Great. The Hobbit stays here. Everyone’s happy about that – you, me, John Key, Robyn Malcolm…we’re all so very happy, at least until we look at what the government has given away. Sir Peter Jackson is happy because he is spared from living in Ireland or Budapest for the next two years. Warners are happy because they got showered with more money. Just how happy Warners are feeling right now can probably be gleaned from the basics of that deal : if the films are successful, Warners gets an extra $US15 million subsidy plus an extra $10 million injection into a co-marketing campaign – plus an expansion of what qualifies for re-imbursement under the Large Budget Screen Production Grants Scheme.

At the very least, that’s an extra $US25 million sweetener for Warners. Our employment laws for film industry workers will also be changed. It means that John Key has done what he said two days ago New Zealand couldn’t afford to do – match the 20% subsidies being offered by countries like France and Hungary, Earlier this week, Key said we could offer Warners some more money, but couldn’t match the offers being made by other countries:

Mr Key said Warner executives had raised the disparity in tax rebates in different countries; New Zealand's rebate is 15 per cent on domestic spending, less than countries such as France and Hungary (20 per cent) and Ireland (up to 28 per cent).
"That is large and we can't match that," Mr Key said. "What I can't rule out is [that] we won't look at some things at the margins that might make the deal slightly better."

Yet matching the bids by some of those countries is exactly what he’s done. At 15% the basic subsidy on the $US500 million budget for The Hobbit stands theoretically at least, to be $US75 million. Add in that extra $US25 million and you get a total of $US100 million – which is the headline rate you’d get from the 20% subsidy on offer in France or Hungary. Except in addition, we’re also offering (a) to change our employment law and (b) to offer greater flexibility about the qualifying criteria for the LBSPGS – though the detail of those criteria changes can’t be revealed for ‘reasons of commercial sensitivity’ lest others, presumably, press for similar treatment. Way to win friends. Warners will end up getting a far better deal from New Zealand than what James Cameron got from us on Avatar. Lets hope that won’t deter Cameron from his plans to come back here again.

The deal seems peculiarly wrong-headed in its emphasis. Employment rights in the film industry will be changed in perpetuity – even though the changes being made were not part of what the unions had been agitating about. By contrast, the changes to the production subsidies will be only temporary – and will effectively be set at 20% only for The Hobbit – even though it is the production subsidies that will very largely determine whether any subsequent major film projects come here in future. So we change for good an employment rule that has been in place since 2005, and which did not affect Avatar coming here – but we will be at pains to retain our current trade disadvantage when it comes to production subsidies. It makes no sense, as a sustainable position.

For an allegedly hard-nosed former merchant banker, Key also seems to have been remarkably inept as a negotiator – having given away his intentions (yes, we’ll change the employment law, yes, we’ll give you more money) even before he entered the bargaining room. There seems to have been no attempt to call Warners’ bluff and use the one factor – time – where we actually had Warners over a barrel. Time was always working in our favour when it came to the final decision about where The Hobbit would be shot. Shooting always had to begin in February if Warners/MGM were going to meet their deadline of getting the first film into theatres by December 2012, and the second film by December 2013. Even though the raw numbers stacked up better to do the film elsewhere, Warners simply didn’t have enough time left to uproot the project, and still be ready to start shooting in February. Yet we don’t seem to have used this advantage to drive concessions from them. Oh right, we got a travel ad onto the DVD. Wicked.

The timeframe was a strong factor, but not our only bargaining chip. Going elsewhere would have meant Warners uprooting its star director, who reportedly hadn’t much enjoyed the experience of shooting part of The Lovely Bones in Pennsylvania. Jackson would have had no desire to live in Ireland for the next two years – not in the least because of the havoc his enforced absence would have wreaked on the ability of Weta to attract other projects in the meantime, with related damage to Weta’s image as a one-stop shop headed by Jackson, and at the forefront of the FX game.

Ultimately, if you were Warners, would you have wanted to burden this troubled project with hauling a reluctant Jackson out of his comfort zone, and risk having him under-perform in alien conditions? It was always going to be hard enough meeting the tight schedule in optimal conditions out of Miramar, let alone adding foreign locations, foreign crews, and foreign trade unions into the mix. In these circumstances we had no reason to cave into Warners – and getting an ad about New Zealand as a location onto the eventual DVD is a laughable trade-off. Key’s basic negotiating stance seems to have been: I’m willing to jump, but don’t ask me to jump too high, please. What a tiger.

