TUESDAY 13 MAY 2003

MR TIM ADLER, MR ANDREW SOMPER, MR DAVID ELSTEIN, MR MARC SAMUELSON AND MS FIONA CLARKE-HACKSTON

  Chairman: Sorry, the reason that we are holding you up is that I am trying to have explained to me what the prospects are of our being interrupted by a division and the collective wisdom of three parties round this table is that we just do not know. That being so, I very much welcome you here today. A number of you are very old friends and we are delighted to see you here and thank you very much for coming. Mr Bryant.

  Q220  Mr Bryant: Mr Elstein, do broadcasters do enough for the British film industry?

  Mr Elstein: If you ask me in my capacity as Chairman of BSAC, I would say that we are about to do a second stage report on that to follow up our fiscal policy paper. If you ask me as an individual, I think that you have already heard a lot of evidence over the last couple of weeks of what I would call wishful thinking; that if only X did more, Y would be happier. Whether X would be happier and indeed better off is a more interesting question. I think it is important to understand the reason why broadcasting and the film industry are separate businesses which have some overlap, but—

  Chairman: There you are. Nobody knew and now it has happened. Sorry to interrupt you in mid-remark, Mr Elstein. Could we make a great effort to be back here no more than ten minutes from now?

  Mr Elstein: Needs must, democracy beckons.

  Q221  Chairman: Mr Elstein, although we are not fully assembled, we have got (a) a quorum, and (b) our questioner. So if you do not mind, we will proceed.

  Mr Elstein: I think I was saying "but" which is always a good point on which to reflect further. Broadcasting has a general duty to the creative community—I think the BBC put that in its written evidence—and the way broadcasters fulfill that duty is across a wide range of programming. It is hard to see what the specific duty to film production is, other than what the commercial or political imperative might be that commands attention from the broadcaster. I certainly do not see the market as being rigged against film makers. I think film producers who persistently complain that they get low licence fees from broadcasters do not understand the broadcast market place. It is an open market place. Films attract the licence fees, US films, UK films, that they justify in terms of their significance to the schedule, no more no less. Nobody is hard done by. In terms of satellite broadcasting, there is a historic structure of deals in place from before BSkyB merged the BSB and Sky businesses which are entirely done with the US majors, which I am confident BSkyB would not voluntarily enter into today. They are certainly not going to voluntarily extend the terms of those deals where they do not have to, which is effectively to UK producers. So I think it is fair to say—and BSAC is well positioned to host and manage a debate because we contain within our membership broadcast organisations as well as film organisations—that film producers historically feel under-privileged and broadcasters feel over-criticised. And Parliamentarians feel over-worked, by the sound of things.

  Chairman: All I am saying, Mr Elstein, is I voted against these new hours. I am very sorry about this. You did manage to get about three whole sentences out.

  Q222  Mr Bryant: And so, Mr Elstein, you were saying? Can I ask a different question actually. You have done some work on diversity in film and I wonder whether you can say something about that because so often I meet people from the film industry and every single one—not every single one, but the vast majority seem to be middle class white men. I know this is a very old Labour obsession, but it would be good to see a bigger diversity, especially in the technical base. Often actors and singers and other parts of the talent base are obviously much more diverse than the whole of the industry.

  Mr Elstein: Obviously BSAC were delighted when the Film Council appointed a Diversity Officer, Marcia Williams, recently and the reason for our delight was that we have been very active on this issue ever since the end of the Film Policy Review Group activities where, in a sense, the failure to come up with policy on cultural diversity and achieving diversity in the film industry had been a kind of glaring gap in that Committee's activities. BSAC commissioned a report written by Simon Albury on a Committee led by Simon Albury on this very subject with a list of recommendations and we had hoped that by now most of those recommendations would have been implemented. So it has been disappointing, to say the least, that three years have passed and not a lot of progress—well, no progress has been made, other than to acknowledge or re-acknowledge, as was recently done, the need to take action. That said, we have got to the point now that Marcia Williams has set herself a number of tasks. The Film Council will address its internal structures in the light of the issues relating to cultural diversity as their first task and hopefully move on quickly, broadening out the industry as a whole. But you are entirely right in your comments. Many of us are acutely aware of it and hopefully, after perhaps an unnecessarily long delay, we are on course to actually take some action.

