Document of The World Bank

Public Disclosure Authorized Report No: ICR0670

IMPLEMENTATION COMPLETION AND RESULTS REPORT (IDA-38230, IBRD-80020)

ON A

Public Disclosure Authorized CREDIT

IN THE AMOUNT OF XDR 5.0 MILLION (USD 7.7 MILLION EQUIVALENT)

AND A LOAN

IN THE AMOUNT OF EUR 4.5 MILLION (USD 5.9 MILLION EQUIVALENT)

TO

Public Disclosure Authorized MONTENEGRO

FOR THE

MONTENEGRO ENVIRONMENTALLY SENSITIVE TOURIST AREAS PROJECT

January 31, 2013

Public Disclosure Authorized Urban, Water Supply and Sanitation Unit Southeast Europe Country Unit Europe and Central Asia Region

CURRENCY EQUIVALENTS (Exchange Rate Effective November 1, 2012) Currency Unit = Euro (EUR) EUR 1.00 = USD 1.30 XDR 1.00 = USD 1.54

FISCAL YEAR January 1 – December 31

ABBREVIATIONS AND ACRONYMS

EAR European Agency for Reconstruction EIA Environmental Impact Assessment EIB European Investment Bank EMP Environmental Management Plan ERR Economic Rate of Return EU European Union FRR Financial Rate of Return FRY Federal Republic of Yugoslavia GoM Government of Montenegro IBRD International Bank for Reconstruction and Development ICR Implementation Completion and Results Report IDA International Development Association ISR Implementation Status and Results Report M&E Monitoring and Evaluation MEIP Montenegro Environmental Infrastructure Project MESTAP Montenegro Environmentally Sensitive Tourist Areas Project MJC Multi-municipality Joint Company NPV Net Present Value PAD Project Appraisal Document PEW Public Enterprise Regional Waterworks ‘Crnogorsko primorje’ PDO Project Development Objective SaM Serbia and Montenegro TSS Transition Support Strategy USD United States Dollar XDR Special Drawing Rights

Vice President: Philippe Le Houerou, ECAVP Country Director: Ellen Goldstein, ECCU4 Sector Manager: Sumila Gulyani, ECSUW Project Team Leader: Sanyu Lutalo, AFTU1 ICR Team Leader: Marcus Lee, UDRUR

MONTENEGRO Montenegro Environmentally Sensitive Tourist Areas Project

CONTENTS

A. Basic Information B. Key Dates C. Ratings Summary D. Sector and Theme Codes E. Bank Staff F. Results Framework Analysis G. Ratings of Project Performance in ISRs H. Restructuring (if any) I. Disbursement Profile

1. Project Context, Development Objectives and Design ...... 1 2. Key Factors Affecting Implementation and Outcomes ...... 5 3. Assessment of Outcomes ...... 12 4. Assessment of Risk to Development Outcome ...... 17 5. Assessment of Bank and Borrower Performance ...... 17 6. Lessons Learned ...... 20 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners ...... 21 Annex 1. Project Costs and Financing ...... 22 Annex 2. Outputs by Component ...... 23 Annex 3. Economic and Financial Analysis ...... 25 Annex 4. Bank Lending and Implementation Support/Supervision Processes ...... 27 Annex 5. Beneficiary Survey Results ...... 29 Annex 6. Stakeholder Workshop Report and Results ...... 30 Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR ...... 31 Annex 8. Comments of Cofinanciers and Other Partners/Stakeholders ...... 43 Annex 9. List of Supporting Documents ...... 44 MAP

A. Basic Information

Environmentally Country: Montenegro Project Name: Sensitive Tourist Areas Project (Montenegro) IDA-38230 Project ID: P079116 L/C/TF Number(s): IBRD-80020 ICR Date: 12/06/2012 ICR Type: Core ICR Lending Instrument: SIM Borrower: MONTENEGRO1 Original Total USD 7.00M Disbursed Amount: USD 12.96M2 Commitment: Revised Amount: USD 12.50M3 Environmental Category: B Implementing Agencies: Regional Water Company (Crnogorsko Primorje) – (PEW) Cofinanciers and Other External Partners: N/A

B. Key Dates Revised / Actual Process Date Process Original Date Date(s) Concept Review: 03/19/2003 Effectiveness: 04/08/2004 Appraisal: 06/25/2003 Restructuring(s): 08/11/2010 Approval: 09/11/2003 Mid-term Review: 04/30/2006 03/10/2006 Closing: 03/31/2008 06/30/2012

C. Ratings Summary C.1 Performance Rating by ICR Outcomes: Moderately Unsatisfactory Risk to Development Outcome: Moderate Bank Performance: Moderately Satisfactory Borrower Performance: Moderately Satisfactory

C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings Quality at Entry: Moderately Satisfactory Government: Moderately Satisfactory Quality of Supervision: Moderately Satisfactory Implementing Satisfactory

1 At the time of project approval in 2003, the Borrower was part of the former Serbia and Montenegro. 2 This amount exceeds the revised total commitment, due to exchange rate fluctuations between USD, XDR and EUR, over the years of project implementation. 3 This amount includes the IBRD loan approved as additional financing in 2010.

Agency/Agencies: Overall Bank Overall Borrower Moderately Satisfactory Moderately Satisfactory Performance: Performance:

C.3 Quality at Entry and Implementation Performance Indicators Implementation QAG Assessments Indicators Rating Performance (if any) Potential Problem Project Quality at Entry No None at any time (Yes/No): (QEA): Problem Project at any Quality of Yes None time (Yes/No): Supervision (QSA): DO rating before Moderately

Closing/Inactive status: Unsatisfactory

D. Sector and Theme Codes Original Actual Sector Code (as % of total Bank financing) Central government administration 5 5 Solid waste management 95 90 Sub-national government administration 5

Theme Code (as % of total Bank financing) Environmental policies and institutions 25 20 Municipal governance and institution building 20 Other urban development 25 10 Pollution management and environmental health 50 50

E. Bank Staff Positions At ICR At Approval Vice President: Philippe H. Le Houerou Shigeo Katsu Country Director: Ellen Goldstein Orsalia Kalantzopoulos Sector Manager: Sumila Gulyani Motoo Konishi Project Team Leader: Sanyu Sarah Senkatuka Lutalo Manuel G. Marino ICR Team Leader: Marcus John Jin Sarn Lee ICR Primary Author: Marcus John Jin Sarn Lee

F. Results Framework Analysis

Project Development Objectives (from Project Appraisal Document) 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 framework; (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 modern 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.

Revised Project Development Objectives (as approved by original approving authority) No changes were made to the project development objectives.

(a) PDO Indicator(s)

Original Target Formally Actual Value Values (from Revised Achieved at Indicator Baseline Value approval Target Completion or documents) Values Target Years Percentage of solid waste produced in the coastal area that is collected on a set Indicator 1 : schedule and disposed of in proper facilities Value More than 90% for quantitative or 0% 90% collection and Qualitative) disposal Date achieved 05/12/2004 03/31/2008 12/31/2012 Target mostly achieved: Almost all solid waste in the five coastal municipalities Comments is now collected. Bar, Ulcinj and Budva began disposing into the Mozura (incl. % sanitary landfill in mid-2012. Kotor and Tivat also began disposing into Mozura achievement) from November 2012. Indicator 2 : Number of municipal disposal sites properly closed Value quantitative or 0 4 2 2 Qualitative) Date achieved 05/12/2004 03/31/2008 08/11/2010 06/30/2006 Target fully achieved: The uncontrolled dumpsites at Grabovac (Tivat) and Comments Lovanja (Kotor) were properly closed as part of the project. In addition, the (incl. % Novoselje (Budva) and Cafe (Bar) dumpsites were also closed, but were not achievement) financed by the project. Number of Multi-Municipal Joint Solid Waste Companies (MJC) that are Indicator 3 : operational and financially sustainable according to the service quality and financial sustainability indicators Value 2 (but full operating quantitative or 0 2 indicators not yet Qualitative) available)

Date achieved 05/12/2004 03/31/2008 09/15/2012 Target partly achieved: MJC1 operated the Lovanja landfill satisfactorily during Comments 2004-7; it now operates only a recycling facility at the site. MJC2 Mozura (incl. % commenced operations in July 2012; sufficient data on the financial indicators achievement) not yet available. Continued public acceptance of the proposed solid waste management solution, Indicator 4 : indicated by the approval rating of the Project as measured by the follow-up social assessment Value quantitative or 50% 70% More than 70% Qualitative) Date achieved 05/12/2004 03/31/2008 Comments Target fully achieved: Follow-up social assessment found that more than 70% of (incl. % surveyed respondents approved of the project. achievement)

(b) Intermediate Outcome Indicator(s)

Original Target Actual Value Formally Values (from Achieved at Indicator Baseline Value Revised approval Completion or Target Values documents) Target Years Coverage of municipal collection system (percentage of municipal areas with Indicator 1 : less than 100m to a container or container route) Value (quantitative 60% 90% More than 90% or Qualitative) Date achieved 05/12/2004 03/31/2008 09/15/2012 Comments Target fully achieved: Coverage in Bar, Budva, Kotor and Tivat is almost 100%, (incl. % while Ulcinj is at about 70%. Simple average across all 5 municipalities is achievement) therefore at least 90%. Indicator 2 : Frequency of collection Varies, with some such as Budva, Every two days in Value Tivat and Kotor summer and twice (quantitative Once every three days having daily weekly during the or Qualitative) collection, but rest of the year average once in 3 days in Ulcinj Date achieved 05/12/2004 03/31/2008 09/15/2012 Comments Target achieved: Municipalities do gear up collection services during peak (incl. % summer periods, with round-the-clock operations in some cases when needed. achievement) Indicator 3 : Density of the compacted waste in the landfill (kg/m3) Value Between 800 and (quantitative n/a 800 900 or Qualitative) Date achieved 05/12/2004 03/31/2008 12/31/2012

Comments Target achieved: Density at the Mozura landfill in Dec 2012 was between 800 (incl. % and 900 kg/m3. Also, density at the Lovanja landfill operated during 2004-2007 achievement) was generally above 800 kg/m3. Indicator 4 : Period between compacting and coverage of waste at the landfill (hours) Value (quantitative n/a 4 6 or Qualitative) Date achieved 05/12/2004 03/31/2008 09/15/2012 Comments Target partly achieved: This figure for the Mozura landfill is the current average (incl. % time during the autumn/winter; period is expected to be shortened to 4 hours achievement) during summer. Indicator 5 : Percentage of waste separated at the source 25% in Bar MJC Value Less than 10% in 0% in Bar MJC area; area; (quantitative Bar MJC area; 15% 0% in Kotor MJC area 10% in Kotor MJC or Qualitative) in Kotor MJC area area Date achieved 05/12/2004 03/31/2008 09/15/2012 Target partly achieved: Bins for separated waste are common in the Kotor MJC Comments area, with significant public participation; collected waste undergoes secondary (incl. % separation at the Lovanja facility. Source separation is relatively limited in the achievement) Bar MJC area. Indicator 6 : Percentage of waste recycled 15% in Bar MJC Value 5% in Bar MJC 0% in Bar MJC area; area; (quantitative area; 12% in Kotor 0% in Kotor MJC area 5% in Kotor MJC or Qualitative) MJC area area Date achieved 05/12/2004 03/31/2008 09/15/2012 Comments Target mostly achieved: The recycling facility located at the Lovanja site (incl. % continues to function and serves the Kotor MJC area. The Bar MJC currently has achievement) no recycling facility at the Mozura site. Indicator 7 : Reform proposal and regulatory proposal elaborated Reforms to Value institutional and (quantitative n/a Draft prepared policy framework or Qualitative) underway. Date achieved 05/12/2004 03/31/2008 09/15/2012 Target achieved: An institutional framework for solid waste management in Comments participating municipalities was implemented, including multi-municipality joint (incl. % companies for waste disposal, and municipally-owned companies for waste achievement) collection. Indicators of financial sustainability of MJCs: collection ratio, working ratio, Indicator 8 : current ratio, operating ratio collection ratio = Collection Ratio: 52%; 90% Value Working Ratio: 1.11; working ratio = Not yet available (quantitative Operating Ratio: 1.37 0.65 for Mozura MJC. or Qualitative) (June-Dec. 2004)-- current ratio = 2.0 unaudited data. operating ratio =

0.95 Date achieved 12/31/2004 03/31/2008 09/15/2012 The Mozura landfill commenced operations in mid-July 2012, therefore Comments sufficient data is not yet available on these ratios for the Bar MJC. These ratios (incl. % are not applicable/relevant to the Kotor MJC, as the Lovanja landfill is no longer achievement) in operation.

