Government mulls reining in ballooning Hollywood film subsidies

The New Zealand taxpayer has forked out nearly $600 million to Hollywood producers since 2010 to support the Wellington-dominated film industry, and despite commissioning numerous studies the Government is unclear whether this represents money well spent.

The subsidy scheme, originally conceived to facilitate filming of the Lord of the Rings, has steadily increased over the past two decades and now sees mostly overseas producers paid subsidies of up to a quarter of production costs - resulting in $161m paid to the makers of the wildly profitable Hobbit trilogy and $12m for animation on Alvin and the Chipmunks 4.

It also appears $3m of the $31m paid to makers of Ghost in the Shell, a critically derided science fiction bomb filmed in Wellington in 2016, was used to subsidise the A-list salary of starlet Scarlett Johansson.

The Government is now looking at ways to limit taxpayer exposure to a high-profile film subsidy scheme.

Economic development Minister David Parker, speaking on the release of a long-delayed review that concluded the Wellywood-dominated industry was now reliant on the subsidies for continued survival, said while they generated positive spillovers for tourism and technology they came with a downside.

"It is though at a very significant cost. It is a heavily subsidised industry," the minister said.

The report, originally scheduled for completion in November, had been delayed by critical peer review for months. Its release yesterday came as the Herald launches its investigative series Inside Wellywood, looking at the nexus between the Wellington-dominated film industry and the Beehive.

The report from economic consultancy Sapere Group found the scheme, dominated by spending on international film production, claimed they generated wider economic benefits that "significantly outweigh the cost of the grant".

But peer review of the report by two independent consultancies said evidence for this claim was weak. Reviewer Sense Partners illustrated that small changes in underlying assumptions about the industry made by Sapere showed the scheme might actually be retarding the economy.

"We would not rely on the results of this evaluation alone, without further supporting analysis, to inform policy or funding decision," the report said.

Parker said the inability to prove the subsidies provided economic benefits for the country was problematic. "We've had three leading economic consultancies on this and they can't agree. You can predict that will remain an eternal difficulty no one can fix," he said.

At present the scheme is uncapped and allows film producers - mostly Hollywood studios - to claim a subsidy from the Government of up to a quarter of spending on screen work conducted in New Zealand.

Director Sir Peter Jackson. Photo / Getty Images

The cost to government has risen over the past decade - both due to growth in the industry and a doubling in the subsidy rate from 12.5 to 25 per cent - and now costs taxpayers around $130m annually. The report said tax paid from work on the stimulated productions only covered around two-thirds the cost of the grants.

The Hobbit films was the largest individual recipient of the scheme, attracting $162m after Hollywood spent $1b making the trilogy in New Zealand. James Cameron's upcoming Avatar sequels - which have begun shooting in Wellington - are expected to eclipse these figures.

Parker said, given the escalating costs of the scheme, he was now considering advice from Treasury about limiting the amount the Government would spend each year.

"We certainly haven't made a decision to axe the subsidies. One of the questions that has been raised with officials with Treasury is whether you can somehow cap it," he said.

Parker said he was open to such a move, but mindful of competing advice from the Ministry of Business, Innovation and Employment it could create uncertainty making New Zealand a less attractive filming destination

The Sapere review said while the industry was growing strongly - faster than the rest of the economy - it had lost the competitive advantage enjoyed a decade ago with innovations forged during filming Lord of the Rings and was now effectively part of a commodity industry competing on price.

"The industry does not appear to be sustainable without the grant," the report said.

Arguing the case for making the subsidy permanent represents a shift from Parker's predecessor, Steven Joyce, who framed the scheme as "breathing room" to allow the local industry to develop a business model that could survive without government assistance.

Parker said, given competition amongst countries vying to attract Hollywood, the film industry had evolved to a situation where subsidies were a precondition of entry. "The film investment backers, the studios, are very good at ratcheting up competition between countries that want this sort of work," he said.

New Zealand Initiative chief economist Eric Crampton said this competition was, in itself, unsustainable.

"That places New Zealand in an ongoing subsidy bidding war for international film productions with other countries that are also happy to provide their own generous subsidies."

Parker was unwilling to commit New Zealand to upping the stakes - and its subsidy rates - to remain in this race. "It's fair of the Government to expect that this industry maintains and improves its competitiveness, and not to rely merely on subsidies. I think industry is aware of that."

Much of the economic analysis around the benefit, or cost, of the subsidies depends the opportunity costs - particularly assumptions made about how much, or how little, of the film sector workforce would be able to transition to other employment.

Crampton said the Sapere report - in concluding the subsidies generated more than $2 of economic benefit for every taxpayer dollar spent - was flawed in concluding most of the workforce would be left stranded out of work or in lower-paying jobs.

"While that may be true during recessions, it is not true either on average or currently. And it is especially dubious where most of the film activity occurs in Wellington and Auckland," Crampton said.

Director Sir Peter Jackson, in a written statement provided to the Herald during reporting for Inside Wellywood, rejected suggestions screen sector workers would be able to transfer their skills to non-subsidised industries.

"There's a false belief that if all these film workers don't have an industry to employ them, they'll simply find other work here, and continue to be New Zealand taxpayers. That's not remotely true," he said.

Jackson, director of trilogies Lord of the Rings and The Hobbit, is the largest shareholder of the Weta Group of companies, a cluster of film and screen industries in Wellington's Miramar collectively known as Wellywood that employs more than 2000 people.