July 4, 2002

CRAFTING AN INDIGENOUS FILM INDUSTRY FOR MALTA

Malcolm Scerri-Ferrante, of the Producer's Creative Partnership, looks into the film policies formulated by Canada and gives his views as to why the Maltese Falcon film fund was economically flawed.

Whilst the Maltese government has long been showing an interest in coming up with a viable film and television policy, certainly it is worth looking at the great lengths other countries have gone to formulate their own policies and create their own indigenous industries.

What I mean by an indigenous industry I am referring to Malta having its own home-grown ‘producing' industry. The current film activity on the island is purely a ‘servicing' one which is unfortunately not consistent enough to develop a professional local support crew in any strategic manner and neither is it encouraging enough for local entrepreneurs to invest in a local infrastructure which specializes in film. The tax breaks offered by the government to local companies are simply not enough. A proper market needs to exist. In short, the government needs to formulate intelligent policies upon which an indigenous industry can be crafted.

“The island's size does not excuse the dearth of production” 

The Canadian industry and the one in Malta are poles apart.   It is indeed a much larger country but the basis for policy-making need not be too different. As one reputed media journalist of The Times (of London)  recently put it when referring to Malta, 'The  island's size does not excuse the dearth of production; Iceland has a population of 250,000 and yet, thanks to considerable state subsidy, makes four or five features each year.”  (April 18, 2002) 

It is incorrect to say that Canada should give credit to the advantageous dollar exchange with the US. Even though the favorable exchange rate of the Canadian dollar makes shooting in Canada financial attractive (US $10 million makes a $15 million production in Canada), it would not be attractive if crews and equipment had to come from the US. There are many other jurisdictions where the exchange rate is attractive but there is no film/television industry because the infrastructure (crews, expertise etc) is not there. Obviously being able to totally crew locally means costs are brought down substantially.

In Malta, a lot of the crew members have still to come from overseas. Moreover, rental equipment houses and most essential facilities specializing in the film industry hardly exist here.

Back to the goal of Malta having a producing film industry, the main problem and hurdle Malta faces is that it does not have any home market for all intents and purposes. Therefore there are no domestic box office or television license fees which are able to be a component of the budget. Therefore if Malta is to develop a real film industry, rather than one simply based on location shoots or the water tanks, it will need more than a decent sound stage. 

Stage building is an important step, most urgently needed right now for the servicing industry, but only one step amongst several others needed in order to create a producing industry.

More importantly, Malta needs to develop substantial tax and financial incentives with foreign co-producers (which will pay for themselves by the economic activity generated). The tax and bottom line government incentives in Canada have propelled not only an indigenous film/television industry but also created a very successful Canadian oil and gas industry and mining industry.  This has enormous financial benefits for the country. The US has similarly done so with their oil and gas - the production industry there has incentives but less as they are world dominant and have a huge domestic market.

In fact, it had not been economical to produce films in Canada 20 years ago and, in most cases, it still requires a foreign sale or partner to be profitable but Canada now brings a lot to the table. It is worthy of note that of the some few hundred production companies who are members of the Canadian Film & Television Production Association only around half a dozen of them are more than 20 years old.  This gives some idea of the magnitude of the success and effect the governments' film policies have had. These companies now generate about $5 billion in revenues annually.

In the recent past successive Maltese governments have made an effort to encourage production.  The Maltese Falcon film fund was set up in 1998 but it's eventual mandate was flawed.  It was supposed to be a revolving fund which entered into co-productions or co-financing agreements for several pictures every year, conditioning its co-producers to shoot in Malta and to guarantee a certain expenditure in the local economy. The importance of creating consistent work all year round (thereby creating a producing industry) was as important as the recoupment of the monies.  But it's financial recoupment policy did not make economic sense nor viability to foreign producers.

The fund was ultimately backed by banks which were under political pressure to participate. And of course bankers expectedly behaved liked bankers. They wanted guarantees and negligible risks, if any at all.

In the circumstances, and given the lack of experience of the film industry,  the fund's design took up a direction which was economically flawed in as much as besides providing funding through equity,  the fund wanted to participate in recoupment either as first out or pari passu (equal basis) without, unlike other co-production countries,  being able to offer access to territories or networks. 

In other words it required being in the same position, say for a television production, as a UK co-producer but without the market. The difference is that the UK would put up money and recoup it from its own television market. Canada would do likewise. Usually that means the production costs are recouped (or, better still, it is profitable) and then the two share the profits from the rest of the world. The economics of feature films is slightly different but a variation on the same theme.

