 498 1,081 S 288 329 444 1,061 Fidic S and N 2% 11 13 19 43 G and ac uisition 66 159 78 303 Indirect cost 2% 74 180 193 447 IS 190 210 197 597 ontingencies 2% 79 188 201 468 T 4,028 9,587 10,233 23,849 Figure 100: CAPEX based on RB input, EUR mn (RBR project team input) Since 2017, there is significant change in CAPEX mainly driven by cost increase in Latvia and Lithuania. Considering all three countries, RBR estimate without inflation results in EUR 26mn / route km cost, from which with the 142 necessary adjustments, validated figure results in EUR 28 mn / route km. Both figures are within the acceptable benchmark range of EUR 14-35 mn/ route km52. The total costs and rail lengths per country are summarized in the table below. y L L T 20 7 route length m 2 3 2 2 3 4 869 20 7 value R mn ,34 , 2,474 ,7 20 7 value with inflation , 2,283 3,0 4 6,924 correction R mn 2022 route length m 2 4 2 3 432 909 2023 value R mn 4,02 , 7 0,233 23,849 Figure 101: Total CAPEX values and railway route lengths in 2017 and 2023 (RBR Project Controls Estimation Team input) There have been significant changes partly due to the increase in maturity of estimates. However, current maturity of mainline railway design is still low, with only 32% of the total mainline in the master design phase. Changes can be caused by three major categories of factors: • Changes between 2017 and 2023, including potential changes in external requirements, scope changes, more holistic calculations, and other changes. • Potential underestimation made in 2017, including underestimations of prices, quantities and missing elements. • Possible limitations of 2023 estimations, including potential overestimations of cost elements and potentially high-cost coefficients. 52 Please note that the lower boundary of this range could be argued to be slightly higher due to the less expensive setup of the lowest benchmarks, which would increase the average EUR 24 mn / route km even closer to RB related estimates. 143 Categorization of changes is based on the analyses of RB teams, with limited possibility for deeper validation. This subsection aims to focus on changed between 2017 and 2023, while later subsections describe in more detail the benchmarking and cost validation of 2023 figures. Figure 102: Historic cost evolution of RB (RBR Project Controls Estimation Team input) Since 2017, major changes took place due to external requirements, scope changes, more holistic calculation methods and other reasons. While inputs were received from RBR without detailed view on the values and their extent, based on the data received majority of changes originated from more holistic calculations53. Changes due to external requirements include impact of geotechnical investigations on railway and unforeseen third-party requirements from the past years, while scope changes include additional point type objects and cost increases on originally planned point type objects with data availability between 2017-2022 and 2021-2022. There were also new major mainlines included since 2017 and more detailed related calculations, as well as increased area of structures and additional structures. In addition, preliminary noise wall quantities were increased and additional land plots were needed. More holistic calculation change category included changes due to contingencies, estimation coefficients, normalization of data, design development calculation change, addition of PISM and indirect costs and management reserve, ENE and CCS calculation change and additional design costs. Considering these mentioned three cost categories and other cost increases, the 2023 CAPEX estimate reached EUR 23.8 bn. The internal estimate of the RB team is having a total of EUR 23.8 bn CAPEX during construction on a 909 km long railway, resulting in EUR 26 mn/km CAPEX based on varying estimate values and processes from implementing bodies and consultants. A third-party consultancy also reviewed CAPEX values and estimated a EUR 30.5 bn total CAPEX on a 930 km route resulting in a EUR 33mn/km CAPEX. This seems as a reasonable estimate with risk of inaccuracy and lack of clarity on RB input assumptions, as railway route length data was under 53 Including the application of contingencies, estimation coefficient, normalization VE (value engineering) estimates, design development (from VE to MD – master design - level), addition of indirect and PISM costs, addition of management reserve, additional ENE and CCS costs and extended design costs including certificates and other relevant costs. 144 review during the third-party’s work and was fixed as 909 km in August 2023. Benchmarking with a 909 km railway length assumption resulted in a EUR 14-35 mn/km range with a EUR 24 mn/km base value, stating RB cost estimates are 11% above average cost estimates yet in the range. The final analysis and validation of RB cost estimates performed consisted of 3 steps: • Applying corrections to optimism bias: EUR 0.2 bn correction • Adjusting costs of significant items based on benchmarks (ENE, CCS): EUR 1.0 bn correction • Applying estimation accuracy range and considering route length variation: EUR 12 bn range As a result, the total adjusted CAPEX is estimated to be in the EUR 21.9 – 29.2 bn range, with EUR 25.0 bn as the baseline value. Exact total CAPEX value remains uncertain, with a potential variance of ~EUR 7 bn due to ambiguities, and ~EUR 12 bn when considering differences in data related to route length. RB CAPEX is adjusted to include changes in optimism bias coefficients (a net EUR 0.2 bn increase) and in ENE & CCS (a net EUR 1.0 bn increase). The resulting breakdown of the EUR 25.0 bn after the validation is listed below: • Mainline CAPEX: EUR 16.5 bn • PTO CAPEX: EUR 3.8 bn • Global project activities CAPEX: EUR 4.9 bn Since CAPEX validation took place in 2023 Q2-3, and additional inputs were received during this period, CAPEX values are assumed to have 2023 mid-year price levels. To be consistent with other assumptions within the cost- benefit analysis of RB, CAPEX values are inflated to projected end-2023 price levels. This results in a total of EUR 26.3 bn CAPEX value and the following values per major CAPEX categories: • Mainline CAPEX: EUR 17.3 bn • PTO CAPEX: EUR 3.9 bn • Global project activities CAPEX: EUR 5.1 bn CAPEX is dedicated to constructing the mainline infrastructure, PTO infrastructure, and other global project activities. These essential investments involve core elements such as tracks, bridges, tunnels, and signaling systems as well as passenger stations, freight terminals, maintenance depots, and others. 10.2.2 Mainline Capital Expenditures The investment expenses allocated to the mainline infrastructure represent a substantial investment, with a total of EUR 17.3 bn benchmarked for building the core railway elements. Of that, Estonia accounts for EUR 2.7 bn, Latvia for EUR 7.7 bn, and Lithuania for EUR 6.9 bn. These expenditures are directed towards critical components like tracks, bridges, and tunnels. 145 The following table presents a summary of the cost composition by asset category and country: y L L T ainline structures and elements 2, 0 7, ,7 16,919 Substructure 794 2,288 2,056 5,138 Superstructure 762 2,195 1,973 4,930 1520 mm 28 82 73 183 RW drainage/land melioration 770 2,219 1,994 4,983 Utilities 61 176 158 395 Road, structures 44 127 114 285 (inc. maintenance) Noise barriers 93 268 241 602 construction supervision 2% 0 32 363 different studies 7 39 esign contracts with IVN s 3 7 361 e pertise T 2,668 7,688 6,925 17,281 Figure 103: RB mainline investments by country and asset type, EUR mn 10.2.3 PTO Capital Expenditures In addition to the mainline infrastructure, there is a substantial investment of EUR 3.9 bn (EUR 3,854 mn) for PTO. These are grouped into three primary categories: passenger stations, freight terminals, and other PTO. CAPEX investment in passenger stations encompasses modernization, expansion, and enhancement to provide passengers with superior facilities and services for existing passenger stations, and construction for new passenger stations. Freight terminals, serving as pivotal points for freight operations, will receive investment for essential upgrades of existing facilities and for the construction of new freight terminals. The 'other PTO' category comprises various infrastructure components essential for a seamless railway operation, including maintenance facilities and junctions. The following table outlines the CAPEX required for constructing the infrastructure, broken down by each category and country. A closer examination of the individual countries reveals that the highest PTO investments will be allocated to Lithuania (approximatively EUR 2.1 bn, in comparison to EUR 1.7 bn 54 combined for Estonia and 54 Due to rounding, numbers do not add up to the total figure. 146 Latvia). This is primarily due to Lithuania having a significantly higher number of passenger stations than the other two Baltic states. y L 55 L T assenger stations 247 2 ,4 4 2,23 Freight terminals 42 3 322 77 ther s 320 3 3 839 T 555 1,160 2,139 3,854 Figure 104: RB point-type object investments by country and asset type, EUR mn 10.2.4 Global Project Activities Capital Expenditures In addition to investments in the mainline infrastructure and point-type objects, there is a substantial investment need of EUR 5.1 bn for global project activities. These activities include CAPEX items such as ENE and CCS costs for signaling and energy, land acquisition, and further costs, which cannot be directly categorized as mainline or PTO infrastructure elements. In the table below, global CAPEX elements are listed for the three Baltic countries. y L L T sBo, NoBo 4 4 13 N 370 47 72 , 7 S 4 702 1,675 Fidic S and N 2% 4 20 45 and ac uisition 7 4 364 Indirect cost 2% 7 203 476 IB IS 7 20 486 ontingencies 2% 203 2 2 496 T 1,157 1,803 2,172 5,132 Figure 105: RB global project activities investments by country and asset type, EUR mn 10.2.5 CAPEX Phasing As currently understood, over the span of nine years, from 2022 to 2030 (values between 2022-2024 are summed up to 2024), RB is strategically allocating investment for the construction, with a total CAPEX of EUR ~26.3 bn, 55 In addition to RB stations, and financial anal sis calculations also include Āgens alns, a station planned on the 1520 mm network only, with a negligible impact (CAPEX of under EUR 5 mn and annual revenue of under EUR 0.1 mn). List and naming of passenger stations and freight terminals is subject to change during final design stages. 147 which includes non-material asset value (EUR ~0.4 mn for Estonia, EUR ~1.1 bn for Latvia, and finally EUR ~1 bn for Lithuania). The following table summarizes the CAPEX phasing across the construction timeline, which amounts to EUR ~23.7 bn, due to the non-material asset value not being included. When analyzing the CAPEX investment allocation, it is observed that Lithuania received the highest share (approximatively EUR 10 bn, so 42% of the total allocated amount), followed closely by Latvia (around EUR 9.5 bn, making up 40% of the total sum), and finally Estonia (EUR 3.9 bn, with only 18% of the total amount). Moreover, CAPEX investments gradually increase, until they reach their peak of EUR ~5.6 bn in 2028, and then gradually decrease until 2030. Up T p C y 2025 2026 2027 2028 2029 2030 2024 y stonia 362 392 643 866 851 647 183 3,944 atvia 917 1,028 1,639 2,162 1,955 1,488 336 9,525 ithuania 1,137 1,046 1,659 2,283 2,179 1,518 376 10,198 T 2,416 2,466 3,941 5,311 4,984 3,654 894 23,667 p y Figure 106: RB investment phasing per country (excluding non-material assets), EUR mn There is significant risk associated with the completion of the construction. This delay would in turn affect the phasing of CAPEX investment. The estimated impacts of the delay of 1-10 years in construction can be accessed in the Construction Delay part of the Construction Phase Risk subsection. 10.3 Passenger Carrier Financial Analysis This section conducts a thorough financial analysis of the passenger segment, focusing on high-speed, night, and regional trains. The analysis provides a detailed overview of revenue generation, cost structures, and profit margins within each service line. This examination offers a factual perspective on the financial efficiency and sustainability of these key components of the RB. The analysis in this section is significantly influenced by the demand outlined in the Passenger demand subsection. Revenues are calculated from the track access charges outlined and the forecasted train and passenger kilometers. A comprehensive analysis of all passenger service segments reveals a cumulative operating loss. The average yearly operational expenditure (OPEX) during the operational phase from 2031 to 2080 is projected to reach EUR 281.8 mn, while average revenues only account for EUR 68.3 mn during the same period. This financial outlook mirrors the inherent complexities of passenger operations, which often necessitate substantial investments in infrastructure and services to provide a functional and sustainable transportation solution. The overall narrative highlights a financial deficit, with the sum of the passenger segments exhibiting an average yearly loss of EUR -206.9 mn. The chart below depicts the projected cash flows for both revenues and OPEX of the passenger segments, clearly demonstrating that revenues fall significantly short of OPEX values, consequently generating an operating loss. Furthermore, the chart reveals a cyclical pattern in OPEX trends. Following the completion of a high capital expenditure (CAPEX) event (2051, 2072), OPEX experiences a period of eight years with the lowest values. This increase is attributable to rising maintenance costs. During the years of the high CAPEX events, OPEX also peaks, 148 reaching 5-6 times the baseline OPEX value due to the significant infrastructure renovation costs that are capitalized in OPEX. Figure 107: RB passenger segment OPEX and revenues, EUR mn Revenue growth, on the other hand, is incremental. Over the span of six years, the envisioned passenger train traffic flow accumulates to 100%. Commencing in Year 1 at 40%, it gradually gains momentum, reaching 70% in Year 2, 85% in Year 3, and surging to 90% in Year 4. By Year 5, passenger train traffic operates at 95%, and it culminates at 100% in Year 6. This scenario reflects a future projection, underscoring the anticipated growth and maturation of passenger train services as the railway network evolves from its initial stages to become an integral and fully adopted mode of transportation. C y Y 1 Y 2 Y 3 Y 4 Y 5 Y 6 assenger 40% 70% 85% 90% 95% 100% Figure 108: RB passenger train ramp-up after completion (Consultant expert analysis) To optimize the utilization of passenger service lines, strategic adjustments are implemented across various segments. In a bid to enhance efficiency and meet changing demands, significant modifications are made. Notably, high-speed, and regional train lengths are halved, a measure designed to boost the utilization of these services. In contrast, the night train service saw a different approach, with its service doubled to address surging demand. 10.3.1 High-Speed Carrier The financial analysis of the first of the passenger segments, the high-speed segment presents a key concern: OPEX consistently surpass the revenues generated annually. The projected average yearly operational expenditure (OPEX) for this segment during the operational phase is anticipated to average EUR 74.3 mn, while the projected average yearly revenues are estimated at EUR 34.2 mn. This financial disparity results in an average yearly operating loss of EUR -40.1 mn for this segment. 149 Plausible handling of loss generating operations may be multiannual contracts / Public Service Obligations (PSOs) to be applied to sustain the operation of the high-speed segment. While the high-speed service offers tremendous benefits in terms of rapid and efficient transit ac economic impact, the revenue deficit poses a challenge. The demand for high-speed rail might be poised for increase in the future with many ongoing initiatives on a European level to broaden high-speed infrastructure. These changes, if implemented, could become feeder lines that would increase the demand for the infrastructure while also boosting touristic interest for the region by enabling an eco-friendly and cheap transportation method. The following figure depicts the annual cash flows of operational expenditures (OPEX) and revenues for the high-speed segment. As evident from the figure, revenues consistently fall below OPEX, leading to an operating loss every year. Figure 109: RB high-speed segment OPEX and revenues, EUR mn 10.3.2 Night Carrier A captivating pattern emerges from the financial analysis of the second passenger segment, RB's night segment, owing to the cyclical nature of OPEX and the incremental revenue growth. The nigh segment's average OPEX stands at EUR 11.5 mn, while average revenues reach EUR 11.3 mn, resulting in an average annual loss of just EUR -0.2 mn. 150 The trend is evident in the accompanying figure, with certain years exhibiting OPEX values above the revenue line and others falling below it. Figure 110: RB night passenger segment OPEX and revenues, EUR mn 10.3.3 Regional Carrier An examination of the financial performance of the regional train segment within RB reveals a concerning trend: the regional train services exhibit a more significant deficit, with OPEX consistently surpassing generated revenues each year. The average annual OPEX amounts to EUR 189.4 mn, while revenues reach EUR 16.0 mn, resulting in an average yearly operating loss of EUR -173.4 mn. This aligns with the general international profitability patterns of the regional segment, as the TACs are the lowest among all segments and train-km-s (train-kilometers) are the highest. It is crucial to acknowledge, however, that the economic benefits for regional passengers are substantial and, as presented in the Socio-Economic Analysis, effectively offset the financial losses. This financial challenge underscores a similar need for the potential implementation of multiannual contracts / PSOs for the states to provide support to the ongoing operation of the regional train services. 151 The following chart illustrates the OPEX and revenues of this segment, highlighting the substantial disparity between the two, with revenues consistently falling short of OPEX. Figure 111: RB regional segment OPEX and revenues, EUR mn 10.4 Freight Carrier Financial Analysis The analysis in this section is significantly influenced by the demand outlined in the Traffic demand model outputs section. Revenues are calculated from the track access charges outlined and the forecasted train and ton kilometers. This section delves into a comprehensive financial analysis of the freight segment within RB, emphasizing two critical service lines: unitised and non-unitised freight services. This examination provides a factual and data-driven insight into the financial efficiency and sustainability of these pivotal components of the RB project, illuminating their contributions to the overall financial landscape. In contrast to the passenger service lines, the freight segment is undeniably an attractive opportunity for RB with positive operating profit generation from opening of services. As opposed to the scenario of the passenger segment in years 2051 and 2072 – when large-scale maintenance work is assumed to take place – the OPEX can be easily covered by an estimated revenue above EUR 112.2 mn for year 2051, and of EUR 122.8 mn for year 2072, after the stabilization following the ramp-up period. With an average annual revenue of EUR 105.9 mn and an average annual OPEX of only EUR 18.7 mn, the total average annual profit stands at EUR 87.2 mn. The following chart demonstrates that revenues consistently exceed OPEX, even during peak OPEX years. 152 Utilizing the profits generated from the freight segment to offset the losses incurred by the passenger segment is termed cross-financing. This approach presents a viable option for reducing the overall subsidy requirement during the project's operational phase. Figure 112: RB freight segments OPEX and revenues, EUR mn Over an eight-year timeline, the anticipated progression of freight train traffic is expected to show a compelling evolution. Starting at a conservative 15% in year 1, it steadily gains traction, reaching 30% in year 2 and 40% in year 3. The subsequent years are forecast to witness substantial growth, with freight traffic surging to 70% in year 4, further advancing to 85% in year 5, and climbing to 90% by year 6. Year 7 sees an increase to 95%, and, by year 8, freight train traffic is projected to reach full capacity at 100%. C y Y 1 Y 2 Y 3 Y 4 Y 5 Y 6 assenger 40% 70% 85% 90% 95% 100% Figure 113: RB passenger train ramp-up after completion (Consultant expert analysis) 10.4.1 Unitised Freight The unitised segment of RB maintains a consistent record of positive operating profit in every year, even during irregular years. The forecasted revenue after the ramp-up period is around EUR 82.9 mn, with OPEX being significantly lower, under EUR 11.1 mn yearly, except for the two years when ample maintenance will be conducted, this consistent profitability highlights the segment's efficiency and its ability to provide intermodal freight services that contribute to financial stability. The unitised segment is a crucial component in efficiently addressing the logistics needs of the region. 153 Exhibiting an average annual OPEX of EUR 13.9 mn and average annual revenues of EUR 93.9 mn, this segment consistently generates an average annual profit of EUR 80.0 mn, as illustrated in the following figure: Figure 114: RB unitised segment OPEX and revenues, EUR mn 10.4.2 Non-Unitised Freight The non-unitised segment of RB exhibits a similarly positive operating profit pattern when compared to unitised. Profits generated, although nearly half as much, emphasize the significant contribution of freight services to the project. This resilience and efficient performance in both segments validate the project's diversified revenue sources. It also underscores the capacity of the railway system to cater to a broad spectrum of cargo transport needs. 154 With an average annual OPEX of EUR 4.8 mn and average annual revenues of EUR 11.9 mn, this segment persistently generates an average annual profit of EUR 7.1 mn, as depicted in the accompanying figure. Figure 115: RB non-unitised segment OPEX and revenues, EUR mn 10.5 Electricity Resale Analysis As part of RB's financial analysis, the RB project includes a forward-thinking approach to energy management, comprised fully of electricity management and resale. This chapter delves into the financial implications of RB's electricity resale initiative. In its commitment to sustainability, RB opts for electricity from renewable sources. To authenticate this, the project will need to invest in Guarantees of Origin, ensuring transparent verification that the electricity used is renewable. As more renewable electricity generation facilities are emerging throughout Europe, the forecasted price is taken as a percentage of the electricity costs in 2025 and assumed for the rest of the modelled years as a conservative approach. C y 2022 2023 2024 2025 uarantees of rigin 7. 0 6.27 4.72 3.71 Figure 116: European average Guarantees of Origin price, EUR (Greenfact, 2022) This not only aligns with the project's environmental goals but also addresses the growing demand for sustainable energy solutions in public transportation. To resell electricity, RB must navigate the regulatory landscapes of Estonia, Latvia, and Lithuania, obtaining an energy trading license in each. Central to the resale strategy is the purchase of electricity, which would be resold to RUs at an assumed 3% mark- up (RB Financial Model, 2018). This section presents the expected revenue from this mark-up, considering factors such as projected electricity consumption rates and the fluctuating costs of renewable electricity. 155 On an annual scale, RB's electricity resale is expected to generate EUR 22.4 mn of revenue on average with the 3% mark-up, maximizing in 2035 at EUR 24.9 mn. The 3% mark-up would result in an average annual profit of EUR 0.7 mn. Figure 117 - RB electricity resale operating profit, EUR mn 10.6 Facilities Financial Analysis Facilities financial analysis covers the financial performance of both passenger stations and freight terminals within RB. This analysis aims to provide a comprehensive view of the economic aspects of these critical components. By examining station and freight terminal financial data, their financial viability and efficiency is being evaluated. The financial analysis of the facilities, encompassing both passenger stations and freight terminals, reflects a positive operating profit trend. Both facilities exhibit consistent profitability, serving as reliable contributors to RB's financial health. The station financial analysis reveals robust financial performance, emphasizing their significance as hubs of passenger activity, generating positive operating profits. Similarly, freight terminal financial analysis underscores the efficient handling of freight, further adding to the project's economic stability. 10.6.1 Passenger Stations Financial Analysis The passenger stations within RB present a compelling financial performance, consistently generating positive operating profit. Notably, their financial profile experiences a sharp increase, distinct from a gradual ramp-up, signifying their immediate and sustained impact on the project's fiscal health. In our financial model, station revenues are calculated using a bottom-up approach. The main sources of revenue stem from fees generated by trains stopping at the passenger stations and income from advertising spaces. These core elements constitute the primary income streams, reflecting the pivotal role of passenger stations in connecting passengers and facilitating advertising opportunities. Additionally, the model includes ancillary revenue sources, such as fees from shunting activities and income generated by renting retail spaces within the station premises. Together, the station, and ancillary revenue sources generate above EUR 17.1 mn constantly per year, from 2031 onwards. Noticeably, operating expenses (OPEX) are observed to decrease, representing ~ EUR 8.9 mn per year, with slight variations. This reduction is attributed to a forecasted decline in electricity prices, contributing to improved cost efficiency within the station operations. 156  Figure 118: RB passenger stations operating profit56, EUR mn 10.6.2 Freight Terminals Financial Analysis Freight terminals exhibit positive operating profit generation. Notably, their ramp-up aligns closely with the flow of freight traffic. This reflects their adaptability and responsiveness to market demands. As key contributors to the project's financial sustainability, the efficient handling of freight underscores the pivotal role of these freight terminals in optimizing revenue streams. Their ability to effectively adjust to evolving freight traffic flows further enhances their importance in the project’s overall success. Freight Terminal Demand Forecast The demand forecast for the freight terminals across Estonia, Latvia, and Lithuania is an integral component to understand the financial dynamics and the potential return on investment in the development of these facilities. 56 In addition to RB stations, CAPEX and financial analysis calculations also include Āgens alns, a station planned to serve 1520 mm services only. List and naming of passenger stations and freight terminals is subject to change during final design stages. 157 Through analyzing the projected throughput across various terminals for 2031, 2046, and 2056, the growth trajectory and demand for these terminals can be estimated. C y m 2031 2046 2056 Muuga 502 685 804 stonia Pärnu 7 10 12 Soodevahe 7 10 12 atvia Salaspils 34 46 55 anevėž s 41 56 66 Palemonas 140 185 213 ithuania arijampolė 49 66 78 Vilnius 134 179 205 Šešto ai 121 161 186 Figure 119: RB freight terminal forecasted TEU handled, thousands (Rail Baltica – internal document, 2023) In the financial analysis, freight terminal revenues are calculated based on a bottom-up approach, with a substantial portion of the revenues originating from the core activities of loading and unloading freight. This primary source of income reflects the fundamental role freight terminals play in facilitating efficient cargo operations, where fees are generated based on the quantity of goods handled. Furthermore, ancillary revenues associated with freight terminals provide an additional income stream. These ancillary sources include warehousing and storage fees, as well as charges for various value-added services such as cargo-handling equipment rentals, and logistics support. After stabilizing in year 2056, the yearly forecasted revenue is EUR 77.8 mn until 2080, which easily covers the estimated OPEX, valued EUR 43.7 mn in the same period. Figure 120: RB freight terminals operating profit, EUR mn 158 10.7 Country-Level Financial Analysis This section presents a comprehensive financial analysis for Estonia, Latvia, and Lithuania. The analysis aims to offer a general estimation rather than a detailed country-specific overview, in accordance with CBA guidelines that require focusing on the overall benefits of the entire project. The analysis is split into two main categories: passenger and freight. Both categories assess necessary operational costs and explore revenue generation opportunities. The objective is to evaluate the possibility of profitability at the country level. 10.7.1 Estonia In Estonia, both the passenger and freight sectors show comparable patterns in the progression of their operational costs, maintaining a generally stable trend with occasional surges, mainly attributed to maintenance expenses. Despite these expenditure trends being alike, the segments have notable differences in profitability. The freight sector proves to be more profitable, generating revenues from the early stages of operation and experiencing a significant growth trajectory thereafter. This indicates a strong possibility for financial success in the Estonian freight transportation segment compared to the passenger segment. Figure 121: RB Estonia OPEX and revenues, EUR mn Passenger Segment Financial Analysis The passenger segments in Estonia consistently operate at a deficit, primarily due to operational expenses exceeding generated revenues. This financial imbalance is particularly evident in specific years, notably around 2051 and 2072, due to the asset renewal cycle. After analyzing the sources of these operational expenditures, it becomes apparent that the regional segment incurs the highest costs EUR 204.8 mn and EUR 179.5 mn during the 159 asset renewal cycle. In addition, both the night-time and high-speed transport services contribute equally to the overall expenses, making them the second-largest contributors to the operational costs. Figure 122: RB Estonia passenger OPEX and revenues, EUR mn Freight Segment Financial Analysis In contrast to the financial challenges of the passenger segment in Estonia, the freight segment is forecasted to be profitable Forecasts suggest an increase in revenues as early as in 2031, with expectations of growth leveling out from 2056 onward at approximatively EUR 27.8 mn annually. Similar to the trends observed in the passenger segment domain, freight OPEX are projected to remain relatively consistent over time, with an anticipated rise in the previously noted years, 2051 and 2072, due to the asset renewal cycle. In terms of an operational cost breakdown, the unitised and non-unitised units of the freight segment share similar expenditure patterns, indicating a close alignment in cost structures. Figure 123: RB Estonia freight OPEX and revenues, EUR mn 160 10.7.2 Latvia The freight and passenger sectors in Latvia display similar patterns regarding OPEX. Generally, OPEX remain steady over time, though they are occasionally punctuated by two distinct increases in costs. Although there are similarities in the evolution of expenses, the sectors exhibit a strong contrast in their profitability profiles. The freight segment stands out as being more financially promising due to its ability to generate revenue right from its early years of operation and its rapid growth trajectory thereafter. Figure 124: RB Latvia OPEX and revenues, EUR mn Passenger Segment Financial Analysis In Latvia, the outlook for the passenger segment looks challenging since projected revenue is anticipated to fall short of OPEX incurred across regional, high-speed, and night segments. In comparison to the passenger revenues in Estonia, Latvia is generating a larger operating loss. When looking at OPEX composition, regional service dominates the cost structure, accounting for the largest share. In contrast, combined expenses associated with 161 the night and high-speed segments are considerably smaller. Thus, while all services contribute to the overall financial performance, it is the regional service that generates the most significant loss. Figure 125: RB Latvia passenger OPEX and revenues, EUR mn Freight Segment Financial Analysis The freight segment in Latvia displays a notable upward trend in profitability, with revenues increasing following the ramp-up of train services. After an initial growth period, these revenues stabilize, indicating a solid financial footing. There are two distinct spikes in operational expenses, particularly around 2051 and 2072, due to the asset renewal cycle involving extensive maintenance and replacement work, pointing to periods of major infrastructure work. Drawing a parallel with Estonia, there are similarities in terms of cost structure: the non-unitised segment of the freight operations consistently demands a slightly higher portion of the operational expenses compared to the unitised segment. Figure 126: RB Latvia freight OPEX and revenues, EUR mn 162 10.7.3 Lithuania The operational costs for both the freight and passenger sectors follow a similar pattern in Lithuania, characterized by general stability with two prominent peaks indicating periodic expenditure increases. When it comes to profitability, there is a clear difference, however. The freight segment generates revenue early on and has a rapid upwards earnings trend, making it financially profitable compared to the passenger segment. Figure 127: RB Lithuania OPEX and revenues, EUR mn Passenger Segment Financial Analysis Lithuania’s passenger segment also faces financial challenges related to the operational costs outweighing revenues in the regional, high-speed, and night services. A deep dive into OPEX reveals that the regional service is the most significant contributor, incurring estimated costs of EUR 148.6 mn yearly starting in 2041, and EUR 773.7 mn during the 2051 asset renewal cycle. Therefore, this segment bears the brunt of the overall expenditure, due to direct costs being allocated based on wear and tear proxied by train kilometers. On the other hand, expenses linked to night and high-speed trains, when combined, are substantially less – in comparison, they reach EUR 222.0 mn during the asset renewal cycle, which is close to the costs that the regional line would incur during 163 normal periods. So, even though all these services add to the total expenses, the regional segment is the primary financial challenge for the sector. Figure 128: RB Lithuania passenger OPEX and revenues, EUR mn Freight Segment Financial Analysis In Lithuania's freight segment, the early years showcase a promising rise in revenue, which eventually levels out at EUR 58.9 mn per year, indicating financial stability. However, there are two pronounced increases in operational costs around 2051 and 2072, at EUR 54.2 mn for unitised and EUR 23.0 mn for non-unitised. These spikes are largely attributable to major maintenance and infrastructure overhaul periods. The non-utilized segment tends to consume a marginally larger slice of the operational budget than the utilized one, underscoring the presence of certain universal financial dynamics within the freight industry. Figure 129: RB Lithuania freight OPEX and revenues, EUR mn 164 In conclusion, the operational expenditures of both the passenger and freight transportation sectors follow a similar pattern of general stability with occasional spikes due to major financial events related to maintenance and replacements. However, in terms of profitability, freight segment consistently outperforms the passenger segment across all three Baltic countries, with early revenue generation and a rapid growth trajectory indicating a more financially promising outlook for freight transportation in these nations. 10.8 Financial Analysis Results This section offers a comprehensive analysis of key financial metrics, presenting a detailed overview of the financial net present value (FNPV) across various facets of RB. This analysis encompasses the FNPV of CAPEX investments, providing insights into efficiency and returns on capital expenditures. It delves into the FNPV of mainline operations cash flows, shedding light on the financial performance of the core infrastructure. Similarly, the FNPV of facility operations cash flows provide a deep dive into the financial dynamics of passenger stations and freight terminals. Additionally, the section covers the FNPV of residual value, a critical component contributing to the total FNPV, as well as electricity resale. This holistic analysis allows for a thorough understanding of the project's financial viability, sustainability, and overall economic impact. Notably, the financial net present value on investment (FNPV(C)) is found to be negative, with a value of EUR - 21.5 bn, aligning with the general anticipated financial dynamics typical of railway projects. This negative FNPV(C) is indicative of the substantial upfront capital expenditures, the challenges often associated with long-term infrastructure investments, and the overall financial landscape that is inherent to railway developments. High- speed and night train segments are expected to be positive, however with low demand from the region and Western Europe now, it is negative. With future railway network developments expected in European initiatives, the business case might change. Despite the negative financial FNPV(C), it is essential to consider the broader socioeconomic benefits and long-term value that such projects contribute to regional development, mobility, and economic growth. 10.8.1 Financial Net Present Value This results overview provides a detailed financial snapshot of the project, highlighting both the challenges and opportunities within its various segments: CAPEX: • The NPV (EUR -19.8 bn) associated with CAPEX is negative, signifying the substantial initial investments required for the project. Mainline Operations:57 • High-speed: The NPV (EUR -580 mn) for high-speed train operations is negative, reflecting the costs and investments associated with this service. • Night: Similarly, the NPV (EUR -56 mn) for night train operations is also negative due to costs and capital expenditures. • Regional: The regional train operations NPV (EUR -1,893 mn) is strongly negative, illustrating the significant financial commitments and challenges faced in maintaining regional services. 57 Effect of increasing passenger TAC can be found in the Passenger TAC subsection of the report. 