OPPORTUNITIES FOR MALTA IN THE FILM INDUSTRY

A half-day seminar organized by the American-Maltese Chamber of Commerce on 7th November 2003

Speakers:

• The Hon.  Mr. John Dalli - Minister of Finance
• Oliver Mallia - Film Commissioner
• Malcolm Scerri-Ferrante - Line Producer/Production Manager
• Dr. Michael Paul - Co-founder and managing director of Paul & Collegen Consulting Berlin and Vienna

Realities on the ground and opportunities for Malta

by Malcolm Scerri-Ferrante

I will begin by stating what some may feel as a shocking realization: Malta does not have a film industry.

The words ‘film industry' imply that Malta has some form of ongoing and consistent economic activity arising from the production of home-grown films.

The reality is that Malta does not produce its own films and the only economic activity which occasionally exists in connection with the film business is a servicing one.

Malta is totally dependent on foreign producers who may or may not decide to come and film here, and when they come, they shoot their films and not ours.

This is all well and good and nothing to be ashamed of if Malta is to be content with never being too much involved in the serious creative process of making movies. After all I am sure that everybody here, and also the government, undoubtedly appreciates that the film servicing industry creates extraordinary benefits to the island's economy where large amounts of foreign currency are injected in very short time spans, especially when compared to other local industries.

However, whilst it is a pity that Malta has no film producing industry, I feel it is tragic that even this film servicing industry is not an ongoing and consistent activity throughout the whole year. And this is very unfortunate when considering the opportunities that Malta could create for itself.

When I look back on some past shoots in the last 3 years it is easily concluded that for each week of shooting Malta's economy can see anywhere from 400,000 up to nearly 1 million dollars worth of foreign currency. (Of course these figures do not always automatically multiply by every additional week of shooting since, for example, often a substantial part of the costs some times are associated with sets builds and such cost is spread out over many weeks.)

The bigger budget films that lately tend to shoot in Malta every four years or so are often bringing in much more substantial amounts, but these are mega budget films which are a minority. Malta should not wait for them but instead focus on attracting the low to medium budget films which form the backbone of many film servicing industries abroad.

I will cut to the chase and tell you plain and simple that Malta has the opportunity to multiply the economic benefit resulting from film shoots by (1) introducing financial incentives to foreign film producers, (2) instigating investment specifically in the construction of much needed sound stages and (3) offering attractive incentives to local businessmen which are willing to invest in the servicing industry, hence build a healthy and strong film servicing infrastructure. These efforts must happen in unison with each other in order to maximize the opportunities out there.

With the right strategy and policies, Malta could easily receive each year – and I say this quite conservatively - between a minimum of 16m and 40m dollars in worst years and better years respectively, from low and medium budget films only. The mega budget films which show up once every few years will be a bonus and would make up substantially for the bad years. So realistically and with minimal optimism there is no reason not to expect up to 200m US dollars entering the economy over five consecutive years. Seventy-five million liri spread into salaries, hotels, restaurants and all support services in the film industry.

Then there is also a substantial multiplier effect with any production industry's activity. For the Canadian industry, for example, PricewaterhouseCoopers reckoned the multiplier effect to be 3.4, meaning for every dollar spent on production it is multiplied 3.4 times in increased employment through the spending generated. 

In Hong Kong it is 2.5. And for ever person employed in film production another 1.7 jobs are created in the local economy, benefiting ancillary services such as equipment rental, catering and transportation.

Malta's economy stands a chance of receiving as much as 75 million liri over the next five years plus whatever benefits of the multiplier effect in increased employment which applies to Malta and which should not be underestimated.

But Malta has first to play its cards right.

The high cost of filming in Malta

Producers shoot in Malta because of the climate, the language, the locations, and the all important water tanks which in certain occasions are the sole attraction for certain films.

Several years ago whenever I was asked why do producers come to Malta I would usually mention five main assets. Today I mention only four.

The missing fifth is the Cost.

Today producers are under more pressure then ever before to get films made on yet tighter budgets. With the exception of some films backed by the larger studios, a lot of producers are finding it difficult to finance their movies. In brief, there are more film projects out there waiting to get made then there is money available for them. In a sense this has always been the case but the imbalance has become more significant. Although TV drama slightly declined in the United States because of the surge of cheaply made reality shows which today dominate a lot of the networks for the time being, the hunger for films is still there through cinema, video, dvd and also on networks and satellite stations around the world.

Various countries, realizing the importance of being cost-competitive, are competing by offering financial incentives.

The locations best suited for a film no longer takes an exclusive lead in a producer's decision making. The cost is just as important, and at times more important.

