Originally published in Contact, January 2011

The number of films being produced by Hollywood is set to fall by more than a third as the major studios struggle against the climate of economic uncertainty. The major threat is from a lack of funding but a new group of leading Guernsey finance professionals may have a solution. Jon Taylor reports on a new government and industry proposition called Guernsey Film.

According to Hollywood figures, 606 films saw the light of day in 2009 but in 2010 fewer than 400 will make it out of Tinsel Town. In the wake of the financial meltdown, banks that had acted as the main funders of films have withdrawn their lending.

Other lines of income have also shrivelled, most importantly DVD sales, which have plummeted by up to 25% in some studios, partly as a result of piracy. Digital downloads and video-on-demand are the new buzz technologies, but they still bring in tiny amounts compared with the dwindling DVD market.

The latest household name to draw attention to the crisis is Francis Ford Coppola, director of the Godfather trilogy and Apocalypse Now. Speaking recently at the Beirut Film Festival, he warned that "the cinema as we know it is falling apart."

That gloomy prognosis rings true with other industry analysts who claim that MGM in particular is on the edge, while other big studios are not far behind. Paramount Pictures registered a loss of almost $150m in the first half of this year.

Paradoxically, while the world's movie capital is in turmoil, the appetite for its products remains buoyant. Ticket revenue has continued to climb by about 2% this year, a modest figure, but a striking achievement in the midst of a recession.

Even those film franchises with a history of solid box office returns are struggling to raise the necessary funding. MGM for example, has been forced to postpone the 23rd film of the James Bond franchise because of debt problems.

Film-making, has the key characteristic of requiring investment over a period of time, with returns deferred until the film is released. There may also be a long tail of 'rights' income from world-wide distribution, video and DVD sales etc. Classically, films were too risky to be used for the savvy offshore investor market but times have changed and the introduction of completion guarantees and of intermediate media holding companies to spread risk has now overcome that problem. It is also apparent that all manner of film financiers are looking towards the independent film fund model for reliable investment returns and this is where Guernsey is beginning to play its part.

"Investment opportunities in films range from pre-sales contracts to tax credits, direct equity investment, gap and bridge finance, completion funds, publicity and advertising. Each stage has its own balance and level of risk and reward. Direct equity investment has been historically common but is not the most lucrative or reliable form of investment. Instead, film funds that spread risk in an informed way are the way forward for film financiers," said Ben Tustin of Guernsey Film.

Ben is director of tax strategies at Marlborough Trust, a Guernsey-based trust company he helped to form in 2003. He is also co-chairman of Guernsey Film which was established by a group of Guernsey-based finance industry professionals in conjunction with the island's government. Richard Garrod is Ben's co-chair and is a director of Confiance Fund Services, a Guernsey-based financial services business.

Richard was also former head of the film tax team at Mazars.

"The idea behind Guernsey Film is to leverage what I believe to be an impressive level of expertise and depth of knowledge of film transactions among those in Guernsey's financial services sector," said Richard. The Guernsey Film management team includes experts in the fields of law, banking, insurance, tax structuring, fund management, investment funds and intellectual property.

While large studios can finance a film or series of films, they have susceptibilities that independent film producers don't and it is this area where Guernsey Film has identified the most likely opportunities.

"Historically, studios were able to sustain large financing structures, but it can take only half a dozen less popular films to cause funding problems in this current economic climate as has happened recently at MGM, where the Bond franchise is now on hold. So more and more film production professionals are starting to look at the independent financing model which the island has been structuring with tax-efficient investment into films for the last 10 years across the whole spectrum of requirements, from pre-production to release," said Ben.

"Financing films is always a delicate balance between the various parties involved in making the film and bringing it successfully to its target audience," Garrod says. "You need to work with people who understand the film industry and have the relevant experience.

"Within Guernsey there are tax-efficient and commercially viable structures available across the board from production to distribution, offering your investors the ability to be involved at all levels in a tax-neutral environment."