G. Ratings of Project Performance in ISRs

Actual Date ISR No. DO IP Disbursements Archived (USD millions) 1 12/30/2003 Satisfactory Satisfactory 0.00 2 06/29/2004 Satisfactory Satisfactory 0.06 3 08/25/2004 Satisfactory Satisfactory 0.06 4 02/22/2005 Moderately Satisfactory Moderately Satisfactory 0.52 5 10/16/2005 Moderately Satisfactory Moderately Satisfactory 1.45 6 01/10/2006 Moderately Satisfactory Moderately Satisfactory 1.58 Moderately 7 04/09/2006 Moderately Satisfactory 1.78 Unsatisfactory 8 09/17/2006 Moderately Satisfactory Moderately Satisfactory 2.14 Moderately Moderately 9 03/15/2007 2.29 Unsatisfactory Unsatisfactory Moderately 10 08/22/2007 Unsatisfactory 2.38 Unsatisfactory Moderately 11 11/09/2007 Unsatisfactory 2.38 Unsatisfactory Moderately Moderately 12 04/14/2008 2.38 Unsatisfactory Unsatisfactory Moderately Moderately 13 07/30/2008 2.38 Unsatisfactory Unsatisfactory Moderately 14 10/10/2008 Unsatisfactory 2.38 Unsatisfactory Moderately Moderately 15 02/01/2009 2.44 Unsatisfactory Unsatisfactory Moderately 16 04/05/2009 Moderately Satisfactory 2.44 Unsatisfactory Moderately 17 08/10/2009 Moderately Satisfactory 2.44 Unsatisfactory Moderately 18 11/07/2009 Moderately Satisfactory 2.44 Unsatisfactory Moderately 19 02/20/2010 Moderately Satisfactory 2.44 Unsatisfactory Moderately 20 07/28/2010 Moderately Satisfactory 2.44 Unsatisfactory Moderately 21 12/08/2010 Moderately Satisfactory 2.44 Unsatisfactory

22 01/25/2011 Satisfactory Moderately Satisfactory 2.43 23 04/10/2011 Satisfactory Moderately Satisfactory 3.03 24 12/25/2011 Moderately Satisfactory Moderately Satisfactory 4.96 Moderately Moderately 25 06/24/2012 9.60 Unsatisfactory Unsatisfactory

H. Restructuring (if any)

ISR Ratings at Amount Board Restructuring Disbursed at Restructuring Reason for Restructuring & Approved Restructuring Date(s) Key Changes Made PDO Change DO IP in USD millions The global financial crisis in 2009 resulted in an unanticipated financing gap, as the Government became unable to co-finance the project from its budget. Price escalations from the fall of the euro against the US dollar, and changes in the landfill design due to a change in location, also widened the financing gap.

Key changes were to: (i) provide additional financing of €4.5 million to cover the financing gap; (ii) scale down 08/11/2010 N MS MU 2.44 Component II by dropping the planned closure of two existing waste disposal sites; (iii) reallocate funds from Component II to Component I for construction of the Mozura landfill in Bar, at a new location and not on a rehabilitated existing site; (iv) increase the percentage of eligible expenditures to allow 100 percent financing for all categories; and (v) extend of the Credit closing date from September 30, 2010 to June 30, 2012.

I. Disbursement Profile4

4 The original disbursement profile shown does not include the Additional Financing of EUR 4.5 million (USD 5.9 million) approved in 2010.

1. Project Context, Development Objectives and Design

1.1 Context at Appraisal

Montenegro’s beautiful coastal area, located on the eastern shores of the Adriatic Sea, is a major tourist destination in the region. At the time of project appraisal in 2003, pollution from waste in the coastal areas of Montenegro had reached alarming proportions. Solid waste was not properly collected, and often accumulated in the streets, particularly during the busy summer tourist season. Municipal solid waste disposal sites were operated as unsanitary dumps, and uncontrolled burning of wastes was common. All this had serious negative effects on the ecological and scenic values of the coastal area, and was the subject of widespread protests by the area’s population. This situation posed a significant threat to the tourism sector, undermining the sector’s sustainability and prospects for additional growth – Montenegro had the target of increasing the number of tourist-nights four-fold to 22 million, by the year 2020.

Although solid waste services in the former Yugoslavia, including in Montenegro, had been relatively well developed, limited capital investment and inadequate maintenance were the proximate causes of the deteriorating conditions in the sector. Underlying this degradation was the lack of a coherent strategy for the sector. An institutional framework to improve the efficiency and sustainability of solid waste collection and disposal services, with clear distribution of responsibilities and sustainable institutions, was lacking.

Development partners in Montenegro, including the World Bank, had focused on addressing the most urgent needs and environmental problems in the country in the immediate post-conflict period. At the time of appraisal, implementation of the Montenegro Environmental Infrastructure (MEIP) grant from the Bank was underway, supporting urgent investments for the short-term remediation of grave environmental problems in the Bay of Kotor. The Environmental Sector Review for the Federal Republic of Yugoslavia (FRY), carried out by the Bank in 2002, identified coastal zone degradation in Montenegro as a crucial issue, and recommended improved solid waste management as a key response.

The Government of Montenegro (GoM) had placed priority on the improvement of solid waste collection and disposal services in the coastal area. A comprehensive strategy for the solid waste sector was under development at the time of appraisal, with the support of the Bank and other development partners, particularly the European Agency for Reconstruction (EAR). The main elements of the GoM’s strategy for the sector were: (i) a regional (multi-municipality) approach to solid waste disposal; (ii) enforcement of environmentally sound collection and disposal practices, (iii) financial sustainability, and (iv) delineation of clear responsibilities among local and central authorities for the enforcement of regulations prohibiting the illegal dumping of wastes.

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It was in this context that the Montenegro Environmentally Sensitive Tourist Areas Project (MESTAP) was approved by the Bank in September 2003. The project directly supported the Bank’s Transition Support Strategy (TSS) for FRY that was issued in 2002. The TSS described the main challenges faced by Serbia and Montenegro (SaM) in achieving sustainable economic development and pursuing reforms. The TSS also identified tourism in Montenegro as one of the main sectors that could contribute to continued growth in the country.

1.2 Original Project Development Objectives (PDO) and Key Indicators

The PDO, as stated in the Project Appraisal Document (PAD), was 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.

As part of the PDO section, the PAD also stated that the PDO would be achieved through: (i) developing the sector’s institutional, policy and regulatory framework; (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 modern 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.

The original credit agreement, and the loan agreement for additional financing, contained a slightly different statement of the PDO from that contained in the PAD: to create an ecologically and commercially sustainable solid waste collection and disposal system, to maintain a clean, environmentally attractive coastal area in the Republic of Montenegro, in order to support the growth of tourism in the area. Section 2.1 below discusses this divergence between the PAD and the legal agreements.

The key performance indicators, as stated in the PAD, were: (i) appropriate institutional framework further developed and enforced; (ii) percentage of solid waste produced in the project area that is collected on a set schedule and disposed in proper facilities; (iii) number of current municipal disposal sites properly closed; (iv) percentage of wastes separated at the source or recycled; (v) operational and financial sustainability of the newly created MJCs; and (vi) continued public acceptance of the proposed solid waste management solution.

1.3 Revised PDO (as approved by original approving authority) and Key Indicators

No revisions were made to the PDO or key indicators. However, as part of the project restructuring, the target for the indicator on the number of uncontrolled disposal sites properly closed, was revised downwards (see section 1.6 below for details).

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1.4 Main Beneficiaries

The primary target groups of beneficiaries identified in the PAD were the populations of the project area – i.e. in the municipalities of Bar, Budva, Kotor, Tivat, and Ulcinj, as well as tourists visiting the area, with improved collection of solid waste and a more general improvement in environmental and aesthetic conditions.

The PAD also identified a much broader group of secondary beneficiaries. The improvement of environmental conditions was expected to enhance the prospects for further development of the tourism sector, which in turn would have a multiplier effect on the economy, and spur further private sector investment. Thus, businesses and people working in the tourism sector, and other closely related sectors, were expected to benefit from the project, as was the wider Montenegrin economy from the growth of the tourism.

The project was also expected to benefit the Montenegrin authorities (national government as well as municipalities), by helping them to consolidate their long-term vision for environmental rehabilitation and the sustainable and efficient provision of solid waste services.

1.5 Original Components

The project had three components:

Component I: Environmental Infrastructure. This component consisted of two sub- components: Regional Landfills, and Collection Equipment. Two municipal solid waste disposal sites that operated in non-sanitary conditions were to be rehabilitated and converted into regional, sanitary landfills – in Kotor for the municipalities of Budva and Kotor (also available for use by the municipality of Tivat); and in Bar for the municipalities of Bar and Ulcinj. In addition, this component was to provide equipment for the collection and transport of solid waste to the regional landfills.

Component II: Environmental Rehabilitation. This component consisted of two sub- components: Closing of Uncontrolled Disposal Sites, and a Pilot Recycling Campaign. Five existing unsanitary disposal sites in the participating coastal municipalities were to be permanently closed in an environmentally sound manner, with long-term environmental monitoring. A pilot program of waste recycling was to include (i) a public dissemination campaign, (ii) the introduction of waste separation in selected locations, (iii) a study on recycling options, demand and markets, and (iv) the improvement of informal recycling practices at Kotor’s disposal site.

Component III: Technical Assistance. This component consisted of two sub- components: Project Management and Sector Institutional Development. Project management was to include final designs and supervision for the proposed landfills, and audits and a follow-up social assessment. Support for institutional development of the sector was to assist GoM in strengthening the newly created MJCs and in further developing the regulatory framework for the sector.

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1.6 Revised Components

A restructuring of the project was approved by the Bank’s Executive Directors in August 2010, in conjunction with additional financing (see section 1.7 below). The project restructuring maintained the three basic project components as listed in section 1.5 above, but made significant revisions to components I and II.

Revision to Component I. The regional landfill in Bar, to serve the municipalities of Bar and Ulcinj, would be constructed at a new location, and not on a rehabilitated existing disposal site as envisioned during project appraisal. The new location for this landfill, at Mozura, was endorsed by all key stakeholders following lengthy delays resulting from a lack of stakeholder agreement on locating the landfill at any of three other potential sites (including the existing disposal sites).

Revision to Component II. The proper closure of two remaining uncontrolled and unsanitary disposal sites was dropped from this component, which was thus scaled down from closing four such sites as originally envisioned at project appraisal. Corresponding changes were made to the project’s results framework, specifically to the targets for the key indicator on proper closure of uncontrolled disposal sites. Closure of these two remaining disposal sites (Cafe in Bar, and Kruce in Ulcinj) was expected to be financed through the solid waste program of the European Investment Bank (EIB) in Montenegro, and allowed for the reallocation of funds from this component towards the construction of the Mozura landfill under Component I.