Perversely, the delays – and the beat-up over the Union Threat– worked in this country’s favour as the location both by virtue, and by default. Given the details in the final deal, some on the left will be happy to believe Jackson was working in a tag team with Warners all along, to ramp up the production subsidies. I don’t share that view. One could just as easily make the argument that Jackson had been working against Warners all along, to counter their plans to move elsewhere – and by that logic, he could be seen as inflaming the dispute at a crucial juncture to foreclose Warners’ options, while on the side helping to compensate them with extra millions from the government. Such conspiracy theories are a dime a dozen and a complete waste of time – given the dearth of proof either way, and the lack of transparency. For ‘reasons of commercial sensitivity’ we are not even going to know the qualifying criteria now governing the subsidies that we, as taxpayers, will be paying Warners on this project.

In the end.. even this crappy deal was still value for money, I’d argue. Key does appear to have bargained like a two-week old kitten, but the stakes involved will still mean we come out ahead. This week, the Los Angeles Times reported Economic Development Minister Gerry Brownlee as saying The Hobbit would create 1,000 jobs in New Zealand, and generate $US1 billion in economic activity. At that rate, even a $US100 million price tab for the subsidies would still be generating a ten-fold boost in economic activity, with much of that being taxable. Of course, increased production subsidies are not the only concessions that New Zealand has made to secure this bounty. Later today, Key will release the detail on the changes to employment law – as they will pertain to the film industry – that he has in mind.

The change to the employment law being mooted is about the status of ‘independent contractors’ and will – presumably – override any claims such workers might have to be treated as employees, in the film industry. The government action will circumvent the Supreme Court decision in the Bryson case, which found that the nature of the employment conditions are the relevant test of whether someone can justly claim the rights of being an employee, and not the contracts that he or she signed, perhaps under duress. Leaving aside the question of whether the Bryson ruling has ever posed a substantive threat to The Hobbit – or whether we should offer to abridge worker rights to placate a multinational’s alleged thirst for ‘certainty’ – the immediate challenge for the drafters of the new law will be to limit the ripple effects of such a change. After all, if an employer could simply get around paying overtime or observing normal work hours or offering sick leave and annual leave etc etc merely by getting the employee to sign a document saying they’re an independent contractor, what employer wouldn’t jump at the prospect? Providing ‘clarity’ in this situation has run the risk of creating a monster – in effect, the Employment Contracts Act on steroids.

Obviously, such a measure needed to be ring-fenced. Television won’t be affected, Key says. On the production subsidies, Key is raising the ante to 20% only for the Hobbit – even though this will guarantee that any subsequent major film projects at risk of being lost in future to better bids. What Key is changing in perpetuity are the rights of workers to have their actual employment conditions be the determinant of whether they qualify for sick leave, annual leave and normal working hours.

Let's assume that this was a serious concern for Warners – which I doubt. There is a better way of ring fencing this issue for The Hobbit, without changing the rights of film workers beyond that project. The LOTR experience provides a better precedent than the one Key is proposing. Of course, it may seem bizarre to even think of writing our employment law around the alleged needs of one film production – but New Zealand has been here before. Ten years ago, it wrote its tax laws around the financing demands that New Line demanded for Lord of the Rings and for exactly the same alleged reason – to stop the production from being moved offshore.

In that instance, ring fencing was achieved by inserting a sunset clause so that LOTR became effectively the only major film that started and ended in the timeframe specified by the legislation. To circumvent (and ring fence) the Bryson issue, a similar sunset clause could be inserted that would achieve all the certainty that Warners are supposed to desire. Yet it would do no enduring damage to worker rights beyond that production.

All along, I’ve argued the union dispute was a sideshow and that the Warners decision hinged on the level of production subsidies available here. Sitting in Los Angeles and reading Jackson’s press releases, the Warners top brass were probably more worried about the effect the union dispute was having on the temperament of their director, than about any direct threat that unions posed to the production. The employment solution still looks like window-dressing – and is almost certainly being deferred to by Warners so that Key won’t appear to have simply caved into their demand for more money.

In reality, Warners have negotiated successfully for decades with far stroppier unions than the industry unions and guilds in New Zealand, and recent weeks have only underlined how incapable such unions would be to mount any effective collective action downstream over The Hobbit, even if they wanted to. To re-state the obvious – the employment solution being pursued by the Key government (ie, to set the status of contractors in concrete regardless of their actual employment conditions) bears little relation to the original quest by the union to attain some form of collective coverage for contractors.

In the course of his dispute both unions and Key alike said some things (Key to the NZ Herald, Simon Whipp to the Hollywood Reporter) and subsequently changed their position. That’s the nature of the bargaining process. It seems willfully naïve to nurse grievances based on those early stances, as if they were biblical texts written in stone. Despite Key’s early rhetoric, New Zealand could always afford the extra subsidies that Warners were seeking. If we can afford to pour nearly $1.8 billion into the moribund Alan Hubbard empire, or over $30 million into the America’s Cup or untold tens of millions into the Rugby World Cup and still budget for it to make a loss… we could afford this. Incidentally, it has been incredible to hear the same Trevor Mallard who flung money at the America’s Cup and caved into the IRB’s commercial demands for draconian legislation to protect the Rugby World Cup, now accusing John Key of caving into Warners. The hypocrisy is breath-taking.

