Downtown Music Hub on business plan & complexities of Special Public Vehicle to manage it

Meeting Summary

The Committee was disappointed with the presentation by the Downtown Music Hub presentation as it had requested it to talk about the complexities of the transfer of Downtown Studios as well as the intricacies of its business plan to allay some of the Committee’s confusion. At its previous meeting on 16 May, the Committee had said that it needed a clearer and more detailed report. The Committee would not endorse the business plan as they did not know what it was.

The National Arts Council (NAC) presentation covered the funding given to Downtown Music Hub since 2008 to date, matters impacting on the transfer of Downtime Studios from the NAC to Downtown Music Hub and progress in achieving this, and the resolution of the adverse audit findings. They envisioned the transfer to go through in the fourth quarter of this financial year.

Members asked questions about the building being a donation, operation costs, the value of the property, whose role it was to maintain the building, the Memorandum of Understanding, employment equity, levels of employment within the sector, legislation guiding the Downtown Music Hub and the transfer and the form of the special purpose vehicle.

At the close of the meeting, the Chairperson said she had been concerned with the Downtown Studios transfer but she understood everyone was trying. It was important that indigenous music did not go down the drain. It was really good news that finality had nearly been reached.

Minutes
Downtown Music Hub presentation
Mr Don Laka, Board Chairperson of Downtown Music Hub, said that Downtown Music Hub (DTMH) had been established in 1978. The studio had a rich heritage and this was what made it stand out from other studios. It had produced numerous South African Artists like Mahlathini, Mahotella Queens, Lucky Dube, Stimela, Ladysmith Black Mambazo and the music history of South Africa could not be spoken of without DTMH. When government had bought the entity, people knew that the gap that had been left by apartheid would be bridged as the studios stood to benefit the disadvantaged people of the country.

Mr Mandla Maseko, Board Member of Downtown Music Hub, noted the high calibre of individuals that sat on the Board which meant there was competent leadership.

Mr Maseko and Ms Chola Makgamathe, Chief Executive Officer, spoke about the market share of the industry. Just five corporations owned 90% of the global music industry. In 2006, the recording industry alone was worth R2 billion in South Africa. However the challenges South Africa faced in harnessing this was the lack of a strong music industry-focused policy, entrepreneurial constraints, lack of complementary services, a weak home-grown investment climate and the monopoly of multinationals.

The presentation looked at what its facilities offered and mention was made of outdated equipment and its competition. Its recent notable achievements included 30 students having spent three months at the Downtown Music Hub where they were taught inter alia the basics of financial and time management, project management and contracts, the recording of the 2011 Nelson Mandela birthday song which was sung by Ubuhle be Mfundo in Tsakani Extension 11 and Thokozani Langa wining the best Maskandi album of the year at this year’s SAMA awards as the album had been recorded at Downtown Studios.

The Downtown Music Hub had been tasked with meeting commercial and developmental imperatives in the management of the assets and also meeting some of the DAC’s strategic objectives including social cohesion, creating decent employment and training and development. Its areas of focus were:
Distribution of Music Products; Production of Music Products; Broadcasting of Local Music Content;
Education, Training, Development; Publishing; Music Manufacturing and Packaging; Music Heritage.
They provided a line item breakdown for their business plan costs of R103 million with the largest item being spent on Heritage at R43 million.

They said that in the short term, in order to attract more customers, grow the business and begin the journey towards self-sufficiency, they required R20 million. This was because the Studios were operating at limited capacity and require immediate investment. It had already lost R514 640 in potential revenue from idle studios.


They pointed out that they had received unqualified audits for the 2010/2011 and 2011/2012 financial years. As the way forward, t
he assets needed to be transferred to the Downtown Music Hub in order for it to implement its business plan.
Funding was required for the business plan, the Downtown Music Hub was looking at a number of sources including the DAC, Lotto, the IDC and other institutions.

The Chairperson stated the presentation had not been what the Committee had requested. They had asked for it to cover the complexities of the transfer as well as the intricacies of the business plan. The Committee would not endorse the plan as they did not know what it was. It was decided that the National Arts Council (NAC) presentation should be given in order to allay some of the confusion.

NAC and Downtown studios Presentation
Ms Angie Makwetla, Chairperson: National Arts Council, said that the Downtown Music Hub building was not as dilapidated as had been previously conveyed. Together with Ms Monica Newtown, CEO of the National Arts Council, she spoke about the progress made since their last appearance before the Committee. The NAC Chairperson and Deputy Chairperson had been hosted by the Downtown Music Hub Chairperson and CEO at a site visit. There had been a good understanding of the challenges and the way forward between the parties. The condonation for the purchase was to be received from the Minister. Audits had been conducted for 2009/10, 2010/11 and 2011/12 based on complete annual financial statements for Downtown Studios and Fox Street properties.

