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Gordon Campbell on the end game for The Hobbit

This column was written for gordoncampbell.scoop.co.nz you can read the post there (and leave comments).

The two main issues that will decide Warners’ decision about where to shoot The Hobbit are both inching towards a resolution. Neither involve the actors’ union dispute which has always been a sideshow – mainly because the cost of reaching a compromise deal on wages and conditions would be chump change for Hollywood. The two factors that matter are (a) the production incentives available in New Zealand compared to elsewhere in the world. This is what Philippa Boyens means when she says Warners are‘ running the numbers” on the five or six locations now in the running for the location shoot and (b) the late intrusion of the 74 year old corporate raider Carl Icahn into the sale of debt-burdened MGM, which owns a major stake in The Hobbit project.

As I’ll explain below, Icahn will not be able to derail what is now a done deal between MGM and Spyglass, but he seems to be delaying the announcement of the MGM sale, and the subsequent greenlight for The Hobbit. The rate at which Icahn has been buying up MGM’s senior debt means that it will cost an arm and a leg for Spyglass and the re-constituted MGM to buy him out, which will in turn make those production incentives even more important than they are already. New Zealand stands to lose in any strict number crunching of the incentive money it can put on the table – because the Key government has allowed our global competitiveness to fall behind other countries, and we may be about to pay the price for that complacency.

Even so, a lot of the emotion needs to be taken out of the issue. The rhetoric of New Zealand “losing” The Hobbit has always been overheated. All along, what we have stood to lose was only the location shoot. The pre-production work is already under way at local work-shops in Miramar and similarly, the highly remunerative post-production work was always going to be done at Weta Digital.

Yes, it would be nice to do the location shoot here as well. But get a grip. Did we “ lose” The Lovely Bones because some of its location shoot was done in Pennsylvania? No, we didn’t. Weta Digital is the jewel in the crown for New Zealand, because that is what lured Avatar here, and it is what will bring other major projects here in future. It is also what will fuel the knowledge industry spin-offs in video gaming and other related industries. And to repeat : Weta Digital was never going to ‘lose’The Hobbit, where-ever it happened to be shot. The alleged threat has been viewed as an industrial relations conflict (and has been deliberately framed as us “losing the production) because it has suited the producers, their lobby group (Spada ) and the politicians to do so. The mainstream media has been more than happy to oblige.

Put it this way. If we “lose” The Hobbit would that mean that the production would not be putting in for any funds whatsoever from the Large Budget Screen Production Grants Scheme? Hardly. I would expect New Zealand will still be paying a sizeable sum to The Hobbit under the LBSPGS, wherever it is shot. In fact, it would be an interesting exercise to break down the ratio of the production costs between (a) the location shoot (b) pre-production and (c) post production, and the potential LBSPGS claim for those last two components.

To the government’s relief though, very little attention has been paid to the film production incentives that New Zealand offers, which have ceased to be globally competitive. New Zealand’s main incentive is the LBSPGS which was created by Jim Anderton back when he was Minister of Economic Development and the responsibility for it has now devolved to his successor, Gerry Brownlee. However, in a speech to a Film NZ networking function in May 2009, Brownlee made it clear that while the Key government would keep the scheme, it would be at its current rate:

Our competitors continue to work to attract productions to their countries. So while we don't want to engage in a ‘race to the bottom' within higher and higher incentives the next step is to cultivate a regulatory environment that makes it easy for filmmakers to come to New Zealand, and film in our locations, use our facilities, and hire our workers, and engage our talent pool.

Note Brownlee’s priorities – don’t increase the incentives, but make it easier for foreign studios to hire our workers. Currently New Zealand offers through the LBSPGS a 15% refund on the local spend by foreign film productions. As I pointed out last week, countries in Eastern Europe (and elsewhere) now offer far more generous deals. Ironically, the government was warned recently about the importance of film incentives to the Hollywood executives now able to pick and choose where in the world to base their projects – and that warning came from Sir Peter Jackson himself,

In his July review of the Film Commission, Jackson slammed the Treasury for its complacency. He cited a recent report in which Treasury continued to rely on its own 2005 evaluation that ‘Very large budget films that come to New Zealand usually did so for quality and creative reasons, rather than economic reasons.’ Treasury’s belief, Jackson maintained, was ‘simply untrue.’ Without the LBSPGS, Jackson continued, “Universal would have insisted King Kong be moved to Canada in the blink of an eye. There’s nothing this country offers that justifies the budget hit Universal would have taken by basing the film in a country with no production incentives.”

