Service Contract No 2007 / 147-446 Socio-economic ... - Swaziland

Restructuring and DiversificationManagement Unit (RDMU)to coordinate the implementation of theNational Adaptation Strategy to the EUSugar Reform, SwazilandService Contract No 2007 / 147-446Service Contract No 2007 / 147-446EuropeAid/125214/C/SER/SZ: Restructuring and DiversificationManagement Unit to coordinate the implementation of the NationalAdaptation Strategy to the EU Sugar Reform, SWAZILANDEC General Budget – SU-21-0603Socio-economic Studyof the proposed Rehabilitation of the Malkerns CanalMission Report – May 2009Submitted to:The Delegation of the European Commission to Swaziland4 th Floor Lilunga House, Somhlolo Road, Mbabane, SwazilandMinistry of Economic Planning and DevelopmentP.O. Box 602Mbabane H100, Swaziland

Your contact personswith GFA Consulting Group GmbH areDr. Susanne PecherAnke SchnoorRestructuring and Diversification Management Unit(RDMU)to coordinate the implementation of the National AdaptationStrategy to the EU Sugar Reform, SwazilandAuthor: Stephen AtkinsMission ReportAddressGFA Consulting Group GmbHEulenkrugstraße 82D-22359 HamburgGermanyPhone +49 (40) 6 03 06 - 111Fax +49 (40) 6 03 06 - 119Email: afrika@gfa-group.de

DISCLAIMERThe contents of this report are the sole responsibility of the RDMUand can in no way be taken to reflect the view of the European Union.

TABLE OF CONTENTS1 EXECUTIVE SUMMARY 12 INTRODUCTION 23 BACKGROUND TO THE MALKERNS CANAL 34 ENGINEER’S RECOMMENDATIONS 55 APPROACH TAKEN 66 STAKEHOLDER ANALYSIS 76.1 Domestic 106.2 Agriculture – medium and small-scale 116.3 Industrial 126.4 Conservation 136.5 Forestry (plantation) 146.6 Main canal system management 147 BENEFIT/COST ANALYSIS 177.1 Without Project Scenario 177.1.1 Domestic 177.1.2 Agriculture 177.1.3 Industrial 187.1.4 Conservation 187.1.5 Forestry 187.1.6 Malkerns Water Management (MIDC) 187.2 Revenue Streams 187.3 “With Project” Scenario 217.3.1 Project Benefits 278 CONCLUSIONS AND RECOMMENDATIONS 309 LITERATURE AND REPORTS REVIEWED 32List of AnnexesAnnex 1: Terms of ReferenceAnnex 2 Malkerns Research Station climatic dataAnnex 3: MIDC ShareholdingAnnex 4: Background to the Water Resources Management on the Usuthu RiverAnnex 5: Financial Analysisi

List of TablesTable 1 MIDC Shareholders – Details of Farm Enterprises 8Table 2 Breakdown of Government’s Water Allocation (2009) 10Table 3 MIDC Shareholders – Computation of Agricultural and Agro IndustrialGross Revenues Based on Malkerns Canal Water 19Table 4 Frequency distribution of estimated gross revenue from agriculturalactivities (Constant 2007/08 Financial Prices) 20Table 5 Estimation of Agricultural and Agro-industrial labour wages generated byMalkerns Canal Per Annum 21Table 6 Calculation of MIDC water and Management Levy 2008/09 22Table 7 Crop options for Malkerns Irrigators 2009 (2009 Financial Prices) 23Table 8 Crop revenues for ‘with’ and ‘without’ project scenarios (2009 FinancialPrices) 24Table 9 Calculation of MIDC Water and management levy for ‘with’ and ‘without’Project scenarios (2009 Financial Prices) 24Table 10 Financial Model for MIDC Water and management levy for ‘with’ and‘without’ project scenarios (2009 Financial Prices) 25Table 11 Assumptions for the ‘with’ and ‘without’ project scenarios 26Table 12 Financial model for “Without” and “With” Project” situation (2009 FinancialPrices) 28Table 13 Sensitivity analysis of Malkerns Canal rehabilitation project 29List of FiguresFigure 1: Average Monthly Flow of Usuthu River at GS9 1958/09 – 2003/04 16Volumetric Units of MeasurementCusec is the imperial measure of flow rate and is informal shorthand for cubic foot persecond (28.317 litres per second).1 ft 3 s -1 = 0.028316847m 3 s -1 1 ft 3 s -1 = 1 cusec1 ft 3 s -1 = 28.316847 litre s -1 1 cubic foot per minute = 1 cufm1 cufm = 1.699m 3 h -1 1 cufm = 28.32 litre min -11 gallon per minute = 0.7577 litre s -1 1 gallon per minute = 7.577x10-5m 3 s -1The cumec is the metric measure of flow rate. One cumec is shorthand for cubic metre persecond; (also cms or m 3 /s (m 3 s -1 ).One cumec is equivalent to 35.3147 cubic feet per second.CurrenciesE1.00 = approximately €10.00 (February 2009)ii

AcronymsAAPAnnual Action ProgrammeCDC Commonwealth Development CorporationEEmalengeni currency of Swaziland (Lilangeni singular)€ EuroECEuropean CommissionEmMillions of EmalengeniEUEuropean UnionFIRR Financial Internal Rate of ReturnGSGauging StationHaHectareIDIrrigation DistrictIRRInternal rate of returnIWRM Integrated water resources managementKmkilometresKm²Square kilometresLUSIP Lower Usuthu Smallholder Irrigation Projectl/slitres per secondm³ cubic metresmasl metres above sea levelMCM Million cubic metresMEPD Ministry of Economic Planning and Development#MIDC Malkerns Irrigation and Development CompanyMLMillion LitresMNRE Ministry of Natural Resources and EnergyMoAMinistry of AgriculturenNumber of observationsNPVNet Present ValueNWA National Water AuthorityO&M Operation and maintenanceRBARiver Basin AuthorityRSARepublic of South AfricaSNLSwazi Nation Land (communal)SSASwaziland Sugar AssociationSWADE Swaziland Water and Agricultural Development EnterpriseSWSC Swaziland Water Services CorporationUNISWA University of SwazilandWUG Water User Groupiii

1 EXECUTIVE SUMMARYIn late 2008 a detailed structural survey of the Malkerns main canal was undertaken toestablish the major areas of risk to, and losses from the aged canal. The RDMU engineerrecommended solutions which could be tackled quickly and effectively utilising EC funds tooptimise the availability of water to provide end-users with maximum benefit.This particular report assesses the financial implications to the Malkerns irrigators of theabove recommendations. The Consultant carried out a socio-economic analysis to determinewhether the net benefits of rehabilitating the canal justify financing from Swaziland’s NationalAdaptation Strategy to the European Union’s sugar reform.The cost benefit analysis shows that the “without project” profitability of the Malkerns canaland irrigation systems is very fragile and sensitive to the frequent outages which are beingexperienced at present. The consultant engineer determined that these are likely to increasein the immediate future. In the case of a catastrophic failure, the nation would lose a majoragricultural hub with the demise of commercial farming in the Malkerns Valley, and with it theloss of many jobs.As a consequence of the nature of the canals current structures, shareholders are injeopardy of losing their livelihoods and for many, agricultural diversification would not be anoption , domestic users are likely to lose substantial welfare, especially those dependentupon high assurance potable water such as schools, Government services including clinicsand the police, as well as many retail traders. Moreover, agricultural research and trainingopportunities in Government and university facilities could be compromised indefinitely, andsmallholders would be unable to lever donor funds to develop their SNL enterprises.The proposed remedial works on the canal include the upgrading or repair of 11 flumes &dump gates, installation of a siphon at the Malkerns Research Station to bypass the UsuthuForest Section to reduce the canal distance by 7km. This intervention will dispel the pendingcatastrophe from the collapse of the canal and increase the capacity of the canal after flume8 from the current 32% to 50% .A simple cost benefit analysis of the incremental cash flow was derived by subtracting the“with-out” project cash flow from the “with project” cash flow. The Net Present Value (NPV) ofthe incremental cash flow was E20.0m (€2.0m) while the Financial Rate of Return (FIRR)was estimated at 26% at a 10% discount rate. These figures indicate the project provides apositive net worth under the realistic assumptions made. However sensitivity analysisindicates the viability is more susceptible to change in that agricultural revenues andproduction costs hence the need to improve cane productivity performance from the averagelevel of 91.7 TCH in 2007.The model also shows that the diversification options outlined in the Exit Strategy – Cost ofDiversification Study if promoted and taken up by farmers will present a highly stableproduction profile for the scheme.The report recommends the implementation of the proposals put forward by the consultantengineer for funding by the European Union. It also recommends that support should also beprovided to undertake a technical audit of the secondary and tertiary canal systems, todevelop an operational and maintenance programme, and accompanying business plan forMIDC, within the framework of an appropriate water management system, for shareholdersto finance and implement.1

2 INTRODUCTIONThe European Union (EU) is reforming its internal sugar market regime which will result inthe lowering of sucrose prices by 36 per cent from 2006 to September 2009 as the first stageof the phasing out of European Community sugar quotas. In order to mitigate the impact ofthese price reductions the EU is providing financial assistance to sugar cane producers indeveloping countries through individual National Adaptation Strategies (NAS). For Swazilandthe indicative NAS allocation (2007-2010) is €69.95m which is being channelled throughAnnual Action Programmes (AAPs).One specific objective of the NAS in Swaziland is to support agricultural diversification forsugar farmers who are unable to remain competitive following the sucrose price reduction.For this action it is planned to allocate €5m in the 2009 AAP within which one possibleelement has been identified as being the rehabilitation of the Malkerns irrigation canal; thisparticular assignment has been designed to prepare background documentation to assiststakeholders consider the case for this rehabilitation programme.The global objective of the assignment is to provide information to allow the NAS SteeringCommittee, chaired by the Ministry of Economic Planning and Development (MEPD), to takea reasoned decision concerning the development of a response strategy for the ‘AgriculturalDiversification’ component of the NAS for submission as part of the 2009 AAP. This wouldthen be reviewed by the EC.The specific objectives of the consultancy are to carry out an economic and social study todetermine whether the net benefits of rehabilitating the canal justify EC financing from the2009 AAP allocation and to provide the necessary linkages with the agriculturaldiversification options which are likely to arise in the immediate future.The requested tasks required to meet these objectives include:1. Estimating the benefits/costs (financial and economic) resulting from the variousengineering options for the rehabilitation of the Malkerns Canal, taking into account:any possible increase in irrigation and potable water supply;reduction in water losses;reduction in maintenance costs;the possible consequences of a rupture to the supply resulting from acatastrophic failure of canal infrastructure.2. Carry out a stakeholder analysis for each of the main category of user.The consultant’s report should provide sufficient information for the stakeholders totake a reasoned decision which option should be the most appropriate for rehabilitationand financing of the canal, if any.2

3 BACKGROUND TO THE MALKERNS CANALThe Malkerns Irrigation and Development Company (MIDC) canal was established in thelate 1940s with funds raised by private farmers, the Colonial Administration and the thenColonial Development Corporation at an approximate cost of £100,000 1 . After a three yeardevelopment period the canal system was commissioned in 1953. The main canal isessentially a 29km earth lined structure which carries a water award granted by Governmentof 100 cusecs (equivalent to 2.83 cumecs) or half the flow of the river, whichever is less atGauging Station 9 (GS9) 2 on the Great Usuthu River.Today the shareholders in the MIDC include Tibiyo Taka Nagwane (Tibiyo), the Nation’sinvestment house which holds the largest number of shares, followed by Government andthen 43 other investors 3 . There are 9,990 issued shares and a holder of 100 shares isentitled to draw 1 cusec (28.32/ls) from the canal system.The source of water for the canal is a diversion weir on the Usuthu River just below GS9.There is no storage of water behind the weir and so the canal system is a pure run-of-riverscheme running on a 24 hour basis. Over the years farmers have constructed storagereservoirs on their properties for better water supply assurance, but capacities are small andintended for short-term rather than seasonal storage. Recent studies indicate thattransmission and leakage losses are large and many of the critical conveyance structuresare in desperate need of repair and rehabilitation if farmers are to continue irrigating with anydegree of assurance that water will be available to sustain their enterprises. Moreover, overthe years, and being unlined, many parts are badly congested with silt and together withvegetation growth its capacity has been reduced to an estimated 32% of its original design.This further undermines the integrity and viability of sustained irrigated agriculture as waterflow has been subject to repeated outages as a consequence of canal failures which havebeen repaired on a continual basis by MICD management.The Malkerns valley has some of the most fertile soils 4 in Swaziland, with a very favourableclimate (see Annex 1), and was considered the commercial hub of the country’s agriculturalsector until large irrigation developments created the sugar industry in the lowveld regionsduring the early 1960s.In the past the traditional crops grown in the valley included rice, citrus, pineapples, maize,cotton and vegetables, along with dairy, beef and poultry enterprises. The area is also thelocation of primary seed cane nurseries for the Swaziland sugar industry which were1 At that time the pound sterling (£) was the unit of currency used in the areas under the British ColonialAdministration. The value of the pound sterling has subsequently departed quite substantially from the SwaziLilangeni (E) since that time, and is now approximately E15.0 to £1.00. In 2003 the British House of CommonsLibrary published a research paper which included an index value of the pound sterling for selected yearsbetween 1750 and 2002; the value of £1.00 in 1952 was indexed to £16.80 in 2002, or roughly equivalent to adepreciation of 5.75% per annum (House of Commons Research Paper 03/82, accessed on the Bank ofEngland website 22/01/09). Using this index to revalue the 1950 investment at 2009 financial prices wouldmake it £2.945m, or E44.18million, with the average cost equating to about £982 or E14,727 per ha (2009financial prices using £1.00 = E15). In Euro terms this is a capital cost for the main canal system of € 3.2m or€1,070 per ha supplied.2 Elevation 823masl; Latitude 26’34:24S; Longitude 31’4:48E.3 See Annex 2, Tables 1a and 1b for the full shareholding list and Government’s allocations respectively.4 Murdoch (1969) makes reference to the unique and highly fertile characteristics of these class A soils whichare generally described as being deep, medium textured, red sandy clay loam or clay loam soils. See alsoNixon (2006).3

established in the 1970s and which produce high yielding, high quality seed and disease freeseed sugar cane.In the late 1990s a group of Malkerns farmers embarked upon growing sugar cane for millingin the lowveld, some 100 km distant from their farms. Given Swaziland’s access to thepreferential sugar markets of Europe and the United States of America, sugar caneproduction has been financially attractive to these growers until recently when input costs,including fertilizer and fuel prices increased substantially. In addition, the profitability of thesefarms is now considerably constrained with the advent of the EC sugar price reform.Notwithstanding this, over the years the cluster of irrigators in the Malkerns Valley have beeninventive and responsive to market conditions, but fluctuations in agricultural commodityprices at regional and international levels have brought modest margins to most of thefarming enterprises. Importantly, these sustained livelihoods have been critically dependenton the Malkerns irrigation canal system.Even though since its inception the MIDC management has levied annual charges onmembers to facilitate maintenance and critical investments for the efficient functioning of thecanal, the fabric of its main canal system has deteriorated and as mentioned earlier, it is nowin need of a major overhaul and rehabilitation. For all farmers irrigating from the canal theirability to continue assured irrigation farming is under pressure, and for those farmers whohave invested substantial sums in sugar cane production their future livelihoods areparticularly under threat given the high cost of diversifying out of the enterprise.This report examines the issues confronting MIDC shareholders and management at thistime, and reviews the costs and benefits of rehabilitating the Malkerns irrigation canalsystem.4