Funding through NAC to date utilising DAC funds since 2008 was
 R14 333 000

Downtown Studios led to a qualified audit for the NAC in 2009/10 and an adverse audit opinion in 2010/12. Recognising the implications of the ongoing challenges presented by Downtown Studios for the NAC, a task team was established to investigate matters and prepare comprehensive recommendations. On the basis of this report, Council resolved that Downtown Studios should be transferred to the Downtown Music Hub as a matter of urgency.
A meeting was held with the DAC to agree on a joint approach, supported by the Downtown Music Hub, to the management of the issue. It was agreed to:
▪ Engage with the short and medium term financial viability of the organisation
▪ Deal with corporate governance matters
▪ Finalise all matters pertaining to the transfer of Downtown Studios.

All matters impacting on transfer had been cleared and it was all systems go. Resolving the Audit findings had nearly been completely sorted out. The work reported on in this presentation has also laid the foundation for the transfer of Downtown Studios and Fox Street Properties to the Downtown Music Hub in 2012/2013 and also laid the foundation for an improved audit outcome for 2012/13.


Discussion
Donation or Payment
Ms H Van Schalkwyk (DA) asked if the building being transferred was to be a donation or DTMH would have to pay for it?

Mr Maseko replied that, from where the DTMH stood, the monies given had been a donation paid into what could be termed a ‘seed fund’ to kick start the music industry and ensure there was a thorough investment that would allow for development of DTMH into a self sustaining player in hard economic conditions.

Operation Costs
Ms Van Schalkwyk asked how the operation costs would be covered?

Ms Makgamathe replied that it was a non profit company but this did not mean that they were precluded from making money, owning shares and businesses or operating businesses. They were merely precluded from taking profits generated and disbursing them amongst the directors. When the transfer took place, the DTMH would be taking on income generating assets in the form of the studios, rehearsals rooms and tenants amongst other things. They also planned expanding into the recorded music industry value chain (refer to slide 29 of DTMH Business Plan presentation). At the moment DTMH was unattractive to investors and was a ‘problem child’ that no one wanted to deal with. DTMH had only become fully operational in July 2010 but had been stuck in limbo as they had been created to manage these assets but could not make any proper decisions as they did not own them. What had been proposed in the business plan was that the DTMH, over a period of four years, required R 103 157195 million in order to deal with the business plan. The DTMH did not expect the Department to deal with that and the business plan did outline what other partners were being looked at. However at this moment the DTMH was not able to approach them. This was because they were not a viable business option and there was still a lot of work that needed to be done. There was a need to get the assets, once transfer took place, to function at a point where DTMH could attract extra business, market themselves, get their name know and make themselves attractive to potential investors. This would allow them to move away from having to ask the Department or any other party for funding. In order to do this in the short term the DTMH was asking for an amount of R20 million, this was to cover the studio upgrade.

Ms van Schalkwyk asked from where would the R20 million come that was needed for the initial start up? When she had visited Downtown Studios, the equipment had needed a great deal of attention.

Mr Laka replied that part of the R20 million was to upgrade the studios. Most of the equipment that was being disposed off could generate some monies and that would be used to help upgrade the equipment.

Mr Maseko replied that the seed funding to get Downtown Studios to a point where they could engage with investors would need to come from the Department. He understood the fear that the Department would be the only source but they would get to a point where they could approach other investors.

Value of the property
Ms L Moss (ANC) said that when a property was transferred, it needed to be valued. It was important for the Committee to know the value of the property.

Mr Thami Kubheka, Chief Financial Officer: National Arts Council, replied that the value of the Fox Street Property was R8 million on the audited financial statement. In totality it sat at R9 million including other assets such as equipment and instruments.

Maintenance of building
Ms Moss said if the property was not ‘up to scratch’ was this not the responsibility of the Department of Public Works? Why did the Department or NAC have be responsible – as would this not be spending money that was not meant to be spent?

Ms Newton replied that in terms of property maintenance, the property was theoretically part of the national estate however Public Works had not been necessarily involved in maintenance. There had been a commitment from the Department to assist with the capital works aspect.

Next steps and time frame for the transfer
Ms Moss said that the entire transfer was taking too long and the Committee needed to know what the next steps were.

Ms Newtown said that a great deal of preparatory work was going on to ensure that the documentation was presented to move the transfer along. However the Deeds Office posed a delay as they did things in their own time. There was also the fact that December was a time when the Deeds Office did not really process transfers. This meant that the physical transfer of the deed from the NAC to the DTMH would take at least four months and the transfer would only happen in the fourth quarter of 2012/13. There was still documentation to transfer to the Deeds Office. Preparatory work for this could only be done once there had been the go-ahead from the Minister. She offered to submit a plan with time frames to the Committee in about a month, once this go-ahead from the Minister had been received.