Whilst labour in Malta is considerably lower compared to many European countries, these same countries are not so much in competition with Malta as is Morocco or Mexico for example, which rob Malta of several filming opportunities.

One big cost problem in Malta is the inevitable shipping-in of equipment that does not exist on the island and simply must be brought in. (For example, there are also port dues, or what I prefer to call ‘imaginary taxes', which still exist at the port and for some reason will apparently remain even after Malta enters the EU.) Moreover, when we are shipping equipment from the mainland, there is often the added hire cost for the time taken to transport it. So shooting for two weeks in Malta would often mean a hire cost of three weeks because it takes at least three days to bring heavy equipment over land from Rome, as Rome would be the closest city for rental houses. Moreover, despite the excellent local talent and also the enthusiastic learners available here, serious costs still have to be incurred with bringing in from abroad the crew members which do not exist in Malta. There are flight costs, living allowances to be paid on a daily basis and of course hotel costs too.

These are the realities on the ground and a serious reason for hesitation for the lower budget films.

Malta often loses out on competition where costs are involved.

A production in development and which is currently being budgeted in various countries is estimated to cost $5.3m in Malta, $5.1m in Toronto, $4.9m in Cape Town and an amazing $4.4m in Romania – almost one million dollars cheaper for producing the same quality film.

We should not fool ourselves into thinking that Malta is some dream sunny island in the Mediterranean that producers will bend over backwards to shoot here.

When aspiring for better opportunities Malta should not be content comparing itself with underdeveloped nations or with banking on other nation's misfortunes such as political troubles in the Arab world, or banking on the possibilities, however rare, that there are enough films out there that require locations which are unique to Malta and which cannot be sought in Spain or Morocco, and which are so unique that they will override the cost problems. Furthermore, the water tanks are no longer unique. The fox studios in Rosarito, Mexico – where Titanic was shot – offer substantial competition and there are now other tanks around the world, including a new multimillion dollar complex in the pipeline which is currently under construction in Spain.

Malta needs to be far more aggressive then simply wait for producers or hope to attract producers through fair attendance or advertising locations in journals and festivals. It is time for Malta to compete well with other nations and to create opportunities for itself.

Malta's current ‘dormant' film servicing industry will hopefully be revived by some production coming next month, or after Christmas, or next Spring …whenever the powers that be – that is the foreign producers or studio executives – decide to come here. 

BUT the power is not only in the hands of foreign producers. The power is, to a great extent, in the hands of the local government which needs to introduce tax and financial incentives.

The setting up of the film commission was one major step made by the government to show producers that it recognizes the importance of films being shot here. Facilitating permits and reducing red tape is all very important. I had actually proposed the idea of a commission back in the mid-90's, to both administrations, and on both occasions never got any real feedback. It was not until 1999 that it was eventually set up.

But without any exaggeration I say that the setting up of a film commission is a step which Malta should have taken at least ten years ago and not four years ago.

Producers today are not only attracted towards greater facilitation and friendly governments. Of course they care if a war is going on or if the country is politically unstable. (Political insurance can be very expensive!) Fortunately Malta is regarded as a very safe, stable and neutral country. Coupled with its location potential Malta already offers half the important reasons for producers to shoot here. 

Producers are today attracted to cost-efficiency more than ever before and because of Malta's weak film servicing infrastructure they are forced into expensive importation of equipment and people.

In the past I have been known to criticize the film commission, particularly during its initial set up. But to be fair I must admit that the commission was very instrumental in bringing certain work to Malta. The recent surge in production was a good trend but in some cases it was also the result of some very aggressive and intelligent marketing done by Oliver Mallia and Luisa Bonello.

A lot of good work is already in motion. But I shall also say that I see the commission being extremely restricted from the proper incentive tools it should have at its disposal in order to be able to sell Malta and create more consistent work throughout the whole year.

Financial Incentives

Financial incentives vary from tax credits, to cash rebates on expenditures or parts of expenditures, equity investments, and in the case of the UK as an example, a substantial non recoupable rebate based on the entire cost of the film regardless of how much was spent in the country. That's how competitive some countries have become. Other form of indirect financial incentives is the provision of certain public services for free, including police assistance and army personnel, which are really only bonuses unless a film requires for example thousands of soldiers.

Financial incentives cannot be introduced simply in any form or manner. They should be introduced intelligently. For example. saying that producers will receive a 10% rebate on labour costs means nothing to a low-budget film which does not have any meaningful set construction. A 10% labour rebate is more meaningful for the bigger budget films who are employing hundreds of workers for several weeks or rather months. And these bigger budget films are at times not as desperate for incentives as the lower budget films.