4 ENGINEER’S RECOMMENDATIONSIn late 2008 the RDMU Consultant Civil Engineer undertook a detailed technical survey ofthe Malkerns main canal to establish the major areas of risk to, and losses from the canal.The engineer recommended solutions which could be tackled quickly and effectively utilisingEC funds to optimise the availability of water to provide end-users with maximum benefit 5 .The report detailed a number of recommendations to reduce risks to the continuedoperations of the system. These were to:rehabilitate canal flumes 1 - 7;build dump-gates to reduce sedimentation and scouring;build a siphon at flume 8 and associated sand trap/partial flume;build a siphon to cut out 7km of the Sappi (Usuthu) forest loop.The total cost for all these recommendations was put at E27m (in 2009 constant financialprices, or €2.7m) which included contingencies, as well as design and supervisionoverheads 6 . Regarding timing, the engineer advises that much of the main rehabilitation workcould be completed prior to a shut-down, for example the erection of scaffolding, and the precastingof certain structures to be put in-situ over a relatively short period of two or so weeks.The technical survey considers that the operation and maintenance costs (O&M) should beincreased from its 2007/08 level by a factor of four as only emergency rehabilitation work iscurrently being undertaken, whereas more regular clearing of vegetation and desilting needsto be done to maximise water flows in the canal. The present limited funding within MIDC forsuch work at present is affecting the efficiency and operation of the canal. For instancesome of the overpasses will have a limited life as they are temporary structures. Long termthinking needs to be developed, as this canal must operate for the foreseeable future.In this regard it was also noted that maintenance costs are very difficult to estimate for themain canal in its current state. The main problem faced by the maintenance team is accessand this is mainly due to the alignment of the canal, especially in the first 10 or so kilometresas it passes very close to the mountain side where there is not enough room for vehicularaccess to take men, machinery and materials along the canal. The technical survey reportalso advised that the only way round this would be to realign the canal in such areas, whichwould effectively be the same as excavating a new canal. In the absence of detailed workreports the MIDC were unable to give a clearer idea of this.This particular report assesses the financial implications to the Malkerns irrigators if thetechnical survey report recommendations are implemented.5 See: “Technical Assessment of the Malkerns Canal for the proposed rehabilitation”, RDMU Mission Report,January 2009.6 Following interaction with the RDMU’s Consultant Civil Engineer included an allowance to cover theinstallation of simple, ‘vandal proof’ partial flumes for each irrigator to enable them to irrigate using avolumetric metering.5

5 APPROACH TAKENThe RDMU mobilized the consultant, Stephen Atkins, on 7th January 2009 to complete theabove assignment within a period of 30 working days.Following a review of relevant documentation, the timescale allotted to the consultancy andthe data available, it was decided by the Restructuring and Diversification Management Unit(RDMU) to focus the study on the financial justification of cost/benefit issues rather thantaking a purely economic perspective. Furthermore, It was agreed that the approach wouldmake an objective assessment of the value of benefits received by stakeholders of theMalkerns Canal, public sector institutions and private stakeholders such as farmers on titledeed land (TDL) including farmers on larger and medium sized farms, the University ofSwaziland Faculty of Agriculture, smallholder farmers on Swazi Nation Land (SNL), smalland medium value added enterprises along agricultural value chains including marketgardening and horticultural and agricultural produce processing companies. Additionally,assessments were to be made of canal water users within the Government allocation suchas schools, prisons and remand centres and informal, unlicensed water users whoseaccommodations neighbour the canal.Against this set of information any developments or improvements made to long standingand potentially new irrigation systems have to be assessed in terms of the changinglandscape of water resources management in the country and in the region. Hydrologically,Swaziland has neither upstream control nor freedom to determine the use of all through-flow,and is geographically sandwiched between two neighbours - upstream the Republic of SouthAfrica (RSA) and downstream Mozambique. Thus, given the challenges facing the countrywith regard to the political economy of water allocation between these countries within theframework of international and interstate agreements and guidelines, Government hasrecently introduced a new Water Act (2003) and drafted a revised irrigation policy (2005) tobetter manage its water resources than hitherto. Thus, future water use will need to beassessed against new integrated water resource management (IWRM) systems that are tobe introduced over time by the Ministry of Natural Resources and Energy (MNRE) and theMinistry of Agriculture (MoA) 7 .Semi-structured interviews were held with groups representing the MICD shareholders toelicit their experiences with the operations and conditions of the Malkerns canal and toestablish the economic drivers associated with the use of its water. In addition, numerousother people were consulted within government and public enterprise institutions, the privatesector and private individuals.In determining the economic drivers, it was agreed from the outset that as businessinformation is confidential and highly sensitive the consultant would attempt to collectinformation from shareholders that was in the public domain. It was also recognised that asimple and pragmatic approach had to be taken in order to cover all the ground needed tosteer towards a reasonable decision. Thus, interviews gathered information on grossbusiness turn-over of enterprises dependent upon canal water. From this net revenue figurescould be extrapolated in a uniform manner. Given that an element of subjective error wouldbe introduced it was argued that sensitivity analyses would test the legitimacy of conclusionsdrawn. Sugar production data obtained from the Swaziland Sugar Association (SSA) wouldprovide a yardstick by which the reports from sugar cane farmers could be checked. It wasalso reasoned that the approach would remove the need to disentangle inter-company loans,pre-financing versus post financing reporting, and the gross returns would show the value of7 For more details on the implications of the new Water Act see notes in Annex 4.6

evenue generated into the economy by the MIDC group of communities. In addition keyinformation was collected on employment generation, for both permanent and casualemployees.6 STAKEHOLDER ANALYSISA stakeholder analysis was undertaken to identify the economic drivers in the canal complex,and to identify the positive and negative aspects of their involvement.As a starting point the user group framework outlined in the new Water Act (2003), for theUsuthu River Basin Authority (RBA) was used to categorise stakeholders of the Malkernscanal as follows:a. Domestic;b. Agriculture – medium and small-scale;c. Industrial;d. Conservation;e. Forestry (plantation).From the latest audited MIDC accounts the Table 1 details the shareholders owning thecompany.7

Table 1MIDC Shareholders – Details of Farm EnterprisesWaterQuotal/secWaterQuotacusecs(m³)TotalArea ofLand(Ha)PermanentStaff(n)AverageMonthlySeasonalStaff (n)Total FarmTurnover (EMillion)No NameNumberof SharesUse of water1 AA Properties 94 26.61 0.94 Flowers, veggies, maize (under administration)2 Bellamy Farm (Nadine Stein) 50 14.16 0.5 Veggies 19.30 10 2 0.743 Boabab Farm (Pete De Hoof) 106 30.01 1.06 dairy, irrigated pastures 43.00 7 1 1.604 C J Vickery 100 28.31 1 nursery, veggies, flowers, fruit trees 38.00 60 6.505 H Du Pont * 50 14.16 0.5 19.00 10 3.006 M Du Pont (Maurice du Pont) 50 14.16 0.5 veggies, maize sunflowers 19.00 10 3.007 Dynamic Distributors Ltd * 32 9.06 0.32 3 1 0.508 Eagles Nest (Pty) Ltd (Derek Chester) 50 14.16 0.5 poultry (layers) 100 1 50.009 Emerald Hill (Pty) Ltd (R Packard) * 150 42.47 1.5 sugarcane, broilers (included in L A Hulley returns) 0.0010 Estate I S Haggie (Swazican) * 65 18.40 0.65 pineapples 5 1 0.3011 Estate Rev Z Kunene 100 28.31 1 veggies, maize 2 1 0.0012 Green Acres (Pty) Ltd Tony Wright 50 14.16 0.5 sugarcane (farms Green Valley for late cousins wife) 35.00 6 1 1.0013 Green Valley (Pty) Ltd (D & P Packard) 50 14.16 0.5 sugarcane, broilers (leased house) 4 1 0.4514 Hlekamanzi Farm (VJR) * 75 21.23 0.75 veggies, property rental on farm 2 1 0.5015 M F Hlope * 50 14.16 0.5 property rental on farm 2 1 0.5016 Khula Imvelo (Pty) Ltd * 170 48.13 1.7 2 1 0.5017 L A Hulley Pty Ltd 200 56.63 2 sugarcane, veggies, broilers, beef, dairy, contracting 300.00 30 38 5.2518 Langeni Greens * 134 37.94 1.34 pinapples 1.0019 Lawuba Investments (Themba Masuka) 50 14.16 0.5 idle (although cane in 2007/08) 24.00 1 3 0.2320 Mrs Le Grange 8 2.27 0.08 Not farming, in arrears with water levy21 M P Mnisi (Hlekumanzi Farm) 50 14.16 0.5 sugarcane 32.00 2 9 1.4022 R M Mabila (Tetsembiso Inv Pty Ltd) * 100 28.31 1 2 1 0.3023 Malandela's Farm (Peter Thorne) 97 27.46 0.97 sugarcane, veggies, lodge, restaurant etc 81.00 9 10 1.1024 W A Mavuso * 50 14.16 0.5 2 1 0.3025 Mawawa Estates * 100 28.31 1 3 1 0.3026 Mdimba Estates Ltd (Derek James) 260 73.61 2.6 sugarcane, landscaping, veggies, lodge 75.00 10 70 4.7027 P L Nsibande (son Mluluki Nsibande) * 53 15.01 0.53 vegetables 18.00 3 1 0.3028 D Ntiwane * 25 7.08 0.25 vegetables, maize 2 1 0.2029 Packard and Wright (Pty) Ltd 100 28.31 1 sugarcane, bananas, flowers (export) 67.00 38 13 10.9030 Penelopes (Pty) Ltd * 12 3.40 0.12 2 1 0.3031 Pineacres Ltd * 185 52.38 1.85 bananas 2 1 0.5032 Pineapple Growers Ltd (Jim Batchelor) 155 43.88 1.55 sugarcane 124.00 20 40 2.2533 Pondorosa Farm (Pty) Ltd 50 14.16 0.5 GARDEN CENTRE - BOREHOLE 0.6034 Prince Mabandla Dlamini 50 14.16 0.5 sugarcane, broilers, veggies 24.00 6 4 0.4035 SEREC Ltd 5 1.42 0.05 2 1 0.1036 St Clements Ltd * 45 12.74 0.45 4 1 0.5037 Swaziland Fruit Canners Pty Ltd 575 162.80 5.75 canning factory, pineapples 200 1,650 260.0038 Swaziland Government (Paul Mkhatshwa)* 2150 608.72 21.5 research, sugar cane, SWSC, prisons etc 400.00 100 100 6.0039 TIBIYO (Dalcrue Agric Holdings Pty Ltd) 2749 778.31 27.49 sugarcane, dairy, pasture, veggies, maize/milling 1,076.00 97 50 24.0040 Tinkhukhu Poultry Farm (Patrick Russell) 100 28.31 1 sugarcane - leased, broilers, vegetables, green (house) 100.00 27 26 14.0041 Tisuka Ezulwini Roses Enthuthwini Farm 60 16.99 0.6 2.2042 Umbane (Pty) Ltd (SEB Pen - John Reilly) 660 186.86 6.6 sugarcane 263.00 15 21 7.0043 UNISWA (Simon Motsa Farm Manager) 600 169.88 6 beef, dairy, irrig pasture, veggies, field crops 260.00 38 20 1.2044 Usuthu Mission (Green City International) * 75 21.23 0.75 veggies, dairy 8 10 0.3045 Van Zuydam A * 50 14.16 0.5 2 1 0.30TOTAL 9,990 2,828.43 99.9 3,017 848 2,086 414Note: * signifies data for this company have been imputed as no interviews were held, or no information was provided at interviewSource: MIDC audited accounts 2007/08, Information collected by auther during stakeholder interviews January/February 2009Table 1 represents the direct stakeholders of the canals water, which essentially fall into theagricultural or industrial users groups. Note that not all land under each shareholder isnecessarily irrigated. The original irrigated area allowed 1 cusec (28.3 l/sec) allowedsufficient water to irrigate 100 acres (40ha).The original shareholding was based upon the use of the full water allocation needed tosupport 4,000 ha (or 10,000 acres) in 1953. Given that the technical survey report estimatedthat only 32 per cent of the design flow was reaching the main farming area serviced by thecanal then for effective use of the water given crop water demands, it is reasonable toassume that only +/-1,280 ha could be profitably sustained by the canal in its current state ofrepair. However, according to crop production from the Swaziland Sugar Association for the2007/08 cropping year, 14 8 MIDC shareholders were cultivating 1,119.10 ha of sugar cane,with a very reasonable average cane tonnage and sucrose content. Given that sugar cane isa thirsty crop and even allowing for those sugar cane farmers who are grossly8 A 15 th shareholder recorded no sugar cane yield from 60ha.8