1.7 Other significant changes

As part of the revisions to the project components, described in section 1.6 above, the following significant changes were made to the project at restructuring, as described in the project paper on additional financing and restructuring:

Additional financing: An IBRD loan in the amount of EUR 4.5 million (USD 5.9 million) provided additional financing to support the regional sanitary landfill at Mozura for the municipalities of Bar and Ulcinj. The need for additional financing arose mainly from the global financial crisis in 2009, which resulted in an unanticipated financing gap as the GoM became unable to co-finance the project from its budget, as originally envisioned at project appraisal. Price escalations also contributed to the financing gap, with changes in the landfill design due to the selection of a new location.

Reallocation of project funds from component I to II: With the scaling down of Component II, XDR 1.26 million (USD 1.94 million) was reallocated to Component I for the construction of the Mozura landfill. The reasons for this are the same as those explained above in relation to the unanticipated financing gap.

Changes in financing conditions: The percentage of expenditures eligible for financing was raised to 100 percent in all categories, up from the 80-83% originally approved. This was in line with the country financing parameters for Montenegro at the time of approval

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of the additional financing and restructuring, and was due to the unanticipated financing gap.

A significant, but perhaps not very prominent, change was also made to the terms of the credit agreement, specifically to Schedule 5, such that the repayment provisions for the sub-credit only applied to the Lovanja MJC. The rationale for this was that the Mozura landfill, being an entirely new investment, should be financed by GoM as a capital investment, and thus the obligation to repay the IBRD loan (and the remaining portion of the IDA credit used for Mozura) should not rest with the Mozura MJC.

Extension of the closing date: The closing date for the original IDA credit was extended by 21 months, from September 30, 2010 to June 30, 2012, in line with the closing date for the additional financing provided by the IBRD loan. The project closing date had been extended before, from March 31, 2008 as initially set at the time of the signing of the IDA credit agreement. The need for these extensions arose from the lengthy delays in project implementation, which are discussed in section 2.2 below.

2. Key Factors Affecting Implementation and Outcomes

2.1 Project Preparation, Design and Quality at Entry

Soundness of Background Analysis. The PAD and other documents related to project preparation displayed a sound understanding of the fundamental challenges that Montenegro faced in managing solid waste in the coastal area. First, that the collection and disposal of solid waste in a sanitary manner is an important direct driver of a clean coastal environment that sustains tourism. Second, and just as important, that long-term success in the sector depends on improved governance, broadly defined – including institutional arrangements, the regulatory framework, and financial sustainability for operating entities.

Project preparation also took into account the lessons learned from the Bank’s experience in Montenegro (including from the MEIP project) and from solid waste projects in other countries. In retrospect, the PAD was highly prescient in mentioning the following factors as being among those that would be critical for project success: • Client ownership at all levels in Montenegro, including the national government, participating municipalities, the implementing agency, and local stakeholders; • Addressing concerns of the local population, and other stakeholders, related to the siting and design of landfills, early in the project preparation process; • A strong and sustainable institutional framework – in this case, setting up MJCs, and putting in place legal agreements among the municipalities, PEW as implementing agency, and the MJCs; and • Strengthening cost recovery and financial management in the solid waste sector.

Assessment of Project Design. Given the background analysis on the fundamental challenges that Montenegro faced in managing solid waste in its coastal area, the PDO to

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“create ecological and commercially sustainable solid waste collection and disposal services…needed to maintain a clean, environmentally attractive coastal area” responded directly to Montenegro’s needs and development priorities. The project objective also clearly responded to the TSS identification of tourism as an important sector for continued growth in the country. Indeed, the project made a strategic choice to focus on the coastal area of Montenegro which is popular with tourists; in contrast, working on solid waste in municipalities in inland areas of the country with few tourists would have contributed relatively little to supporting the tourism sector. The PDO in the legal agreements was basically identical to that in the PAD, with the additional phrase of “…in order to support the growth of tourism in the area.” Although no direct explanation for this is given in the project files, this addition simply made the overarching objective of supporting tourism more explicit, without substantially altering the focus of the project on the environmental and financial aspects of solid waste management.

It is worth asking, however, how realistic the PDO actually was. The PDO clearly sought to support the growth of tourism, while being specifically accountable for improvements in the solid waste sector – this much seems reasonable. On the other hand, to “create” both environmental and financial sustainability was probably overly ambitious, in a sector that had been performing poorly and needed fundamental, far-reaching reforms. A more realistic objective would have been to “improve” the sustainability of the sector.

The project components were generally well structured in relation to the project objectives. All elements of components I and II, in particular, contribute directly to improved solid waste collection and disposal, within the broader context of environmental sustainability and attractiveness for tourism. Public Enterprise Regional Waterworks ‘Crnogorsko primorje’ (PEW) – an independent company fully owned by the government, with the mandate to improve water services across multiple municipalities in the coastal region – was chosen as the implementation agency due to its regional role and its track record with the execution of the MEIP project.

The core of the project design rested on a regional (i.e. multiple municipality) approach to solid waste disposal, with the concept of MJCs to operate the two regional landfills that were to be financed by the project. These arrangements were carefully designed and elaborated in detail in the PAD: • Each MJC was to be owned jointly by the relevant municipalities and PEW (for GoM). • Revenues were to consist mainly of tipping fees paid by the municipal waste collection companies, under service agreements that specified the fee level and quantities of waste to be disposed. • Each MJC was to be the legal owner of the respective landfill asset. • Each MJC was to be responsible for servicing its part of the proceeds of the IDA credit (both principal and interest) through a “sub sub-credit agreement” with GoM. (This requirement was removed for the Mozura MJC as part of the additional financing – see section 1.7 above.) • Detailed financial projections for each MJC were included in the PAD, demonstrating their projected financial viability.

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A crucial gap in the project design, however, was the lack of emphasis and attention to the upstream collection of solid waste service fees from consumers (i.e. households, businesses and other entities). Increasing cost recovery and financial sustainability of the entire system depends on adequate fee collection, or on some combination of fees with funding also drawn from general municipal budgets. The project’s results framework included the critical assumption that “cost recovery mechanisms provide financing for operation and maintenance.” Indeed, the project design basically assumed that this aspect would be taken care of as part of the overall reform and institutional development of the sector, and did not delve into this in sufficient detail.

As part of the overall institutional framework that included MJCs, the municipally-owned communal services companies were to be responsible for the collection of both solid waste and service fees. The financial projections for MJCs assumed that fees would be set at an affordable level (around 1-2% of household income). However, apart from including low fee collection as a possible risk (see also the sub-section on risk assessment below), and a public awareness campaign to be implemented by PEW, the project design did not propose any detailed actions or steps to be taken to strengthen the municipal service companies and improve fee collection. In hindsight, this gap had a significant effect on the final achievement of the financial sustainability part of the PDO.

Government Commitment and Stakeholder Consultations. Government commitment – including from GoM, participating municipalities, and PEW – was adequately secured at the time of entry, but it is questionable if consultations with stakeholders were fully sufficient. The PAD explicitly recognized the risk of public opposition to the siting of regional landfills, and described how the Bank received letters from an NGO expressing concerns about the site in Kotor in relation to inadequate local consultations, adverse effects on the local environment, and the proximity of the nearby airport. The Bank’s response to these concerns is detailed carefully in the PAD discussion of possible controversial aspects, and is also reflected in the sections of the PAD on environmental and social assessments.

Yet, shortly after the project was approved by the Board in September 2003, small-scale local protests took place at the Kotor site. This led PEW and the mayors of Budva and Kotor to send a joint letter to the Bank, reaffirming their commitment to the project and explaining how they would fully and satisfactorily address ongoing local opposition. Although it appears that both the Bank and the Montenegrin authorities exercised the necessary due diligence at entry, this early opposition presaged the difficulties experienced subsequently during project implementation.

Assessment of Risks. The assessment of risks that was undertaken as part of project preparation was comprehensive and well summarized in the PAD, in the table on critical risks. Most of the risk ratings were ‘moderate’ or ‘substantial’, with an overall project risk rating of ‘moderate’. Given the issues already mentioned above (i.e. on local opposition to landfill sites, and the need to increase user fee collection), in hindsight some of these risks should probably have been rated as ‘high’, with the overall project

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risk as ‘substantial’. As it turned out, some of the risk mitigation measures turned out to be insufficient during project implementation. For example, despite the comprehensive preparatory work for the project that included stakeholder consultations and environmental and social assessments, issues related to siting of the regional landfills plagued project implementation and resulted in lengthy delays subsequently.

2.2 Implementation

Siting of Regional Landfills. Difficulties related to the siting of the regional landfills, originally intended to be at the existing uncontrolled disposal sites in Bar and Kotor, came to predominate most of the period of eight years during which the project was implemented. These difficulties can mostly be ascribed to local public resistance to potential landfill sites, with the so-called attitude of ‘not in my backyard’ (NIMBY). Correspondingly, political resistance by elected officials at the municipal level can be understood to be at least in part a reflection of local citizens’ concerns.

In Kotor, the Lovanja sanitary landfill operated between 2004 and 2007, taking in waste collected from Budva, Kotor and Tivat. This landfill operated under a temporary license from the municipality of Kotor, on the understanding that updates to Kotor’s spatial plans for a long-term landfill at the site would lead to the construction of subsequent phases. However, after three years, the municipality declined to renew the license, changing its position on the use of the site.

One reason given by Kotor was its dissatisfaction with the fact that although it was not necessarily the municipality generating the largest quantity of waste in the northern coastal area, it was playing host to the landfill and thus receiving all of the area’s waste. On this view, the other municipalities were benefiting from having the landfill in Kotor. However, it is not clear what arrangement would be acceptable to Kotor itself, other than to simply site the region’s sanitary landfill somewhere else. In addition, beginning in 2004, legal actions against Kotor municipality were pursued by four groups of claimants, who claimed historical ownership of portions of the Lovanja site. At least three of these claims have been recognized by the courts, although the prior records of the land registry showed that the municipality owned the entire site.

In Bar, work on the regional landfill for Bar and Ulcinj was seriously delayed – by over four years – due to a lack of stakeholder agreement on locating the landfill at any one of three potential sites, including the existing disposal sites. The Mozura site was finally endorsed by all key stakeholders in late 2008, and gazetted for this purpose in the municipality’s detailed urban plan. Yet, even in this case, the EIB declined GoM’s request to co-finance the Mozura landfill, citing concerns related to potential seismic risk and site visibility (see also the sub-section on additional financing below).

The Bank suspended disbursements on the project between June 2007 and March 2008, and came close to canceling the project in 2008, due to the serious delays and implementation difficulties experienced by the project, in the lead up to the final selection of the Mozura site. The suspension of disbursements was understandable given that in 2008, the performance of the project was without doubt unsatisfactory given the closure

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of the Lovanja landfill (with no alternative site in Kotor), and the prospect of no suitable site being found in Bar.

Project Restructuring and Additional Financing. The changes made as part of the project restructuring and the approval of additional financing in 2010 were instrumental in getting the project back on track, and in supporting the turnaround from the unsatisfactory performance of the project at its low point in 2008. The reasons for the various changes made, and the need for additional financing, are described in sections 1.6 and 1.7 above.

Important factors in the design of this successful turnaround were the two major lessons learned from the experience with the short-lived Lovanja landfill in Kotor, as mentioned in the project paper. First, the importance of ensuring adequate political buy-in and the long-term engagement of all stakeholders. Second, investment in a landfill with sufficient design capacity for longer term operations – 25 years in the case of Mozura, compared to four years in the case of the initial (and only) phase of Lovanja.

The Bank’s appraisal of the additional financing was also careful to ensure a complete and careful review of EIB’s concerns with the Mozura site. On site stability in relation to seismic risk, the Bank team’s detailed assessment concluded that regional seismic risk is significant, but that the Mozura site itself appears geologically homogeneous and stable. The assessment also concluded that site visibility could be easily addressed through landscaping with appropriate vegetation.

