The roads are crumbling and the power and water supply is erratic but British investors are placing bets. Welcome to Tivat, which is being described as the Monaco of the Balkans.

It may lack the cachet of Cannes, but developers have big plans for Tivat, a derelict port and former Yugoslav naval base in the tiny former communist country of Montenegro.

A group of high-profile investors, including Lord Rothschild, the financier and friend of the Prince of Wales, and his son Nat, are converting what used to be the dockyard into a marina for the oversized yachts of the rich and famous.

It is hoped that Porto Montenegro, as it is to be christened, will become a magnet for mega-rich yacht owners cruising the Mediterranean.

The £200m project was the idea of Peter Munk, an 80-year-old Canadian who heads Barrick Gold, a giant mining company. His other investors include Bernard Arnault, the French luxury goods magnate, and Oleg Deripaska, the Russian mining billionaire.

“It’s going to become the Monaco of the Adriatic, putting this little country on the map for generations to come,” Munk said, noting that Monaco was once just as backward as Montenegro, where annual income per head is £2,000.

The logic of his business plan is simple: the number of large yachts being built has more than tripled during the past decade as new billionaires – particularly Russians – have invested in them as status symbols, while the ports able to service them are increasingly crowded.

“The boats are getting bigger and bigger,” said Munk. “And people are complaining that they can’t find proper berths for their boats. That’s no problem in Tivat. It used to cater to warships.”

It will offer moorings for up to 800 yachts as well as repair yards, hotels, restaurants and shops. The project calls for the construction of 1,000 flats where crews can make their homes. On the site of an old warehouse, the Four Seasons is building its first Mediterranean resort, to open in 2010.

The developers are negotiating with casino operators. Montenegro is also offering its customers generous tax breaks: income tax is about to be reduced to 9% and there is no capital gains tax. The corporate rate is just 9%.

The greatest appeal is natural, however. The coast, where green mountainsides plunge into cerulean water, is one of the most spectacular in the Mediterranean, and was once extolled by Lord Byron as “the most beautiful encounter between the land and the sea”.

In the 1950s and 1960s, it attracted film stars such as Eliz-abeth Taylor, Sophia Loren and Kirk Douglas who holidayed on the red-tiled resort island of Sveti Stefan. Now, after the break-up of Yugoslavia and political turmoil in which Montenegro gained independence, celebrities are returning.

The Rolling Stones performed on one of the beaches last year and next month Montenegro will stage part of Madonna’s 50th birthday tour.

Michael Douglas and Catherine Zeta-Jones were recently seen house-hunting in Montenegro. So were Venus and Serena Williams, the tennis players, and Michael Schumacher, the former Formula One driver.

Russia is the main investor.

Roman Abramovich, owner of Chelsea football club, was reported to be in discussion over the purchase of an eight-mile beach to build a luxury resort.

Wealthy Arabs are appearing on yachts off the coast. “I met a chap from the Middle East who told me he was going on holiday on his yacht to a country in the Mediterranean, but he couldn’t remember the name, just said it began with an ‘M’,” said an investor in Tivat who did not wish to be named.

One shadow is the woefully inadequate infrastructure. “The people are friendly, the food is excellent and the coast is magnificent,” said Stane Zivanovic, who runs an estate agency, “but there was no running water in my house this morning and the lights often go off.” Things are expected to get better: as part of the Tivat project, the European Bank of Reconstruction and Development and the World Bank are pumping in money to improve roads, the sewerage system, railways and airports.

Munk recalls with a grin his first visit to Montenegro on his boat a decade ago: “I couldn’t even get insurance, because they were bombing.”

He became friendly with Milo Djukanovic, the prime minister. “He said to me, ‘The biggest heritage is our coast-line. I can turn it into a Monaco of the Adriatic’.”

At first Munk thought he was crazy. “But it struck a chord with me. Monaco was just a poor fishing village to begin with,” he said.

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