The recent Manzini Regional Physical Development Plan indicates that Malkerns townshiphad a registered population of 12,500 people in 2005, and that the community was a nodalgrowth point with a range of shops, a Government Revenue Office, police station, clinic,bank, post office, telephone exchange, recycling centre, five schools, one hotel and nine bedand breakfast establishments 9 , a country club and numerous churches.The total monthly domestic bill for this community is put at E70,000 putting the SWSCsannual revenue from this community at some E840,000. Currently, there is a large number ofclients waiting for a water connection which will be accommodated once the purification planthas been upgraded. The SWSC also advises that they have sunk numerous boreholes fordomestic clients at considerable cost (Government drilled boreholes costing E12,000 each,and private sector company E24,000 each) but the vast majority are not viable or else haveextremely poor yields.In the case of a catastrophic failure of the canal infrastructure, the SWSC advises that theywould be faced with a major problem. While the cost of integrating the Malkerns domesticwater system into the Ezulwini facilities was put at an estimated cost of E8m, it is recognisedthat the project would take considerable time to plan, finance and implement, and it isunlikely that they would have sufficient capacity to cope with the growing domestic waterdemand from Malkerns.Another, characteristic of ‘domestic’ water users in the valley is the proliferation of somefarmers into non-agricultural small homesteads and real estate developments. Here, theyuse borehole and not canal water. However, within recent years informal canal water usersnow abstract water, especially within the first eight kilometres of the canal from the Malkerns-Bhunya road to the UNISWA off-take. Other informal users can be seen along the length ofthe canal using the water for the washing of clothes, block making and indeed theblossoming car wash trade.The Luyengo resettlement community on SNL does use some canal water for domesticpurposes although its reservoir, which is under Government’s control, was said to be in needof maintenance. This particular community within the Lembelele Chiefdom has 600homesteads of which 40 use canal water for domestic and irrigation purposes, and supports400 orphans.The analysis did not develop a model for estimating the gross turn-over accruing from waterfor the activities of Malkerns businesses.6.2 Agriculture – medium and small-scaleAgriculture is the dominant economic driver in the valley, and as expected, each shareholderin the MIDC practices farming in one form or another, either as a principal or secondaryincome generating activity.The mix of farmers includes larger holdings of over 100 ha, which are invariably located oncontiguous parcels of land. The bulk of the farms are medium to small scale holdings ofbetween 10 and 100 hectares. Many of these have fragmented land areas, and as aconsequence are unable to enjoy the economies of scale of the larger enterprises. This limitsthe profitability of many commercial opportunities open to them.Smallholders are also part of the Malkerns community of irrigators. They are allowedabstraction allocations out of the Government quota, although in recent years these havebeen adjusted downwards in some cases. Support from the MoA to these irrigators has been9 These enterprises are situated on farms within the Valley and access borehole water for domestic purposes.11

lacking even though it was learned that if they could be assured of canal water they couldgain financial support from development agencies for vegetable and dairy enterprises.As mentioned earlier there are numerous farming systems found in the valley, ranging frommono-cropped sugar cane and banana production to integrated arable and livestock systemsinvolving grains, legumes, vegetables, dairy and beef, pigs and sheep, all of which are solelydependent upon canal water for their continuance. Included in these enterprises are sugarcane harvesting and in-field haulage concerns.However, the case of most poultry enterprises, both broilers and layers, is slightly different.While the enterprises described above use canal water from individual allocations, poultryfarming is dependent upon high quality water, with a high level of assurance. Thus, it wasfound that nearly every chicken farmer uses borehole water for their birds. A side-line of theindustrial poultry enterprises is the production of manure, which could be used to fertilizearable production throughout the valley – one major company produced over 3,000 tonnesannually. Opportunities are currently being explored to develop and integrate poultry feedmilling and outgrower maize enterprises with some MIDC shareholders.For the few high value vegetable and herb producers using micro-jet irrigation systems,supplying niche markets, it was also learned that due to the high silt load of canal water theyhad either to filter it before using, or else use borehole water. The current high silt levels andsediment loads also indicate that should farmers wish to migrate to more efficient irrigationsystems such as hyrdophonics or more extensive drip irrigation systems, they would mostlikely be unable to operate give this type of contamination unless expensive filtration plantswere incorporated.Chemical contamination was also a cause of concern mentioned by numerous water userswho complained of regular occurrences of black-foamy water said to be associated withdischarges from the Sappi pulp mill on the Usuthu River, up-stream at Bhunya. While thismay not seem too problematic at this time, in the event that farmers wish to grow produce fororganic or other niche markets, they are unlikely to be given certification due to suchcontamination. This will no doubt impact the diversification prospects for farmers in thevalley 10 .From interviews and extrapolating the data to include those holdings not visited, it wasestimated that there are approximately +/-650 permanent people employed on theagricultural holdings, with an additional +/-440 casual workers throughout the year (excludingSwazican).6.3 IndustrialThis group of water users is principally centred around the Swazican company in theMalkerns township. Apart from having pineapple farms close to the processing plant, it alsoconnects with out-growers to meet its processing capacity, including citrus fruit from itsrecently acquired estate at Tshaneni located in the north eastern lowveld, some 120kmsaway.10 Agricultural diversification options and enterprise viability issues are covered in another report commissionedby the RDMU - see Ernst Grenzebach (2009). Exit Strategy – The Cost to Farmers of Moving out of SugarCane; Tables A4-A9 – for example switching from cane to maize, cotton or cassava will cost E15,070,E13,921 & E18,625 per ha respectively. Additionally the Commonwealth Secretariat and SWADE alsocommissioned a report – The Ryeford Partnership (2008). Towards a Strategy for Agricultural Diversification inSwaziland.12

The company started processing pineapples and citrus fruit in the 1950s, initially withassistance from CDC who also financed a smallholder outgrower pineapple scheme atnearby Mpetseni 11 . The complex has had a very chequered existence and margins havebeen very tight. However, the value added activities have provided substantial employmentopportunities to the Malkerns and surrounding population. For example, the permanent workforce is around 200 persons while at the peak processing period in May through to earlyAugust when citrus fruit from the lowveld is processed, causal labour demand peaks ataround 2,500 per month. For the remaining seven operating months when pineapples aremainly processed, casual labour demand is reported to be around 1,500 persons per month.Thus, the company provides a substantial employment platform for the valley and thecountry, which is based upon canal water.The bulk of the company’s water needs are for steam that drives its processing equipmentwith a large proportion of its water draining back into the canal system. No information wasavailable regarding the quality of these return flows. The company does have reservoircapacity to meet around 30 days of plant operations, but in the event that water outagesexceed this time then the company would have to close its operations. Should an outage lastlonger than a few months then the financial viability of the company would be severelychallenged and it was reported that the business would most likely be forced to close.In 1957, the company was given a water servitude to the Mhlambanyatsi River some 3kms tothe north west of the factory. A pipeline and associated infrastructures constructed throughthis servitude would enable Swazican to compete with Mlilwane and the Royal Kraal forwater. However, it was reported that the company would be unable to meet its waterdemands from this source.Currently, the annual turn-over of industrial value added activities is estimated at E260m. Inthe event that the Malkerns canal shuts down for a three month period May to August, then itis likely that a third of this turn-over will be lost, and profitability of Swazican would becompromised. Moreover, there would be disruption to the marketing of citrus from theTshaneni plantations.6.4 ConservationWithin the valley the Mlilwane Game Reserve borders with some of the larger sugar canefarms and receives return flows from the main canal system. On the edge of this area aretwo sacred Swazi areas which are significant for the traditional reed dance, or Umhlanga,held in September. Within this location during peak summer rainfall periods (December toMarch) there are sometimes excessive seepage which can come through as a delugecausing severe erosion of the Mlilwane water course which feeds its wildlife lakes and ponds.Moreover, this drainage system receives return flows from Swazican’s settling ponds which itis felt lack the purity of natural flows coming through the Usuthu forest areas. It was alsonoted that the main water features are found to the north of the conservation area, shouldSwazican develop its servitude to draw water from the Mhlambanyatsi River it would depletethe water going into the wildlife reserve with minor impacts to its wildlife populations whichinclude water birds, assorted buck, hippopotamuses and crocodiles.This said, a canal failure would impact negatively upon this conservation area if in the eventSwaziCan decided to take water from the Mhlambanyatsi River. Additionally , during peakflows the canal does bring some negative impacts which are currently borne by Miliwane andnot the irrigators.11 See Sithole and Boeren (1988) for a review of the Mpesteni and VIF (sugar cane) schemes.13

Officials from the reserve reported that they have a permanent staff compliment of 150people, and hire on average 30 to 50 casuals each month. This critical conservation area is amajor centre for tourism in the country, providing just over 28,000 tourist bed nights for the12 months up to June 2008, with a turn-over of E9.7m (€0.97m).6.5 Forestry (plantation)At this time plantation forestry is not actively featured in the enterprises being supported bythe canal. During its start-up phase the MIDC had CDC as one of its shareholders (1,600 ofthe 9,990 total shares) as part of the Usuthu plantation forest ran for almost 7kms of itslength. MIDC report that currently this 7km stretch of the canal is responsible for a largeproportion of the maintenance budget of the company. The canal area is impenetrable andovergrown in parts making it very difficult to access for regular maintenance and to attend toemergency outages. Not only this the eucalyptus tree cover in this forest is responsible fordrawing off water through natural transpiration, as well as causing damage to the canalstructure. The MIDC Water Bailiff estimates that this stretch of the canal accounts for +/-30%of the company’s annual maintenance budget, and for a large proportion of the outages.No estimates are available for water losses through this stretch of the canal, and thus it isassumed these losses are contained in the “with project benefits”.6.6 Main canal system managementIn addition to the above stakeholder groups the analysis also examined the impact of thenew Water Act on the management of the main canal system as this would help determinethe resources the company would have to mobilise in the future so as to remain compliantand viable with the new water operating systems.Being a run-of-river canal system the early life of Malkerns canal was associated withrelatively easy management. Questions of storage and reservoir management were notcritical. Allocations and monitoring were based quite pragmatically upon simple guidelines,and outlets were designed to provide constant discharges. Management of the main canalwas largely a question of maintaining physical works, avoiding siltation and other damage,and following established routines for rotations according to well-understood rules.Thus, management of the main system canal has been seen as a relatively easy occupationthat has been delegated to various company shareholders on a revolving basis, requiringlittle formal allocation of funds for the application of rigid management procedures andmaintenance regimes. A water bailiff and a team of nine labourers have assisted thechairman, and more recently a dedicated part-time manager, maintain the main canal andassociated structures, although it is apparent that in most cases they ‘fire-fight’ emergencyoutages and are currently unable to support a much needed structured and fundedmaintenance programme throughout the main system.Thus, annual MIDC water levies have not necessarily been sufficient to cover the full cost ofmanaging the main canal system, and have certainly been unable to facilitate the creation ofa financial reserve to cater for the level of scheduled annual maintenance programmesrequired to keep its assets in top condition, and for meeting unexpected emergency repairs.As landholdings changed hands over the years original water allocations have changed, landparcels have become fragmented and servitudes and other legal documentation have beenmisplaced and are not held in a central repository. Not all water allocations remain attachedto the land titles. A clear glossary of information relating the evolution of the MIDC and itsphysical resources is not available.14

Management of the secondary and tertiary canal systems has been attended to by MIDCmanagement, but shareholders are primarily responsible for the maintenance and upkeep. Insome cases land has been sold to non-irrigating farmers, or for housing developments andthus servitudes have not always been maintained and critical maintenance has not beenmade. This situation also makes life very difficult for those farmers stuck between nonirrigatingfarms – outages are not necessarily communicated to canal management to effecttimely repairs. For high value crops such as sugar cane, seasonal vegetables and othermarket garden crops, this can be critical to enterprise sustainability. It also means that manyfarmers are physically limited with regard to irrigation options and cannot plan to producecertain crops in a businesslike manner. This exacerbates the already poor financial situationof many farm businesses and indeed limits what financial demands MIDC can levy on itsshareholders to ensure its own sustained financial viability.The fact that many shareholders have not farmed to the extent that they could use theirwater allocations has hidden these shortcomings. And for those members of the MIDC whohave gone into sugar cane production, favourable sucrose prices have tended to hide theproblems of sub-optimal irrigation regimes through frequent water outages and transmissionlosses associated with the main and subsidiary canal systems.It is noteworthy that the sugar cane yields for the Malkerns growers have averaged justunder 91.7 tonnes per hectare with a sucrose content of around 13.97% (SSA 2007/08cropping season data). However, the feedback from many growers is that where improvedirrigation water management has been applied, and notwithstanding an application rate thatwas well below the shareholders allocation as a consequence of the loss in main systemefficiency, sucrose yields have been very good.The current MIDC Chairman along with many shareholders are very much aware of thecurrent situation and are determined to improve the management of the canal and systemefficiency. In recent years, an independent, but part-time manager has been appointed towhom the water bailiff and maintenance team are responsible. The consensus amongstshareholders is that system efficiency has improved and outages have been well attended,and communication channels improved substantially.However, along with the Chairman, the manager is only too well aware that much moreshould be done, and that a radical rethink needs to be made of the way the companyoperates to ensure that it moves forward as a sustainable organisation that meets the futureneeds of its shareholders while conforming to the mandate of the new Water Act.Considering the future volumetric nature of Swaziland’s approach to water management,there is therefore a pressing need to force improved transmission efficiency. Thus muchrehabilitation of the whole canal is considered essential, along with the introduction ofimproved system management. In particular, the MIDC will need to attend to the question ofbeing aware of how much water is physically available for allocation at any particular time,whether or not all farmers can gain access to water, the scheduling of water delivery of mainsystem supplies, and communications and controls.Given that all water taken into the system will have attached a specific levy, whether or not itwill be used by irrigators, means that water issues will need to be more precisely managedand transmission losses reduced, damage avoided through minimising silting and scouring,prevention of damage to structures or erosion to fields, and scheduling periods ofmaintenance. The company will also need to link water issues to corresponding crop waterrequirements, to fit and support secure and profitable farming systems. The company willalso have to ensure that water is distributed equitably between outlets, that conflicts arecontained between outlet groups and within outlets including providing preconditions forconstant flow. In essence it is recognised that the company will have to provide water to15