  Q223  Mr Bryant: Just finally, going to the cinema is, I guess, for many of the people in the room one of the most enjoyable pleasurable things and for many people it is the highlight of their family entertainment. But sometimes some of the cinemas themselves, even many of the new multiplexes, are not as quite as inviting an environment as they might be and they seem particularly American. My local Showcase cinema actually shows a great big thing before the start of the film which says "Don't forget to get your candy here" and then at the end says "If there is an emergency, please use the exits at the front of the cinema because they are closest to the parking lot". It is a minor detail that they are not. But is there any way that somehow we can create more of a British environment when people go to the cinema?

  Mr Elstein: I am sure this is an anecdotal piece of rapportage rather than a serious piece of analytical study and the fact of the matter is that the exhibition sector has expanded at a rapid rate. There is a huge amount of investment that has gone in there and, for the most part, to my untutored eye, it looks like pretty good value for the consumer. So I am slightly puzzled by the comments you have made. We can certainly raise them with our own membership, which includes the exhibition sector, but it does not seem like a very bright thing to do to tell the people of the Rhondda where the parking lot is, if they know what a parking lot is in the first place.

  Q224  Mr Bryant: But it is true in the Trocadero as well, it feels like an American experience dumped into London rather than a British cinema-going experience and I just wonder whether that makes British films sit just slightly oddly in the middle of it.

  Mr Elstein: Marc, is that your experience?

  Mr Samuelson: I do not think so. I think that what is relevant is, I suppose, that MacDonalds is one of the biggest and most popular restaurants in the country and it could not be a more American experience. I suppose that that it is the price that is paid for the amount of investment that has gone pouring in to building all of the multiplexes is that yes, they do feel like some of them dropped in from outer space or from the US. I think that the young audience quite like some of the aspects and I think that there are other sides of the Americanism that are really very positive. There is a much better level of service than there ever used to be and I think that that is an American style of service in many cinemas.

  Mr Bryant: But then they are forced to eat this food that is terrible for them and drink drinks that are terrible for them. The whole—sorry, this is to take up a Debra Shipley issue—I will stop, Chairman. I will give in.

  Mr Elstein: Do you think roast beef sandwiches and tripe and onions should be on tap?

  Mr Bryant: I give up. Debra can ask that question.

  Chairman: When I went to see Chicago at the Warner West End the man sitting next to me, as the film proceeded, ate an entire Chinese meal. This is life today, Chris. It is not life as you would like it and it is not life as I would like it.

  Mr Bryant: Chairman, he was doing it vindictively against you.

  Q225  Chairman: Well, there is that as well. And the fact is, isn't it, that part of the experience now—and it may not be an experience that those of us who started going to the cinema in the 50s or 60s or even earlier might like, but it is like holiday and hotels, it is like MacDonalds and Wendy's, you could be anywhere in the world now when you are a watching a film in a multiplex, but the people who go to multiplexes, which a few exceptions such as Mr Bryant and myself, actually like it.

  Mr Elstein: Well, maybe there will be a market soon in some kind of the "throwback" experience.

  Q226  Chairman: In Stockport they have got a wonderful project for re-constituting, almost as it was, one of the most great super cinema palaces and I went and had a look at it. But this is self-indulgent and it is nothing to do with a serious inquiry. I asked the representative of the MPA what changes he might suggest in the tax environment in this country that might make this country more hospitable to people coming from abroad to make movies. What changes in the tax environment would be more likely, in your view—and please, I put this to anybody on the table who would like to answer—to indigenous companies being created of which Working Title—and I think you were here for part of what they were saying—will make it more likely and more possible to get that done as distinct from companies being formed to make one movie and then ending their existence when that movie has been made?

