Film Funding Reaches Beyond Government Intervention

An increased filming incentive for foreign productions by the Government is only one part of solving the NZ film and TV industry woos says Tim Riley. We need to think bigger and to think better … and to think local.

If there is one thing the recent debate around the Large Budget Screen Production Grant (LBSPG) shows, it is that we operate in an extremely thin industry. One company from the US pulls out of NZ and a number of businesses go into free-fall. The only thing people can think of to remedy the situation is to ask the Government to increase the incentive it pays to foreign producers to bring film and TV projects here.

Economically speaking, there are some obvious flaws in this type of model. If it is not possible to sustain an industry without substantial government intervention that industry will always be fragile. Political risk is a factor in many areas of commerce but if a whole industry can come crashing down because the government decides not to increase an incentive, investment in that industry becomes a very risky proposition indeed. Likewise, if a whole industry is built around providing services to just a few key players who can leave at any time.

It seems obvious to me that whether or not one believes there are sound reasons for increasing the LBSPG (and personally I think there are), we must put effort into developing a local market for capital investment in film and TV. There is no doubt that even if we put the LPSPG up to 25% there will come a time in the future when the countries we are competing with will be up at 35% and we will face a similar collapse to the one we have just seen. There is no point just focussing on the short term. That is how boom and bust cycles happen.

I believe our local production industry is a crucial part of the equation, and a part that often gets ignored in the debate on how to attract foreign producers. If our own production industry is thriving and operating on a sustainable basis we will not be so reliant on foreign producers. And in our local industry we are creating our own IP which after all, is what the Government is always telling us we should be doing!

The problem with our local production industry is that it is always short of capital. For investment, it is almost totally reliant on taxpayer funding (leading to the same economic issues as discussed above in relation to the LBSPG). It is very difficult to attract private investment to what is perceived as a very high risk industry.

A funding mechanism that is sometimes used is to exchange services for equity in the film, usually by means of deferred fee arrangements. Many of you will have been presented with this type of deal. You are asked to work on a film for a token amount (or sometimes for nothing) in exchange for a net proceeds position in the recoupment schedule. The risks and problems with this type of arrangement are obvious including no cashflow during production to meet your own costs and a significant risk that you will never receive anything (the film might never be finished, or if finished it might not be sold). I think NZ filmmakers have become quite proficient at stitching these types of deals together and we have made some great low and no-budget films but you need to think carefully before becoming involved in a film on this basis. It is really important that you assess whether the filmmaker has a realistic marketing plan for the film and is going to make something that people are actually going to want to see. It is certainly possible to make successful low budget films on a participant equity model and I would not say don’t do it, rather, just exercise some discrimination over the projects you agree to do it for.

Crowdfunding has also been tried with varying degrees of success. Crowdfunding is where the producers go out to the public via the internet to seek financial contributions to their project. Typically, this has been more in the form of donations rather than equity investments. (Just to clarify the terms, the phrase ‘equity investment’ is usually used in the film industry to mean the situation where the investment gives the investor the right to receive a share of proceeds from the exploitation of the film. This is contrasted with the usual meaning of the term which is a purchase of shares in a company). In the typical crowdfunding scenario the investments are very small and the ‘investor’ would receive in return a range of benefits which could include credits, progress reports on the film, tickets to the premiere, a DVD copy of the film, tickets to cast and crew screenings etc. This type of crowdfunding then is not particularly useful for putting together a production budget (although it has been used successfully for this purpose like Age of Stupid, a UK film which was one of the pioneers of crowdfunding).

One of the issues preventing crowdfunding being used to raise actual capital for a film is its dubious legality under our securities laws. If the funding is more in the nature of a donation it is okay, but if the investor receives rights in the film then it crosses the line and very substantial compliance costs need to incur to meet the requirements of the legislation. However, amendments to the law have been made which take effect from April next year and which will make it a lot easier for crowdfunding platforms to operate. Under the new regime, using crowdfunding for true capital raising will become much more viable.

Another option, however, could be some sort of quid quo pro for the LBSPG investment (beyond simply spending money in NZ). The obvious one is to set up a points system so that the production company had to tick a number of different boxes in order to qualify for the grant. For example, points could be awarded based on the number of New Zealanders engaged on the project. (As an aside, the employment law change that The Hobbit dispute resulted in has removed fundamental rights of film workers. Compounding that, immigration protections have been progressively eroded since then. Tying entitlement to the grant to an obligation to employ NZ workers is one way of reversing that backwards trend). There are other criteria that could be built into a points system. I’m not sure what they are yet, but I think it’s something we should be thinking about. It seems appropriate on the 50th anniversary of JFK’s death to say to the Warner Bros of the world – “think not only of what NZ can do for you, but also of what you can do for NZ”.