House of Lords - Communications Committee

The British Film and Television Industries - Communications Committee Contents

Memorandum by the Producers' Alliance for Cinema and Television (Pact)

10-POINT OVERVIEW

1.—UK-made content represents, challenges and, at its best, unites our society.

2.—UK film industry contributed more than £4.3 billion to UK GDP in 2006, while the £3.5 billion UK television content sector is the largest in the world in proportion to GDP.

3.—The 2003 Communications Act enabled independent TV producers to own/exploit IP rights. As a result, independents generated £126 million to fund UK content in 2008.

4.—Pact proposed a similar intervention—a Digital Rights Framework—to the Government's Digital Britain review and asks the Committee to support our proposal.

5.—Channel 4's remit should include UK children's content and, if a contestable fund is created following Digital Britain review, children's content should be eligible.

6.—In film, UK producers sell all IP rights to fund a film, and rarely secure any significant share of box-office revenues. As a result, they cannot develop their businesses.

7.—To address this, we have agreed in principle with the BBC, Channel 4 and the UK Film Council for producers to share in their recoupment, giving producers an income stream they can use to attract investment.

8.—To build on this, Channel 4's remit should include UK film, and UK film should continue to be part of the BBC Charter.

9.—UK tax credit for film should include overseas costs of UK cast, crew and equipment on UK films. Because it currently does not, UK co-productions have halved since credit introduced in 2006. This represents a direct loss of £50m per year to UK.

10.—The UK Film Council has a crucial role in stimulating UK film industry, but its deal terms when investing in UK films are commercially aggressive and can make it more difficult for producers to raise the rest of the film's funding from the private sector. The Film Council should review its approach so as to ensure it maximises its role in the development of the UK film sector.

EXECUTIVE SUMMARY

1.—UK-made film and television content represents, challenges and, at its best, unites our society. This was a key conclusion of Ofcom's recent review of Public Service Broadcasting (PSB), which found that UK-made content was crucial to reflecting UK cultural identity and representing diverse viewpoints.[1]

2.—In addition to this cultural significance, the film and television industries play an important economic role. Taking into account multiplier effects such as the positive impact on tourism or service sectors, the UK film industry contributed more than £4.3 billion to UK GDP in 2006, and more than £1.1 billion to the Exchequer.[2] According to new analysis commissioned by Pact, the £3.5 billion UK television content sector is the largest in the world in proportion to GDP—even higher than the US.[3]

3.—Digital technology is creating challenges and opportunities for the financing models of both film and television. As audiences and advertising revenues fragment across digital television channels, on-demand broadband services and other new platforms, some traditional sources of funding are under increasing pressure. Ofcom predicts a funding shortfall of up to £235 million per annum by 2012 just to maintain current levels of UK-made, public service television programming.[4] This raises issues for UK films as well as UK television content—Tessa Ross, FilmFour's head of film and drama, told this review in oral evidence that her department faced uncertainty.

4.—In response, producers of content must be able to develop new sources of production funding. In television, this has been achieved with the introduction of the Codes of Practice in the 2003 Communications Act, which enabled independent producers to own and exploit Intellectual Property (IP) rights to the content they create, alongside broadcasters. Independents have developed new sources of production funding by exploiting their IP rights—global exports of UK television content have for example grown nearly 39% since 2003.[5] Producers have then used these revenue streams to grow businesses of global scale, and to generate investment worth £126 million for the development and production of UK television programmes in 2008.[6]

5.—The Government's Digital Britain review is currently reviewing the Codes of Practice, and Pact has proposed that a similar rights framework that allows producers as well as broadcasters to exploit IP rights should be developed for the digital era. We ask the Select Committee on Communications to examine the case for this "Digital Rights Framework" and, if it agrees with our argument, to support our proposal.

6.—We propose that this Digital Rights Framework would sit alongside additional support for certain television genres with a clear public service value and where there is a confirmed market failure—for example, UK children's content. We support proposals from Ofcom and the Digital Britain review for Channel 4's future remit to include UK children's content and that, if a contestable fund is created, children's content should be eligible for support.

7.—In film, Pact's overarching aim is to stimulate the production of UK content and the growth of sustainable companies in the UK film content sector. UK producers have typically had to sell off all IP rights to their films in order to raise sufficient production funding to get a film made (the Codes of Practice in the 2003 Communications Act do not apply to film), and have rarely been able to secure any significant share of revenues should their film be a box-office success. This has meant they are unattractive to investors, and unable to develop their businesses as has occurred in the television production sector.

8.—To help address this, we have agreed or are in the process of agreeing with the BBC, Channel 4 and the UK Film Council to allow the producer to benefit from a share of the recoupment of their equity.[7] This reflects the fact that the BBC, Channel 4 and the UK Film Council are themselves in better recoupment positions as a result of the new tax credit for UK film production. In this way, the tax credit is being used to enable producers to receive a share of revenues from a film's success, which in turn will make UK film production more attractive to private investment—this is the same core principle that has underpinned the success of the Codes of Practice, as it provides creative entrepreneurs with revenue streams that can be re-invested in the development of product and capacity.