“It seems almost unimaginable that the Canada/Malta co-production treaty will ever be used”

One can readily see that a UK, German, French or Canadian etc. model does not work in Malta's case. The reason is obvious. If a Canadian producer, for instance, were to do a Canadian co-production in Malta it would bring to the table a network license fee, second window and video markets etc. in Canada plus substantial Canadian tax incentives and CAFCO government payments (so called Tax Credits) covering a substantial part of the budget. These are sources of the production's income.

There are other revenue and investment streams that the Canadian producer would also probably have accessed such as Telefilm.

This is the Canadian government funding agency which makes investments in productions (technically they can invest up to 49% of budget but usually it works out somewhat lower as that level is usually not required to finance a production). They will typically take a small equity position to give them some additional funding but their reason d'etre is to make it economic for producers and attractive for the producer's investors.

The Canadian producer would also hope to access the Canadian Television Fund  which gives a top up grant of about 15 per cent of the Canadian budget. This is primarily a television fund but a small percentage of this fund is available for features. This is funded by the cable operators and the Government and has the advantage to the producer that it is a grant and is not repayable.  It is intended as a top up to increase the Canadian primary network television license fees which range between 15 to 30 per cent thus making them up to 30 to 45 per cent of the budget. (and there are other funds, mostly private, driven by government initiatives).

The Federal and Provincial tax incentive (actual cash payments but which often need bank bridge financing as they only are available once production is completed) add approximately another 22 per cent to 30 per cent depending on Provincial jurisdiction.  They are designed to attract a production to come to their jurisdictions as they compete for the economic advantage production activity generates. 

So with Telefilm and second windows, video etc. a production can break even in the Canadian market in television production. If it is a treaty co-production the tax incentives only relate to the Canadian portion of the budget and therefore are less in total.

Financing scenarios are in fact complex but an effort is being made here to simplify it into a sort of layman's terms.

The Maltese investor cannot bring any revenue stream, as other European or world co-producers can, because it has none domestically. The Canadian co-producer would therefore be at a huge disadvantage doing business with a Maltese company, at the present, vis-à-vis with another country where there is a film/television market and where the co-producer (or distributor having advanced against the budget) would deliver sales in their own territory. This is because the Maltese Falcon design would call for their investment to be repaid out of world sales (from an independent Malta investor's point of view a reasonable expectation) but it would, in fact, use up income from those territories that the Canadian producer would then have sold into (instead of having sales made for them by an indigenous partner) and bite heavily into the profitability of the production for say a Canadian or British producer.

“Doing business on a Maltese Falcon type scenario would have made no economic sense for non-Maltese production companies or their investors”

The foreign producer would, in other words, have had to make sales but instead of benefiting the productions bottom line they would go to repay the Malta investment. Then future sales would be split with the Malta investor. The producers equity would have been diluted without the Maltese partner bringing any revenue stream to the table. 

The Maltese Falcon type company would, in fact, be acting as a bridge funder but with similar equity to the foreign producer. But the foreign producer would have brought in revenue into the production in pre-sales at the outset and would then have been expected to be responsible for seeing the Malta entity is taken out before the producer participated in the now diluted profits. Not a very attractive scenario compared with what say a UK producer would bring to the production in providing their domestic sales as a revenue stream to cover the UK investment (in this manner any future sales would be profit to the production).

Thus doing business on a Maltese Falcon type scenario would make no economic sense for non-Maltese production companies or their investors, as they would have not only put up money but would have provided their domestic sales income to cover (or it would have gone a good way towards doing so). As a result it seems almost unimaginable that the Canada/Malta co-production treaty will ever be used (what would be the advantage?) or a Maltese Falcon type of fund (unless the Producer is just intent on making money out of production fees and believes that there is no hope of the production going into profit. In which case the Malta investment would not be recouped. Obviously a very unsatisfactory proposition).

That is why it is vital that in designing a film and television policy for Malta the business realities are taken into account and those who understand the financial aspects of the industry are involved.  Policy makers with expertise in this subject need to be involved. In designing a financially sound film policy we must draw on film professionals with financial backgrounds in the producer sense from outside Malta. People need to have a sound reason to take their money out of their pocket and put it on the table.

