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Regulatory Impact Assessment

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									Regulatory Impact Assessment UK-South Africa film co-production treaty
1. Title of proposal Bilateral Film Co-production Agreement with South Africa. 2. Purpose and intended effect (i) The objective The Government wants to encourage and support the growth of the British Film Industry, and believes that establishing an agreement with South Africa will help maximise the potential for the co-production of films which bring filmmaking and/or cultural benefits to the UK, whilst also helping to ensure that the film tax relief in the UK is used appropriately. The result will be a clear, flexible, and effective agreement. (ii) Background The UK film industry Viewed as an economic sector, the UK film industry employs on average 47,300 people 1 , produces in whole or part on average over 140 2 feature films per year with a combined UK production value of £840million 3 , earns on average £710 million p.a. in export income 4 and achieves a trade surplus with the rest of the world an average of around £124million 5 . The distribution sector is responsible for the reproduction and delivery to cinemas of thousands of film prints and in 2004 spent £159 million on advertising 6 . The cinema exhibition sector has a presence in city centres, suburbs, rural and even remote areas throughout the UK, employs around 20,000 people and generates large box office and food and drink revenues that flow back into local economies, the film production and distribution industries and the exchequer (VAT). In addition to their theatrical release, films are distributed through video/DVD and television, providing essential content and revenue streams for these sectors. In 2004, revenues for films on TV (£1 billion) 7 were greater than theatrical revenues (£770 million) 8 and video/DVD revenues (average £2.9 billion) 9 were almost four times the size of theatrical revenues.


Including some people employed in video production and distribution who are not separated from film production and distribution in the official statistics. Source: ONS Labour Force Survey, years 2003 – 2005. 2 Source: UKFC International and DCMS. Taken from years 2003 – 2005. 3 Source: UKFC International and DCMS. Taken from years 2003 – 2005 4 In film rights and film production services. Source: ONS Film and TV Survey, years 2002 – 2004. 5 Source: ONS Film and TV Survey, years 2002 – 2004. 6 Source: Nielsen Media Research 7 Source: Estimate from UKFC Research and Statistics Unit, based on data and analysis from David Graham and Associates. 8 Source: Nielsen EDI 9 Source: MRIB, BVA, UK Official Charts Company, years 2002 - 2004

Film production is centred on London with clusters of production companies, visual effects, post-production houses and film financiers in Soho and other parts of the West End. Outside London there are centres of film production in Central Scotland, Cardiff, Manchester, Liverpool, Bristol and Nottingham, and all regions host location shoots to a greater or lesser extent. The UK film industry is a substantial exporter. High-end production services are directly exported when overseas (particularly American) film productions use UK studios, locations and services such as visual effects and post-production. The UK is a popular and attractive destination for the US studios. On the other hand, when UK film producers make UK films an important part of their value chain lies in the overseas markets, particularly in the USA and Europe, extending from theatrical release to video/DVD and television distribution. To facilitate the export of UK films there is an active body of sales agents and UK filmmakers who attend international festivals to gain critical support for their films and sell overseas distribution rights directly. Film finance comes mainly from commercial and overseas funding, but film tax relief and lottery funding also play an important role. The film industry in South Africa The Department of Arts and Culture is responsible for international co-operation in the field of mass media, films and broadcasting and interacts with its foreign counterparts on behalf of the Government of South Africa. The value of the South African film industry is very small. A recent report from the DTI in South Africa highlighted the fact that South Africa’s share of the growth in global filmed entertainment was less than 0.5% 10 . A Price Waterhouse Coopers Study of the South Africa Film, TV, Video and Commercial Sector of 2000 estimated a 1.1% growth rate for the South African film sector compared to 2.4% for economy overall. The Department of Arts and Culture in South Africa estimates that the entertainment industry (including broadcasting, cinema, music, interactive) is worth about 7.7bn Rand (£770m). It is estimated that the film sector employs around 4,000 people and that the local production industry (inc. video, TV and commercials) is worth around Rand 1.4 billion. There are 170 film, TV and other media production companies listed in South Africa and the DTI estimate that the sector employs around 15,000 people directly in broadcasting, film, commercials and other media related companies. Foreign investment in South Africa via foreign produced projects and commercials shooting is estimated to be between 500m – 1 billion Rand per annum (£46-£92m). The South African film industry is primarily a facilitation industry and is an attractive destination to UK filmmakers both for its locations, ‘summer for winter’ with a 2 hour time difference (GMT-2), experienced below the line talent and a wealth of creative talent and a tradition of story-telling. There is a small but growing domestic film industry that is supported by government through the National Film and Video Foundation (NFVF) and the introduction of a rebate scheme by the DTI (not yet operational). 2004/5 was a boom year for