165  • Unitised: In contrast, the NPV (EUR 384 mn) for unitised freight services is positive, indicating the revenue generation and financial sustainability of this segment. • Non-unitised: The NPV (EUR 24 mn) for non-unitised freight services is also positive, underscoring the financial viability of conventional freight operations. Electricity Resale: • After the inspection of the resale opportunity, a positive NPV (EUR 155 mn) reveals a modest, but positive potential dependent on further country specific analysis of regulation, cost, and ability of IMs to acquire an electricity license. Facility Operations: • Passenger stations: The financial analysis reveals a positive NPV (EUR 58 mn) for station operations, emphasizing their role as revenue-generating hubs. • Freight terminal: Freight terminal operations also yield a positive NPV (EUR 160 mn), highlighting their efficiency in handling freight and contributing positively to the project's financial health. • Ancillary: The ancillary revenues also contribute positively to the NPV (EUR 49 mn). Residual Value: • The residual value is calculated using the depreciation formula and summing all not-modelled weighted average useful lifetime cash flows, resulting in a positive FNPV (EUR 9 mn), reflecting the enduring value of project assets. Total FNPV(C): • When all elements are considered, the cumulative FNPV(C) (EUR -21.5 bn) is negative, reflecting the challenges and investments associated with a comprehensive railway project. The following figure summarized the key elements of FNPV(C). Figure 130 - RB FNPV(C) build-up, EUR mn 166 The build-up of the FNPV(C) totaling to EUR -21.5 bn is a result of various contributing components that encapsulate the complex financial landscape. In this calculation, revenues account for EUR 1.6 bn discounted. Conversely, the project's expenses play a pivotal role, amounting to the negative NPV of EUR -23.1 bn discounted. The following table details each component of the FNPV build-up, also referencing FNPV (K) that reflects the return on national capital. Key parameters Value Unit of Measurement Type Revenues 1,626 EUR mn Discounted Passenger track access 366 EUR mn Discounted charges Freight track access 569 EUR mn Discounted charges Passenger stations 122 EUR mn Discounted Freight terminals 365 EUR mn Discounted Ancillary revenues 49 EUR mn Discounted Electricity resale 155 EUR mn Discounted Expenses 23,124 EUR mn Discounted CAPEX 19,799 EUR mn Discounted OPEX 2,042 EUR mn Discounted • Maintenance 1,354 EUR mn Discounted • Other expenses58 688 EUR mn Discounted Asset renewal 1,283 EUR mn Discounted Residual value 9 EUR mn Discounted FNPV (C) (21,489) EUR mn Discounted FRR (C) N/A (negative CF) % FNPV (K) (5,722) EUR mn Discounted FRR (K) N/A (negative CF) % Figure 131: RB FNPV(C) & (K) component build-up Based on the inputs from the FNPV analysis, a critical financial parameter is the financing gap, quantified at 108.53%. This metric signifies the difference between projected expenses, revenues, and residual value. It provides a pragmatic assessment of the financial challenges the project confronts, revealing the extent to which expenses surpass revenue generation. The financing gap serves as a pivotal indicator to guide practical financial planning and resource allocation, essential for closing the fiscal divide and achieving financial sustainability. 58 Other expenses: personnel expenses, cost of materials, utilities, and ICT 167 The following table outlines the calculation of the financing gap: Key parameters Discounted value Unit of Measurement Total CAPEX 19,799 EUR mn Residual value 9 EUR mn Revenues 1,626 EUR mn Expenses 3,325 EUR mn Net profit (1,690) EUR mn Expenses not covered by revenues 21,489 EUR mn Financing gap rate59 108.5 % Figure 132: RB financing gap calculation Benchmarking NPV/km This analysis focuses on comparing the FNPV/km of various high-speed rail lines. The projects under consideration are High Speed 1, Barcelona-Perpignan, Barcelona-Madrid, and Vancouver-Oregon. The FNPV/km metric is pivotal for assessing the economic viability of these projects. RB has an FNPV of EUR -21.5 bn, positioning it between the FNPV values of Barcelona-Perpignan and Vancouver- Oregon. While it has a lower FNPV than both Barcelona-Perpignan and Vancouver-Oregon, it is closer to Barcelona-Perpignan's FNPV. RB exhibits an FNPV/km of EUR -23.7 mn/km. While this is worse than Barcelona-Madrid (EUR -7.0 mn/km), it outperforms High Speed 1 (EUR -61.0 mn/km) and Vancouver-Oregon (EUR -45.0 mn/km). High-speed rail Barcelona- Barcelona- Vancouver- High Speed RB line Perpignan Madrid Oregon Track length (km) 108 175 621 482 909 Max speed (km/h) 300 350 350 400 249 NPV (EUR bn) (6.6) (4.3) (4.4) (21.7) (21.5) NPV/km (EUR mn) (61.0) (24.7) (7.0) (45.0) (23.7) Figure 133: High-speed rail project NPV benchmarking (Consultant team analysis) In the context of FNPV/km, RB demonstrates a performance that falls between Barcelona-Madrid and the less economically viable High Speed 1 and Vancouver-Oregon. Its FNPV/km of EUR -23.7 mn/km suggests a financial performance that is more favorable than High Speed 1 and Vancouver-Oregon but less favorable than Barcelona- 59 Financing gap rate = Expenses not covered by revenues NPV / Total CAPEX NPV 168 Madrid. The longer track length of RB should be considered when evaluating its overall financial viability in comparison to the other benchmarks. 10.8.2 Financial Rate of Return The financial rate of return on investment (FRR(C)) and return on national capital (FRR(K)) in the case of RB cannot be computed due to negative cash flows during the modelled years of the project. 10.9 Financing Plan 10.9.1 Introduction The funding for the RB project will be derived from a multifaceted approach encompassing European Union (EU) resources, national co-financing, and various alternative financing options. As per insights provided by the Finance department of RBR, it is envisaged that the principal funding component will originate from EU Funds, constituting approximately 70% of the project expenses. Furthermore, the three Baltic nations are expected to make substantial contributions to the endeavor through their respective national co-financing, typically accounting for 20% of the total project cost. The residual 10% of the project's financial requirements will be met through a diverse range of private funding sources. These may encompass state-backed financing, the utilization of Public-Private Partnerships (PPPs), concession agreements, or the engagement of international financial institutions. This comprehensive funding strategy underscores the project's commitment to securing the necessary resources from a variety of avenues. 10.9.2 Key Financing Sources EU Funds Connecting Europe Facility (CEF) Transport funds The Connecting Europe Facility (CEF) is a funding instrument of the European Union that supports investment in transport infrastructure across Europe. It is one of the key pillars of the EU's transport policy, and it aims to create a more interconnected and efficient transport network. CEF Transport is the main source of funding for the RB project with an 81% co-funding rate from the EU. The project has already secured over EUR 2.237 bn in funding from CEF Transport as of October 2023, and it is expected to receive additional funding in the future. Part of the CEF financing sources is Military Mobility. The RB project managed to secure an additional EUR 4.9 mn in funding. 169 CEF funding instruments are categorized into specific actions, from which RB has secured the following amounts: Name Action Action of grant Action Action Action Action Action Action Action Action Action 2014- 2021- Sum agree- 2014 2015 2016 2019s 2019w 2020 2021 2022-C 2022-G LT MM ment60 Amount (EUR 72 442 130 110 73 108 16 353 4.9 323 605 2.237 mn) Figure 134: Secured CEF funding instruments until 2022, EUR mn The application process to receive further CEF funding is in progress, and RB expects to receive additional funds in the upcoming years with 70% co-funding rate. However, the availability of CEF funding in the future is uncertain, which could pose a risk to the financing of the project. Cohesion Fund The Cohesion Fund is designed to reduce the economic and social gap between and within countries where gross national income (GNI) is below 90% of the EU average. Estonia will receive 3.5 bn EUR from the Cohesion Fund from 2021 to 2027 (European Commission, 2023f), Latvia 4.6 bn EUR (European Commission, 2023g), and Lithuania 6.4 bn EUR (European Commission, 2023h). European Regional Development Fund (ERDF) The ERDF aims to strengthen economic, social, and territorial cohesion in the EU by correcting imbalances between its regions. The ERDF can co-finance a percentage of around 50%-85% of eligible costs. Recovery and Resilience Facility (RRF) The RRF is a temporary instrument that is the centerpiece of NextGenerationEU, the EU's plan to emerge stronger and more resilient from the COVID-19 crisis. Estonia will receive a grant from RRF of 0.953 bn EUR (European Commission, 2023i), and Latvia 1.826 bn EUR (European Commission, 2023j). Lithuania was initially supposed to receive a grant of 2.224 bn EUR, revised to 2.1 bn EUR, with a potential additional 0.194 bn EUR and a proposal for 1.7 bn EUR in loans (European Parliament, 2023b). National Co-Funding National co-funding is an essential component of the project's financing. In addition to CEF funding instruments, the three Baltic states are expected to contribute at between 15-30% in national co-funding. However, due to the significant increase CAPEX estimates compared to the project's original budget, state co- funding rates for certain assets could increase significantly to complete the project on time depending on availability of EU funding. 60 Names of grant agreements signed between the European Innovation and Networks Executive Agency (INEA) and the RB joint venture 170 The following table summarizes the national co-funding contributions that the Baltic states have made to the RB project to date. Action Action Action Action Action Action Action Action Action Action Action Sum 2014-LT 2014 2015 2016 2019s 2019w 2020 2021 2021-MM 2022-C 2022-G 12 94 22 19 12 19 2.9 68 4.9 87 108 454.2 Figure 135: National co-funding amount per CEF action, EUR mn Potential Alternative Financing Sources Three alternative financing avenues are available to address the project's funding shortfall spanning from 2024 to 2030. These options encompass state financing, Public-Private Partnerships (PPPs) or concessions, and engagement with international financial institutions. However, achieving private project financing necessitates a structured approach, and RB must navigate three key steps to enhance its prospects of securing funding from private sources successfully. Preparing the RB project for private project financing Private project financing is a way to finance large-scale infrastructure projects by attracting private investment. Private investors are willing to invest in such projects if they believe that they will generate a sufficient return on their investment. The RB project is a large-scale infrastructure project that is eligible for private project financing. However, there are several steps that need to be taken to prepare the RB project for private project financing. Step 1: Establish clear infrastructure management principles and establish multi-annual contracts with them IMs are responsible for the operation and maintenance of railway infrastructure. To attract private investment, it is important to establish clear infrastructure management principles and sign multi-annual contracts with them. These contracts should define the IMs' responsibilities for construction, operation, and maintenance, as well as the revenue stream that they will receive. Requirements: • Create a clear cash flow profit-sharing mechanism between the three Baltic states. • Set TACs methodology and values for 3 countries, stable over time and countries. • Make it a legal requirement. • Prepare business plans for IMs for a period of 7-20 years. Step 2: Provide state guarantees for the construction period State guarantees can help to protect private investors from the risk of financial loss. This is important because the construction of large-scale infrastructure projects can be complex and risky. Requirements: • A state guarantee that should be provided for the entire financing period to secure the construction phase. • Getting export credit agency guarantees. 171 Step 3: Refinance the project without state guarantees, but maintain the multi-annual contracts Once the RB project is operational and generating a sustainable revenue stream, it may be possible to refinance the project without state guarantees. This would reduce the cost of financing for the project and allow private investors to generate a higher return on their investment. Requirement: • Multi-annual contracts must be in place and enforceable. State Financing Tools Financing additional funding needs of the RB project from national budgets will likely be a necessary option to complete the whole project on time. However, there is a risk that the national credit rating could fall to levels that would significantly negatively impact the state if funding for state needs increases too much. One option to increase the national budget for the RB project would be to increase carbon taxes for roads. This would also help the Baltic states to reduce their greenhouse gas emissions. As of March 1, 2023, 21 European countries have introduced carbon taxes, and the Baltic states still have room to increase carbon tax rates as current levels are well below EU member averages. Taxes in Europe range from less than EUR 1 per metric ton of carbon emissions in Ukraine to more than EUR 100 in Sweden, Liechtenstein, and Switzerland. The EU average is EUR 44.5 per metric ton of carbon emissions, while Latvia's taxes are set at EUR 15 per metric ton of carbon emissions, and Estonia's rates are set at EUR 2 per metric ton of carbon emissions, that are set to increase in 2024 July to EUR 25 per metric ton. Lithuania does participate in the European Union Emissions Trading System (EU ETS), but it does not currently have an explicit carbon tax. The Lithuanian government has proposed to introduce an explicit carbon tax in 2025. The proposed tax would start at EUR 10 per ton of CO2 and rise gradually to EUR 60 per ton of CO2 in 2030. Figure 136: Carbon tax rates in Europe, EUR/ton CO2 (Tax Foundation, 2023) Another way in which the states could finance the RB project would be to borrow funds and then lend them to the project companies. This is often the most cost-effective way of borrowing, but it requires a multi-year contract between the government and companies. It is important to note that the government may be providing 172 state aid to the project company if it borrows money at a lower than market interest rate and then lends it to the project company at the market rate. If this is the case, the government has to consider additional costs (including further risk cost) that may arise, therefore, the government may need to charge the project company an additional margin to cover these costs. Public-Private Partnerships and Concessions This option allows the government to tap into the private sector's expertise and resources and reduce the overall project risk. PPPs and concessions are a good solution for the sections of the project that are most profitable, yet they also take some part of the profit away from such sections. International companies are interested in financing the Rī loop of the project as a PPP, but in case of insufficient funding for the entire project, the main corridor would be prioritized. Additional funding could be available from the EU's Multiannual Financial Framework (MFF) in 2035. Concessions could be a good option for sections with high service demand if the private sector is willing to take on the risk. To reduce the private sector's risk, there are three options to consider. 1. To offer state guarantees, which is the most straightforward option but also the most expensive one. 2. To sign multi-annual contracts, which would require the governments to sign long-term contracts with IMs. 3. To involve export credit agencies, as they can provide guarantees for loans made to private companies working on infrastructure projects in developing countries. This is a relatively low-cost financing option but is not suitable for all projects. If the PPP financing option is pursued to fund a portion of RB-related investments, it would entail engaging in state aid, and consequently adhering to the state aid regulations. This would further mean that the eligibility to apply for the maximum allowable Cohesion Fund support rate would be forfeited. International financial institutions International financial institutions provide credit and equity funding as well as guarantees for railway projects. Based on the analysis of the team and the input provided by the RBR team, the following international financial institutions are potential good partners for RB: • The Nordic Investment Bank, for example, provides sustainable, long-term financing for their customers in both the private and public sectors on competitive market terms. Nordic Investment Bank loans usually do not exceed 50% of the project costs. They have allocated a total of EUR 3.8 bn in new funding in the first quarter of 2023. • The European Bank for Reconstruction and Development (EBRD) focuses on projects dealing with infrastructure and climate action, supporting social impact goals. They finance equity stakes of up to 35% and invest between EUR 10 mn and EUR 200 mn per investment. Loans to private sector projects usually start from a minimum of EUR 3 mn up to EUR 250 mn. • The European Investment Bank (EIB) is the lending arm of the European Union and one of the largest providers of climate finance. It provides equity investments of 10% to 20% of the fund size, with a maximum of 25%. Typical investment size is between EUR 25 and EUR 60 mn but can go up to EUR 200 mn for certain conditions. Loans for the public sector can cover up to 50% of a project's total cost, which starts at EUR 25 mn. The EIB approved a total of EUR 65.15 bn of financing in 2022. 173 10.9.3 Financial Sustainability Analysis The sustainability analysis indicates that the project will require external financing throughout its life cycle, both during the construction and operational phases, as it is not expected to generate sufficient revenue and cash flow to cover its costs and meet its financial obligations over the long term. It is important to note that future externalities could make the business case for the project positive, even if European connectivity is not yet predictable for the infrastructure. The following figure shows the additional subsidy requirements during the operational phase, from 2031 to 2080. It is currently estimated that the additional funding needed for operations will be around EUR 466 mn annually, and this will be financed by state subsidies during this period. 174  Closing Opening Closing Additional Cash flow after Year Revenues Costs cash cash funding for the year additional balance balance needed funding 2024 - - - - - - - … 2030 - - - - - - - 2031 73 510 (438) - (438) - 438 2032 115 536 (421) - (421) - 421 2033 140 548 (408) - (408) - 408 2034 187 562 (375) - (375) - 375 2035 214 572 (358) - (358) - 358 2036 226 577 (351) - (351) - 351 2037 235 579 (344) - (344) - 344 2038 248 584 (337) - (337) - 337 2039 249 585 (336) - (336) - 336 2040 252 586 (334) - (334) - 334 2041 257 689 (433) - (433) - 433 2042 260 692 (432) - (432) - 432 2043 264 694 (431) - (431) - 431 2044 267 697 (430) - (430) - 430 2045 271 699 (429) - (429) - 429 2046 274 702 (428) - (428) - 428 2047 279 705 (427) - (427) - 427 2048 283 708 (425) - (425) - 425 2049 287 711 (424) - (424) - 424 2050 291 713 (423) - (423) - 423 2051 295 2,694 (2,400) - (2,400) - 2,400 2052 299 628 (329) - (329) - 329 2053 303 631 (328) - (328) - 328 2054 307 633 (326) - (326) - 326 2055 311 635 (324) - (324) - 324 2056 315 639 (323) - (323) - 323 2057 315 640 (325) - (325) - 325 175  Closing Opening Closing Additional Cash flow after Year Revenues Costs cash cash funding for the year additional balance balance needed funding 2058 315 642 (327) - (327) - 327 2059 315 644 (328) - (328) - 328 2060 315 645 (330) - (330) - 330 2061 315 647 (332) - (332) - 332 2062 315 749 (433) - (433) - 433 2063 315 751 (435) - (435) - 435 2064 315 753 (438) - (438) - 438 2065 315 755 (440) - (440) - 440 2066 315 757 (442) - (442) - 442 2067 315 760 (444) - (444) - 444 2068 315 762 (446) - (446) - 446 2069 315 764 (449) - (449) - 449 2070 315 766 (451) - (451) - 451 2071 315 769 (453) - (453) - 453 2072 315 2,529 (2,214) - (2,214) - 2,214 2073 315 682 (366) - (366) - 366 2074 315 683 (368) - (368) - 368 2075 315 685 (370) - (370) - 370 2076 315 687 (372) - (372) - 372 2077 315 689 (373) - (373) - 373 2078 315 691 (375) - (375) - 375 2079 315 693 (377) - (377) - 377 2080 315 695 (379) - (379) - 379 Figure 137: RB sustainability analysis, EUR mn When observing the subsidies allocated to the high-speed segment, Estonia leads with a subsidy of EUR 34.6 mn, followed closely by Latvia with EUR 33.5 mn, and Lithuania with a lower allocation of EUR 27.1 mn. The night segment receives the lowest allocation in Lithuania (EUR 2.8 mn), while Estonia and Latvia have slightly higher subsidies with EUR 2.9 mn and EUR 3.0 mn respectively. A significant portion of the subsidies in Latvia and Lithuania are directed towards the regional segment, with Latvia needing to allocate EUR 128.8 mn and Lithuania even higher at EUR 155.4 mn. Estonia, on the other hand, needs to allocate a substantially lower amount of EUR 30.4 mn. As mentioned throughout the Financial Analysis chapter, passenger segments are forecasted to be loss generating, thus large subsidies are needed to sustain them. 176 While unitised and non-unitised segments are generally profitable, during asset renewal years, they generate a loss. These losses are averaged out throughout the years not considering profitability in stable expense years. In the unitised segment, all three countries have need to allocate relatively small amounts, with Latvia providing the highest subsidy at EUR 0.4 mn, followed by Estonia with EUR 0.1 mn, and Lithuania with the least at EUR 0.0 mn. Lastly, the non-unitised segment sees allocations with Lithuania providing a subsidy of EUR 0.5 mn and Estonia and Latvia allocating EUR 1.0 mn and EUR 0.5 mn respectively. C y H p N R U N stonia 34.6 2.9 30.4 0.1 1.0 atvia 33.5 3.0 128.8 0.4 0.4 ithuania 27.1 2.8 155.4 0.0 0.5 Figure 138: RB average annual subsidy need per segment per country, EUR mn 10.9.4 Financing of the Construction and Operational Phases The RB project is financed through a combination of construction financing and operational financing. Details for the two phases are described below. Construction Financing The construction phase is expected to be finished by 2030 but is subject to change. During this period, out of the total CAPEX requirements, 70% of financing comes from EU financing sources, 20% from state co-funding and 10% from private sources. There is major risk associated with the assumed financing structure of the project. Decrease in the percentage of grants can significantly increase the interest expenses. Furthermore, not securing funds in a timely manner can cause delays in construction. Associated risks with financing can be found in detail in the Appendix in the Risk Mapping section. The total financing need of the constructions phase adds up to a total value of EUR 26.3 bn not accounting for inflation from 2023 on, of which EUR 18.4 bn comes from EU funds, EUR 5.3 bn from national co-funding and EUR 2.6 bn from alternative financing sources. The following table summarizes the already identified and expected sources of construction financing by year and by country. In case of unavailability of the expected amount in EU funds, state co-funding and alternative financing sources need to increase. 177  Up to 2024 2025 2026 2027 2028 2029 2030 Sum EU funds (70% of total CAPEX) EE 406 427 450 606 596 453 128 3,066 LV 839 917 1,344 1,710 1,368 1,042 235 7,455 LT 1,038 974 1,404 1,598 1,525 1,063 263 7,865 Total 2,283 2,318 3,198 3,915 3,489 2,558 626 18,386 State co-funding (20% of total CAPEX) EE 116 122 129 173 170 129 37 876 LV 240 262 384 489 391 298 67 2,130 LT 297 278 401 457 436 304 75 2,247 Total 652 662 914 1,119 997 731 179 5,253 Alternative financing (10% of total CAPEX) EE 58 61 64 87 85 65 18 438 LV 120 131 192 244 195 149 34 1,065 LT 148 139 201 228 218 152 38 1,124 Total 326 331 457 559 498 365 89 2,627 Figure 139: Sources of construction financing by country, EUR mn Operational Financing Operational financing of the RB project is assumed to start in 2031 and continue until 2080. Operating costs will need to be subsidized by each state, with a higher subsidy required every 20 years to renew capital expenditures (CAPEX). Subsidies can be given to either passenger or freight operations. If either category generates a surplus, it is possible to allocate that surplus to the other category, which is referred to as cross- financing. In the base case, passenger operations are loss generating so they could be cross financed from freight operations making a surplus. Analysis shows that there is a 25% difference in subsidy needs between scenarios with and without cross- financing. Without cross-financing, the total need is around EUR 0.6 bn while with cross-financing, the total subsidy need is estimated to be an annual EUR 0.5 bn for the three Baltic countries. The following two tables summarize the yearly estimates for both scenarios by year and by country. Annual average subsidy need Estonia Latvia Lithuania Total With cross-financing 60 205 201 466 Without cross-financing 87 240 256 583 Figure 140: Subsidy need across countries with and without cross financing, EUR mn The need for subsidies during the operational phase could be mitigated by introducing the Defense Capacity Fee part of military mobility sources of funding for RB. Ministries of defense and NATO do not invest in railway infrastructure themselves, but they do pay for usage. It is difficult to predict how much money 178 actors would be willing to pay as a capacity fee for RB. However, this could be a possible source of funding, and it could be put into law. The capacity fee could be a fixed amount, or it could be based on future cash flow. The Defense Capacity Fee would be a way for the military to contribute more to RB as the latter provides benefits not only for passengers and cargo but also for defense. 179 The following charts showcase annual subsidy needs estimated for passenger operations across countries without and with cross-financing from freight operations. Figure 141: Subsidy need across countries with cross financing, total EUR mn Figure 142: Subsidy need across countries without cross financing, total EUR mn 180 10.9.5 Financing Sensitivity Analysis As summarized in the previous sections, the RB project is expected to be financed from three major sources: EU financing, state financing from the three Baltic states, and other sources of financing. In this subsection three analyses are outlined to provide a view on the potential financing plans and their impacts: • A sensitivity analysis on FNPV(C) (Financial Net Present Value on Investment) to demonstrate how varying the shares of different financing sources impacts the overall FNPV value of the RB project. • Financing plan scenarios to offer an overview of the financing needs for each country involved in RB, depending on the distribution of financing sources. • A risk-return matrix with different EU financing and interest rates on loan service for the project to illustrate the maximum feasible combination of leverage and interest rates for the RB project. Sensitivity Analysis on FNPV(C) The total financial net present value of the RB project is highly dependent on CAPEX due to the nature of the project. During construction period, financing is primarily aimed at covering capital expenditures, making the cost of financing a crucial factor. Figure 143 - Sensitivity of FNPV(C) from financing sources, EUR bn RB is assumed to obtain 70% of its financing needs from EU sources, 20% from state budgets, and the remining 10% from other sources. The sensitivity analysis above explores the impact of changes in these proportions, summing up the sensitivity of FNPV(C) in relation to the various shares of financing. FNPV(C) excludes interest expenses and interest capitalization. The columns in the table represent the percentage of EU financing, while the rows show the state financing percentages. The proportion of financing from other sources is calculated by subtracting the total of EU and state financing percentages from 100%. The most favorable options from FNPV(C) perspective are the ones, where other non-EU and non-state financing sources are low; please see with green coloring on the figure above. As other financing sources incur costs in terms of debt, this makes this financing source less preferred, and it impacts FNPV(C) negatively. Until the absolute value of FNPV(C) is lower than the absolute value of economic benefits monetized, inclusion of other financing sources with the assumption of having a 5.9% interest rate. The calculated value for economic benefits is EUR 28.1 bn (to be detailed in the next chapter), resulting in a favorable position regarding FNPV(C), as its absolute value remains always below the absolute value of economic benefits. 181 Financing Plan Scenarios The EU co-financing rate highly influences the need for other financing sources; therefore, scenarios are analyzed with different financing plans during the construction period on country level breakdown. Below, there are five financing plan scenarios analyzed with the assumption that 10% of the total financing sources come from other sources. As the value for other sources of financing is fixed, cost of debt is affecting the financing plan scenarios to the same extent, leaving FNPV(C) value at a negative EUR 21.5 bn level, as seen in the last rows in each table. Share of financing Share of financing Share of financing Share of financing Share of financing Share of financing 5% 85% 10% 10% 80% 10% 15% 75% 10% 20% 70% 10% 30% 60% 10% 40% 50% 10% State EU Other State EU Other State EU Other State EU Other State EU Other State EU Other funding financing financing funding financing financing funding financing financing funding financing financing funding financing financing funding financing financing Estonia 0.2 3.7 0.4 0.4 3.5 0.4 0.7 3.3 0.4 0.9 3.1 0.4 1.3 2.6 0.4 1.8 2.2 0.4 Latvia 0.5 9.1 1.1 1.1 8.5 1.1 1.6 8.0 1.1 2.1 7.5 1.1 3.2 6.4 1.1 4.3 5.3 1.1 Lithuania 0.6 9.5 1.1 1.1 9.0 1.1 1.7 8.4 1.1 2.2 7.9 1.1 3.4 6.7 1.1 4.5 5.6 1.1 Total 1.3 22.3 2.6 2.6 21.0 2.6 3.9 19.7 2.6 5.3 18.4 2.6 7.9 15.8 2.6 10.5 13.1 2.6 FNPV(C) (21.5) (21.5) (21.5) (21.5) (21.5) (21.5) Figure 144: Financing plan scenarios with 10% of other sources of financing, EUR bn 182 The table below presents varying assumptions regarding the contribution of other sources to the p ’ financing, ranging from 0% to 30%. The variations lead to different values for total project FNPV(C). A higher rate of financing from other sources correlates with a lower FNPV(C) value. For instance, a 20 percentage- point increase in the rate of other financing sources (resulting in a 30% contribution) corresponds to a 6 percentage-point decrease in the FNPV(C). Share of financing Share of financing Share of financing Share of financing Share of financing Share of financing 15% 85% 0% 20% 80% 0% 20% 75% 5% 20% 70% 10% 20% 60% 20% 20% 50% 30% National EU Other National EU Other National EU Other National EU Other National EU Other National EU Other Estonia 0.7 3.7 - 0.9 3.5 - 0.9 3.3 0.2 0.9 3.1 0.4 0.9 2.6 0.9 0.9 2.2 1.3 Latvia 1.6 9.1 - 2.1 8.5 - 2.1 8.0 0.5 2.1 7.5 1.1 2.1 6.4 2.1 2.1 5.3 3.2 Lithuania 1.7 9.5 - 2.2 9.0 - 2.2 8.4 0.6 2.2 7.9 1.1 2.2 6.7 2.2 2.2 5.6 3.4 Total 3.9 22.3 - 5.3 21.0 - 5.3 19.7 1.3 5.3 18.4 2.6 5.3 15.8 5.3 5.3 13.1 7.9 FNPV(C) (20.9) (20.9) (21.2) (21.5) (22.1) (22.7) Figure 145: Financing plan scenarios with varying rates for other sources of financing, EUR bn 183 Risk-Return Analysis The risk-return analysis of the RB project examines the interrelation between the percentage of capital expenditures (CAPEX) financed through grants (EU and national contribution) and the interest rate on loans. Considering that interest rates can vary significantly over time, evaluating different interest rate scenarios is crucial for understanding their impact on the project's financial health. The primary outcome of this analysis is the FNPV(C) of the project. The following table summarizes the results, based on the assumption that the portion of CAPEX not covered by grants is financed through loans. As shown, changes in the interest rate have a more pronounced impact on the FNPV(C) than the proportion of the project financed by grants. This is primarily because the interest rate also acts as the cost of debt in the WACC calculation. The most favorable scenario, highlighted in the top right-hand corner of the table, showcases the relationship between WACC and FNPV(C). The improvement in this scenario is largely due to the residual value discounting: as the discount rate decreases, the future value of the asset increases when viewed from the present perspective. In summary, the interest rate exerts a more significant influence on RB's ability to generate cash flow than the proportion of grants received. The matrix focuses on the FNPV(C), where interest-related expenses are not included. Therefore, the analysis would yield a different outcome if the overall FNPV is used instead. Figure 146: Risk-return matrix, EUR bn 10.9.6 Conclusions Financing is essential to the success of the RB project. The total funding requirement for the construction phase is EUR 26.3 bn, not considering inflation from 2023 on. Of this amount, EUR 18.4 bn will come from EU funds, EUR 5.3 bn from national co-funding, and EUR 2.6 bn from alternative financing sources. During the operational phase, subsidy requirements could range from EUR 23.3 bn with cross-financing to EUR 29.1 bn without cross-financing. The sensitivity analysis shows that the amount of grant funding received for the project has the greatest impact on its profitability. This suggests that RB should focus on securing as much grant funding as possible. 184 RB is committed to securing the necessary financing for the project, exploring a variety of financing options, including: • EU funds • National co-funding • Alternative financing sources, such as loans, guarantees, and equity investments • Cross-financing, which involves allocating surplus revenue from one category of operation (e.g., freight) to subsidize another category of operation (e.g., passenger) The RB team is confident that it will be able to secure the necessary financing for the project. The project is a strategic priority for the Baltic states and the EU, and it is expected to generate significant economic benefits. 10.10 Sensitivity analysis The sensitivity analysis assesses the impact of six different variables on the FNPV(C) of the RB project: discount rate, TAC, traffic demand, CAPEX overrun, OPEX overrun, and 1-TAC incidents on RU revenues. It can be observed that: • A 1%p reduction in the discount rate decreases FNPV(C) by approximately EUR 1.0 bn. This is because a lower discount rate gives more weight to negative cash flows early in the modeled period. • A 10%p reduction in TAC decreases FNPV(C) by EUR 99 mn. This is because TAC is a close to ~50% of the revenue source for the RB project, and a lower TAC revenue would reduce the overall revenue of the project. • A 10%p increase in OPEX (operating expenses) overrun decreases FNPV(C) by EUR 215 mn. This is because OPEX overruns are unexpected increases in operating costs, which can significantly reduce the profitability of a project. The analysis is not symmetrical in results, as the operating profit in aggregate is negative for RB. • A 20%p decrease in traffic demand decreases FNPV(C) by approximately EUR 199 mn. This is because lower traffic demand would lead to lower revenues for the RB project. • A 5%p change in CAPEX overrun decreases FNPV(C) by approximately EUR 1.1 bn. This is because CAPEX overruns are unexpected increases in construction costs, which materializing early in the modeled period, can significantly decrease the overall value of the project. • A 5%p decrease in 1-TAC incidents on RU revenues decreases FNPV(C) by approximately EUR 74 mn. This is because TAC disruptions can lead to lost revenue for RUs, which can reduce the overall profitability of the RB. The sensitivity analysis shows that the FNPV(C) of the RB project is sensitive to several factors, including the discount rate, TAC, traffic demand, CAPEX overrun, OPEX overrun, and TAC incidents on RU revenues. Among these variables the change in discount rates and the CAPEX overrun has the highest impact on the FNPV(C) of the project. 185  Change Discount rate FNPV(C) Change FNPV(C) Change FNPV(C) Value TAC OPEX overrun (%p) chg. (21.5) (%p) (21.5) (%p) (21.5) 4.0% -4% -4% (26.3) -40% 60% (21.9) 40% 140% (22.4) 5.0% -3% -3% (24.9) -30% 70% (21.8) 30% 130% (22.1) 6.0% -2% -2% (23.7) -20% 80% (21.7) 20% 120% (21.9) 7.0% -1% -1% (22.5) -10% 90% (21.6) 10% 110% (21.7) 8.0% 0% 0% (21.5) 0% 100% (21.5) 0% 100% (21.5) 9.0% 1% 1% (20.6) 10% 110% (21.4) -10% 90% (21.3) 10.0% 2% 2% (19.7) 20% 120% (21.3) -20% 80% (21.1) 11.0% 3% 3% (19.0) 30% 130% (21.2) -30% 70% (20.8) 12.0% 4% 4% (18.3) 40% 140% (21.1) -40% 60% (20.6) Change Traffic FNPV(C) Change CAPEX FNPV(C) Change 1-TAC incidents FNPV(C) (%p) demand (21.5) (%p) overrun (21.5) (%p) on RU revenues (21.5) -80% 20% (22.3) 20% 120% (26.0) 20% 94% (21.8) -60% 40% (22.1) 15% 115% (24.9) 15% 89% (21.7) -40% 60% (21.9) 10% 110% (23.7) 10% 84% (21.6) -20% 80% (21.7) 5% 105% (22.6) 5% 79% (21.6) 0% 100% (21.5) 0% 100% (21.5) 0% 74% (21.5) 20% 120% (21.3) -5% 95% (20.4) -5% 69% (21.4) 40% 140% (21.1) -10% 90% (19.2) -10% 64% (21.3) 60% 160% (20.9) -15% 85% (18.1) -15% 59% (21.3) 80% 180% (20.7) -20% 80% (17.0) -20% 54% (21.2) Figure 147: Financial analysis sensitivity analysis, EUR bn 186 10.10.1 Passenger TAC The objective to analyze the sensitivity of RB's passenger TACs is relevant to evaluate the current and future market conditions. The current charges might be poised to change from the present-day market analyses, considering factors such as passenger demand, operational costs, and existing competition. A crucial aspect to consider is that the final ticket prices for passengers influence the forecasted TAC. There are two potential avenues for increasing the TAC. The first is the completion of high-speed infrastructure developments in surrounding countries. This expansion is expected to enhance RB's connectivity to the broader European high-speed rail network. As a result, RB may find an opportunity to increase the TAC, given that better connections might enhance the rail line's attractiveness to passengers. Additionally, RB might leverage its anticipated superior service quality compared to other 1520mm gauge local infrastructures to justify a higher TAC. This assumption is based on the expectation that Rail Baltica will provide faster, more comfortable, and safer services, with additional amenities compared to other local rail lines operating on the 1520mm gauge. A 100%p increase in TAC (doubling) can result in an increase in FNPV(C) of EUR 383 mn. High-speed and FNPV(C) Average regional night final consumer Change (%p) Passenger TAC final consumer price (21.5) price EUR 0.10 EUR 0.06 0% 100% (21.5) EUR 0.12 EUR 0.07 20% 120% (21.4) EUR 0.14 EUR 0.08 40% 140% (21.3) EUR 0.16 EUR 0.09 60% 160% (21.3) EUR 0.18 EUR 0.10 80% 180% (21.2) EUR 0.20 EUR 0.12 100% 200% (21.1) EUR 0.22 EUR 0.13 120% 220% (21.0) EUR 0.24 EUR 0.14 140% 240% (21.0) EUR 0.26 EUR 0.15 160% 260% (20.9) Figure 148: RB passenger TAC sensitivity analysis, EUR bn 187 11 Socio-Economic Analysis 11.1 Methodology Overview Within the CBA framework, this chapter presents the socio-economic impact analysis of the RB project. In line with EU guidelines, the net economic benefits of RB are identified, a key step prior to the combination of these benefits with the financial impact to calculate the ultimate performance indicators: the economic net present value (ENPV) and economic rate of return (ERR). These indicators will ultimately demonstrate the value of RB for the economy and society. The analysis focuses on the project’s direct microeconomic impact on market participants, emphasizing that RB's financial gains represent only a part of its broader societal and economic benefits. Direct benefits are realized by industry players across the passenger and freight value chains, passengers, freight shippers, the environment, and labor61 (see following figure). The impact components are defined to provide a mutually exclusive and completely exhaustive set of elements, covering all relevant aspects of the RB project’s socio-economic influence. While the induced and indirect impacts of the project are also crucial to understand the true extent of societal benefits, they are assessed in the Wider Economic Impact Analysis chapter to avoid potential overlaps and to comply with EU CBA guidelines. Figure 149: Socio-economic impacts measured within the CBA framework To determine direct socio-economic impacts, the analysis focuses primarily on modal shift and induced demand, comparing scenarios both with and without RB (detailed in the Traffic Demand Forecasting chapter). Specific impact components (detailed in the Assumptions chapter) are considered to understand the incremental benefits of both scenarios. This socio-economic impact analysis is conducted without assuming any additional investments beyond the project itself as these are considered independent developments requiring a separate CBA. This is to ensure a consistent attribution of benefits to their respective costs. Nevertheless, this approach might be conservative in capturing the synergistic impact of dependent developments, such as the interplay between rail development and urban housing schemes. The evaluation framework is defined by crucial project characteristics, including RB's useful economic life and the social discount rate. These parameters are vital for evaluating the project's long-term socio-economic benefits 61 The calculation excludes potential benefits realized by construction workers as construction is considered as the cost of the project which enables the realization of benefits during the operational phase. 