In Canada's case, there was a real problem in their early film policies.  They were designed by civil servants and film buffs without using the savvy of producers and the investment community. They wasted a lot of money and failed.  The architects of these failed attempts could not understand how their seeming largesse was not creating an industry.  Handouts will not create an industry as, if there is no tangible return, the taxpayers will rightly revolt. It is all about economic realities for all parties involved (including the government).

What is obvious to a producer is often not well explained. Well meaning people and governments are frustrated as to why their concept is seen to be flawed from their financial prospective.

There is the added problem in that tourism is so well entrenched in Malta that there is the feeling that this extra stream of revenue from a viable production industry is not required.

People should not be under the misapprehension that a business model like Maltese Falcon can work. The HSBC people, after taking over Mid-Med Bank which had a large stake in the fund, obviously understood well that it made little sense to any party except as a limited bridging fund which could be supplied without equity (albeit not without its own difficulties) by existing institutions.

It is hoped that the Maltese Government does not go down a path that will not work nor or fail to establish a Malta film industry. The policy needs to be based on aggressive tax incentives and tax shelters (tax deferrals) and perhaps generous bridging terms (with recoupment in mind) because Malta's situation as a very small country is different from most. The Irish model and others obviously should be studied and much can be learned from them but Malta has its own hurdles to overcome. It will not be enough to try to get a sound stage financed. Malta will still not have an industry. If one can get sound policies that establish a film industry in Malta then a lot would have been achieved and the activity will increase employment and swell the exchequer's coffers in Malta in the long run. It would be a win-win situation all around.

“The importance of boosting Malta's identity at home and abroad is no less important than the identity of Canadians, Americans or the Irish.”

Furthermore, the government should understand that an industry is needed to be able to tell the Malta's own stories if Malta is to have and maintain its own identity at home and abroad (look what the Australian production industry has done in generating goodwill and identity for them, their wines etc.). Coupled with that, when the economic multiplier effect is added Malta cannot afford to be left out of the new and powerful worldwide information and entertainment content industry. There is a great and growing appetite around the world for content. Malta must be apart of this huge export industry both in terms of export potential and world influence. Taking the example of Canada, if Canadian production has a presence in say African homes through television when people are thinking of buying new mining equipment they may well inquire whether Canada makes such equipment as well as the US..  The same could apply to trains, commuter jets etc. areas where Canada can be among the world leaders in manufacture, but not the natural first to jump to mind. In a similar manner, whilst Malta's export potential is somewhat limited compared to Canada, the island would at very least be giving a serious boost to its tourism industry and a pause for thought as a destination foreign investment.

The importance of boosting Malta's identity at home and abroad is no less important than the identity of Canadians, Americans or the Irish. 

Also important is the production industry's labour intensive nature and the spin-off in terms of image for industry, tourism etc. The Maltese government needs to see the spectacular advantage both in increased tax revenue, good will and world-wide spin-offs.

‘It is a win-win situation for the government and the Maltese who can use the media entertainment industry to give a presence to their identity abroad, while making eminent economic sense for the country.'

Like other people who are proud of their own nation, the Maltese people also want to tell their own stories so we must make it economic for them to do so. There is no reason why Malta cannot be a real player on the world stage by generating a home grown production industry to work with other players in the Global village which can be out of all proportion to Malta's size. It would give Malta standing in the world through its own ingenuity. Malta could thus become the latter day Phoenicians of the content providers.

Incentives have worked in Canada. In ten years Canadian production has risen very dramatically from $1.5 billion in 1992 to over $5 billion today. Its growth from 1982 - 1992 was even more spectacular going from a few million dollars to the $1.5 billion. Exports went from $414,000 in 1992/3 to approx $2.5 billion today. From 1994-1998 the Canadian GDP grew at 2.8%. The Canadian production and distribution industry grew at 9.3%. This economic track record speaks volumes for itself.

There is also a substantial multiplier effect with a production industry's activity,, reckoned by PricewaterhouseCoopers as 3.4 for the Canadian industry (for every lira spent on production it is multiplied 3.4 times in increased employment through the spending generated). 

If Malta remains just an occasional location shooting destination it is forgoing a large stimulus to the economy through increased production spending - economic activity and money remaining in Malta.

There are big and exciting opportunities out there. It is a win-win situation for the government and the Maltese who can use the media entertainment industry to give a presence to their identity abroad, while making eminent economic sense for the country.

But it only will if it makes economic sense to the other players as well.