In relation to the additional financing also, a waiver was obtained from the Executive Directors for a policy exception to OP 13.20 which requires satisfactory implementation of a project as one of the prerequisites for additional financing. At the time of approval of additional financing, implementation progress of the project was rated ‘moderately unsatisfactory’, because award of the contract for the design and construction of the Mozura landfill was dependent on adequate financing being available.

2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization

Design. The project’s results framework and the indicators therein, as laid out in the PAD and subsequently modified during project restructuring, were adequate with some shortcomings.

First, some indicators actually consisted of more than one indicator, and included multiple targets. For example, Indicator 1 was on both the collection of solid waste, and the disposal of such waste. Even though there was only one target set, measuring achievement of this indicator required tracking two different (albeit related) measures. Another example would be Indicator 8 on financial sustainability of MJCs, which included targets for four individual financial ratios. Such combined indicators should have been structured as separate indicators with individual targets.

Second, the results framework contained indicators on activities and outcomes that were not directly addressed by the project. For instance, although the project financed waste

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collection equipment (e.g. trucks and containers) for the use of municipalities, the project design did not directly address the operations of the municipal waste collection companies. Yet, the service indicators on frequency of collection and frequency in the cleaning of containers are primarily indicators of these companies’ performance.

In addition, the financial performance of the MJCs was to be assessed through four indicators. Two of these indicators – the working ratio (ratio of operating expenses excluding depreciation to collected revenues) and the operating ratio (ratio of collected revenues to operating expenses excluding depreciation) – were mathematically the inverse of each other, and thus redundant. The results framework set targets for these ratios of 0.65 and 0.95 respectively; this meant that achieving the target for the working ratio entailed overachieving by as much as 60 percent in excess of the target for the operating ratio.

Implementation and Utilization. Throughout project implementation, regular progress reports were prepared and submitted by PEW, and the Bank’s Implementation Status and Results (ISR) reports also tracked the indicators in the project’s results framework. The actual utilization of these indicators to improve project implementation is difficult to evaluate. As noted above, for much of the time during which the project was implemented, delays related to landfill siting were the predominant issue. Some indicators were simply not relevant, or data was not available by definition – this is reflected to a certain extent in the Data Sheet of this ICR as well, where indicators related to the performance of the Mozura landfill are incomplete given the landfill’s very short period in operation at the time of writing.

2.4 Safeguard and Fiduciary Compliance

Safeguards. The only safeguard policy triggered during project preparation was Environmental Assessment, for which the project fell under Category B (Partial Assessment). This categorization was maintained at project restructuring and additional financing. Environmental impact assessments (EIAs) and environmental management plans (EMPs) were prepared as part of initial project preparation and for the Mozura landfill that obtained additional financing.

The environmental issues addressed in the EIAs and EMPs were typical of projects involving landfills. One notable feature was the issue of the Lovanja landfill site potentially attracting birds that would pose a threat to the safety of aircraft utilizing the nearby Tivat airport. Adequate measures were proposed and pursued in this respect, with careful monitoring by the Bank during project implementation – these included ensuring full coverage of the wastes and acquiring a mechanical falcon.

Financial management. A comprehensive financial management assessment was performed as part of project preparation. PEW’s track record and capacity were assessed to be generally sound. This was borne out throughout the years of project implementation, where financial management was consistently found to be satisfactory. Quarterly financial reports were submitted to the Bank in a timely manner. In addition, annual audit

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reports of the project accounts by independent external auditors raised no significant issues.

Procurement. Procurement activities under the project were reviewed periodically during project supervision, and found to be generally satisfactory. The assessment of PEW’s procurement capacity at the time of appraisal noted that PEW had limited Bank procurement experience, and recommended that all contracts undergo prior review. As project implementation progressed, PEW gained more experience with procurement and the assessment at the time of approval of additional financing found PEW’s procurement capacity to be adequate.

2.5 Post-completion Operation/Next Phase

In the short-term, the transition arrangements to post-completion operation of investments financed by the project relate mainly to the Mozura landfill, which commenced operations only in July 2012, just after project closure, and within two months of the ICR mission in September 2012. In terms of staffing of the Mozura MJC, the ICR mission learned that the necessary technical staff to meet current needs have been recruited, and that additional staff for leachate management and environmental monitoring will be recruited in due course. The position of Executive Director was still vacant, however, as the Mozura MJC Board of Directors could not reach a consensus on selecting a candidate despite a recruitment process that identified a few qualified candidates.

Future monitoring and evaluation of the project outcomes in relation to the operations of the Mozura landfill could include indicators of the landfill’s performance from the project’s results framework (i.e. density of compacted waste, period between compacting and coverage of waste, and the financial sustainability ratios of MJC Mozura). The timing for this could be sometime after July 2013, once the landfill has completed its first full year of operations.

Broader questions arise with regard to the institutional framework and overall financial sustainability of the solid waste collection and disposal system in the participating municipalities. Specifically, concerns related to the financial sustainability of their operations were raised by the Mozura MJC and by the Bar municipal waste collection company, during the ICR mission’s visit – suggesting that issues still remain to be resolved, at least at the level of the operating entities.

Under the terms of the Loan Agreement, GoM was to pass on the IBRD loan proceeds for the landfill. An asset transfer agreement provided for the transfer of ownership of the Mozura landfill from GoM to the Mozura MJC, as a grant. At the time of the ICR mission, the asset transfer itself had yet to be effected, although GoM has assured the Bank that the process for this was well underway.

Notably, the Mozura MJC expressed concern to the ICR mission that repayment of the IBRD loan is to be made from the MJC’s own operating surpluses. Although such concerns are unjustified according to the Loan Agreement, the MJC appeared to feel

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driven to maximize the waste quantities disposed into the its landfill, in order to obtain the necessary revenue to service the loan repayment. Rather than the primary consideration of disposing into a sanitary landfill for environmental reasons, this motivation is in effect a perverse outcome/incentive towards quantity maximization for financial reasons.

On the other hand, Bar’s waste collection company (and to a lesser extent, Ulcinj also) was concerned about its revenue, in terms of the tariffs set and the low rate of fee collection from households and businesses. The key issue for the waste collection company is that disposing at the Mozura landfill means that it now has to pay a tipping fee to the Mozura MJC, compared to not having to pay such fees previously at the old disposal sites.

These issues were meant to be addressed in part through the service agreements between the Mozura MJC and the respective municipalities. The signing of the service agreements, and accompanying legal opinions, were a covenant in the legal agreements between the Bank and Montenegro, and were a specific condition to be fulfilled before construction of the Mozura landfill could commence. The service agreements should therefore remain the point of reference for the operating entities involved.

In any case, since the municipalities and GoM (through PEW) own both the municipal waste companies and the MJCs, this problem is in some ways a transfer pricing issue, where funding shortfalls in any part of the system will ultimately have to be covered by the government. On the other hand, as discussed in section 2.1 above, cost recovery has clearly been a challenge for the solid waste sector in Montenegro, which this project did not adequately address, neither in design nor implementation. The Bank could therefore seek to continue the policy dialogue with GoM on the solid waste sector in Montenegro, and potentially undertake follow-on analytical and advisory work on financial sustainability issues for the long-term management of the sector.

3. Assessment of Outcomes

3.1 Relevance of Objectives, Design and Implementation

3.1.1 Objectives

Rating: Highly Relevant

The PDO is assessed as highly relevant to current priorities, as it sought to support the growth of tourism in Montenegro’s coastal area, by improving the environmental and financial aspects of solid waste collection and disposal. Tourism continues to be an important revenue earner and priority sector for Montenegro today. Moreover, preparing for European Union (EU) accession is a national priority for Montenegro, and is actively supported by the Bank. EU accession will require compliance with EU standards on environment and solid waste management, again confirming the relevance of the PDO

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today. In this regard also, Montenegrin legislation requiring disposal of all solid waste into sanitary landfills took effect in 2009. On the other hand, the PDO’s stated objectives to create financial sustainability in the sector were overly ambitious given the pre- existing challenges and the fundamental reforms that were needed.

3.1.2 Design and Implementation

Rating: Relevant

The project design and implementation are assessed as relevant, being broadly consistent with the stated project objectives. Both Component I on regional landfills and collection equipment, and Component II on closing uncontrolled disposal sites and promoting waste recycling, contributed directly to the objective of improving the environment of the coastal area in terms of solid waste. The rating in this area would in fact have been highly relevant, if not for the shortcomings of Component III in terms of its support for sectoral reform and in particular the limited focus on cost recovery. Yet it should be recognized that the completion and opening of the Mozura landfill is a very significant milestone for the solid waste sector in Montenegro, as it is only the second sanitary landfill in the country after Podgorica’s.

3.2 Achievement of Project Development Objectives

Rating: Partly Achieved

The PDO is assessed to have been partly achieved, based on the key outcome indicators in the project’s results framework, described in Section F of the Data Sheet.

With respect to Indicator 1 that measures both collection and proper disposal of solid waste, almost all waste in all five participating municipalities is now collected, with the greatest improvements seen in Ulcinj. As for disposal, the municipalities of Budva, Kotor and Tivat have joined Bar and Ulcinj in disposing into the Mozura landfill. Although this move by the northern municipalities to dispose at Mozura was not part of the project design, it has come about by mutual agreement between them and MJC Mozura, and is further evidence of the success and value of the Mozura landfill. The fact remains that the project set out to deliver two operating sanitary landfills, but only one, Mozura, is currently operating. The targets for Indicator 1 were thus mostly achieved.

Indicator 2 on the closure of two uncontrolled disposal sites was fully achieved. The Grabovac site in Tivat, and the uncontrolled site originally at Lovanja in Kotor, were both closed through the project’s financing. It is important to note that two other sites that were identified for closure during project appraisal have also been closed, although financed not through the project but by the relevant municipalities – Cafe in Bar, and Novoselje in Budva.

Indicator 3, on MJCs that are operational and financially sustainable based on underlying service and financial indicators, was only partly achieved. The Lovanja MJC operated the Lovanja landfill satisfactorily during 2004 – 2007; it now continues to operate the

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recycling facility at that site, but this does not fulfill the intent of this indicator which assumed an operating sanitary landfill. The Mozura MJC has been operational since July 2012, but the full indicators of its financial performance are not yet available.

Indicator 4, on continued public acceptance of the project’s solid waste management solution as measured by a follow-up social assessment, was achieved. A social survey undertaken in May 2012 indicated that the project had met the target of at least 70 percent of surveyed respondents approved of the project.

In addition, although not explicitly measured in the outcome indicators of the results framework, the long-term commercial (financial) sustainability of solid waste services in the coastal area has not been adequately addressed (see also sections 2.1 and 2.5 above), although it is part of the project’s ambitious objectives in the PDO. Financial sustainability of the MJCs themselves was, however, measured through the indicator on financial ratios of the MJCs.

The outcomes achieved by the project can be seen to have been causally linked to some of the output indicators. For the output indicators for Component I on environmental infrastructure, the indicators related to solid waste collection (coverage of the collection system, frequency of collection) contributed directly to outcomes on collection and for improving the coastal environment. Likewise, the output indicators for Component II on environmental rehabilitation (waste separation and recycling rates) contributed directly to improving collection, reducing the need for disposal, and reversing environmental degradation. The indicators for Component III (reform and regulatory framework, and financial sustainability of MJCs) contributed to commercially sustainable solid waste services.

Beyond the results framework itself, perhaps the most telling indicator of success with regard to actual improvements in the coastal environment lies in the growth of tourism in the area. The Montenegro Statistical Office’s Release No. 285 (October 2012) reported almost 8.8 million tourist-nights in 2011, up from the PAD’s estimate of approximately 5.5 million tourist-nights in 2002. Of course, tourism growth depends on a variety of factors such as the state of the global economy, and the availability of tourism infrastructure and services – all external to the project. Although it is impossible to establish the counter-factual of what would have happened without it, the project is at least partly responsible for improvements in solid waste collection and disposal in the coastal area, and any visitor to the area today can attest to the area’s general cleanliness.