188 and costs. All results are presented within this framework, ensuring a comprehensive assessment that accurately represents RB's entire lifespan and its socio-economic context. First, a summary of the socio-economic impact analysis results is presented, followed by detailed assessment methodologies, and assumptions of each impact component. A sensitivity analysis concludes the chapter, exploring how variation in different assumptions might affect socio-economic impacts. 11.2 Socio-Economic Impact Summary (NPV) RB Global Project is expected to generate net economic benefits worth EUR 28.1 billion NPV throughout the project’s lifetime. Passenger benefits, contributing 80.3% of this total, are the most significant. Environmental impacts account for 13.6%, followed by freight shipper impacts at 4.9% and labor impact below 1%. The table below offers a summarized breakdown of the net economic benefit for each component in the socio-economic impact analysis. Impact component Impact driver EUR mn % Total Transport value chain profit 113.6 0.4% Passenger transport profit Passenger 25.9 0.1% Freight transport profit Freight 87.7 0.3% Passenger benefits 22,535.2 80.3% Passenger time savings Modal shift 11,497.4 41.0% Travel cost savings Modal shift 4,634.8 16.5% Accident cost savings Modal shift 3,307.7 11.8% Leisure, health, personal accessibility Induced demand 2,783.7 9.9% Education accessibility Induced demand 161.4 0.6% Job accessibility Induced demand 150.2 0.5% Freight shipper impacts 1,363.7 4.9% Transport cost savings Modal shift 904.7 3.2% Time savings Modal shift 255,7 0.9% Accident cost savings Modal shift 82,7 0.3% Induced freight flow benefits Induced demand 120,6 0.4% Environmental impact 3,816.7 13.6% GHG emissions (passenger) Operation - Passenger 2,389.9 8.5% Air pollution (passenger) Operation - Passenger 530.2 1.9% Noise pollution (passenger) Operation - Passenger 411.9 1.5% GHG emissions (freight) Operation - Freight 539.9 1.9% Air pollution (freight) Operation - Freight 128.6 0.5% Noise pollution (freight) Operation - Freight 192.5 0.7% GHG (const) Construction - 0.1 0.0% Air (const) Construction - 346.3 -1.2% Noise (const) Construction - 29.8 -0.1% Labor impact 223.3 0.8% Net benefit for labor employed RB employees 223.3 0.8% Total benefits (discounted) 28,052.5 100.0% Figure 150: Summary of socio-economic impact components (NPV) 189 The following chapter provides a clear and detailed explanation of the calculation methodologies and assumptions applied to each impact component. 11.3 Socio-Economic Impact Components To understand underlying rationale and assumptions behind results above, this section shifts focus to specific socio-economic impact components assessed within the CBA framework. Each component is thoroughly analyzed to understand its contribution to the project's overall socio-economic impact, considering calculation methodologies and assumptions. Total discounted benefits of Rail Baltica are estimated to be EUR 28.1 bn, with significant contributions from various sectors. Operational benefits within the transportation value chain amount to EUR 0.1 bn, reflecting enhanced performance and efficiencies. Passenger impacts, being the largest contributor, are valued at EUR 22.5 bn, underscoring the project's transformative role in passenger transportation. Freight shippers are expected to see benefits of EUR 1.4 bn, highlighting improvements in freight transport. Environmental benefits, another major contributor, are estimated at EUR 3.8 bn, demonstrating Rail Baltica's commitment to sustainable development. Labor market (RB employees) stand to gain EUR 0.2 bn, indicative of the positive outcomes from job creation. Figure 151: Socio-economic component overview In the next subsections, each of these components is further examined, providing insights into their particular significance and contri ution to RB’s socio-economic impact. 190 11.3.1 Transport Value Chain Impact This subsection assesses the impact of Rail Baltica on industry players involved in both passenger and freight transportation. Total net benefits from these impacts are expected to reach EUR 0.11 bn. Significantly, 75% of these benefits are related to the freight sector, highlighting RB's considerable effect on this area. Figure 152: Transport value chain profit impact overview Passenger Transport Value Chain Impact The illustrated methodology aims to determine the extent of economic benefits and costs of RB within the passenger transport ecosystem. The analysis begins by assessing the modal shift and induced demand, which evaluates the variation in traffic volumes and modal shares between scenarios with and without RB (expressed in pkm). Subsequent steps involve quantifying the average revenues, expressed in EUR/pkm, for various modes of transportation, considering factors such as fuel cost, insurance, and maintenance (Rail Baltica TDM, 2023). Further in the analysis, industry benchmarks are employed to determine the profit margins for each transport mode. Assumptions for these margins, such as the average EBT margin, are derived from expert analyses and other industry benchmarks. An essential component in this analysis is the consideration of road damage, quantified in EUR/pkm, which encompasses factors like wear and tear on road infrastructure due to transportation. 191 Consequently, this methodology estimates the net present value (NPV) of the total benefits in the passenger value chain at EUR 0.026 billion. Figure 153: Passenger value chain profit calculation 192 Freight Transport Value Chain Impact In this chapter, impacts on players in the freight transport value chain are outlined. The analysis starts with modal shift and induced demand (in tkm), showing expected changes in freight volumes for each transport mode with Rail Baltica's introduction. Next, average transport prices for various cargo types and modes are considered, along with profit margins based on industry benchmarks. The analysis also covers road damage costs caused by truck transport, which is EUR 0.004/tkm. Consequently, this methodology estimates the NPV of the total benefits in the freight value chain at EUR 0.086 billion. Figure 154: Freight transport value chain profit calculation 11.3.2 Passenger Impacts Passengers represent a key beneficiary of the RB project and constitute the category with the highest net discounted benefits, amounting to EUR 22.5 bn, representing over 80% of total net benefits. The following chapter examines the direct impact on passengers through the analysis of six categories and their related specific benefits. The first three categories, namely travel cost savings, time savings, and accident cost savings, are outlined in the EU guidelines as mandatory parts of the Cost-Benefit Analysis, and assess effects related to modal shift of existing passengers. 193 The remaining three benefit categories – job, personal, and education accessibility benefits – though not directly outlined in the EU guidelines, are crucial in analyzing the passenger impact by assessing induced passenger demand. While the guidelines provide a methodology for estimating induced demand benefits, specifying the trip purpose adds depth to the analysis. Such an assessment is particularly valuable for large transport infrastructure projects like RB, as it highlights the enhanced access to opportunities in education, employment, and leisure, among others. This aspect is especially relevant for the Baltic region, where rail connectivity is currently limited. Figure 155: Passenger impacts overview Time Savings This chapter focuses on passenger time savings associated with Rail Baltica. The methodology starts by analyzing the modal shift between transport modes (in pkm) to understand expected changes in passenger volumes due to the introduction of RB. The analysis then moves to the speed difference between scenarios with and without RB, determining potential time savings. It is important to note the variations in travel speeds across different modes, such as air, car, and train, highlighting the time efficiency RB brings. Furthermore, productive time ratios associated with different transport modes are defined, expressed as the average share of non-productive time during travel with each mode, providing insights into how effectively time passengers can utilize their time. Lastly, these time savings are monetized using the Value of Time (VoT) metrics, based on passenger surveys and literature from the RBM model. 194 Consequently, NPV is estimated at EUR 11.497 bn, emphasizing the significant economic value RB introduces in terms of time savings for passengers. Figure 156: Passenger time savings calculation Travel Cost Savings Passenger cost savings are indicative of the monetary benefits passengers may experience, encompassing reduced ticket prices, ancillary expenses, and potential indirect savings (such as car ownership costs). The calculation methodology first measures modal shift (pkm). This shift is then multiplied by the difference in travel costs (EUR/pkm), considering average travel costs across different transport modes, such as air, car, buses, regional trains, and high-speed or night trains. 195 Consequently, total passenger cost savings are estimated at EUR 4.634 bn NPV, emphasizing the substantial economic benefits RB is set to deliver to travelers. Figure 157: Travel cost savings calculation Passenger Accident Cost Savings This chapter focuses on savings related to a reduction in accident costs because of the modal shift due to Rail Baltica. The methodology starts by analyzing the modal shift between transport modes, highlighting anticipated changes in passenger volumes once RB is in operation. Next, average externality costs of accidents per transport mode are assessed and expressed in EUR/pkm. This step encompasses a thorough examination of the number of casualties and related costs across different vehicle categories, including both human and material impacts. 196 Based on this detailed assessment, total accident cost savings are estimated at EUR 3.307 bn NPV, emphasizing the potential of RB to reduce transport-related accidents and their associated economic burdens. Figure 158: Accidents calculation Leisure, Health and Personal Accessibility Leisure, health and personal accessibility refers to the convenience of individuals in reaching desired destinations, whether it is for personal purposes, leisure activities, or healthcare services – a significant component in assessing the societal advantages of railway infrastructure investment. The assessment method examines the induced non-business trips demand, gauging the difference in passenger volumes between scenarios with and without the RB project. The subsequent part quantifies the implicit cost and time savings for individuals traveling for these purposes, expressed in EUR/pkm. These savings account for factors like reduced travel time, diminished personal vehicle expenses, and increased convenience. In accordance with the rule of half, for all induced trips related to personal, leisure, and healthcare purposes, only half of the generalized cost savings are considered. This rule is used to account for the fact that not all benefits from induced demand translate to full savings, ensuring a more conservative and realistic estimation in line with standardized EU CBA methodologies. 197 Combining all these benefits, the RB project's total value for better access to personal, leisure, and healthcare is estimated at EUR 2.784 bn. Figure 159: Leisure, health and personal accessibility benefits calculation Education Accessibility Education accessibility, in the context of this analysis, specifically refers to the ease with which individuals, influenced by the presence of RB, decide to pursue university education across different regions. The presented methodology measures how RB facilitates this increased accessibility for potential university students. The assessment starts by determining the total number of induced commuters, shedding light on the anticipated rise in passenger trips due to the project. The analysis then estimates the percentage of the commutes that are university-related, leading to the projection of the number of new university students (who would have not pursued higher education if it was not for RB). This data highlights RB's role in enhancing university student mobility across regions. An essential element of the analysis is the assessment of wage disparities between highly educated and less educated labor cohorts. This comparison highlights the wider economic advantages of university education and the role that enhanced accessibility can play in these benefits. Considering these factors, the NPV of education accessibility benefits is projected at EUR 0.161 bn. This figure highlights RB's potential to positively impact university enrollment and the subsequent economic benefits of a more educated workforce. 198  Figure 160: Education accessibility calculation Job Accessibility Improving job accessibility is an important objective of Rail Baltica, emphasizing its potential to enable individuals to pursue more productive job opportunities. By improving connectivity and reducing travel times, RB can play a role in bridging the gap between job seekers and employment hubs. The assessment of job accessibility benefits begins by determining the total number of induced commuters, reflecting the additional passenger trips generated by the project on a yearly basis. From this, the analysis identifies 199 the proportion of the commutes that are job-related, then evaluates the discounted average wage level difference between the capital city and other regions connected by RB. Incorporating these factors, the net job accessibility benefits, quantified by the Net Present Value (NPV), are estimated at EUR 0.150 bn. This figure underscores Rail Baltica's role in enhancing employment prospects and fostering economic development in the region. Figure 161: Jobs accessibility benefits calculation 200 11.3.3 Freight Shipper Impact Freight shippers are one of the main stakeholders in the RB project. This chapter analyzes the related benefits by evaluating four separate sub-divisions: shipping cost savings, cargo time savings, trade volume expansion, and accident cost saving. The following figure summarizes the net present value of the impact of RB. Figure 162: pp ’ mp w Transport Cost Savings Transport cost savings refer to the reduction in expenses associated with moving goods from one place to another, achieved through optimized routes, efficient modes of transportation, and streamlined operations. In the context of the RB project, these savings underscore the economic advantages of transitioning freight traffic to more efficient and sustainable rail-based solutions. The process begins with identifying the modal shift to rail, (in tkm) representing the volume of traffic that transitions from other transport modes, such as ship and truck, to RB. Following this, the focus shifts to the calculation of incremental shipping cost differences between transport modes, expressed in EUR/tkm. This difference is a cumulative result of several factors: • base shipping costs associated with transporting goods, • insurance costs related to safeguarding shipments, • stockholding costs associated with holding stock or inventory, • environmental costs attributed to environmental considerations, such as emissions. 201 After considering the modal shift and associated cost reductions, the net present value of these savings for the RB project stands at EUR 0.905 bn. Figure 163: Transport cost savings calculation Time Savings In the context of the RB project, time savings refer to the reduction in transit durations achieved by redirecting freight from slower transport methods to the more efficient RB system. To estimate net benefits of 202 this impact, the modal shift to RB is identified (in tkm). This indicates how much freight is redirected from other methods to the more rapid RB system. Subsequently, the speed difference between RB and alternative transport modes is determined. This distinction suggests that while trucking remains more favorable in terms of speed due to flexibility and first and last mile convenience, rail is highly competitive against maritime shipping in this aspect. From this data, the total hours saved are calculated. A monetary value, known as the value of time, is then attributed to these saved hours. It is noted that the value varies, with unitised cargo typically being assigned a higher value due to its time-sensitive nature. By integrating the modal shift data, speed differences, and the value of time, the net present value of time savings for the RB project is projected at EUR 0.256 bn. Figure 164: Cargo time savings calculation Freight Accident Cost Savings In the context of the RB project, accident savings refer to the reduced costs associated with freight-related accidents, achieved by shifting cargo from more accident-prone transport methods to the safer RB system. The first step in understanding these savings is to identify the extent of modal shift to RB (in tkm). This shows the volume of freight that is moved from other modes to RB. Following this, the costs associated with accidents per transport mode are determined, expressed in EUR/tkm. These costs encompass the number of casualties per vehicle category and the corresponding financial implications, factoring in both human and material losses. 203 Based on the above data, the net present value of the savings from reduced accidents due to the RB project is calculated. Integrating the modal shift data and externality costs of accidents reveals that the NPV of accident savings for the RB project amount to EUR 0.083 bn. Figure 165: Accident cost savings overview Induced freight flow benefits In the context of the RB project, induced freight flow benefits (trade volume expansion) denote the increase in freight traffic, resulting in economic growth, due to the efficiencies and advantages introduced by the project. The analysis begins with identifying freight demand induced by RB (in tkm). This measures the additional freight traffic generated because of the project's presence, distinguishing between scenarios with and without RB infrastructure in place. The next step involves calculating the marginal implicit decrease in generalized transport costs, expressed in EUR/tkm. This represents the savings in transportation costs per unit of freight due to the shift to RB. In accordance with the rule of half method outlined in the EU CBA guidelines, only half of the generalized transportation savings, encompassing both time and cost savings, is accounted for in calculating induced demand. This approach provides a conservative estimate, aligning with established methodologies. 204 By integrating the induced demand data and the cost savings, the NPV of benefits arising from expanded trade volumes due to the RB project is estimated at EUR 0.121 bn. Figure 166: Induced freight flow benefits (trade volume expansion) calculation 11.3.4 Environmental Impacts The environmental impact generated by RB is one of the cornerstones of the project as public rail transport is viewed as a greener alternative to existing transportation options in the Baltic regions. This subsection analyzes the direct environmental implications of RB assessing the project’s impact on both operational and construction phases. EU guidelines do not explicitly require the inclusion of construction-phase environmental impacts in the CBA framework. However, they have been included in this report to provide a more comprehensive analysis of the environmental effects, especially that they are expected to be included in future CBA guidelines. 205 The environmental impact of RB is further broken down into three categories: climate change impact of GHG emissions, air pollution, and noise pollution. Furthermore, a qualitative analysis of the biodiversity impact of RB is carried out alongside the potential mitigation measures in this regard. Figure 167: Environmental impacts overview GHG emission – Operation Phase Climate change impact of GHG emissions impact refers to the effect of greenhouse gases on the environment, a crucial factor in assessing the sustainability and ecological footprint of railway infrastructure investment. The assessment begins with considering modal shift and induced demand, evaluating the difference in traffic volumes and modal shares between scenarios with and without the RB project (in pkm and tkm). The next step quantifies the average GHG emissions for various modes of transportation in grams of CO2 equivalent (g CO2e/pkm or g CO2/tkm). Combustion engine emissions are assumed to decrease over time, reflecting the evolution and modernization of vehicle fleets. Subsequently, external costs associated with GHG emissions are calculated, expressed in EUR per ton (EUR/t) of CO2 equivalent. The shadow costs of GHG emissions have been determined based on guidance from the EU, with data sourced from the European Investment Bank (EIB). 206 Based on this methodology, the net NPV of the cost savings associated with reduced GHG emissions due to the RB project is projected at EUR 2.930 bn. Figure 168: Climate change – operation phase calculation GHG emission – Construction Phase The methodology presented quantifies the GHG emission impact due to the construction activities of the RB project. The process commences with the determination of the total line length of the RB project based on the RB design documentation and input from the RBR project team. Subsequently, GHG emissions resulting from the construction works are calculated. Emissions are denoted in tons per constructed kilometer (t/km) and are informed by several Environmental Impact Assessments (EIAs) conducted by RB. Following this, external costs associated with the GHG emissions are calculated, expressed in EUR per ton (EUR/t) of CO2 equivalent. Shadow costs of GHG emissions are derived from specific breakdowns provided for different periods up to the year 2080 by the European Investment Bank (2023b). 207 After assessing all the parameters, the net present value of the GHG emissions due to the RB project's construction activities is defined at EUR -0.0001 bn. This negative value suggests a minimal adverse economic impact from GHG emissions associated with the project's construction. Figure 169: Climate change – construction phase calculation Air Pollution – Operation Phase Transportation modes relying heavily on the combustion of fossil fuels emit harmful pollutants such as nitrous oxides, particulate matter, and volatile organic compounds into the air, degrading air quality and posing a serious health risk to both urban and rural populations. RB aims to provide a less harmful alternative and, therefore, to reduce air pollution externalities of the transport ecosystem. The following methodology evaluates the impact of the modal shift to RB and the associated induced demand on air pollution. The analysis begins by assessing modal shift and induced demand, by comparing modal shares in scenarios with and without the RB project (in pkm and tkm). Next, external costs associated with air pollution are determined (in EUR/pkm and EUR/tkm) based on the "Handbook of external costs of transport (European Commission, 2019a). Combustion engine emissions are expected to decrease over time due to an anticipated evolution and modernization of vehicle fleets. Externality costs are projected to increase over time in line with GDP/capita growth. 208 Consequently, air pollution benefits of the RB project during the operational phase are projected at EUR 0.659 bn NPV, representing the socio-economic implications of the noise pollution generated or mitigated by the project over its lifecycle. Figure 170: Air pollution – operation phase calculation Air Pollution – Construction Phase Air pollution resulting from the construction phase of RB is another pivotal environmental concern due to its potential implications on public health and the environment. The methodology extrapolates data from specific rail sections to quantify the air pollution impact, with the assumption that these sections are representative of the entire infrastructure in terms of air pollution. The process begins by determining the total duration of the construction, which is based on the project's operational concept and is assumed to span seven years. It has to be noted that this is a conservative assumption, as the construction of specific sections is expected to be completed in less than seven years. Subsequently, air pollution resulting from construction activities is quantified in terms of emissions per year per kilometer (t/year/km). Specific pollutants like PM10, PM2.5, and NOx have been considered, and their respective emissions have been sourced from the RB Environmental Impact Assessment, extrapolated to estimate emissions for the construction of the total rail length for the project. Finally, the external cost of air pollution, expressed in EUR per ton (EUR/t), is derived. The costs for individual pollutants, like PM10, PM2.5, and NOx, are based on the EU Handbook for external cost of transport. 209 Consequently, the externality cost of air pollution during construction is projected at EUR -0.347 bn NPV, representing the socio-economic implications of the air pollution generated during the construction phase. Figure 171: Air pollution – construction phase calculation Noise Pollution – Operation Phase Combustion engine vehicles and public transportation systems contribute to increasing noise pollution in cities mp ’ w -being. RB tracks are planned to be mostly located at a considerable distance from densely populated areas. Additionally, the use of noise barriers along railways will help mitigate the impact of vibrations and noise, offering an improvement over traditional transport modes. This is particularly relevant in Estonia and Latvia, where the absence of a motorway system results in increased traffic near residential areas. The following methodology evaluating the impact on noise pollution encompasses both modal shift and induced demand. The analysis begins by assessing the modal shift to RB, including induced demand, by comparing modal shares in scenarios with and without the RB project (in pkm and tkm). Following this, the cost associated with noise pollution for each transport mode is quantified (in EUR/pkm or EUR/tkm). The averages for each mode, such as cars, buses, and trains, are sourced from the "Handbook of external costs of transport (European Commission, 2019a). Combustion engine emissions are expected to decrease over time due to an anticipated evolution and modernization of vehicle fleets. Externality costs are projected to increase over time in line with GDP/capita growth. 210 As a result, noise pollution savings due to the RB project are projected at EUR 0.604 bn NPV. This figure represents the socio-economic implications of the noise pollution generated or mitigated by the project throughout its lifecycle. Figure 172: Noise pollution – operation phase calculation Noise Pollution – Construction Phase While RB brings significant benefits in terms of reduced noise pollution in the operational phase, it is essential to recognize that there are also negative impacts in the construction phase. The methodology for quantifying the impact of noise pollution during the construction phase of the RB project is based on detailed estimations from specific rail sections. These estimations are then extrapolated to represent the noise pollution impact for the entire infrastructure. The first step in the analysis identifies the number of people exposed to various noise levels. This figure assumes that 5,883 residents would be exposed to a noise level higher than 55 dB (the threshold chosen to identify impacted residents), as outlined in RB's environmental impact assessments. Subsequently, annual exposure in decibels per year (db/year) is calculated. This is based on several factors: the duration of the construction, the proportion of exposed residents, and the average noise pollution level. Construction duration is presumed to span seven years as per the RB operational concept, with an average noise pollution level of 58 db. Some 20% of the impacted residents are forecast to be simultaneously exposed. External cost of noise emissions, expressed in EUR per decibel per year (EUR/db/year), is then determined based on the EU Handbook for external cost of transport (European Commission, 2019a). 211 In total, NPV of noise pollution externality costs during the construction phase is estimated at EUR -0.0298 bn. This figure represents the socio-economic implications related to noise pollution arising from the project's construction. Figure 173: Noise pollution – construction phase calculation Biodiversity The preservation of biodiversity is essential in infrastructure projects to prevent the disruption of ecosystems and thus preserve the health of the environment. RB has carried out extensive site investigations and research in this regard including biodiversity monitoring. The latter refers to the studies of mammals and birds, vegetation, their habitats, species and landscape specifics such as migration patterns. The main mitigation solutions identified for the project encompass both operational and construction phase implications. The latter encompasses special planning for the inclusion of technical solutions for animal migration such as animal passages in the RB corridor. These can take the form of green bridges, river crossings with special clearance for animal passage, multiuse overpasses, green tunnels, and multiuse underpasses. Throughout the construction phase of the project, it is crucial to preserve the local fauna and flora. This involves implementing time restrictions and carefully planning construction sites to avoid establishing bases and roads in protected habitats. From an operational perspective, it will be necessary to verify that the solutions implemented for habitat protection are effective, and that regular maintenance of the animal crossings is carried out. While biodiversity is not measured in the ENPV calculation in line with CBA guidelines (European Commission, 2014a), the mitigation measures of such impacts are important to understand the overall environmental footprint and ensure sustainable development throughout the project's lifecycle. 212 11.3.5 Labor Market Impacts Within the RB project, the benefit of wage increases for RB employees signifies not only the enhanced compensation but also the improved livelihoods for those working in the initiative. The process to quantify these benefits is structured as follows: Firstly, the number of workers employed by RB is identified. The number of RB employees are expected to grow from 122 in 2024 and peaking at 1,458 from 2054 onwards. The calculation excludes potential benefits realized by construction workers as construction is considered as the cost of the project which enables the realization of benefits during the operational phase. Subsequently, the marginal salary increase of these employees is determined in EUR. This represents the additional earnings that RB employees receive compared to what they might have earned in alternative employment scenarios without the RB project. The opportunity cost of RB employees (essentially their potential earnings in other jobs) is based on several assumptions: • A 4.3% unemployment rate, which is proportional to the weighted average of unemployment. • 45.7% of these individuals might have earned 70% of the RB salary in alternative roles. • The remaining 50% are assumed to potentially earn 100% of the RB salary in other employment scenarios. Integrating the employee count and their associated wage benefits, the NPV of additional compensation for RB employees is calculated to be EUR 0.223 bn. Figure 174: Labor market impacts calculation In addition to benefits realized by RB employees, the project is expected to mitigate labor shortages in the Baltic states through modal shift from more labor intensive transport modes (i.e. trucking). This transition from labor- intensive trucking to more efficient transport modes will add flexibility to the job market and could decrease the reliance on recruiting workers from abroad. Furthermore, this strategic shift not only addresses immediate labor concerns but also fosters a more adaptable and sustainable workforce structure, crucial in the context of demographic changes in the region. Ultimately, this effect is expected be realized as transport shipping cost savings for freight shippers and considered accordingly in subsection Freight Market Impacts. 213 11.4 Socio-Economic Impact Analysis Results and Sensitivity Analysis Building on the economic impact assessment outlined in the previous chapter, revealing EUR 28.1 bn in net economic benefits for the RB Global Project, this chapter turns to evaluate the robustness of the socio- economic impact of the project. In this context, a sensitivity analysis is carried out, assessing the ceteris paribus impact of variations in several key parameters on the project’s socio-economic impact. Global parameters 1. Social discount rate adjusts the chosen rate to reflect the present value of future benefits and costs. 2. Construction delay refers to the extent of delays experienced in the construction process and the timeline for the opening. 3. Residual lifetime: sets the assumption for the last year of the useful economic life of the infrastructure after the modeling period (2080). 4. Value of time – GDP/capita elasticity changes the elasticity of the value of time and real wage growth to GDP/capita growth. 5. Vehicle fleet pollution evolution determines the rate of decrease in pollution (GHG, air and noise) by all transport modes with setting the assumption for 20 0 as the percentage of toda ’s emissions. 6. Vehicle fleet safety evolution determines the rate of safety increase across all transport modes. It assumes that by 2080, the costs associated with accidents will be a certain percentage toda ’s accident costs. Passenger impact parameters 1. Passenger modal shift determines the percentage of the forecasted modal shift that is expected to be realized. 2. Passenger induced demand determines the percentage of forecasted induced demand that is expected to be realized. Freight impact parameters 1. Freight modal shift determines the percentage of forecasted modal shift that is expected to be realized. 2. Freight induced demand determines the percentage of forecasted induced demand that is expected to be realized. To evaluate potential positive and negative impacts of the parameters outlined, a specific adjustment range is defined based on realistic fluctuations, considering the unique characteristics of each parameter. Key findings show that the most significant factors influencing the NPV of the socio-economic impact are the social discount rate, construction delays, and residual lifetime. Notably, no individual parameter, even under a 214 worst-case scenario, leads to a decrease in NPV greater than EUR 4.9 bn. In this context, the analysis concludes with a high degree of confidence that the NPV likely falls within a range of EUR 23.2 bn to EUR 33.1 bn. Figure 175: Sensitivity analysis overview (Consultant team analysis) Findings of the sensitivity analysis clearly show that the socio-economic impact range consistently exceeds the negative financial outlook presented in the base case scenario, reinforcing the project's economic viability across a spectrum of socio-economic conditions. Moving forward, the next chapter provides a more comprehensive evaluation of the project's total economic performance by identifying key economic performance indicators, considering both financial and economic factors. 215 12 Conclusion of Economic Viability and Key Performance Indicators Considering both financial and socio-economic impact assessments within the CBA framework, the project is expected to generate EUR 6.6 billion in ENPV by offsetting the negative EUR -21.5 bn FNPV with positive EUR 28.1 bn in net present economic benefits. This corresponds to a benefit-cost ratio (BCR) of 1.31 and an economic rate of return (ERR) equal to 5.3%62, well above the SDR63 employed. Consequently, the project's economic viability is firmly established, with expectations for generating more economic benefits for the region than the financial costs incurred. Figure 176: Financial and economic cash flows, discounted Expanding on these results, the sensitivity analysis of the ENPV integrates both financial and socio-economic dimensions to provide detailed insights into the project's resilience and viability under varying parameters. The base case ENPV at EUR 6.6 bn shows a strong confidence interval between EUR -3.1 and 16.1 bn, resulting from the cumulative effects of the worst- and best-case scenarios in both financial NPV and net economic benefits. 62 The ERR of 5.3% mentioned earlier relies on the assumption of a fixed FDR. However, if the FDR is pegged to the SDR, as mandated by EU guidelines, the ERR adjusts to 4.7%, still slightly surpassing the applied SDR. However, this approach overlooks the fundamental differences between FDR and SDR, which are typically distinct. Therefore, adhering to the method using a fixed FDR is recommended for a more accurate representation of the project's economic viability. 63 SDR = Social Discount Rate 216 This analysis concludes that while there is a very limited probability of a negative ENPV, the project demonstrates significant robustness to changes in key parameters. Figure 177: ENPV sensitivity analysis, discounted Following the analysis of the project's economic performance indicators, the subsequent chapters on scenario analysis, risk assessment, and wider economic impact analysis support the contextualization of these findings leading to a full understanding of the project's broader socio-economic implications and viability. 217 13 Scenario Analysis 13.1 Prolonged War Impact Following the evaluation of the base case scenario and its sensitivity to several key parameters, a scenario analysis reflects on recent geopolitical developments in the region with potential implications on the RB project. In particular, the ongoing war in Ukraine and its impact on trade patterns is a key consideration from the risk management perspective and helps to gauge the project's resilience against external shocks. RB, being a significant connector in the region, can be influenced by changes in trade dynamics, sanctions, and geopolitical agendas. The analysis assumes that a prolonged war would impact demand for freight transportation in the region through two key drivers: • Limited trade with Russia: Given the tensions and potential economic sanctions, it is assumed that trade volume with Russia remains limited, ramping up to 70% of current flows by 2036. This assumption represents the potential for long-term sanctions between the EU and Russia as well as the reorganization of regional supply chains. • Increased freight volumes to/from Ukraine: Given the war in Ukraine and its potential realignment towards the EU and other western countries, there is an assumption for trade increasing by 30% compared to base case forecasts, especially in commodities like grain. Ukraine, being one of the world's leading grain exporters, might look for alternative routes and partnerships, potentially realizing benefits from improved shipping capacity in the Baltic Sea region. While the war may influence aspects like freight shipping costs due to labor shortages or reduced passenger numbers from Russia, this study finds that these effects are negligible in the context of RB compared to the expected shift in freight demand. In this context, a potential escalation of the war, especially if it involves Russian aggression breaching NATO territories, could lead to more severe impacts. However, insights from interviews with defense representatives and military strategy experts suggest no strong evidence to anticipate such an escalation in the prolonged war scenario. Considering the presented assumptions, a prolonged war scenario would result in a 7.7% decrease of total ENPV to EUR 6.1 bn, driven by financial losses of EUR -325 mn and lost socio-economic benefits of EUR -144 mn. Results support that while a prolonged war is expected to influence trade dynamics in the region, its impact of decreased Russian trade flows on the ENPV of the RB project is limited due to strong demand from/to other countries and the low overall contribution of freight to the economic benefits of the project. Furthermore, the potential decrease in trade with Russia is expected to be offset, to a certain extent, by increased trade activities with Ukraine and third countries due to the reorganization of supply chains. Financial aspects of the prolonged war scenario impact are negligible considering the total negative FNPV(C). The overall impact (EUR -325 mn) is ~1.5% of the total FNPV(C), which comprises changes in 4 categories: passenger segments, freight segments, residual value, and CAPEX. The largest contributor to the impact is the freight segments due to a shift in demand for services. In terms of socio-economic impact, a prolonged war scenario would result in a EUR -144 mn net loss in benefits, mainly driven by lost freight shippers’ benefits (EUR -115 mn) and environmental benefits (EUR -28 mn). This limited change in socio-economic benefits illustrates that even in the event of decreased demand for freight 218 transport in the Baltics due to the war, the amount of traffic transitioning to rail, and the incremental impact of the new infrastructure remains significant. Figure 178: Prolonged war scenario impact The results of this scenario analysis underline the robustness of the RB project. Even in times of geopolitical uncertainty and potential economic shifts, the project's economic viability remains solid. To extend on the analysis of potential risks in the context of the project, the next chapter provides an overview of risk categories and probabilities. 