I've hit the setuptools + subversion 1.5 problem again with a freshly install Plone 3.1.7 buildout: I've added my egg develop folder in zinstance/src/, I've added the egg in the relevant sections in buildout.cfg, but it wouldn't work because of the incompatibility with the old setuptools version.

The solution is to upgrade the installed setuptools to the latest version. For example, for a standalone Plone installed at /home/tibi/Plone, we have this structure:

/home/tibi/Plone
   /Python-2.4
   /buildout-cache
   /zinstance

I've changed directory to the Python-2.4 from above and ran:

bin/easy_install -U setuptools

Then I could succesfully run the buildout in the zinstance folder.