  Mr Elstein: Well, Chairman, I think you are in possession of a paper that BSAC has submitted on the current issues relating to tax breaks. I could refer you back I think six years to a previous BSAC submission to a previous Government on how structural change could be induced into the British production and distribution industry by means of tax breaks granted to companies with ongoing investment, as opposed to individual films and we would be happy to re-submit that paper if you were so interested. I think it is important to differentiate between a tax regime which is attractive to runaway pictures, the ones on the roam from Hollywood looking for a place to locate, given the strength of our underlying craft industry, the quality of our studios, it would be remiss of us not to respond to whatever else is going on in the world and have a tax regime that takes advantage of our underlying strengths and does not waste them by allowing other countries to, in a sense, drive us out of the market. But I think the most important thing for this inquiry is; is the tax regime conducive to the making of good quality, marketable British films which reflect our culture and our concerns? I will ask Marc to speak in a moment, but in that connection our view is that Sections 42 and 48, or versions of them, are essential to the health of what we call the British film industry. We have already accepted that British film industry cannot be an equivalent to Hollywood. Apart from what Michael Kuhn told you, there is no serious room for a competitive distribution mechanism comparable to that which the studios themselves maintain. So we have to limit our ambitions. But the quality of what we produce and the marketability of it will continue to depend of Sections 42 or 48 or versions of them. And the simple truth, Chairman, is that we have only just begun to see the way in which those tax breaks could work in the last 12 to 18 months, that the distortive effects of introduction of the television abuses have only recently been eliminated. So it is galling to imagine that within a year and a half those tax breaks, or one of those tax breaks, might go without any substitute there to take its place. The other thing that we have concentrated on in the current paper is how to embed, to borrow a recently popularised phrase, the distribution function within the tax break structure. We do not take the view that the tax break should be transferred to distribution. That would have all kinds of knock-on effects, almost certainly undesirable, but there is a way in our view—and this is what our paper hopefully demonstrates—of tying the distribution function and its market sensibilities into production decisions by tailoring the tax breaks in such a way that you get that relationship going that much earlier. The truth of the matter is that there are virtually no tax break driven British films being made that do not have some distribution relationship in place before they are made. So it is not as if you are going to revolutionise and kind of create a date line for producers and distributors who otherwise would never speak to each other, but what you can do is to entwine them that much more firmly and give the next generation of tax breaks the successes of the present sections a stronger underpinning for the future. But Marc, perhaps you could elaborate.