The minimum incentive which should be offered by Malta is a rebate of 15% on the total local expenditure and which could, for example, be done in a form of a tax credit which is then sold to a Maltese corporation. This way the government is not constrained to fork out the cash quickly. A ceiling could be placed in order to set limits for the bigger budget films, should the government be worried about excessive rebates. Having said this, such incentives should in principle not discriminate between low and big budget films. They should be placed across the board with an eye for being more attractive for the lower to medium budget films, meaning films which are budgeted at between $4 and approximately $30 million dollars. Such a rebate would be conditional on strictly fiscal receipts, whereby the government would be instilling a fiscal mentality amongst the operations of foreign producers.

These rebates will pay for themselves by the economic activity generated.

What I understand the government is afraid of, is giving money back to those productions which would anyhow come to Malta regardless of whether there are financial incentives or not. 

My answer to this is: There is a choice. Excluding the multiplier effect, would you like to see an average of four to five times the amount of foreign currency entering Malta's economy in the next five years? Would businessmen here not feel more confident to risk and invest in a film specialized venture if they knew that Malta had a strong framework of incentives and policies that ensured four to five times more income?

Saying that Malta is offering ‘tailor-made incentives' does not work. Although I am sure that this form of incentive was planned out in good faith, it simply does not work effectively. When producers abroad are green-lighting any particular film, the first question they ask themselves is where is the most cost-efficient place to shoot? They shortlist the countries which provide the necessary locations. They or their people bring in all the factual information about costs and the incentives offered by different countries and they compute them into their budgets there and then. Often there is little time to waste on contacting governments and getting engulfed in lengthy beurocratic procedures. Producers rely on incentives which are written in black and white and usually promoted by the respective film commissions, detailing exactly what kind of rebate is provided and which exactly type of productions are eligible. A professional and ethical producer will not attempt to assume any figures based on a promise of ‘tailor-made' incentives and with no more specific details at hand.

Moreover no producer is going to believe any verbal statement promising tailor-made incentives following a recent experience by a Hollywood studio which was promised such but which had to wait eight months to get it in writing.

Furthermore, financial incentives will have little effect if Malta is to develop again the reputation of being a crooked and dishonest place to work in, simply because of a number of people – particularly in the private sector and including high ranking crew members who are supposed to protect these productions, who are only interested in making a fast buck and nothing else. Unfortunately a recent production which shot this year has left Malta with some very disturbing comments. Everybody should realize that it takes years to develop a good reputation and it takes only one day to lose it.

Back on the incentives, anything introduced by the government should be intelligent, across the board and not tailor made and, here's another important note, they should be so attractive that they are literally taken advantage of by foreign producers for the next five years at least, which – through the increased amount of films shooting in Malta - should give enough time for Malta to build a local support crew and strong infrastructure specializing in film business. And then, only then, could the government begin to gradually tighten the belt on incentives. This strategy worked wonders in other countries.

The VAT

I once read a report on how producers can now get their VAT refund back sooner than before. Well, all I can say is that I still get calls or emails from producers asking why their VAT for a shoot done 10 months ago has still not surfaced.

Before coming here I have checked out six productions which shot here between March and December of last year. The average wait for each was 9 months. The offer of 1% interest for VAT refunds delayed over six months is not a solution, considering that film financing loans overseas are far more than 1%. This 9 month delay is due from statutory time limits set by the VAT department to provide a refund not sooner than 5 months plus the occasional delays over and above this period plus the time often existing between the end of production and the submission date of the invoices.

Still on the subject of VAT, an example on how any incentives introduced must be intelligent, I have also read a press report once, in the previous management of the film commission, on how film producers can now receive their VAT back on even restaurant bills. To give you an example of the null value of such an incentive, on The Count of Monte Cristo the total cost of business meals did not exceed $1000. And this was a film which had a budget of nearly $40m. At that time, VAT on restaurant bills were not refundable. Today, the spyglass executives would have got back $150 worth of VAT. Without trying to sound pessimistic I don't think this figure is substantial enough to attract producers to Malta. Actually I know it isn't. 

I bring this example up not to demoralize those within the government who are trying their best to do something about incentives. I do believe that there is a genuine effort to create incentives. Actually when this restaurant business was published, it was in connection with other so-called fixes to the VAT refund system for film producers. Previously if a producer hired a self-drive car which was a five-door car and thus not regarded as a commercial vehicle then it would get stuck in the refund process. At times small TV advertising companies shooting here for one or two days were getting their entire refund stalled because there was no apparent system set up for such film productions.

Today these problems have fortunately been solved. But I mention all this to stress how important it is to introduce incentives intelligently and how, in the absence of any real financial incentives, any big delays with the VAT refund only add insult to injury. VAT should really be refunded within no more than 30 days after presentation of the invoices.

