Monday, November 8, 2010

A rhetorical post...

We're living in troubled times but let's imagine it's 1993 and the madness has yet to begin in earnest.

The government is being lobbied to support industry. A few legislative tweaks and a state agency, it is argued, will prime the pump, create lots of employment, and develop local entrepreneurial initiative.

Rojam Inc. promise 2,500 fulltime jobs making nannacs in return for an investment by the State of approximately €25,000,000. This will not be a one-off investment, however, like those offered to the likes of Dell or Intel.

Rojam Inc. require €25,000,000 a year for the foreseeable future because the market for nannacs is uncertain, but they argue persuasively that the fiscal return to the State in direct and indirect taxes will offset the non-profitablility of (a) nannacs, (b) Rojam (Ireland), its (c) affiliates and (d) sub-contractors.

The Irish government agrees the proposal despite reservations expressed by officials in the Department of Finance and the Revenue Commissioners, mostly around issues of transparency to do with Rojam (Ireland)'s investment and accounting practices, and the actual production cost of nannacs.

Some 16 years later, and various re-treads of the Rojam (Ireland) support scheme, the State has invested, say, €400,000,000 in return for about 2,500 fulltime jobs.

There are a few wobbles over the years. Numerous other countries offer Rojam Inc. better inducements to set up similar operations and Rojam (Ireland)'s turnover suffers as a result. It becomes clear that very few nannacs will be made in Ireland without increased levels support from the Irish government.

The government steps up to the plate and offers additional direct investment going forward. It covers some infrastructural overhead which further subsidises the production of nannacs. It is even persuaded of the wisdom of part-financing the making of nannacs in off-shore locations because it provides some occasional work for Irish sub-contractors.

Meanwhile, the international market for nannacs is very poor. All nannacs are essentially nano-businesses in their own right, and almost always unprofitable. The government remains persuaded, however, that the market for nannacs is not relevant to its support for Rojam (Ireland), its affiliates and sub-contractors. The Irish government would rather close hospital wards and cut social services than rigorously examine the basis for its ongoing subsidy for the making of nannacs.


at said...

First off, thanks a lot for all your work on this blog which I find really useful. Not least because information on funding allocation seems, be it deliberately or inadvertently, pretty opaque

I have two general questions. As the IFB provides what are described as production loans, is there any data on the rate of their repayment, or better, what percentage of these monies end up getting written off?

Secondly, and along the same lines, in the case of 481 investors, is it the case that the mechanism is designed such that the investor always gets their money back and the ensuing tax benefit (so long as the film is made)? Or is the film bombs, do people regularly end up losing most of their money?

I've searched fruitlessly for information on the first issue, including in the IFB annual report.

Anyhow, hope you can help, and thanks again for the resource.

irish film portal said...

There is no readily available historical data on levels of recoupment (repayment) of IFB loans.
In the case of development loans they fall due to be repaid once the developed film starts production. I do not know the precise number/precentage of developed projects that have proceeded to production but if it were say, 15%, then one might conclude that 15% of all development loans have been recouped. I do not know what the Board's long term policy or accounting position is on these loans - ie are they ever 'written off'.
It may be that they retain a charge on the projects in perpetuity but, since the greater proportion of these loans would be to production companies, what happens the loan if/when a company folds would be another matter. Sometimes projects turn up with other companies (eg All Good Children; Killing Tom) and presumably in those instances the Board's security in the loan travels with it.
As regards production loans (generally described as 'soft money' in the business) the Board will be looking to recoup these loans until the end of time. That said, there is little likelihood of recoupment on the vast majority of production loans. Even when a film does well at the box office, here and/or abroad there are a very large number of businesses that have to earn their keep from the film's earnings - exhibitors, distributors, sales agents etc - whose costs are netted from a film's gross income.
Usually the Board will be a co-financier, so any return that does come back will have to be shared with the other financiers in proportion with their investment.
A decision made a few years back to allow a film's producers to share income in first position, 50/50, with the Board will have had some diluting effect on the Board's own recoupment position.
I believe what money has been recouped has been released back to the Board by the Department for re-investment.
Historically, a recoupment rate of 13% was expected of the Board by the Department of (now) Tourism, Culture & Sport. Whether it is reaching that level will depend on several things, not least how the percentage is expressed - is it a percentage of all loans, or a percentage of feature film production loans only... etc etc.
The Board also offers production loans to TV projects; it has contributed capital subvention to cinema digitisation; to Ardmore Studios; to 'cultural' cinema; to the cinemobile; to representative organisations; to Eurimages and so forth - presumably most of this money is written off.
In an ideal world, given that it is public money, the Board would do three things (i) publish the exact amount of money it recoups each year, (ii) maintain, update and publish a list, by project, of all monies recouped and, (iii) maintain, update and publish a balance sheet of all non-recoverable capital spending.