9.—As such, these agreements with the BBC, Channel 4 and the Film Council are essential to delivering the Government's stated aim in introducing the film tax credit "of promoting the sustainable production of culturally British films."[8]

10.—To build on this, we have four key proposals to stimulate UK film and foster a strong UK film production sector. Firstly, we ask that the Committee should examine the case for an explicit commitment to UK film for Channel 4 to be introduced under its remit (possibly as part of the new Channel 4 remit that may emerge following the Government's current Digital Britain review). This is important as there is currently no specific requirement on Channel 4 to invest in UK film.

11.—Secondly, we ask the Committee to support the BBC's continued investment in UK film as part of its Charter Agreement.[9] This is particularly important given the current economic climate.

12.—Thirdly, we are concerned that the new tax credit system for film, while broadly effective and welcome, excludes the legitimate costs of UK cast and crew members working on UK films overseas, as well as other UK elements such as equipment hired from UK companies that is used on UK films abroad. As a result, UK co-productions with international partners have more than halved since the new tax credit was introduced in 2006, falling from over £100 million per year to under £50 million.[10]

13.—The previous tax incentives regime for film (Section 42/48) supported co-productions because it funded a percentage of the total budget of a qualifying film (whether it shot in the UK or overseas). However, the new credit only applies to services "used and consumed" in the UK.

14.—Economically, the decline in UK co-production activity represents a direct loss of more than £50 million per year of spend in the UK. However, the real impact could potentially be several times that once multiplier effects are factored in. This fall directly undermines one of the key stated goals of the Government's film policy: making the UK "a global hub for film," as expressed in the Department for Culture, Media & Sport's current policy directions for the UK Film Council.[11]

15.—Fourthly, we propose that the UK Film Council should review its commercial deal terms when granting producers production funding from its National Lottery funds. In Pact's view, the Film Council should ensure that any commercial terms that it seeks should be consistent with the remit set by the Department for Culture, Media & Sport. In terms of high level, overarching principles, this includes to "develop a sustainable UK film industry."[12] As a policy priority, the DCMS' policy directions to the Film Council require it to foster "a flourishing competitive film industry."[13]

16.—Currently, the Film Council takes commercially aggressive approach when negotiating with the production sector to fund a film through its National Lottery grants. This can have the consequence of making it more difficult for the producer to secure the remaining production investment to cover the rest of the budget from other sources in the private sector. Historically, this has often meant that the producer ends up with less of a margin, which is a potential contributory factor to the difficulties of the production sector in attracting other private investment and developing its business model.

17.—We stress that the Film Council has a vital role to play in stimulating UK film and that its National Lottery funding for film development and production is crucial to maintaining diversity within UK filmmaking. We are also hopeful that the Film Council will finalise the producer recoupment agreement that we have noted above—in our view this will mean the Film Council has taken a significant step in fostering a flourishing production sector. To build on this, our proposal is that the Film Council review its wider policy on deal terms with the UK production sector with a view to playing an even more critical role in the development of the UK film sector.

18.—In summary, our proposals on film and television for the Committee are:

— Television: Review case for producers owning and exploiting IP rights alongside broadcasters in the digital age under a Digital Rights Framework

— Television: Children's content to be part of Channel 4's remit and to be eligible for contestable funding if the Government creates such funding following the Digital Britain review

— Film: Film to be an explicit part of Channel 4's remit

— Film: BBC should at the very least maintain current commitment to film under the BBC Charter Agreement

— Film: UK elements in a UK film shooting overseas should be counted towards the UK tax credit

— Film: UK Film Council should review its deal terms when funding UK films

INTRODUCTION

1.—Pact is the trade association that represents the commercial interests of the UK independent production sector. We have more than 600 member companies across the entire UK, involved in creating and distributing television, film and interactive content.

2.—The independent production sector creates 49% of all new UK television programmes each year across the BBC, ITV1, Channel 4 and Five.[14]

3.—The sector has a turnover of more than £2 billion per year[15] and employs 20,950 people—more than the terrestrial broadcasting and the cable and satellite sectors respectively.[16]

4.—As well as television, the independent sector encompasses the leading producers of UK films, with credits including Slumdog Millionaire, The Last King of Scotland, Girl With A Pearl Earring, Bend It Like Beckham, Notting Hill, Trainspotting, and Happy Go Lucky.

5.—We welcome this review by the House of Lords' Communications Committee, and the opportunity to contribute. We can also supply the Committee with our submission to the Government's Digital Britain Review on request.

