Risks associated with the construction of the Rail Baltica railway project persist and are increasing, and the project’s current funding model is no longer sustainable, according to the Fiscal Discipline Council (FDP) in its interim monitoring report on the Ministry of Finance’s draft Fiscal Structural Plan for Latvia for 2025–2028.
The report notes that several companies under the supervision of the Ministry of Transport pose potential fiscal risks.
The FDP emphasizes that Rail Baltica continues to face significant fiscal challenges. According to the TEN-T Regulation, the project must be implemented by 2030, but it is currently under threat due to several factors.
The fiscal risks stem not only from rising construction and overall project costs but also from the funding model itself. The existing model—85% European Union (EU) funding and 15% from the national budget—is no longer sustainable. The European Commission (EC) has shifted its funding priority to construction work, leaving expenses for project oversight, contract management, property expropriation, and building construction likely to be borne by Latvia.
Moreover, EU funding is granted through competitive calls (CEF calls), meaning the requested financing is not guaranteed in full—this can delay the project and increase costs.
Further uncertainty arises from a possible gap in EU funding during 2026–2028, which could require additional national co-financing or third-party involvement, such as through public-private partnerships.
The FDP warns that these challenges pose serious fiscal risks if the project fails to meet its goals or exceeds budget estimates.
Given these high risks, the FDP recommends enhanced monitoring and active involvement by the Ministry of Finance in developing a new project financing plan.
The report also highlights that Latvijas dzelzceļš (Latvian Railways, LDz) is in financial difficulty due to a sharp decline in east–west cargo transit. In 2018, rail freight volume totalled 49.363 million tons, but by 2024 had dropped fourfold to 11.564 million tons. This decline began in 2019–2021 due to Russia redirecting cargo to its own ports and was exacerbated from 2022 onward by international sanctions related to the war in Ukraine.
As freight volumes decreased, state financial support for LDz increased. In 2024, LDz was allocated 46.8 million euros to cover financial shortfalls from 2022 and 2023 as the state’s public rail infrastructure manager. Since these funds were used to increase LDz’s share capital, they did not impact the general government budget deficit. However, in earlier years, 63.2 million euros in support was granted from the contingency fund, which did affect the deficit.
In total, the state has provided 110 million euros to cover LDz’s operational losses from 2020 to 2023. Preliminary unaudited data shows that LDz ended 2024 with 27.667 million euros in losses, which will likely also require budget support, the FDP notes.
This is not the only form of state support—LDz also receives grants from the budget program “Funding for Public Railway Infrastructure.” In 2023, LDz received 43.5 million euros in grants, 50.5 million euros in 2024, and 64.368 million euros is planned for 2025.
While these expenditures are already budgeted and do not affect the fiscal balance, the FDP points out that they represent an additional spending burden that could be redirected to priority sectors like defence, healthcare, or education.
The report also reminds that LDz has historically received other forms of state support—for example, 32.4 million euros in capital injections in 2020, and further funds from the contingency program for infrastructure investments.
The FDP acknowledges that LDz has recently worked on reorienting its business model, reducing staff, and shifting its core focus to passenger transport. However, a national railway infrastructure development plan—due in 2023—has still not been adopted. The country’s railway infrastructure is in a state of disrepair, requiring substantial investment. The entire sector faces major transformation and strategic decision-making, requiring a comprehensive national strategy.
The FDP also lists airBaltic as a potential fiscal risk. Although the airline posted a 33.7 million euros profit in 2023, it reported a 118.2 million euros loss in 2024, largely due to the impact of the pandemic in recent years.
In the FDP’s view, privatization is clearly the best development path for the airline, and the government should facilitate a swift and efficient privatization process to ensure that the company no longer burdens the national budget.