War in Ukraine has caused prices of many materials increase, and many construction companies underscored that they will not be able to complete the agreements signed before the war. Martins Lazdovskis, the board chairman of Latvijas Valsts Celi (LVC) state road manager, said in an interview with LETA that the company is ready to compensate up to 15 percent of the previously agreed price. LVC has resolved to resign all agreements by Midsummer. It is clear now that five construction projects will not be continued, and new tenders will be announced.

This year, road construction season started out with a price hike. You have already said that all builders have informed about the necessity to revise agreements signed earlier. What is the approximate price hike?

The price hike that we are ready to compensate as a contractor is up to 15 percent of the agreement price. The increase depends on the works planned in the agreement. Where there is more asphalting, the growth is near 15 percent, for example.

We have agreed on a methodology of recalculating prices, it has been published. We have spoken about these principles with the association, and an agreement has been reached. Our resolution is that all agreements should be resigned by Midsummer.

It has been said that five contracts will be terminated. Has it been done already?

Two agreements have been terminated, two are in a process of termination, and in the fifth case, the offer has been withdrawn.

Which projects had the agreements terminated?

The most important project was in relation to the road Russia’s border (Grebneva)-Rezekne-Daugavpils-Lithuania’s border (Medumi) - A13. The offer was submitted in 2020, but due to complaints filed with the Procurement Monitoring Bureau, the agreement was signed a year later. The prices of 2020 already were by 10 percent lower than actual prices in 2021. Then this year’s price hike occurred. The agreement has been terminated.

Are there any conclusions about the methodology you use to recalculate prices?

It is important to understand why LVC came to a decision on a unified methodology. After Russia unleashed war in Ukraine, we started to receive letters from builders, mentioning very different figures about possible price growth - 30 percent, 50 percent and even 80 percent. It is clear that LVC as a company managing public funds cannot compensate 80 percent for one company and 30 percent for another just because they asked for that. It was important to understand the objective price increase. We cooperated with Lithuanian and Estonian colleagues to understand what the neighboring countries are doing because the situation in relation to supplies is very similar.

If oil prices keep growing, will the agreements be revised again?

Right now we have come to an agreement that the projects can be built with the presently indexed prices. Otherwise, we might find ourselves in a situation when agreements should be revised every week.

Where will this money for compensating price hikes come from?

Mostly we will cover it from what we have saved up in tenders announced last December and this January. We started to plan this construction season last August and September when the first indications about the budget are clear. As soon as the budget is approved, we announce tenders. This season we started to announce tenders in December and January. In these tenders, prices for many projects were by 20 percent lower than we planned. We saved up more than EUR 10 million, and now this will be used to cover the price hike.

Will deadlines be extended?

Deadlines will be extended in a great deal of the agreements. This largely refers to supply chains. For example, metal supplies from Russia are sanctioned. While supplies are organized from other places, additional time is needed. The same refers to bitumen, for example.

Does extension of deadline mean completion of the projects this season or will they be postponed to next year?

In most of the cases it means completion of the projects this season. Most often extension is necessary for a month or so.

Recently the sixth package of EU sanctions against Russia was approved, providing that oil supplies from Russia will be cut considerably in the next six months. How will it affect supplies of bitumen and other materials needed for road construction?

The supplies are mostly from Mazeikiai plant in Lithuania, and they have confirmed that supplies will be possible. At the same time, after the latest sanctions have been approved, the oil price rose from USD 110 to USD 120 per barrel. Therefore, in time it will definitely affect fuel prices and bitumen prices.

Has the market already adapted to the new situation created by war in Ukraine in relation to availability of metal and bitumen?

Latvian business representatives should be commended as they are actively looking for other ways of supplies, therefore the situation is stabilizing in general. But I think nobody can tell us right now what tomorrow will bring.

If the price hike of agreements exceeds the planned EUR 10 million, will you have to ask for additional funding from the state budget?

We have discussed this with the Transport and Finance Ministries and we have to fit within this year’s budget. Therefore, we will see if there are things we could do less, and things which we can do next year.

Will this situation affect also next year’s projects?

Yes. We work with a three-year plan. Next year’s plan is elaborated in detail, but further two years are outlined. Of course, in the three-year plan we had not envisaged such a price hike. Thus, we will have to revise it, maybe postpone some projects for another year.

What will the criteria be for choosing which projects should be implemented and which should be postponed?

If we cannot afford all projects, we will assess them based on a number of criteria. First of all, those will be projects with a bigger number of traffic participants and larger traffic intensity. Then the condition of the road is considered. Also, the volume of the completed work. All these criteria are described and published on our internet website.

RB Rail manager said in an interview with LETA that a double-digit inflation is not a thing anybody could have predicted when planning infrastructure projects, therefore it would not be fair to leave it on the shoulders of contractors or builders alone, and a centralized solution should be found. Do you see that centralized solutions on the EU or national levels are being considered?