6.—For further information please contact Adam Minns, Pact's Director of Policy: 020 7380 8232, adam@pact.co.uk

Question 1:—What do the UK film and television industries currently contribute to the UK economy and British culture? In what ways might this contribution be enhanced?

Cultural contribution of UK film and television

1.—In Ofcom's consumer research for its PSB review, the regulator found that 83% of the public thought it important for the PSB channels to provide content made in the UK and reflecting life in the UK.[17]

2.—Ofcom's PSB review concluded that UK-made content was essential to four public purposes:

— Informing our understanding of the world: home-grown content is crucial to informing ourselves about the UK and ensuring that events in the rest of the world are made relevant to UK audiences;

— Stimulating knowledge and learning: UK content is clearly intrinsic to learning about UK topics; however, it also help UK audiences to understand international issues by using appropriate reference points;

— Reflecting UK cultural identity: UK-made content is essential in reflecting the culture of the UK as a whole, including the devolved nations and English regions, both to UK audiences and to the wider world; and

— Representing diversity and alternative viewpoints: UK programming is crucial in making us aware of diverse communities and views from within the UK; at the same time, it plays a valuable role in interpreting viewpoints from around the world for UK audiences.

3.— The important role of domestic content within PSB is enshrined in the Communications Act 2003, which states that licensed PSBs must broadcast an appropriate level of original (ie UK) productions.[18]

4.—Historically, the UK production sector has succeeded in delivering high levels of UK content. However, this success is not just about the sheer volume of UK content: quality and diversity are also fundamental. The independent sector has a continuing and important role to play in achieving this, acting as creative catalyst, challenging and complementing broadcasters' in-house production departments across a wide range of genres. UK content is crucial in reflecting and defining our society, but a dynamic, competitive and innovative content creation sector ensures the quality and range of that content. This year's Oscar winner Slumdog Millionaire is, for example, a notable example of a UK film made by an independent production company.

ECONOMIC CONTRIBUTION OF TELEVISION

5.—According to new analysis commissioned by Pact from Oliver & Ohlbaum Associates (O&O), the £3.5 billion UK television content sector is the largest in the world in proportion to GDP—even higher than the US.[19]

6.—The independent sector (comprising production companies that are external to broadcasters) plays an increasingly important role in creating UK content. The independent sector has an annual turnover of more than £2 billion and creates around half of all UK television programmes each year across the BBC, ITV1, Channel 4 and Five.[20] The sector employs 20,950 people—more than the terrestrial broadcasting and the cable and satellite sectors respectively.[21]

7.—This is due to a combination of a well-financed licence fee broadcaster in the BBC, commercial public service broadcasters with a traditionally significant commitment to originated output, plus a reasonably well developed secondary and ancillary market for content rights. Additionally, since the 2003 Communications Act introduced Codes of Practice between broadcasters and independent producers, independent television producers have been able to own and exploit Intellectual Property (IP) rights to the content they create. This has enabled them to drive a pronounced increase in UK exports—since the 2003 Communications Act, UK television global exports have risen nearly 39% to hit around £800 million a year.[22] In addition, indies have used IP rights to open up innovative new media services (independents launched online video-on-demand services before the commercial PSB broadcasters, for example).

8.—Independents are using the resulting revenues to become significant investors in the creation of UK content creation, and invested £126 million in 2008 in the development and production of UK television content.[23]

Economic contribution of film

9.—UK and Republic of Ireland box-office admissions recorded their strongest year ever in 2008, despite the economic recession. Box office revenues rose 5% cent to hit £949 million, while 164.2 million cinema admissions represented a year-on-year rise of 1.1%. Of the top 20 films, UK films had a market share of 31%.[24]

10.—In the same year, the value of UK film production totalled £578.2 million, encompassing locally-made films, international co-productions and inward investment from overseas films shooting on location in the UK.[25]

11.—However, this figure belies the multiplier effect of UK film production in stimulating the wider economy. Estimates vary but, according to a recent report, the UK film industry employs 35,000 people directly but supports a further 95,000 jobs, taking into account people working in its supply chain, the contribution to UK tourism, trade and merchandise sales. The same report suggests that films depicting the UK are responsible for attracting one in 10 overseas tourists, spending around £1.8 billion a year.

12.—Taking into account all multiplier effects, the UK film industry is said to have contributed more than £4.3 billion to UK GDP in 2006, and more than £1.1 billion to the Exchequer.[26]

Challenges and opportunities: television

13.—Due largely to the fragmentation of audiences and advertising revenues across digital services and platforms, funding from traditional PSB broadcasters for UK content is coming under increasing pressure. Ofcom predicts a funding shortfall of up to £235 million per annum by 2012 just to maintain current levels of UK-made, public service programming.[27]

14.—But as well as creating a pressure on traditional funding sources, the growth of new services and platforms as a result of digital technology opens up the opportunity of raising investment for content creation by exploitation in as many of these new markets as possible. The independent television production sector, underpinned by the Codes of Practice, can be part of the solution for the funding of UK content. As we have noted above, independents have proven that they are incentivised to exploit their IP rights, and can excel at doing so. As result, they are now investing the resulting revenues into content development and production.