3.3 Efficiency

Rating: Efficient

Overall, this ICR finds that the total project cost of USD 15 million was reasonable in relation to the benefits for sustaining tourism in the coastal area.

The financial analyses undertaken at the time of project appraisal, and also for the additional financing, showed relatively low financial rates of return (FRRs) in the range

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of 3 to 4 percent. Accordingly, the net present values (NPVs), calculated using a discount rate of 10 percent, were negative (the FRR being the discount rate at which NPV would be zero). A re-estimate undertaken as part of this ICR yielded a slightly higher FRR of 5.4 percent, for the Mozura landfill. It was noted that the low rate of return and negative NPV were due to the assumption of tariffs set at a low level, to ensure affordability relative to household incomes. The conclusion was that even with the low FRR, the investment was financially justified given the stable positive cash flows expected. Annex 3 provides more details of the financial analyses undertaken.

The financial analyses above should not be taken by themselves to be entirely indicative of the project’s efficiency – these were analyses of the regional sanitary landfill component of the project only, and not of the total project investments. Of the total project cost of USD 15 million (see Annex 1), about USD 8.6 million was spent on the Mozura landfill (plus another USD 1.8 million or so from GoM’s exemption of related duties and taxes), so the financial analysis of the Mozura landfill given above covers just about two-thirds of the final project cost.

Cost effectiveness was also used as a measure of project efficiency, with the PAD estimating the cost of investments at EUR 12.5 per capita. The financial analysis for additional financing cited EUR 22.3 per capita. In both cases, it was asserted that the project investments were efficiently sized to deliver solid waste services to the coastal population. No explanation was provided as to how these estimates were actually derived. Given the estimate of the coastal area’s permanent population of about 200,000, and tourists in excess of half a million, it appears that again it was not the total project cost that was used, but only the estimated sanitary landfill cost.

From a broader economic perspective, most of the project’s benefits arise through externalities, including from improved environmental conditions and greater attractiveness of the coastal area for tourism. Tourism generates direct monetary benefits – receipts from international tourism in Montenegro in 2010 were USD 713 million (source: World Development Indicators) – and also has multiplier effects on the wider economy. In addition, intangible aesthetic benefits from an improved environment are usually non-monetary in nature. The other investments under the project, including for collection equipment, closure of uncontrolled disposal sites, and recycling, were important contributions to the final project outcomes.

3.4 Justification of Overall Outcome Rating

Rating: Moderately Unsatisfactory

The overall outcome of the project is rated as moderately unsatisfactory. The project’s objectives were highly relevant, while project design and implementation were relevant, to the challenges of the solid waste sector in Montenegro. The PDO was, on balance, partly achieved. There was strong achievement in terms of solid waste collection in the participating municipalities, and in waste disposal with the Mozura sanitary landfill, all contributing to an environmentally attractive coastal area that supports tourism growth. More broadly, a notable achievement of the project was to support fundamental reforms

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in the sector, in the context of new legislation that took effect in 2009, to bring the sector in line with EU standards. In particular, the MJCs established as part of the project demonstrate how the MJC model can be operated, within an updated legal and regulatory framework. The project was also efficient when the overall financial investment of USD 15 million is placed in the context of the coastal area’s permanent population of about 200,000, tourists in excess of half a million, and the very significant contribution of tourism to the area’s economy.

On the other hand, the project also had significant shortcomings. First, there is still no sanitary landfill in the northern coastal area. Although Budva, Kotor and Tivat are now disposing their wastes at Mozura, it should be noted that the original design intent of Mozura was to serve the municipalities of Bar and Ulcinj only. The northern municipalities thus face higher transport costs in transporting waste to Mozura, compared to if they had a sanitary landfill at a location closer to them. A second significant shortcoming is in in terms of not clearly achieving long-term financial sustainability for the operating entities involved in solid waste services. This latter shortcoming can be seen to be due to having set an overly ambitious PDO, and associated targets, in the first place.

3.5 Overarching Themes, Other Outcomes and Impacts

(a) Poverty Impacts, Gender Aspects, and Social Development

One outcome of the project that has not yet been mentioned is the positive impact for the community of 50 or so Roma people who had been long-term residents at the Lovanja site prior to the project, while Lovanja was still an uncontrolled disposal site. They have now benefited from employment at the recycling facility that was established through the project and which is still under operation. The facility operates in compliance with all EU health and safety standards, including personal protective gear for workers. The project’s achievement in this regard is an example of good practice, as the livelihoods of waste pickers is an issue that commonly arises in solid waste projects.

(b) Institutional Change/Strengthening

As already discussed earlier in this ICR, part of the project’s objectives was to contribute to institutional strengthening and reform of the solid waste sector in Montenegro, centered on the model of joint ownership of MJCs to operate regional sanitary landfills. A key achievement of the project has been to support fundamental reforms in the sector, providing a road map and operating model for other municipalities in the country. Although issues remain with the overall financial sustainability of the system, particularly with respect to cost recovery from consumers, the project has been instrumental in establishing the MJC model in Montenegro, and demonstrating that it is workable. Importantly, the necessary legal and administrative steps were taken to establish and operate the two MJCs for Lovanja and Mozura. The lessons and experience from these MJCs and from the project in general would be useful for continued institutional reform of solid waste management in Montenegro.

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4. Assessment of Risk to Development Outcome

Rating: Moderate

The overall risk to the development outcome is rated as moderate. Maintaining the development outcomes achieved by the project requires the coastal municipalities to continue operating solid waste collection services as they do now, and the Mozura landfill to continue in operation with the municipalities of Bar, Ulcinj and Budva disposing their waste there. Maintenance of equipment will be needed, as well as longer- term replacement of collection equipment in the municipalities, and operating equipment at Mozura.

The main risk is financial, specifically that cost recovery and fee collection from consumers will not increase, thus requiring support from general municipal / government budgets. An external shock to the government’s fiscal position, for example, would put pressure on available funding. On the other hand, this risk is mitigated by factors such as the strong commitment of GoM and the municipalities to improving solid waste management, the momentum of preparation for EU accession, and the support of other development partners such as EIB for the sector. It is in fact likely that the outcomes achieved by the project will expand over time – in the near-term, with Kotor and Tivat now beginning to dispose their waste at Mozura, and in the longer term, with a solution eventually being found to locate and construct a sanitary landfill for the northern coastal municipalities.

5. Assessment of Bank and Borrower Performance

5.1 Bank Performance

(a) Bank Performance in Ensuring Quality at Entry Rating: Moderately Satisfactory

The Bank’s efforts in project preparation reflected a sound understanding of the challenges facing the solid waste sector in Montenegro, as well as the lessons learned from other solid waste operations of the Bank. Project components were well structured in relation to project objectives. The safeguards and fiduciary assessments were comprehensive. The detailed plans and arrangements for the MJCs directly supported institutional reform for the sector. Yet, the Bank clearly underestimated the potential complications and pitfalls with siting the regional landfills, and did not adequately anticipate the resistance that was to materialize during project implementation. The project design also did not actually address the issue of improved cost recovery for solid waste services, as is reflected in the results framework which does not actually have a direct indicator measuring cost recovery from users/consumers.

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(b) Quality of Supervision Rating: Moderately Satisfactory

Project implementation was closely supervised by the Bank. Missions were undertaken very regularly, on average at least three times a year, sometimes in conjunction with missions for other projects in the country. Visits to participating municipalities, including disposal sites, were the norm. Implementation issues were described in detail in aides- memoire and ISRs, and sufficient attention was paid to safeguards and fiduciary aspects as needed.

The decision to restructure the project and provide additional financing at the same time was critical to the final achievement of the project’s objectives. Without this, the Mozura landfill would not have been constructed, in which case Montenegro’s coastal area would almost certainly have no sanitary landfill today. The Bank did also consider the option of canceling the project in 2008, given the very serious delays and poor performance of the project up to that point. Restructuring and additional financing are assessed here to have been the best response to GoM’s request and the ongoing commitment of the relevant municipalities. Rather than giving up on the project, the Bank team sought to proceed with the additional financing to ensure that the Mozura landfill was constructed, once the availability of the site was confirmed.

However, a moderate shortcoming that can be identified in the quality of supervision was the relatively limited attention given to financial sustainability and cost recovery issues, which was carried through from this same shortcoming in project design.

(c) Justification of Rating for Overall Bank Performance Rating: Moderately Satisfactory

On balance, the Bank’s performance is rated as moderately satisfactory. The Bank generally fulfilled its roles well for project supervision, and exercised the correct judgment in opting not to cancel the project, but to restructure and provide additional financing instead. However, the moderate shortcomings identified in project preparation, design, and supervision yield an overall rating of moderately satisfactory.

5.2 Borrower Performance

(a) Government Performance Rating: Moderately Satisfactory

Government performance can be assessed in terms of the performance of the national government and of the participating municipalities. The commitment of GoM and the participating municipalities to achieving the project objectives was mixed. At the level of GoM, the Ministry of Urban Planning and subsequently the Ministry of Sustainable Development and Tourism provided the overall vision and direction for the solid waste sector in the country, closely following project implementation, and encouraging the participating municipalities to perform better. The municipalities improved their solid waste collection services, utilizing collection equipment financed by the project, with

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clearly visible results in terms of environmental cleanliness. They also worked together to establish the MJCs, entering into the necessary service agreements between the municipal waste collection companies and the MJCs, as provided for in the project design. However, the fact remains that Lovanja’s landfill is closed due to Kotor municipality’s unwillingness to allow the landfill to continue to operate, and there is as yet no agreement on a long-term solution for a sanitary landfill in the northern coastal area. In Bar, on the other hand, the municipality has facilitated the construction and operation of the Mozura landfill, but the question remains whether more could have been done by GoM and the municipality to reduce the lengthy delays in the years it took to finally agree on the Mozura site. Given these moderate shortcomings, therefore, government performance (GoM and municipalities combined) is rated moderately satisfactory.

(b) Implementing Agency Performance Rating: Satisfactory

PEW’s performance as the implementing agency is assessed as satisfactory overall, based on the fulfillment of its key roles for project implementation and fiduciary management as stipulated in the Subsidiary Agreement with GoM. Project supervision ratings for financial management and procurement during project implementation were generally satisfactory. This is well supported by PEW’s track record of timely submission of required reports, and the generally clean audit opinions provided by the external auditors. In overseeing overall project implementation, PEW coordinated and supervised required tasks, including the engineering, feasibility, and EIA assessments in accordance with required procedures, in spite of the overall outcomes. One might ask whether PEW could have taken on a more proactive role in engaging various stakeholders and institutions to resolve the issues with the landfill locations, and whether the associated unsatisfactory implementation progress recorded for most of the project life could be fairly attributed in part to PEW’s actions or failures. This ICR concludes that PEW fulfilled its tasks but had limited direct influence on the municipalities, which were ultimately responsible for decision-making concerning the sites. As earlier alluded to, stronger influence and intervention with the municipalities could perhaps only have come from GoM.

(c) Justification of Rating for Overall Borrower Performance Rating: Moderately Satisfactory

On balance, the overall rating of borrower performance is moderately satisfactory. This rating recognizes the significant achievements in solid waste management that have been delivered by the coastal municipalities including their municipal waste collection companies and the MJCs, with the facilitation of GoM and PEW. However, the lengthy delays in project implementation, in particular with the siting of the regional landfills, and the lack of a long-term solution for the northern coastal area, were shortcomings that are assessed as ‘significant’ on the part of the govenrment, even though the Mozura landfill is now operating.

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6. Lessons Learned

A positive lesson learned is that an effective combination of government commitment, investments, and public participation can achieve real improvements in solid waste services, and result in a significant positive impact on the local environment. The experience of the project is proof of how the commitment of the national and local governments, execution by municipal enterprises, and provision of the right equipment has very effectively reversed the environmental degradation from solid waste in Montenegro’s coastal area. A related lesson is that this same combination can catalyze fundamental reforms in the solid waste sector, but these changes take time to be effective and cannot be expected to happen overnight.