farmers which is adequate, hassle free, manageable, timely for convenience, assured andpredictable and timely for crops.Figure 1 shows the effects of improved water management systems as a consequence of theinfrastructure developments proposed technical survey report for the canal. It also clearlydemonstrates the volumes of water that will continue to be lost, and paid for if issues ofimproved demand management are not attended by the company.Figure 1: Average Monthly Flow of Usuthu River at GS9 1958/09 – 2003/04 12Source: Data derived from RDMU Consultant EngineerEven though the company is slowly moving towards improved water demand management,the executive is aware that its members require a radical change of mind-set to get there.Apart from attending to the system infrastructures as outlined in the report, given thedemands of the new Water Act and IWRM, it is also very much aware that it shouldundertake an audit of the secondary and tertiary canal systems and to revise its watermanagement and scheduling regimes. Having sufficient water to meet most farmersdemands is an essential and necessary precondition for management and shareholders tomove towards IWRM. A consequence of these actions will undoubtedly be the monitoring ofwater flows by way of an appropriate metering and billing system to ensure water demand ismanaged in an effective and efficient manner. However, it must be borne in mind that surplusresources generated by the shareholders are limited and that any managementimprovements must be realistically designed and conform with the company’s longstandingand practical approach to managing its main canal system.12 Source: Data obtained from Knight Piésold (originally sourced from Water Resources Branch of MNRE) andused in a current study to develop a water Master Plan for Swaziland16

7 BENEFIT/COST ANALYSISFrom interviews conducted, the consultant developed a framework for financial valueadditions to MIDC shareholders as a consequence of water delivered by the Malkerns canal.The existing situation of revenue generation is discussed in the following sections along withabove assumptions made in the calculation of net revenues.7.1 Without Project ScenarioEstimates of revenue streams derived for the “without project” scenario reflecting the currentsituation derived from stakeholder interviews are as follows:7.1.1 DomesticThe SWSC indicated that water connections are billed around E840, 000 at current usagevolumes (equivalent to a volume of 0.212 cusecs) and valued at charged rates for domesticwater. The technical survey report mentions that informal abstractors account for 1 cusec inthe first 7kms of the canal from its intake off the Usuthu to the UNISWA off-take.For this analysis it is assumed that formal and informal domestic water abstractions accountfor 2 cusecs. Using the SWSC billing rates this equates to water valued at approximatelyE8m (€0.8m). No economic multiplier is used to account for value added by consumers inrural areas or within the Malkerns township.SWSC advised that their costs account for 96% of their revenue base, across all operations(interview with Elwyn Dlamini 4 th February 2009) 13 .7.1.2 AgricultureFrom the interviews conducted with shareholders and associated farmers of the MIDC, andextrapolating the data to include those holdings not visited, it was estimated that there areapproximately +/-650 permanent people employed on the agricultural holdings, with anadditional +/-440 casual workers throughout the year.Gross turn-over for all agricultural enterprises irrigating with Malkerns water is given in Table1 is as follows (which excludes large scale poultry producers and for this analysis allSwazican activities, but which includes Highveld seed cane, bananas, dairy and beef):All agricultural enterprises, excluding both Swazican and poultry = E 90m (€9.0m).During the 2007/08 growing season SSA data show that sugar cane revenues accounted forE28.7m of this E90m (€9.0m), or 32% of total agricultural revenues (excluding pineapplesand poultry).13 This low profit figure is attributed to SWSC being a public enterprise operating in many areas of the economy,and for which profit levels cannot be identified for a specific operating area such as the purification anddistribution of potable water in the Malkerns area.17

7.1.3 IndustrialWith only Swazican placed within this group the value of its gross turn-over is E260m(interview with SwaziCan Managing Director, Richard Price, and Market Chain Manager IanVercoe, 22 nd January 2009).7.1.4 ConservationIt is considered that no revenues are generated by Malkerns canal water at Mlilwane,although a case could be put forward that within the initial and unspecified capital injectionfrom the project, a one-off payment could be made to provide rip-wrap etc to mitigate theerosion hazard (to be ratified during design phase).7.1.5 ForestryIt is assumed that no revenues are generated by the canal water at present, although in theevent that the canal’s Usuthu forest loop is closed off, then there may well be a change ofland use and a small cost may be incurred to make safe various flumes and associatedstructures.7.1.6 Malkerns Water Management (MIDC)For the 2007/08 financial period gross revenues, through the collection of shareholders waterlevies, was E1.142m (€0.1142m) (cf E0.907m (€0.0907m) in 2006/07), equivalent to E114.32(€11.42) per share (MIDC 2007/08 audited accounts). Operating expenses were put atE0.58m (€0.058) – the surplus of E0.56m went towards a capital reserve to meet future costsand contingencies.7.2 Revenue StreamsFrom the estimates of current revenue streams generated by the irrigation system, Table 3shows the revenues from agricultural and (agro) industrial water users based upon interviewsand the MIDC shareholders register. Table 4 shows the frequency distribution of grossrevenues from all agricultural enterprises:18

Table 3MIDC Shareholders – Computation of Agricultural and Agro IndustrialGross Revenues Based on Malkerns Canal WaterTotalFarmTurnover(Em)PoultryRevenueTaken out(Em)PoultryandSwazicanRevenueTakenout (Em)No Name1 AA Properties2 Bellamy Farm (Nadine Stein) 0.74 0.74 0.743 Boabab Farm (Pete De Hoof) 1.60 1.60 1.604 C J Vickery 6.50 6.50 6.505 H Du Pont * 3.00 3.00 3.006 M Du Pont (Maurice du Pont) 3.00 3.00 3.007 Dynamic Distributors Ltd * 0.50 0.50 0.508 Eagles Nest (Pty) Ltd (Derek Chester) 50.009 Emerald Hill (Pty) Ltd (R Packard) * 0.00 0.00 0.0010 Estate I S Haggie (Swazican) * 0.30 0.30 0.3011 Estate Rev Z Kunene 0.00 0.00 0.0012 Green Acres (Pty) Ltd Tony Wright 1.00 1.00 1.0013 Green Valley (Pty) Ltd (D & P Packard) 0.45 0.45 0.4514 Hlekamanzi Farm (VJR) * 0.50 0.50 0.5015 M F Hlope * 0.50 0.50 0.5016 Khula Imvelo (Pty) Ltd * 0.50 0.50 0.5017 L A Hulley Pty Ltd 5.25 5.25 5.2518 Langeni Greens * 1.00 0.00 1.0019 Lawuba Investments (Themba Masuka) 0.23 0.23 0.2320 Mrs Le Grange 0.00 0.00 0.0021 M P Mnisi (Hlekumanzi Farm) 1.40 1.40 1.4022 R M Mabila (Tetsembiso Inv Pty Ltd) * 0.30 0.30 0.3023 Malandela's Farm (Peter Thorne) 1.10 1.10 1.1024 W A Mavuso * 0.30 0.30 0.3025 Mawawa Estates * 0.30 0.30 0.3026 Mdimba Estates Ltd (Derek James) 4.70 4.70 4.7027 P L Nsibande (son Mluluki Nsibande) * 0.30 0.30 0.3028 D Ntiwane * 0.20 0.20 0.2029 Packard and Wright (Pty) Ltd 10.90 10.90 10.9030 Penelopes (Pty) Ltd * 0.30 0.30 0.3031 Pineacres Ltd * 0.50 0.50 0.5032 Pineapple Growers Ltd (Jim Btachelor) 2.25 2.25 2.2533 Pondorosa Farm (Pty) Ltd 0.60 0.00 0.6034 Prince Mabandla Dlamini 0.40 0.40 0.4035 SEREC Ltd 0.10 0.10 0.1036 St Clements Ltd * 0.50 0.50 0.5037 Swaziland Fruit Canners Pty Ltd 260.00 260.0038 Swaziland Government (Paul Mkhatshwa)* 6.00 6.00 6.0039 TIBIYO (Dalcrue Agric Holdings Pty Ltd) 24.00 24.00 24.0040 Tinkhukhu Poultry Farm (Patrick Russell) 14.0041 Tisuka Ezulwini Roses Enthuthwini Farm 2.20 2.20 2.2042 Umbane (Pty) Ltd (SEB Pen - John Reilly) 7.00 7.00 7.0043 UNISWA (Simon Motsa Farm Manager) 1.20 1.20 1.2044 Usuthu Mission (Green City International) * 0.30 0.30 0.3045 Van Zuydam A * 0.30 0.30 0.30TOTAL 414.2 348.6 90.2Note: * signifies data for this company have been imputed as no interviews wereheld, or no information was provided at interviewSource: Information collected by auther during stakeholder interviewsJanuary/February 200919

Table 4Frequency distribution of estimated gross revenue from agriculturalactivities (Constant 2007/08 Financial Prices)Gross Turn-overEmAll AgriculturalEnterprises%All AgriculturalEnterprisesExcluding Poultry%All AgriculturalEnterprisesExcluding Poultryand Swazican%0 -

Table 5Estimation of Agricultural and Agro-industrial labour wages generatedby Malkerns Canal Per AnnumCategory of workerNumbers(n)Averagemonthlywage(E/m)Total annual wagesgenerated (E/annum)Permanent 848 1,000 11,024,000*Seasonal 2,086 550 11,473,000**Total 3,482 22,497,000Source: Stakeholder interviews and consultant’s estimates; Note: assumes* 12 months per annum and 13 th month bonus; ** 10 months per annumThis puts the permanent staff wage bill at E11.02m (€1.102m) per annum and total annualseasonal worker wage generation of E11.44m (€1.14m).7.3 “With Project” ScenarioFrom the above it is evident that the main economic drivers in the Malkerns canal watersystem are domestic users, agricultural users and agro-industry users. Currently, thedemand of domestic and agro-industry water users are met and so their main needs from thecanal rehabilitation is to provide as high an assurance level of water availability as possible.While a similar need is apparent from irrigators, it is also apparent that they require access togreater volumes of water to improve the efficiency, and the scale and scope of their existingfarming systems. In this regard the objective of the rehabilitation work to be undertaken onthe Malkerns Canal is to improve the level of water assurance to existing irrigators, whileproviding an incremental volume of water for additional irrigation and usage by shareholders.Thus, the overarching assumption of the ‘with project’ analysis is that the current revenuestreams shown in Table 2 as a minimum remain stable.The analysis further assumes that the off-take for domestic and agro-industrial uses remainsconstant. In consequence, the domestic and agro-industry systems are not included in thecost benefit analysis as they do not feature in the incremental ‘with project’ scenario.Thus the incremental water available will be used to stabilise existing agricultural enterprises,along with providing for the addition area under irrigation. Given that Malkerns irrigatorsreported that current agricultural production was being compromised by lower than requiredvolumes of irrigation water, a proportion (20 per cent) of the incremental water arising as aconsequence of the project is set aside for the current area of irrigation (primarily sugarcane).The technical survey report also advises that for the canal to improve its water transmissionefficiency in a sustainable manner, the MIDC will need to increase its Operational andMaintenance budget by a factor of four from E0.38m (€0.04m) to E1.54m (€0.15m).Moreover, in order to up-grade the aged infrastructures over time there will need to be put inplace an up-grading programme which will need to be funded through shareholders funds,earned for the greater part from irrigated agriculture, but along with proportional contributionsfrom domestic and agro-industrial users, who own 1 per cent and 5.5 per cent of thecompany’s shares. Table 6 shows a computation of the MIDC management and water levy toshareholders compared to areas actually irrigated.21

Table 6 Calculation of MIDC water and Management Levy 2008/09Calculation of MIDC water and Management Levy 2008/09WithoutProjectArea for full cost recovery (Ha) 4,000Number of shares (n) 1,000Area per share (Ha) 4Proportion of full design capacity at flume 8 (%) 32%Area irrigated (based on % water compared to full command) (Ha) 1,280MIDC annual revenue budget (Em per annum)* 1.14of which: Maintenance budget 0.38Administrative overheads 0.20Capital reserve account 0.56Annual MIDC Levy per actual ha irrigated (E/Ha/pa) 892Annual MIDC Levy per ha irrigated assuming full design (E/Ha/pa) 286Annual levy per share (E pa) 11,420Note: * 'without project' - MIDC audited accounts 2007/08 and MIDC records;Where:Annual MIDC Levy per actual ha irrigated= MIDC annual revenue budgetArea irrigatedAnnual MIDC Levy per ha irrigated (full design)= MIDC annual revenue budgetArea for full cost recoveryAnnual Levy per share= MIDC annual revenue budgetNumber of sharesCurrently, shareholders are levied an annual management and water levy to cover O&Mcharges, whether or not they use the irrigation water available to them, and regardless of theactual water flowing through the canal system. Currently there are 100 shares which equatesto the full design capacity of 4,000 ha. Thus, currently this means that every shareholder hasto pay E286 (€28.6) per ha. However, the actual cost of O&M for the actual area irrigated isE892 (€89.2) per ha per annum.In establishing a base case for agricultural production for the ‘without project’ situation, andfor assumed agricultural production in the ‘with project’ situation we can turn to the recentRDMU exit strategy study that looked at the agricultural options open to irrigators in theMalkerns Valley amongst other sugar cane production areas (Grenzebach et al, 2009). Table7 summarises the crop options currently open to Malkerns irrigators along with their netannual revenue details, including farm management and MIDC management and water levycharges.22