15.—Yet the contribution of indies must not be taken for granted. O&O's analysis for Pact, and its previous work for Ofcom's PSB review, indicates that the market conditions that made the introduction of the Codes of Practice necessary—namely the dominance of the four PSB broadcasters in the commissioning market—remain in place today. Without the Codes of Practice, PSBs would be able to demand control of all IP rights when commissioning programmes. When this has occurred in the past, PSB broadcasters have sought to restrict access to content by the market in order to protect their own core services. In the digital era, this would not only restrict the availability to the public of content on new platforms and services, it would also prevent independents from exploiting IP rights in those markets, and thereby stop them raising investment for programme production.

16.—The Government's Digital Britain review is currently reviewing the Codes of Practice, and we ask the House of Lords Communications Committee to review the case for extending the principles underpinning the Codes—the disaggregation of IP rights and the ownership of rights on the part of the producer—into the digital era and, if the Committee agrees, support our position. We detail our position in response to question 7.

Challenges and opportunities: film

17.—BBC Films and Channel 4's FilmFour remain key investors in UK film production, often taking risks on material that would not attract financing from commercial sources, but which nevertheless is hugely significant culturally (and often proves highly commercial once it reaches audiences, as shown recently by Channel 4's independently-produced Slumdog Millionaire).

18.—We note the comments of Tessa Ross, head of film and drama at FilmFour, to the House of Lords Select Committee that funding for film at FilmFour could be under threat. Although the provision of UK feature films is included as part of the general definition of PSB under the Communications Act,[28] there is currently no legislative requirement specifically for Channel 4 to invest in UK film under its public service remit. The Communications Act defines UK feature films as a public service genre but this does not mean that Channel 4 must be the provider of such a service (or indeed any other licensed PSB broadcaster).[29] Although any significant change to a PSB broadcaster's current output must be approved by Ofcom in advance as part of its annual statement of programme policy, Ofcom's decision must take into account commercial pressures on the broadcaster, meaning that film could in principle be cut or removed entirely from Channel 4's schedule in response to current or future financial pressures.[30]

19.—Exactly the same legislative and regulatory framework has failed to prevent significant and well-documented cuts in the children's genre—even when Ofcom asked ITV not to make cuts in the children's genre, the Communications Act only requires ITV to "take account" of Ofcom's guidance, which meant that ITV went ahead with the majority of its proposed cuts against Ofcom's wishes.[31]

20.—Given the current commercial pressures on Channel 4 it is therefore important for film (as well as children's content, as we explain in Section 6) to be explicitly enshrined in its remit (which the Digital Britain review has proposed to redraw). We therefore ask the Committee to support film being made part of the remit for Channel 4 or whatever service emerges as a PSB alternative to the BBC following the Government's Digital Britain review.

21.—We also ask the Committee to support the BBC's continued investment in UK film as part of its Charter Agreement, and to recommend that the BBC should at the very least maintain its current levels of commitment to this genre. We note that the Charter Agreement calls on the BBC to develop a strategy to stimulate the UK film sector.[32] As a key investor in the UK film production industry, the BBC's continued commitment is all the more important as the production sector enters a recession. The committee should be aware that the investment per hour in new UK films by the PSB broadcasters (in this case BBC and Channel 4) has already dropped by a third in recent years.[33] It is typically left to the producer of the film to raise investment to cover the gap between what the PSB broadcaster is prepared to invest and the actual cost of making the film.

22.—The total value of UK film production in 2008 was down 23%. Within this, spending on indigenous films was up, but the expenditure on inward investment projects and on international co-productions was significantly down.

23.—In terms of inward investment (from overseas films shooting in the UK), this fall is likely to be attributable to a combination of short term or cyclical issues including a US writers strike and actors' dispute and reduced output by the US studios, plus competition in the form of subsidies offered by other countries around the world. The decline in co-production activity is, however, due to a flaw in UK public support for the film sector through the tax credit, which we will detail in response to question 3.

Question 2:—How do the current UK arrangements for distribution and exhibition of films affect the commercial success of the film industry? How might long run changes in international film production and distribution affect the UK film industry and its export potential over the next decade? To what extent is the raising of finance an inhibiting factor in UK film projects?

1.—The Committee should be aware that only a small proportion of box office receipts ever returns to the UK production sector. On a UK film, an exhibitor (ie the cinema) will take up to 75%, with the distributor keeping a large proportion of the remainder. After that, investors, including the UK Film Council and public service broadcasters Channel 4 and the BBC, recoup prior to the producer. This has historically made it difficult for the UK production sector to develop sustainable businesses that are attractive to investors.

