$17 Billion China-Backed Subsea Baltic Tunnel Is Set Back

(Bloomberg) -- A plan to build the world's longest undersea rail tunnel is on the ropes after the Estonian government rejected a private developer and Finland said it has no plans for stepping into the project.

Estonia halted proceedings by the Chinese-backed Finnish company that has spearheaded the project below the Gulf of Finland, citing reasons that include national security. Though the Baltic nation's government maintains the concept is still on the table and said it wants the two governments to take a leading role in the Baltic Sea project, the cabinet in Helsinki has no such plans, local media reported.

Finnish entrepreneur Peter Vesterbacka had received a promise of about $17 billion from China's Touchstone Capital Partners Ltd. for a tunnel between the Finnish and Estonian capitals. The project would span more than 100 kilometers (62 miles) and require the construction of at least one artificial island.

But the Estonian cabinet on Thursday agreed to reject an application for a national designated spatial plan, needed to conduct environmental impact studies, from Vesterbacka's Finest Bay Area Development Oy, Prime Minister Juri Ratas told reporters in Tallinn. Estonia still supports moving ahead with the project “under the auspices of both countries' economy ministries, something we have always talked about with our Finnish counterparts,” he said.

No ‘Ambition'

His predecessor, Taavi Roivas, now an opposition lawmaker, lamented the “total lack of ambition of our current government,” in a Twitter post. “What would possibly be the harm in graciously allowing a spatial planning if this is done 100% with private money?”

Finland has no plans for a publicly financed tunnel project, public broadcaster YLE cited Sabina Lindstrom, director-general of the Networks Department at the Ministry of Transport and Communications, as saying.

A tunnel could be economically feasible as a private-public partnership, with European Union aid covering 40% of the estimated construction cost of 13 billion euros ($15.3 billion) to 20 billion euros, a study commissioned by both countries showed in 2018. Estonians have said the results of that study are hard to square with Vesterbacka's plans, including the launch target of December 2024.

‘Questionable' Assessments

The reasons for rejection included “unclear” financing, “questionable” feasibility assessments and “overly optimistic” passenger and cargo estimates, according to Public Administration Minister Jaak Aab, who's led the drawn-out negotiations with the Finnish company. “There are also national security-related issues which have been the focus of Estonian security bodies,” he said in an e-mailed statement, without specifying.

Estonia's foreign intelligence service has warned of an increasing security threat to the country -- a member of both NATO and the euro zone -- from “the potential use of China's foreign investment for political purposes and the possible development of technological dependency.”

In a report in February, it cited “rumours about the possibility that the tunnel will be funded by China Investment & Construction Group Holding Limited,” which would seek financing through a public listing. “With China, raising capital on a stock exchange often points to the involvement of a state-owned enterprise,” the report said.

Read more on the disputes between China and Estonia

The Estonians have made a proposal to Finland to sign a memorandum of understanding on how to move forward with the tunnel project, Aab said, adding that the Estonian spatial plan alone would take more than five years.

Finest Bay Area Development “is surprised” by the news and expects to learn more directly from the Estonian ministry, Kustaa Valtonen, co-founder of the developer, said by phone.

©2020 Bloomberg L.P.