Another lesson learned is that financial sustainability in solid waste management is incomplete if cost recovery from primary waste generators is not addressed. This lesson is not new in any way, and much has been said about the importance of cost recovery in solid waste. But the project design and implementation experience clearly show how the focus on designing and establishing the MJCs, and the exhaustive efforts spent on landfill siting issues, resulted in a neglect of cost recovery issues and the uncertain financial sustainability of the system overall.

Perhaps the most important lesson learned from the project is that local opposition to siting landfills can be a serious stumbling block to project implementation, resulting in lengthy delays and potential project failure. This can arise even if extensive consultations with stakeholders have been undertaken. The practical recommendation for any future regional landfill in Montenegro would therefore be to never underestimate the risks of local opposition. In this regard, the experience from this project has wider relevance for Bank projects involving landfills in other countries; it underlines the importance of ensuring all necessary due diligence, as well as full compliance with all applicable safeguard policies.

A broader, related lesson that can be drawn is that since landfill projects are inherently risky from a non-technical standpoint, a multi-municipality and multi-site approach can help mitigate these non-technical risks. In the case of this project, failure in establishing a long-term sanitary landfill in the northern set of coastal municipalities has been offset by success in the southern set of municipalities. The practical recommendation in this regard would be to adopt a project design that specifies realistic targets while anticipating high individual probabilities of failure. So, for example, a project design could involve multiple landfill sites in multiple municipalities, in anticipation that some of these sites would not succeed in the end, but thereby also ensuring a good chance that some sites would succeed.

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7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners

(a) Borrower/implementing agencies

The Borrower provided comments on the draft ICR (see part (b) in Annex 7), pointing out that the municipalities of Kotor and Tivat had entered into agreements with the Mozura landfill in November 2012, and have thus begun to dispose their solid waste into that sanitary landfill. The final text of this ICR has been revised accordingly, to reflect this development.

(b) Other partners and stakeholders

No comments were received from other partners/stakeholders.

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Annex 1. Project Costs and Financing5

(a) Project Cost by Component (in USD Million equivalent) Appraisal Actual/Latest 6 Percentage of Components Estimate Estimate Appraisal (USD millions) (USD millions) I. Environmental Infrastructure 6.30 13.94 221 II. Environmental Rehabilitation 1.50 0.59 39 III. Technical Assistance 0.70 1.14 163

Total Baseline Cost 8.50 15.67 184

Physical Contingencies 0 0.65 0.00

Price Contingencies 0 0.35 0.00 Total Project Costs 9.50 15.67 165 Front-end fee PPF 0.00 0.00 N.A. Front-end fee IBRD 0.00 0.01 N.A. Total Financing Required 9.50 15.68 165

(b) Financing Appraisal Actual/Latest Percentage of Source of Funds Estimate Estimate Appraisal (USD millions) (USD millions) Borrower 2.50 2.46 98 International Development Association (IDA) 7.00 7.67 110 International Bank for Reconstruction and 0.00 5.56 N.A. Development (IBRD) 7 Total Financing 9.50 15.68 165

5 The figures for Bank financing in this annex differ from those shown in the Data Sheet, due to variations in exchange rates between USD, XDR and EUR during the years of project implementation. 6 Includes additional financing of EUR 4.5 million approved in 2010. 7 The IBRD loan was provided as additional financing in 2010.

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Annex 2. Outputs by Component

Component I. Environmental Infrastructure

Regional Landfills • The Lovanja sanitary landfill in Kotor was constructed in 2004, and operated for three years, serving the municipalities of Budva, Kotor, and Tivat. During this period, almost all of the waste produced in these three municipalities was disposed at Lovanja. The landfill was subsequently closed in an environmentally sound manner. • The Mozura sanitary landfill in Bar was constructed in 2011, and went into operation in July 2012. It is the second sanitary landfill in Montenegro, after Podgorica’s. With an overall design capacity of 25 years, Phase 1 is designed for ten years. The Mozura landfill serves not only the municipalities of Bar and Ulcinj, but also the municipality of Budva which began disposing at Mozura in August 2012.

Collection Equipment • Equipment was procured for the five participating municipalities in 2004 and in 2012, summarized in the table below:

2004 2012 Bar • Compactor: 18m3 • Compactor: 18m3 with washing container system • Compactor: 25m3 Budva • Vacuum cleaner • Tow truck-Skip loader • 110 containers • Compactor: 4m3 Kotor • Tow truck-Skip loader • Compactor: 13m3 • Two compactors: 13m3 • 100 containers, different sizes • Compactor: 9m3 • Container cleaning truck • Vacuum cleaner • 260 containers Tivat • Compactor: 9m3 • Compactor: 18m3 • Compactor: 16m3 • 110 containers Ulcinj • Compactor: 4m3 • Two compactors: 13m3 • Two compactors: 18m3 • Compactor: 18m3 with washing container system • Tow truck-Skip loader • Excavator-style backhoe – front loader • 340 containers, different sizes

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Component II. Environmental Rehabilitation

Closing of Uncontrolled Disposal Sites • The Grabovac site in Tivat, and the uncontrolled site originally at Lovanja in Kotor, were both closed through the project’s financing. (Two other sites that were identified for closure during project appraisal have also been closed, although financed not through the project but by the relevant municipalities – Cafe in Bar, and Novoselje in Budva.)

Pilot Recycling Campaign • A pilot recycling campaign was initiated through the project, and a small recycling station was installed at the Lovanja sanitary landfill site. This facility was handed over to the Lovanja MJC in November 2006, and is still operational. It includes equipment for sorting solid waste based on use of a trammel system for opening of the waste bags with preliminary sorting, conveyor belts, recycling cabin, press-balling machine, containers, and tractor.

Component III. Technical Assistance

Project Management • This sub-component included the preparation of designs for the Lovanja and Mozura sanitary landfills, and supervision of construction. External audits of the project were also undertaken annually.

Sector Institutional Development • Through this sub-component, technical support was provided for the establishment and operation of the MJCs for Lovanja and Mozura, including service agreements with respective municipalities.

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Annex 3. Economic and Financial Analysis

The PAD provided a limited economic analysis and a more detailed financial analysis of the project. In terms of the economic analysis, the PAD stated quite correctly that most of the expected project benefits would be through externalities, including improved environmental conditions and greater attractiveness of the coastal area for tourism. The PAD did not, however, attempt to provide a quantified estimate of these benefits. This ICR concurs that the project’s positive externalities are significant, given the large pool of project beneficiaries consisting of local residents in the coastal area as well as the high numbers of seasonal tourists. The Montenegro Statistical Office’s Release No. 285 (October 2012) reported almost 8.8 million tourist-nights in 2011, up from the PAD’s estimate of approximately 5.5 million tourist-nights in 2002. Tourism generates direct monetary benefits – receipts from international tourism in Montenegro in 2010 were USD 713 million (source: World Development Indicators) – and also has multiplier effects on the wider economy.

The position taken in the PAD was that the project was justified since the financial analysis showed a positive rate of return, without taking into account the intangible benefits and positive externalities of the project. This ICR shares the view of the PAD that the project was justified – more specifically, that the project was economically justified, since the economic rate of return (ERR), taking into account externalities, would be exceed the already positive financial rate of return (FRR).

The PAD presented a very detailed financial analysis for the two MJCs that were to operate the sanitary landfills financed by the project. Key assumptions included tariffs (tipping fees) of EUR 22 per ton initially, rising to about EUR 34 per ton for the Kotor MJC, and EUR 38 per ton for the Bar MJC, after the first five years of operation. Waste quantities to be disposed at each landfill were estimated at around 20,000 tons annually. Capital expenditure for each landfill was assumed to be approximately EUR 4 million. Over a 20-year time horizon, the FRR – based on actual cash flows and not including depreciation – was thus calculated to be 3% for the Kotor MJC, and 4% for the Bar MJC. Net present value (NPV), using a discount rate of 10%, was negative for both landfills: EUR -1.36 million in Kotor, and EUR -1.26 million in Bar.

Financial analysis for the Mozura sanitary landfill investment was also performed during appraisal of the additional financing for the project in 2010. Tariffs were assumed to start at EUR 21 per ton in 2012, rising to EUR 28 per ton by 2021. Annual waste quantities from the municipalities of Bar and Ulcinj were estimated to start at 40,000 tons, rising to 46,000 tons in 2021. Capital expenditure was assumed to be EUR 9.6 million (including taxes and duties of EUR 1.3 million, to be covered by GoM). Over a 20-year period, FRR was calculated to be 2.9%, with NPV of EUR -3.1 million at a discount rate of 10%. The financial analysis noted that the low rate of return and negative NPV were due to the assumption of tariffs set at a low level, to ensure affordability relative to household incomes. The conclusion was that the investment was financially justified given the stable positive cash flows.

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For the ICR, the FRR and NPV were re-estimated for the Mozura landfill. The tariff was assumed, conservatively, to remain unchanged at EUR 20 per ton, which was the amount paid by the municipality of Budva at the time of the ICR mission. Annual waste quantities were assumed to be 60,000 tons, being the current quantities disposed by the municipalities of Bar, Ulcinj and Budva8. Actual capital expenditure of EUR 6.6 million was used, this amount being the total investment in construction, equipment, and related consultancy services. (GoM’s contribution of the exemption of taxes and duties was not included as it is not an actual cash flow for the purposes of calculating FRR.) Annual operating costs were taken from PEW’s latest estimates – starting at EUR 285,000 in 2013, and rising to EUR 385,000 in 2022. Over a ten-year period from 2013 to 2022, FRR was calculated to be 5.4%, with NPV of EUR -1.1 million at a discount rate of 10%. A shorter period of ten years was used conservatively, since the Mozura landill is receiving higher quantities of waste, from more municipalities, than originally expected. The ICR’s re-estimates of FRR and NPV look more positive than the estimates at the time of additional financing, mainly due to the use of a lower figure of the actual cost of the Mozura investment, and lower estimates of operating and maintenance costs.

The table below provides a summary and comparison of the selected key input variables/assumptions and results from the financial analyses from the PAD, the additional financing, and ICR. Figures shown are rounded.

PAD Additional ICR Financing Sanitary landfill In Kotor In Bar Mozura Mozura Capital expenditure (EUR) 4,000,000 4,000,000 9,600,000 6,600,000 Time horizon (years) 20 20 20 109 Initial waste quantities (tons per year) 20,000 20,000 40,000 60,000 Tariff (EUR per ton) 22 22 21 2010 (rising to 34 (rising to 38 (rising to 28 after 5 years after 5 years) after 5 years) FRR11 (%) 3 4 2.9 5.4 NPV12 at 10% discount rate (EUR) -1,360,000 -1,260,000 -3,100,000 -1,100,000

8 The analysis here was performed before November 2012, when Kotor and Tivat also began to dispose their waste at Mozura. 9 A shorter time horizon was used, conservatively, since the Mozura landfill is receiving higher waste quantities (from additional municipalities) than originally expected. FRR is nonetheless higher, even with the shorter time horizon. 10 This was the tariff paid by Budva at the time of the ICR mission, and is assumed, conservatively, to remain unchanged. If the tariff is raised over time, the FRR and NPV would improve accordingly. 11 Although not calculated directly, project ERR would be higher than FRR, due to positive externalities. 12 A ‘standard’ discount rate of 10% was used for calculating NPV. NPV would be positive, however, at a discount rate lower than FRR. Such a lower discount rate would be justifiable given the project’s positive social and environmental externalities.

