SERBIA AND MONTENEGRO-Montenegro Environmentally Sensitive Tourist Areas Project Region

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Updated Project Information Document () Report No: AB131 Project Name SERBIA AND MONTENEGRO-Montenegro Environmentally Sensitive Tourist Areas Project Region Europe and Central Asia Region Sector Solid waste management (100%) Theme Pollution management and environmental health (P); Environmental policies and institutions (S) Project P Borrower(s) SERBIA AND MONTENEGRO Implementing Agency(ies) CRNOGORSKO PRIMORJE (PEW) on behalf of the Government of Montenegro and the Multi-municipal joint solid waste disposal companies for Kotor and Budva and Bar and Ulcinj Address: TRG Sunca Budva, Republic of Montenegro - Serbia and Montenegro Contact Person: Predrac Bjelobrkovic (Director) Tel: 381 (86) / 381 (86) Fax: 381 (86) / 381 (86) P.Bjelobrkovic@cg.yu / Lovcenko@cg.yu Environment Category B (Partial Assessment) Date Prepared August 13, 2003 Auth Appr/Negs Date July 1, 2003 Bank Approval Date September 11, Country and Sector Background Main sector issues. Solid Waste services were well developed in the former Yugoslavia, including Montenegro. In the recent past, though, the situation has deteriorated considerably due to limited capital investment, inadequate maintenance, and most importantly, the lack of a coherent strategy for the sector, with clear distribution of responsibilities and sustainable institutions. Because of this situation, Montenegro's Solid Waste sector faces important challenges, the most critical of which are: * There are important environmental problems associated with a large number of sites where municipalities dispose of their solid wastes in unsanitary conditions. * Montenegro lacks a clear strategy for sector development and is in need of an institutional framework to improve the efficiency and the sustainability of solid waste collection and disposal services, which will no doubt include the participation of the private sector. Strategy of the Government of the Republic of Montenegtro. After the post-conflict period and the initial focus by the donor community on addressing the most critical urgent needs and environmental problems, a comprehensive sector strategy is now under development with the support of the Association and other development agencies, particularly the European Agency for Reconstruction (EAR). The main elements of the GoM's strategy for the sector are: (i) support for a regional approach to solid waste disposal; (ii) enforcement of environmental sound collection and disposal practices, (iii) financial sustainability of the sector, and (iv) introduction of clear responsibilities among authorities on local and central level regarding the enforcement of reglulations to prohibit illegal dumping activities. To address the main sector issues, the GoM is currently focussing on the following priorities: * Consolidation of cur r ent municipal landfills into fewer regional facilities, that will serve those municipalities that are within distances that allow the economic transport of the waste (nonnally around km). The consolidation of disposal sites will facilitate better operation and maintenance and

2 2 increase and secure the financing capacity required to guarantee the sustainability of these services and the closing of current unsanitary disposal sites. * Developing a basic instilutional and policy framework to clarify asset ownership, regulate the overall functioning of the sector, transition towards economic pricing, and establish a policy approach which improves governance, transparency, and accountability. Such institutional arrangements will establish the foundation for the process of medium- and long-term reforms aimed at sustainable service provision and the further involvement of the private sector. The GoM also aims to control the existence or reappearance of unsanitary disposal sites and wild uncontrolled dumps by (i) creating MJCs to manage these services from a regional perspective; (ii) providing adequate disposal facilities; (iii) enacting regulations for the development of the policy framework, particularly regarding to the control of unsanitary disposal sites and enforcement responsibilities; and (iv) developing a Master Plan for solid waste management, with the involvement of municipal authorities and the support of the European Agency for Reconstruction (EAR). 2. Objectives The main objective of the Project is to create ecological and commercially sustainable solid waste collection and disposal services in Montenegro coastal municipalities, needed to maintain a clean, environmentally attractive coastal area. This will be achieved through: (i) developing the sector's institutional, policy and regulatory fiamework; (ii) rehabilitating two current municipal disposal sites, that operate without sanitary conditions, to function as properly designed regional sanitary landfills; (iii) closing current disposal sites in an environmentally acceptable manner; (iv) provision of modem collection equipment; (v) initiating a pilot recycling campaign; and (vi) strengthening multi-municipal joint companies (MJC) that will be created to operate the two regional solid waste disposal systems. Additional to the environmental benefits the project seeks to achieve, the Project aims at bolstering tourism prospects by eliminating the important obstacle that represents the current solid waste collection and disposal problems, that are gravely affecting environmentally sensitive tourist areas in the coast. 3. Rationale for Bank's Involvement The Association is uniquely positioned to add value in supporting the project and the broader aspects of sector reform which it will contribute to. Specifically, the Association brings to the table: * broad intemational experience, both in private sector participation and in the design of development projects in post-conflict areas; * the relationships to mobilize other sources of funds for donor cooperation; * policy development expertise and experience in the design of institutional regimes for municipal services; and * extensive experience in development of sustainable mechanisms for disposal management. 4. Description The total project costs of US$9.5 million, of which SDR 5.0 million (equivalent to US$7.0 million), will be Association financed through an IDA credit. The project will be organized in the three components summarized below. Component I. Environmental Infrastructure v Regional Landfills. The Project will finance the improvement of environmental infrastructure in the coastal municipalities, rehabilitating two of the current municipal landfills that operate without sanitary conditions, to develop in the same areas properly designed Regional Landfills. The Project will