13.2 Optimistic Operational Assumptions and Passenger Preferences Following the evaluation of Rail Baltica's base case scenario, this section evaluates the impact of an alternative, more optimistic outlook. This model forecasts a substantial increase in the project's economic and financial potential, driven by updated operational assumptions and recalibrations in passenger utility. In this optimistic scenario, the ENPV is estimated to increase by EUR 2.2 bn, rising from the EUR 6.6 bn base case to EUR 8.8 bn. This significant enhancement in the project's economic value is underpinned by two main factors that redefine the model's assumptions. First, the scenario assumes the implementation of direct services on key routes, such as Tallinn – Warsaw and Vilnius – Warsaw. This approach mirrors an optimal scheduling scenario, pushing the operational plan towards its efficiency zenith. However, it's crucial to recognize the optimistic nature of this assumption, as it does not entirely capture the possible waiting time inefficiencies in real-world service changes. Second, the scenario involves a technical recalibration of passenger utility curves. By easing constraints on rail attractiveness and removing cost parameters beyond ticket price and travel time, such as comfort or passenger habits (modeled implicitly through a generalized cost parameter), this recalibration paints a picture of Rail Baltica as a potential disruptor in the transport market. This adjustment, while optimistic, reflects the scope of RB's impact potential on passenger choices and behaviors. 219 The financial aspect of this scenario also shows a slight uptick. The FNPV observes a modest increase of about EUR 0.03 billion (0.14%), from the current -EUR 21.49 billion. This growth, albeit small in proportion, aligns with the overarching theme of increased economic viability under this scenario. In terms of socio-economic impact, a significant increase in passenger benefits stands out, amounting to EUR 1,759 mn, driven primarily by optimized scheduling. Further, environmental impacts contribute positively, adding EUR 420 mn to the benefits. Transport value chain profits see a slight decrease of EUR 11 mn, while freight shippers' impacts and labor impacts remain neutral, with no change observed. Figure 179: Optimistic operational assumptions and passenger preferences scenario impact In total, this somewhat optimistic scenario results in an ENPV of EUR 8.8 bn for the Rail Baltica project, highlighting the potential upper boundaries of Rail Baltica's impact in a context where operational efficiencies are maximized and passenger preferences heavily favor rail travel. The findings from this scenario underscore RB’s potential in reshaping regional travel dynamics and reinforce the project's robustness, even under varying assumptions and market conditions. 220 14 Risk and Regulatory Rail Baltica, with its extensive scope and international reach, faces a unique set of risks and regulatory challenges. This chapter provides a detailed analysis of these aspects, essential for the project's successful execution and compliance with legal standards. The first section addresses the risks associated with the project, providing a comprehensive overview of potential challenges, and outlining strategies for risk mitigation. The second section focuses on the regulatory framework key for RB. This includes environmental regulations, railway industry standards, and competition laws. The aim is to detail most important regulatory requirements the project must consider on a strategic level. This section also discusses the implications of these regulations on project planning, execution, and long-term operation. In summary, this chapter serves as a crucial guide to understanding and managing the risks and regulatory re uirements of the RB’s project, emphasizing the importance of these elements on a strategic level in ensuring the project's successful and compliant implementation. 14.1 Risks and Mitigation In this section, risks faced by RB are assessed by looking at large risk categories, evaluating their likelihood and potential impact, and further proposing mitigation measures to manage them. It is important to highlight that this section addresses broad project considerations. The identified risks are not associated with any particular entity and are rather viewed holistically, reflecting the project's cross-border scope. Qualitative risk analysis is paramount to deal with the uncertainty that always permeates investment projects as it provides the opportunity to anticipate potential risk sources and foresee mitigation measures. Risks are identified based on four phase categories: risks concerning the design phase, construction phase, operational phase, and a general overarching phase (a fourth category covering risks which span across the entire life of the project). The topic categories analyzed within each phase are the following: regulatory (which are further explored in this section as well), operational, financial, strategic, political, and geopolitical. To map risks, the following approach is used. The likelihood of the respective risk event is categorized into five probability clusters: 1. Very unlikely (0–10 % probability) 2. Unlikely (10–33 % probability) 3. About as likely as not (33–66 % probability) 4. Likely (66–90 % probability) 5. Very likely (90–100 % probability) The potential impact classification is also performed in five impact dimensions: 1. No relevant effect, even without remedial actions. 2. Minor loss of the benefit generated by the project, minimally affecting the project long run effects; however, remedial or corrective actions are needed. 3. Moderate: Loss generated by the project, even in the medium-long run. Remedial actions may correct the problem. 4. Significant: High loss generated by the project; the occurrence of the risk causes a loss of the primary function(s) of the project. Remedial actions, even large in scope, are not enough to avoid serious damage. 5. Critical: Project failure that may result in serious or even total loss of the project functions. Main project effects in the medium-long term do not materialize. 221 The combination between risk probability and potential impact results in 4 aggregate risk levels: low, moderate, high and very high. Following this methodology, a total amount of 76 risks is identified across all project phases, the majority being rather moderate risks (see figure below). Figure 180 – Aggregate risk levels overview (Consultant team analysis) For a more detailed break-down, the following figure provides an overview of the allocation of risks within each phase of the project. In the design phase, risks are scattered among low, moderate and high-risk levels, but no very high risks have been identified. In the construction phase, most of the identified risks are evaluated as low and moderate. In the operational phase, most of the identified risks are evaluated as low or moderate, as well. Last category of risks are general risks, i.e., risks present during the entire project. Majority of them are evaluated to be moderate risks. For a detailed overview of the identified risks, please refer to Appendix – Risk Mapping. Figure 181: Risks categorization by phases (Consultant team analysis) 222 Out of this framework, 10 risks labeled with “ y ” aggregate risk scores emerge. Short description of each of these risks, including reasoning behind their impact categorization, as well as mitigation strategies for each of them are detailed in the following. 14.1.1 General Risks General very high risks that affect the project entirely are mostly financial and strategic - financial risks include (#10) reduced EU funding and (#6) lack of funding leading to delays or stoppages (from non-EU sources); strategic ones encompass (#12) lack of proper organization and governance with sufficient autonomy, transparency, and/or efficiency in decision making, (#19) inconsistent quality and non-compliant processes across RB, and (#20) delayed decision making. Reduced EU Funding (#10 in Appendix – Risk mapping) Funds from the European Union are expected to constitute a substantial portion of the budget for the project. Their reduction could stem from shifts in EU policy priorities, budgetary constraints, or changes in economic conditions. Such a decrease in funding could lead to significant financial shortfalls, impacting the project's scope, timeline, and execution. The risk of reduced EU funding for RB is rated as 3 on a probability scale of 1 to 5. This moderate rating reflects a balance between the EU's historical commitment to infrastructure development and the unpredictability of funding allocations, which can be influenced by changing political and economic landscapes. While the EU has shown a strong inclination to support trans-European transport networks, written commitment for the full required value has not been provided, and external factors such as economic fluctuations or shifts in policy focus can also impact funding availability. On the impact scale, this risk would score a 5, indicating a high impact on the project. A significant reduction in EU funds could lead to drastic project downscaling, delays, or even jeopardize its overall realization. Given the scale and importance of RB, any substantial funding shortfall would have a profound and direct impact on its completion and success. Mitigating the risk of reduced EU funding involves proactive and strategic approaches. Engaging in continuous dialogue with EU authorities is crucial to secure ongoing commitments and stay aligned with EU funding policies. This dialogue helps in understanding and adapting to the evolving priorities and requirements of EU funding bodies. Moreover, some form of official involvement of EU representatives in project governance and steering decision could be considered resulting in increased transparency and alignment to the ’s e pectations. Simultaneously, exploring alternative financing options is imperative to compensate for potential reductions in EU funding. This could include seeking private investments, public-private partnerships, or other governmental financial support. By diversifying the funding sources, RB can enhance its financial stability and resilience against fluctuations in EU funding. Final financiers of RBGP are the three Baltic states who could leverage various opportunities to increase their funding (for details please see Financing Plan section). Lack of Funding Leading to Delays or Stoppages (from non-EU sources) (#6 in Appendix – Risk mapping) This risk involves the potential shortfall in financial contributions from non-EU sources, which could stem from economic constraints, shifting priorities, or political changes in these countries. Such a funding gap could hinder the project's progress, leading to delays in construction, scaling down of project components, or in extreme cases, halting certain aspects of the project altogether. 223 This risk is assigned a score of 4 out of 5 for likelihood, meaning there is a high probability of limited third party funding. Funding partners other than the EU might decide to allocate their capital into other projects. This could be due to changes in their economic situations, policy shifts, or other priorities taking precedence over their contribution to RB. Furthermore, a project that is not expected to generate positive financial return might not be very attractive to investors. The impact of a funding shortfall from non-EU sources is rated as 4 out of 5. While the project is primarily EU-funded, the contribution of non-EU sources is still significant. Lack of funding could lead to notable delays and require a reevaluation of project scope and timelines. However, since the project has multiple sources of funding and a strong EU backing, it may still proceed, albeit at a slower pace or reduced scale, hence not warranting the maximum impact score of 5. To mitigate the risk of high funding uncertainty, RB needs to plan and prepare funding estimations for the entirety of the project. The project team should tailor their strategic spending approach based on these estimations with flexibility to adjust non-critical path spending as needed to align with forecasted funds. In the event of potential funding reductions, it is essential to align the delivery strategy and spending plans with funding authorities. This alignment allows for the implementation of discrete, affordable delivery stages, ensuring that the project continues to make progress and deliver value, even in the face of funding challenges. This approach helps in maintaining project momentum and adapting to financial constraints while striving to meet the project's overarching goals. In addition, the three Baltic states – final beneficiaries of socio-economic gains – could create safeguards to offset impact of less attractive financial performance. These safeguards could potentially include multi-annual contracts and various forms of subsidies, or operational and financial guarantees. Lack of Organization and Governance with Sufficient Autonomy, Transparency, and/or Efficiency in Decision-making (#12 in Appendix – Risk mapping) In the context of RB, a significant risk is a potentially suboptimal organization and governance with sufficient autonomy, transparency, and efficiency in decision-making. Given the project's complexity and multiple sta eholder’s involvement, there is a heightened risk of bureaucratic inefficiencies, unclear lines of authority, and decision-making bottlenecks. This could lead to delays, increased costs, and a potential dilution of the project's strategic objectives. This risk is assigned a score of 4 out of 5 for likelihood, indicating a high probability. The reasoning behind this is the inherent complexity of large-scale infrastructure projects like RB, which involve multiple stakeholders, cross-border coordination, and extensive regulatory frameworks. Such complexity often breeds organizational challenges, including issues with governance and decision-making autonomy and efficiency. Moreover, the dynamic nature of long-term projects can lead to evolving governance needs, which might not be promptly addressed. Furthermore, this risk is already materializing in the project, slowing-down decision-making. On the impact scale, this risk would also rate a 4 out of 5. Poor organizational structure and governance can significantly impede the project's progress, leading to inefficiencies, miscommunications, and delays. It can also result in suboptimal decision-making, affecting the project's quality and financial health. While not necessarily catastrophic, these issues can substantially derail the project's timeline and increase costs, thereby having a high impact on its overall success. To mitigate this risk, it is crucial to establish a clear organizational and decision-making structure with defined responsibilities, which are to some extent already in place. This structure should be capable of evolving to reflect the project's progression. As the project moves forward, it is important to recognize that leadership themes and operational scaling may need to transition across different organizational segments. Such an adaptive 224 organizational approach is aimed at ensuring alignment with the project's evolving demands and stages. Some form of a mechanism to watch out for needed organizational changes can help in maintaining a governance structure that is efficient, transparent, and capable of effective decision making. This generally involves 1) a responsible group/person (e.g., typically a board member and/or their direct reports), 2) clear escalation paths to end decision makers (e.g., steerco involving beneficiaries), and 3) if necessary, possibility to adjust the organizational design. The frequency of these reviews has to be set in a need-based way to make sure they are not overwhelming for the organization. In addition, frequent involvement of the final decision makers or delegation of authority coupled with clear decision-making routes can enable a more efficient and adaptive approach needed. Inconsistent Quality and Non-compliant Processes across Rail Baltica (#19 in Appendix – Risk mapping) This risk stems from the project extensive scope involving various contractors and entities across different countries, each with their own working standards and regulatory requirements. Inconsistencies in quality and deviations from standard processes can undermine the efficiency, safety, and integrity of the infrastructure, leading to potential failures and noncompliance with international and regional standards. This risk is assigned a score of 4 out of 5 for likelihood, indicating a high probability. The diverse nature of stakeholders involved in RB and the complexity of coordinating across different regulatory environments with limited coordination power of RBR make it challenging to maintain consistent quality and standards. While efforts are often made to standardize processes, the risk remains significant due to varying interests of stakeholders in applying standardized processes. On the impact scale, this risk scores a 5, reflecting a very high impact on the project. Inconsistent quality and noncompliance with established processes can have severe consequences for RB. It could lead to critical infrastructure failures, safety hazards, legal and financial penalties, a loss of public trust, and decreased customer satisfaction. Such issues could not only delay the project but also increase costs substantially and potentially compromise the project’s overall o jectives. Mitigating this risk typically involves the appointment of a dedicated quality manager is crucial for overseeing and harmonizing quality standards across the project. The implementation of a standardized Quality Management System (QMS) across RB could supporting consistent quality and compliance with processes. Establishing clear quality, compliance standards, guidelines, and protocols for all project parties ensures uniformity in execution. Regular quality audits and process assessments are essential to identify and address any inconsistencies or noncompliance. Employing quality management software facilitates automated quality control processes and real- time monitoring. Training and awareness programs are necessary to educate all project parties about the importance of adhering to these standards. Furthermore, establishing a corrective action process enables prompt resolution of any identified quality or compliance issues, ensuring the project maintains its integrity and adheres to the highest standards. In addition, increasing coordination through different mechanisms such as stronger enforcement of standards or increasing coordinating power through delegated authority of final decision makers are also important enablers of an optimal quality management and standards across stakeholders. Delayed Decision Making (#20 in Appendix – Risk mapping) This risk stems from the complexities of managing a multi-national project, coordinating among various stakeholders, and navigating bureaucratic processes. Delays in making crucial decisions can result from challenges in reaching consensus, ambiguity in roles and responsibilities, or lengthy approval processes. Such delays can lead to a chain reaction, impacting various facets of the project, including timeline, budget, and overall project momentum. 225 The likelihood of delayed decision making in the context of RB is rated as 4 out of 5, indicating a high probability. The project's extensive scope, involving multiple countries and stakeholders, inherently increases the complexity and potential for delays in reaching decisions. Additionally, the necessity to align diverse interests and regulatory requirements across borders can further exacerbate the challenge of timely decision-making. On an impact scale, this risk would be rated as 4 out of 5, signifying a high impact on the project. Delays in decision-making can lead to project inefficiencies, extended timelines, increased costs, and potential loss of stakeholder confidence. While not immediately catastrophic, such delays can cumulatively have a significant negative impact on the overall success and delivery of the project. To mitigate this risk, it is essential to establish an optimized and well-functioning organizational structure. This includes forming a group of key decision-makers who have clear and defined authority to make timely decisions. Implementing clear decision-making protocols and assigning specific responsibilities for key decisions can streamline the process. Additionally, setting frequent steering meetings and defined deadlines for decision making helps in maintaining project momentum. Implementing a group with decision power, such as a steering committee or executive board, can facilitate quicker resolution of critical issues and ensure that decisions are made efficiently and effectively. This structured approach to decision-making will aid in reducing delays and maintaining the overall progress and integrity of RB. 14.1.2 Construction Phase Risks Very high risks in the construction phase are two operational risks namely (#45) insufficient contractor capacities throughout the length of the project, and (#47) construction delay. One strategic risk present is (#52) construction site interface risk. Insufficient Contractor Capacities Throughout the Project (#45 in Appendix – Risk mapping) Insufficient contractor capacities throughout RB project poses a very high risk. This issue pertains to the possibility that contractors may not have adequate resources, expertise, or manpower to fulfill their obligations effectively. Given the project's scale and complexity, the need for specialized skills and substantial resources is critical. Inadequate capacities can lead to delays, substandard work, or even the inability to complete certain project segments, impacting the overall progression and quality of the infrastructure development. This risk is given a likelihood score of 3 out of 5, suggesting a moderate probability. While rigorous contractor selection processes are likely in place for a project of this magnitude, unforeseen challenges in resource allocation, financial stability, or technical expertise among contractors can still arise. The dynamic nature of long-term projects like RB, combined with market fluctuations and resource availability, contributes to this level of risk. The impact of insufficient contractor capacities is rated as 5 out of 5, indicating a very high impact on the project. Contractor deficiencies can critically disrupt project timelines, increase costs, and compromise the quality and safety of the infrastructure. This could potentially lead to substantial rework, legal challenges, and damage to stakeholder trust, significantly hampering the project's successful completion. Mitigating this risk involves implementing a rigorous contractor selection and evaluation process to ensure that contractors possess the necessary capacities and resources. Establishing clear contract terms and Service Level Agreements (SLAs) that outline performance expectations, timelines, and capacity requirements is essential. Regular contractor performance reviews help in early identification and resolution of capacity issues. Developing a contingency plan for potential contractor capacity shortfalls is crucial, which may include identifying alternative contractors or additional resources. Engaging with contractors to foster capacity building and continuous 226 improvement ensures ongoing capability enhancement. Additionally, utilizing a centralized project management system to monitor contractor performance and capacity in real time provides a comprehensive overview, enabling proactive management and quick response to early warning signs to emerging capacity issues. Construction Delay (#47 in Appendix – Risk mapping) Construction delay is a prominent risk in RB. This risk encompasses delays due to unforeseen circumstances such as logistical challenges, technical difficulties, contractor issues, regulatory hurdles, or environmental factors. Given the project's complexity, involving extensive coordination across different countries and stakeholders, such delays are a significant concern. They can result in prolonged timelines, increased costs, and potential breach of contractual deadlines. The risk of construction delays is rated a 5 out of 5 for likelihood, indicating it is very likely. Large infrastructure projects like RB are inherently prone to delays due to their scale, complexity, and the multitude of variables involved. Factors such as weather conditions, technical challenges, coordination among various contractors, and regulatory approvals can all contribute to potential delays. Furthermore, such delays have already appeared throughout the project and current timeline is observed to have limited or no buffer for delays. This risk is rated as 4 out of 5 in terms of impact. Construction delays can lead to significant repercussions, including cost overruns, funding issues, and negative stakeholder sentiment. However, the impact score for this risk is not at its maximum because, despite potential delays, the overarching consensus and commitment to the RB project ensure its eventual realization. Even in the face of delays, the foundational support and strategic importance of the project suggest that it will proceed, albeit with adjusted timelines. To mitigate the risk of construction delays in RB, a multifaceted approach is necessary. Initially, robust project planning with detailed, realistic timelines and built-in buffers for potential delays is crucial. This should be complemented by a comprehensive risk assessment to identify and strategize against potential delay causes. Effective contractor management, including the selection of contractors with strong track records and adequate resources, is key. Implementing rigorous monitoring and reporting mechanisms will ensure that progress is closely tracked, and issues are addressed promptly. Open and continuous communication with all stakeholders, including contractors, government bodies, and the public, is essential for managing expectations and addressing concerns swiftly. Additionally, having well-developed contingency plans for known risks, such as adverse weather or supply chain disruptions, allows for quick response and minimization of delay impacts. Moreover, maintaining flexibility in resource allocation to address changing project needs and avoid bottlenecks will be instrumental in keeping the project on track. Additionally, maintaining an effective governance structure, activist project management and delivery rhythm with clear decision-making allocation, escalation routes and authority delegated for coordination are crucial for keeping and evolving the delivery roadmap. These strategies collectively aim to enhance project resilience against delays, ensuring more efficient and timely completion of RB. Evaluating the quantified implications on the financial net present value (FNPV) in conjunction with the socioeconomic benefits, it is evident that construction delays exert a more pronounced impact on the FNPV than on the socioeconomic benefits. This significant influence can primarily be ascribed to the substantial contribution of capital expenditure (CAPEX) to the overall negative FNPV. As construction delays necessitate the postponement of CAPEX allocations to future periods, they consequently elicit a notable reduction in the net present value. The base case scenario FNPV and socio-economic benefits are EUR -21.5 bn and EUR 28.1 bn respectively. The maximum impact on both figures is 10 years of delay in construction, increasing the negative FNPV to EUR 15.2 bn and lowering the socio-economic benefit to EUR 23.2 bn. The positive impact of EUR 1.5 bn additional on net benefits is attributable to the large CAPEX investment postponed to later years, being discounted on a larger 227 factor. As analyzed above, further factors have to be considered such as losing willingness of financiers to continue to back the project, public and political opinion changing from supportive, or suppliers losing their belief in the feasibility of development. Figure 182 – Construction delay impact on FNPV, and socio-economic benefits (Consultant team analysis) 64 Construction Site Interface Risk (#52 in Appendix – Risk mapping) Construction site interface risk in RB involves the potential complications arising from the interaction and coordination between different construction sites and teams. This includes challenges in managing overlapping activities, resources, and timelines, particularly given the project's transnational nature and the involvement of multiple contractors. Such risks can lead to miscommunication, resource conflicts, delays, and safety issues on the construction sites. This risk is rated a 3 out of 5 for likelihood, indicating a moderate probability. While there are inherent challenges in coordinating activities across various construction sites in a large-scale, multi-country project like RB, effective project management and communication strategies can significantly mitigate these risks. The likelihood reflects the balance between the complexity of managing multiple interfaces and the typically robust management structures in place for such large infrastructure projects. The impact of construction site interface risks is scored as 5, denoting a very high impact on the project. Poor coordination and management of site interfaces can lead to significant construction delays, increased costs, and potential safety hazards. These issues can cumulatively have a critical impact on the project's overall timeline, budget, and safety record, which are key to the success and reputation of RB. Mitigating construction site interface risks involves implementing a detailed site interface management plan to effectively coordinate between different contractors and project teams. Establishing clear guidelines for site 64 FNPV value is in absolute terms, it is forecasted to be negative. Please note, the following calculation employs a simplified approach to estimating impact. CAPEX multiplier due to delays in construction is not considered, however different phasing of investment is. The phasing due to uncertainty surrounding investment is assumed to be linear for years following the base case estimated finish of 2030. 228 access, communication, and coordination is essential for smooth operations. Utilizing a centralized coordination platform can enhance real-time communication and resource allocation. Regular coordination meetings should be conducted to proactively address interface issues and ensure alignment among teams. Developing a comprehensive risk assessment and mitigation strategy specifically for potential interface risks is crucial. Engaging with construction management experts can provide valuable guidance in managing complex site interfaces. Lastly, implementing a feedback mechanism to capture and learn from on-site experiences will continuously improve the efficiency and effectiveness of site interface management, thereby reducing the risk and enhancing overall project performance. 14.1.3 Operation Phase Risks Operation phase may be harmed by the strategic risks of (#69) lack of interest from RUs to operate, and (#70) misalignment of long-term operational goals and strategies among countries. Lack of Interest from Railway Undertakings to Operate (#69 in Appendix – Risk mapping) A significant potential risk for RB is the lack of interest from RUs to operate the service. This risk involves the possibility that RUs may not find the route commercially attractive or feasible, possibly due to concerns about profitability, market demand, or operational challenges. The absence of RUs willing to engage could severely impact the project's utilization and its ability to meet intended transport and economic objectives. This risk is rated a 4 out of 5 for likelihood. While RB is a major infrastructure project with significant potential, uncertainties in market attractiveness, competition with other modes of transport, and operational challenges could deter RUs. The score reflects a balance between the project's inherent attractiveness due to its scale and significance, and the commercial considerations that RUs will weigh in their decisions. On the impact scale, this risk would score a 4 out of 5, signifying a very high impact. The success of RB heavily relies on active participation from RUs. In the absence of their full participation, substantial operational losses could occur, necessitating an increase in subsidies. To mitigate this risk, it is crucial to develop strategies aimed at attracting RUs. This can include offering incentives or crafting tailored agreements that make operation on RB line more appealing and economically viable for RUs. However, it is important to ensure that these strategies and agreements are designed in compliance with the principles of equity, non-discrimination, and transparency, as mandated by the Directive 2012/34. Such incentives could involve financial benefits, or operational support. Additionally, conducting early market testing can provide insights into the expectations and requirements of potential RUs, guiding the development of effective incentive schemes. These strategies not only aim to attract initial RUs but also foster competition within the railway system, which can lead to better services and increased efficiency in operations. This proactive approach in engaging with potential RUs and addressing their concerns will be key in ensuring the successful utilization of RB infrastructure. For more details, please refer to the subsection Strategies to Attract Railway Undertakings in this report. Misalignment of Long-term Operational Goals and Strategies among Countries (#70 in Appendix – Risk mapping) RB, involving multiple countries, faces the risk of misalignment in long-term operational goals and strategies. This risk stems from the potential divergence in national priorities, economic objectives, and strategic visions of the participating countries. Such misalignments can lead to inconsistencies in the project’s e ecution, funding, and future operational management, potentially impacting project delivery and the overall integration and effectiveness of the rail network. 229 The likelihood of this risk is rated as 3 out of 5. While the participating countries have committed to implementing the RB line, variations in political, economic, and social landscapes can influence their long-term goals and strategies. The moderate score reflects this possibility, balanced against the existing multilateral agreements and shared objectives that underpin the project. The impact of misaligned long-term goals and strategies among the participating countries is rated at 5 out of 5, indicating a ver high impact. Such misalignment can lead to significant challenges in the project’s sustaina ilit , operational efficiency, and potential expansions or enhancements. It could also result in operational inefficiencies, increased costs, and reduced benefits for the involved regions, thereby affecting the overall success and utility of the project. To mitigate this risk, it is crucial to establish shared long-term operational goals and strategies that align with the visions of all participating countries. This involves creating a collaborative and inclusive governance framework that ensures consistent and ongoing collaboration among the countries. Such a framework should facilitate frequent dialogue, review of strategic objectives, and adjustment of operational plans to reflect the evolving needs and priorities of each country. It should also include mechanisms for resolving disputes and ensuring that all parties remain committed to the shared vision and objectives of RB. In addition, synchronization of national laws and codifying international agreements could also strongly contribute to preventing escalation of this risk. These approached can help maintaining alignment and coherence in the project’s long-term operational strategies, contributing to its overall success and sustainability. In conclusion, the comprehensive risk analysis for RB underscores the importance of proactive risk management in ensuring the project's success. The identified risks, ranging from funding shortfalls to stakeholder engagement challenges, highlight the intricate network of factors that must be vigilantly monitored and managed. Mitigating these risks requires not only strategic planning but also adaptive responses to evolving circumstances. It is crucial to acknowledge that risk management is only one facet of ensuring RB's success. Equally vital is the project's adherence to the regulatory and compliance standards, which form the bedrock of its operational integrity. The two areas are intertwined. Compliance with regulatory standards is, in itself, a risk mitigation strategy, ensuring that the project meets legal requirements, adheres to safety standards, and aligns with environmental principles. The following section delves into the comprehensive regulatory framework that governs RB. 14.2 Regulatory and Compliance Navigating the complex environment of regulations and ensuring compliance are fundamental for operations. This section explains the most relevant regulatory frameworks affecting RB, involving environmental, railway, and competitors’ regulations. The section does not aim to provide legal advice. The objective of the analysis is to present a comprehensive understanding of the most relevant parts of the regulatory landscape to be considered in the context of the project. With this objective in mind, the section investigates the following three regulatory areas with a more detailed analysis, highlighting the relevance for RB: 1. Environment Environment related regulations are the European Green Deal and "Fit for 55" package. These contain the ’s goal of reducing greenhouse gas emissions % 2030. RB can emerge as a sustaina le transportation alternative in the Baltic states, contributing to this goal. However, discussions surrounding fossil fuel subsidies are pertinent as they may pose a challenge to RB by potentially diverting resources 230  away from the transportation mode. Additionally, regulations like Directive 2008/68/EC, for handling hazardous goods transportation, promote the safe transportation of several goods on the RB line. Furthermore, the Habitats Directive delves into ensuring environmental and ecosystem protection during the project's construction phase. This is followed by the Environmental Noise Directive, which mandates the assessment and management of noise pollution from major infrastructure projects like RB, ensuring that noise levels are kept within acceptable limits to protect human health and the environment. Finally, the EU's Environmental Impact Assessment Directive mandates assessing major infrastructural projects like RB for environmental impacts. RB, securing EIA approvals, demonstrates its commitment to ecological standards, underlining its broader sustainability impact. 