As regards your second question, yes, Section 481 investors always get their money back, with a small 'premium', as long as the film is completed and compliant with the regulations. The performance of the film is immaterial. They do not really invest in the film and have no equity in it arising from their Section 481 tax relief.

at said...

Thanks for such a comprehensive answer.

On one point I can also make a minor contribution: reading appendix 3 to the IFB's annual report ('Details of Loan Conditions') as regards development loans, one finds the following:

"These should be seen as development/ feasibility loans; the Board makes every effort to track these monies and provides information and support for independent producers seeking other potential production partners. Some of the projects receiving development loans from the Board will not proceed into production and may eventually have to be written off."

What I found curious was that there was no similar proviso to be found in the meagre section dedicated to production loans.

I would have thought that five years after release, the deals and revenue would have all but dried up, and the prospects of recouping drift correspondingly towards nil. Or am I being too optimistic, and would the time-frame be more like 24-36 months?


irish film portal said...

You're right, the deals and revenue would in most cases have dried up after five years but the films/programmes may retain a longer term library/catalogue value and continue earning income over the years either on foot of new rights licensing agreements or sales.
Some time back (March/April) I wrote a post about the Irish film DVD promotion that Tesco ran, using a sizeable back-catalogue of titles, some of them backed by the Film Board.
It would be interesting to know the flow of revenue from that promotion and what, if any, money percolated back to the Film Board and Irish producers.

Denis said...

The Tesco case is interesting in that it marks possibly the first attempt to mass-market Irish DVD product to an Irish audience in any sustained way.

But given that the DVD rights would have been earlier sold by the production companies to the DVD distribution companies, any investigation of 'recoupment' would need to encompass:

(a) the size of the distribution 'advance'- i.e. how much the company sold the rights for.

(b) the production company's participation rate in sales beyond a certain threshold (i.e. when and if the distribution goes into 'profit').

(c) the Board's rate of participation (corridor) in returns to each individual film.

Recoupment rate would presumably be roughly equal to (a+b) x c. I would imagine that (b) would be negligible, even if Tesco sold a lot of DVDs.

Unfortunately, private production companies, even in the case of a film totally funded from public sources such as IFB, BAI etc., do not seem to be under any obligtion to release 'competitive' information such as amounts received from domestic or international distribution deals.

The actual number of DVDs sold by Tesco (12,000 in total, according to the original posts), while interesting in itself as a marker of the effectiveness of Tesco as a retail channel, is unlikely to reveal any meaningul information of a per-film recoupment level.

irish film portal said...

Denis, thanks for your input.
The other factor to consider is time - rights are generally held/sold by territory for a specific period of time after which they would revert to the producers.
The terms of the deal could vary greatly, not least depending on the age and marketability of the title. An old title that has not previously been available might obtain a premium price.
There will be other issues that have a bearing on price - master copy standards, the availability of marketing materials, and so on. If new materials have to be produced then the cost of these together with duplication and other costs will impact the price being paid.
I have the impression that rights may have lapsed on many titles in the Tesco promotion and that producers may have received a modest flat fee per title in those instances, with the distributor taking on nearly all of the attendant costs. In those cases it is unlikely there would have been a royalty/percentage return to the producers.