Table 7Crop options for Malkerns Irrigators 2009 (2009 Financial Prices)Total AnnualCosts (VC &overheads)E/haGross Revenue Variable Costs Gross MarginManagementOverheadMIDC WaterManagementCrop(E/ha) (E/ha) (E/Ha) (E/HA) Levy (E/Ha)Sugar Cane (105kms to mill) 24,539 25,467 -928 935 892 27,294 -2,755Sugar Cane (25kms to mill) 24,539 16,082 8,457 935 892 17,909 6,630Other CropsMaize 15,440 3,698 11,742 935 892 5,525 9,915Green Mealies 18,000 8,602 9,398 935 892 10,429 7,571Dry Beans 13,750 7,444 6,306 935 892 9,271 4,479Soya Beans 12,921 8,602 4,319 935 892 10,429 2,492Lucerne 38,000 26,340 11,660 935 892 28,167 9,833Cotton 13,500 10,902 2,598 935 892 12,729 771Cabbage 35,730 17,298 18,432 935 892 19,125 16,605Green Peppers 48,372 18,294 30,078 935 892 20,121 28,251Average other crops 24,464 12,648 11,817 935 892 14,475 9,989Source: Adapted from Grenzebach, E et al (2009). Exit Strategy – The Cost of Moving Out of Sugarcane. Mimeographed, GFA, Hamburg, Table A4-13Note: MIDC Water Management Levy of E892/Ha is the average MIDC cost to each ha assumed to be actually irrigated ond not that levied to each shareholder..Net AnnualRevenue (E/Ha)This particular study is not specifically tasked to recommend preferred farming systems.However, as it is necessary to examine the financial margins open to irrigators, it wasdecided to take the average of ‘other crops’ options as a marker for financial viability. Sugarcane is an interesting crop option. Within the Malkerns Valley there are currently 15 sugarcane producers but with varying levels of productivity. Using Grenzebach’s model the breakevenproduction for growers 105kms distant to the nearest mill is 104 tonnes 15 of cane perhectare, yielding 14 per cent sucrose. Of the 15 Malkerns sugar growers seven are wellabove this level of production and averaged 115 tonnes of cane per hectare, five are withinclear reach of this production level, while three are well below 100 tonnes cane per ha perannum (Swaziland Sugar Association final yield data 2008/09). Thus, with better waterassurance levels, and if coupled with appropriate crop management regimes, the averagesucrose production levels could realistically goes above the break-even mark.However, in the absence of scientific evidence to support the notion of improved yields, the‘with project’ model is based upon the current sugar cane situation continuing, and with theincremental water being used for an increased area cultivated under irrigation, calculated onaverage for all other crops as shown in Table 8.15 Note that Grenzebach calculated the break-even to be 110 tonnes of cane per ha, but using his data thebreak-even point in fact comes out at 104.2 tonnes per ha with the administrative overhead charge of E935per tonne cane included.23

Table 8Crop revenues for ‘with’ and ‘without’ project scenarios (2009 FinancialPrices)Without ProjectGross Revenue(E/ha)Variable Costs(E/ha)Gross Margin(E/Ha)Manage-mentOverhead(E/HA)MIDC Levy(Water &Management)E/HaTotal AnnualCosts (VC,overheads,Levy)E/haNet AnnualRevenue (E/Ha)Net AnnualRevenuebefore MIDCLevy (E/Ha)Sugar Cane (105kms to mill) 24,539 25,467 -928 935 892 26,359 -2,755 -1,863Sugar Cane (25kms to mill) 24,539 16,082 8,457 935 892 16,974 6,630 7,522Other Crops/enterprises 24,464 12,648 11,817 935 892 13,540 9,989 10,882With ProjectGross Revenue(E/ha)Variable Costs(E/ha)Gross Margin(E/Ha)Manage-mentOverhead(E/HA)MIDC Levy(Water &Management)E/HaTotal AnnualCosts (VC,overheads,Levy)E/haNet AnnualRevenue (E/Ha)Net AnnualRevenuebefore MIDCLevy (E/Ha)Sugar Cane (105kms to mill) 24,539 25,467 -928 935 1,570 27,037 -3,433 -1,863Sugar Cane (25kms to mill) 24,539 16,082 8,457 935 1,570 17,652 5,952 7,522Other Crops/enterprises 24,464 12,648 11,817 935 1,570 14,218 9,311 10,882Source: Adapted from Grenzebach, E, Mhlongo, L, Ferguson, J (2009). Exit Strategy – The Cost of Moving Out of Sugarcane. Mimeographed, GFA, Hamburg, Table A4-13Note: MIDC Water Management Levy of E892 without-project and E2,284 with project is cost accrued to only the area irrigated to reflect true cost of the canal system to area supported.It can be seen that the crop production systems can support an increased MIDCmanagement and water levy, which was calculated on the basis shown in Table 9 andderived from Table 10.Table 9Calculation of MIDC Water and management levy for ‘with’ and ‘without’Project scenarios (2009 Financial Prices)Calculation of MIDC water and Management Levy 2008/09WithoutProjectWithProjectArea for full cost recovery (Ha) 4,000 4,000Number of shares (n) 1,000 1,000Area per share (Ha) 4 4Proportion of full design capacity at flume 8 (%) 32% 50%Area irrigated (based on % water compared to full command) (Ha) 1,280 2,000MIDC annual revenue budget (Em per annum)* 1.14 3.14of which: Maintenance budget 0.38 1.54Administrative overheads 0.20 0.38Capital reserve account 0.56 1.22Annual MIDC Levy per actual ha irrigated (E/Ha/pa) 892 1,570Annual MIDC Levy per ha irrigated assuming full design (E/Ha/pa) 286 785Annual levy per share (E pa) 11,420 31,405Note: * 'without project' - MIDC audited accounts 2007/08 and MIDC records;'with project' consultant's estimatesMost O&M work contracted out, Water Bailiff and team attend to general mainatenance24

Table 10Financial Model for MIDC Water and management levy for ‘with’ and‘without’ project scenarios (2009 Financial Prices)Financial model for MIDC showing 'Without Project' situation (E'm, 2009 constant prices)Project Year et seq ->1 2 3 4 5 6 7Revenues (Gross Turn-over) :Revenue from MIDC shareholder levy 1.14 1.14 1.14 1.14 1.14 1.14 1.14Other 0.00 0.00 0.00 0.00 0.00 0.00 0.00Total MIDC Revenue 1.14 1.14 1.14 1.14 1.14 1.14 1.14Expenditures:O&M 0.38 0.38 0.38 0.38 0.38 0.38 0.38Administrative overheads 0.20 0.20 0.20 0.20 0.20 0.20 0.20Capital reserve 0.56 0.56 0.56 0.56 0.56 0.56 0.56Infrastructure rehabilitation 0.00 0.00 0.00 0.00 0.00 0.00 0.00Total Expenditures (Em) 1.14 1.14 1.14 1.14 1.14 1.14 1.14Without Project Net Revenue (Em) 0.00 0.00 0.00 0.00 0.00 0.00 0.00Accumulated reserve (Em) 0.00 0.00 0.00 0.00 0.00 0.00 0.00Annex , Table b: Financial model for MIDC showing 'With Project' situation (E'm, 2009 constant prices)Project Year et seq ->1 2 3 4 5 6 7Revenues (Gross Turn-over) :Revenue from MIDC shareholder levy 3.14 3.14 3.14 3.14 3.14 3.14 3.14Other 0.00 0.00 0.00 0.00 0.00 0.00 0.00Total MIDC Revenue 3.14 3.14 3.14 3.14 3.14 3.14 3.14Expenditures:O&M 0.38 0.38 0.38 0.38 0.38 0.38 0.38Administrative overheads 1.54 1.54 1.54 1.54 1.54 1.54 1.54Capital reserve 0.00 0.00 0.00 0.00 0.00 0.00 0.00Infrastructure rehabilitation 0.00 5.00etc 0.00 0.00 0.00 0.00 0.00 0.00 0.00etc 0.00 0.00 0.00 0.00 0.00 0.00 0.00Total Expenditures (Em) 1.92 1.92 1.92 1.92 1.92 6.92 1.92With Project Net Revenue (Em) 1.22 1.22 1.22 1.22 1.22 -3.78 1.22Accumulated reserve (Em) 1.22 2.44 3.66 4.88 6.10 2.32 3.54Without Project Net Revenue (Em) 0.00 0.00 0.00 0.00 0.00 0.00 0.00Incremental Net Benefit (Em) 1.22 1.22 1.22 1.22 1.22 -3.78 1.22Source: MIDC and Consultant's estimatesThe MIDC financial model is built upon the current administrative management overhead andO&M costs, being increased from the total current level of E0.58m to E1.92m (€0.06 to0.19m). This allows for sustainable O&M and an accumulated financial reserve to meet thecosts of major infrastructure rehabilitations every five years.25

The complete list of assumptions for the ‘with’ and ‘without’ project is given in Table 11.Table 11Assumptions for the ‘with’ and ‘without’ project scenariosWithout ProjectWith ProjectASSUMPTIONSDesign Capacity of canal (cusecs) 100 100Potential Irrigable Area at design (Ha) 4,000 4,000% design capacity water transmitted to flume 8 32% 50%Total Water Available at flume 8 (cusecs) 32 501. Domestic (high assurance) 1 12. Agri-business (Swazican) 5.5 5.53. Current Agricultural Irrigators:i Sugar cane irrigators 22.46 29.59ii Non-sugar cane agricultural enterprises 3.04 13.91Sugar Cane Production:Water available for irrigation 22.5 29.59Area irrigated (Ha) 1,123 1,184Average cane yield (Tonnes/ha) 96.82 96.82Sucrose % 14.05% 14.05%Sucrose price (E/tonne) 1,804 1,804Average cane revenue (E/ha) 24,539 24,539Total Sucrose revenue (E) 27,557,821 29,044,913Sugar Cane Variable Costs (E/Ha) 25,467 25,467Management overhead charge (E/Ha) 935 935Total Costs (before MIDC water levy) E/ha 26,402 26,402Sugar Cane Net Revenue (E/ha) -1,863 -1,863% gross revenues production costs (ex MIDC levy) 111% 111%Existing Farm enterprisesGross Revenue (E millions) 90.22 90.22Estimated total Expenditures (E millions) 53.38 53.38% gross revenues production costs (ex MIDC levy) 59% 59%Area irrigated from incremental waterGross Revenue (E/ha) - 24,464Variable costs (E/ha) - 12,648Incremental labour costs (E/Ha) - 1,111Incremental person labour days (n/ha) - 44.4Total labour person days (n) - 19,323Management overhead charge (E/Ha) - 935Total Expenditures (before MIDC levy) E/ha - 13,583Net Revenue (E/ha) - 10,882Incremental water available after flume 8 (cusecs) - 10.87Area for incremental irrigation (Ha) 434.8Gross value of agricultural production (E) - 10,637,002Total production and overhead costs (E) - 5,905,671Incremental labour days employed (n pa) 19,323Total Value of incremental Production per annumTotal Incremental Revenue (E) - 12,124,093Total Incremental Production costs (E) - 5,905,671Total Incremental Production costs (E) - 6,218,422As mentioned earlier, the financial model used to assess the cost benefit of the MalkernsCanal Rehabilitation programme was based upon the incremental use of water within theagricultural sector. It should also be noted that the crop production costs used byGrenzebach were applied to the gross revenue data collected from interviews, namely 111per cent for sugar cane, and 59 per cent of gross revenues for all other agriculturalenterprises.26

Capital infrastructure costs for the projects as provided by the consultant engineer were usedfor the immediate remedial and rehabilitation work and put at E27m (€2.7m). This would bea one-off cash injection to stabilise the main canal network and provide greater assurance toirrigators and domestic users. Allowing for additional and unspecified expenditures to coverthe audit of secondary and tertiary canal systems, improved silt trapping on bridges,including support to the water drainage conduit into the Mlilwane area, and an allowance forany EIAs required to ensure compliance with the environmental and water acts etc, a totalproject cost of E30m (€3.0m) has been used in the cost benefit analysis as indicated below.Summary of Proposed Project CostsEstimated cost of Flumes 1 to 7Estimated cost of Dump GatesEstimated cost of Siphon 8Estimated cost of Usutu SiphonEstimated cost of Measuring devices at all OfftakesEstimated cost of Sand Trap and FlumeSUB-TOTALAdd ContingencyTOTALApproximate BudgetE0.83 millionE0.10 millionE4.35 millionE17.22 millionE1.00 millionE0.35 millionE23.85 millionE3.15 millionE27.00 millionE30.00 millionThese expenditures would however need to be ratified at design stage.In addition, a capital injection of E5m (€0.5m) has been included in the “with project”expenditures in year 6 and year 11 to cover unforeseen incidents and refurbishments. Thesecosts are assumed to be met from MIDC accrued reserves from annual operations andrevenues received.7.3.1 Project BenefitsA simple cost benefit analysis of the incremental cash flow was derived by subtracting the“with-out” project cash flow from the “with project” cash flow. A snapshot of this is given inTable 12. The Net Present Value (NPV) 16 of the incremental cash flow was E20.0m (€2.0m)while the Financial Rate of Return (FIRR) was estimated at 26% using a 10% Discount Rate.These figures indicate the project provides a positive net worth under the realisticassumptions made.The model was extended to a 15 year period and a sensitivity analysis was made on variouskey parameters. Given that the major flumes are in need of immediate rehabilitation it is not16 Net Present Value is the value of a future income stream discounted to a present value at a predeterminednumeraire or interest rate. A NPV of zero signifies a break-even point while a negative NPV denotes a lossand a positive NPV shows profitability. An NPV is calculated using a predetermined discount or interest rate,while the Internal Rate of Return (IRR) denotes a percentage return on investment which may be below orabove the rate of borrowing (to which the IRR is not always referenced).27