As I also explained earlier, these incentives should be introduced jointly with a government-led goal to build sound stages and with incentives offered to local businesses specializing in film servicing. It is a three-way policy which is needed.

It is now obvious to me that the private sector does not have enough initiative to construct sound stages, even though producers have been encouraging this idea for several years. To a certain extent I can understand some of their arguments. Some say they are concerned about the inconsistent frequency of films coming to Malta. 

I feel in this situation the government should take a leading role in anything required to spark off an ongoing economic activity. Simply because the government's policy is to privatize and not try to manage companies, does not mean that it is relieved of its responsibility to take the first step and help an industry stand up on its two feet. The reality is that small or large business deciding to specialize in the film servicing industry are unable to provide a realistic business plan if the frequency of film shooting in Malta remains unpredictable.

That is why any efforts to provide intelligent financial incentives should not be followed by a lethargic attitude but by a timely effort to build sound stages. Also by offering incentives to local businessmen Malta can create the much needed strong infrastructure specialized in film servicing. The government's business plan is fundamental for the private sector to base its own business plans. 

The recent amendment to the law as regards to incentives for film production companies or audiovisual companies whereby a reduced tax rate of 5% is provided (I am referring to legal notice 135 of 2001 section 4 subsection 3 and subsection (i)) does not apply for any businessman who takes the risk of building a soundstage. Such facility providers are excluded.

So this means that the private sector is expected to build sound stages, or provide any kind of facilities, at its own risk and with no incentives? Its like expecting some hoteliers to build a hotel exclusively for film crews, given the sporadic nature of their arrival.

Creating a film producing industry

I spoke so far about  ways of creating better opportunities for Malta's film servicing industry. If Malta is to create a producing film industry, Malta actually would have a creative and financial stake in international films.

The government needs to formulate intelligent policies upon which an indigenous industry can be crafted, thus creating its own film industry. Ideally this is done by means of a film fund whereby the private sector, through again government incentives, is encouraged to invest in a pool of funds which would be used to co-produce a number of films with foreign producers, films which would be partly or wholly shot in Malta. Films which could also, at times, portray Malta as itself. Films would be produced in a rollover fashion on a yearly basis and be selected according to their financial risks, commercial potential and the stories they tell. 

Whether such investment is done through a fund or directly on an individual project, the government should offer attractive tax incentives to such investors. This form of investment is the only way for Malta to co-produce international films. The creation of a properly managed low-risk film fund is the only way – and I here wish to stand on record for saying this – the only way to create an ongoing film industry with an ongoing economic activity in this respect.

I will elaborate on the kind of tax incentives which the Maltese government can give to a film fund. One example would be a ‘short-fall' guarantee to the fund guaranteeing the investors at least 60% of their investment. If the film fund has very strict investment rules it is extremely unlikely that this guarantee would ever be used.

An alternative is the government gives tax incentives for individuals and/or companies which invest in the fund.

There are ways and means of setting up a film fund with strict investment rules and minimum risk. A low-risk film fund would invest in several films every year, thus not putting all its eggs in one basket. Through diversity, a possible low income on some films should normally be compensated by higher revenues on other films in the same portfolio.

Another way of keeping the fund at low risk is by investing only in films where their budgets are not totally financed with recoupable monies but by soft monies which could represent up to 40% of the budget. This means that if the cumulated net income of all the films in the fund's portfolio reach at least 60% of the cumulated production cost, the fund would at least recoup 100% of its investment. 

To add to the low risk policy of the fund, not more than 30% of a film's budget would be financed by the fund, thus sharing the risks with others and having the ability to diversify also.

Simply signing co-production treaties with other countries is no real solution. Incentives need to be created for local investing co-producers who cannot raise finance from pre-sales in their home market because such a market in Malta does not exist for all intents and purposes.

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. Investors need to have a sound reason to take their money out of their pocket and put it on the table.

It is easy to make the classic mistake where policies are designed by civil servants and film buffs without using the savvy of producers and the investment community. These attempts often waste a lot of money and fail.  The architects of these failed attempts often do not understand how their seeming largesse is not creating an industry. 

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.

I hope the government does not go down a path that will not work or fail to establish a Malta film 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.

Furthermore, the government should understand that an industry is needed to be able to maintain Malta's own identity at home and abroad. 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 a part 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 obviously 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 say the Irish.  The power and influence of film and television should never be underestimated.

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

Like other people who are proud of their own nation, I believe there are many on this island who want to make their own films, tell their own stories and share in the creative process with foreign producers. I feel it is the duty of the government to make it economic for these people 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.

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. As I said already it is a win-win situation for the government and for us Maltese who can use the media entertainment industry to give a presence to our identity abroad, while making eminent economic sense for the country.