P.7 of DTI Sector Development Strategy Film and Television June 2005

domestic South African production with 12 films being produced, amongst which were three internationally award-winning films – ‘U Carmen e-Khayelitsha’, ‘Drum’ and ‘Tsotsi’. In 2003/4 there were 7 films produced and 2005/6 the number is expected to be around 6 films. Opportunities for collaborations and partnerships between the South African and UK film industry exist in creative collaborations, local marketing and production management services, sale of cinematography equipment and studio infrastructure, post-production (including special effects, SFX and VFX), marketing and distribution, support legal and financial services, film festivals and a host of other areas. The co-production agreements Following a comprehensive review of the UK’s film co-production treaties, the Secretary of State announced on 28 February 2005 the UK’s intention to develop a new package of bi-lateral co-production agreements, which deliver maximum filmmaking and/or cultural benefits to the UK. To achieve this the DCMS has worked together with the film industry to introduce new, overarching principles that will underpin all future agreements. These key principles are reflected in the body of the agreement with South Africa and include: Provision for agreeing approved co-production status. Provision for the minimum and maximum financial contributions of coproducers. Provision for appropriate filmmaking and cultural benefits to the UK and South Africa. Provision for maintaining balance in the film-making and cultural contributions benefiting each Party, and provision for rectifying imbalance. Provisions for the review and amendment to the agreement. Rules of procedures on: the granting of approvals of an application for Approved Co-production status; the withdrawal of Approved Co-production status; the imposition of temporary additional requirements.

Next steps The Secretary of State has committed to a bilateral film co-production treaty with South Africa. The Secretary of State and Dr. Pallo Jordan, Minister of Arts & Culture, signed the signed the Statement of Intent in February 2005. Negotiations have now been finalised on the Treaty and annex. The UK-South Africa Ministerial bilateral, scheduled to take place on 8-9 May 2006, will involve discussions on film. The agreement cannot come into force until it has been agreed, signed and ratified by both countries. (iii) Rationale for government intervention Establishing a new film co-production agreement with South Africa is a Ministerial priority. It will maximise the opportunities for UK producers to co-produce films with partners in South Africa, and thereby increase the potential to develop films with a strong filmmaking or cultural value to the UK and its citizens.

The UK Film Council (UKFC) - the UK’s strategic agency for developing the film industry and film culture in the UK – has an aim to “stimulate a competitive, successful and vibrant British film industry and culture, and to promote the widest possible enjoyment and understanding of cinema throughout the nations and regions of the UK”. This includes encouraging inward investment to the UK from international production companies and developing the skills base of the film industry, supported by the development of a package of film co-production treaties. South Africa has a lot to offer the International Film Market, in particular: clearly articulated economic and cultural objectives for the film industry; a strong infrastructure; a diverse workforce; and a wide variety of locations. In addition, South Africa is a priority country for the British Council regarding the export of UK culture. 3. Consultation As well as with Government Departments, the Department for Culture, Media and Sport has actively consulted extensively with the UK Film Council, the Producers’ Alliance for Cinema and Television (PACT), the British Screen Advisory Council (BSAC) - important representative bodies for the UK film industry - and other industry experts. 4. Options Option 1 Do nothing. Option 2 The UK establishes a co-production agreement with South Africa. 5. Costs and benefits Option 1 The do nothing option does not allow the UK to take the opportunity to forge new film co-production relationships with a strong film industry at a time when many other competitor countries have already concluded such relationships (Canada, Italy, Germany and a Memorandum of Understanding with India) and others are actively pursuing (France and Australia and China). This option will incur no extra costs and would have no impact on the opportunities available to members of different groups, e.g. race, health, age, gender, or income. Option 2 The new agreement with South Africa may result in benefits to the Exchequer, the film industry and the film watching public. There are unlikely to be significant costs to any party.