2. Railway Railway related regulations contain the 4th Railway Package, alongside the EU Directive 2012/34. These regulations have the aim to ensure competitiveness and interoperability within the European rail sector. The minimum access package ensures fair and non-discriminatory practices for European networks. The alignment with EU's technical requirements, especially the revised Technical Specifications for Interoperability65 SIs , it is important for RB’s am ition to harmonize operations across stonia, atvia, Lithuania and the European network. Finally, EU's state aid railway guidelines aim to transition towards sustainable transport modes, allowing member states to subsidize operations like RB. 3. Competition Heavy goods vehicle bans on high-traffic roads, regulated under policies like the EU's Regulation (EC) No 561/2006, can shift focus towards alternative transport modes like rail, favoring projects like RB. The Baltic states, by maintaining a supportive regulatory environment, can channel traffic onto RB, promoting it as a greener, efficient transportation choice amidst rising road usage restrictions for environmental and road safety considerations. 14.2.1 Environment Green Deal The European Green Deal represents a broad initiative started by the European Union (EU) with the primary objective of transitioning the continent, as the first in the world, to climate neutrality by the year 2050 and therefore limiting global warming to 1.5 °C this century. At the heart of this attempt are particularly crafted policy measures aimed at significantly reducing greenhouse gas emissions across the board while simultaneously promoting sustainable economic growth within the region. One of the north star targets under this initiative is the reduction of net greenhouse gas emissions by at least 55% by the year 2030, relative to the emissions levels recorded in 1990. This interim target serves as a crucial milestone on the path to achieving the goal of climate neutrality by 2050. The Green Deal takes a comprehensive approach by extending its goals across various sectors including construction, biodiversity, energy, transport, and food. The policy initiatives captured within the Green Deal are tailored to expedite the EU's green transition (European Commission, 2019c). An example of initiative with the power to influence RB is the target for emission reductions among road heavy vehicles. 65 The Technical Specifications for Interoperability (TSIs) define the technical and operational standards which must be met by each subsystem or part of subsystem in order to meet the essential requirements and ensure the interoperability of the railway system of the European Union. 231 In 2023, the European Commission proposed a revision of the Regulation on CO2 emission standards for road heavy-duty vehicles. If adopted, the proposal would introduce new, stronger CO2 emission standards for heavy- duty vehicles from 2030 onwards and extend the scope of the Regulation to cover smaller trucks, city buses, long- distance buses and trailers (European Commission, 2023b). However, with regards to the truck segment, achieving the EU target will require huge investments not only to upgrade the fleets, but also to consolidate accompanying infrastructure and component parts, such as batteries or charging facilities. Because zero-emissions trucks are significantly more expensive than their diesel counterparts currently, and the freight industry runs on extremely tight profit margins, complying to this new policy may push many smaller companies out of the market, as they will charge a much higher price to recover their investments. Even though this regulation negatively impacts the road transportation sector, it presents opportunities for railways – such as RB – to capture a part of the freight transport that trucks used to carry. Fit for 55 he s "Fit for ” is a pac age constituting of R III Renewa le nerg irective , which is the consolidated version of REDII. REDIII encompasses various initiatives aimed at aligning various sectors with the broader objective of reducing greenhouse gas emissions by 55% by 2030 (Green Deal). These initiatives come as a range of legislative tools designed to transform the economy and society towards a greener, fairer, and more prosperous future. It includes measures like EU-wide carbon pricing for transport, improvements in vehicle efficiency, a switch to low-carbon fuels, and an overhaul of the EU emissions trading system (EU ETS) (European Council, 2023). Three regulations proposed in the Fit for 55 package and addressed within REDII and REDIII (Renewable Energy Directive) that may significantly affect RB are ReFuelEU Aviation, carbon pricing for transportation, and Alternative Fuels Infrastructure Regulation. The ReFuelEU Aviation sets out EU-wide harmonized rules for the promotion of sustainable aviation fuels (SAF), with an increasing minimum share of SAF required to be blended with kerosene by aviation fuel suppliers and supplied to EU airports (European Commission, 2023a). The ReFuelEU Aviation initiative applies to all airlines operating in Europe, regardless of their origin. The primary challenge for SAF deployment is its cost, being 3 to 5 times higher than conventional jet fuel (RHG, 2023). This cost gap is attributed to SAF's newer, pricier production methods. Adopting SAF would have significant consequences for the passenger segment, as it would cause ticket prices for air transportation to increase, in order for airlines to afford to meet the EU standard – the International Council on Clean Transportation predicts sustainability measures will drive up ticket prices by 22% by 2050 compared to where they would otherwise stand (The Business Times, 2023). The European airline market has mostly small players that generate less revenue in comparison to their global peers, therefore European carriers encounter more significant financial challenges when adopting SAF that their counterparts. Larger and more profitable airlines can afford switching easier to sustainable fuels without causing a major impact on the ticket fare for consumers. In light of this, European carriers may have to increase the price of tickets more significantly, which may hinder their competitiveness, as it poses the ris of the fare e ceeding the consumers’ willingness to pay, especially in the context of travel to neighboring countries. This represents an opportunity for RB to become a substitute for passenger air transport – the project could emerge as a viable alternative, which offers passengers a more affordable and eco-friendly travel option. The second regulation that may have an influence on RB is carbon pricing, an approach to reducing carbon emissions that uses market mechanisms to pass the cost of emitting on to the emitters, with the broad goal of discouraging the use of carbon dioxide-emitting fossil fuels (Carbon Pricing Leadership Coalition, 2023). This regulation encompasses various instruments that can be adopted by market players depending on their needs, such as a carbon tax, an emission trading system, a crediting mechanism, or a results-based climate finance framework. As the goals and mechanisms of the tools are quite similar, the focus will be on the EU Emissions Trading System, also abbreviated as ETC. This directive sets a decreasing annual cap on greenhouse gas emissions 232 for covered entities, aligning with EU's climate goals. Entities must hold emission allowances, purchasable or receivable for free from the EU carbon market, equal to their emissions, facing fines otherwise. They can trade allowances, promoting emissions reduction as entities can sell excess allowances. Since 2005, the EU ETS has reduced emissions from power and industry plants by 37% (European Council, 2022). When looking at the rail segment in particular, railways are generally more energy-efficient and emit fewer greenhouse gases per passenger or tkm than road or air transport. Therefore, under a carbon pricing or ETS regime in particular that would be expanded to address the carbon footprint of the entire transportation industry, RUs would likely face lower costs compared to those in higher-emitting sectors. For example, if the Baltic states implement a carbon pricing mechanism where entities have to pay for their emissions, RB may have to pay less, and its pricing towards its freight and passenger services may be minimally affected. This would generate a competitive advantage in relation to its peers in the maritime, air, or road transport segments, as they may have to increase their prices to match their CO2 emissions quota, and potentially lose traffic volume as a consequence. Finally, Under the "Fit for 55" package, the Alternative Fuels Infrastructure Regulation focuses on the deployment of interoperable and user-friendly infrastructure across the EU for recharging BEVs and refueling FCVs (European Parliament, 2023a). This regulation includes proposed mandatory targets for alternative fuels infrastructure, which are pivotal in supporting the penetration and market growth of cleaner vehicles. It aims to guarantee infrastructure coverage even in rural and remote areas, ensuring a uniform transition to cleaner transport solutions throughout the EU. Because a crucial element of this regulation is the development of a widespread BEVs and FCVs network, service facilities on key routes like those that RB is planned to serve may become instrumental. Integrating recharging/refueling stations at RB facilities would align with EU goals for regular station placement along principal transport corridors, significantly aiding in the creation of a comprehensive network. Fossil Fuels Subsidies Fossil fuel subsidies remained relatively stable, at about EUR 56 bn (2022 prices), over the period 2015-2021 (European Environment Agency, 2023a). he ’s ighth Environment Action Program, in line with EU and international commitments, calls for an immediate phase out of fossil fuel subsidies. However, EU Member States have no concrete plans on how and by when they will phase out these subsidies, therefore, it remains unlikely that the EU will make much progress towards phasing out fossil fuel subsidies by 2030 as planned (European Environment Agency, 2023a). This misalignment may have unfavorable financial impacts on the transportation sector, with respect to rail, from three angles: competitive disadvantages, reduced incentives for rail subsidies, and, finally, delayed adoption of sustainable practices. The lower prices for fossil fuels, driven by subsidies, can make rail transportation, especially electric or alternatively fueled trains, less economically competitive compared to road or air transport which predominantly relies on fossil fuels (International Monetary Fund, 2023). Because fossil fuels are the primary resource which road or air transportation modes use to operate, it is a key driver of the price they charge to passengers or freight companies. Therefore, continuing to subsidize such fuels would make road and air transportation more competitive and cost- effective. Similarly, governments might be less inclined to provide subsidies for rail transportation if substantial amounts are already being allocated to fossil fuel subsidies. Lastly, rail transport has numerous improvement opportunities in terms of sustainability through the development of alternative drives, increased operational efficiency. However, the presence of fossil fuel subsidies might slow down the adoption of such sustainable practices as they make fossil fuels cheaper compared to alternative, more sustainable ones (Boston Consulting Group, 2022). 233 Directive 2008/68/EC This directive by the European Union governs the inland transport of dangerous goods by road, rail, and inland waterway within or between Member States of the European Union, with a prime focus on ensuring high levels of safety and environmental protection. For IMs overseeing railway networks, this directive mandates rigorous safety management, necessitating the implementation of systems to identify and mitigate risks associated with the transportation of hazardous goods. The compliance with the directive's safety measures is imperative to prevent accidents and ensure safe transit of dangerous goods across the rail network. I s need to design operational protocols accordingl to meet the directive’s re uired technical and operational requirements, ensuring the safe and efficient transportation of hazardous goods. This might include modifications in the scheduling, routing, and handling of hazardous goods to adhere to the safety requirements laid down by the directive. Additionally, an environmental management plan must be established to respond appropriately to potential accidents (European Union, 2008). The Habitats Directive Due to human activities, there is a large-scale disappearance and degradation of many natural areas and of the species that live in them within the EU. The Habitats Directive, adopted in 1992, aims to protect the wildlife by ensuring that the species and habitats are properly conservated and bound to thrive in the long term. Apart from all forms of deliberate capture or killing in the wild, all Member States must prohibit deterioration or destruction of animal habitats under any form (European Commission, 2023c). his directive is highl significant in the conte t of RB, given the project’s e tensive construction activities. Therefore, it is crucial to ensure that such activities do not adversely impact any national sites or species declared under the list of Sites of Community Importance (SCIs). However, even if the project strives to minimize environmental damage through employing various initiatives, such the construction of forest bridges designed to preserve animal migration routes, adoption of noise reduction measures, and the establishment of micro- restriction zones for bird protection, it remains important to adhere to legal guidelines and continually monitor local developments to proactively address any other unforeseen environmental impacts that may emerge. The Environmental Noise Directive The Environmental Noise Directive is of also of significant importance to RB. This directive focuses on assessing and managing environmental noise, which is particularly relevant for major transportation infrastructure projects like RB. The directive requires member states to determine exposure to environmental noise through noise mapping and to adopt action plans to reduce noise levels, especially in areas where exposure levels can harm human health (European Parliament and Council of the European Union, 2002). For RB, adherence to the END involves conducting comprehensive noise assessments, mapping noise exposure, and implementing effective noise mitigation measures. The directive emphasizes the importance of public information and consultation, ensuring transparency and community involvement in the decision-making process. Compliance with the END is not just a regulatory requirement for RB but also a commitment to sustainable and responsible development. Environmental Impact Assessment (EIA) he uropean nion’s nvironmental Impact ssessment I irective 20 2 as amended 20 4 2 mandates that major infrastructure projects like RB within the EU must first be assessed for their impact on the environment before they can proceed. This assessment includes typically the following areas: 234  • Air Quality • Water Quality and Hydrology • Noise and Vibration • Soil and Land • Flora and Fauna • Cultural and Heritage Resources • Traffic and Transportation • Human Health and Safety • Socio-Economic Aspects • Climate Change and Greenhouse Gas Emissions • Waste Management • Cumulative Effects Therefore, several areas must be assessed if they match the requirements of the Environmental Impact Assessment (EIA) . The main goal of the EIA is to inform decision-making and promote sustainable development by evaluating, mitigating, and documenting the potential environmental impacts of proposed projects before they are carried out (European Parliament, 2014). The Environmental Impact Assessment is currently ongoing for RB. 14.2.2 Railway 4th Railway Package The 4th railway package, adopted by the EU in 2016, is a comprehensive set of reforms aimed at revitalizing the rail sector, enhancing its competitiveness, and ensuring its integration within the European transport system. It contains three pillars: technical, market, and governance. The technical pillar streamlines authorization and certification processes for railway vehicles and undertakings, fostering interoperability and safety across the EU. The market pillar promotes open access and competition by mandating fair and non-discriminatory practices, especially in domestic passenger rail services. The governance pillar restructures the roles of IMs and RUs to avoid conflicts of interest and ensure effective service provision. Through these reforms, the 4th railway package endeavors to create a Single European Railway Area, enhancing rail's appeal as a sustainable and efficient mode of transport (European Commission, 2016). The 4th Railway Package has direct impact on RB. The technical pillar requires RB to comply with technical specifications and operational requirements that facilitate seamless cross-border rail services. Under the market pillar, RB is required to promote open access and fair competition within its network, ensuring non-discriminatory practices in service provision. While the establishment of PSOs for passenger services on the RB line is a necessary step, it should not hinder open access operators from offering their services. This balance is crucial to ensure that the RB infrastructure can be used competitively by various RUs. Lastly, the governance aspect requires a clear distinction of roles between IMs and RUs to avoid conflicts of interest, ensuring effective service provision and fair market practices. Directive 2012/34 Regarding to EU Directive 2012/34 IMs must provide fair access to RUs, carriers, and other eligible applicants, operating on the European railway network. This open access principle extends to both domestic and international rail services. Member states have the option to exclude certain networks and services from this access rule, like local and regional standalone networks, networks serving only urban or suburban passenger rail services, or those with a track gauge different from the main EU rail network. The Directive outlines key provisions detailing the 235 processes for allocating railway infrastructure capacity and the methods for calculating and collecting infrastructure charges (European Union, 2012). According to EU Directive 2012/34, the IM needs to provide fair access to the network. In compliance with this directive, countries establish transport authorities or implement other monitoring and control structures in existing governmental agencies or authorities. These authorities have the task to oversee the IMs and ensure compliant behavior. The European Commission is proposing a modification to the existing EU framework (Directive 2012/34/EU) concerning capacity allocation. As of today, capacity allocation is mainly conducted during the time tabling periods of the IMs. Therefore, RUs typically reserve their access slots far in advance. For additional individual train runs serving transport needs at short notice, capacity can be allocated following ad hoc requests only if left-over capacity is available. The regulation will enable RUs to request and receive infrastructure capacity whenever needed, according to market demands, moving away from the current practice of submitting requests within strict deadlines. Additionally, it will facilitate railway companies in submitting and receiving responses to their capacity requests all in one location, thanks to improved interoperable ICT tools. This would not just increase capacities of the network but also efficiency. Overall, the availability and therefore, the utilization of infrastructure would increase. RB can benefit from such changes in regulations since the new and modern infrastructure can be utilized more effectively and increase TAC revenues for the IM. Due to the flexibility and short-term planning options the attractiveness of railway transport can increase significantly (European Commission, 2023d). Minimum Access Package The minimum access package for railways outlines a set of basic services that IMs must provide to RUs and other eligible entities to ensure fair and non-discriminatory access to the railway network (as EU Directive 2012/34). This package is designed to facilitate the smooth operation of railway services across the network, promoting competition and interoperability. By providing essential services like track access, train path allocation, and related operational services, the minimum access package aims to create the same opportunities for all RUs, thereby fostering a more integrated and competitive railway market. This regulation emphasizes that charges for the minimum access package and access to infrastructure connecting service facilities should be determined based on the actual costs directly related to operating the train service. This principle is crucial for ensuring fair and transparent pricing for access to railway infrastructure (DB Netze AG, 2021). In RB’s case, future I s, must esta lish this cost-based pricing system in order to fulfill the regulatory requirements for European track accesses. Technical Requirements The technical requirements for railways in the EU are principally governed by the Technical Specifications for Interoperability (TSIs). These specifications define the technical and operational requirements that need to be met by each subsystem or part of a subsystem to fulfill essential prerequisites and ensure the interoperability of the railway system across the European Union. The TSIs cover various aspects of rail operations and infrastructure, ensuring a harmonized and integrated rail network across EU member states. These TSIs cover infrastructure, energy, noise, rolling stock, safety, CCS, operation and traffic management, persons with disabilities and reduced mobility, and telematics applications. For each of those subsystems, the essential requirements need to be specified. The essential requirements can be summarized as safety, reliability and availability, health, environmental protection, technical compatibility, and accessibility. On September 8, 2023, the European Commission published a package of revised TSIs aimed at enhancing rail interoperability across borders. These new EU requirements are set to come into force on September 28, 2023, with a requirement for each Member State to notify the European Commission of their compliance by March 28, 2024 (European Union Agency for 236 Railways, 2023). This update emphasizes enhancing the European Rail Traffic Management System (ERTMS) by standardizing operational rules and introducing new requirements for ERTMS-related engineering information and safety instructions. It also mandates improved information sharing between IMs and railway companies. For RB, adhering to the European Union's TSIs is essential and mandatory. While an extensive range of TSIs exists, a detailed analysis of each exceeds the scope of this business plan. Some TSIs are directly relevant to RB in the development phase, but for ensuring interoperability of services Technical Specifications for Interoperability need to be comprehensively considered; for example, Infrastructure TSI specifically covers aspects such as line layout, track parameters, switches and crossings, platforms, and the resistance of tracks and structures to traffic loads. Other TSIs are more relevant for future operations; for example, the Telematics TSI aims to harmonize and standardize procedures, data, and messages exchanged between IMs, RUs, and other stakeholders. This specification encompasses two primary elements: • Applications for Passenger Services: These include systems providing passengers with information before and during their journey, reservation and payment systems, luggage management, and management of connections between trains and other transport modes. • Applications for Freight Services: This part covers information systems for real-time monitoring of freight and trains, marshalling and allocation systems, reservation, payment, and invoicing systems, management of connections with other modes of transport, and production of electronic accompanying documents. Furthermore, noise emissions from railways are governed by the Technical Specification for Interoperability on Noise (Noise TSI). The vision behind this TSI is to set an optimal level of harmonization regarding specifications on rolling stock subsystems, such as locomotives, passenger rolling stock, and freight wagons, to limit the noise emission of the railway system across the EU. The aim of this TSI is to lower the noise pollution caused from rolling stock for around 12 mn EU inhabitants which are affected by railway noise during the day and 9 mn during the night (Directorate-General for Internal Policies of the Union, 2012). Even if Noise TSI is related to rolling stock, there could be interesting implications for RB, such as the quieter route concept. This concept involves designing and routing railways in a way that reduces noise impact, such as using specific materials and technologies, and routing tracks away from densely populated areas. This approach complements the END 66’s o jectives proactively reducing noise pollution at the source. Subsidies The state aid railway guidelines by the European Union are aimed at supporting the shift to more sustainable transport modes in alignment with the EU's Green Deal agenda. Member States are allowed to subsidize rail transport operations and intermodal transport solutions as long as they reduce external costs compared to competing transport modes and lower the additional costs for infrastructure use incurred by rail transport. They can also support investments in digitization, interoperability, and noise reduction in rail infrastructure and rolling stock (European Commission, 2023e). If the nations involved are considering subsidizing railway operations on the RB line, compliance with EU Regulation 1370/2007 is essential in terms of state aid (European Union, 2007). Due to the Green Deal, the possibilities for granting subsidies have expanded, particularly if they facilitate a reduction in external costs relative 66 Railway noise is regulated within the Environmental Noise Directive (END) which sets the requirements for the noise pollution of rail systems. The design and the operation of the rail system should align with these regulations. On the European level there are predefined noise levels for high-speed trains which need to be followed. The noise level should not exceed 87 (250 km/h), 91 (300 km/h) or 92 (320 km/h) dB(A). In stations or in stabling tracks, the noise levels should not exceed 70 dB(A) (European Commission, 2002). 237 to competing transport modalities. Through strategic subsidization, the Baltic states can foster an alternative eco- friendly transportation mode, thereby amplifying the socio-economic impact and potentially enhancing the region's competitive advantage. 14.2.3 Competition Usage of Road During peak traffic seasons, some countries institute bans on trucks at roads with high traffic to prevent overloading the road infrastructure. In the European Union, such driving bans are orchestrated under Regulation (EC) No 561/2006, which defines the rules on driving times, breaks, and rest periods for drivers of commercial vehicles with a weight over 3.5 tons, aiming to enhance both working conditions and road safety (European Union, 2006). Moreover, some countries like Austria are adopting driving bans for heavy goods vehicles for environmental considerations, prompting a look towards other modes of transportation to compensate for this legislative intervention. These bans can pose challenges in planning and timely delivery of goods. With driving bans gaining traction, the industry is pushed towards exploring alternatives (van den Engel, 2010). In scenarios where such interventions are implemented by states, rail freight transportation becomes more important. RB can benefit from heavy goods vehicle bans along the North Sea-Baltic corridor, as it may channel traffic onto the tracks, positioning itself as a stream to the Baltic states. On the other hand, a favorable regulatory environment is crucial for the successful operation of RB concerning competition. The Baltic states must foster railway competitiveness through appropriate regulatory measures. Any decisions favoring alternative transportation modes, such as trucks or personal cars, could adversely impact RB. For instance, if tolls for road usage were eliminated, demand for rail transportation might decrease. Thus, it is in the shared interest of the Baltic states to uphold a regulatory framework supportive of transformation to emission free transportation. 238 15 Wider Economic Impact Analysis 15.1 Introduction Following the evaluation of economic viability within the CBA framework, the wider economic impact analysis (WEI) assesses indirect and induced socio-economic impacts of the project. While the standard CBA framework provide a robust structure to assess financial and direct economic impacts of Rail Baltica within the transport ecosystem, the WEI extends beyond the scope of the standard CBA to capture wider, context-specific impacts of the development, largely restricted by EU guidelines and monetization constraints. To reflect on these often overlooked, but significant benefits, the WEI assesses impacts on economic growth, as well as geopolitical and social benefits in the particular geographic, economic and demographic context of the project. Figure 183: Wider Economic Impact Analysis within the Economic Appraisal framework The report starts with a review of literature on the significance of wider economic impacts (WEI), setting the context for the analysis of key WEI components in the context of the Rail Baltica project. 15.2 General Literature Overview As the methodology of Wider Economic Impact (WEI) assessments is less strictly regulated and EU guidelines rarely include specific analysis approaches, this assessment is developed based on academic literature, the contribution of Rail Baltica and expert analysis, tailored to the specific context and objectives of Rail Baltica. In this regard, several academic and regulatory studies promote the significance of incorporating wider socio- economic impacts in the economic appraisal of transport projects. In a contribution to the International Transport Forum, Venables (2016) argues that wider economic impacts typically extend beyond the scope of a conventional transport cost-benefit appraisal (CBA). CBA primarily focuses on the user benefits generated by a project, often assuming no alterations in land-use. It is suggested that the standard CBA approach presents an inadequate alignment between the strategic rationale presented in favor of a project and the corresponding economic analysis. Even if the magnitude of these wider economic 239 impacts proves to be limited, the appraisal process must engage with the justifications presented by project promoters and local stakeholders. The Transport Analysis Guidance of the UK Department for Transport (2019) emphasizes the particular importance of WEI assessment in case significant market failures in secondary markets, beyond the transport sector, are anticipated to have a substantial impact on the welfare consequences of a transport intervention. It also outlines that the evaluation of a transport scheme's impact on Gross Domestic Product (GDP) should be approached with caution. GDP, while a valuable indicator of economic health, is not a complete measure of the full economic impact and should not be used as a substitute for welfare analysis. According to the Economic Appraisal Vademecum (Worldbank, 2023), induced impacts on local economies is recommended to be assessed in case boosting the economic activity of the region is key objective of the project. Additionally, indirect impacts on complementary markets (e.g., cost savings achieved by the promoter's suppliers, distributors, etc.) can be included, when relevant and if they are not already captured in the shadow prices of the project's inputs and/or outputs. Graham (2019) argues that the traditional consumer surplus-based calculation employed in conventional Cost-Benefit Analysis (CBA) encompasses only a portion of the potential advantages offered by transport schemes. Recent research on WEI has broadened the assessment's purview to encompass effects stemming from externalities and various manifestations of imperfect competition, all substantiated by well-defined theoretical and empirical evidence. Reflecting on the perspectives provided by scientific and regulatory studies, the y R ’ w economic impact accounts for the economic impact due existing market imperfections and context-specific benefits as well. First, the incremental GDP contribution of the development will be estimated, supported by the analysis of key growth drivers (e.g., land use change, tourism and hospitality spending, business creation, etc.). Then, the role of Rail Baltica as a critical infrastructure component is assessed to evaluate its impact on the military mobility of the Baltic region, with particular attention to the current geopolitical context. Further, the impact of stronger supply chain integration is studied, as well as social equity benefits. Finall , Rail Baltica’s impact on energ security is described, along with potential corridor synergies. 240 15.3 Wider Economic Impact Overview Rail Baltica has a significant positive impact beyond the direct users of the line. This includes monetary economic benefits, such as induced GDP growth, and qualitative effects like improved accessibility for historically underserved communities. Furthermore, Rail Baltica has implications on military mobility and supply chains in the Baltics, corridor synergies, and environmental sustainability. Key analysis results are outlined below, with further details covered in the following chapters. Figure 184: Wider Economic Impact Analysis Economic growth Rail Baltica is expected to boost GDP of the Baltic region by 0.5-0.7 pp in additional yearly growth, or EUR 20-28 bn in the operational phase until 2105 67, composed of direct, indirect and indirect impact components. Direct impacts (EUR 4.4 bn) are accounted for in the economic CBA, while indirect and induced GDP impacts (EUR 15.5-23.5 bn) of the investment feed the economy of the catchment area through multiple drivers, as listed below: • Increased traffic and spending of both urban and rural areas are anticipated to drive a 10-20% increase in land value in areas with international or regional RB stations according to benchmarks of comparable rail developments.68 • Tourism and hospitality demand is expected to increase by 25-30% in terms of foreign traffic based on benchmarks of similar projects69. • Innovation and expertise agglomeration has the potential to result in an uptake in the number of new businesses and startups (Lu Y., 2022). • Labor productivity is anticipated to grow through agglomeration effects (Hiramatsu, 2018). 67 On top of wider economic impacts during the operational phase, the investment during construction feeding through the economy also mitigates the financial burden of the project. While it is important to consider impacts during the construction period in the evaluation of the project’s feasi ilit , construction investment is primaril considered as the cost of the project, in line with CBA guidelines. 68 Consultant expert benchmarking of 3 comparable rail investments across multiple geographies 69 Consultant expert benchmarking of 6 comparable rail investments across multiple geographies 241  • Net inflow of residents has the potential to increase due to improved connectivity and better employment opportunities, reducing the overall shrinking rate of the population (Blanquart, 2017). • Market competition is expected increase due to reduced shipping times and higher concentration of businesses (Cartmell, 2018). Military mobility impacts In addition, Rail Baltica has the potential to become a game changer to the military mobility strategy of the Baltic states, with regards to the provided capacity and the connection to the 1435 mm network. Rail Baltica is designed to operate as dual-use civilian/military infrastructure, with rolling stock capacity to accommodate military transport demand. Through its potential to enable movements of military units in a single transport, as well as to reduce loading and unloading times, RB is expected to play a crucial role in military logistics both in case of armed conflict and peacetime. Some examples are listed below to highlight the potential key role of RB for military mobility purposes: • In case of armed conflict, Rail Baltica would increase civilian movement capacity by approximately 143 k citizens daily (9% of the population of the three capitals) from the Baltic countries to Poland, as well as the capacity to transport military supplies by 79 k tons daily 70. • By establishing a high-speed North-South railway axis, transport time would decrease along key population clusters, from 10 hrs to 5.7 hrs in the case of Tallinn based on estimations from RB traffic model and external sources. • RB infrastructure to play a pivotal role in enabling efficient logistics and transportation during peacetime military operations, in line with increasing allied deployments in the eastern flank of NATO. • Through the ability to transport an entire military unit on a single train, Rail Baltica would enable military movements without major disruptions to road traffic, as well as time savings 1 day unloading/loading time per transport at PL/LT border. Supply chain integration Apart from military mobility, Rail Baltica enables efficient integration into global supply chains, ensuring the swift movement of goods to and from international markets, promoting economic development, and supporting EU transport development objectives. Rail Baltica, connected to both top two priority axes of TEN-T, would contribute 4.5% of total investment required for the completion of the core TEN-T network by 2030, and 35% of the Baltic – Adriatic corridor (which would be directly connected to the Rail Baltica line via Warsaw)71 (Jensen, 2020; German Federal Ministry for Digital and Transport, 2023). Further, increased freight handling capacity would allow more freight to be transported along the northern flank of the Asia – EU land corridor, resulting in induced foreign investment and wider access to goods and services. 70 See Chapter 4 for detailed explanation of the calculations carried out 71 Calculating with a CAPEX value of EUR 25 bn for Rail Baltica, EUR 550 bn for the total completion of the core TEN-T network by (German Federal Ministry for Digital and Transport, 2023), and EUR 71.66 bn for the Baltic – Adriatic corridor (Jensen, 2020) 242 Additional capacity also plays a vital role in rebuilding healthy and efficient trade flows in countries impacted by the war in Ukraine, especially with Ukrainian grain transport challenges. The Rail Baltica project stands to participate in the reconstruction efforts, building on the relative importance of rail capacity within Ukraine (Kosse, 2023). In terms of new services, more reliable and faster transport modes are expected to allow e-commerce players to offer time-sensitive shipping offerings (e.g., overnight shipping). Social equity Rail Baltica promotes social equity by serving marginalized passenger segments. RB regional services have the potential to serve 351 k low-income residents to offer affordable public transportation for commuting/personal trips. 