2.—To address this, we have campaigned for the BBC, Channel 4 and the UK Film Council to allow the producer to benefit from a share of the recoupment of their equity. This reflects the fact that the BBC, Channel 4 and the UK Film Council are themselves in better recoupment positions as a result of the tax credit. In this way, producers are able to receive a share of revenues from a film's success, thereby making UK film production more attractive to private investment—in essence, this is the same core principle that has underpinned the success of the Codes of Practice in stimulating the growth of the UK television content sector. We see this as crucial to ensuring that the tax credit is more than just a subsidy, that it actively stimulates the growth of a sustainable film production sector. This delivers on the Government's statement in introducing the film tax credit that its core aim is "that of promoting the sustainable production of culturally British films."[34]

3.—The BBC and Channel 4 have agreed or are finalising agreements to this effect, while talks are progressing with the UK Film Council—we have an agreement in principle but not finalised as yet. We view this initiative as particularly important at a time when the production sector is entering a recession.

4.—In addition, we have asked where possible that the tax credit be treated as producer equity alongside the investment from the BBC, Channel 4 and the Film Council, which would also enable the producer to secure a revenue stream should a film be successful. In practice this has often been difficult to implement, however, as third-party commercial sector investors have refused to accept such an arrangement. Our agreements with the BBC, Channel 4 and the UK Film Council that producers share in their recoupment are therefore all the more important—and an example of how publicly-backed institutions can work in partnership with the independent sector to deliver the Government's aim of fostering a sustainable UK film production industry.

5.—We would also like to point out that the level of investment per hour from Channel 4 and the BBC in new UK films has fallen steeply in recent years. Figures from Ofcom show that the cost per hour to PSBs of first-run original (UK) films has fallen by a third since 2003, from £467,000 to £310,000.[35] It is typically left to the producer of the film to raise investment to cover the gap between what the PSB broadcaster is prepared to invest and the actual cost of making the film.

6.—This fall in cost per hour, as well as Tessa Ross' comments to the Committee, shows the pressure that UK film is under. In Pact's view, it is important to ensuring continued investment in UK film by Channel 4 and the BBC that both broadcasters are required to make a commitment to UK film as part of their remits. This is already the case for the BBC, but we ask the Committee to recommend that the BBC at least maintains current levels of investment in film production. We have also asked in this submission that the Committee supports film being an explicit part of Channel 4's new remit following the Digital Britain review.

Question 3:—Have the 2006 changes to the tax credit system been of benefit to the UK film industry? Have they had a perceptible effect on UK film production? Are the qualifying conditions, including the "Britishness" test, for the tax credit appropriate? Are any types of film or types of commercial arrangement unreasonably excluded?

1.—Pact broadly welcomes the new tax credit as an effective way of funding UK film. Without such a system we would expect the level of UK film production to drop more dramatically than it has done over the last two years. Indeed, while the overall level of UK film production may have declined in recent years, the level of wholly domestic films has remained constant, and even grown.

2.—The fall in UK film production in the last two years has been in inward investment (overseas films shooting in the UK) and international co-productions. We see the decline in inward investment as largely cyclical, due to relatively short term factors such as strikes in the US and cutbacks at US studios, plus competition from overseas subsidies. However, the fall in co-production activity is directly related to the introduction of the new tax credit system in April 2006. Since 2006, co-productions have more than halved, falling from £108 million in 2006 to £48 million in 2008, as the table below illustrates.

UK CO-PRODUCTION LEVELS SINCE NEW TAX CREDIT (£ MILLION, UK SPEND ONLY)

Source: UK Film Council.

3.—To be clear, the table and figures above refer only to the element of the co-production spent in the UK, in order to best reflect the impact on the UK economy.

4.—This fall directly undermines one of the key stated goals of the Government's film policy: making the UK "a global hub for film," as expressed in the Department for Culture, Media & Sport's current policy directions for the UK Film Council.[36] Co-productions, including the level of co-productions, are cited as one of indicators of success in achieving this goal by the UK Film Council, the Government's strategic film body.[37]

5.—The previous tax incentives regime for film (Section 42/48) supported co-productions because it funded a percentage of the total budget of qualifying films (whether they shot in the UK or overseas). Criteria for co-production status included salaries paid to UK crews working in the co-production territory.

6.—Broadly, Pact supports the new tax credit scheme as a practicable and effective mechanism for stimulating film production, with the exception of co-productions. The new credit only applies to services "used and consumed" in the UK. This leaves the UK without any public support for co-productions. The effect is evidenced in the fall in co-production activity since the new tax credit was introduced.