3 3 finance landfills in Kotor, for Kotor and Budva, and in Bar, for Bar and Ulcinj, including the equipment needed for operation. * Collection Equipment. In addition to the development of the two regional landfills, the component will finance equipment for collection and transport of solid wastes to the landfills (containers, underground facilities in sensitive areas, compactors, collection trucks, support vehicles and mobile equipment for the cleaning of containers). Component 11. Environmental Rehabilitation * Closing of Uncontrolled Disposal Sites. The project will finance equipment and civil works needed to permanently close five current municipal unsanitary disposal sites in an environmentally sound manner, and institute long-term environmental monitoring. * Pilot Recycling Campaign. The project will finance works for the rehabilitation of solid waste management facilities, recycling equipment and technical assistance to support a pilot program of recycling, that includes: (i) the execution of a public dissemination campaign, with particular attention to local schools; (ii) the introduction of separation of wastes at the source in selected locations; (iii) an study on recycling options, demand, and markets; and (iv) the improvement of current informal recycling practices in Kotor's landfill. Component III. Technical Assistance * Project Management. The project will finance equipment and consultant services for project management, including auditing and follow-up social monitoring, and for the supervision of the proposed regional landfills. * Sector Institutional Development. The project will also finance consultant services and training to support the GoM to strengthen the newly created MJCs and further develop the regulatory framework for the sector. Project costs by component and percentages financed by the Association are summarized in the table below (price and physical contingencies have been estimated to be in the order of 15% of base costs). I. Environmental Infrastructure a. Regional Landfill Construction b Collection Equipment II. Environmental Rehabilitation III. Technical Assistance Unallocated (contingencies) 5. Financing Source (Total (US$m)) BORROWER ($2.56) IDA ($7.00) Total Project Cost: $9.56

4 4 6. Implementation The project will be implemented over a period of four years, with a closing date of September 30, The Ministry of Urban Plamning, on behalf of GoM, will have overall responsibility for project coordination. PEW will have direct project imnplementation responsibilities on behalf of the GoM and the MJCs (see annex 11 for a description of the project implementation arrangements). The Republic of Montenegro created PEW, a frilly GoM owned company, to improve water supply and sanitation services in the coastal region and in the municipality of Cetinje. As a GoM owned company, PEW reports directly to the Ministry of Urban Planning. The following legal agreements will define the flow of funds and the respective parties' roles and responsibilities: (a) (b) (c) The Development Credit Agreement, between IDA and SaM The Sub-credit Agreement, between SaM and GoM Two Sub-credit and Project Implementation Agreements, each such agreement being entered by the appropriate GoM agencies/ministries, PEW, and the respective MJC; plus a guarantee agreement between GoM and the municipalities in question. The Sub-credit Agreement between SaM and GoM will be a condition of effectiveness of the Development Credit Agreement. Under the two Sub-credits and Project Implementation Agreements, the GoM will be providing a sub-credit to the MJCs, the MJCs will be accepting the responsibility to repay the credit and to implement the project, through PEW, and PEW, as indicated above, will be performing the function of an agent for the MJCs and GoM in terms of project implementation, including procurement, financial management, reporting and other operational functions. This Sub-credit and Project Implementation Agreement will define the following: * The obligation of GoM to onlend part of the credit proceeds it receives from SaM to the MJCs and contribute, through PEW, its share of the project costs. The responsibilities and functions of PEW, as implementer of the sub-credit on behalf of the MJCs and GoM (procurement and procurement procedures and limits, use of the special account, monitoring and reporting requirements in relation with the World Bank, reporting to GoM and the MJCs on the project). The responsibilities of the MJCs as the legal borrowers and final beneficiaries of the project (operate and maintain the project financed assets, comply with financial/performance/financial management indicators, implement the Environmental Management Plan (EMP), implement the results of the proposals developed in the teclhical assistance/strengthening component, and provide information to PEW on its operation of the project financed assets for monitoring and reporting to the World Bank, and the fmnctions it delegates to PEW, including the agreement to give PEW access to the projects accounts). In order for the Development Credit Agreement to become effective, at least one Sub-credit and Project Implementation Agreement will need to be executed. The signing of the other agreement would be condition for disbursement of the investments benefiting the respective MJC. On-lending and Disbtursement Arrangements: Credit funds will be passed from SaM to the Republic of Montenegro (Ministry of Finance) under modified IDA terms. The Government of Montenegro will receive the modified IDA terms for SaM, with a 10-year grace period, a final maturity of 20 years, a