There are discussions on this issue. In road construction costs are quite similar in all projects, therefore we have this advantage that we can develop a unified methodology. The guidelines from the Procurement Monitoring Bureau have helped, stating what we may and may not do. It is also good that the Economics Ministry submitted a report on the situation in construction to the government. We have good cooperation with the Riga City Council traffic department, and we are coordinating these matters. The more there are explanations and good practice examples, the easier it is to adapt regulations.

The transport minister called on local governments to take over state roads. How does it affect you?

The number of roads local governments were ready to take over was not big. Several years ago we started work on so-called road inventory to understand the traffic intensity on roads, what they connect, how much they serve the state functions and local functions. One of the criteria for state roads is that they connect two municipalities. After the administrative territorial reform, many municipalities have merged and roads that connected two municipalities now are located in one. Therefore, there is a question, whether the state should manage these roads.

The road network can be compared to the human cardio-vascular system - Riga and its vicinity can be compared to a heart as 60 percent or the state traffic is there. The main roads are like arteries and smaller roads form the vascular system. Then there are local roads with low traffic intensity - 50 or 100 cars a day. This is why this discussion has arisen because there are roads which should be handed over to local governments along with the funding. This year we sent municipalities a list of the roads we have considered - more than 4,000 kilometers. For now, we have received information about readiness of local governments to take over some 70-80 kilometers. However, we do not plan to force anything, it is a matter of discussions.

Have municipalities said "no" or have they just not responded?

The responses are different. Funding has been earmarked for five years, and there are local governments who want it guaranteed for life. There are municipalities who are categorically against it, and there are municipalities who want to take over the roads when they are fully repaired.

If local governments do not take over these roads, do they drop lower on your priorities list?

These roads have not been on our priorities list. It means that the maintenance will continue as previously. It is a fair conversation with local governments.

Our approach is that we have separate programs for the main roads, for local and regional roads where goals are defined. For example, in relation to local roads, we have a goal that there is a road with black surface leading to every county center. When we have achieved this goal, we can set new goals in relation to local roads.

There is also the strategic plan for a time period until 2040, providing that Riga bypass should be reached from any place in Latvia in two hours. Are there concerns about achieving this goal with the current prices?

The strategy for 2020-2040 has been divided into three medium-term stages. Therefore, primarily we are focusing on what should be achieved by 2030. Until this time, we have to repair the Riga bypass - road A4 - Baltezers-Saulkalne, road A5 - Salaspils-Babite, including a new bridge over the Daugava River that will be dual-use bridge with Rail Baltica.

We have to repair Via Baltica stretch until the Lithuanian border because also our Lithuanian colleagues have resolved to complete this road by 2030. This is about a road with four lanes.

Riga bypass from Babite to Kekava and from Baltezers to Salaspils already have earmarked financing in the Cohesion Fund.

We are speaking here about a speed road with the speed limit up to 130 kilometers per hour. In our opinion it is very significant to move the traffic away Riga because now if someone has to get to Sigulda, Saulkrasti or anywhere in Estonia from Ventspils or Liepaja, they have to go through the Riga center. Trucks going from Lithuania or Poland to Estonia have to go through Riga, crossing the Daugava River on Dienvidu Bridge.

Will the new bridge across Daugava River be built by Rail Baltica builders?

Yes, but we are co-funding additional costs for building the road part on the railway bridge.

What will the priorities be after 2030?

Ventspils road A10 in the direction of Tukums with high traffic intensity. Also, a new stretch of road to Jekabpils, which will continue Tinuzi-Koknese road P80. By building a speed road to Jekabpils, Latgale region will be considerably quicker reachable from central Latvia and Riga. Also, there is Via Baltica stretch to the north.

Do you have plans how to promote micromobility?

We have to think about mobility and safety of less protected participants of the traffic. Therefore, in each project we also analyze traffic safety aspects. At the same time, additional cycling path, pedestrian path and lighting adds one third of the reconstruction costs, therefore usefulness of this should be considered. At the same time, we are in charge of cycling path connections among cities and towns, we have developed a cycling mobility plan.

What is the progress with construction of Kekava bypass? Can you tell whether PPP model can be used also in other projects?

Kekava bypass construction is in line with the schedule, and representatives of the private partner confirmed recently that all works are according to the plan. This has not been an easy project, its preparation was quite complicated and challenging. Therefore, I am happy that we managed to attract also large international players, including the European Investment Bank and the Nordic Investment Bank as financiers.

There were reports recently that Salaspils residents object to construction of noise barriers. Are there any other solutions?

This is a very interesting case. There is a state road going through Salaspils and it is our duty to take care of reducing the noise level. We assumed that residents are interested in living in a less noisy environment, and this is also stated in normative regulations. What we had not considered is people’s attachment to the environment they have got used to. They have said quite clearly that they do not want a noise barrier.

Salaspils council has sent us a letter, asking to consider a solution with greenery along the road. We will do that. We will not go against the will of the local residents. The allotted financing will be used in other places where noise barriers are needed, like in Olaine.