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Annex 4. Bank Lending and Implementation Support/Supervision Processes

(a) Task Team Members Responsibility/ Names Title Unit Specialty Lending Ventura Bengochea Sr Water and Sanitation Spec. LCSWS Peer Reviewer Janis Bernstein Senior Environmental Specialist ECSSD Xavier Chauvot de Beauchene Engineer GPOBA Joseph Formoso Senior Finance Officer Michael Gascoyne Financial Management Specialist CSRRM Anders Halldin Safeguards Coordinator Takao Ikegami Sanitary Engineer Rita Klees Peer Reviewer Manuel Marino Engineer, Environment Spec. ECSSD TTL Kishore Nadkarni Financial Analyst Stanley Peabody Social Scientist Gennady Pilch Legal Advisor Andreas Rohde Sanitary Engineer ECSSD Co-TTL

Supervision/ICR Arben Bakllamaja Consultant ECSSD Finance Sabine Beddies Senior Urban Specialist SDV Salim Benouniche Sr Procurement Spec. ECSPS Francois Boulanger Urban Economist ECSSD Konrad Buchauer Consultant ECSSD Waste Water Rita Cestti Sr Water Resources Economist ECSSD Xavier Chauvot de Beauchene Infrastructure Specialist GPOBA Olav Rex Christensen Sr Financial Management Spec. ECSPS Hermine de Soto ECSSD Roman Dinslage Consultant Solid Waste Ama Esson Program Assistant ECSSD Admin. Support Benito Fernandez Consultant ECSSD Miroslav Frick Operations Analyst ECSSD Michael Gascoyne Sr Resource Management Officer ECSPS Ahmet Gokce Senior Procurement Specialist Procurement Don Hawkins Consultant Tourism Devt. Nicola Ille Sr Rural Development Specialist ECSSD Bekim Imeri Social Scientist ECSSD Henry Laino Marcus Lee Urban Economist FEUUR ICR author Maria Teresa R. Lim Program Assistant ECSSD Sanela Ljuca Operations Analyst ECCME Sanyu Lutalo Senior Environmental Engr. ECSSD TTL Silvia Mauri Consultant ECSSD

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Shelley McMillan Water Resources Specialist ECSSD Gennady Pilch Sr Counsel LEGES Legal Wolfhart Pohl Senior Environment Specialist ECSSD Julie Rieger Counsel LEGLE Legal Andreas Rohde Sr Sanitary Engineer ECSSD TTL Karin Shepardson Senior Operations Officer ECSSD Dragana Varezic Program Assistant ECCBM Admin. Support Frank van Woerden Senior Environmental Engineer ECSSD Solid waste Danijela Vukajlovic-Grba Economist ECSPR Michael John Webster Sr Water & Sanitation Spec. ECSSD TTL Ulrich Ziedler Consultant Ecologist

(b) Staff Time and Cost Staff Time and Cost (Bank Budget Only) Stage of Project Cycle USD Thousands (including No. of staff weeks travel and consultant costs) Lending FY03 17 134.97 FY04 9 54.64 FY05 0.2 1.11

Total: 26 190.72 Supervision/ICR FY04 6 33.10 FY05 14 96.54 FY06 21 102.90 FY07 20 89.14 FY08 15 66.30 FY09 15 71.19 FY10 25 123.82 FY11 26 108.12 FY12 21 91.00

Total: 163 782.11

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Annex 5. Beneficiary Survey Results

No beneficiary survey was conducted.

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Annex 6. Stakeholder Workshop Report and Results

No stakeholder workshop was conducted.

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Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR

(a) Borrower’s Completion Report

The Government of Montenegro’s completion report is attached here in full as it is not more than 10 pages long.

Montenegro Environmentally Sensitive Tourist Areas Project

PROJECT ID: P079116 & P120659

IDA Credit No: 3823 YF, IBRD Loan No: 8002-ME

BORROWER’s IMPLEMENTATION COMPLETION REPORT

PODGORICA - BUDVA, October 2012

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1. Project Data

Name: Montenegro Environmentally Sensitive Tourist Area Project (MESTAP) Project ID: P079116 & P120659 / Credit and Loan No: 3823YF, 8002-ME Country: Montenegro Region: Europe and Central Asia

Sector/sub sector: Solid waste management (95%) Public Administration – Central government administration (5%),

Borrower: Montenegro

Implementing Agency: Public Enterprise “Regionalani vodovod Crnogorsko primorje”, Budva, Montenegro (PEW)

Approval dates: Signing dates: Effectiveness Closing dates: dates: IDA -September 11,2003 October 13, 2003 April 8, 2004 June 30, 2012 IBRD – December 20, 2010 December 23, 2010 March 22, 2011 June 30, 2012

2. Principal Performance Ratings per Project parts

(HS=Highly Satisfactory, S=Satisfactory, Moderately Satisfactory =MS, Moderately Unsatisfactory =MU, U =Unsatisfactory, HU=Highly Unsatisfactory)

Part A Environmental Infrastructure Part A-1/ MJC 1 Improvement of environmental infrastructure for Kotor, Budva and Tivat municipalities Outcome: MS Sustainability: MU Institutional Development Impact: S Bank Performance: HS Borrower Performance: MS Implementing Agency Performance: HS

Part A-2/ MJC 1 Improvement of environmental infrastructure in Bar and Ulcinj municipalities

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Outcome: HS Sustainability: HS Institutional Development Impact: S Bank Performance: HS Borrower Performance: MS Implementing Agency Performance: HS

Part B Environmental Rehabilitation Outcome: S Sustainability: MS Institutional Development Impact: MU Bank Performance: S Borrower Performance: MU Implementing Agency Performance: S

Part C Technical assistance Outcome: MS Sustainability: MU Institutional Development Impact: MU Bank Performance: S Borrower Performance: MU Implementing Agency Performance: S

3. Assessment of Development Objective and Design

3.1Project Objectives

The objectives of the Project were to create an ecologically and commercially sustainable solid waste collection and disposal system, to maintain a clean, environmentally attractive coastal area in Montenegro, in order to support the growth of tourism in the area.

3.2 Original Project Components

There were three components originally designed:

Part A: Environmental Infrastructure

Improvement of environmental infrastructure of the coastal municipalities of Bar, Budva, Kotor, and Ulcinj and other municipalities of the Republic of Montenegro that own shares in MJC1 or MJC2, through the rehabilitation of two existing municipal landfill in the municipality of Kotor and Bar , conversion of such landfills into regional landfills, and provision of equipment for the collection and transport of solid waste to the

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regional landfills, through the provisions of goods, works and services.

Part B: Environmental Rehabilitation

1. Permanent closure of five existing unlicensed waste disposal sites in an environmentally sound manner, and institution of long-term environmental monitoring of such sites, through the provision of goods and works.

2. Implementation of a pilot recycling program, including public dissemination campaign, separation of solid waste at the source, study on recycling options, demand, and markets, and improvement of the current informal recycling practices in the Kotor landfill, through the provision of goods, works and services.

Part C: Technical Assistance

Provision of support to MJC1, MJC2 and PEW in the management, implementation and monitoring of the Project, through the provision of goods and services, including the audit of records, accounts, and financial statements.

3.3 Changes in Project Components

In January 2008, the Government of Montenegro assessed that a part of the project referring to the municipalities of Bar and Ulcinj (MJC2) developed from the mere beginning in unsatisfactory manner. Besides the reasons which dealt with the lack of planning documentation, the inadequate steps taken by municipal administration, lack of cooperation and uncertainty into the decision making process were the main reasons which caused complete slowdown of the project. Local governance crises in Ulcinj that resulted in several extraordinary elections additionally hampered the implementation of the project. Those were the reasons for which the Government asked the urgent continuation of this project to have been treated as a priority assignment of the new local authorities in Bar and Ulcinj. The efforts made by the Government resulted in passing the necessary decisions (Decision on joint organization of the activities related to the solid waste disposal in the municipalities of Bar and Ulcinj and the Decision on Foundation of the multi municipal company in charge of managing the landfill «Mozura» including the decision on land use permit for the sanitary landfill.)

In May 2008, GoM sent the Restructuring Action Plan to the Bank in order to provide all necessary conditions for successful implementation of the project, including additional financing. The Bank approved the Government’s requests and provided additional financing through IBRD loan and parties agreed to amend Development Credit Agreement (IDA). Changes in Project Components were as follows:

Part A: Environmental Infrastructure

Improvement of environmental infrastructure of the coastal municipalities of Bar, Budva, Kotor, Tivat and Ulcinj and other municipalities of the Borrower that own shares in MJC1 or MJC2, through the provisions of goods, works and services for:

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1. the rehabilitation of existing municipal landfill in the municipality of Kotor and , conversion of such rehabilitated landfill into a regional landfill.

2. the design and construction of a regional sanitary landfill to serve the municipalities of Bar and Ulcinj, and

3. the provision of equipment for the collection and transport of solid waste.

Part B: Environmental Rehabilitation

1. Permanent closure of two existing unlicensed waste disposal sites in an environmentally sound manner, and institution of long-term environmental monitoring of such sites, through the provision of goods and works.

3.4 Assessment of Development Objective

In the overall perspective, the Montenegro Environmentally Sensitive Tourist Area Project’s development objective was generally achieved, that is, in respect to Components 2 and 3, the objective was posed well, and as such it was achieved, or should be achieved in the near future, while on the other hand the objective aimed under Component 1 was not completely fulfilled. Although the Project development objective as originally formulated was perhaps too broad, and, at one point of Project’s implementation, it was decided to be restructured, as previously explained.

4. Achievement of Objectives and Outputs

4.1 Outcome / Achievement of objectives

The objectives were envisaged to be achieved by:

(i) developing the sector’s institutional, policy and regulatory framework;

(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 modern collection equipment;

(v) initiating a pilot recycling campaign; and

(iv) 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, it 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.

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Key project performance indicators to measure progress towards achievement of the objectives are:

(i) appropriate institutional framework further developed and enforced;

(ii) percentage of solid waste produced in the Project area that is collected on a set schedule and disposed in proper facilities;

(iii) number of current municipal disposal sites properly closed;

(iv) percentage of wastes separated at the source or recycled;

(v) operational and financial sustainability of the newly created MJC; and

(vi) continued public acceptance of the proposed solid waste management solution.

4.2 Implementation

Progress of the Project towards the planned results /results framework/ and achievement of the PDO results, based on the mentioned performance indicators is summarized below:

(i) Development of sector institutional framework: The project has helped to support establishment of an institutional framework to ensure that solid waste management in the coastal municipalities is carried out in a sustainable manner. The framework is based on (a) multi-municipal joint companies to manage disposal of solid wastes in regional sanitary landfills serving multiple municipalities, and (b) municipally owned communal services companies responsible for waste collection. The Lovanja Ltd. landfill management company was established in 2004 and it efficiently operated the landfill and recycling plant supported by the project to serve the Kotor, Tivat and Budva municipalities from 2004 to 2007. Following closure of the landfill in 2009, it continues to complement the communal services companies’ operations by facilitating management of recycled waste, and is planned to be used for operation of the new landfill for these areas to be constructed by EIB under a separate on-going program. The Multi-municipal company “Možura”Ltd has been legally founded, regional landfill has been constructed and a Service level Agreement between “Možura“Ltd and Bar and Ulcinj Municipalities has been signed for the company which currentlyy operate the regional landfill. The communal companies are currently managing waste collection in these municipalities. There is however need for further strengthening of the sector institutions, through staff training and other capacity building efforts.

(ii) Improvements in waste collection and disposal (indicated by percentage of solid waste produced in the Project area that is collected on a set schedule and disposed in proper facilities):

Currently, waste produced in Bar, Ulcinj and Budva municipalities is collected on a set schedule and disposed of in proper facilities.

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- During the year 2004, modern equipment for collection and transport of waste was procured for the local public utilities in Kotor, Budva and Tivat, with a positive impact on the environmental condition, level of hygiene, and the quality of services rendered by these utilities to the inhabitants and tourists. During the year 2012, modern equipment for collection and transport of waste was procured for local public utilities in Ulcinj and Bar and some equipment which was lacked has been procured Kotor, Budva and Tivat, with a very strong positive impact on the environmental condition in the municipalities, especially in Ulcinj municipality.