5 5 service charge of 0.75%, and a commitment fee of 0.50%. Credit funds will then be passed from the Ministry of Finance to the MJCs, with guarantees from the participating municipalities, under further modified IDA terms (a 4 year grace period, a final maturity of 4+10 years, a service charge of 0.75%, and a commitment fee of 0.50%), in Euro, for the part of the funds used in physical investments to be financed by the project (Components 1 and 2). The use of these modified IDA terms in the sub-credit agreement is justified to account for the expected implementation period of the investments and to take into consideration the projected financial sitlation of the MJCs, in addition to the fact that the credit proceeds will be used to address past environmental liabilities caused by the use of inappropriate disposal practices, the project benefits accrue to a wide segment of the population, beyond the coastal area, and is part of an strategy designed to gradually move these services to fill cost recovery and financial sustainability. Most disbursements are expected to take place as direct payments from the Credit Accotunt. Only small payments by PEW, for consultant services and equipment purchases, are foreseen. A special account (SA) will be opened by the Government of Montenegro on behalf of PEW in a bank acceptable to the Association. As all contracts are subject to the Association's prior review, all reimbursements of the Special Account will be against full documentation. Under the GoM authority and the implementation agreement with the MJCs, PEW will have access to the SA in relation with its responsibilities in the project management and implementation. Monitoring and Evaluation Arrangenments: PEW will provide the Association with quarterly Financial Monitoring Reports (FMRs) and semi-annuial evaluation reports regarding the achievements under their activities in relation to the project. As part of the credit and implementation agreements, the MJCs will provide PEW with semi-annual monitoring and evaluation reports on the part of the project for which they are beneficiaries. 7. Sustainability The project is expected to be operationally and financially sustainable since adequate tariffs to guarantee proper operation and maintenance of the infrastructure to be financed will be secured as part of the business plan for the MJC agreed with the authorities during appraisal. Initial estimates indicate that the landfill dumping tariffs will need to be about 24 Euro per ton to cover operation and amortization costs. This would represent an increase of about 5 Euro for person equivalent per year. Current tariffs, that only cover collection, are in the order of 30 Euro per family per year (with collection rates around 70%). Hotels, restaurants and other commercial entities are currently charged on the basis of their surface. The sustainability of the project will largely depend on: (a) successfully operating the multi-municipal landfill sites on an autonomous and commercial basis, with full support from all levels of the GoM; (b) achieving financial viability by gradually increasing revenues to cover adequate operating and maintenance expenditures, the debt service, and a portion of investments; and (c) the long-term impact of the technical assistance component on the efficiency and operations of the sector. Hence it is critical for the project to educate consumers oni the importance of paying for services received and to target funding to least-cost investments only.

6 6 8. Lessons learned from past operations in the country/sector Project design reflects the Association's experience in the preparation and implementation of other solid waste management and sanitation projects, and specifically borrows on the lessons learned from the implementation of projects of similar natlre successfully carried out with the Association's participation. Some of the critical lessons leamed and applied in this Project's preparation include: (i) a rapid technical and operational assessment is needed with a well-defined priority strategy and objectives; (ii) simplicity in design and implementation arrangements; (iii) simplicity in the procurement and disbursement procedures for efficient and rapid component implementation; (iv) need for strong supervision and financial controls; (v) institutional autonomy and freedom from political interference to allow implementation of components quickly and transparently; and (vi) need to address early in project preparation the difficult political decision on the selection of the sites for the regional landfills and on the creation of joint companies to manage them. The project also addresses the following aspects that have been identified in the Association's experience as critical for the success of this type of operations: * Creating client ownership by all levels of the GoM by preparing the project in close collaboration and implementation with the local stakeholders. Total commitment from the PEW and municipal governments has been assured to ensure that preparation and implementation proceeds smoothly; * Addressing early on in project preparation the concerns that might be raised in the local population and stakeholders regarding the sitting and design of the rehabilitated landfills that will operate as regional sanitary landfills, the precautions that will be incorporated to mitigate any potential environmental impact of these landfills and the involvement of public opinion in the environmental impact assessment process (see details below in chapter E.). * Establishing a strong institutional framework to ensure that the project is sustainable. Experience shows that multi-municipal joint companies are the best instrument to manage these regional landfills and respond to the demand and requirements of the local stakeholders. During project preparation Draft Statutes have been prepared for these joint companies that set out a clear definition of sector responsibilities and establish the mechanism for proper functioning and financing of these services. Signed agreements were reached with all the municipal authorities involved for the creation of these joint companies, with clear understanding that access to project funds would be conditioned to the creation of the companies (financial support for the consultant services required for the registration of these companies is provided as part of project preparation). Experience elsewhere in Europe (particularly in Spain and France) confinns the viability of the multi-municipal disposal district model proposed in this project, and demonstrates the importance of the political will to cooperate, establishing an environment conducive to self-financing and commercial behavior, and bringing in the private sector for specialized operations; * Strengthening cost recovery and financial management as necessary steps toward eventual self-financing at the local and regional level. The project sets realistic and prudent financial improvement targets in the short-tern and includes a business planning process for the medium-term achievement of self-financing;