Economically the treaty will benefit both UK and South African film industries in drawing closer synergies between two industries. It will also support the very best creative talent from both countries to work together to produce commercial and artistic films attractive to diverse audiences throughout the world. The principal economic impact of signing this agreement will be the production of films that could only be made between UK and South Africa if an official coproduction relationship is established, allowing co-productions to be counted as national films in both countries (providing certain conditions are met). There is significant benefit to the UK that films are structured as co-productions, bringing work and cultural value to the UK. Without the co-production structure the films may well shoot in South Africa and undertake their post production there as well or possibly elsewhere where there is a cost base advantage to the UK. There are a number of co-productions in the pipeline which have been developed in both South Africa and the UK. For example, Zola Maseko (the award-winning director of ‘Drum’) will film his next film in Liverpool and Zwazulu Natal with Ewan Macgregor. It is possible that without the treaty this film and others will not come to the UK. There are a significant number of potential UK inward investment films that will benefit UK GDP which are envisaged as UK-South African co-productions. Our estimations have been made with the following assumptions: 1. The treaty will be signed in May and come into force after ratification approximately 3 months later (August 2006); 2. Films starting principal photography on or after 1 April 2006 and completing after ratification will be eligible to qualify; 3. Films have at least 25% of qualifying UK spend (as defined by the Finance Bill); 4. Many films will not now need to be classified as co-productions as they will pass the UK cultural test on UK elements alone; 5. Balance in both filmmaking and cultural contributions will be carefully managed. The following table sets out, in high, medium and low expectations, the estimated number of films which may come through the UK-South African co-production treaty during its first 2 years of existence. Based on the assumptions made above, it also attempts to estimate the likely cost of tax relief which will be going to these films.

Year 1 Number of films High Medium Low 5 4 0

Cost of tax relief (£m) 3.25 1.25 0

Year 2 Number of films 5 4 0

Cost of tax relief (£m) 3.25 1.25 0

We anticipate that the medium scenario is the most likely in both year 1 (2006) and year 2 (2007) we estimate that there will be 4 films as follows (it should be noted that these figures are contingent on a multiplicity of factors, but represent our best possible estimation in the current circumstances): • 4 UK majority co-productions, with combined budgets of £15m and UK spend for filmmaking contribution purposes of £10m, of which £5m would be allowable for UK tax relief purposes, costing £1.25m in tax relief.

In addition to this best possible estimation, we have included high and low estimations in the table to illustrate the potential range of cost given our uncertainty about the number of films that will be produced and whether they will be able to access tax relief with a floor of 25%. The high calculation includes 1 UK majority inward investment co-production, with a budget of £30m and UK filmmaking contribution purposes of £20m, of which only £8m would be allowable for UK tax relief purposes costing £2m in tax relief. The addition of stronger cultural and economic tests, the tightening of the rules and greater management of balance than existed in previous bilateral agreements are also likely to result in a more targeted allocation of exchequer funds in the form of tax relief. The required minimum spend in both countries under this agreement is 20% for bilateral co-produced films. For the film industry the new, clearer rules in the agreement will make it easy for producers to understand and apply the rules in their applications. The new rules will also benefit the film sector by providing a regulatory system flexible enough to respond to the innovative nature of their industry. There may also be bettertargeted investment in UK co-produced films that bring filmmaking and/or cultural benefits to the UK. Such investment may result in a boost for all sectors of the British Film industry. However, the value is more than just economic – the new treaty will also make an important contribution to the cultural and creative economy of the UK and enhance the skills base of the industry. The agreement will also enhance cultural diversity. Within the UK there is a growing interest in African language films with Tsotsi having recently won the Oscar for best foreign language film and earning a BAFTA nomination as well. Films in Afrikaans and also other indigenous Southern African languages have played well at UK film festivals and are entering into UK distribution through initiatives in digital distribution, Channel 4 have been running a very popular strand of digital African cinema and have been co-developing projects with African filmmakers. There may