  Mr Samuelson: If I may, Mr Chairman. Thank you. Before I just talk about the detail of what is in our paper, I would just like to add that it was very interesting listening to Tim Bevan and Eric Fellner's evidence because they are brilliant producers, I am sure they are the best producers in Britain, but their experience is almost irrelevant to the experience of everybody else. It was quite amusing when Eric said he would talk about everybody else; it is everybody else. They are owned effectively by an American studio. They were able to build their company under the auspices of Polygram, which was an absolute one off, and by the time Polygram was sold to Universal, they had established themselves. But there have been many years of making a great many films with all the experience gained, enormous amount of money spent on script development, all the resources and building on their successes and being able to continue even though they had failed. There are no other companies that have had that experience. For everybody else I think that there are some very good companies out there. I work as an independent producer. I know that most of my peers are talking very closely to international sales companies and distributors all the time and, in fact, I think that alliances are growing up and there are companies like Jeremy Thomas' company, Recorded Picture Company, which now has its own sales company, Hanway, and it is in effect a distributor, a worldwide distributor. It sells its own films around the world. That is a vertical integration which is much to be encouraged and there are several other examples; Renaissance Films will be another one where producers are becoming sales agents and as the market develops I think we will see more of that. Of course, what will throw a huge, humongous spanner in the works is that the main tax break on which a lot of this activity is founded will come to an end in 2005 and I have been involved in the industry long enough to somewhat despair of the fact that we seem to be on about a seven year cycle where we get some kind of new regime, it was the capital allowance regime previously, it was more recently the Section 48. It takes a couple of years to bed in. We have a couple of years of actually operating it and then it ends. Then we have another seven years where the industry plummets to incredible lows. Everybody tries to analyse what is wrong with it. Eventually then we come up with a new tax break and then it just lasts another short period, five to seven years. What we actually need, if I may say, if we were really going to try and solve this once and for all, is we need a permanent fiscal regime which we know is there forever, that is how you treat a film from a tax point of view. The end. Because that would allow long term planning, long term investment. It would be something that—we talked about venture capitalists before, they look at the industry and they say "But a crucial part of your whole financing scheme is time limited". What we have come up with is if we accept that there does have to be support for there to be a British film industry, why should we be the only one in the world that can exist without support? So if we accept that there has to be support, it is really a question of what is the most efficient, what can we actually do and it is our submission that now that television has been eliminated and now that deferments have been eliminated and now that co-productions are being brought under control, that the Section 48 system is actually working very efficiently. We think that it is low cost, the benefit reaches the productions and, more importantly, an infrastructure has grown up of specialist companies who consolidate individual investors on the one hand and productions on the other. It is a very difficult job to do and you have to have done it for a few years before you can start to make that work. Andrew can talk about that because he is one of them. What we would suggest is that if it were possible to keep some version of Section 48, albeit that it is felt to be somehow tarnished or politically incorrect to do so, but if we were just trying to do the best thing and that was an irrelevance, some version of Section 48 would remain but what we would suggest is that, at the moment, the way that the value is assessed of a film is the production cost. It is simply what is spent on making the film, that is the value that can be used as part of the tax break. That is the value that the tax break is attached to. We are suggesting that partly instead of that the investment made by distributors would be the thing that attaches to the tax break or that attracts the tax break so that if, for example, half of the budget of a film was being invested by distributors and sales agents, rather than the production being able to say "Right, we have got a film worth £5 million. We can now go and try and arrange some tax finance for that", actually the producer will be left with £2.5 million to find the tax break on but the distributor would have control of the £2.5 million that they were putting in. They would be able to raise a tax fund based on that. They would be able to have very much more influence over which films get made. It is obviously set out in detail in the paper, but we do think that it would have the effect of driving distributors right into the mix of the decision making process as to which films got made.

  Chairman: I think that is very important and I am grateful to you for setting it out with such clarity. Adrian Flook?

  Q227  Mr Flook: Thank you, Chairman. Mr Somper, the history of Parliament seems to be littered with special interest groups claiming tax breaks for their various bits and bobs. How important is a tax incentive success of your company?

  Mr Somper: I think I would like to look at it from the perspective of what my company does for the film industry. And what we are trying to do is aggregate the benefits coming flowing through to the film production companies and, at the same time, involving investors which, during the '80s and prior to that, looked at film as something that they would never get involved in, it was far too risky. So the advent of the tax breaks in 1999 had such a big effect on the City because they were going in with tax based products initially. In the first two or three years I think a lot of the opportunities were lost because it was focused predominantly on the television industry. As that went away last year, the complete focus of the City and IFAs who sell investments to individuals is on film. So from a period of ten or 15 years ago no-one would touch film at all, all of a sudden we have companies like Close Brothers, Teather and Greenwood, Binder Fry, we have banks that are lending to individuals, all of them becoming very familiar with the structure of a film deal. First of all, they got involved purely on the sale and lease back benefit and that is a tax deferral product. It was one that has been highly popular. It has become part of an independent financial advisor's stock in trade. It would be quite incredible; after all this time he would be doing pensions and insurances and then he has a film product, a film specialist. So the familiarity with the film industry has grown enormously. Since last year, it probably started two years ago, we had the biggest change now that the film industry is the main focus and that is the development of individuals coming through companies such as mine and others who invest not only for a pure tax deferral basis, but they are also investing equity, venture capital which was talked about earlier in the previous sessions as—

  Q228  Mr Flook: Or as Angels, if it were the theatre.