too difficult to see that the low revenues generated by a long-term outage as described in thetechnical survey report would seriously jeopardise the welfare of the 45 irrigators and waterusers, and that of the almost +/-2,900 people directly employed by them. This scenario wouldrepresent a major economic set-back for the country.Table 12 Financial model for “Without” and “With” Project” situation (2009Financial Prices)Financial model showing incremental net cash flow projections 'Without Project' situationProject Year (E'm, 2009 constant prices) et seq ->1 2 3 4 5 6 7Revenues (Gross Turn-over) :Agriculture 90.22 90.22 90.22 90.22 90.22 90.22 90.22Other 0.00 0.00 0.00 0.00 0.00 0.00 0.00MIDC 1.14 1.14 1.14 1.14 1.14 1.14 1.14Total 91.37 91.37 91.37 91.37 91.37 91.37 91.37Imputed Expenditures:Agriculture 67.22 67.22 67.22 67.22 67.22 67.22 67.22Investments (infrastructures) 0.00 0.00MIDC (O&M) 0.38 0.38 0.38 0.38 0.38 0.38 0.38MIDC (Overheads) 0.20 0.20 0.20 0.20 0.20 0.20 0.20Total Expenditures (Em) 67.81 67.81 67.81 67.81 67.81 67.81 67.81Without Project Net Revenue (Em) 23.56 23.56 23.56 23.56 23.56 23.56 23.56NPV179 EmFinancial model showing incremental net cash flow projections 'With Project' situationProject Year (E'm, 2009 constant prices) et seq ->1 2 3 4 5 6 7Revenues (Gross Turn-over) :Agriculture 102.35 102.35 102.35 102.35 102.35 102.35 102.35Other 0.00 0.00 0.00 0.00 0.00 0.00 0.00MIDC 3.14 3.14 3.14 3.14 3.14 3.14 3.14Total 105.49 105.49 105.49 105.49 105.49 105.49 105.49Imputed Expenditures:Agriculture 73.13 73.13 73.13 73.13 73.13 73.13 73.13MIDC infrastructures 30.00 5.00MIDC (O&M) 1.54 1.54 1.54 1.54 1.54 1.54 1.54MIDC (administrative overheads) 0.38 0.38 0.38 0.38 0.38 0.38 0.38Total 105.05 75.05 75.05 75.05 75.05 80.05 75.05With Project Net Revenue (Em) 0.44 30.44 30.44 30.44 30.44 25.44 30.44NPV200 EmWithout Project Net Revenue (Em) 23.56 23.56 23.56 23.56 23.56 23.56 23.56NPV179 EmIncremental Net Benefit (Em) -23.12 6.88 6.88 6.88 6.88 1.88 6.88NPV20 EmIRR 26%28

Table 13Sensitivity analysis of Malkerns Canal rehabilitation project% Change in Base Case NPVRevenue/Cost Parameter +20% +10%Base caseNPV (Em) -10% -20%SwitchingValueRevenues (Gross Turn-over) :-veAgriculture 176.2 98.3 20.5 -57.4 -135.2 2.6%MIDC 25.3 22.9 20.5 18.1 15.7

8 CONCLUSIONS AND RECOMMENDATIONSEven with water continuing to be available as is the current case for the Malkerns canalsystem, three aspects of its current situation give cause for concern. These are:1. The poor state of repair of the main canal system;2. The problems with providing irrigators and domestic users with the assured andsufficient quantities of water to continue current operations; and3. The need to comply with the new volumetric pricing system that will be introduced in thenear future, and with it the associated improved water management systems.The cost benefit analysis has shown that the profitability of the Malkerns canal and irrigationsystems is very fragile and sensitive to the frequent outages which are being experienced atpresent. These are likely to increase in the immediate future. In the case of a catastrophicfailure, the nation would lose a major agricultural hub with the demise of commercial farmingin the Malkerns Valley, and with it the loss of many jobs. The current bad state of some of theflumes indicates that this failure can occur anytime from now.As a consequence of the nature of the canals current structures shareholders are in jeopardyof losing their livelihoods, domestic users are likely to lose substantial welfare, especiallythose dependent upon high assurance potable water such as schools, Government servicesincluding clinics and the police, as well as many retail traders. Moreover, agriculturalresearch and training opportunities in Government and university facilities could becompromised indefinitely, and smallholders would be unable to lever-in donor funds todevelop their SNL enterprises.Regardless of the crops grown and diversification options open to irrigators, in order tomaintain the stability of the valley’s economy it is essential that the main canal systemis improved and stabilized as soon as possible. Moreover, In order to enhancediversification options, it is also recognized by shareholders that a technical audit of thesecondary and tertiary canals systems is required, along with recommendations toimprove current water scheduling and management systems.The integrated water resources management report commissioned by the TPTC referred toearlier developed an economic model to analyse water use patterns and to assess theeconomic benefits for alternate allocations within the Rio Maputo Basin (of which the UsuthuBasin forms part).The main recommendations emanating from the study suggest that withinthe Usuthu Basin the following certain guidelines should be used to allocate water betweenand within user groups. These include the following:Domestic water should get preferenceCurrent approved irrigation schemes must receive priorityCommercial and light industry should receive high priorityWater for high value, low intensive water users should receive priorityImprove water demand managementThe implication is that the activities of the MIDC must be consistent with this nationalperspective. Not only does the company cater for domestic users within Government’sdevelopment focus, its shareholders are also ensuring that improved water managementsystems will be introduced to facilitate environmental issues. This will enable the company tobecome compliant with the new Water Act so as to improve water use efficiency and30

conservation. It is also envisaged that the move towards full compliance with these guidingprinciples is a process that needs to be initiated immediately, for which the company needsassistance and support.This report thus recommends the implementation of the proposals put forward by thetechnical survey report, and that support is also provided to undertake a technical audit of thesecondary and tertiary canal systems to develop an operational and maintenanceprogramme, and accompanying business plan for MIDC, within the framework of anappropriate water management system for shareholders to finance and implement.31

9 LITERATURE AND REPORTS REVIEWEDFunnell, D.C. (1988). "Water Resources and the Political Geography of Development inSouthern Africa: the Case of Swaziland", in Geoforum, Vol 19, No 4, pp 497 -505.Grenzebach, E, Mhlongo, L, Ferguson, J (2009). Exit Strategy – The Cost of Moving Out ofSugarcane. Mimeographed, GFA, Hamburg.Government of Swaziland (1971). General Notice No 12 of 1971: Water Apportionment of theUpper Usutu River Control Area. Government Printer, Mbabane.HMG, UK House of Commons Research Paper 03/82, accessed on the Bank of Englandwebsite 22/01/09.Jones, R P (2003). Maintenance Report on Malkerns Canal (May 2002 & May 2003).Mimeographed.Knight Piésold (2009). Malkerns Canal Report 312-48/02. Mimeographed, Mbabane.Merry, R E (1997). Malkerns Sugar Scheme: Extract of a visit report by RE Merry, RSSC,January 1997. Mimeographed, Booker Tate Thame, UKMurdoch, G (1968). Soils and Land Capability in Swaziland. Ministry of Agriculture andCooperatives, Mbabane, Government Printer, Mbabane.Nixon, D J (2006). Guide to the Soils of the Swaziland Sugar Industry. Swaziland SugarAssociation &South African Sugar Research Institute, Mount Edgecombe, Durban.Ryeford Partnership (2008). Towards a Strategy for Agricultural Diversification in Swaziland.Mimeographed, Commonwealth Secretariat, London.Sithole, V.M. and Boeren, C.C.M. (1989). Contract Farming Schemes in Swaziland:Vuvulane Irrigated Farms and Mphetseni Settlement Scheme. In: Eastern African EconomicReview, ed M S Mukras, Nairobi, August, pp59-69.Swaziland Sugar Association (2009). Final Yields 2008/09. Excel file received from RDMU.TECHNOSERVE (2008). The Opportunity for Organic Sugar Production. PowerPointPresentation, Mbabane.Vakakis (2000). Environmental Impact Assessment Study On The Proposed Lower UsuthuSmall-Holder Irrigation Development Project, Project Nr. 8 Sw 6/01. Vakakis International,Athens.Water Resources Department (2003). Legal Notice No of 2008 – Establishment of UsuthuRiver Basin Authority Notice, 2008 (under Section 23 of The Water Act, 2003, Act No 7 of2003. MNRE, MbabaneWater Resources Department (2006). Water Allocations – Upper Usuthu River Basin(Malkerns Canal). MNRE, MbabaneWSM, LESHIKA Consulting (Pty) Ltd 2007. Malkerns Irrigation Development Company: FlowMeasurements in the Malkerns Irrigation Canal, Swaziland. Mimeographed, Durban(February).Also see National Archives of Swaziland, Files numbered 1098A and I830 accessed 16 thJanuary 2009.32

ANNEXES

Annex 1Terms of Reference

TERMS OF REFERENCEFinancial, Economic and Social Study of the Malkerns Irrigation CanalAssignment for an Socio-Economist (Unspecified Expert)1 BACKGROUND1.1 The Swaziland Sugar IndustrySwaziland has an agricultural based economy, for which the sugar sector plays an importantrole. It contributes about 18 percent to national output and over 35 percent of theworkforce in the agricultural sector is employed in the sugar industry.Part of this success has been due to its access to protected and preferential markets. In the1960’s Swaziland took over South Africa’s Commonwealth quota in the 1960’s, and it enjoysaccess to SACU. It also sold 120,000 tons per annum to the EU market under the EU raw,ACP and SPS. The European market absorbs about 150,000 tonnes of the total sugarproduction of Swaziland, whilst representing over 30% of industry revenue due to thehigher prices obtainable in the EU.1.2 The National Adaptation StrategyThe EU is reforming its internal sugar market regime, which will result in the lowering ofprices obtainable in the EU by a cumulative 36% over the next four years (starting in2006) as EU quotas are phased out. As a result, the prices to growers and millers areestimated to drop by about 20%, and annual revenues will decline by €22m over a fouryear period. With all other factors remaining constant, the sucrose price in 2010 will drop byE 270 ton compared with 2005.To help mitigate the negative effects of the loss of the preferential markets on the industryand the wider economy, the EU agreed to provide financial assistance. To meet the EU’srequirement for a comprehensive strategy as a condition for support, and to ensure thecontinued viability of the sugar industry, Swaziland prepared its National AdaptationStrategy (NAS) in 2007. The NAS foresees activities and investments to be fundedamounting to € 350 million.1.3 EU Programme- DiversificationThe EU’s contribution to the NAS is set out in a Multi Annual Indicative Programme 2007 –2010. The indicative allocation for Swaziland is €69.895m. It will be financed throughsuccessive Annual Action Programmes (AAPs).One of its four Specific Objectives is to support agricultural diversification for sugar canefarmers who are unable to remain competitive following the reduction in the price. Theinterventions will be financed from the 2009 financial allocation, with an indicative budget of€5m. To mobilise these funds, the EC and the MEPD must sign a Financing Agreement,based on a project document (Annual Action Fiche). The first step in this process is thepreparation of a Project Identification Fiche.The RDMU contract includes EC funds to contract short term expertise to help thestakeholders define the interventions strategy and prepare project documents. The MEPD1

and EC agreed that these resources could be used to examine the feasibility of rehabilitatingthe Malkerns Canal for potential inclusion in the diversification programme.1.4 Malkerns – Long distance producersThe sugar cane farmers in the Malkerns area are more than 100 km from the mill. Theincrease in fuel and energy costs on top of declining sugar prices has squeezed margins.The growers are reluctant to move out of sugar as it is still very attractive compared withalternative crops, and the loss of over 150,000 tons of cane per annum would have seriousimplications for the mill. Therefore some farmers might choose to stay in sugar, whereasothers would be advised to move into alternatives. The final decision will have to be taken byindividual farmers, shareholders or the farmer association members. However, regardless ofindividual preferences, both sugar and any other irrigated crop production in Malkerns areheld back by the water situation. This limits the potential of a fertile area of importance to theagricultural economy of Swaziland.1.5 The Malkerns CanalWater for irrigation in Malkerns is taken off the Usuthu River in a ‘run of the river system’, andtransported along a 40 km main canal and a further 60km of secondary canals into eachuser’s individual storage dam. It was constructed in 1949 for £41,000, fully financed by thefarmers. The canal has rights to abstract 100 cusecs (1 cusec = 28 litres per second),providing this represents no more than 50% of the river flow. The Government was given50% share in exchange for access rights (it now owns 21.5% of the shares, with Tibiyoholding 27.4%). The remaining shares were allocated in proportion to land holding, with 100shares equal to one cusec, sufficient to provide water to irrigate 100 acres.The canal is operated by the Malkerns Irrigation Company. Shareholders have abstractionquotas, which are monitored by measuring the flow into their storage dams, and paymanagement levies. The company has a staff of 12, 10 of whom are field operatives. Thecompany has an annual maintenance programme. The canal is shut down for a period of onemonth during a time of low water requirements for farming for cleaning and repair. Despitelimited physical access owing to difficult terrain, small excavators are being hired to carry outspot improvements within the limit of the small budget. Erosion on critical stretches of thesecondary canals is being controlled by application of a sprayed concrete lining (gunnite).Since 1997 Malkerns farmers have successfully grown sugar cane, following less thansuccessful experiences with upland rice, citrus and rain-fed cotton. Currently an estimated35% of the water rights are used for sugar production, a total of 1,766 ha. Sugar producersinclude medium-scale commercial (17 ha – 70 ha); Tibiyo (270 ha); a company set up bySEC employees as an investment (256 ha); and Farmers Associations.The balance is used for other agricultural purposes (diary, poultry). Pineapple production inthe valley does not require supplementary irrigation, but the canning plant relies on waterfrom the canal for its processing operations (it owns 5.75% of the shares).The government’s 21.5% share provides potable water to a number of facilities in and aroundthe Malkerns settlement, including the police station, women’s prison, the University ofSwaziland’s Agriculture Faculty (which has its own demonstration farms) and the AgriculturalResearch station. 4% of the government’s share is informally taken up by approximately 31homesteads on SNL that abstract water from the main canal for agricultural purposes.2