Ms Makwetla said that the NAC was waiting for the letter from the Minister to give the go-ahead. Everything that needed to be done, had been done. This should not take more than six months. Even though it was difficult to give a time frame, it was nearly done.

Ms Makgamathe replied in terms of conditions for transfer there were a number of agreements that were meant to be entered into by all the parties. There needed to be a ‘transfer of business’ agreement which governed the transfer of the studios to DTMH. This dealt with issues of underlined assets, any employees and any liabilities uncovered through the audit process. The agreement was to be a tripartite agreement as it involved the NAC referring to the Department in order to complete the transfer to DTMH. The second agreement was for the transfer of the building as by law this needed to be reduced into writing. There would thus be a second agreement of the transfer of the building to DTMH which was an agreement between the NAC and DTHM. The third thing to be attached to the agreement of transfer of fixed property was the deed of transfer. This deed of transfer was to stipulate the terms and conditions on which the assets were being transferred to DTMH.

Memorandum of Understanding
Ms F Mushwana (ANC) asked if the Memorandum of Understanding that had been signed had passed before the Committee or was it an issue they had not needed to deal with?

Employment equity
Ms Mushwana asked if employment equity was taken into consideration for DTMH Board Members? She asked if a document could be circulated with a list of Board Members.

Ms Makgamathe replied that the Board had two black African females and six black African males. In terms of staffing, when the NAC purchased it from Avusa, the employees had been transferred as part of the business to the NAC. In terms of the Labour Relations Act, the NAC was required to keep them as part of business for a period of 12 months, being only able to dismiss them on grounds of misconduct. The DTMH had inherited this staff of two white males, one black male and one coloured female. The DTMH staff consisted of a black female, herself (a black African female) and a black African male.

Employment in the Sector
Ms Mushwana asked if employment in the music industry, which the presentation mentioned as being only 10% of the cultural industry
, was this not concerning?

Ms Makgamathe replied that when she was referring to the issue of employment she was referring to the cultural industries sector as a whole in Gauteng. It was merely a comparison between cultural heritage and tourism and music.

Downtown Studios Building
Ms Mushwana said she was wondering why the NAC wanted to get rid of the building so badly?

Ms Makwetla replied the NAC did not want to ‘get rid’ of Downtown Studios in that sense but transfer it to its rightful owner as the NAC was not in the music industry and did not know anything about music. She had said ‘get rid’ because as the NAC had owned property they were not supposed to own, they had received a qualified opinion (2009/10) and an adverse opinion (2010/11) which had caused them to appear before the Standing Committee on Public Accounts (SCOPA). Once Downtown Studios was transferred, the NAC would have an unqualified audit. The NAC would still be involved in ‘parenting’ it and if the new owners needed advice then the NAC would be open to giving it.

Accounts
Ms Mushwana said that it was strange that the amount used for ‘accounts settled’ was not stated. It had only been said in the presentation that ‘progress had been made’.

Legislation
Ms Mushwana asked if there was legislation guiding DTMH?

Ms Newton replied that the building and the assets would be transferred in terms of the Public Finance Management Act (PFMA) for the assets and in terms of the legislative framework of land transfers and standard processes in terms of the property. The Acts that applied were the Culture Promotion Act the PFMA, the NAC Act and the Companies Act.

Special Purposes Vehicle
The Chairperson asked about the Special Purpose Vehicle stating that they had, at a previous Committee meeting, sought an answer on what this was.

Mr Maseko replied that when all the transfer processes were finalised, DTMH would be managed by a Special Purpose Vehicle. This was a Section 21 company and would be established with stakeholders in the music industry. These stakeholders would, in turn, become shareholders. These stakeholders were registered and officially recognised organisations in the industry that managed the economic interests of specific entities and individuals. They included the Association of Record Companies, Composers Association of South Africa (CASA), South African Music Promoters Association (SAMPA), Creative Workers Union of South Africa (CWUSA), the Music Management Forum, South African Disabled Music Association (SADMA) and some collecting societies such as South African Music Rights Organisation (SAMRO). Thus the building was said to be ‘donated’ to the music industry through this manner. The Special Purpose Vehicle was this Section 21 company which was managed by the Board appointed by the Minister. Their responsibility was to ensure that they involved these aforementioned stakeholders and drove the business plan that was discussed earlier.

Closing remarks
The Chairperson said she was concerned with the Downtown Studios transfer but she understood everyone was trying. She also stated that it was important that indigenous music did not go down the drain. It was really good news that finality had nearly been reached.

The meeting was adjourned.