Memorandum submitted by the Producers'
Alliance for Cinema and Television (PACT)
The Producers' Alliance for Cinema and Television
(PACT) represents the commercial interests of independent feature
film producers in the UK. It has over 200 corporate members who
make the great majority of films produced in this country each
year. We welcome the opportunity to submit our views to the Committee's
inquiry into the British film industry and intend to focus our
contribution on the challenges facing film production as an industrial
sector.
WHY SUPPORT
FILM
Feature film is a powerful medium and a rich
art form. It is a conduit for expressing our national identity
and perspectives to domestic as well as international audiences,
and can change how individuals and societies view themselves and
are viewed by the world. And, importantly, films can foster international
prestige. We believe all of these factors provide an important
cultural rationale for supporting British film activity that we
hope the Committee will affirm. Originality is a hallmark of British
film in the global market. In order to give the Committee a flavour
of British films made in the last five years, we will also shortly
be submitting a representative list of films that would all be
considered British that were made by independent producers. It
illustrates that in addition to its cultural importance, film
is also a creative industry in which the UK can demonstrate a
competitive edge through our world-class creative talent in acting,
writing, directing, technology and all aspects of live action
and animated feature film production.
The Committee has begun its inquiry by asking
several fundamental questions about the status of the British
film industry. In order to assess Britain's competitive role and
level of economic success within an international context, we
should review some of the guiding principles operating in the
film industry today.
BACKGROUND ON
THE FILM
INDUSTRY
As most of us would readily acknowledge, the
film industry is a significant global business, growing at an
average compound growth rate of over 5%, with $59 billion in worldwide
revenues in 2001 (Price Waterhouse Coopers). Of this the UK represents
just over 7% or approximately $4 billion in revenues, exhibiting
growth of 16% over 2001. In comparison, the US market share in
2001 was approximately 49%, or $29 billion in revenues. The main
reason for the US leadership position is that the major Hollywood
studios dominate the film production and distribution markets
by virtue of vertical integration and the resulting synergy between
the two activities.
However, it is worth taking into consideration
some of the key statistics relating to the Hollywood "majors"
in any assessment of our own production industry's economic health.
In order to reach an annual production slate of approximately
10 to 15 films, the studios each develop over 100 projects. According
to the MPA, an average production budget for each of these films
is more than $55 million. The cost of reaching the market on these
films is extremely high, averaging in excess of $30 million on
prints and advertising spend. Of the ten films that are released
perhaps two will return a profit at the most successful Hollywood
studio. In all cases, the studios themselves are just one operating
division of a large conglomerate where there can be many other
channels for earnings from a film property.
It is within this framework that we should analyse
the British film industry and determine the contribution indigenous
production companies have made. In contrast to the US, there is
a separation between production, distribution and exhibition of
films in the UK, a market of limited size. UK film producers have
to raise finance or investment up front to fund development, production
and marketing, without control of the distribution or exhibition
elements of the business. Thus the riskiest element of the process—production—has
to survive on its own. In spite of this disproportionate burden
of risk, the British independent producer has often succeeded
against all odds in raising the finance needed to make many noteworthy
and successful films.
SUCCESS WITHIN
THE BRITISH
FILM INDUSTRY
Many independently produced films have succeeded
critically or at the box office, in both the UK and key export
markets like the US. Over the past 30 years, approximately 140
British actors and technicians have been awarded Oscars. Notably,
there has never been a year in that time period where a British
actor has not won an Oscar. Last year two independent British
films—Bend it Like Beckham and The Importance
of Being Earnest—won two out of three pan-European film
awards. So far in 2003, the Magdalene Sisters won the Venice
Golden Lion award and In this World was awarded the Berlin
Golden Bear award. In 2002 six local films including Bend it
Like Beckham and Gosford Park each earned over $16
million at the UK box office alone.
Despite the structural problems in the UK film
industry and the myriad sources of finance that inevitably have
to be pieced together, independent British films still manage
to generate an average one third of the grosses per title of Hollywood
films in the UK. Since most UK films have one tenth of the budget
of a Hollywood film, it would be fair to define this as a real
success. Add to this the fact that every year several UK films
beat the average and do as well as their US competitors. The best
example in recent years is Gosford Park that grossed $83
million at the worldwide box office and was also nominated for
four Oscars in 2001.
So, in answer to your question as to whether
Government should support the industry, and in particular the
production community, our answer is a resounding "Yes".
Public policy should not be about prescribing what type of films
get made, but Government does have a vital role to play in creating
the right environment for the industry to mature both creatively
and economically. The establishment of the Film Council as a strategic
body, and its emphasis on skills development in particular, has
been a move in this direction. The next phase of the Government's
policy for a sustainable film industry should be to help create
a more stable and better capitalised indigenous film sector, where
support for film production and distribution are brought closer
together.