1.6 Problem AnalysisThe problem facing users is that the canal is now delivering only approximately 50% of itscapacity. The result is that farmers cannot be assured of sufficient water to irrigate crops.The reduced flow is caused by various factors:- Increased abstraction upstream in RSA and changing land use (mainly theestablishment of plantation forests in Usuthu) has reduced the flow of the UsuthuRiver. Measurements indicate that the 200 cusecs required to abstract a maximum100 cusecs is only achieved an estimated 55% of the year.- Changes in land use (forestry, new settlements, and over-grazed pastures) haveincreased the rate and intensity of soil erosion above – and into - the canal.- Despite regular maintenance, erosion of the unlined canal over a protracted periodhas caused a change in profile, making it wider and shallower. Combined with theimpact of soil erosion, it causes a back-water effect that reduces the rate of flow.- Water loss due to leakages in ageing infrastructure.- The use of concrete to line damaged flumes has had the effect of raising their leveland reducing the flow rate.There is also a significant risk of a sudden structural failure of one of 12 flumes along thecanal. Constructed using corrugated iron, these now required replacing. Any disruption tothe water supply due to breakage would have immediate social and economicconsequences.1.7 Justification for Support- The canal is an important infrastructure that supports an agricultural sector employingover 4,000 people, and provides potable water to several government facilities andsettlements. This supply must be secured.- Sugar production is 1,766 ha, and its loss would be a blow to the industry. Improvingwater supply can improve farm efficiency, and reduce the capital costs the canegrowers would otherwise have to incur undertaking major works.- The water supply must be secured for any agricultural diversification to be viable.- The declining flow is to a large extent caused by external factors beyond the controlof the shareholders (eg, soil erosion resulting from changing land use in adjacentareas).- The users have financed maintenance, which is why the canal still functions after 60years. But shareholders have not been able to make adequate provision for majorworks, owing to the low profitability of agriculture over long periods of time. The lowersugar price will exacerbate this situation.- Many shareholders would be unable to raise new capital in proportion to theirshareholding.- Reductions in the amount of water available from the Usuthu River, and the newwater levies that users will now pay the Regional Water Authority, make it imperativeto reduce the rate of water loss resulting from the ageing infrastructure.Therefore, although the NAS could not undertake a full rehabilitation, putting the canal inbetter order would provide a guaranteed water supply, and build a sound financial and3

agronomical platform from which farmers can determine their own strategy to adapt to thesugar price. It would also benefit all users proportionately.1.8 Technical BackgroundOriginal design data of the Malkerns canal are extremely scarce. Over the years theadministrative documents of the company have been frequently moved from “house tohouse”. Apparently the handovers were not always carried out completely, one can imaginethat transferring the most recent (administration and accounting) papers had a higher prioritythan the transfer of all technical design documents from the past.In recent years some visual survey exercises and short studies have been done to indicatehow the Malkerns Canal could be improved and upgraded, but the missing original designdata together with the merely observational type of surveys (surveying by “eye” and not withinstruments) makes it difficult to arrive at firm recommendations for rehabilitation.One of the issues is the original design capacity of the Malkerns Canal. Although theMalkerns Irrigation Company has a total water right of 100 cusecs (2.83 m3/s) and it is moreor less generally accepted that therefore the canal has been designed for this capacity, no(written) evidence could be found. At present the canal runs at a capacity of approximately50 cusecs, a figure that is confirmed by actual stream gauging exercises in 2007 by 1) WaterResources Branch, Ministry of Natural Resources and Energy and 2) WSM LeshikaConsulting (PTY) Ltd.). The flow reduction could be caused by silting up of the canal(aggravated by surface water run-off entering the canal due to increased soil erosion),degradation of the canal banks, a decreased water level over the weir in the Usuthu river dueto decreasing river discharges or a combination of them.In order to make a better assessment of the present situation the RDMU financed alongitudinal profile (giving the values of its bed slope over the length) and the profiles of thecanal cross sections (giving, together with the water depth, the wetted areas). Thisinformation is currently being analysed to understand better the observed flow of 50 cusecsand to pinpoint the bottlenecks in the canal needing rehabilitation.There are 12 flumes (aquaducts) and 1 siphon in the canal, all original structures which havebeen kept functioning by regular maintenance and repairs. The collapse of each of thesestructures will have serious repercussions for the irrigated areas downstream (replacing sucha structure will be a matter of months, not days). An engineer is surveying each flume togauge its structural integrity and the need for rehabilitation. He is also costing the possibilityof constructing a new siphon to cut off 7km of the canal where it flows through the UsuthuForest. The final results will be available in December.Preliminary indications are that the canal no longer maintains a steady gradient over its fulllength: flume 8 is structurally very unsound and requires replacement; and that by this stagethe canal is at capacity.4

2 DESCRIPTION OF THE ASSIGNMENT2.1 Global ObjectiveThe global objective of this assignment is to provide information to allow the NAS SteeringCommittee, the MEPD and the EC to take a reasoned decision concerning the developmentof a response strategy for the ‘Agricultural Diversification’ component of the NAS forsubmission as part of the 2009 AAP.2.2 Specific ObjectivesThe specific objective of this consultancy is to carry out an economic and social study todetermine whether the net benefits of rehabilitating the canal justify EC financing from the2009 allocation.2.3 Requested servicesThe consultant is expected to carry out the following tasks:a) Estimate the benefits/costs (financial and economic) resulting from the variousengineering options for the rehabilitation of the Malkerns canal, taking into account:- Any possible increases in irrigation and potable water supply- Reduction of the water losses- Reduction in maintenance costs- The possible consequences of a rupture to supply resulting from a catastrophicfailure of canal infrastructureb) Carry out a stakeholder analysis for each of the main category of user.2.4 Expected resultsThe report should provide sufficient information for the stakeholders to take a reasoneddecision which option should be most appropriate for rehabilitation and financing of thecanal, if any.3 EXPERT PROFILEThe expert will be an economist with:Qualification and SkillsUniversity degree or professional qualification in economics, with work experiencerelevant to the assignment;Excellent analytical skillsAbility to relate with multidisciplinary teams;5

Fluency in both written and spoken EnglishComputer literate (word processing, spread sheets)Good reporting capabilities.General professional experiencePreferably 10, but no less than 5 years working experience in developing countries;Minimum of 5 years experience carrying out economic and social surveys for similarinterventions;Specific professional experienceKnowledge of ecofin analysis of irrigation/water systemsExperience in Swaziland would be an advantage;4 LOCATION AND DURATIONStarting period: The assignment will commence not later than 15 January 2009Duration:The assignment will take 30 work-days.Location:The consultant will be based in Swaziland under the supervision of theRDMU team.5 DELIVERABLESThe consultant will produce a draft report. The RDMU will make comments within 10 workingdays of its submission. The final version of the report will then be prepared within 5 workingdays.At the request of the RDMU, the consultant will present the results of the study to the NASWorking Group.6 ADMINISTRATIVE INFORMATIONThe expert should be equipped with his own laptop computer appropriate computer software.Any technical support should be included in the fee rate of the expert. The expert will workvery closely with the RDMU Civil Engineer who is doing the detailed costing of the variousoptions.6

Annex 2Malkerns Research Station Climatic Data

Annex 2Malkerns Research Station Climatic DataMalkerns Research Station - Monthly Rainfall andTemperature Data 1961 -2006Month 1961 -2006Average MonthlyRainfall mmAverageMonthlyTemperatures1961-2001°C1986 -2006 Max MinJanuary 169.7 159.5 27.7 17.9February 161.5 188.7 27.0 17.6March 102.1 111.1 26.8 16.8April 56.7 47.6 25.2 14.2May 20.3 17.1 24.1 11.2June 10.9 15.3 22.3 8.7July 11.1 6.9 22.4 8.5August 18.7 14.3 23.8 10.1September 39.6 34.2 25.5 12.5October 97.7 99.6 25.3 14.1November 137.5 135.1 26.1 15.7December 145.6 157.8 27.1 17.2AverageAnnualTotal 971.4 987.2Source: Malkerns Research Station, Altitude 740m absl1

Annex 3MIDC Shareholding

List of Shareholders in MIDC, 2007/08WaterQuotal/secWaterQuotacusecsNo NameNumberof Shares1 AA Properties 94 26.61 0.942 Bellamy Farm (Nadine Stein) 50 14.16 0.53 Boabab Farm (Pete De Hoof) 106 30.01 1.064 C J Vickery 100 28.31 15 H Du Pont 50 14.16 0.56 M Du Pont )Maurice du Pont) 50 14.16 0.57 Dynamic Distributors Ltd 32 9.06 0.328 Eagles Nest (Pty) Ltd (Derek Chester) 50 14.16 0.59 Emerald Hill (Pty) Ltd (R Packard) 150 42.47 1.510 Estate I S Haggie (Swazican) 65 18.40 0.6511 Estate Rev Z Kunene 100 28.31 112 Green Acres (Pty) Ltd Tony Wright 50 14.16 0.513 Green Valley (Pty) Ltd (D & P Packard) 50 14.16 0.514 Hlekamanzi Farm (VJR) 75 21.23 0.7515 M F Hlope 50 14.16 0.516 Khula Imvelo (Pty) Ltd 170 48.13 1.717 L A Hulley Pty Ltd 200 56.63 218 Langeni Greens 134 37.94 1.3419 Lawuba Investments (Themba Masuka) 50 14.16 0.520 Mrs Le Grange 8 2.27 0.0821 M P Mnisi (Hlekumanzi Farm) 50 14.16 0.522 R M Mabila (Tetsembiso Inv Pty Ltd) 100 28.31 123 Malandela's Farm (Peter Thorne) 97 27.46 0.9724 W A Mavuso 50 14.16 0.525 Mawawa Estates 100 28.31 126 Mdimba Estates Ltd (Derek James) 260 73.61 2.627 P L Nsibande (son Mluluki Nsibande) 53 15.01 0.5328 D Ntiwane 25 7.08 0.2529 Packard and Wright (Pty) Ltd 100 28.31 130 Penelopes (Pty) Ltd 12 3.40 0.1231 Pineacres Ltd 185 52.38 1.8532 Pineapple Growers Ltd (Jim Btachelor) 155 43.88 1.5533 Pondorosa Farm (Pty) Ltd 50 14.16 0.534 Prince Mabandla Dlamini 50 14.16 0.535 SEREC Ltd 5 1.42 0.0536 St Clements Ltd 45 12.74 0.4537 Swaziland Fruit Canners Pty Ltd 575 162.80 5.7538 Swaziland Government (Paul Mkhatshwa) 2150 608.72 21.539 TIBIYO (Dalcrue Agric Holdings Pty Ltd) 2749 778.31 27.4940 Tinkhukhu Poultry Farm (Patrick Russell) 100 28.31 141 Tisuka Ezulwini Roses Enthuthwini Farm 60 16.99 0.642 Umbane (Pty) Ltd (SEB Pen - John Reilly) 660 186.86 6.643 UNISWA (Simon Motsa Farm Manager) 600 169.88 644 Usuthu Mission (Green City International) 75 21.23 0.7545 Van Zuydam A 50 14.16 0.5TOTAL 9990 2,828.43 99.91

List of Allocations within Government Shareholding in MIDC, 2007/08AllocationCusecGovernment's Allocation 21.5Derived from:Mbetseni Farmers' Cooperatives 4.00Zephania Vusizwe Mabuza 0.50Khalalephi Mndzebele 3.00Luyengo Settlement Scheme 2.00Lobamba Lomdzala Irrigation Scheme 2.00Gwabhe Investments Pty Ltd 0.15Rodgers B Matsebula 0.20John Mphikwa Nsibande 0.20Lomabhuku Green Plots Pty Ltd 0.25Ngondini Farmers' Association 0.30Johane Cindzi 0.25Joseph Kunene 0.40Comfort Mndzebele 0.1513.40Government Institutions 8.10Derived from:Malkerns Research StationSwazi Nation LandWomen's PrisonPoliceMalkerns Township (SWSC)Others (informal abstractions?)Total Government Allocation 21.50Source: MIDC corrspondence - information base sparceAn original group of shareholders formed the MIDC in 1947 with a vision to transfer waterfrom the Usuthu River to the fertile Malkerns Valley by way of an earth lined canal. Fewhistoric background documents are available to us, but it is evident from the filessafeguarded in the National Archives in the Ezulwini Valley that during the 1940sconsiderable energy was expended towards putting the ideas of those involved into realisticplans. A water award discussed earlier was granted by the Colonial Administration inNovember 1949 for 100 cusecs (equivalent to 2.83 cumecs ) or half the flow of the river,whichever is the less, to be allowed at any one time into the canal system 1 . However, thegroup of investors were required to start development within three years of the award beinggranted, and to have completed construction within a further three years.1 This was subsequently gazetted in 1971 and with a bulk extraction award for 100 cusecs to irrigate 3,000ha.2