The same logic surely, still applies. It is hard to see why the Hollywood studios making The Hobbit wouldn’t shift it to Europe or North America, or Britain ‘ in the blink of an eye’ if they thought they could get a better deal on incentives. Yes, our exchange rate gives us a 30% edge on the US dollar – far better than the 5% edge on offer in say, Australia – but even that exchange rate advantage is less than in the LOTR days. Jackson is the only factor still keeping us competitive. The real political question is – what is Brownlee now going to do about the uncompetitive 15% that we have out there these days as a lure?

Last week, I pointed out on Scoop that Serbia is offering 15-25% rebates on local spend, and the Czech Republic is offering 20%. Hungary is also offering 20%. In addition, Jackson provided a long list of foreign film production incentive schemes (they can be found on pages 68-69 of his Film Commission review) that exceed what New Zealand has to offer. This recent Time magazine article on the film industry in Hungary (“Hooray for Hungary – Is Budapest the New Hollywood of Europe?”) shows just how sophisticated some our competition is getting.

For much of the past week, the Jackson camp has been running a thin argument that it couldn’t do a deal on The Hobbit because that would set a precedent for the entire local film industry. Supposedly, every aspect of union coverage agreed to on this huge two film project would automatically carry over to every small budget New Zealand film made by Taika Waititi, by Gaylene Preston and by film-makers even further down the food chain.

Supposedly, continuous employment with Jackson’s Three Foot Seven company stretched over two films for a period of years would be comparable under the law, to the occasional week long shoots that characterise so many New Zealand productions, even though it is only in that hand-to-mouth context that the ‘ independent contractor’ status makes any sense. Call me cynical, but I don’t think the makers of an elephantine project like The Hobbit should be trying to hide behind this particular mouse.

If Philippa Boyens doesn’t want the deal on The Hobbit to become a binding precedent for a struggling local industry… well duh. Write words to that effect into the contracts for The Hobbit and ring fence the wages and conditions. Newsflash: it is not unknown for court rulings to be ring fenced with statements to the effect that no precedent can be deemed to apply (or are to be inferred) from the particular findings. At most, an agreement on wages and conditions for The Hobbit would set an aspirational precedent only – and the status quo could be defended if any employee on The Hobbit wanted to be treated as such on the next shoestring local production. A compromise deal on wages and conditions for The Hobbit might carry over automatically only if and when the Film Commission gets around to greenlighting its next $212 million film project. That may take a while.

If one took the Boyens/Jackson arguments at face value – i.e. as anything other than a bargaining tactic – one would have to conclude that unions have little or no place in the film industry, and that workers in that industry should be content with whatever largesse their employers deem appropriate, and bestow on them. Ironic really, that the most cutting edge of our knowledge industries seems to be insistent that its industrial relations should be conducted on terms that hark back to the Victorian era. The deal on residuals for instance, that Jackson is said to be offering to non-Screen Actors Guild members may turn out to be as generous as he says it is – but really, that is no substitute for allowing workers to negotiate fair wages and conditions. Industrial relations should not be run as a charity. Whatever the benign intent, the residuals deal has smacked of the box of vegetables left on the doorstep by the feudal lord at Christmas time, for each of his faithful serfs. Mind you, at the Wellington actors’ meeting in particular, there seemed no shortage of people willing to tug their forelocks in gratitude, or in fear.

The MGM sale

As mentioned, the MGM sale is crucial to the outcome on The Hobbit, and to the ability of the production to meet its self-imposed deadline of being in theatres by December 2012. The production cannot be formally greenlit until the deal is concluded – and as I indicated in mid July Spyglass has now emerged as the leading suitor, and letters of intent have reportedly been exchanged. This is why pre-production on The Hobbit has proceeded so confidently. MGM’s latest debt repayment extension has been rolled over until October 29.

However, the 11th hour advent of Carl Icahn seems to have stymied the public announcement. Back in July, Icahn was locked in an internal boardroom war with the other directors of Lions Gate, a major art house company that makes the Mad Men television series (it also made the film Precious) in which he owns a 33% stake. Icahn’s motivation back then was to block Lions Gate from bidding seriously for MGM. Now however, he has jumped the fence and has bought up some 10% of MGM debt and is – ostensibly – trying to get MGM to merge with Lions Gate.

While no one can predict Icahn’s ultimate game plan, the more likely outcome would seem to be that the new owners of MGM would have to buy him off. And surely, if you or I were Carl Icahn, we might be tempted to angle for a premium for our foregone share in the profits from The Hobbit and from the next James Bond movie, in which MGM holds the ahem, lion’s share. New Zealand should be regarding these manoeuvres with trepidation. The mounting costs will be making its 15% production incentive look scrawnier by the day to the anxious bean counters in Hollywood.