7.—In Pact's view it seems reasonable that UK artists and crews working overseas should attract the UK tax credit, as well as equipment hired from UK companies that is used for UK films shooting abroad.[38]

8.—Under the previous Section 42/48 scheme, there was abuse by certain UK tax fund schemes, which were used to finance overseas productions with little UK involvement. Providing these productions met a minimal level of UK requirements, UK tax relief would be granted against the entire production, including elements with no UK connection. This could not occur under the reform of the current tax credit that we are proposing, as the credit would apply only to the UK element of the overseas shoot (such as UK nationals working in the crew or cast), in addition to spend in the UK as it does now.

9.—We are not advocating a return to the old system under Sections 42/48, whereby all overseas expenditure on a film, including that with no UK connection, was eligible for UK tax relief. We are asking that, where UK nationals are working overseas in the cast and crew of a UK film or UK co-production, this should eligible. This will create an added incentive to employ UK cast and crewmembers, thereby increasing expenditure and employment in the UK, and enable UK production companies to play a more active role in international co-productions.

10.—The consequences of the current exclusion for legitimate UK elements overseas are both economic and cultural. Acclaimed UK films such as The Wind That Shakes The Barley or the Oscar-winning The Constant Gardener would face significant difficulties raising funding, because their UK crews working on location overseas would not count for tax credit purposes.

11.—In addition, and most importantly in terms of raising investment for the creation of UK content, UK producers need to be able to work with partners in overseas countries to raise production funding from markets around the world. This ability is increasingly important given the pressures on traditional sources of funding in the digital era, and is directly undermined by the exclusion of UK costs incurred overseas.

12.—We therefore ask the Committee to call for the credit to be extended to cover UK nationals and UK equipment on UK films shooting overseas.

Question 4:—Is the UK Film Council meeting its objectives of giving support to production and export of British films? Could it do more to assist the UK film industry's contribution to the UK economy?

1.—The overarching remit for the UK Film Council, set by the Department for Culture, Media & Sport, is twofold: to develop film culture in the UK; and to "develop a sustainable UK film industry."[39] As a policy priority, the DCMS' policy directions to the Film Council require it to take into account the need for "a flourishing competitive film industry."[40]

2.—In our view the Film Council plays a vital role in stimulating the production of UK films, and its National Lottery funding for film development and production is crucial to maintaining diversity within UK filmmaking. We welcome the Film Council's commitment as part of its current policy priorities in its three-year plan help provide UK companies with better access to debt and equity finance and to develop an initiative "to provide UK film companies with better access to corporate finance."[41]

3.—However, there are in our view areas where the Film Council's policies could potentially better deliver its DCMS mandate to foster a flourishing film industry, specifically in relation to the production sector. We are now working with the Film Council to develop ways to enable the UK film production sector to develop businesses that are capable of attracting private investment for the development and production of UK films. We have an agreement in principle with the Film Council that it will follow the BBC and Channel 4 in agreeing to allow the producer to benefit from a share of the recoupment of their equity.[42] This reflects the fact that the BBC, Channel 4 and the UK Film Council are themselves in better recoupment positions as a result of the new tax credit for UK film production. In this way, the tax credit is effectively being used to enable producers to receive a share of revenues from a film's success, which in turn will make UK film production more attractive to private investment—this is the same core principle that has underpinned the success of the Codes of Practice in stimulating the television production sector, as it provides creative entrepreneurs with revenue streams that can be used to raise investment for production and develop businesses.

4.—Using the tax credit in this way will mean the Film Council has taken a significant step towards developing the strength of the UK film production sector—and in delivering the Government's stated aim in introducing the film tax credit "of promoting the sustainable production of culturally British films."[43]

5.—In addition, we have asked that the tax credit be treated as producer equity, enabling the producer to recoup alongside the BBC, Channel 4 or the UK Film Council. However, in practice, third-party commercial sector investors have often refused to accept this arrangement, making it all the more important that the producer share instead in the recoupment by the BBC, Channel 4 and the Film Council. Enabling producers to share in recoupment in this way demonstrates how the publicly-backed sector can work in partnership with the independent production sector to strengthen the film industry in the UK, and thereby use the tax credit to work towards the Government's goal of sustainable production.

6.—We look forward to working with the UK Film Council on other initiatives that will stimulate the ability of film companies to attract investment that can be used to fund the creation of UK films. As part of this, we support a review of the Film Council's overall approach to dealmaking with the production sector when it contributes to a film's development and/or production costs through its National Lottery funds. Currently, the Film Council takes a commercially aggressive approach when negotiating with the production sector. This can have the consequence of making it more difficult for the producer to secure the remaining production investment to cover the rest of the budget from other sources. Historically, this has often meant that the producer ends up with less of a margin, which is a potential contributory factor to the difficulties of the production sector in attracting other private investment and developing its business model.

7.—As the Committee will be aware, there are relatively few other sources of UK public investment for film that the production sector can access instead of the National Lottery funds administered by the Film Council, particularly as public funding for film from different organisations was folded into the Film Council on its creation.