On that score, Key’s cave-in was rather more justified. With The Hobbit, we will not be budgeting for a loss. We will be hosting a $US500 million project that will generate a slew of multiplier effects and retail spending (much of it taxable, thus recouping the initial outlay) downstream, plus a lot of upskilling, tourism spinoffs and all the added intangible benefits of remaining at the forefront of one of the world’s leading knowledge industries.

The deal on The Hobbit is also not the same sort of tax break sellout as we saw on LOTR. As I’ve previously mentioned, the production subsidies on offer with The Hobbit are ‘after spend’ rebates. They are grants paid out after the foreign film company has spent its money – and are thus unlike the ‘sale and leaseback’ tax variation that underpinned the financing for LOTR, and which always had the potential to become a tax avoidance vehicle (for the benefit of corporate investors) that raided the country’s revenue. The LBSPGS are not ‘tax breaks’ in that sense at all.

In one important sense, The Hobbit experience has given New Zealand a second chance. What LOTR offered was an opportunity to build an entire industry off the back of what Peter Jackson had achieved. We could have created a wide ranging knowledge industry of a sort that bypassed the usual tyranny of New Zealand’s distance from its markets. Almost by accident from a national planning point of view, the film industry could have become exactly the sort of business cluster that Harvard University marketing guru Michael Porter had – decades ago – urged New Zealand to create.

Did we take full advantage of that opportunity? Hardly. Jackson built Weta Digital alright, but the government copped out of its side of the bargain. It grudgingly went along with the LOTR tax breaks. For good reason, it then phased them out ASAP, created the Large Budget Screen Production Grants Scheme and the one-off Film Fund instead, and pretty much left it at that. Oh, and it also created the Screen Production Incentive Fund, which was the local equivalent of the LBSPGS.

Ever since though, successive governments have left the private player (Jackson) to do all the heavy lifting, while keeping the Film Commission on starvation rations. The result has been a lopsided local film industry rancorously fighting among itself for the scraps – and far too heavily dependent on Jackson and Weta to ever become a healthy partner capable of bringing anything much to the table. The resulting imbalance has left Wellington as a company town, with its film industry unhealthily beholden to Jackson.

Against the odds, the industry somehow managed to grow, at least until the global recession began to bite. This week, the Los Angeles Times, in a story entitled “Company Town”, summarised the main statistics (pre recession) about the film industry here:

New Zealand’s so-called screen industry employs 7,000 people and supported 2,673 companies in 2009, up 30% from 2005. Most of the growth has been in the digital graphics, animation and effects business, where revenue swelled to $196 million in 2009, up from $26 million in 2007, according to a report from Statistics New Zealand. The largest of the players is Jackson's Weta Digital, which did most of the effects work on James Cameron’s hit film “Avatar.”

Exactly. We have a world leading FX shop, and little else of any stature. Put the Film Commission alongside Peter Jackson, and the result looks like what the Albanians used to say about the Chinese – together, we are 701 million strong. Keeping The Hobbit now gives us a second chance to re-balance the mix, because film seems to be what we do best. It is our knowledge economy forte.

This is not a case of picking winners. The winner, in the shape of Weta Digital at least, has already galloped past the post and picked up the Cup for being a globally recognized star performer. The strategy now should be to seriously fund and foster the growth of spinoffs – in gaming, in animation, design shops etc – that will enable the industry to expand out horizontally. To pull its weight properly in this process the Film Commission needs more funding – under conditions that ensure it meets cultural and commercial objectives from micro-budget features to mainstream theatrical releases. Unfortunately, Jackson did not provide that framework in his recent Film Commission review. After paying lip service to writers and directors, he then advocated funnelling most of the money to fewer of them, and virtually neglected the digital realm altogether. But that’s another story.

Oddly enough, the government would probably get bipartisan support for a national planning initiative based around building our film industry, in order to ensure that the opportunity presented by The Hobbit is not, once again, lost. The committee that sanctioned the LOTR tax breaks after all, included Michael Cullen and Bill Birch. Similarly, the Key government inherited the LBSPGS and defended it last year over the payout to Avatar – now, it should take the next step and expand it. It shows no sign of an inclination to do so.

Instead, the structure of the settlement deal for The Hobbit means that the same negative mindset – and the same undue reliance on Jackson – will be perpetuated. Rather than raise New Zealand’s 15% level of production subsidies to 20 % - and thus protect our ability to compete for projects – the government has concocted a de facto 20% deal and reserved it exclusively for The Hobbit. This will virtually ensure that next time round, major film projects that are not umbilically tied to Jackson will be lost elsewhere. What Key has done is to increase our dependence on Peter Jackson. It is no way to build an industry, or run an economy.

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