Looking back over the past fortnight, it has been extraordinary to see the producers and their lobby group claiming to be bound by the conditions that they have imposed on the work force in the New Zealand film industry. In his review of the Film Commission, Jackson was highly critical of the producer-driven nature of our film industry. Not in this instance, evidently.

As an aside, The Hobbit furore has also been an interesting case study of how the mainstream media has seemed content to be a passive conduit for the P.R. statements of the celebrity players – whose claims have largely been taken as read, no matter how self serving. Only on the blogosphere has there been any attempt at weighing the competing positions, or at getting behind the posturing on both sides of the fence – notably by The Standard and also I hope, by Scoop.

In passing, a special dinosaur award for service to the anti-union cause though, has to be awarded to Rosemary McLeod, who invoked the spectre of organized labour – the boilermakers, cooks and stewards and watersiders were all hauled back by her from the editorial grave – to intimate that The Hobbit production and our tourism industry were all now under threat from the combined might of Jennifer Ward-Lealand and her army of dues-paying orcs. To combat this menace, McLeod volunteered to be a scab for Jackson, and bring her own packed lunch on set if need be. Come to think of it…there may be a job going as stand-in for those hobbits held captive by the Elf King, and who get nailed into barrels and tossed in the river.

Once the dust on this particular project has settled – and unions are finally able to do what unions do elsewhere in the work force – I don’t think the government’s film incentives will be able to avoid critical scrutiny for much longer. As things stand, Peter Jackson is carrying the government and the film industry on his back. Most of the foreign film projects coming here are despite the level of our production incentives, and not because of them – and the bulk of that traffic these days is post-production activity bound for Weta. Film NZ might be able to prove me wrong, but New Zealand does not seem to be getting the kind of location shoots it used to attract only a few short years ago.

If that situation is ever going to turn around, Jackson deserves a break. Gerry Brownlee and Bill English need to raise the LBSPGS to 20%, immediately. The Greens – who earlier this came up with the moronic idea of capping the scheme – need to be told that New Zealand will receive back far more in local spending on wages and downstream services from the LBSPGS than it pays out on film incentives. The LBSPGS is a virtuous grant scheme paid out after the money has been spent here, and not a shonky tax dodge that raids the revenue beforehand.

So far though, Treasury has been able to maintain its ideological hostility to such incentives, and the government has been able to dodge the political fallout – mainly because the mainstream media has been happy to ensure the union demands on The Hobbit keep copping the flak. Genuine transparency is needed. If Warners do finally choose to shift the location shoot for The Hobbit out of New Zealand, we need to be aware for the true rationale behind that decision – union organizing, or the larger incentives now available in Europe and elsewhere? And what sums, if any, will The Hobbit production still expect to take from the LBSPGS?

Routinely, we have been left in the dark on such issues, mainly because the media doesn’t ask, and the film-makers and politicians have reasons of their own to fudge the details that they release to the public. Eight years on, we still do not know the net benefit of the tax incentives that we paid for LOTR. Essentially, we have come no distance at all from what I wrote in 2003, when this stuff already seemed like ancient history :

In the January [2003 Onfilm] issue, Jackson alleged that the $200 million figure routinely cited for the tax breaks is a “ludicrous” and “irresponsible figure” that was “published once” and its truth never subsequently analysed. Furthermore: “Cullen knows it’s not true and yet he’s been capitalising on that figure.” The government has allowed such nonsense to be perpetuated, Jackson believes, to try to give tax breaks a bad name. According to him, the tax breaks were less than the $110 million paid in PAYE tax by the production.

A highly frustrating situation for the taxpayer, who might feel like tossing both of them into the cracks of Mt Doom. We have Jackson saying that the tax breaks were really small – but he’s not “allowed” to be specific – and Cullen suggesting that they were really big, but he can’t be specific, either, and certainly not to the taxpayers footing the bill. At the premiere of Return of the King, it was left to the ever-gracious Viggo Mortensen to thank the taxpayers of New Zealand for making the film possible.

For years [the public] has sought clarity on this point. First, we had to establish that the tax breaks existed, then figure out their likely size and how the deals worked. The figure of circa $200 million – roughly one third of a $600 million budget – was not plucked from the air. It was the IRD’s own shorthand estimate, stated in interviews with them and based on the company tax rate. We may never know the exact figure, although $217 million has been cited to me by government sources. My final attempt in mid 2003 to prise the net situation regarding LOTR from Economic Development Minister Jim Anderton hit the usual stonewall: “We don’t know.”

Such declarations of ignorance seem incredible. How, then, does the government devise rational policy in this area?

Answer: it doesn’t. It just crosses its fingers, thanks God for Peter Jackson, and leaves the fate of the industry to the winds of chance.

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