40016 Memorandum to the Board Montenegro Sustainable TourismDevelopment Project June 11,2007 1. In response to questions received from Executive Directors, the following provides additional information regarding environmental aspects of the Montenegro Sustainable Tourism Project (MSTDP). 2. The proposed project is intended to assist Montenegro in further developing the tourism industry, focusing on the high value-added segment of that market. That market segment demands high levels of environmental amenities, the protection of which is therefore a focus of the project and its planned second phase. The Environmental Assessment (EA) focuses on the increased need for environmentally sound wastewater disposal and treatment. Broader secondary impacts have been covered extensively in other activities and reports including: (i) A strategic EA on the proposed Ulcinj Regional Tourist Plan was carried out for the tourism development at Velika Plaza and Ada Island (the coastal portion of the Bojana-Buna Delta) in the framework of the Tourism Masterplan, both supported from the DEG (German Investment and Development Agency). This provided a very detailed EA on proposed tourism development in the most ecologically sensitive and biologically significant area along the southern branch (Ulcinj area) which had already been carried out by DEG, in support of the Municipality of Ulcinj and the Tourism Masterplan. The Tourism Masterplan, which covers the entire coastal area, focuses on the sustainability of the coastal tourism development and of mitigation measures to avoid negative impacts tourism development could otherwise cause. (ii) The proposed longer term Bank financed program would support implementation of key recommendations of the DEG study by supporting establishment of a protected area and other measures (e.g. a construction moratorium) to protect the most ecologically sensitive areas. (iii) Other initiatives in Montenegro which are addressing this vital issue of trying to make sure that tourism development is environmentally sustainable and preserves natural and cultural heritage are, as described in chapter A1 and Annex 1C of the Project Appraisal Document, the Coastal Zone Spatial Plan and the National Spatial Plan, including the Strategic EA for the National Spatial Plan which was supported by the Bank, and the Tourism Master Plan which was supported by the DEG. 3. As noted in the Project Appraisal Document (PAD), this project had to be prepared in two phases because of: (i) Montenegro's limited fiscal space, and the decision by the Government to borrow non-concessional IBRD finance only in 2008, and (ii) the restrictions on accessing GEF preparation funds during the period following Montenegro's independence in June 2006, but before the country became a member of the Bank in January 2007. Therefore the wastewater portion had to be deferred to MSTP2, which is foreseen to be presented to the Board in FY08. This means that phase 2 of the project, which serves to mitigate the impact of the increased wastewater volumes, is expected to begin next year. It will not wait for the end of phase 1 of the project. The slight difference in implementation time of these two projects does not present difficulties because the regional water supply system will take more time to construct than the wastewater treatment investments, and the regional water supply system will not cause an immediate substantial increase in wastewater generation. Wastewater generation will only slowly increase over the years as substantial tourism development occurs in the area. 4. The work on alternatives regarding the coastal water supply has been underway for some years, supported by, among others, USAID, the German government, the World Bank and the Government of Montenegro. This has been documented in studies such as the Government study on "Long term solution for water supply to the coastal region of the Republic of Montenegro" and the Bank financed "Montenegro Sustainable Tourism Development Report", and was the subject of several workshops in Montenegro in 2005 and 2006. Indeed, the issue is not alternatives in the sense of fully using one approach and ignoring others, but employing a combination of approaches. Demand management and leakage reduction strategies are employed in varying ways throughout the service area. For example, as mentioned in chapter C5 of the PAD, the German Kreditanstalt fur Wiederaufbau (KfW) is continuing to provide support in this respect to the coastal water utilities and is helping the water utilities with the investments needed to reduce leakage rates. However, the extensive studies and consultations have made it clear that options such as demand managementlleakage reduction, rainwater collection or use of local water sources near the coast would not meet the urgent needs for increased, reliable water supply. 5. The EA provides substantial technical detail regarding the project components (including water flow issues and potential impact on water flows at intake point). Additional details are provided in preliminary designs (in most cases also final designs of the Regional Water Supply Scheme are available), and in reports such as "Environmental Impact on Water Quality of the Bolje Sestre Spring (2006)", "Report of hydro-biological and microbiological investigation of the Bolje Sestre Source (2006)", Report of hydro- geological investigation at the area between Grbavci and Bolje Sestre Spring (2006)" and "Comparative analysis of the Karuc and Bolje Sestre Spring (2006)". All such documents can be provided to Executive Directors if required. The EA addresses minimum water flows of the water source (e.g. see summary on page 26), the variability of flows, as well as the natural variability of the lake water levels and the negligible impact on lake levels expected as a result of the project. Of course the EA focuses on the worst case when the water flow is the lowest and the withdrawal amount is the highest (in the summer). 6. The Environmental Management Plan (EMP) details mitigation measures and monitoring to be carried out. The Bank does not normally require an EMP to include specific descriptions of equipment to be used or their operating procedures - instead the EMP should focus on the mitigation approaches and results to be achieved, the parameters to be monitored (and with what regularity), and which agencies are responsible for carrying out and reporting on the work. This information is provided in the EMP, which also has the positive feature of including some cost estimates (often omitted). The EMP addresses the mitigation of all the issues dealt with in the EA. Investments and activities to address secondary/induced impacts of future tourism development facilitated by the project (i.e. establishment of the protected area and improved planning and monitoring) are included in the Phase 2 project, rather than being mitigation measures in the EMP for the Phase 1 project. 7. The EA explains that the Dodosi village population was selected for consultation because it is the closest village to the water source and was therefore judged by the client to be the most affected village. We agreed with.that judgment and expected that those villagers would react most strongly to the plans. The main potential impact of the pipeline route would be associated with construction of the tunnel and main service reservoir, which are both already in place. The impact of water pipes which mainly run under main roads or a single pumping station near or at the outskirts of a townlvillage, create only short term construction impacts and for these low impact investments along the pipeline route, the conducted TV presentation and public consultation with NGOs were judged sufficient by both the client and the Bank. 8. As part of the preparation of this project phase the Government has issued a letter of Development Policy which includes the commitments to (i) grant the status of a protected area to the Bojana-Buna Delta, (ii) found an environmental management unit for the Bojana-Buna Delta, and (iii) protect the biodiversity of the Bojana Buna Delta. In addition the Government has signed a Memorandum of Understanding which includes (i) the preparation of a management plan for the protected area satisfactory to the Bank and (ii) the commitment that the exact boundaries of the protected area will be precisely defined through an expert analysis as foreseen by article 10 of the Montengrian law on Nature Protection. Our willingness to present a Phase 2 loan to the Board is predicated on Government performance in these existing undertakings. If additional actions will be required, they will be advised by Bank Management during the preparation of Phase 2 and, of course, the Board will review any resulting loan proposal. 9. There is a distinction between declaring an area protected (which is envisaged under Phase 1) and creating a protected area benefiting from significant protection activities that make the protected status effective. The latter may only come with the activities foreseen under Phase 2. Declaring an area protected is really only the first step and the Bank want to avoid the situation seen in many areas in the world with a protected status yet which are either insufficiently or simply not protected. 10. Granting of protected area status would entail a legislative act by the Government, which as noted above has been committed to in the letter of development policy. Actual establishment and complete functioning of the protected area would entail the implementation of the environmental management plan for this area, which would comprise such measures as establishment of the management unit, zoning inside the area, enforcement of the protection of the area, environmental monitoring etc.