We analysed the extent of ecological damage of gully and inter‐gully erosion in a sub‐catchment situated in the drylands (300 mm yr−1) of the winter rainfall area of South Africa where small‐stock farming on rangeland is the main source of income. We applied low‐cost measures to revegetate the bare sites of the inter‐gully erosion and stabilised gully erosion by loosening soil surfaces and applying geotextile and constructing check dams to reverse gully erosion. We compared vegetation cover, silt accumulation and penetration resistance of the soil upslope of the check dams with the situation downslope of the check dams and untreated gullies as controls. For the treated bare patches, we compared penetration resistance and vegetation cover with untreated controls. Two years after implementation, the restoration measures resulted in increased soil depth and vegetation cover upslope of the check dams and increased vegetation cover on the treated bare patches. We calculated the net present value of the restoration measures based on the financial benefit that a landowner can realistically expect under current economic and governance conditions (i.e. payment for additional livestock and for C sequestration). At the current rates of return for livestock production or carbon sequestration over a 20‐year period, rehabilitation of this sort is not financially feasible for private landowners. Either the current payment for carbon sequestration would have to be increased by a magnitude of 40–80, or restoration measures would have to be funded by the public or private sector to make them financially viable for landowners.