Guernsey Film started its promotional drive at an event this September in Soho. The UK film industry is also suffering in these testing economic conditions and the event attracted a wide range of film finance related professionals. London's Charlotte Street Hotel was the venue for the event which, featured the chief executive of Future Films, Stephen Margolis, a lawyer with more than 20 years' experience in the film industry and who has raised in excess of £2 billion for film production since founding the 'specialist, integrated motion picture organisation' in 2000.

More than 75 members of London's film community attended the presentation and the audience comprised specialists from across the London film community, including bankers, investors, investment advisers, lawyers, accountants, producers, distributors and the media.

"Everything came together very well. We had a very strong turnout of more than 75 delegates, our presentation made use of the high quality audio-visual facilities available, the presence of Stephen Margolis was a superb endorsement for the Island and the audience was very receptive to the message that Guernsey can provide a 'one-stop shop' solution for film finance," said Peter Niven, who represented Guernsey Finance at the event.

The event was staged with great timing as it coincided with the drawing up of an aggressive new plan by the UK Film Council to prepare the industry for what it describes as a crucial three years as the body's funding has been slashed to help pay for the 2012 Olympic Games in London. The Government-backed council unveiled its latest three-year plan. John Woodward, the council's chief executive, said it planned to tackle head on the British movie industry's failure to get to grips with the current lending climate and should look 'beyond the normal channels' for future funding. The UK Film Council spent three months consulting with a broad range of companies throughout the industry about the best way to support British film, help them deal with the move into the digital era and also to face the fallout from the recession.

Mr Woodward said: "Aside from the six major studios, the UK film industry is a collection of small and medium-sized enterprises. All the companies face the same problems with the business models collapsing, of how they find a way through."

Tim Bevan, the co-founder of Working Title Films, chairs the film council and will oversee a think-tank set up to identify new policy initiatives to help UK film companies grow. This underlines the fact that there are few independent British production houses that are actually sustainable. Mr Bevan said: "We have a new set of priorities, and a new way of working. With the right level of support, finance and innovation a successful British film industry can continue to help get the UK out of recession and create more high-skilled jobs."

The problems faced by the industry have been compounded by the economic downturn and the forthcoming London Olympics, which will swallow up £25m of the film council's funding over the next three years. "In the film world, the development money is the hardest to find so we will be looking further afield for support," said Mr Woodward.

The UK Film Council was set up by the Government a decade ago and is backed by money from the National Lottery. It has helped to fund more than 900 short films and features and it is one of the few, if any, lottery-backed projects that succeeds in bringing in revenue. For every £1 of lotto money received, the council generates £5.

Recently acclaimed movies which were backed by the fund include Fish Tank, a gritty drama about an Essex teenager which won the Jury Prize at Cannes and a Bafta for best British film. Other big hits include the Oscar-nominated political satire In the Loop and Man On Wire, a film about high wire walking which won a best documentary Oscar.

The council's other roles include promoting digital cinema and attracting US film-makers to shoot at British studios and use British post-production facilities and special effects teams. In the past year, US studios have been convinced to make such films as Clash Of The Titans and Ridley Scott's Robin Hood in the UK. Mr Woodward said the film industry and the council had grown in importance, adding: 'The two have changed together. In the early years we said film could grow beyond a cottage industry. This has unquestionably been achieved as the UK's industry is now one of the most important in the world (The UK film industry turned over £7bn last year, making a £4.3bn contribution to Britain's gross domestic product and employing 49,000 people).

Unfortunately however, without an injection of funding from the private sector this position of strength may suffer. Clearly there are great opportunities for Guernsey Film in this exciting, if somewhat erratic sector. Perhaps this is an opportunity for the governments of Guernsey and UK to work collaboratively to help develop the UK film industry. This new found optimism for film is unlikely to result in the next Die Hard action sequence taking place through the Esplanades of St Peter Port but is another opportunity for Guernsey to diversify its financial service offering. We're recognised as the leading international centre for Captive Insurance, why can't recognition for film finance follow. Guernsey Film, we'll be watching.

For more information about Guernsey's finance industry please visit www.guernseyfinance.com.

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