8.—A review of the Film Council's policy on dealmaking should therefore encompass:

— Whether monies recouped by the UK Film Council from its investments in film production should go to non-production activities, including the Film Council's overheads;

— The potential for the Film Council to allow producers to recoup their equity (in the form of the tax credit) alongside their own equity (pro rata and pari passu), and to encourage other financiers to do the same. The BBC and Channel 4 are we understand already actively facilitating this;

— The effect of the Film Council only finalising a deal once all other parties, including private sector companies, are on board—including whether this creates difficulties for the production sector when seeking to raise investment from other sources, and whether supporting a production at an earlier stage would present a genuine risk to National Lottery funds; and

— The appropriate, most efficient level of supervision over a production, particularly where there is a verified completion bond in place.

9.—We reiterate that the Film Council's National Lottery development and production funds are a key investment in the film production sector and the Film Council has a vital role to play in stimulating UK film production, and that we welcome the Film Council's agreement in principle to enable the producer to share its recoupment as a potentially significant step in stimulating UK film production and the production sector. Our proposal for a wider review of the Film Council's approach to dealmaking is aimed at building on this hugely welcome step, with a view to ensuring that the Film Council's activities are aligned as closely as possible with the goal of helping deliver a flourishing production sector.

Question 5:—Is the current business infrastructure in the UK conducive to the acquisition of the managerial and technical skills required by the film and television industries? Is the business environment conducive to the emergence of entrepreneurial talent, which can take advantage of opportunities in the creative industries?

1.—Pact's concern in the current economic climate is that support for skills development must be at least maintained. Having the necessary skills base in place will be crucial for companies to take advantage of opportunities created by new technology as they emerge from the current downturn.

2.—Pact members contribute to industry training through their contributions to the Industry Training Fund, which supports a wide range of training initiatives, including schemes for the freelance sector and funding for Skillset, the sector skills agency. In addition, the production sector contributes to the Skills Investment Fund run by Skillset.

3.—Pact itself runs or supports a range of training initiatives. We run the Talent Attraction Scheme with the BBC, ITV and Channel 4, Creative Business Wales and Skillset, which is aimed at developing skills at companies in the devolved Nations and regions. Pact is also currently involved in joint mentoring schemes with NESTA and with the Cultural Diversity Network. Additionally, we have developed a cross-platform training programme for Pact members to strengthen and improve their positioning as suppliers of digital media.

Question 6.—How successful has the regulatory system been in supporting UK content in television? Are there particular types of programming, such as drama, children's or factual programming, for which more support is needed? Could more be done through regulation or incentives, for example, to encourage non-public service broadcasters to commission original UK content? Might financial measures, such as industry levies, be feasible and effective?

1.—As we noted in response to question 1, due largely to audiences and advertising revenues fragmenting across digital services, Ofcom predicts a funding shortfall of up to £235 million per annum by 2012 just to maintain current levels of UK-made, public service programming.[44]

2.—As Ofcom identified in its PSB review, certain core areas of PSB—other than news, most immediately children's—are already experiencing particular shortfalls. Without urgent steps it is clear that the PSB system will fail audiences in these key areas. In the case of children's programming, this is already a reality: investment from commercial PSBs has plummeted over the last decade by 80%, destroying the plurality of programming in many areas.[45]

3.—Pact therefore welcomes the commitment to addressing this issue in the Digital Britain interim report, which stressed the important of "plural public service provision of high quality, original UK programming for children."[46] This followed and built on Ofcom's conclusion in its PSB review that "UK programming for school age children is one area of particular concern."[47]

4.—Throughout the PSB review and subsequent Digital Britain review by Government, Pact has supported the existence of a strong public service alternative to the BBC, be that a well-funded Channel 4 or another entity. We see this as crucial in providing audiences with a rich choice of public service content. We have agreed with Ofcom and Digital Britain's proposal that this "PSB2" service should have a commitment to children's content as part of its core remit. If this service were not sufficient, possibly due to lack of funds, the Government should consider adopting Ofcom's proposal in its recent PSB Review of creating a contestable fund for core public service genres where there is a clear market failure, such as children's.

5.—We have suggested that one way of providing some of the funding for this contestable fund would be to address the nature of Public Sector Procurement, where Government or NGOs commission new media content from external suppliers. This is an increasingly important area as more Government services are moved online and, in terms of investment in new UK content, is worth around £200-£300 million a year—considerably more than the contribution of the BBC's online services.

6.—However, when external companies are commissioned by Government under Public Sector Procurement, the commissioning entity retains all IP rights. This means that the external supplier cannot exploit that content globally—it is "warehoused" by the commissioning entity. This is a potentially significant waste of public resources.