59 k reduced mobility passengers, currently with limited access to public transportation, could benefit from access to high-quality rail services.72 It is estimated that 75-125 students per year could take up university studies because of the improved accessibility to education with RB (Rail Baltica TDM, 2023). Marginalized communities currently underserved by public transportation would realize benefits due to decrease of pollution and accidents in areas with high car usage. Additionally, Rail Baltica is expected to improve w m ’ y, contributing to their social inclusion and integration into the labor market given the studies analyzing such phenomena on metro stations. (Pogonyi, 2019) Environmental sustainability Rail Baltica aims to be entirely powered by renewable electricity sources, in alignment with the European nion’s car on neutralit target for 20 0. onse uentl , the project has the potential to reduce the annual demand for fossil fuels in the Baltics between 1.5% and 3.3%. By reducing fossil fuel dependency through a modal shift from combustion engine vehicles, RB would contribute to electricity independence in the region, a key target of the European Union. he project’s commitment to renewa le electricity could lead to an induced investment in the region for offshore wind energy production of EUR 354 mn to cover the electricity need of the newly built rail. By helping the renewable energy sector reach economies of scale, it promotes an economically sustainable shift towards renewable power in transportation. RB has the potential to make the Baltic region a global leader in reducing short-haul flights. A limitation or outright ban in short-term flights in the region would lead to substantial emission savings amounting to EUR 11.5 mn. 72 he population of Rail Baltica’s catchment area was e amined ta ing into account the corresponding countries’ relative income poverty index. In cities with regional stations and a population greater than 25,000, the entire city's population is included within the core catchment area. For smaller cities, populations within a 4.8-kilometer radius of the station were considered. 59 k is calculated by taking 30% of the catchment area`s reduced mobility passenger population, given their increased difficulties in accessing nearby stations. 243 Corridor synergies In addition to the earlier mentioned beneficial impacts, the Rail Baltica project has the potential to unlock corridor synergies through “ ig once” enefits in the deplo ment of innovative technologies along line through realizing cost synergies, providing services which are not profitable as a standalone business unit. RB set the general conditions for service providers to have access to dark fiber optic as well as 5G mobile infrastructure, unlocking up to 20% in deployment cost synergies based on case studies (Christina Biedny, 2021). Rail Baltica is also expected to induce investment in adjacent transport infrastructure to realize cost and revenue synergies. 244 15.4 Economic Growth in the Catchment Area This section assesses the anticipated economic impacts of the Rail Baltica project in the Baltic region during the operational phase, considered as a key objective of the investment. The analysis offers a thorough evaluation of direct, indirect, and induced economic advantages, in line with EU guidelines for assessing local economic impacts73 (European Commission, 2021a). On top of wider economic impacts during the operational phase, the investment during construction feeding through the economy also mitigates the financial burden of the project. While it is important to consider impacts during the construction period in the evaluation of the project’s feasi ilit , construction investment is primarily considered as the cost of the project (not as benefit), in line with CBA guidelines. Drawing from empirical data and benchmarks from similar projects, as well as scientific literature, the potential influence on GDP growth is supported by further assessment of impacts on land value, tourism, business innovation, increased market competition, inflow of new residents and labor productivity. The methodology employed to estimate the economic impact of RB is detailed below alongside the calculation breakdown. 15.4.1 GDP Contribution of Rail Baltica Rail Baltica holds transformative potential for catalyzing economic growth within its catchment area. Benchmarks from comparable rail development projects suggest an annual incremental boost of 0.5-0.7 pp to the region's economic growth74, with a preliminary discounted net benefit estimated to range between EUR 20 and 28 bn over the project's lifespan split across the three Baltic countries. 75 N G R 7 n 20 2 R 7 n R n R 0 4 n Figure 185: Net discounted additional GDP by country and the evolution of GDP (2019-2105) of the catchment area (compared to GDP without RB) 73 The Economic Appraisal Vademecum 2021-2027 recommends excluding the assessment of induced benefits on local economies due to potential displacement effects. However, the assessment is encouraged in case boosting economic growth of the region is a key objective of the project, as in the case of Rail Baltica. 74 Consultant expert benchmarking of comparable rail investments across multiple geographies 75 Until 2105, discounted 245 The incremental GDP contribution of RB partially includes direct benefits already captured in the CBA (EUR 4.4 bn), as well as additional indirect and induced economic benefits (EUR 15.5-23.5 bn), as presented in the following figure. To estimate the additional wider economic impact on GDP net of direct benefits already accounted for in the ECBA, direct benefits are segmented based on their contribution to GDP. Among direct economic impact components, impacts on the transport value chain, business passenger time savings, enhanced job and education opportunities and labor benefits directly contribute to GDP, while remaining impact components do not or indirectly effect economic performance. More specifically, monetary benefits including cost savings and freight shipper benefits only contribute to GDP through operators’ profits while externalities such as accidents and environmental benefits do not directly contribute to GDP. Figure 186: Overlap between direct socio-economic impact components and GDP contribution In contrast to Economic CBA impact calculations, the approach for estimating incremental GDP growth impact follows a top-down methodology based on empirical evidence to enable a comprehensive estimation of interdependent benefit components. The initial step of the assessment establishes of a baseline GDP growth trajectory in the local and regional catchment area of Rail Baltica, only considering areas within the Baltic countries. This refers to the metropolitan 246 hubs with RB train stations and surrounding within a shorter than 1 hour commute (approximately 80 km radius from RB stations). Figure 187: GDP contribution calculation Metropolitan areas alone account for a combined 53% of GDP and, with the addition of the surrounding area, the overall considered catchment area accounts for 80.7% of GDP, assuming non-urban areas contribute uniformly to GDP. Figure 188: Catchment area for Rail Baltica considering a Local and Regional level The second step of the methodology is the calculation of incremental GDP growth induced by rail infrastructure development. To benchmark this increment, comparable projects across different geographies are analyzed, where similar investments related to rail development have led to additional GDP growth ranging from 0.5% to 247 0.7%.76 Given the current underdevelopment of rail infrastructure of the Baltics, Rail Baltica is expected to drive faster growth than Western European examples with higher without-project connectivity. Figure 189: Incremental GDP growth benchmarks This increment is a composite outcome of several interrelated factors, each playing a distinctive role in contributing to economic growth. Key components of incremental GDP growth include land value increase, tourism and hospitality sector growth, improvement in new businesses and improved agglomeration dynamics. Land value appreciation, projected at a substantial 10% to 20%, driven by improved accessibility and connectivity. Furthermore, the tourism and hospitality sector are expected to experience noteworthy growth, spanning between 15% and 30%, owing to increased regional attractiveness. The creation of new businesses is anticipated to increase, driven by better commercial opportunities and connectivity. Lastly, improved agglomeration dynamics are projected to yield productivity gains. These combined factors synergistically contribute to the incremental GDP growth stimulated by Rail Baltica. While the economic benefits of Rail Baltica are promising, it is essential to recognize and address potential risks and uncertainties. One notable risk is the possibility of lower-than-expected baseline GDP growth, which could limit the project's incremental economic impact. Variability in construction timelines, demographic trends and market conditions also presents inherent risks that could influence the ultimate wider economic benefits. Additionally, global economic dynamics and unforeseen events, such as geopolitical shifts or economic crises, can introduce uncertainties into the project's economic outcomes. A detailed risk analysis is conducted within the Rail Baltica Economic Appraisal. To provide an in-depth understanding of the top-down estimation of economic growth benefits and associated risks, the next chapter analyzes key economic drivers in the context of high-speed, regional and freight rail development. It is important to note that these quantifications aim to provide insights into the drivers of GDP growth and not an exhaustive list of its components. 76 Consultant expert benchmarking of six comparable rail investments across multiple geographies. Japan is considered as an outlier due to high deviation from average. Western European examples (Turin – Salerno and Paris – Brussels – Cologne) are excluded due elevated level of existing infrastructure. 248 15.4.2 Land Value Increase Transport investments significantly influence land use and value. Although the rise in land value can be quantified, much of this increase represents capitalized benefits already considered in the project's Economic CBA (such as time savings and improved accessibility). Consequently, CBA guidelines advise against quantifying this land value increment. However, given the project's aim to stimulate economic growth in the surrounding area, the increase in land value is assessed in a non-monetary manner. Accounting for the impact of both high-speed and regional stations in urban and rural environments, Rail Baltica is expected to induce land values increase of 10-20% based on empirical studies of comparable rail projects according to consultant benchmarks and Song et al. (2019).77 Figure 190: Increase in property prices (%) experienced in similar rail infrastructure projects The drivers of this increase are high-speed and regional stations and services, resulting in enhanced connectivity and improving future opportunities for rural areas as well. High-speed stations, often located near major urban areas, are likely to become hubs of development. Their ability to open connections between major cities makes them and their surrounding area prime locations for businesses, housing, and commercial centers. As a result, the land near these stations is expected to see an increase in value. With 67% of passengers using regional services, the vicinity of these stations is likely to form local commercial hubs benefiting from mainly commuting traffic (Rail Baltica TDM, 2023). Consequently, there will be a growing demand for housing, commercial properties, and facilities related to transport, thereby increasing land values in traditionally lesser-developed regions. While the intrinsic value of land in established urban centers is expected to rise swiftly due to enhanced connectivity and the subsequent inflow of businesses and consumers, rural areas are subject to a more intricate transformation. Changes in land use will encompass multiple sectors, from industrial zones benefiting from streamlined transport facilities to previously agricultural terrains gaining newfound value from potential tourism or leisure-oriented uses. As a subsequent impact of land value increase in areas favored by the development, a less significant decrease is expected in geographies with persistently low connectivity to economic clusters. 77 External benchmarks on land value increase induced by comparable rail developments. 249 15.4.3 Tourism and Hospitality The tourism and hospitality sector is a primary beneficiary of Rail Baltica high-speed and night train services in particular. As seen on the figure below, international benchmark projects experienced foreign passenger traffic increase between ~2-3% to 50%. Taking the benchmark average and staying conservative despite of the greenfield investment nature of the project (resulting in creating the first high speed line in the Baltics, Rail Baltica is expected to add 25-30%78 in tourism and hospitality traffic based on benchmarks of similar rail projects. The increase in spending is largely driven by passenger arrivals with Rail Baltica from within the region and neighboring countries across the region, as well as international passengers motivated by increased mobility across the Baltics. Figure 191: Induced foreign passenger traffic experienced in similar rail infrastructure projects Rail Baltica offers passengers a swift, flexible alternative to air and car travel, especially for those from proximate origins. For distant travelers, it could provide seamless access to key regional highlights via high-speed rail. This connectivity not only could facilitate exploration of multiple destinations in a single trip but also showcases the Baltics' rich natural and cultural assets, catering to tourists’ demand for diversified and convenient itineraries. Rail Baltica is expected to drive economic benefits across multiple hospitality segments (Campa, 2016). Hotels and hostels especially along the route, are expected to see increased demand, potentially catalyzing further investment. Restaurants can anticipate a surge in patrons, diversifying food offerings. Major attractions and localized experiences, from museums to historical sites, can attract more visitors. Additionally, the region's potential as an event hotspot will be leveraged, all while promoting sustainable, eco-friendly travel. Importantly, Rail Baltica is anticipated to also spotlight lesser-known towns, enriching their local economies through increased tourism. 15.4.4 New Business Creation and Innovation Historically, there is both political and industry support behind the concept that transportation infrastructure investments such as RB have the potential to drive business growth and innovation. Not only is mobility 78 External benchmarks of comparable rail projects 250 enhanced by such investments, connecting underserviced areas, and allowing for access to better job opportunities, but new businesses are created causing a boost in local employment. However, there is a lack of consistent academic literature confirming this hypothesis with evidence not pointing in a clear direction. In this context, the following subsection aims to provide support for the positive implications of infrastructure investments for businesses and innovation with RB serving as a prime example for the Baltic region, based on scientific literature. Rail Baltica's development has the potential drive business and technological growth in the region. As traveler and resident numbers grow, there is expected to be a higher demand for goods and services. This would boost the hospitality sector around stations, increase retail offerings tailored to traveler needs, prompt the establishment of workspaces near transport hubs, accelerate real estate investments along the route, create opportunities for new first and last-mile carriers and necessitate expanded operational services to maintain quality and customer satisfaction. With Rail Baltica's modern infrastructural and service ecosystem, a significant boost towards new venture opportunities and for innovative business models can be expected. According to Du (2022) there is an inherent incentive for companies to invest in research and development, creating innovative solutions tailored for the changing landscape. This could range from tech startups developing smart ticketing systems or travel apps optimized for the Rail Baltica route to sustainable and green technologies targeting eco-conscious travelers. The implementation of high-speed rail specifically has also shown to foster urban traditional and green innovation. Chang Ma (2023) analyses urban panel data from 285 prefecture-level cities in China from 2003 to 2019 in order to estimate the impact of opening a HSR on urban innovation. The results of the study show increased urban green innovation in cities with a more pronounced effect in smaller centers. 15.4.5 Productivity Growth and Agglomeration Effects Rail Baltica's direct connectivity is anticipated to increase productivity across sectors. By cutting transportation time and costs, businesses could operate faster, and supply chains would become more efficient. Improved workforce mobility means businesses access a wider talent range and employees spend less time in transit, leading to higher productivity and job satisfaction. A report by the Banque the France (Claire, 2017) shows the positive impact of the TGV (the French high-speed rail) on productivity with industries benefiting from increased profit margins in the range of 0.6 to 1.9 percent. Furthermore, Graham (2019) analyses the impact of transport investments in relation to productivity benefits via agglomeration economies. The latter are achieved when agents benefit from being in proximity to other agents. The study estimates the effect on total factor productivity and outlines the positive relationship between transport investments and increased productivity. The results of the study show however that the effects of agglomeration diminish more rapidly as the distance from the source increases. As a consequence, the area immediately surrounding RB train stations is set to mostly benefit in terms of agglomeration economy productivity. A major investment in infrastructure also stimulates the economy with economies of scale and an improving job market. In an empirical study of the Shinkansen line, Hiramatsu (2018) has observed a growth for population, jobs, and economic scale in the regions with improved access. These areas are found to be more productive, while in other in parts of the country with no investments, productivity and population decreased. 251 15.4.6 Inflow of Residents Modern train infrastructure can drive higher immigration and improved mobility of residents. By connecting remote regions to economic centers, rail networks unlock broader employment, service access, and improved living standards. Better connections to larger urban centers particularly benefit peripheral areas which can now gain access to a large pool of qualified workers. For potential migrants, from specialized professions to basic roles in sectors like construction or hospitality, efficient rail connectivity offers crucial mobility and access. Additionally, introducing a varied workforce can invigorate local economies, filling employment gaps in areas with labor shortages. (Blanquart, 2017). Rail Baltica is also expected to attract diverse businesses, from tech to manufacturing, and thus, both specialized and general workers. Such infrastructure can also amplify cultural and leisure attractions, appealing to those seeking vibrant communities. This not only boosts local allure, drawing a larger population, but also catalyzes demographic diversity. By investing in advanced rail systems, regions not only stimulate economic growth but also reshape their demographic landscape. Drawing parallels from the German example, high-speed rail specifically can lead to increased commuting between regions. A reduction in travel time by 1% is associated to a 0.25% increase in commuters between regions (Daniel F Heuermann, 2019). For Rail Baltica, this could not only signify enhanced intra-Baltic mobility but also higher inflows from neighboring states such as Poland. Given the projected 0.6% annual population decline in the Baltic states until 2080 (Eurostat, 2023b) seen on the figure below, higher inflows from neighboring states might be crucial for sustaining a thriving, balanced society both socially and economically. (Eurostat, 2023b) Figure 192: Population decrease in the Baltic states until 2080. (Eurostat, 2023b) 15.4.7 Increased Market Competition Rail Baltica's connection of the Baltic states can intensify market competition, particularly in transportation due to improved travel efficiency. It is expected to streamline logistics and supply chain management for businesses and promote regional collaborations. According to the research of Ou et al. (2022), expanded connectivity facilitates a wider customer base and leads to more intense competition. Rail Baltica's connection to various markets provides businesses with a wider customer base. This expansion could drive heightened competition, necessitating improved service standards. As a result, businesses would likely need to innovate more to stay relevant. 252  result of Rail Baltica’s esta lishment is e pected to e the enhanced presence of domestic and international businesses in the region. Such a business surge is projected to create competitive pricing dynamics. Data from similar infrastructural projects in case studies by the Department for Transport Rail Group of the United Kingdom (2018) indicate that sectors deeply interconnected with rail services might witness price stabilizations due to the increased competition on the market. Amid these shifts, consumers are expected to gain the most. The increased competition promises a wider array of choices, enhanced service standards, and competitive price points. This new market dynamic characteristically leans towards ensuring consumers obtain optimal value from their spendings. 253 15.5 Enhanced Military Mobility To reflect on geopolitical benefits beyond economic impact, this chapter assesses the potential of Rail Baltica to significantly contribute to the military mobility strategy of the Baltic states, offering enhanced capacity and integration with Europe through the 1435 mm network. Enabled by the dual-use design to serve both civilian and military needs, Rail Baltica possesses the infrastructure and rolling stock capacity to meet requirements during both peacetime and potential armed conflicts. Since EU CBA guidelines do not consider indirect and induced impacts direct benefits of the project, military implications are not part of the standard ECBA. However, given Rail Baltica's geopolitical significance and the Baltic’s crucial role in maintaining peace along the Eastern flank of the NATO and EU, it is recommended to consider its defense logistics impact during funding allocation discussions. The analysis of the geographical focus of military operations needs enables a deeper understanding of the feasibility of military transports on the RB line. In this context, while most military vehicle transport destinations are located in the Eastern parts of the countries without direct RB-connectivity, last mile segments can be covered by vehicles in a self-driven manner (except for tanks and containers, needing further road transport capacity) due to the short distances in the region. 15.5.1 Enhanced Military Mobility in Armed Conflict RB is designed to serve defense logistics purposes in times of armed conflict, facilitating the rapid movement of civilians, military personnel, cargo and humanitarian supplies from and to potential frontlines, thereby reinforcing the defense strategy of the Baltic states. The evaluation of the impact in case of armed conflict is a crucial, as increased capabilities project power of deterrence in times of geopolitical sensitivity and volatility, underlining a strong level of regional and EU-level cohesion. While in peacetime, military logistics decisions are highly cost-driven, time efficiency and capacity become the most important decision factors in case of emergency. Accordingly, the impact of Rail Baltica is assessed along dimensions including civilian movement capacity, military cargo transport capacity and time savings on key routes. Figure 193: Enhanced military mobility in armed conflict chapter overview 254 RB's infrastructural framework promises to enhance civilian movement capabilities, with a potential additional capacity to transport from 95 k up to 143 k civilians per day from the Baltic states towards Poland during emergencies. This not only ensures civilian safety but simultaneously frees up military logistics resources for other strategic deployments. To calculate maximum civilian movement capacity, demographic data is used for the allocation of trains to specific routes. For crisis evacuations, capacity is assumed to range from 100% to 150% of standard operational capacity to derive total daily civilian movement capacities (consultant expert analysis). Such reductions, when translated to strategic mobility, offer a distinct advantage in terms of agility and responsiveness. Beyond civilian movements, RB's infrastructural prowess is expected to enhance the military transport capacities for defense. It can pave the way for the streamlined movement of troops within the Baltic states and from Poland, and an estimated daily transfer capacity form 39,449 tons up to 78,898 tons of supplies from Poland to the Baltic states. To calculate potential capacities, data from the Rail Baltica model provided information on cargo train length, including locomotives and flat wagons, enabling the determination of wagons per train and the maximum payload for each. In crisis scenarios, a freight train could be dispatched approximately every hour, giving a daily freight estimate. A more conservative estimate is also calculated taking into account a train being dispatched every two hours due to organizational complications. These calculations are contingent on the availability of the required rolling stock. RB's operational efficiency is set to bring about a marked reduction in transit time compared to transport by bus to the Polish border, offering a strategic edge during emergencies (Rail Baltica TDM, 2023). Civilian movement times are assessed based on track lengths from each Baltic capital to the Polish border, ending at Suwał i (RBR project team input). Assuming a reduced passenger train speed of 140 km/h for crisis situations, 255 transit times are calculated for each route. These are contrasted with bus travel times at 70 km/h, underscoring rail's efficiency. Figure 194: Map of Baltics with reduced civilian movement times enabled RB Indeed, it remains imperative to consider the intrinsic vulnerabilities associated with such critical infrastructure. The strategic essence of RB also earmarks it as a possible high-priority target during armed conflicts. Military strategists suggest that the long-term sustainability of a frontline might be challenging, with potential damages to this infrastructure in the early stages being highly probable. In this context, RB's most profound benefits are anticipated during the crucial preparatory phase leading up to potential confrontations. 15.5.2 Enhanced Military Mobility in Peacetime Rail Baltica infrastructure is positioned to enhance logistics and project power during peacetime military operations by facilitating the rapid movement of goods and personnel. This capability not only offers additional revenue opportunities during exercises, but also equips the Baltic and NATO armies with improved responsiveness, allowing for the swift transport of equipment and troops during military operations (Biernikowicz, 2021). Furthermore, NATO has increased its military presence in the eastern flank of the Alliance as a response to the military conflict in Ukraine, which has a direct impact on the demand for logistics in the Baltic region N ’s military presence in the east of the Alliance, 2023). To serve this increasing demand, modern rail infrastructure is 256 expected provide the optimal solution for military logistics given its optimally balanced speed and capacity characteristics. The following figures highlight key quantified impacts of road congestion reduction, additional revenue, and mobilization time reduction. Figure 195: Enhanced military mobility in peacetime chapter overview The Baltic states also invest significantly into military and equipment, led by Lithuania which tripled its military budget since 2008. Estonia, Latvia and Lithuania all agreed to spend successively 3% of the GDP on defense in the future. This development leads also to a higher demand for military transport services (Mark F. Cancian, 2023). Based on the analysis of expected military movements of military vehicles, equipment, and personnel along the North-South axis79, RB is expected to provide capacity for NATO transports (up to 2000 vehicles and 3600 tons of cargo annually) and national armed forces (up to 27-33 trains annually). This not only promises to improve RB's economic impact by an estimated EUR 2-4 mn per annum, accounting for expected movements of military vehicles, equipment and personal along the North-South axis, but also stands to elevate the efficiency quotient of military drills. Further, through the ability to transport an entire military unit on a single train, Rail Baltica would enable military movements without major disruptions to road traffic. The transportation of a full military unit could be alternatively conducted in military truck convoys up to 7 km long, causing major disruptions to road traffic mostly taking place on already overloaded single lane roads along the North-South axis, rendering the operation unfeasible on EE-PL routes. Military logistics entails the transportation of specialized cargo, including heavy machinery and potentially hazardous goods. Relying on rail transport, as opposed to roadways, not only ensures safer and more efficient 79 Based on information from NFIU LV and LT, EE MoD 257 movement but also minimizes wear and tear on road infrastructures. Since military transports on road are often carried with super heavy load vehicles, this can have significant negative effects on the infrastructure (Nguyen Ngoc Thach, 2021). With shifting to rail transport, significant economic savings in terms of maintenance of road infrastructure and bridges in particular can be achieved. From logistics operations perspective, the one-time movement of units provides further benefits through a significant reduction of transport security, as well as time savings 1 day unloading/loading time per transport at PL/LT border. Enhanced rail capabilities also enable swift mobilization and demobilization of heavy forces, especially in the face of potential adversarial activities. This ensures a dynamic and responsive military strategy, enabling forces to be swiftly moved to counter provocations and equally rapidly repositioned once tensions de-escalate (Biernikowicz, 2021). Further, the enhanced rail network is expected to strengthen the military industrial ecosystem across the region. With better connectivity, there will be a marked improvement in the efficiency of equipment production and maintenance facilities. The strategic positioning of these centers along RB will also enable rapid response capabilities, crucial in times of defense and security needs. While the prospects seem promising, effective utilization of RB for military purposes demands intricate collaboration with national and allied military institutions. Ensuring seamless coordination of cross-border operations and understanding shared objectives is pivotal in maximizing RB's potential for military logistics. 258 15.6 Improved Global Supply Chain Integration The following chapter outlines the supply chain impacts of Rail Baltica, reflecting its potential to support the integration of the Baltic region into the European and global supply chains. Positioned in a strategic location between Asia, Europe and the Baltic Sea, Rail Baltica can accelerate the flow of goods between international markets, fostering economic development, and aligning with a broader regional growth strategy. In this context, while indirect supply chain implications are not part of core CBA calculations, mm R ’ impact during funding allocation discussions. Supply chain benefits are analyzed along three key dimensions focusing on the integration in the European TEN-T network and the Baltic-Adriatic corridor, as well as the capacity contribution to the Asia-EU land corridor. Additionally, supply chain flexibility improvement in the context of the ongoing conflict in Ukraine, and fast commerce shipping opportunities are analyzed to provide a comprehensive overview of supply chain impacts. Figure 196: Supply chain chapter overview 15.6.1 TEN-T Core Network and Baltic-Adriatic Corridor In delving into the economic impacts, RB's connection to the top priority corridors of the TEN-T network is a key advantage. Representing 4.5% of the required investments to develop the whole TEN-T core network by 2030, and 35% of the Baltic – Adriatic corridor80, RB's successful operationalization could lift the benefits of completing 80 Calculating with a CAPEX value of EUR 25 bn for Rail Baltica, EUR 550 bn for the total completion of the core TEN-T network by 2030 (German Federal Ministry for Digital and Transport, 2023), and EUR 71.66 bn for the Baltic – Adriatic corridor (Jensen, 2020) 259 other corridor segments across the North Sea – Baltic and Baltic – Adriatic corridors and incentivize further investments. Figure 197: Map of TEN-T network and required investment for completion of RB 15.6.2 Asia – EU Land Corridor Regarding the Asia – EU land corridor, the improved transport capacity offers an opportunity to handle additional 30 k TEUs81 through the northern flank of the China – Europe route, with the potential to attract foreign investment 81 Source: consultant expert analysis 260 and widen access to an array of goods and services. This, however, is contingent upon the economic and technical feasibility of transit between the 1520 mm and 1435 mm networks in combination with current alternatives. Figure 198: Map of transshipping terminals in the Baltic region 15.6.3 Economic Rehabilitation of Ukraine Moreover, the RB corridor could play an important role in restoring trade to and from Ukraine and Eastern Europe. Its additional capacity could inject vitality into trade streams in regions affected by the Ukrainian conflict. Should the conflict persist, RB would serve as a conduit for Ukraine to retain access to Baltic ports. The post-war infrastructural reconstruction of Ukraine will pose significant challenges, especially given that transport infrastructure density, such as roads, waterways, and airports in Ukraine is in general much lower compared to other EU countries, except for railways (Kosse, 2023). This suggests that the heavy materials required for the reconstruction will be primarily moved on rail to and from Ukraine. The chart below summarizes 261 the infrastructure density among Eastern European countries by analyzing four main modes of transport, namely railways, roads, waterways and passenger airports. Railwa s m inha itants Roads m inha itants 00 ,000 400 0,000 200 ,000 0 0 raine oland Romania odova urope raine oland Romania oldova urope aterwa s m inha itants assenger airports per inha itants 00 .0 0. 400 0. 0.4 200 0.2 n.a 0 0.0 raine oland Romania oldova urope raine oland Romania oldova urope Figure 199: Infrastructure density among Eastern European countries. 82 In this context, should traditional shipping routes stay blocked, Rail Baltica has the potential to increase the efficiency of rail transport from Ukraine, contributing to the security of global supply chains of grain in particular. The logistical issue to switch from Soviet era-wide gauge to European standard 1435 mm gauge will remain, however, the modern Rail Baltica infrastructure has the potential to transport more freight than the current Eastern European rail network and reduce the cost and time spent associated with changing twice between rail gauges (Reuters, 2023). Currently, grain arriving from Ukraine requires two gauge changes, one in Poland and one in Latvia, with the latter potentially to be avoided on the Rail Baltica line. Within the economic framework of the e-commerce sector, the infrastructure provided by Rail Baltica presents an opportunity for enhanced logistical efficiency. The integration of RB's swift and reliable transit capabilities can enable businesses to optimize warehousing locations, streamline supply chain processes, and expedite customs clearances, potentially reducing operational costs and improving the time-value proposition of goods in transit. The foundation of this analysis rests on a couple of pivotal assumptions. Realization of assessed benefits requires that subsequent network developments will support long-term freight transit through the Baltic region. This encompasses enhancements in areas like the TEN-T network segments, border amenities, and intermodal 82 Source: WorldData.info 262 terminals. In particular, existing challenges in bridging the transit between the 1520 mm and 1435 mm networks could limit the realization of potential advantages. 15.7 Improved Social Equity The following chapter focuses on the social implications of the Rail Baltica project as its regional services aim to advance social equity by providing sustainable and affordable transportation, especially for communities currently lacking adequate public transport options. Promoting social equity is central to Rail Baltica's strategic objectives. Therefore, for funding applications, it is recommended to include the impact the project could have on dismantling social barriers. To underscore this recommendation, the European Pillar of Social Rights lists transport (alongside water, energy, sanitation, financial services, and digital communication) among the essential services to which everyone should have access and highlights the necessity to support people in need in accessing them. Considering this aspect, the social equality impact of Rail Baltica is considered beyond the Economic CBA framework across several dimensions. To comprehensively analyze the social implications this chapter focuses on affordability, accessibility for reduced mobility passengers, social closeness and equal opportunities, wellbeing and environmental equality, as well as safety and security. Figure 200: Social equity chapter overview 15.7.1 Affordability Affordability plays a crucial role in gauging socio-economic impact, particularly when it comes to essential services like transportation. Public transportation is a lifeline for numerous low-income households and individuals who can't afford personal vehicles. However, the prohibitive costs associated with public transit can tie communities to their immediate localities, primarily those within walking or cycling distance (Goodman, 2013) depending also on weather conditions. This mobility constraint hinders access to a wider range of employment opportunities, thus leading to a vicious cycle: reduced income means fewer job opportunities and vice versa. This cycle is often described as the "geographic poverty trap" and infrastructure investments are proven to be a way out (Bird, 2019). Moreover, this constraint can also limit access to social and recreational activities, further diminishing the overall quality of life. Rail Baltica can address this link between low income and limited mobility, potentially improving employment opportunities. Regional services of Rail Baltica could become the preferred solution for 263 approximately 351,000 low-income residents, which is equivalent to 35% of the Baltic's population living in relative poverty, by presenting an economical commuting option. 83 Figure 201: Baltics GDP per capita84 The number of impacted residents is derived by analyzing the population in Rail Baltica's catchment area considering the Local level factoring in the share of the population living in relative poverty. In cities with regional stations and a population greater than 25,000, the entire city's population is included within the core catchment 83 Relative income poverty refers to the share of people with household disposable income below 50% of the national median. Relative income poverty indexes are available at: For Estonia: https://www.oecd.org/estonia/Better-Life-Initiative-country-note-Estonia.pdf For Latvia: https://www.oecd.org/latvia/Better-Life-Initiative-country-note-Latvia.pdf For Lithuania: https://www.oecd.org/lithuania/Better-Life-Initiative-country-note-Lithuania.pdf 84 Source: Rail Baltica 264 area. For smaller cities, populations within a 4.8-kilometer radius of the station are considered.85 The detailed specification of catchment areas is provided in the assumptions chapter above. The utility of advanced transportation infrastructure extends beyond the immediate benefits of convenience. In an economic framework, Rail Baltica functions as a critical intervention to address locational disadvantages (Kate Bird, 2010). By offering a cost-effective transportation alternative, it facilitates better access to a diverse range of economic opportunities, spanning employment, education, and healthcare sectors. This enhanced mobility has the potential to mitigate the challenges posed by geographic poverty traps, fostering broader socio-economic development and integration. 