7 7 * Creating greater opportunity for private sector participation through the creation of larger, more economically viable, service providers. The project will help develop the regulatory framework for the sector that establishes clear functional distinctions between regulatory, client, and operator roles; and * Improving environmental management through the introduction of affordable, cost-effective disposal technologies and adequate monitoring procedures, as a first step toward maintaining the most demanding international standards in the long-term. 9. Environment Aspects (including any public consultation) Issues : The project is expected to have an important and positive environmental impact in the project area. By closing current uncontrolled sited and developing two of them to function as properly controlled sanitary landfills, that include all necessary pollution control measures, the project will not only eliminate the existing degradation, but provide the basis for adequate management of solid wastes in the future, in an environmentally and financially sustainable manner. An Environunental Assessment (EA) has been completed of the proposed regional landfills in Kotor (for the municipalities of Kotor and Budva) and Bar (for the municipalities of Bar and Ulcinj). The environmental assessment follows the guidelines of the EU and the Governmuent of Montenegro (Official Gazette 21/97). Public consultation meetings with local stakeholders and public in general, including NGOs, were carried out by PEW during project preparation to discuss the proposed assessment TORs and results. The conclusions of these consultation meetings have been incorporated in the final EAs submitted to the Bank. Issues/impacts known to occur in landfill development and of most concern to stakeholders were studied during the preappraisal mission, and in the EAs, particularly: (i) social, socioeconomic and cultural issues; (ii) hydrogeology, hydrology and water quality; (iii) health and safety; (iv) air quality; (v) noise; (vi) ecology; (vii) off-site traffic; and (viii) visual/landscape. The types of likely impacts expected and the mitigation measures that will be applied are presented in the project's EAs, which conclude that since the project proposes to remedy past environmental degradation and incorporates necessary pollution prevention measures, these impacts are positive in tenns of the local environment and any effect on the environment would be limited and technically and institutionally manageable. During project preparation the Bank obtained from the relevant authorities confirmation of the compatibility of the proposed landfill with activities carried out in its surroundings. In particular, consultants reviewed during appraisal any potential attraction to birds associated to the proposed landfill, the problems and risks this might cause in the nearby Tivat's airport operation, and proposed measures to prevent them. The consultants concluded that the current status is unacceptable and represents a high risk, that further recommends the urgent implementation of the project. The consultants also recommended locating the landfill further away for the runway for added security, and full coverage of the wastes. With these measures, the Federal Ministry of Transport and Telecommunications approved the location of the proposed landfill on January 28, This issue was also reviewed in the EA, which concluded that the landfill was, with the proposed control measures and in the proposed location, fully compatible with the airport and a fundamental improvement of the current situation. The control measures have also been incorporated in the EMP and will be a credit covenant. The EA and EMP were approved by the government and the municipality, that issued the required construction pennit. As part of the preparation of the EAs, an Enviromnental Management Plan for each landfill was also prepared. These were published, together with the EAs summary, in the official gazette and made

8 8 available to the public at the beneficiaiy's offices and local libraries (a summary of the EA is attached in annex 13). The obligation to implement the EMPs will also be adopted by the MJCs under the Sub-credit and Project Implementation Agreement. These EMPs are binding documents and the commitment for their implementation by the Project beneficiaries is part of the project legal agreements. Local NGO's and coimmunity representatives will have an opportunity to be involved in the monitoring and control of the proposed activities, to ensure that the EMP requirements are followed. 10. List of factual technical documents: 11. Contact Point: Task Manager Manuel G. Marino The World Bank 1818 H Street, NW Washington D.C Telephone: Fax: For information on other project related documents contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C Telephone: (202) Fax: (202) Web: Note: This is information on an evolving project. Certain components may not be necessarily included in the final project.