Gordon Campbell on the usual grumbling about subsidising the Lord of the Rings TV series

middle-earth-jpegReportedly, Amazon has chosen to film most of its Lord of The Rings prequel TV series here in New Zealand, rather than in Scotland, or elsewhere. While a TV production on this scale will certainly qualify for the rebates available in this country, New Zealand seems to have attracted this particular production for reasons additional to the film subsidies, given that these are now not particularly generous, by global standards.

Ultimately, we seem to have won this production largely because of the mature film industry infrastructure that New Zealand has built on the back of those previously subsidized productions. For example: we now have the studio sound stages that Scotland currently lacks, highly skilled film crews, expert props-makers, costumers and set-builders, and can boast a world-leading post-production facility. Basically, New Zealand can offer the entire spectrum of services from initial shoots to post-production FX, and none of this would have been possible without the previous generation of tax breaks and production grants. As the World of Locations industry website points out, those prior productions also committed to substantial quotas of key local personnel, tourism campaigns and skills and talent development programmes for emerging local crew.

Obviously, New Zealand can also offer a range of spectacular natural landscapes, comparable to or surpassing what the likes of Scotland (where the Outlander TV series was shot) or Serbia/Croatia can bring to the table. In marketing terms, Amazon will also enjoy the advantage of being able to leverage off the existing audience identification of New Zealand with Middle Earth. Which means that our tourism industry will also be able to revitalize New Zealand as a Middle Earth location, and destination.

Finally, New Zealand has been smart enough to keep in place a reasonably attractive subsidy scheme of grants, whereby film productions spending over $NZ15 million qualify for a base 20% cash rebate, rising to 25% on large productions, such as the Avatar sequels. There is also a base 20% rebate on any post-production spend that exceeds $NZ500,000. For TV series, the 20% base rebate kicks in for spending over $NZ4 million. While media reports have suggested that uncertainties over Brexit have affected the Scottish bid – which would be deeply ironic, given how strongly Scotland voted for Remain – the real bidding war here was probably not over the value of the subsidies on offer, but over the value of the currency. Would Amazon get more bang for its buck in New Zealand from our low currency relative to the greenback, or in Scotland, from the plunging value of pound sterling?

Assuming the media reports are correct, most of the LOTR TV series shoot will occur in New Zealand. Just how much remains unclear – so the early calculations of a $375 million rebate on the $1.5 billion production budget seems excessive. (Scotland will not be frozen out entirely by Amazon.) Rather than being mere handouts to Hollywood, the subsidies deliver mutual benefits to Hollywood and to the host countries that succeed in attracting major film productions to their shores.

After all, productions need to spend 100% in New Zealand in order to get 25% back – while creating jobs, enhancing skills and greasing the wheels of the retail economy along the way. There are critics of course, who remain ideologically opposed to any form of government support for the film industry, or for any form of business activity at all. Treasury for instance, has long decried the Large Budget Screen Production Grant (LBSPG) as a sin against free market ideology – ie, the rebates work in practice, but not in theory – and it has mounted a lonely, decade-long crusade against the rebate scheme.

Every other major analysis carried out on the grants scheme however, has found it to be a value-for-money investment. The analysis by the NZ Institute for Economic Research (NZIER) and the Sapere Group analysis commissioned by MBIE (which was largely validated in a peer analysis by two independent firms) has concluded that far from being a handout to Hollywood, the film subsidies are a major boon for the New Zealand economy, to the tune of tens of millions of dollars annually, even before the related skills transfers, industry cluster spinoffs and tourism benefits are taken into account.

Last year, Werewolf analysed in depth the evidence (and arguments) about the worth of the film subsidies. Among the observations:

On market principle, shouldn’t New Zealand go cold turkey, axe the film subsidies on offer to Hollywood studios and see what happens next? Even if, on the available evidence, what would happen next would be a smoking crater where our film industry used to be? That wouldn’t make a lot of sense, given that we simultaneously say we’re trying to foster a modern, IP-driven, value-added digital economy. For the past decade, the film industry has been one of the few success stories along that path….

The Future of Film Subsidies

While winning (most of?) the Amazon bid for the LOTR TV series is a great achievement, the new Economic Development Minister Phil Twyford would be unwise to breathe a sigh of relief, and go to sleep on the politically volatile issue of whether the film rebate scheme needs a revamp, to keep it competitive. While there is no sign of the NZ dollar rising in value by its own merits any time soon, US President Donald Trump was talking only yesterday about the US playing the “currency manipulation game” and pushing the value of the greenback downwards, to boost US trade.

The greenback has slid overnight. It would not only be our exporters who would feel the pain if Trump seriously follows through on his threat to depress the value of the US currency. Our film industry would also become less competitive, virtually overnight. At that point, the heat would come in earnest on raising the value of our film subsidies.