15.7.2 Accessibility for Reduced Mobility Passengers Promoting accessibility and ensuring the well-being of reduced mobility passengers are fundamental objectives in the development of equal public transportation. Accessibility for passengers with reduced mobility (RMP) in the Baltic region's current rail services leaves much to be desired. For instance, most Latvian trains lack efficient wheelchair accessibility due to their high-floor design86. Currently, 32 new Skoda Vagonka EMUs are only low-floor models; however, their expected delivery is at the end of 2023 (Vitenbergs, 2023). Additionally, the Rīga main station is theoretically wheelchair accessible, interviews with individuals with reduced mobility reveal that it remains challenging to navigate independently (Rozenberga, 2018). 87 Boarding trains poses another challenge, as the majority of rolling stock in Lithuania and Latvia lack low- floor boarding options.88 In contrast, the Baltic capitals already offer wheelchair accessibility in most non-rail public transportation modes, including buses and trams (Wheelchair Accessible Public Transportation in Tallinn, Estonia, n.d.). This existing accessibility infrastructure enables reduced mobility passengers to fully leverage the advantages of accessible trains, allowing them to achieve mobility without the need for private automobiles. Further, Rail Baltica's capacity to enhance the train commuting experience for reduced mobility passengers in these cities may see a notable uptick if it succeeds in reducing travel times or introducing supplementary benefits. To support the reduced mobility passenger segment, Rail Baltica is committed to providing accessible rolling stock and stations, in line with EU mandatory interoperability requirements set out in the TSI related to reduced mobility passengers (European Union, 2019) . This move is expected to greatly benefit the reduced mobility passenger’s communit , especiall given that alternative transportation modes are often either disproportionatel expensive or unavailable due to accessibility constraints. Rail Baltica's accessible rolling stock and stations are poised to offer independent transportation options for over 59 k reduced mobility passengers, constituting approximately 11% of the total reduced mobility passenger population (Social Insurance Board of Estonia, 2022; European Commission, 2021b; National Audit Office of Lithuania, 2020). Assumption: The population residing within a 4.8-kilometer radius can conveniently reach the station by other 85 means of public transport, car, bicycle, or even on foot. 86 Consultant team analysis on Latvian rolling stock portfolio 87 Note: the cited article is from 2018. However, the Rīga station has not been updated since then. 88 Consultant team analysis of rolling stock operated in Baltic countries 265 Reduced mobility population with access to services is calculated using residents in Rail Baltica's catchment area and each country's reduced mobility index. The catchment area's calculation method is detailed in this chapter's Affordability section. While the general population within the catchment area can access Rail Baltica stations in various ways, reduced mobility individuals mainly rely on accessible public transport. It's estimated that 30% of these individuals will consistently use Rail Baltica stations. Figure 202: At-risk-of-poverty ratio of reduced mobility passengers for European countries Furthermore, it is crucial to note that there is a significant overlap between reduced mobility and low-income populations, according to the "at risk of poverty or social exclusion" indicator from the European Statistical Agency (2022). This indicator measures various factors, including the percentage of people at risk of poverty, and it is evident that all Baltic countries exhibit rates well above the EU average (see figure above). This is particularly applicable for individuals facing some or severe limitations. While this indicator encompasses factors beyond mobility, it is worth highlighting that Rail Baltica's efforts to improve individual mobility can have a disproportionately positive impact in regions facing greater challenges, as opposed to areas where conditions are already favorable. 15.7.3 Social Cohesion and Equal Opportunity Accessible rail systems play a pivotal role in reducing inequality by promoting equitable access to education and enhancing employment opportunities. Rail Baltica will enable students from diverse socio-economic backgrounds, including those in rural areas, to easily reach educational institutions, narrowing educational disparities and contributing to a more educated workforce. The impact on education is estimated to result in 75 to 125 more students starting university every year because of RB (Rail Baltica TDM, 2023). While education and job accessibility are assessed in the Economic CBA from the perspective of direct transport users, the induced benefits of this impact go beyond individual level. According to Graham (2019), by connecting underserved areas to job centers, rail development creates new employment opportunities. Blanquart (2017) further confirms the additional societal benefits derived from connecting agglomerations and underserved areas to densely populated neighborhoods, leading to a reduction of income inequalities and fostering a more stable and harmonious society where wealth and resources are distributed more equitably. Further, Rail Baltica is anticipated to facilitate social interactions by making it easier for individuals to visit friends and family across different regions. This connectivity strengthens social bonds and cultural exchange, fostering a 266 sense of belonging and shared identity. Furthermore, it reduces social isolation, particularly among vulnerable populations like the elderly or those with limited mobility, leading to more inclusive and tightly knit communities. 15.7.4 Wellbeing and Environmental Equality Beyond the individual health accessibility benefits already captured in the Economic CBA, rail developments, such as Rail Baltica, present indirect advantages to marginalized communities. Key benefits include health improvement due to transition to eco-friendly transport modes and its impact on air quality, decreased stress levels from vehicle accidents, the mental wellness advantages stemming from decreased urban congestion and noise, and the promotion of active lifestyles through increased use of public transport. Rail development typically results in a shift towards more sustainable transportation modes, in previously car- oriented neighborhoods. Electric trains, for instance, produce fewer greenhouse gas emissions than private vehicles, leading to improved air quality. Cleaner air reduces exposure to pollutants, a key driver of respiratory health within impacted communities. Moreover, the decrease in noise pollution and traffic congestion contributes to reduced stress levels, enhancing mental well-being and overall health. With fewer vehicles on the road, Rail Baltica is expected to lead to a notable reduction in traffic accidents. This not only saves lives but also lowers the physical and emotional toll associated with accidents. Fewer accidents result in reduced strain on emergency healthcare services and less trauma within the community, further promoting overall well-being. The introduction of efficient rail systems reduces the stress associated with unpredictable and lengthy commutes. As constant urban and road noise can directly lead to adverse symptoms such as anxiety, stress, fatigue, headache, as well as sleep disturbances (Jing Ma, 2018), residents experiencing quieter streets with less congestion due to Rail Baltica would likely experience lower stress levels. This reduction in stress not only fosters better mental health but also contributes to a sense of well-being and community cohesion. Increased utilization of public transportation will encourage physical activity. Residents may choose to walk or bike to and from train stations, promoting an active lifestyle. This not only leads to improved physical health but also reduces the risk of chronic diseases, enhancing overall well-being. 15.7.5 Safety and Security RB, as a transformative infrastructure project, promises to address multiple urban challenges, notably enhancing commuter safety, promoting community engagement in public spaces, and elevating women's safety in urban contexts. Historically underserved communities may face safety concerns, especially during nighttime or in poorly lit areas. Well-lit and meticulously maintained stations are at the heart of Rail Baltica's design. Coupled with the presence of security personnel and surveillance systems, these measures are set to instill a heightened sense of safety among commuters. Further, the development will connect communities to safe shared public spaces such as parks, recreational areas, and cultural venues. This connectivity encourages residents to access and enjoy these spaces, contributing to their overall well-being and psychological safety. Safer public spaces promote community cohesion and reduce social isolation. 267 Drawing parallels from studies focusing on the impact of metro stations on women's feeling of safety (Pogonyi, 2019)it's anticipated that Rail Baltica will significantly enhance safety for women. Infrastructure projects that spur increased pedestrian activity have an inherent crime-deterring effect; a notion supported by Twinam (2017) through the “e es on the street” concept. A persisting challenge is the necessity to improve "last mile" connectivity in marginalized communities. Addressing this issue holds the potential to unlock a wide array of benefits, including enhanced job access, improved healthcare, and greater educational opportunities. 15.8 Environmental sustainability RB is expected to play a key role in supporting energy security and accelerating the transition to renewable energy sources, in alignment with the uropean nion’s goal to reach net zero 20 0. his strategic shift, aligning with RB's objective of replacing fossil fuels with renewables, promises to reduce external energy dependencies, stimulate investment in renewable technologies, align with sustainability objectives and limit the number of short-haul flights in the region. The following chapter quantifies RB’s impact on the environment anal zing both the emissions replaced via its service and the induced investment it generates in the region. Figure 203: Environmental sustainability chapter overview 15.8.1 Reduced Demand for Fossil Fuels RB’s commitment to renewable-generated power supply would enable the reduction of demand for fossil fuels in the transport ecosystem of the Baltics. The three countries, on average, consumed 305 577 TJ of energy from fossil sources between 2010 and 2021, primarily imported from third countries. 89 By reducing this dependency through a modal shift from combustion engine vehicles, RB would contribute to energy independence, a key target of the European Union, ultimately enhancing energy security within the region. Fossil fuel consumption is estimated to decrease between 1.5% and 3.3% compared to the historical average consumption observed Consultant team analysis based on (World Energy Statistics and Balances, 2020a)) for Estonia, (2020c) for 89 Latvia and (2020b) for Lithuania. 268 between 2010 and 2021. To realize these benefits, the analysis assumes that a reduction in energy demand would lead to diminished fossil fuel consumption. Figure 204: Annual projected fossil fuel consumption savings from modal shift to rail 15.8.2 Induced Investment in Renewables RB's commitment to being exclusively powered by renewable energy sources is expected to stimulate local investments in renewable technologies. This not only aligns with environmental objectives but also sets the stage for increased utilization of renewables in the energy mix, ensuring a more sustainable and secure energy future. As Rail Baltica will be entirely powered by renewable energy sources, consuming an estimated 293 k MWh energy annually90, an induced investment in renewable energy generation is anticipated in the region. Because of its considerable untapped potential, offshore wind energy is assumed to be the main future source of renewable energy for RB. This is further supported by the Baltic Declaration for offshore Wind Energy, a signed declaration from Poland, Germany, Denmark, Sweden, Finland, Estonia, Latvia, Lithuania and the EU (Baltic Declaration for Offshore Wind Energy, 2022). Using the average capacity factor 91 of offshore wind installations, which stood at 48.87% between 2010 and 2018 (Anna Sobotka, 2019), the required installed capacity is estimated at 88.29 MW. Based on information available for the 12 largest operating wind power plants in the North Sea, the cost per MW of offshore wind power capacity installation is assumed to be EUR 4 mn (ESFC Investment Group). The increased demand for renewables may therefore contribute, among other factors, to an estimated induced investment for offshore wind energy of EUR 353.69 mn for the Rail Baltica project. 90 Consultant team analysis. Based on the 2018 operational plan, RB estimates to use EUR 30 mn worth of energy. On the average projected industrial market price between 2030 and 2050, that converts to approximately 378 k MWh, assumed to be covered by offshore wind power. Considering the capacity factor of offshore wind, an estimated 88.29MW additional installed capacity is required to meet this annual demand. (Anna Sobotka, 2019). Assuming EUR 4 mn per MW investment necessary (ESFC Investment Group), an estimated EUR 353.69 mn is achieved. 91 he capacit factor is a measure of a power plant’s actual output over a period of time, e pressed as a percentage of its potential output if it were operating at full capacity continuously. 269 RB's drive towards achieving a net-zero transport ecosystem by 2050 holds economic significance. By helping the renewable energy sector reach economies of scale, it promotes an economically sustainable shift towards renewable power in transportation, further enhancing the region's energy security. Furthermore, achieving cost efficiencies through economies of scale has shown to foster innovation and thus lead to growth (Stern, 2021). 15.8.3 Short-Haul Flight Replacement RB has the potential to make the Baltic region a global leader in reducing short-haul flights along its High- Speed Rail network. Through flight number limitations or bans as per in the case of France, this initiative is expected to yield emission savings valued at EUR 11.5 mn annually, contributing to a greener and more sustainable transportation sector. Further, the reduction of intra-Baltic flights would also benefit air carriers given the negative profitability of short-haul feeder flights replaced by Rail Baltica.92 Route Annual flights Emissions saved (EUR) RIX - TLL 3,016 5,867,930 RIX – VNO 2,912 5,665,587 Total 5,928 11,533,517 Figure 205: Impacted air O/Ds, yearly flights, and emission savings93 It is important to note that indirect and induced impacts, although not classified as direct project benefits in the ECBA, include the potential implications on energy independence. Given the complex geopolitical and economic context of the development, it is strongly recommended that funding applications consider energy security as a key and integral benefit, acknowledging its significance within the broader scope of RB's transformative impact. 92 Source: airline expert analysis 93 Calculation based considering Airbus A220 capacity and 80% average utilization rate. The emissions saved consider both GHG emissions and noise pollution. 270 15.9 Corridor Synergies This chapter details the corridor synergies Rail Baltica (RB) is positioned to unlock corridor through "Dig once" benefits. This strategy enables the deployment of innovative technologies along its lines, offering services that might not be financially viable as standalone business units. The key synergetic corridor projects RB can benefit from include telecommunications and digital infrastructure, as well as local transport connections. 94 Figure 206: Corridor synergies chapter overview 15.9.1 Telecom Synergies Several crucial assumptions underpin this strategy. Firstly, it assumes the technical and financial feasibility of deploying energy, telecommunications, and transport systems in tandem. Successful implementation also relies on investments and efficient collaboration from system providers. Additionally, the analysis acknowledges the potential for maintenance costs to increase over the long term, contingent on the lifecycle of adjacent systems. RB's involvement in setting conditions for service providers to access dark fiber optic and 5G mobile infrastructure marks a pivotal development. It extends beyond mere transportation, potentially revitalizing rural and regional areas within the European Union. This initiative would foster cross-border telecommunications infrastructure development, strengthening the interconnectedness and performance of European fiber optic networks. In doing so, it would elevate service quality, ensuring that the benefits of enhanced telecommunications extend to a wider audience. Digital and telecom deployments have the potential to realize 20% cost reduction, due to synergies with the development of Rail Baltica corridor, making its construction financially feasible (Christina Biedny, 2021). 15.9.2 Local Transport Connections RB's emphasis on improving local transport connections is supported by the construction of regional railway branches. These branches are designed to facilitate accessibility for industrial, defense, and logistics areas, encouraging further investment in synergistic transport infrastructure. This would enable a further shift away from road transport thus benefiting RB with increased rail freight traffic. The catchment area identified for RB 94 Source: Rail Baltica Corridor Synergies Study 271 encompasses over 100 industrial areas of the Baltic region with a direct overlap with the main urban centers. By fostering improved connectivity, RB aims to catalyze economic development and regional growth. Figure 207: Location of industrial areas in proximity of the RB network95 However, the primary challenge lies in efficiently collaborating with energy, telecom, and transport providers to streamline the construction of adjacent infrastructure, ensuring that the "Dig once" strategy realizes its full potential. In summary, RB's potential transcends traditional transportation infrastructure, offering substantial synergies and economic benefits through strategic deployments. Recognizing these benefits and efficient collaboration with system providers are key to fully realizing the transformative potential of the "Dig once" strategy within the project. In the context of funding applications, it's important to recognize that while indirect and induced impacts are typically not considered direct benefits in the CBA, RB's substantial size and potential synergies with adjacent systems warrant a more comprehensive evaluation, as the realization of otherwise unfunded public projects will provide true socio-economic benefits. 95 Consultant team elaboration on Rail Baltica Global Project Corridor Synergies Study (2021) 272 15.10 Conclusions and Recommendations This wider economic analysis estimates the forecasted indirect and induced socio-economic benefits in addition to the ENPV, extending the standard CBA framework proposed by EU guidelines to capture context- specific benefits in a more comprehensive manner. In this context, the analysis underscores the significance of impacts beyond the direct users of the infrastructure across several dimensions. In particular, the analysis focuses on quantifiable economic advantages, including stimulation of GDP growth, alongside qualitative enhancements such as increased access for traditionally marginalized communities. Additionally, Rail Baltica holds significant consequences for military logistics and supply chain efficiency in the Baltic region, as well as corridor synergies and environmental sustainability. Rail Baltica is expected to boost GDP of the Baltic region by 0.5-0.7% in additional yearly growth, or EUR 20- 28 bn in the operational phase until 2105, composed of direct, indirect and indirect impact components. This increase is partially captured by the ECBA (direct impacts with an influence on GDP amount for EUR 4.5 bn), with EUR 15.5-23.5 bn additional GDP growth realized through indirect and induced effects. Rail Baltica could significantly impact the military mobility strategy of the Baltic states by enhancing capacity and integrating with the 1435 mm gauge network. Designed for dual-use, both civilian and military, Rail Baltica's infrastructure and rolling stock are equipped to meet military transport needs. Specifically, its capacity to facilitate the transport of entire military units in a single movement, coupled with the reduction in loading and unloading durations in cross-border operations, positions Rail Baltica as a critical asset in military logistics, in both peacetime operations and potential armed conflicts. Rail Baltica is expected to streamline integration into global supply chains, enhancing the movement of goods, fostering economic growth, and aligning with EU transport objectives. It represents a significant investment in the TEN-T network, notably contributing to the Baltic-Adriatic and Baltic-North Sea corridors. This expansion is anticipated to boost freight capacity along the Asia-EU land corridor, attracting foreign investment and broadening access to goods and services. The project also plays a critical role in supporting trade flows affected by the Ukraine conflict, particularly addressing transport bottlenecks and Polish logistical constraints. Additionally, Rail Baltica can support Ukraine's reconstruction efforts, especially given the country's reliance on rail infrastructure. The introduction of more reliable and expedited transport services is expected to benefit e- commerce sectors by enabling faster delivery options. Rail Baltica is set to enhance social equity by improving transportation access for marginalized groups. Regional services are projected to benefit around 351,000 low-income individuals, offering them affordable options for commuting and personal travel. Furthermore, approximately 59,000 passengers with reduced mobility, who currently face barriers in accessing public transport, are expected to gain from high-quality rail services. The improved accessibility to educational institutions provided by Rail Baltica could enable an additional estimated 75-125 students to pursue university studies each year. The project also promises environmental and safety benefits for communities currently reliant on cars, through reduced pollution and accidents. In addition, Rail Baltica is likely to bolster women's safety during travel, fostering their social inclusion and participation in the workforce, as evidenced by studies on metro systems. From an energy perspective, Rail Baltica is anticipated to bolster energy security in the Baltic states by encouraging a shift from fossil fuels to renewables in transportation. This shift is expected to cut fossil fuel consumption between 1.5% to 3.3% and stimulate a EUR 353.69 mn investment in renewable energy, driven by the railway's reliance on green energy. Additionally, by offering an alternative to short-haul flights, Rail Baltica 273 could yield EUR 11.5 mn in emission savings, contributing to the Baltics' goal of achieving net-zero emissions in transport by 2050. Finally, Rail Baltica is poised to catalyze corridor synergies, leveraging "Dig once" benefits through the integration of innovative technologies along its route. This approach could unlock up to 20% in deployment cost savings by providing shared infrastructure for services like dark fiber optic and 5G mobile networks. Furthermore, the project is expected to trigger investments in adjacent transport infrastructure, enhancing both cost and revenue synergies. Ultimately, the assessment finds that wider economic impacts are key benefits of infrastructure projects, especially in regions with moderate economic performance which is also the case with RB. The results imply that even in the case of a project with net positive direct economic and financial impact, a more comprehensive assessment of costs and benefits can provide a more detailed understanding of its true societal impact. In this context, the study recommends the consideration of wider economic impacts in funding application processes to account for context-specific benefits of infrastructure investments. 274  16 Appendix 16.1 Risk mapping Potential Probability Project's Risk impact (1- Aggregate # Risk description (1-5, low Potential mitigation methods phase category 5, low to risk level to high) high) The establishment of legal monitoring for legislative and other regulatory changes is advised. A transparent change- management process is suggested, where Changes in implications of potential changes are fully legislation and assessed and considered by governing General Regulatory 1 1 3 Low regulatory bodies before acceptance. This approach requirements aims to ensure that all regulatory alterations are constantly evaluated to maintain compliance and project stability. Ministries, being end shareholders, to be also considered in mitigation. Challenges in Development of a clear and comprehensive procurement procurement guideline, involvement of General Operational 2 documentation 3 4 High legal experts, and strict documentation for the standards to minimize procurement- construction related challenges. Implementation of a comprehensive cybersecurity framework to safeguard against potential ICT system vulnerabilities. Conducting regular vulnerability assessments and penetration testing to identify and rectify security weaknesses. Establishment of a robust patch management process to ensure timely updates and mitigations against known vulnerabilities. Adoption of multi-factor RB ICT system authentication and encryption General Operational 3 2 5 High vulnerability technologies to enhance system security. Engagement with cybersecurity experts to ensure continuous monitoring and swift response to any security incidents. Development of a cybersecurity awareness training program to educate staff on best practices and the latest threats. Establishment of incident response and disaster recovery plans to ensure resilience and rapid recovery in the event of a security breach. Project management team with clear Suboptimal responsibilities. Establishment of a project project General Operational 4 3 3 Moderate management software to ensure effective management and oversight and communication throughout communication the project. Implementation of a clear 275  Potential Probability Project's Risk impact (1- Aggregate # Risk description (1-5, low Potential mitigation methods phase category 5, low to risk level to high) high) communication strategy detailing channels, frequency, and responsibilities to ensure accurate and timely information exchange among project teams and stakeholders. Establishment of regular project update meetings and reporting mechanisms to keep all parties informed and engaged. Adoption of collaborative tools and platforms to facilitate seamless communication and document sharing. Training on effective communication skills and conflict resolution to foster a positive communication culture. Engagement with communication experts to assess and improve the existing communication processes. Implementation of a detailed Health and Safety (H&S) plan outlining the standards, timelines, and responsibilities to ensure on-time delivery with requisite quality. Health and Safety Engagement of H&S experts for guidance (H&S) standard and assessment of the H&S plan and its General Operational 5 not implemented 1 5 Low implementation. Establishment of a robust on time and at monitoring and evaluation system to track sufficient quality and ensure adherence to H&S standards and timelines. Conducting regular H&S training and awareness sessions to foster a culture of safety and quality among the project team and contractors. To address high funding risk, it is necessary to plan in advance and prepare funding estimations for the entire length of the project. The strategic spending approach Lack of funding should be tailored by the project team leading to delays based on these estimations, with options General Financial 6 or stoppages 4 4 Very High to adjust non-critical path spending to (from non-EU meet forecasted expectations. In case of sources) potential funding reduction, align delivery strategy and spending plans with funding authorities to allow for discrete, affordable delivery stages, ensuring continued progress and value delivery. An analysis of economic conditions and the inclusion of inflation contingencies in the project budget are suggested to buffer Inflation and against economic instability impacts. This General Financial 7 economic 4 2 Moderate analysis could extend to other investment instability programs under the same governance body and, where feasible, coordination with other relevant governing bodies may 276  Potential Probability Project's Risk impact (1- Aggregate # Risk description (1-5, low Potential mitigation methods phase category 5, low to risk level to high) high) be beneficial to navigate artificial supply chain rate inflation due to constrained supply scenarios. In cases where demand exceeds supply, a coordinated market strategy among governing bodies may be advisable to optimize or expand market capacity. Allocation of financial Open and upfront communication. Clear responsibilities resource allocation agreement (contract General Financial 8 2 1 Low and benefits and international laws) and regular review among project of allocations. partners Monitor interest rate trends and incorporation of interest rate sensitivity General Financial 9 Interest rates 2 3 Moderate analysis into financial planning. Frontload funding agreements and consider hedging. Engagement in continuous dialogue with EU authorities to secure commitments and Reduced EU General Financial 10 3 5 Very High explore alternative financing options to funding compensate for any potential reductions in EU funding. Ukraine's reconstruction Develop a comprehensive financing could divert strategy that factors in potential risks and infrastructure alternative funding sources, given the General Financial 11 funds from RB, 3 3 Moderate chance of fund diversion. Additionally, potentially consider lobbying for extra funding due to reducing the proximity to Russia. available financing for RB projects A clear organizational and decision-making Organization and structure with defined responsibilities is Governance – Lack advised to be in operation. The of organization organizational design should evolve to and governance reflect the project's progression, General Strategic 12 with sufficient 4 4 Very High recognizing that leadership themes and autonomy, scaling may transition across different transparency, organizational segments as the project and/or efficiency progresses. This adaptive organizational in decision making approach aims to ensure alignment with the project's evolving demands and stages. Early discussions concerning the operating set-up are advised. These discussions and Unclear General Strategic 13 3 3 Moderate related decisions should aim to clarify Operational Vision operating principles, operations, and maintenance regimes, sufficiently to 277  Potential Probability Project's Risk impact (1- Aggregate # Risk description (1-5, low Potential mitigation methods phase category 5, low to risk level to high) high) inform whole life cost optimization by managing trade-offs between capital expenditures (CAPEX) and operational expenditures (OPEX). Implementation of a unified Information Security (InfoSec) framework for all project parties. Establishment of a centralized information security management system Information to ensure synchronization and compliance. security not Conducting regular information security General Strategic 14 synchronized 3 4 High alignment meetings with all project parties. among project Utilization of secure and standardized parties communication and data sharing platforms. Development of a collaborative incident response plan to address any information security breaches promptly. Implementation of a change control process with defined approval protocols Changes to the General Strategic 15 3 4 High (and boards) to evaluate and manage any project scope proposed changes to the project scope, ensuring alignment with project objectives. Development of a comprehensive emergency and crisis management plan outlining protocols and responsibilities. Conducting regular training and simulation No clear exercises for readiness. Establishment of a emergency and dedicated emergency response team. General Strategic 16 2 3 Moderate crisis management Utilization of emergency notification plan systems for timely communication. Periodic review and updating of the emergency and crisis management plan. Ensuring availability of necessary resources and equipment for effective response. Implementation of a robust document management and control system to ensure accuracy and timeliness of information. Clarifying responsible and chain of related decision makers with an escalation route. Utilization of document management software to automate version control, Lack of document ensuring that all project parties access the General Strategic 17 management and 3 4 High most current documents. Establishment of control clear guidelines for document review, update, and approval to maintain document relevance and accuracy. Conducting regular training to ensure adherence to document management protocols. Periodic audits to identify and rectify outdated information. Establishing a 278  Potential Probability Project's Risk impact (1- Aggregate # Risk description (1-5, low Potential mitigation methods phase category 5, low to risk level to high) high) notification mechanism to alert relevant parties of document updates, ensuring everyone stays informed of the latest information. Further comprehensive environmental impact assessments are advised, along with engagement with relevant stakeholders to address and mitigate environmental issues. It is essential to ensure that any environmental-related project requirements are identified and Environmental integrated into the project scope. This General Strategic 18 concerns of the 1 2 Low integration allows for effective tracking society and allocation for design and implementation through either i) project team action or ii) inclusion in the supply chain contractor scope of work, facilitating a structured approach to environmental compliance and management throughout the project. Implementation of a standardized quality management system (QMS) across RB to ensure consistent quality and compliant processes. Hiring of quality management professional(s). Establishment of clear quality and compliance standards, guidelines, and protocols to be followed by all project parties. Conducting regular Inconsistent quality audits and process assessments to quality and non- identify and rectify inconsistencies and General Strategic 19 4 5 Very High compliant process noncompliance. Utilization of quality across RB management software to automate quality control processes, ensuring real-time monitoring and compliance. Training and awareness programs to educate all project parties on the importance of adhering to quality and compliance standards. Establishment of a corrective action process to address any identified quality or compliance issues promptly. Establishment of an optimized and well- functioning organizational structure including a group of key decision-makers, Delayed decision clear decision-making protocols, General Strategic 20 4 4 Very High making assignment of clear responsibilities for key decisions, and definition of deadlines. Implementation of a group with final negotiating and decision-making power. 279  Potential Probability Project's Risk impact (1- Aggregate # Risk description (1-5, low Potential mitigation methods phase category 5, low to risk level to high) high) Open and transparent communication with stakeholders, complemented by active stakeholder management and regular feedback, is advised. Additionally, the development of a stakeholder management plan is recommended, Stakeholder capturing the concerns and materiality of General Strategic 21 3 2 Moderate satisfaction issues each stakeholder. The plan should outline the management approach through e.g., a RASCI-type (Responsible, Accountable, Supporting, Consulted, Informed) consultation, ensuring transparency, provision of information, and decision- making input. Lack of knowledge management Documentation of project knowledge and General Strategic 22 during 3 3 Moderate briefing of new leadership according to the fluctuations of project scope. workforce Development of a political risk management strategy to monitor and Changes of respond to local political changes. political Maintenance of open communication General Political 23 2 3 Moderate environment channels with local political stakeholders to (local) address concerns, foster support, and ensure a collaborative approach towards project objectives amidst political changes. Geopolitical conflicts in the region causing Close monitoring of the situation and General Geopolitical 24 disruptions e.g., 2 4 Moderate preparation of actions if required. Russian/EU tension impacting the project. Implementation of a comprehensive security plan to protect construction teams amidst potential geopolitical conflicts. Establishment of a security coordination Geopolitical center related to H&S to monitor conflicts in the geopolitical developments. Conducting region affecting regular security briefings and training for General Geopolitical 25 the railway's and 1 3 Low construction teams. Coordination with construction local law enforcement and security teams safety and agencies for enhanced security measures. stability Development of an evacuation and emergency response plan for prompt action on security incidents. Utilization of secure transportation and housing 280  Potential Probability Project's Risk impact (1- Aggregate # Risk description (1-5, low Potential mitigation methods phase category 5, low to risk level to high) high) arrangements for construction teams. Regular review and updating of the security plan to reflect changing geopolitical dynamics. Establishment of a diversified network of partners and stakeholders to reduce dependency on any single regional alliance. Changes in Maintaining open communication channels regional alliances with all project stakeholders to address and geopolitical General Geopolitical 26 1 3 Low concerns and build trust amidst changing dynamics affecting geopolitical landscapes. Fostering strong project relationships with key stakeholders and cooperation regional entities to ensure continued support and cooperation for the project, regardless of geopolitical shifts. Changes in regional alliances and geopolitical Regular assessment of geopolitical General Geopolitical 27 1 4 Low dynamics affecting developments. operational cooperation A comprehensive regulatory analysis is suggested, with engagement from relevant authorities across all three Baltic countries to ensure project compliance. An alignment exercise among the three Regulatory governing bodies and adherence to compliance International Railway Construction Design Regulatory 28 differences 3 4 High Standards could contribute to normalizing between the a consistent end-to-end standards countries specification for RB, except in instances where unique demands necessitate variances or concessions. Establish a tri- country corridor team to recommend legislative changes, harmonize policies, and initiate lobbying as necessary. Early initiation of the permitting process and maintaining open communication with authorities is advised to expedite approvals. Setting up dependency Delays in roadmaps and contingency plans could also obtaining Design Regulatory 29 4 2 Moderate be beneficial for potential delays. Early necessary permits engagement with regulatory bodies and and approvals transparency in development progress are also recommended to foster an environment for timely approvals and to address any potential challenges promptly. 