  Mr Somper: Well, Angels are going into it on the basis that they love the theatre and therefore it would be quite nice to be involved in it, but they know they are probably going to lose the money. These are highly sophisticated individuals, mainly from the City. The investors are normally people who are senior executives from either companies or banks, highly sophisticated individuals, and they are now looking at film structures as real investments. They are looking at return on investment. They are looking at the company that is organising the investment. And that is a massive change. So in the last two years approximately £30 or £40 million worth of equity has been raised by a number of companies such as Movision, Vision View, which is a joint venture with Close Brothers, and I think that that development has massively changed the way in which London is looked at now by the Americans. Our American independent colleagues, instead of the traffic being that way to Hollywood, it is now back to London because they see London as the hub of film finance and not only for the UK tax benefits, but also as a centre for them to make European based films because of the low cost centres of making films in other countries.

  Q229  Mr Flook: Mr Adler, would you have anything to add to that?

  Mr Adler: Well, I am a disinterested party. I do not have an axe to grind here, but—

  Q230  Mr Flook: Feel free to grind away.

  Mr Adler: One thing that I would like to get across, I have reservations about subsidy full stop, but having looked at the film finance equation, subsidy is absolutely crucial and I do not understand why there is talk now, just as things are beginning to go right, that the Section 42 and Section 48 relief is being used in the right way, now that there is talk of having the plug pulled.

  Q231  Mr Flook: Well, talking about that subsidy as such, there was in 96 something set up called the Film Franchise—£92 million went into three sorts of studios. Did they bring about any significant change? Was it a good investment of, ultimately, taxpayers' money?

  Mr Adler: My view is that the thrust of the Middleton Report, the Advisory Committee on Film Finance, the initial recommendation was to keep the whole of the Lottery money intact, to basically set up a Working Title type—

  Q232  Mr Flook: One company as opposed to three.

  Mr Adler: One company as opposed to three. However, a decision was made to split that money into three. I think in hindsight it was the wrong one.

  Q233  Mr Flook: Anything to add to that, Mr Somper, in terms of the last few years?

  Mr Somper: In relation to the film franchises, it is a highly difficult basis. It is much better to leave the benefit so that it percolates amongst a number of different companies rather than focused necessarily on three particular ones.

  Q234  Mr Flook: So it should have either been spent on one or spread even more broadly than three?

  Mr Somper: I just think the overall tax benefits so that different companies can grow to be able to take advantage of the benefits coming in through Sections 48 and 42 rather than necessarily pinpoint one particular company.

  Mr Elstein: I think it is important also to recognise that, however well intentioned the Lottery money being put into three franchises was, there were two key structural problems. The first is that each of the franchises had to submit each individual film for separate approval by the Film Council. In other words, you could not actually generate a slate of films even though you had multi-year, multi-film franchise. Effectively it was just one organisation corralling a whole range of individual films. So you were not structurally any better off, frankly, than you had been before. There was some marginal saving in terms of overhead, but that is all. The second problem is that because every decision was unpredictable because there were no absolutely clear criteria being applied, it meant that if you were—how can I put it?—the possessor of a strong movie, you were not going to spend any time trying to pick up Lottery money because of the level of bureaucracy and the level of delay was insupportable and the unpredictability of the outcome. So almost by a process of definition and self-definition, it was the weaker projects that ended up being Lottery funded projects. The ones that were most marginal. So cumulatively what you generated was an inadequate process of restructuring the industry because nothing could get restructured and a succession of marginal films being approved, many of which subsequently failed commercially. Now maybe they would have failed commercially anyway. More likely they would not have been made in the absence of the Lottery franchises, but I think it is now broadly accepted that the attempt to use the Lottery monies to induce structural change were misguided and have certainly failed.

  Q235  Chairman: Thank you very much indeed. That was an extraordinarily valuable session and we are most grateful for the trouble you have taken and we apologise for the interruptions.

  Mr Elstein: We will now go and vote with our feet.