7.—In our response to the Digital Britain review, we therefore proposed that the Government adopt a rights framework similar to the Codes of Practice in television for a range of services, including Public Sector Procurement. This would enable external suppliers to retain and exploit a share of the IP that they create. Under the current Codes of Practice in broadcasting, the commissioning PSB broadcaster receives a share of any revenues generated by the indie producer from subsequent exploitation. In the case of Public Sector Procurement, revenues due to the commissioning entity, ie the Government or public agency, could flow instead into a contestable fund for commissioning public service content.

8.—We have also proposed that the Rights Agency that the Digital Britain review is developing should include in its remit a role as a collecting agency, which could potentially extend to retransmission payments by non-PSB broadcasters of content originally commissioned by PSBs. Revenues could be returned directly to the rights holder, or used to create a contestable fund for core public service content.

Question 7.—How will the structural changes facing the UK television industry, and particularly the public service broadcasting component, affect UK originated television content? To what extent are these effects irreversible? To what extent are they being offset by changes elsewhere in the creative industries sector? What are the implications for television content creation of digital switchover and widespread broadband availability?

1.—The structural changes facing the broadcasting industry give rise to significant challenges. As we have mentioned, Ofcom predicts a funding shortfall of up to £235 million per annum by 2012 just to maintain current levels of UK-made, public service programming.[48]

2.—In the digital era, it will be crucial to make content commercially available to the public as quickly and as conveniently as possible, taking advantage of new platforms and services. It will also be vital to raise investment for content creation via exploitation in as many of these new markets as possible.

3.—The independent production sector, underpinned by the Codes of Practice or a similar IP rights framework, can be part of the solution for the funding of UK content. It has proven it can excel at exploiting IP rights and investing the resulting revenues into content development and production, as we have noted previously in this submission.

4.—Yet the contribution of indies must not be taken for granted. Separate analysis for Ofcom and for Pact by Oliver & Ohlbaum Associates (O&O) indicates that the market conditions that made the introduction of the Codes of Practice necessary—namely the dominance of the four PSB broadcasters in the commissioning market—remain in place today. Although the overall spend by broadcasters on UK content may decline due to cyclical and structural pressures, O&O's analysis suggests that the proportion of spend controlled by the four PSBs will remain unaltered through to 2020. While those PSB broadcasters may spread their commissioning across a greater range of digital channels and new media platforms, they will still control 90% of all commissioning of UK content. That dominance enables the PSBs to demand control of all IP rights when commissioning content.[49]

5.—Whenever this has occurred historically, PSB broadcasters have sought to restrict access to that content in order to protect their core services. This is occurring today when broadcasters commission outside the Codes of Practice (on their digital channels or online, for example).

6.—In contrast, since the Codes of Practice were introduced, independents have maximised the exploitation of IP rights, driving exports and new media services, as we have noted previously. In the process, independents are making content available to the public as quickly and as widely as possible. However, removing the Codes of Practice would fatally undermine the independent sector's ability to retain and exploit IP rights, and its ability to use resulting revenues to invest in content creation.

7.—The Government's Digital Britain review is currently reviewing the Codes of Practice. Although the details of the commercial terms surrounding the Codes of Practice should evolve for the digital era, Pact has detailed the case for retaining the high-level principles enshrined in the Codes—the disaggregation of IP rights and ownership of IP on the part of the creator—in its submission to the Digital Britain review, which we can supply on request. We ask the House of Lords Communications Committee to review the case for introducing our proposed "Digital Rights Framework" and, if the Committee agrees, to support our position.

March 2009

1 PSB Review Phase 1: The Digital Opportunity, Ofcom. Back

2 The Economic Impact of the UK Film Industry, Oxford Economics, July 2007, Back

3 The Economics of UK TV content supply, Oliver & Ohlbaum Associates, interim report, March 2009. Back

4 Second Public Service Broadcasting Review, Phase 2: preparing for the Digital Future, Ofcom, September 2008, page 5. Back

5 UKTI/Pact annual export figures. Back

6 Pact survey 2009. Back

7 We have finalised such an agreement with the BBC, and are in the final stages of an agreement with Channel 4. With the UK Film Council, we have an agreement in principle but this is yet to be finalised or implemented. Back

8 Reform of Tax Incentives: Promoting the sustainable production of culturally British films, HM Treasury, July 2005, Section 1.4. Back

9 BBC Charter Agreement, 8 (2) (a). Back

10 UK Film Council. Back

11 DCMS direction issued to the UK Film Council under Section 26 (1) of the National Lottery Etc Act 1993, N. The UK Film Council's Strategic Plan 2007-10 states that, for the UK Film Council, UK co-productions are one of the direct (and indirect) indicators of success in achieving the goal of making the UK a global hub for film (Film in the Digital Age, UK Film Council policy and funding priorities, April 2007-March 2010, page 35). Back