281  Potential Probability Project's Risk impact (1- Aggregate # Risk description (1-5, low Potential mitigation methods phase category 5, low to risk level to high) high) Compliance challenges with Implementation of environmental evolving management systems and their regular Design Regulatory 30 2 2 Low environmental update following changing regulations; and sustainability collaboration with environmental agencies. regulations Independent review to validate and Rail design potentially enhance the design guidelines, Design Regulatory 31 guidelines are of 1 4 Low ensuring they meet industry standards and poor quality best practices. Establishment of a cross-functional committee with the necessary authority delegated to address differences in operating standards. Development of a harmonized set of operating standards and practices for consistency across the project. Engagement with operational Differences in experts for standardization. Conducting local operating Design Operational 32 4 2 Moderate regular training to ensure adherence to standards and harmonized standards. Implementation of practices a monitoring and audit system to rectify deviations. Facilitation of open communication for continuous improvement of operating standards. Maintenance of a repository for easy and mandatory access and reference to the agreed-upon standards and practices. Early initiation of land acquisition processes, engagement with local authorities and communities, setup of clear escalation routes, and the establishment of contingency plans are advised to address potential land acquisition issues and Land acquisition delays. This should encompass Design Operational 33 2 3 Moderate issues and delays understanding legislative requirements to permit i) an efficient purchasing or procurement process for each parcel of land, and ii) a basis for land pricing that aims to avoid cost escalation or market inflation when the acquisition process starts. Unforeseen Conducting geological and environmental geological and assessments, implementation of Design Technical 34 environmental 1 3 Low appropriate engineering solutions and challenges and soil mitigate challenges related to the project's conditions location and environment. 282  Potential Probability Project's Risk impact (1- Aggregate # Risk description (1-5, low Potential mitigation methods phase category 5, low to risk level to high) high) Conducting regular technical assessments, creating dependency roadmaps, collecting alternative operational partners, engaging Delays due to prospective 'Plan B' partners now for technical Design Technical 35 4 3 High quicker involvement if issues arise later, difficulties or relationship building and streamlining the design changes change management process to minimize delays caused by technical difficulties or design changes. A comprehensive regulatory analysis is suggested, with engagement from relevant authorities across all three Baltic countries to ensure project compliance. An Regulatory alignment exercise among the three compliance governing bodies and adherence to Construction Regulatory 36 differences 3 3 Moderate International Railway Construction between the Standards could contribute to normalizing countries a consistent end-to-end standards specification for RB, except in instances where unique demands necessitate variances or concessions. Early initiation of the permitting process and maintaining open communication with authorities is advised to expedite Delays in approvals. Contingency plans for potential obtaining delays could be beneficial. Early Construction Regulatory 37 2 2 Low necessary permits engagement with regulatory bodies and and approvals transparency in development progress are also suggested to foster an environment for timely approvals and to address any potential challenges promptly. Necessary Initiation of the permitting process in construction Construction Regulatory 38 1 2 Low advance, open communication with permits not regulatory bodies. obtained Establishing legal monitoring for legislative and other regulatory changes. Set-up of a Changes in transparent change-management process, regulations or Construction Regulatory 39 1 2 Low where implications of potential changes standards during are fully assessed and considered by the project governing bodies before acceptance, is suggested. Import/export Monitoring of trade regulations, Construction Regulatory 40 restrictions/disrup 3 4 High establishment of alternative supply tions sources. 283  Potential Probability Project's Risk impact (1- Aggregate # Risk description (1-5, low Potential mitigation methods phase category 5, low to risk level to high) high) Implementation of a robust security strategy encompassing physical measures such as fencing, lighting, and surveillance systems. Engagement with local law enforcement and community stakeholders for a collaborative approach to infrastructure security. Establishment of a rapid response and repair protocol to address incidents of theft or vandalism Security of Construction Operational 41 2 5 High promptly. Employment of security infrastructure personnel and conduction of regular security audits to enhance infrastructure protection and minimize associated risks throughout the project lifecycle. Creation of comprehensive handbook for IBs and subcontractors to lower risks. Identifying leaders responsible for security management, and related decision-making hierarchies and escalation routes. Communication with approval bodies and Rejection of setting of clear deadlines for necessary transition from Construction Operational 42 2 4 Moderate approvals. Implementation of a tracking construction to system for monitoring of construction operational phase tasks. Communication with approval bodies and Delays of setting of clear deadlines for necessary transition from Construction Operational 43 2 4 Moderate approvals. Implementation of a tracking construction to system for monitoring of construction operational phase tasks. Disruptions due to Development of a comprehensive disaster unforeseen response plan, and implementing of Construction Operational 44 weather 1 4 Low weather monitoring systems to minimize conditions or disruptions. natural disasters Implementation of a rigorous contractor selection and evaluation process to ensure chosen contractors have the necessary capacities and resources. Establishment of clear contract terms and SLAs outlining Insufficient performance expectations, timelines, and contractor capacity requirements. Conducting regular Construction Operational 45 capacities 3 5 Very High contractor performance reviews to identify throughout the and address capacity issues early. project Development of a contingency plan to manage potential contractor capacity shortfalls, including identifying alternative contractors or additional resources. Engagement with contractors to encourage 284  Potential Probability Project's Risk impact (1- Aggregate # Risk description (1-5, low Potential mitigation methods phase category 5, low to risk level to high) high) capacity building and continuous improvement. Utilization of a centralized project management system to monitor contractor performance and capacity in real time. Safety incidents Establishment of safety protocols, regular leading to legal safety trainings, and a robust incident Construction Operational 46 liabilities and 2 4 Moderate reporting and response system to prevent reputation safety incidents and minimize legal damage liabilities. To mitigate construction delays in RB, key strategies include robust planning with realistic timelines and buffers, comprehensive risk assessment, effective contractor management, and rigorous progress monitoring. Continuous communication with stakeholders and well-developed contingency plans for known risks are essential. Flexibility in Construction 47 Construction delay 5 4 Very High resource allocation is also crucial to adapt to changing needs and avoid bottlenecks, collectively enhancing project resilience and ensuring efficient completion. Finally, maintaining an effective governance structure, activist project management and delivery rhythm with clear decision-making allocation, escalation routes and authority delegated for coordination are important Operational for keeping the delivery roadmap. Implementation of stringent cost monitoring and project management controls, complemented by regular budget reviews, is advised. Additionally, active risk Significant cost management is suggested to maintain overruns and continuous scanning of potential threats Construction Financial 48 budget deviations 3 4 High and to identify risk management actions in during response to such risks. It is also advised to construction implement key response strategies (avoidance, management, ignoring, or mitigation). Establish a dedicated oversight team with decision-making authority. A comprehensive estimation of testing cost, accounting for potential contingencies, unforeseen complexities, Underestimated and regulatory requirements, is advised to Construction Financial 49 1 1 Low testing costs prevent underestimation of testing cost. Additionally, defining a Testing and Commissioning Strategy from the start is recommended. Planning this from the start 285  Potential Probability Project's Risk impact (1- Aggregate # Risk description (1-5, low Potential mitigation methods phase category 5, low to risk level to high) high) ensures a proper understanding of the full scope of work, making time and cost plans more representative and potentially reducing risks associated with testing and commissioning. Implementation of strict contractor Poor or late performance and quality monitoring, Construction Financial 50 delivery from 4 3 High enforcement of clear contract terms and contractors deadlines. Setup of early warning systems and management controlling. Development of a detailed project schedule with well-defined milestones, interdependencies, regular progress reviews, and establishment of clear Misalignment of communication channels to ensure Construction Strategic 51 construction 2 3 Moderate alignment of construction milestones milestones among all project stakeholders. Potentially utilizing a dynamic project management software allowing for e.g., dynamic interdependencies and decisions tracking. Implementation of a detailed site interface management plan to coordinate between different contractors and project teams. Establishment of clear guidelines for site access, communication, and coordination. Utilization of a centralized coordination platform. Conducting regular coordination Construction site meetings to address interface issues. Construction Strategic 52 3 5 Very High interface risk Development of a risk assessment and mitigation strategy for potential interface risks. Engagement with construction management experts for guidance on site interface management. Implementation of a feedback mechanism to capture lessons learned and improve site interface management practices. Implementation of design reviews, engagement with experts, and the establishment of a quality assurance program are advised to identify and rectify design flaws and engineering errors early in the project. Additionally, the engineering Design flaws and Construction Technical 53 1 4 Low governance process should encompass engineering errors cross-disciplinary design reviews at key intervals to ensure alignment across each engineering stream as well as conformance with requirements, deliverability, constructability, and value for money objectives. 286  Potential Probability Project's Risk impact (1- Aggregate # Risk description (1-5, low Potential mitigation methods phase category 5, low to risk level to high) high) Strategic planning early on to discern the Archeological potential impacts on the critical path is Construction Technical 54 3 2 Moderate findings advised, which may lead to considering earlier implementation of certain activities. Unforeseen Conduction of thorough geological and geological and environmental surveys, employment of Construction Technical 55 environmental 2 4 Moderate experienced geotechnical experts, and challenges and soil preparation of contingency plans in place conditions to address unforeseen challenges. The implementation of a comprehensive quality control and inspection program during construction is advised. An overarching Technical and Quality Defects found Construction Technical 56 2 1 Low Assurance Framework is suggested, during testing defining the approval and certification process for each element of the project delivered scope, ensuring compliance with project requirements and standards. Change of Close monitoring of evolving regulations operation Operation Regulatory 57 2 2 Low and standards and implementation of regulations and regular safety audits. safety standards Close monitoring of legislative changes, Legal issues from and proactive adjustment of financial changes in cross- strategies and contracts to address any Operation Regulatory 58 2 3 Moderate border taxation or legal issues arising from changes in cross- tariffs border taxation or tariffs. Establish a cross- border team with decision-making power. Issues with Implementation of stringent maintenance Operation Operational 59 maintenance 2 3 Moderate service level agreements, regular (provider) evaluation of provider performance. Establishment of workforce training Inadequate programs, conduction of regular skills Operation Operational 60 workforce training 3 2 Moderate assessments, and hiring skilled workers to and skill gaps address and bridge skill gaps. Design of an environmental management plan outlining general principles. Potential Additionally, on a secondary level, precise accidents guidelines and procedures should be involving Operation Operational 61 2 4 Moderate established, creating a framework for both hazardous goods preventive measures and reactive transport on strategies in case of an incident. railway network Establishment of robust disaster management practices. 287  Potential Probability Project's Risk impact (1- Aggregate # Risk description (1-5, low Potential mitigation methods phase category 5, low to risk level to high) high) Establishment of a strategic labor contingency plan, including cross-training and workforce development, to address Operation Operational 62 Shortage of labor 4 3 High potential labor shortages. Advocacy and educational activities to secure future labor supply. Implementation of cross-border management model standards and Coordination collaboration frameworks, and a challenges among maintenance coordination team with the Operation Operational 63 4 3 High countries for necessary decision-making power, and the maintenance utilization of modern technology for real- time information sharing to address coordination challenges among countries. Comprehensive and ongoing cost assessments, establishment of financial Underestimated reserves for unexpected expenses, and Operation Financial 64 2 3 Moderate operating costs implementation of cost control measures to prevent underestimation of operating costs and maintain financial stability. Optimization of operational efficiencies, Lower OPEX exploration of cost-sharing partnerships Operation Financial 65 2 3 Moderate coverage (subsidies), and implementation of resource allocation adjustments. Diversifying energy sources to include a mix of renewable options like solar, wind, hydro, geothermal, and biomass, thereby reducing dependency on any single source. Direct investment in renewable energy infrastructure could provide more control over energy supply and stabilize costs over the long term. Additionally, financial hedging strategies could also be used to guard against significant price swings. Demand or supply Moreover, adopting energy-efficient shocks increasing technologies and practices would lower Operation Financial 66 2 2 Low the costs of overall energy consumption, offering a renewable energy buffer against supply shocks. Collaborating with governments and regulatory bodies could foster a supportive environment for renewable energy stability and growth. Finally, while aiming for 100% renewable energy, RB should also develop a strategy for flexible energy sourcing. This includes having agreements or plans in place to source energy from alternative (non- renewable) sources in case of shortfalls in renewable energy availability. 288  Potential Probability Project's Risk impact (1- Aggregate # Risk description (1-5, low Potential mitigation methods phase category 5, low to risk level to high) high) Enhancing the rail system's value proposition by improving reliability, and Competition from connectivity, while also developing Operation Strategic 67 other forms of 3 2 Moderate marketing strategies to promote its unique transport advantages and to attract passengers and freight shippers. Differentiation of services through better Competition with value proposition, modernization, Operation Strategic 68 existing railway 1 3 Low improved efficiency, and enhanced network customer experience. Offering of incentives or tailored Lack of interest agreements to attract RUs and foster from railway Operation Strategic 69 4 4 Very High competition within the railway system. undertakings to Early market testing and incentive scheme operate development. Misalignment of Establishment of shared long-term long-term operational goals and strategies, and Operation Strategic 70 operational goals 3 5 Very High creating a governance framework to and strategies ensure consistent collaboration. among countries Evolving market Monitoring evolving market demands and demands and customer preferences through market Operation Strategic 71 3 4 High customer research and customer feedback preferences mechanisms. Establishment of regular maintenance. Significant defects Operation Technical 72 2 4 Moderate Implementation of quick response teams during operation to solve operational issues. Development of a disruption tracking Significant service system in addition to a robust disaster disruptions due to recovery and business continuity plan, accidents, natural Operation Technical 73 1 5 Low investment in redundancy and backup disasters, or systems, and execution of regular infrastructure emergency response drills to minimize failures service disruptions. Difficulty in Establishment of a strategic spare parts sourcing spare inventory and forecasting, diversification of Operation Technical 74 parts and 2 4 Moderate suppliers, and a network of reliable sources maintenance to ensure the availability of spare parts and materials maintenance materials. Political Engagement with legal and political interference or advisors to navigate political landscapes Operation Political 75 2 2 Low lobbying from and ensuring compliance with all interest groups regulatory and ethical guidelines. 289  Potential Probability Project's Risk impact (1- Aggregate # Risk description (1-5, low Potential mitigation methods phase category 5, low to risk level to high) high) affecting project decisions Trade restrictions Close monitoring of international or embargoes geopolitics, trade policies and affecting the flow Operation Geopolitical 76 2 4 Moderate implementation of diversified supply of goods and chains and establishment of contingency services across plans. borders 16.2 Detailed macroeconomic overview For easier readability of the main analysis, additional drivers behind trends like population decline, GDP growth and war in Ukraine are not mentioned in those sections. These key underlying drivers will be detailed in the following pages as per the following figure. 16.2.1 Population Decline in the Baltics Demographic decline is primarily attributed to factors visible in figure below. The first graph in top-left shows that even though fertility rate is expected to rise in all three Baltic countries, it will still be well below 2.1, i.e., the value needed to ensure natural population growth. Second graph on the left shows that there will be no drastic changes in mortality and in 2080 all three Baltic countries will have a mortality rate of approximately 14 deaths per 1000 people. Another contributing factor to population decline is a slight negative net migration which can be seen on the graph in bottom left. The allure of better living standards, higher wages, and broader career prospects in neighboring countries often entices the younger and working-age population from the Baltics to emigrate. The population decline is further intensified by the aging demographic. Graphs on the right in figure 290 below confirm that all three Baltic countries will experience an increase in life expectancy over the next 60 years with expected median age of 49 years in 2080. Figure 208: Data explaining population decline (UN, 2023)96 96 Forecast from 2023 onwards. 291 16.2.2 GDP Growth Charts presented in the figure elow summarize important indicators of countr ’s economic health including GDP PPP, foreign direct investment, public debt to GDP ratio and Gini index. Figure 209: Economical landscape in the Baltics (World Bank, 2023; S&P Capital IQ, 2023)97 GDP PPP is a measure of the total value of all final goods and services produced in a country each year, adjusted for the relative cost of living in that country. The first graph in the figure above shows that all three Baltic countries have had a significant increase in this metric since 2010 which means that the living standard has improved. From 2010 to 2022, Estonia experienced a GDP PPP growth at a CAGR of 6.1%, Latvia 7% and Lithuania 6.5%. 97 The data shown in figure is not available through S&P, thus World Bank data was used. World Bank data is assumed to be aligned to S&P as S& ’s data on GDP for Estonia, Latvia and Lithuania was the same. Forecast from 2023 onwards. 292 On the bottom left chart in the figure above it is visible that from 2010 to 2022, Estonia has received a total of $27.05 bn of foreign direct investment at a CAGR of -4.31% which indicates that foreign investments are decreasing. In the same period Latvia has received a total of $14.86 bn at a CAGR of 7.61% which indicates the foreign investment is increasing at a high rate. Similar to Estonia, Lithuania has received a total of $21.29 bn at a CAGR of -3.52%. All countries have a public debt to GDP ratio below the Maastricht criteria (60%) which is an indicator of good fiscal health. Despite the expected increase in the short term, all countries are expected to experience an even bigger decrease in this metric until 2053 (see figure above). Therefore, it comes as no surprise that Estonia, Latvia, and Lithuania have credit ratings of AA-, A+ and A+ respectively. Another important aspect of every economy is income inequality. Gini index in the figure above shows that from 2010 to 2022 Estonia has seen a decrease in income inequality. On the other hand, in the same time frame Latvia and Lithuania have seen a slight increase in inequality. Both countries have Gini indices of approximately 36 which is generally considered to be high, indicating a significant level of income inequality. On the other hand, Estonia has a Gini index of 30.7 which indicates low to medium income inequality. As a reference Poland, Germany and Finland have Gini indices of 28.8, 31.7 and 27.1 respectively. Analyzing lending interest rates unveils that the region has a relatively high cost of borrowing, which may influence the funding of infrastructure projects and increase financing costs if it persists. One indicator potentially affecting funding is the corporate borrowing rate. Due to the macro-economic environment, the corporate borrowing rate forecasted by the end of 2023 is higher for all countries compared to previous years. By the end of 2023, ’ corporate borrowing rate is estimated to reach 16.8%, while Latvia and Lithuania are bound to have rates of 6.7% and 6.1% respectively. (Oxford Economics, 2023) Historically, when analyzing the period between years 2016 and 2023, the CAGR by which the corporate borrowing rate increased in Europe has been of 16.8%. The European Central Bank's tighter monetary policy has elevated loan interest rates, causing them to rise uniformly across the Eurozone, now 2-3 percentage points higher than last year, with the aim of restricting generally high inflation. Lithuania’s corporate orrowing rate has a CAGR of 14.8% (Oxford Economics, 2023), Estonia of 30.5% (Oxford Economics, 2023), and finally Latvia of 14.2% (Oxford Economics, 2023). hen comparing the Baltic region’s Rs with the uropean average, it is noticed that Estonia exhibits a significantly higher growth rate that its counterparts. Previously, Estonian entities benefited from low rates through floating-rate loans tied to Euribor. However, the increased rates are swiftly impacting the cost of servicing earlier loans. While banks retain strong lending capacity, the economic outlook and higher risks have led to slight tightening in lending standards, marginally narrowing the pool of eligible borrowers (Eesti Pank, 2023). However, the outlook for the future period between 2024 and 2029 is more positive, as all three Baltic countries are projected to have negative borrowing rate CAGRs. Lithuania’s R is forecasted to e -4.3%, and Lithuania’s -5% (Oxford Economics, 2023), which is in line with the average CAGR of -3% estimated for the 293 European continent in the same period. Estonia may have a negative CAGR of 1.4%. Both the historic outlook and the future forecast can be seen in the figure below. Figure 210: Corporate borrowing rate in Europe and the Baltic states (European Central Bank\Haver Analytics, 2022; Oxford Economics, 2022)98 16.2.3 Effects of the War in Ukraine This section aims to provide an in-depth view about the effects that the war in Ukraine on the trade landscape in the Baltics. The effects discussed below are the emergence of alternative trade routes, the disruptions associated with trade activities, the increasing electricity prices, and, finally, the change of the population and the labor market composition. Alternative Trade Routes Alternative trade routes are emerging in adaptation to the war in Ukraine and trade sanctions imposed on Russia and Belarus. Global and Baltic economies are exploring new and rediscovering old ways to continue trade with East Asia. The war in Ukraine disrupted overland trade paths, specifically the Northern Corridor passing through Russian and Belarusian territories, thereby revitalizing the Middle Corridor. The sanctions imposed on Russia and Belarus have complicated cargo transportation between Europe and China through these nations, leading to a growing interest in the Middle Corridor. This initiative connects Turkey to China via a network spanning Georgia, Azerbaijan, the Caspian Sea, and multiple routes into Central Asia (see next figure). 98 Forecast from 2023 onwards. 294 The Middle Corridor witnessed a surge in cargo traffic and attracted investments from both European and Asian stakeholders, resulting in significant cargo volume increase in early 2022 – approximately 3.2 mn tons of cargo were transported via this route, marking a substantial growth from the 350,000 tons recorded in 2020 (Foreign Policy Research Institute, 2023). This positive impact comes on top of the traffic increase fueled by the pandemic, when the shift in trade routes favored the shorter length of the Middle Corridor connecting the East and the West. Recent collaborative efforts by transit countries to enhance infrastructure and coordination, coupled with the geopolitical ramifications of the Ukraine conflict, have further enhanced the appeal of the Middle Corridor. While the Middle Corridor is gaining traction, the growth in volumes has not entirely offset the decline in volumes on the Northern Corridor. This is partly attributable to the rising popularity of ocean routes, driven by decreasing ocean rates and the surge in China-Russia trade volumes following the sanctions. However, the European Union (EU) has become increasingly interested in its use, driven by disruptions in glo al suppl chains and the ’s need for alternative routes following Russia’s invasion of raine. he recognizes the significance of alternative routes connecting Asia and Europe and is open to investing in such projects. For example, the European Bank for Reconstruction and Development has announced plans to invest over USD 100 mn in Kazakhstan railways. Figure 211: Alternative routes from China to Europe (Stiftung Wissenschaft und Politik, 2022) Overall, the implications of the increasing popularity of the Middle Corridor and the decreasing popularity of the Northern Corridor for RB are mixed. RB could lose some of its traffic related to the Middle Corridor, but it could also become more important as a transit route between Russia and Europe. The ultimate impact of these trends on RB will depend on a number of factors, including the future development of the Middle Corridor and the Northern Corridor. Moreover, RB could serve as a conduit for Ukraine to retain access to Baltic ports. Additionally, in the event of a prolonged war in Ukraine, the development of infrastructure in the Baltic region, including RB, could become crucial in expanding grain export capacity as explained in earlier chapters. As traditional Black Sea routes face disruptions, the Baltic ports offer a viable alternative, especially as Polish ports approach full capacity. This shift would significantly enhance the Baltic region's role in maintaining critical global grain supply chains during geopolitical crises. 295 Trade Disruption The second effect of the war in Ukraine are trade disruptions. Baltics have historically been the most exposed countries in Europe to the Russian economy (Fleck, 2022). The three Baltic states are among the 12 countries most exposed to Russian trade, Lithuania being the fourth and Estonia the sixth on the list below. Figure 212: Countries where international trade with Russia equals the highest share of GDP in 2020 (Fleck, 2022) Despite the tensions with Russia, the region witnessed a 25% uptick in overall trade when comparing the period before the war (from March 2021 to February 2022) to the period after the onset of the war and the imposition of sanctions on Russia (from March 2022 to February 2023). This indicates a resilient trade landscape in the region. A close examination of recent and anticipated trade activities in Estonia, Latvia, and Lithuania helps to gauge the potential impact on the RB project. Assuming that the military conflict does not escalate further, current projections suggest that the disruptions caused by the war might not significantly hinder the project in the long run. This notion is supported by the trade forecast, which outlines the progression of trade from 2005 and estimates trends up until 2040. Figure 213 – Trade evolution between years 2005 and 2040, including forecast from 2023 onwards (S&P Capital IQ, 2023) 296 To grasp the scenario fully, it is necessary to delve into each country's individual trade dynamics, specifically focusing on the trade composition and primary trade partners, including an analysis of trade relations with Russia and Ukraine in the wake of the ongoing conflict. Due to lack of country level pass-through trade data availability, the focus is on exports and imports that constitute the majority of trade; thus, are appropriate proxies of greater trade dynamics. Estonia Starting with Estonia, the data illustrates a notable increase in trade activities, seen in the figures below99. Exports surged by 11%, and imports witnessed a 17% growth. Considering the countries where Estonia exports the most, there has been a significant 50% increase with Latvia, generally attributable to the geographical proximity and possibly shared market characteristics between the two states. Out of the state’s main import partners, Finland experienced a 42% growth – Estonia and Finland share a long-standing and significant economic relationship, which is supported by a series of economic agreements that span a wide array of areas, encompassing economic cooperation, aid, the avoidance of double taxation, aviation, as well as reciprocal customs and road transport, collectively laying a strong foundation for their trade partnership (Embassy of Estonia - Helsinki, 2023). 99 This chart includes rounded figures where applicable for stonia’s trade mi presented for all trade partners and top trade partners between March 2022 and February 2023. Specific attention has been given to highlight data for Ukraine and Russia. 297  Figure 214 – Trade in Estonia (Statistics Estonia, 2023) Regarding trade composition, machinery and equipment, along with mineral products, remained the dominant goods traded, experiencing a surge in both imports and exports during this period. This growth is propelled by Estonia's rich repository of natural resources like oil shale, sand, and gravel, fostering a thriving industrial sector (Ministry of Climate Estonia, 2023). The nation's sound economic strategies have also played a pivotal role in this progression, fueling rapid growth in technology, and manufacturing sectors, primarily focusing on the international markets (Workman, 2022). Furthermore, being a member of the European Union facilitates Estonia's access to expansive markets, fostering collaborative trade relations and negotiations with other EU nations (Montonen, 2019). Consequently, these aspects have potentially cushioned the adverse effects of the Russian conflict on Estonia's trade dynamics. Analyzing Estonia's trade partners, a significant positive shift in trade relations with Ukraine is observed. Exports soared by 41%, and imports more than doubled, registering a 110% growth. This development is largely due to Estonia's increased imports of wood and wood-related products from Ukraine, a strategic shift initiated after halting wood imports from Russia following sanctions. This strategic realignment, which began in July 2022, has not only diversified the source of wood imports but also resulted in a trade surplus in the wood sector in 2022 (Post Times, 2023). 298 Latvia In Latvia, the trade sector has also observed an expansion, with exports rising by 24% and imports by 30% during the defined period presented in the charts below100. Latvia has seen increasing exports to Nordic countries, in particular Finland (117%) and Sweden (33%). Latvia and these Nordic countries have strong economic ties, with all three states undergoing active efforts in the previous years to enhance economic activity through various investments and cooperation (Cabinet of Ministers - Republic of Latvia, 2023). Latvia has seen the highest increase in import activity with neighboring countries Lithuania and Estonia (89% and 52% growth respectively), as all three states have similar economic structures, aligned EU-wide trade-specific policies and enhanced connectivity for the streamlined transport of goods. 100 This chart includes rounded figures where applicable for atvia’s trade mi presented for all trade partners and top trade partners between March 2022 and February 2023. Specific attention has been given to highlight data for Ukraine and Russia. 299  Figure 215 – Trade in Latvia (Central Statistical Bureau of Latvia, 2023) The trade composition has also seen a striking growth in the mineral products sector. While Latvia's main export commodities include wood, wood products, and charcoal, a significant portion of exports in 2022 also consisted of mineral fuels, mineral oils, and products of their distillation. These were primarily exported to Lithuania, Finland, and Estonia (LSM, 2023a). Between the selected timeframes, the value of mineral products in exports rose by approximatively 70% (from EUR 1.6 bn to EUR 2.7 bn) (Central Statistical Bureau of Latvia, 2023). One underlying reason for this can be found in the government policies and regulations – the Latvian government has implemented proactive policies and regulations to ensure the sustainable development of mineral resources, and of trade activities associated with them (International Trade Council, 2022). For trade partners, atvia’s e ports with Russia have registered a ver small growth rate of just 2%, while with Ukraine they more than doubled, rising by 112%. The effect of the trade sanctions has been offset by the continued trade of chemical products between Russia and Lithuania, which is reflected in the 2% increase. Latvia's chemical exports, especially pharmaceuticals, to Russia rose as they are not subject to EU sanctions - the chemicals category grew by EUR ~0.2 bn amid the ongoing political tensions (reaching EUR ~1.7 bn from EUR ~1.5 bn) (Central Statistical Bureau of Latvia, 2023). The 20% rise in imports from Ukraine was mainly driven by products of the chemical and allied industries, while the 17% decrease in imports from Russia, considered one of the 10 main trade partners of Latvia, is significantly affected by declining trade of mineral products. 300 Lithuania Finally, the Lithuanian trade landscape experienced positive developments in both exports and imports, which are marked by a 27% and 35% increase respectively, as depicted in the upcoming figures101 (Official Statistics Lithuania, 2023). ithuania’s e port partners which depict the highest growth are atvia and stonia, due to aforementioned reasons such as geographical proximity, regional economic cooperation and similar policies. However, a striking 75% increase in imports is seen with Sweden, mainly attributable to both countries being members of the EU and benefitting from easier trade due to common regulatory frameworks and diminished trade barriers. 101 This chart includes rounded figures where applicable for ithuania’s trade mi presented for all trade partners and top trade partners between March 2022 and February 2023. Specific attention has been given to highlight data for Ukraine and Russia. 301  Figure 216 – Trade in Lithuania (Official Statistics Lithuania, 2023) In terms of the trade mix, between the years until end of February 2022 and February 2023, Lithuania's export and import of mineral products experienced a pronounced increase due to a confluence of factors. The 27% growth in exports is propelled by a strong global market for crude oil and other commodities, alongside Lithuania's adaptability to the COVID-19 pandemic and geopolitical challenges. This resilience led to a significant increase in exports, particularly in the chemicals and oil industries, highlighting a robust demand in specific subcategories like petroleum gases and electrical energy. The significant decrease in trade between Lithuania and Russia, one of its primary trade partners, is primarily due to geopolitical developments and economic sanctions related to Russia's invasion of Ukraine. The 70% drop in imports is fueled by Lithuania's decision to halt imports of oil, gas, and electricity from Russia, in line with EU sanctions. This marked a shift in its economic relations and foreign policy, making this change impactful given Russia's role as a major trading partner, with much of the trade being transit trade (OECD, 2022). Additionally, this reduction in trade aligns with Lithuania's strategy to diversify its economy, lessen reliance on Russian energy, and more closely align with the EU's economic and political frameworks. However, unlike the other states, Lithuania exhibited negative growth in trade with Ukraine, primarily due to Ukraine's halted agri-food exports caused by the conflict (European Central Bank, 2022). The war in Ukraine seems to have had a limited impact on the overall trade landscape of the Baltics. While the trade with Russia has generally decreased or experienced very slow growth, trade with Ukraine has picked up. However, activity with the Baltic states’ main partners has in principle increased, and this scenario points to an escalation in the volume of goods traded, supported by the S&P forecasts, therefore potentially elevating the demand for railway freight services in the region. 302 Population and Labor Market As of November 2023, the Baltic states are hosting 73,627 Ukrainian citizens, accounting for about 1% of their total population. Among the 58,468 individuals aged 15 to 74, there is a gender distribution of 55% women and 45% men. By October 2023, there are 21,361 persons aged 20-64 receiving temporary protection, with about 54% of them employed. A breakdown of their occupational distribution is shown in the following figure, revealing that 29% are unskilled workers. (Statistics Estonia and Estonian Ministry of Economic Affairs and Communications, 2023) Figure 217: Occupations of 15-74-year-old citizens of Ukraine (Statistics Estonia and Estonian Ministry of Economic Affairs and Communications, 2023) A comprehensive 2022 study by RAKE, the University of Tartu's Center for Social Science Applied Research and Think Tank Praxis found that 63% of the Ukrainian war refugees plan to return to Ukraine within three years. Only 25% of war refugees saw themselves in Estonia after three years. Ultimately, the analysis of the geopolitical landscape and the effects of the war in Ukraine indicates that the long- term disruptions impacting RB's viability are relatively contained. 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