also be a social benefit for the film watching public encouraging of the production of films that offer a cultural benefit, for example those which tell a UK story. 6. Small Firms Impact Test The UK film industry is organised along ‘flexible specialisation’ lines in that it consists of numerous small companies carrying out the many specialised tasks once performed within major studios. In 2004, for example, 97% of all film and video production workplaces in the UK had ten or fewer employees and 58% of all employees worked in workplaces in that size band. Most of the rest worked in workplaces with 50 or fewer employees 11 . The flexible specialisation model also manifests itself in the high proportion of freelance labour. In 2005, 40% of all workers engaged in the film and video production sector were self-employed 12 . Discussions with film sector representatives, including those that represent small firms (PACT and BSAC) have not identified any disproportionate or negative impacts on small firms. 7. Competition assessment Only the film production sector will be directly impacted by these proposals, and we believe the impact on competition will be inconsiderable. The character of the film production sector generally dictates that it is unlikely that any one company will have more than 10% of the market share at any one time. For example in 2004, out of the 89 co-productions made, the maximum produced by one company stood at 9. Given this wide playing field the agreement with South Africa is unlikely to disproportionately affect one company. Costs would be similar for all market entrants, and the number and size of firms is likely to remain the same. However, there is a possibility that the proposals to re-dress imbalance between co-producing partner countries, may mean that at times some productions may need to be relocated in whole or part to the UK in order to qualify as official co-productions; and by the same token qualifying films are required to have a minimum UK spend. Finally, the film production market is characterised by rapid technological change. This change has been fully accounted for in policy making, for example the flexibility given to allow the annex to the agreement to be changed at contracting party level will help enable the UK film industry to keep up with important technological advances. 8. Enforcement, sanctions and monitoring The Department for Culture, Media and Sport is expected to enforce the new agreement and monitor it through the existing certification system. In addition, we will work to ensure that South Africa has a similarly effective system in place. 9. Implementation and delivery plan

11 11

ONS Annual Business Inquiry. ONS Labour Force Survey.

The agreement will come into force once signed and ratified by both parties; we are currently aiming for November 2006. The Department for Culture, Media and Sport will work closely with the UK Film Council to ensure that the details of the new agreement are disseminated across the UK film industry prior to the date on which the agreement comes into force. 10. Post-implementation review The Department for Culture, Media and Sport will keep the operation of the new agreement under review. The agreement will allow either party to introduce temporary additional requirements to rectify an imbalance in the overall filmmaking and cultural benefits derived from the agreement. In order to assess the state of balance between the UK and South Africa, the competent authorities on both sides will collate and analyse statistical data about successful applications for the grant of Approved Co-production status. In addition, should either of the contracting parties wish to do so, six months notice of their intention to terminate the bilateral agreement can be given at any time. 11. Summary and recommendation Summary costs and benefits table: Option Total benefit per annum: economic, environmental, social 1 2 No additional benefits. We estimate that that the ‘medium scenario’ is the most likely in both 2006 and 2007 with a combined UK spend for filmmaking contribution purposes at around £20m for the two years. Total cost per annum: - economic, environmental, social - policy and administrative No additional costs. Cost of tax relief granted to films qualifying as official co-productions with the necessary balance of spending in the UK and South Africa. We estimate that that the ‘medium scenario’ is the most likely in both 2006 and 2007 with a combined tax relief cost to the Exchequer at around £2.5m for the two years.

The agreement will: - Create closer synergies between the two industries. - Promote inward investment into No additional administrative costs. and expenditure on the UK film industry. - Support creative talent from both countries. - Contribute to the strengthening of the skillbase of the UK industry. - Enhance cultural diversity within the UK. Option 1: There will be no additional benefits other than those enjoyed as a result of the current ad hoc co-production relationship between the UK and South Africa.

Option 2: is the Government’s preferred option. It will deliver the Government’s stated objectives in maximising the potential for the co-production of films which bring filmmaking and/or cultural benefits to the UK. 12. Declaration and publication I have read the regulatory impact assessment and I am satisfied that the benefits justify the costs Signed Date Rt Hon Tessa Jowell Secretary of State for Culture, Media and Sport Department for Culture, Media and Sport Contact Point: Dee Davison Film Branch Department for Culture, Media and Sport 2-4 Cockspur Street London. SW1Y 5DH 020 7211 6435

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