A summary of equipment procured for these municipalities is provided in Table 1 and Table 2 below:

Table 1: Equipment procured in the year 2004, for Kotor, Budva and Tivat municipalities

Kotor Tivat Budva

Tow truck-Skip loader

Two compactors 13 m3 Compactor 9 m3 Compactor 9 m3 Vacuum cleaner Compactor 16 m3 Container cleaning truck 110 containers 110 containers Vacuum cleaner

260 Containers

Table 2: Equipment procured in the year 2012, for Ulcinj, Bar, Budva, Kotor and Tivat municipalities

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Ulcinj Bar Budva Kotor Tivat

Two One compactor One tow truck- One compactor One compactor compactors 18 25 m3 Skip loader 13 m3 18 m3 m3

Two One compactor One compactor 100 containers- compactors 13 18 m3 4 m3 different size m3

One compactor One compactor 18 m3 with 18 m3 with washing washing container container system system

One compactor 4 m3

One tow truck- Skip loader

One excavator style backhoe- front loader

340 containers- different size

(iii) Rehabilitation of unsanitary municipal disposal sites function as properly designed regional sanitary landfills / Construction of new landfills:

- One Sanitary landfill was constructed in 2004 and served the municipalities of Kotor, Budva and Tivat. More than 95% of the solid waste produced in these three municipalities was disposed on this sanitary landfill between 2004 and 2007, with a very positive impact on the local environmental conditions. After three years of operations, the landfill was closed in environmentally sound manner. The closing was due to the decision of Municipality of Kotor not to extend the permit.

- A second landfill was constructed in the municipality of Bar and the facility is serving the municipalities of Ulcinj, Bar and Budva

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(iv) Proper closing of municipal disposal sites (Two sites out of the targeted two13 completed): Two unsanitary waste dumpsites were closed in Grabovac near Tivat Airport. One municipal disposal site that operated without sanitary conditions in Kotor MJC area was rehabilitated and reconstructed to function as properly designed regional sanitary landfill operating in accordance with European Directive No. 31/1999. All resulted in improved environmental conditions in these municipalities. Two other sites in Kotor and Ulcinj, originally to be closed through the project, are now to be financed by EIB following the restructuring of the project in 2010, and are currently in the design phase.

(v) Introduction of waste recycling: A pilot recycling campaign was initiated through the project, and a relatively small recycling station was installed for the sanitary landfill “Lovanja” together with equipment for sorting the municipal solid waste based on use of a trammel system for opening of the waste bags with preliminary sorting, conveyor belts, recycling cabin, press-balling machine, containers, tractor etc. The recycling station was delivered to “Lovanja” management on November 6th, 2006, and is still operational. Currently about 12 percent of the waste in the Kotor MJC area is recycled.

(vi) Operational and financial sustainability of the newly created MJC:

As mentioned the joint multi municipal company (MJC) Lovanja was established through the project in order to operate the landfill for the Kotor, Budva and Tivat municipalities. MJC1 Lovanja ltd. was able to fulfill the indicators of service quality and financial viability while the landfill operated. Despite closure of the landfill at Lovanja, it is still active and operating existing infrastructure – recycling plant, storage and platforms and weighbridge in cooperation with communal companies of Kotor and Tivat. The company is expected to operate the new landfill for the same municipalities; to be constructed under the on-going EIB financed operation.

The Multi-municipal company “Možura”Ltd is now fully operational but the staffing process is still not completed (executive manager is still to be hired.) The Service level Agreement is however designed to ensure that it operates in a financially and operationally sustainable manner.

The main additional result of the Project that were not foreseen as project’s direct outcome but have resulted from project activities has been its positive impact on the local

13 Four sites were originally to be closed with support from the project. However during the 2010 restructuring the Government requested that these be removed from the project, and financed through the EIB program that is financing several such investments, and the funds be reallocated to contribute to financing the Mozura landfill.

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Roma community near the Lovanja site, that has been able to benefit from employment at the recycling plant established under the project.

4.3 Institutional Development Impact

The implementation and sustainability of the Project highly depended on institutional arrangements, which had to be made between the municipalities and the Government on one side, and between the Government and the Bank on the other side. This refers mainly to the institutional setup related to the creation of regional multi- municipal companies which was the process undertaken in parallel with construction of regional sanitary landfills. Different institutional arrangements including comprehensive Service Level Agreements have been developed.

It is very important that the Government of Montenegro intends to apply the same institutional set-up for the management of solid waste in the rest of the country

5.Sustainability

The sustainability of the project largely depend on: (a) successful operation of the multi-municipal landfill site on an autonomous and commercial basis, with full support from all levels of Government; (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 was critical for the project to force communal solid waste companies to accept and learn the importance of paying for services received and to target funding to least-cost investments only.

The operating cost of the communal companies is partially covered through the service tariffs and the rest through the municipal budget and cross financing that comes from different activities of these companies.. The Mozura regional sanitary landfill company is operating as a commercial entity and the landfill disposal fee is set on cost recovery principles. Actuall estimates indicate that the fee that the Mozura landfill company is charging Ulcinj, Bar and Budva municipalities will cost these municipalities about quarter of the previous cost of disposal in the Podgorica landfill (including transport costs). The current cleaning fee represents about 1.5 to 2,5 percent of the average household monthly budget in the coastal region.

The project is expected to be operationally and financially sustainable since adequate tariffs to guarantee proper operation and maintenance of the infrastructure are secured as part of the Service Level Agreement between Ulcinj, Bar and Budva Municipalities and “Možura” Ltd. which (apart of cost covering tariff) includes “put or pay” options for municipalities.

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6.Bank and Borrower performance

6.1 Bank’s performance

The overall Bank performance can be assessed as satisfactory, both in landing and in supervision of the project. The number of Bank supervision missions was sufficient. Bank staff and experts hired by the Bank took part in all major meetings with all stakeholders (Government, municipalities, NGO’s, etc.) and gave key contribution to resolving all capital issues. Also through the whole project, the Bank staff had intensive communication via e-mail, faxes, etc. with PEW and other stakeholders through which they shared their views and experiences obtained during implementation of other projects regarding certain issues. During procurement procedures, the Bank experts responded regularly with detailed and extensive comments regarding the submitted bidding documentation.

6.2 Borrower’s performance

The overall performance of the Borrower cannot be assessed as satisfactory, although the fact remains that for the Government, Municipalities and PEW this was the first project of such complex nature involving many different stakeholders from diverse institutions. PEW, as Project Implementation Unit, sufficiently improved during the project implementation and carried away its obligations in a timely and satisfactory manner, although the project was rated as high-risk, from the very beginning

7. Lessons Learned

Only with involvement of both central and local authorities and their commitment to sustainable development of tourism and other economic activities in the coastal region of Montenegro -through capital investments- these kinds of projects can be satisfactorily implemented. This also includes a wide public information and public awareness campaign, so that each citizen realizes all the benefits and all the risks of the certain project. Such campaigns have to be realized prior the beginning of implementation of the project. Capital investments should have as a result the benefit for the whole local population, but in the same time should secure the protection of environment and sustainable spatial development, which consequently requires substantial institutional strengthening. For implementation of all high-risk projects from environmental point of view, the domestic institutional and legislative framework has to be made more transparent with clear division of responsibilities between central and local authorities. In that view, urban planning process has to be based on the relevant studies that will make undisputable the decision of the locations for all kinds of regional solid waste facilities. Having in mind small population, territory and limited suitable locations for solid waste disposal, leading role in taking decisions process has to be transferred from municipalities to the central government.

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(b) Borrower Comments on Bank ICR

The following comments were received from Mr Sinisa Stankovic, Deputy Minister, Ministry of Sustainable Development and Tourism:

“Representatives of the World Bank in Montenegro submitted Implementation Completion Report and Results Report for the Montenegro Environmentally Sensitive Tourist Areas Project to Ministry of Sustainable Development and Tourism for suggestions and opinion. Generally, I mostly agree with the report.

However, please mark my suggestions: Regarding on justification of overall outcome rating, on page 15th 16th and 22 it is necessary to make changes in the text relating to the municipalities Tivat and Kotor. Your statement in the last line is that Kotor and Tivat are continuing to dispose waste on unsanitary landfill. Please, let me remind you that Kotor and Tivat signed an Agreement with Možura on November 2012 so they are disposing waste on landfill Možura.

Thank you for providing us this document and I certainly hope for future cooperation.”

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Annex 8. Comments of Cofinanciers and Other Partners/Stakeholders

The project did not have cofinanciers other than the Government of Montenegro.

No comments were received from other stakeholders.

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Annex 9. List of Supporting Documents

Project Appraisal Document. August 20, 2003.

Development Credit Agreement. Credit Number 3823 YF. October 13, 2003.

Project Paper on Restructuring and Additional Financing. August 2010.

Amendment to the Development Credit Agreement. December 23, 2010.

Loan Agreement. Loan Number 8002-ME. December 23, 2010.

Project Supervision Aides-Memoire

Project Implementation Status and Results Reports.

Project Financial Reports

Project Procurement Plans

Lawsuit and Court Judgment Documents on Claims to Lovanja Land

44 IBRD 39672 BOS. & 19˚ HERZ. 19˚00' MONTENEGRO Crkvice Sekulici´ ENVIRONMENTALLY SENSITIVE Danilovgrad Bioce TOURIST AREAS PROJECT Risan PROJECT MUNICIPALITIES h Spuz Ce otin MAJOR HIGHWAYS 42˚30' 42˚30' a Perast D r OTHER ROADS in Herceg- Kotor Bay a BOSNIA AND RAILROADS Novi Kotor Municipality HERZEGOVINA Pljevlja AIRPORTS Tivat Podgorica MUNICIPALITIES Tivatski Bay Kotor NATIONAL CAPITAL Cetinje MUNICIPALITY BOUNDARIES (approximate) Radovici INTERNATIONAL BOUNDARIES LOVANJA: v closed dumpsite and Plužine Zabjlak sanitary landfill, in Golubovci Tuzi Kotor municipality L j Rijeka´ u b Tivat Municipality GRABOVAC: o Crnojevica v ij closed dumpsite, in K a om SERBIA Tivat municipality a r T in a Bijelo Polje c ra Plavnica 43˚ a 43˚

Budva Milocer ˘ Savnik L i Mojkovac m Sveti Stefan Virpazar Z Budva Municipality Lake e ta Berane Rozajev Skadar v Petrovac Kolasin

ALBANIA v Niksi´c a r Ta Andrijevica

Adriatic Stari

a

Zet c Bar a KOSOVO a r Sea Bar o CROATIA M Plav Bar Municipality Danilovgrad

Herceg- MOZURA: Novi sanitary landfill, in Ulcinj Municipality Kotor Bar municipality Tivat 4200' Kotor Municipality Podgorica 42˚00' a Cetinje v n

a Cije

c

a r

Budva Municipality o PROJECT MUNICIPALITIES Sveti- M Dorde Tivat Municipality ALBANIA MAJOR HIGHWAYS Ulcinj Budva OTHER ROADS Bar Municipality TOWNS Lake MUNICIPALITIES Sveti Nikola Skadar NATIONAL CAPITAL MUNICIPALITY BOUNDARIES (approximate) Adriatic INTERNATIONAL BOUNDARIES Sea Bar MONTENEGRO

42˚ 42˚ 0 5 10 15

KILOMETERS Ulcinj This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other information 0 5 10 15 20 25 shown on this map do not imply, on the part of The World Bank Ulcinj Municipality Group, any judgment on the legal status of any territory, or any For detail, KILOMETERS endorsement or acceptance of such boundaries. 19˚00' see map at left 19˚ 20˚ DECEMBER 2012