As mentioned, our film subsidies are not the only magnet for major film and TV productions. But financial incentives still do matter. Across the Tasman, Australia offers a massive expanse of quality studio sound stages, and technological expertise to burn. Leaving aside for as moment the incentives available at state level, Australia’s main federal filming incentive for international producers is the 16.5% location offset – on production spending more than $A15 million – and this rebate was effectively doubled in mid-2018 by Canberra’s decision to pump another $A140 million into the scheme.

Australia also offers a post production, digital and visual effects offset (PDV), which is worth 30% of local expenditure for productions spending at least $A500,000 locally. As with New Zealand, productions do not need to have been filmed locally to qualify for the PDV offset – but in Australia, it functions as an either/or arrangement with the location offset.

More to the point, the Aussie states are also offering their own inducements on top. As the World of Locations site notes. “Queensland has been leading the charge, with a state government willing to put its money where its mouth is, by bankrolling an additional 13.5% tax concession to Paramount, to lift the overall benefit to 30% and secure the Dora The Explorer movie for Village Roadshow Studios on the state’s film-focused Gold Coast.” Moreover:

The deal was secured after a trade mission to the US by Queensland premier Annastacia Palaszczuk and Screen Queensland CEO Tracey Vieira… Screen Queensland and Ausfilm have lobbied the federal government to overhaul the national incentives scheme and raise the offset for all high-value films from 16.5% to 30%….Queensland’s premier has committed to “keep on pushing for screen jobs for our local crews and creatives, and for productions that inject hundreds of millions of dollars into our economy and take our creative talent and our stunning Queensland locations to screens around the world.”

As for the UK…

Producers can claim a payable cash rebate of up to 25% of UK qualifying expenditure (this is capped at 80% of core expenditure). A film must either pass a cultural test or qualify as an official co-production and it must be intended for theatrical release and reach a minimum UK spend requirement of 10%. The high-end TV tax relief offers a rebate of up to 25% of UK qualifying expenditure. Funding can also be accessed from regional screen agencies. For example, the Yorkshire content fund can invest from $14,300 (£10,000) to $716,000 (£500,000) in individual film or TV dramas.

Again, as with the states in Australia, the likes of Wales and Scotland offer additional inducements. So… while we’re roughly in the same ballpark as comparable countries, we’re not leading the pack, by any means. Our film industry is a four-legged beast: it relies on (a) rebates (b) locations (c) proven expertise in everything from shoots to physical FX to post production and (d) a low currency. The variables liable to change are (a) and (d) and if (d) goes into reverse, then the pressure will come on to increase the rebates. Arguably, and given the sunk costs in the film industry, it would still be a good deal at a 30% rate for major productions, whereby we would be returning less than one third of the hundreds of millions of dollars being spent here.

Footnote One: Interestingly, those who regard the rebate scheme for film productions as an ideological sin, don’t seem to display the same abhorrence for other forms of corporate welfare. Across the economy, employers can get away with paying low wages because the income of the waged poor is subsidised by the state via the benefit system, accommodation subsidies and by the likes of Working For Families. Similarly, our corporate chieftains can afford to shower their shareholders with dividends because the state is picking up the lion’s share of the tab for the research and development costs that those firms should be paying for themselves.

Meaning: if they want to be consistent, critics of the film industry scheme should also be railing against ( a) our low wage structures and (b) our pitiful levels of private sector investment in r&d. Taxpayers are picking up much of the tab in those areas, too.

Footnote Two: As a few non-Tolkien nerds may not know, the events to do with The Hobbit and the subsequent War of Ring were preceded by thousands of years of back story, as sketched in outline in the LOTR footnotes and appendices, the Silmarillion and the Unfinished Tales of Numenor and Middle-Earth. Some of these tales – like the love story of Beren and Luthien which occurred some 6,500 years before the Lord of the Rings – were written out in fuller detail by Tolkien than a lot of others.

Also and crucially, these stories won’t have hobbits as comic, or quasi-human, relief. Plus, it will be a challenge to flesh out the stories and scraps of stories, consistently. Still, maybe those eternal questions about Tom Bombadil’s nature, origins, power and destiny can finally be addressed. Was Glorfindel of Gondolin really the same as Glorfindel of Rivenfell? Discuss. How about that Feanor??? What an elf he was. How on middle-earth are they going to depict what it was like to live in Valinor, in the light of the Two Trees? And what about the Second Prophecy of Mandos, and the Dagar Dagaroth???

In other words… a lot of people felt vexed about the handling of the characters and the relatively straight-forward narrative contained in The Lord of the Rings. It’s a reasonable bet to assume that the Internet is going to break down entirely from the outpouring of outrage likely to ensue once Amazon tries to give coherent form to the pre-history of Middle Earth. It had better be awesome.