CHALLENGES FACING
THE BRITISH
FILM INDUSTRY
Historically, the problems facing the independent
production sector have been fragmentation, under-capitalisation
and an inability to retain intellectual property rights. The majority
of UK film producers do not have the financial assets required
to finance their own films. Additionally, there are few sources
that are willing to wholly finance a producer's film so the producer
is required to piece together numerous sources of finance from
the UK and the rest of the world. The only way they are able to
do this successfully requires giving away the rights in the film,
which clearly prevents them from ever building their business.
The film producer's only asset thus continues to be his or her
talent and creativity. The main danger with this situation is
that producers are unable to accumulate sufficient capital from
their fees and profits to invest in further project and corporate
development.
This is a similar predicament to that faced
by independent television producers for 20 years. The Government
has recently implemented a thorough review of the television programme
supply market and as a result has amended the Communications Bill
to ensure that commercial terms for independent producers are
regulated in future. This is a major step forward, and we believe
that similar progressive thinking should be applied to independent
film production.
CURRENT FISCAL
POLICY
The existing tax incentives for the development
and production of feature film have been very useful in helping
to offset some of the structural disadvantages faced by UK film
makers. Many successful films have been made utilising either
Section 42 or Section 48 tax relief. Since Section 42 was introduced
it has been extremely effective in driving up inward investment
by encouraging international, mobile productions from the Hollywood
studios to film in the UK. This investment creates high quality
jobs across the film industry and also helps to provide a consistent
flow of work for creative talent, film crews, film studios and
post-production houses in the UK. It helps maintain and improve
the skills base in the sector, providing important training opportunities
as well as generating very significant indirect economic activity
within other industries serving the sector.
The Section 48 relief has begun to help to connect
British creativity with capital by catalysing alliances between
producers, distributors and financiers. In particular, it has
led to a significantly increased flow of information, knowledge
and expertise between financial institutions and film-makers who
now better understand the objectives and concerns of the financiers.
The equity partnerships that have been created as a result of
Section 48 are now raising funds from their investors that combine
risk investment along with the tax break benefit. Section 48 has
also created a more level playing field between the UK and other
European countries that now are highly competitive in terms of
the economic and fiscal incentives they provide to develop their
own production industries. Without the UK fiscal support it would
have been impossible for the UK independent producer to compete.
With Section 48 due to expire in July 2005, there is considerable
uncertainty in the independent production community as to what
might come next. Given the long lead times needed to develop,
finance and produce feature film (particularly animated features),
it is imperative that the film community in the UK work together
now to determine the most effective fiscal policy to ensure that
we move forward instead of backward.
LOOKING AHEAD
PACT is calling for Government measures to help
develop and strengthen a British independent film production business
that can play on a world stage. We believe these measures must
take into account the importance of the role of the independent
producer as the key instigator of investment in film. One way
in which to do this would be to give corporations and individuals
tax relief if they invested into the share capital of independent
production companies. This should allow producers the ability
to develop projects carefully and select projects that meet the
criteria for commercial success.
Another area that should be addressed is the
commitment to film by UK broadcasting organisations. Prices for
television licences for film have been frozen for more than a
decade and the investment terms demanded severely limit the attractiveness
of projects to other potential partners. In economic terms, much
of the value created by feature films in the UK accrues to and
is retained by the broadcasters. Independent producers need more
control over UK television rights so they can get a better share
of income on the rights on a film. Government should encourage
initiatives agreed between broadcasters and Ofcom to develop film
production to mutual benefit. As an example, Ofcom could require
the broadcasters to take UK rights for only a 3-5 year window
as is the case in other markets, versus in perpetuity. This would
allow the producer to license to other broadcasters after that
period. Another option would be to require the broadcaster to
step up the license fee in accordance with the ultimate performance
at the UK box office. In this way, the broadcaster's risk would
be more fairly apportioned.
Distribution of film is another area where potential
fiscal incentives might be applied. The film distribution business
is highly risky since each film is a prototype for which there
is no guaranteed market and only substantial expenditure on prints
and advertising can help to connect the film to its potential
audience. Various options, including the provision of a tax incentive
for distributors that make a bigger investment into British film
via larger minimum guarantees, or prints and advertising spend,
should be considered.
Thank you for the opportunity to share our views
with the Select Committee. For the reasons we have outlined PACT
believes that targeted support for film production must be at
the heart of the ongoing Government strategy to build a sustainable
film industry. We would welcome the chance to give oral evidence
to the Committee to further elaborate on our proposals.
7 March 2003
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