Blyde River – the inside story

Now that the dust has settled over the dispute between Rand Merchant Bank and Marulaneng (Hoedspruit) farmers over payment for a state-of-the-art pipeline, the region is quietly prospering. Stephan Hofstätter unpacks the deal both sides agreed to live with.

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It was never in doubt that Marulaneng’s (Hoedspruit) irrigation farmers needed to replace the old earth-lined canals serving their export fruit plantations. Seepage resulted in water losses of up to 60% and waterlogged fields, taking large areas out of production. But as costs spiralled out of control, the question of who should pay for the new system, and what constituted affordable repayments, turned into a bitter dispute between farmers and Rand Merchant Bank (RMB). dispute was only resolved after a protracted court battle and a generous bail-out by the Department of Water Affairs and Forestry (DWAF). Now that the dust has settled, the district is beginning to prosper.

Prosperity in the pipeline
In the fertile, drought-prone region between the Blyde River Canyon and Kruger Park, the R200-million pipeline provides export fruit farmers with a reliable water supply for the first time. This has boosted exports, sparked an explosion of wildlife estates worth hundreds of millions of rand and attracted new farming ventures, including one of the two R1-billion biofuel plants the Industrial Development Corporation (IDC) hopes to fund in South Africa.

Water savings also enabled 800ha of irrigable land, the so-called Blyde-800, to be reserved for black farmers. A ccording to an agricultural survey, total revenue rose from R38 million to R840 million between 1995 and 2005.
The pipeline was completed in 2003. RMB says since then, crops under irrigation increased from 4 500ha to 6 200ha. The bank estimates the pipeline saved the district R150 million in crop losses during the 2004 drought. “It has demonstrated how private sector investment and expertise can generate infrastructure, driving a region’s economy,” says RMB chief operating officer Peter Gent. key indicator of value creation is the threefold increase in the price of water rights since 2003, from between R5 000 and R10 000 per hectare to between R15 000 and R25 000 per hectare, he says. “The free market has placed a value on certainty of water supply.”

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Government bail-out
A R48-million bail-out by DWAF in 2004 made it possible to arrive at a repayment rate most farmers could live with. Ownership of the pipeline will revert to the department once RMB recoups costs. senior DWAF official says calls for state intervention sparked heated debate.

The top brass wanted to know why they should bail out white farmers going bankrupt. “When they realised the Blyde-800 project could fall flat, with serious social consequences, Trevor Manuel and [Kader Asmal’s successor] Ronnie Kasrils agreed to sign,” says the official. R MB believes DWAF must be commended for its willingness to cover cost overruns from unforeseen events, effectively underwriting some of the risk. “It makes [similar ventures] more attractive to the private sector,” says Gent. “This is a real public-private partnership success story.” T he Blyde-800 has yet to be allocated. An advanced bidding process for joint ventures between commercial farmers and empowerment partners, initiated in 2004, ground to a halt when a land claim was gazetted later that year on over 500 farms in the district. As Farmer’s Weekly reported last week (FW 3 August, page 58) the first batch of 27 farms has been transferred. Farmers and claimants are forming joint ventures and there has been no decline in production, although the delayed disbursement of government grants is beginning to threaten their viability.

Most hi-tech in sub-Saharan Africa
The new 155km pipeline, fully operational since 2003, is regarded as the most advanced in sub-Saharan Africa. It uses a sophisticated monitoring and control system. Sensors at valve stations can send technicians SMS alerts of pressure fluctuations that could lead to pipe bursts. Main valves can be operated from the control room to isolate breaks. The system is entirely gravity-fed. It can distribute water to any point of the 460km2 irrigation area at enough pressure to drive overhead pivot or drip systems, without the use of electrical pumps. This makes it “Eskom-proof”, as operating engineer Cassie du Toit jokes, a real boon for farmers with crops worth millions dependent on timeous water supply. Power savings are a major advantage. RMB has calculated that at an electricity inflation rate of 6% to 8% within five to 10 years, farmers would be better off paying for the pipeline than pumping water from the river. Eskom is proposing an 18% hike.

But the main motivation was reducing water wastage, which is now down to 1%. Severe drought in the late 1980s prompted farmers to investigate a replacement system for the earthen canals. They opted for a pipeline in 1993 but political and legislative changes meant a formal decision to go ahead was delayed until 1997. After initially approaching the IDC, the old water board representing the farmers, which later became a Water Users Association (WUA), secured finance from RMB in 1998. The R105-million loan was secured by the pipeline, with the first installment of R1 450 per hectare due at the start of construction in early 1999. Completion was expected by mid-2000. Major flooding for six months and a redesign midway through construction caused lengthy delays and ballooning capital costs, with smaller farmers especially becoming increasingly reluctant to pay escalating installments.

There were further delays and cost hikes when a lawyer used a legal loophole to argue the water board had no authority to conclude the financing agreement. Many members withdrew from the project, arguing their contracts weren’t legally binding. RMB called the action a ploy to buy the pipeline at a substantial discount.

Price dispute
Rather than sue each member for breach of contract and try to sell a half-built pipeline, RMB opted to take ownership of the project and complete it with additional finance. Capital costs reached R145 million, bringing the price tag to R200 million, with interest. By then the legal loophole had closed because the water board had become WUA, but a major price dispute loomed. The bank and farmers offer different versions of what happened next. The WUA says the bank demanded up to R4 000 per hectare a year, which would have driven many farmers out of business. Efforts to reach an affordable settlement deadlocked, RMB resorted to water cut-offs, and the farmers took legal action.

RMB says it turned down proposals for restructuring repayments because they were premised on an implied write-off of R84 million. The bank also refused to cave in to demands that it relinquish control of a secured asset in a distressed debt situation. The protracted legal wrangle ended with a High Court ruling in November 2006, declaring RMB the undisputed owner of the pipeline. An earlier ruling had confirmed RMB’s contractual right to cut off defaulters. The farmers decided not to appeal. “It was time to bury the hatchet and find a sustainable solution,” says WUA chairperson Pieter Scholtz. Farmers negotiated payments of R2 000 per hectare during the two-year dispute, including arrears, and a subsequent rate of about R2 400 per hectare, with an inflation-linked annual increase. “It’s a fair deal,” says Scholtz. “Farmers who aren’t cost-effective in every segment of the market chain will be knocked out by normal market forces, but current prices are sustainable for efficient commercial farmers.” As one farmer put it, “It’s always painful to pay, but we’re much better off than before.” Call Pieter Scholtz on (015) 795 5087.