In addition to the private sector investors the Colonial Development Corporation, now CDCPlc Group, held a large interest due to its then shareholding in both the Usuthu PulpCompany and Swazican. The canal was completed in July 1953 and commissioned in early1954. The final cost was a little over £100,000, the initial cost was put at £30,000 in 1949.Although funds were extremely tight in those post war years, money was borrowed at a costof 5.6% per annum amortised interest from the Barclays Colonial Development Fund. Thecompany also sought financial support from the Colonial Administration who atcommissioning, held the largest shareholding. Although it did not have controlling interest,the Administration insisted that while all down-slope lands serviced by the canal had firstaccess to water allocations, native Swazi’s on traditionally tenured land could also availthemselves of water through its water allocation from its shareholding.The water supported considerable economic activity in the valley right up to Independence in1968. In the early 1970s King Sobhuza II felt that the valley was such an important hub ofagricultural prosperity in the country he proclaimed that the Faculty of Agriculture of theUniversity of Swaziland (UNISWA – previously an agricultural college) should be located atLuyengo. This institution was critically dependent on the MIDC water. As a consequence ofthis development a community of traditionally tenured Swazi families were resettled into aneighbouring area and were given access to water, again using Government’s allocation.Other Swazi irrigators have been, and still are, involved in irrigation and are fully dependentupon the canals water. They are the Lobamba Lomdzala Community, the community underthe Lembelele Chiefdom, and the Mpetseni Cooperative.3

Annex 4Background to the Water Resources Management on the UsuthuRiver

Annex 4:Background to the Water Resources Management on the Usuthu RiverBeing a water-limited country, water demand management is very important in Swaziland asthere are high opportunity costs associated with inefficient water management or excessivedemand. Until 2003, the water policy framework was not conducive to the implementation ofIWRM. However, with the new Water Act has come a greater awareness of the need toincorporate improved water demand management concepts into the operations of the watersector.The Usuthu basin is one of five river catchments in Swaziland. The river has a totalcatchment of 15,800 km², 49% of which lies in the RSA (Funnell 1988). The Republic hasmajor developments on the Usuthu with four dams currently in operation accounting for 675MCM of storage capacity; Jericho (60MCM); Westoe (61 MCM); Morgenstond (101MCM);and Heshope (453MCM). A fifth dam has been earmarked at Dumbarton although it is stillvery much in the planning stage. Most of these dams are involved with inter-basin transferswithin RSA to feed the large coal-fired power generators complexes which are critical to theeconomy of South Africa (Vakakis 2000).In contrast, since its 17 year civil war between the mid 1970s and the early 1990,downstream Mozambique has had an increasing awareness of the need to ensure it receivedits appropriate allocation of water from the rivers flowing across its borders, including theUsuthu (which forms part of the Rio Maputo after joining the Pongola River in RSA on itseastward journey into Mozambique).Within Swaziland, the present water allocation is higher than the estimated irrigation waterdemand for most irrigated crops ensuring a stable water supply when there is adequate flowin the rivers. However, this method of water allocation provides limited incentive for irrigatorsto adopt IWRM methods for improved cost effective and efficient use of the water.Currently, up-stream of the Malkerns scheme in Swaziland there is little competition for theconsumptive use of water. However, apart from the large wood pulp factory at Bhunya, it isunderstood that a possible smallholder irrigation scheme is planned that will draw run-of riverwater from the Mpuluzi River, a major tributary of the Usuthu. This could have seriousimplications for the MIDC in its current form of operation.Along the downstream course of the Usuthu are numerous important users, including formaland informal domestic users, industrial users, conservation and tourism operations, andcommercial estates and irrigation schemes on the lower reaches of the Usuthu Basin in thecountry’s lowveld area.Currently, at the local level in Swaziland, water management activities are coordinatedthrough production groups and associations. Irrigation infrastructure is mostly privatelyowned and users meet all investment shortages. These schemes are largely unregulatedand to-date few major conflicts have arisen in the allocation and management of water.However, this will soon change with the recent introduction of river basin authorities (RBAs)that will be charged with the responsibility of regulating and monitoring water use inSwaziland.The apex institution governing and regulating the water resources management in Swazilandis now the National Water Authority (NWA). The role and purpose of each of the fiveproposed RBAs falling under the NWAs jurisdiction are to ensure:1. Coordinated catchment management; and2. Efficient management and utilization of water resources of the basin.In addition the Usuthu River Basin Authority will:1

1. Have authority over project boards, irrigation districts, and water user associations;2. Promote the efficient use of water;3. Liaise with the Department of water Affairs4. Promote best practice in catchment management;5. Monitor and control water users;and6. Assume all powers in the water Apportionment Board, according as outlined in theWater Act, 2003.To pay for the national water resources administrative and regulatory framework, through theRBAs, IDs and WUGs water abstractions will be levied certain tariffs including those for 1) anational overhead, 2) water resources management, 3) bulk transfers, 4) retail uses, and 5)effluent discharges. Not all users will be levied each tariff. The exact method of calculatingthe tariffs has yet to be finalised but in due course each water user within the catchmentstructures will be legally obliged to pay an appropriate water user charge 1 . What is clear isthat water taken into a system, regardless of its non-consumptive and consumptive uses, orits recharge characteristics, will be levied water user tariffs, including those on all flows notused.The RBAs in Swaziland are composed of registered members representing all water usersectors in each river basin, with each user group nominating two representatives from whomthe NWA appoints one member to serve as a member of the RBA Board.The NWA has been in place since July 2006 and board members are shortly due for electionas the tenure of the first NWA lapses after three years. Currently, the NWA has 10 members,four from Government and six from private sector groups. After 2010 this mix of members willchange to a total of nine with only five private sector members representing the main sectorsof the economy including tourism and conservation.Of the five identified RBAs in Swaziland only two (Komati and Usuthu) have been gazetted.Within the Usuthu RBA it has been recognised that there is a strong emphasis on industrialactivity, and thus its membership includes a hydropower water user group in addition to anindustrial user group. Thus the full mix of user groups in the Usuthu RBA is as follows:1. Domestic;2. Agriculture – large-scale;3. Agriculture – medium-scale;4. Agriculture – small-scale;5. Industrial ;6. Hydropower;7. Conservation;8. Forestry.Irrigation Districts (IDs) will operate within each RBA, which are to be sub-divided into wateruser groups (WUGs). Currently for the Usuthu RBA the Lower Usuthu Smallholder IrrigationProject (LUSIP) irrigation district has been petitioned by stakeholders for legal recognition. Itis understood that this ID is being gazetted shortly. Thereafter, other IDs will be invited topetition the NWA for gazetting.1 Knight Piésold are currently drafting a Water Master Plan for Swaziland which will outline the equations andmodus operandi for water tariffs,2

The water resources management structure for the Usuthu Basin will enable Government tobetter guide and regulate the efficient and effective use of the country’s water resources. Asa first step to implementing the requirements of the new Water Act, each community ofwater users will need to organise themselves into an ID and petition the NWA for legalrecognition and gazetting. For Malkerns irrigators, the MIDC will have to initiate this processwith two thirds of its membership agreeing to the process. It will also be incumbent upon itsmanagement to limit transmission losses and seepages to make better and more efficientuse of its water award; it will also need to have in place a mechanism to maintain and refitthe canal system as required. This will mean much groundwork on the part of MIDCmanagement including regularising its allocation amongst members, synchronisingallocations between its records and those of the NWA, ensuring all deeds correctly reflect theagreed allocations, developing mechanism to ensure the sustainability of structures, and thephysical monitoring of water discharges, and the payment of all water resources levies.3

Annex 5Financial Analysis

FINANCIAL ANALYSISFinancial model showing incremental net cash flow projections 'Without Project' situationProject Year (E'm, 2009 constant prices) et seq ->1 2 3 4 5 6 7 8 9 10 11 12 13 14 15Revenues (Gross Turn-over) :1.00 Agriculture 90.22 90.22 90.22 90.22 90.22 90.22 90.22 90.22 90.22 90.22 90.22 90.22 90.22 90.22 90.221.00 Other 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.001.00 MIDC 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14Total 91.37 91.37 91.37 91.37 91.37 91.37 91.37 91.37 91.37 91.37 91.37 91.37 91.37 91.37 91.37Imputed Expenditures:1.00 Agriculture 68.27 68.27 68.27 68.27 68.27 68.27 68.27 68.27 68.27 68.27 68.27 68.27 68.27 68.27 68.270.00 Investments (infrastructures) 0.00 0.00 0.001.00 MIDC (O&M) 0.38 0.38 0.38 0.38 0.38 0.38 0.38 0.38 0.38 0.38 0.38 0.38 0.38 0.38 0.381.00 MIDC (Overheads) 0.20 0.20 0.20 0.20 0.20 0.20 0.20 0.20 0.20 0.20 0.20 0.20 0.20 0.20 0.20Total Expenditures (Em) 68.86 68.86 68.86 68.86 68.86 68.86 68.86 68.86 68.86 68.86 68.86 68.86 68.86 68.86 68.86Without Project Net Revenue (Em) 22.51 22.51 22.51 22.51 22.51 22.51 22.51 22.51 22.51 22.51 22.51 22.51 22.51 22.51 22.51NPV171 EmFinancial model showing incremental net cash flow projections 'With Project' situationProject Year (E'm, 2009 constant prices) et seq ->1 2 3 4 5 6 7 8 9 10 11 12 13 14 15Revenues (Gross Turn-over) :1.00 Agriculture 102.35 102.35 102.35 102.35 102.35 102.35 102.35 102.35 102.35 102.35 102.35 102.35 102.35 102.35 102.351.00 Other 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.001.00 MIDC 3.14 3.14 3.14 3.14 3.14 3.14 3.14 3.14 3.14 3.14 3.14 3.14 3.14 3.14 3.14Total 105.49 105.49 105.49 105.49 105.49 105.49 105.49 105.49 105.49 105.49 105.49 105.49 105.49 105.49 105.49Imputed Expenditures:1.00 Agriculture 74.18 74.18 74.18 74.18 74.18 74.18 74.18 74.18 74.18 74.18 74.18 74.18 74.18 74.18 74.181.00 MIDC infrastructures 30.00 5.00 5.001.00 MIDC (O&M) 1.54 1.54 1.54 1.54 1.54 1.54 1.54 1.54 1.54 1.54 1.54 1.54 1.54 1.54 1.541.00 MIDC (administrative overheads) 0.38 0.38 0.38 0.38 0.38 0.38 0.38 0.38 0.38 0.38 0.38 0.38 0.38 0.38 0.38Total 106.10 76.10 76.10 76.10 76.10 81.10 76.10 76.10 76.10 76.10 81.10 76.10 76.10 76.10 76.10With Project Net Revenue (Em) -0.61 29.39 29.39 29.39 29.39 24.39 29.39 29.39 29.39 29.39 24.39 29.39 29.39 29.39 29.39NPV192 EmWithout Project Net Revenue (Em) 22.51 22.51 22.51 22.51 22.51 22.51 22.51 22.51 22.51 22.51 22.51 22.51 22.51 22.51 22.51NPV171 EmIncremental Net Benefit (Em) -23.12 6.88 6.88 6.88 6.88 1.88 6.88 6.88 6.88 6.88 1.88 6.88 6.88 6.88 6.88NPV20 EmIRR 26%Annex 4 Financial Analysis

Sensitivity Analysis of Malkerns Financial Model to changes on revenues and expenditures% Change in Base Case NPVRevenue/Cost Parameter +20% +10%Base caseNPV (Em) -10% -20%SwitchingValueRevenues (Gross Turn-over) :-veAgriculture 176.2 98.3 20.5 -57.4 -135.2 2.6%MIDC 25.3 22.9 20.5 18.1 15.7

ASSUMPTIONSWithout ProjectWith ProjectASSUMPTIONSDesign Capacity of canal (cusecs) 100 100Potential Irrigable Area at design (Ha) 4,000 4,000% design capacity water transmitted to flume 8 32% 50%Total Water Available at flume 8 (cusecs) 32 501. Domestic (high assurance) 1 12. Agri-business (Swazican) 5.5 5.53. Current Agricultural Irrigators:i Sugar cane irrigators 22.46 29.59 1,123 ha as proportion of full design (4,000 ha) only 80% water available per ha irrigatedii Non-sugar cane agricultural enterprises 3.04 13.91Sugar Cane Production:Water available for irrigation 22.5 29.59 20% increase to improve assuranceArea irrigated (Ha) 1,123 1,184 all cane areas brought up to full production potentialAverage cane yield (Tonnes/ha) 96.82 96.82 as beforeSucrose % 14.05% 14.05% as beforeSucrose price (E/tonne) 1,804 1,804 as beforeAverage cane revenue (E/ha) 24,539 24,539Total Sucrose revenue (E) 27,557,821 29,044,913Sugar Cane Variable Costs (E/Ha) 26,402 26,402Management overhead charge (E/Ha) 935 935Total Costs (before MIDC water levy) E/ha 27,337 27,337Sugar Cane Net Revenue (E/ha) -2,798 -2,798% gross revenues production costs (ex MIDC levy) 115% 115%Existing Farm enterprisesGross Revenue (E millions) 90.22 90.22 Derived from interviewsEstimated total Expenditures (E millions) 53.38 53.38 Assuming 58% of gross revenues as total expenditures (not including MIDC levy) derived from G% gross revenues production costs (ex MIDC levy) 59% 59%Area irrigated from incremental waterGross Revenue (E/ha) - 24,464 Derived from Grenzebach et al on Sugar Cane Exit and Diversification StrategyVariable costs (E/ha) - 12,648Incremental labour costs (E/Ha) - 1,111 E25 per person day, labour inputs derived from Grenzebach et alIncremental person labour days (n/ha) - 44.4Total labour person days (n) - 19,323Management overhead charge (E/Ha) - 935 Grenzebach et alTotal Expenditures (before MIDC levy) E/ha - 13,583Net Revenue (E/ha) - 10,882Incremental water available after flume 8 (cusecs) - 10.87Area for incremental irrigation (Ha)434.8 Assuming existing sugar cane brought up to irrigation potential leaving water for this area to beGross value of agricultural production (E) - 10,637,002Total production and overhead costs (E) - 5,905,671Incremental labour days employed (n pa) 19,323Total Value of incremental Production per annumTotal Incremental Revenue (E) - 12,124,093Total Incremental Production costs (E) - 5,905,671Total Incremental Production costs (E) - 6,218,422Annex 4 Assumtions